Japan plans to slash official development assistance (ODA) by 5.8 per cent next year as worries about a snowballing budget deficit outweigh the humiliation of slipping to second place in the world donors league.

The cuts, outlined in the Finance Ministry's draft for for the fiscal 2003/04 budget presented to Prime Minister Junichiro Koizumi's cabinet last week, follow a 10.3 per cent cut in the current year to end-March.

The government put on a brave face, saying the leaner aid budget of 857.8 billion yen ($7 billion) was a result of cuts in wasteful spending and that help for the needy would not be compromised.

"We have secured a scale that is necessary to sufficiently and appropriately carry out our international responsibilities," a Finance Ministry official told reporters.

The number of dams and other big infrastructure projects in developing countries funded by Japanese ODA has been criticised for destruction of the environment and feeding corruption, but declining aid has raised concerns among recipient countries.

Japan has slipped to second place after the United States as a disperser of global aid but still tops the list in Asia, doling out 57 per cent of the region's total official aid.

The Organisation for Economic Cooperation and Development said earlier this year that Japan lost its position as the world's leading aid donor in 2001, partly due to a weaker yen.

Japan, pressured by a weak economy, is mapping out a strategy to make better use of its still vast resources.

The finance ministry official said contributions to key supranational institutions were left unchanged or even increased in the draft budget, while those to entities deemed less financially strapped were cut.

For instance, funding of 10.6 billion yen ($88 million) to the United Nations Development Programme and nine billion yen to the United Nations High Commissioner for Refugees were steady, while contributions to the World Bank were reduced.

The official said Japan wanted to use its clout to take a higher profile in global affairs by offering help in trouble spots.

The draft budget included a 15 billion yen grant for "human security" projects, such as de-mining, combating the drugs trade and resolution of regional conflicts.

A 16 billion yen grant was set up for water resource development and no reduction was made to a 22.2 billion yen grant for emergency issues, such as refugee support and reconstruction of war-torn areas.

Earlier this month, Japan hosted a donors' meeting for Indonesia's strife-ridden Aceh province as an inducement to a peace pact to end decades of bloody conflict.

It also announced it would do the same for Sri Lanka next year, after sponsoring peace talks in Tokyo.

The Sri Lanka donors conference was announced after a breakthrough in talks between rebel Tamil leaders and the Sri Lankan government in Oslo, but ahead of any formal peace deal.

The new effort to focus aid on global trouble spots is in part an attempt to play a role in maintaining world security after the September 11 attacks on New York and Washington.

Such security worries led Tokyo to host a donors' conference for Afghanistan last January, and Japan itself pledged $250 million for the war-torn land in 2002.

Japan is expected as well to be heavily involved in the reconstruction of Iraq after any attack by the United States.

Japan has also done an about-face on debt forgiveness to heavily indebted poor countries, announcing earlier that it would forgive up to 900 billion yen in ODA loans to countries such as Bangladesh, Myanmar and Ghana from next March.

Previously, Japan had preferred giving out additional grants to help recipients pay back existing debt, rather than simply forgive the debt.

"That policy never went down well among taxpayers at home nor did it impress people abroad," the ministry official said.

Quirky bureaucracy aside, Tokyo has had a hard time lately convincing voters of the strategic importance of foreign aid, particularly after a series of scandals involving bribes and kickbacks for foreign aid projects.

The image of Japan's overseas aid programme has been tainted by scandals, such as alleged bid-rigging that led to the arrest in August of three executives at Mitsui and Co, Japan's second biggest trading house.