Japan has revised its defence policy to allow for a greater role in global military co-operation.
Japan's troop deployment in Iraq has been extended for another year
The new guidelines, the first for nine years, re-state Japan's constitutional pledge never to threaten other nations.
But the changes also ease some of the restrictions on Japan's military, allowing it to collaborate with the US in areas of missile defence.
The report singles out North Korea as a particular area of regional concern, along with China's military build-up.
The guidelines were unveiled just a day after Japan extended its troop deployment in Iraq for another year.
The non-combat mission has caused controversy in Japan, being the nation's first mission since 1945 to a country where fighting is under way.
Re-states 1945 pacifist constitution
Partially lifts arms sales ban, to allow joint US missile research
Highlights N Korea and China as nations to monitor
Military spending to be cut, reducing troop levels
More emphasis on terrorist and missile threat
Signals wider role in global peacekeeping missions
In its new National Defence Outline - covering a period from April 2005 to March 2009 - the cabinet was careful to stress the principle of self-defence which has governed Japan since 1945.
"Abiding by the basic principle under Japan's constitution, our country, devoting itself entirely to self-defence, will never threaten other countries or become a military power," the
But the plan does allow for certain key changes, in order to reflect what Japan sees as the world's changing security situation.
A ban on arms sales will no longer apply in areas like anti-missile defence, where Japan wants to develop new systems jointly with the United States.
The new guidelines identify North Korea as an area of concern, describing the Stalinist nation's military moves as "serious, destabilizing factors for regional security".
North Korea's possession of missiles which can reach Japan has persuaded many Japanese that their country should rely less on the US - and more on itself - for security, according to the BBC correspondent in Tokyo, Jonathan Head.
Neighbours like North Korea are making Japan nervous
China's military build-up was also singled out as an area which Japan needed to monitor.
"China, which has a great impact on security in this region, is pushing ahead with enhancing its nuclear and missile capabilities... We need to continue to watch these moves in the
future," the guidelines stated.
The two countries have a prickly relationship, complicated by memories of Japan's occupation of China during World War II, and more recently by rivalry over diplomatic influence and access to natural resources.
Under the new guidelines, military spending is due to be cut by more than 3% over the next five years, and troop levels are set to be reduced by 5,000 to 155,000.
But Friday's announcement also signalled a move to more mobile and multi-functional military capabilities, and the need for a more proactive contribution to peacekeeping.
According to our correspondent, this suggests that in future Japanese forces will be deployed overseas more frequently.
But the new policy does not incorporate a controversial suggestion by business leaders and academics that Japan should consider acquiring a pre-emptive strike capability.
"We are not in a position to consider having the capability of attacking missile bases in an enemy country," a senior Japanese official told Reuters news agency.
None of the changes announced on Friday amount to a revolution, according to our correspondent.
But there is little doubt that they set Japan on the path to becoming a nation whose military muscle more closely reflects its economic power, he says.