Security concerns and political uncertainty in Iraq are discouraging Japanese companies from joining in the race for a slice of the country's lucrative energy sector, a Japanese diplomat said.

Tokyo's cautious approach contrasts sharply with a more aggressive investment tactic pursued by its rivals such as China, which has made inroads into Iraq's battered economy.

Hideyuki Urata, counsellor for economic and commercial affairs at the Japanese embassy in Baghdad, said protracted wrangling over a new government prevented Japanese majors from making swift investment decisions.

"We are making efforts to encourage Japanese companies to come here," he told Reuters in an interview at the Japanese embassy compound inside Baghdad's heavily guarded Green Zone.

"We cannot say that currently the situation is totally stable and we are waiting for the formation of a new government. Most Japanese companies are waiting for the security situation in Iraq to stabilise."

As competition over new emerging markets heats up, US Under Secretary of Commerce Francisco Sanchez, in Iraq on a trade mission this week, urged US firms to hurry up with investments to avoid losing out to others.

Iraq has long urged Japan to set up shop on its soil and help rebuild its economy, which is in tatters after decades of violence, sanctions and economic decline.

Even though drive-by shootings and explosions still occur daily, overall violence has subsided, and foreign investors are scrambling to grab contracts, particularly in oil and gas.

Japanese majors such as Nippon Oil, Mitsubishi Heavy Industries and Sumitomo have voiced their interest, and there have been some tentative deals.

Japanese companies are mainly looking at the oil and electricity sectors, Urata said. "We can expect a lot of projects in those fields coming in the future."

Japan Petroleum Exploration Company, in partnership with Malaysia's Petronas, last year signed a deal with Iraq to develop the Gharaf oilfield, one of several development contracts auctioned by Iraq in 2009.

But the overall Japanese presence remains limited. Nippon Oil initially grabbed attention by announcing interest in Nassiriya oilfield, but those talks reached a dead end in February.

Japan was a top Iraqi trade partner before the years of war and sanctions. Hundreds of Japanese engineers and managers worked in the country in the 1970s. Now there are just about 30 Japanese left in Iraq, half of them diplomats, Urata said.

Urata said the attitude was changing, citing last year's Japanese investment forum held at Baghdad airport. Even though delegates did not venture out of the airport, their willingness to visit Iraq even for a day was seen as a step forward.

"Their mindset is changing right now," he said. "I think last year was a good starting point to rethink their attitude towards Iraq."-Reuters