TOKYO - Japan said on Tuesday it had decided to grant 74 billion yen ($659 million) in low-interest loans to China, more than two months after a decision on the aid was delayed due to strained bilateral ties.

The decision on the loans for the year ended last March, made at a top government panel on foreign aid strategy, follows signs of a potential thaw in chilly Sino-Japanese ties.

Relations between the two countries have deteriorated since Prime Minister Junichiro Koizumi took office in 2001 and began annual visits to Tokyo's Yasukuni shrine, where some convicted war criminals are honoured along with Japan's war dead.

The two countries have also feuded over territorial rights and energy resources and have expressed mutual suspicions about each other's military strategies in the region.

Koizumi told reporters that the decision had been made after an overall assessment of the situation, adding that he "always attached importance" to Sino-Japanese ties.

But Farm Minister Shoichi Nakagawa, known for taking a hard line against Beijing, said he was perplexed by the decision.

"Why are we giving aid to China. To be honest, today's meeting was bizarre," Nakagawa told reporters.

International bodies like the World Bank insist that despite China's economic boom in recent years, the country still needs international support to lift its people out of poverty.

Japan, however, has scaled back its aid to China in recent years, partly because of concern among some lawmakers that the funds are funnelled into military spending.

Japan decided in March 2005 to extend about 85.9 billion yen worth of loans, bringing its total loan aid to China to more than 3 trillion since 1979, but has already decided to halt fresh loans by the time of the Beijing Olympics in 2008.

CHINA TIES IN PM RACE

Japanese media said a meeting between Foreign Minister Taro Aso and Chinese Foreign Minister Li Zhaoxing in Qatar last month, the first foreign ministerial contact between the two nations in about a year, had cleared the way for the aid decision.

Relations with China have also emerged as a focus of debate in the race to succeed Koizumi when he steps down in September.

Chief Cabinet Minister Shinzo Abe, the frontrunner in the leadership race, has criticised Beijing for refusing to hold leaders' summits because of the dispute over Koizumi's visits to Yasukuni shrine. But on Sunday Abe declined to say whether he would continue the practice if elected prime minister.

His main rival, veteran ruling party lawmaker Yasuo Fukuda, supports a proposal to build a new, secular war memorial where Japan's war dead can be honoured without offending China and South Korea, where bitter memories of Japan's aggression persist.
Chinese Commerce Minister Bo Xilai last week blamed slowing growth in trade between China and Japan on the political tension triggered in part by Koizumi's Yasukuni pilgrimages.

Sino-Japan trade rose just 9.9 percent last year, slower than China-EU and China-U.S. trade, Xinhua news agency said.

Japanese business leaders have also expressed concern about the fallout of the diplomatic feuding on economic ties.

The Japanese government decides its total aid budget before the start of each fiscal year in April but usually does not decide on the final breakdown until the end of the year.

Foreign Ministry officials had stressed that the delayed decision on aid to China was not a freeze and that the flow of money had not been halted since project loans are often disbursed over several years.