By Risa Maeda

TOKYO, Jan 25 (Reuters) - Japan is set to embark on a five-year plan this year to harness a new form of energy using unused wood biomass to produce auto fuels and other industrial products currently made from imported petrol.

Japan, where two-thirds of the country is covered by forests, can supply a part of alternative fuels made from wood-origin ethanol as well as raw materials for plastic and carbon fibres.

The Ministry of Agriculture said on Friday it was to set aside a total of 1.2 billion yen ($11.2 million) in the next fiscal year's budget to support a few private projects to develop an alternative processing system to that of the petrochemical industry, pending parliament approval.

Satoshi Ishihara, director of the technology development office at the ministry's Forest Agency, said up to 10 billion yen of the total subsidy would be used for a project or projects using the wood for cellulosic ethanol technology.

"We're looking for a cellulosic technology using enzymes and yeasts to cut down the size of such a plant," Ishihara told Reuters on the sideline of a gathering of potential project operators in Tokyo.

Cellulosic is expected to create several billions of dollars in an industry globally in enzymes and fermentation organisms, which help break down the tough bits of the plants into ethanol, as the world seeks economic and environmentally-friendly ways to produce a renewable fuel.

Japan's sole commercial cellulosic plant in Sakai city in Osaka prefecture, western Japan, uses an acid process to produce ethanol from waste wood collected in construction sites.

When the next fiscal year starts in April, the farm ministry also has plans to spend a total of 3.2 billion yen to support a few consortiums comprising farmers, engineers and regional governments to produce ethanol from non-food soft plant parts such as rice stems and use it locally.

Japan, the world's fifth-biggest emitter of greenhouse gases, has a target to replace 500,000 kilo litres in crude oil equivalent of auto use of energy with biofuels in fiscal 2010/11.

Japanese law allows oil distributors to sell gasoline blended with up to 3 percent ethanol. But the circulation of such alternative fuels is so far limited to government-backed test sales. ($1=107.19 Yen) (Reporting by Risa Maeda, editing by Jacqueline Wong)

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