(Adds Japanese government quotes in paragraphs 15, 17-18)
By Aaron Sheldrick
TOKYO, March 5 (Reuters) - Russia's incursion into Ukraine is setting off alarm bells in Tokyo, where officials worry that any push by Japan's Western allies to impose economic penalties will undermine its drive to improve relations with Moscow.
While U.S. President Barack Obama and other G7 leaders of advanced economies talk of sanctions or other punitive responses, Japanese officials say ties with Moscow remain on track.
There has been no change in the direction of economic and resource diplomacy between Japan and Russia, Trade Minister Toshimitsu Motegi said on Tuesday.
In reality, "they are in a state of shock", one diplomatic source close to the situation said, referring to Japanese officials. "It is a big pain in the back for the Japanese government."
Closer ties are being driven by mutual energy interests, as Russia plans to at least double oil and gas flows to Asia in the next 20 years and Japan is forced to import huge volumes of fossil fuel to replace lost energy from its nuclear power industry, shut down after the 2011 Fukushima disaster.
"If Western countries come together and agree to take action such as imposing economic sanctions, we may be affected," said a senior executive at a Japanese company involved in the energy sector in Russia.
"We don't know what will happen at the moment, but I am afraid the energy sector usually gets a lot of attention."
Japan's Prime Minister Shinzo Abe has made better ties with Moscow a priority since returning to power 15 months ago and has met Russian President Vladimir Putin five times, despite a territorial dispute dating from World War Two.
By contrast, Abe has not met either of the leaders of neighbouring South Korea or China. Tokyo is embroiled in disputes over uninhabited islands and wartime history with both countries.
Russian forces seized Crimea, an isolated Black Sea peninsula with an ethnic Russian majority, without firing a shot following the ousting of the pro-Moscow Viktor Yanukovich as Ukrainian president last month.
All eyes are now on whether Russia makes a military move in predominantly Russian-speaking eastern Ukraine, where pro-Moscow demonstrators have marched and raised Russian flags over public buildings in several cities in the last three days.
Following his return to power in December 2012, Abe has travelled extensively, pushing for expanded trade ties and investment for Japan as he attempts to jolt the country's economy out of more than a decade of stagnant growth.
Russian ties have been a major focus of that diplomatic effort and Abe's visit to Moscow in April last year was the first by a Japanese prime minister in a decade. He has met Putin more than any other leader, Japan's foreign ministry confirmed.
Abe attended the opening ceremony of the Sochi Winter Olympics last month, while Obama, French President Francois Hollande and British Prime Minister David Cameron stayed away. Whilst there, he announced a visit to Japan by Putin in the autumn.
Japanese Foreign Minister Fumio Kishida said on Wednesday that there was no change in the diplomatic schedule with Russia but that Japan was closely watching the situation. Abe said Japan's stance would be decided after comprehensively considering relations with the United States, Russia and the international community.
Official comments by Japanese government officials have stressed the need to respect territorial integrity, softer language than Tokyo signed up to in a G7 statement on the Crimean situation on Monday. G7 leaders pulled out of talks on a G8 summit in Sochi, according to the statement.
Suga on Wednesday reiterated the need to respect Ukrainian sovereignty.
"Our nation's position is that we strongly call for a peaceful solution and we expect all parties involved to act carefully, with self-restraint and responsibility," he told a news conference, adding that the G8 summit was in June and he would refrain from commenting on any decision on taking part.
Japan has a lot at stake. An agreement on the islands east of Hokkaido seized by Russia with the eviction of 17,000 Japanese would involve a peace treaty, after the two sides failed to formally close the war in 1945, and pave the way for closer energy ties.
A dramatic transformation is under way in Russia's energy sector, with oil flows being redirected to Asia via the East Siberia-Pacific Ocean pipeline and Putin pushing for more gas sales to reduce Moscow's reliance on Europe.
Japan now consumes a third of global liquefied natural gas (LNG) shipments, and purchased 10 percent of its supplies from Russia's east, which lies on Japan's doorstep.
Oil imports from Russia rose almost 45 percent in 2013 and accounted for about 7 percent of supplies to the world's fourth-biggest crude importer.
With all the country's nuclear reactors shut down and no timetable for restarts, Tokyo is desperate to diversify and slash costs of energy imports and Japanese companies are involved in projects to export more gas in liquid form.
"A worsening relationship between the US and EU with Russia may damage Japan's ongoing improved dialogue with its closest neighbour if economic, trade, or banking sanctions follow," said Tom O'Sullivan, founder of independent energy consultancy Mathyos Japan.
"This could impact Japan's gas and oil imports from Russia as well as investments in upstream energy assets at a time when Japan's energy security is still threatened due to the continued closure of all of its nuclear power plants."
(Additional reporting by Kaori Kaneko, Yuka Obayashi, James Topham and Osamu Tsukimori; Editing by Alex Richardson)
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