Japan aims to cut domestic consumption of a heavy rare earth used widely in hybrid cars and electronics by 30 percent over the next two years as China keeps a tight grip on exports of the material, known as dysprosium.

China ratcheted up export controls on the rare earth, mainly used in high-powered magnets, early last year, sending prices 10 times higher to around 3,000 yen per tonne by the middle of 2011, though it is now trading at about 2,000 yen.

China produces about 95 percent of global rare earth supplies, but says that excessive production is depleting its reserves and damaging its environment.

Japan's government said it would spend 5 billion yen ($65 million) in two years on assisting companies in cutting their usage of the dysprosium through recycling and the development of dysprosium-free products. It aims to slash the metal's domestic use by 200 tonnes to 400 tonnes a year.

All domestic makers of high-power magnets that use dysprosium have applied for the scheme, a Ministry of Economy, Trade and Industry official said.

Japan's high-powered magnet makers are grappling with tight supplies of dysprosium, which is commercially available at a reasonable cost only in China.

Magnet makers including TDK Corp are engaged in the development of new motors that use less dysprosium. Toyota has come up with a way to make hybrid and electric vehicles without the use of the metal, Japan's Kyodo news agency said last month.

Mitsubishi Materials Corp, Panasonic Corp and TDK are working on a project to recover the expensive metal from discarded air conditioners, the ministry official said.

Some analysts have said that China's policies on rare earths are designed to give priority of supply to domestic consumers and encourage foreign consumers, mostly in high-tech strategic sectors, to move their operations to China.

China has rejected this, saying nationwide output caps have also raised domestic prices and forced local users to scale back operations.

($1 = 76.8800 Japanese yen)

(Reporting by Yuko Inoue; Editing by Joseph Radford)