TOKYO, March 13 (Reuters) - Japan will tweak its military equipment transfer rules to allow exports of the jet fighter it is developing with Britain and Italy, the country's leader said on Wednesday, removing an obstacle that could have stymied the project.

The joint Global Combat Air Programme (GCAP) last year established a joint organisation and industry group led by Britain's BAE Systems PLC, Japan's Mitsubishi Heavy Industries and Italy's Leonardo that aims to deploy an advanced fighter by the middle of the next decade.

Without a loosening of Japan's military export rules, which ban overseas sales of lethal equipment, Tokyo's partners would have been unable to sell the aircraft abroad, which would cut unit costs by spreading development expenses across more planes.

After months of political wrangling between Prime Minister Fumio Kishida's ruling Liberal Democratic Party and its coalition partner Komeito, the government has agreed to allow exports to countries that have defence equipment transfer agreements with Japan and are not embroiled in any conflicts, Kishida told the country's parliament.

Each export will also require Cabinet approval and the rule change will be limited to the GCAP fighter, he added. Japan, Britain and Italy may involve other nations as junior partners in GCAP. Saudi Arabia is among the contenders because it would bring money and a lucrative market to a project expected to cost tens of billions of dollars, sources have said.

Other companies involved in the project include European missile maker MBDA, Japanese avionics manufacturer Mitsubishi Electric Corp, and engine makers Rolls-Royce PLC , IHI Corp, and Avio Aero. (Reporting by Tim Kelly; Editing by Gerry Doyle)