Japanese latest step in the supply of scarce land supply,

Japanese trading house Sojitz Corp (2768.T) said it has forged a rare earth procurement deal with Australian miner Lynas Corp (LYC.AX), marking the latest move by Japan to reduce its reliance on China for the crucial minerals.

News of the deal comes one day after Australia promised to be a future long-tem supplier of rare earths to Japan, after shipments from China to Japan had stalled amid a spat over disputed islands in the East China Sea.

Shares of Sojitz surged 9 percent on the news, with volume spiking to more than 8 times the daily average of the past 3 months.

Under the agreement, the two aim to start shipments of 1,000 to 3,000 tonnes of rare earth in the final quarter of 2011, and boost shipments to more than 9,000 tonnes per year by early 2013, Sojitz said.

Sojitz and the state-run Japan Oil, Gas and Metals National Corp (JOGMEC) will together invest up to $250 million to finance a Lynas expansion project, Sojitz said, adding that buying a stake in Lynas in the future was an option.

China has a virtual monopoly on world supplies of rare earths, used in everything from flat screens to defence equipment, and its moves to curb exports have prompted consumer nations to look for alternative supply sources and suppliers to expand business opportunities.

Lynas, which plans to begin production next year, has already signed about half a dozen supply contracts including a new long-term deal with a European consumer announced earlier this month.

While China accounts for about 97 percent of world's total production, rare earths reserves are available in other regions.

China has the largest reserves, accounting for 36.4 percent of total, followed by 19.2 percent in the Commonwealth of Independent States, 13.1 percent in the United States and 5.5 percent in Australia, according to USGS Mineral Commodity Summaries.

Japan's trade minister Akihiro Ohata said on Wednesday that Japan-bound rare earth shipments have left China, confirming the end of a de-facto suspension by Beijing on exports of the minerals since late September.

Japan has been stepping up efforts to diversify its sources of supplies of the strategic minerals, agreeing with Mongolia last week to cooperate on developing mineral resources, including rare earths.

Last month, Tokyo agreed with India to cooperate in developing and recycling rare earth minerals and rare metals, as well as with Vietnam to mine rare earths in the southeast Asian nation.

Demand for rare earths is forecast to grow by between 7 percent and 9 percent a year over the next five years against a 5 percent increase in supply, according to Resource Capital Research analyst Trent Allen.

"This could create severe undersupply of some elements, especially the scarce middle and heavy rare earths," Allen said.

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