The ministry has asked for an initial 80 million yen (USD 642,000) from the finance ministry for the next fiscal year starting April to produce a mock aircraft, the Yomiuri Shimbun reported.
It said that military planners want to complete the development programme for planes featuring advanced surveillance radar by the mid-2020s, to replace Japan's US-made E-2C Hawkeye planes, which are based on a 1960s design.
Japan says it scrambled fighter jets more than 800 times in the last fiscal year to shadow intruding aircraft, mostly from China and Russia. That was the highest number of deployments since the final year of the Cold War in 1989.
Today's report comes after Japan lifted a self-imposed ban on weapons exports, as Prime Minister Shinzo Abe looks to expand the country's diplomatic and military reach after a long period of economic stagnation.
Defence ministry officials could not be reached to comment on the report.