Prime Minister Yoshihiko Noda conducts his annual inspection of the Japanese Self Defence Forces in Tokyo.

In a speech on Tuesday, he reiterated the importance of Japan's military preparedness should regional tensions heighten between its neighbours, including China.

(SOUNDBITE) (Japanese) JAPANESE PRIME MINISTER, YOSHIHIKO NODA SAYING:

"Whether it's China as they look to continue to increase their military power and increase their activities in the surrounding area, or Russia as they increase their activities in the far east when one looks around the world the threat of terrorism or the spread of weapons of mass destruction cannot be ignored."

His warning comes just as his cabinet approved a decision to buy disputed islands from a private owner in a deal worth more than $26 million US dollars.

The islands, known as Senkaku in Japan and Diaoyu in China, are at the heart of a months-long diplomatic row between the two nations due to vast fishing and natural gas resources.

Chinese officials have called the purchase illegal and asked that Japan halt the transaction as Beijing considers its next steps.

Chinese residents in the capital were also upset at the news and held a protest outside the Japanese Embassy.