* Nippon Steel planning $1 bln a year in strategic spending
* Acquisition targets may arise amid oversupply, falling prices -analysts
* New Japanese processing plants coming up in China, Indonesia
TOKYO, May 9 (Reuters) - Japanese steelmakers, fresh from a bumper year of profits amid an upswing in their home market after massive government stimulus, are looking to step up expansion overseas despite the prolonged supply overhang that now grips Asia.
The fresh drive overseas means top Japanese steelmakers will be producing more than half of the total output of their mainstay automotive steel sheets in factories outside Japan by 2016, as their home market stagnates with a falling population.
Executives at steelmakers such as Nippon Steel & Sumitomo Metal Corp and JFE Holdings are faced with little choice but to accelerate their push abroad as the effects of the stimulus led by Prime Minister Shinzo Abe wane and spending on autos falls after a sales tax hike from April.
"As for automotive steel, Indonesia is a key area where we would consider to invest," Executive Vice President Katsuhiko Ota said at an earnings briefing on Friday, adding that expansions of plants in India and China are other issues to tackle.
"We'll be also studying various investment options overseas including upstream (crude steel production). But we need to figure out which investments are the most beneficial when the supply-demand gap is so huge," he said.
Given the excess supply fuelled mostly by Chinese output of about 780 million tonnes of crude steel a year, Japanese mills are reluctant to invest in blast furnaces, but they are eager to enlarge their processing plants and clientele in Asia.
Nippon Steel, which on Friday reported for the year ended March 31 a return to net profit that was the highest since the start of the global financial crisis in 2008, plans to set aside about $1 billion a year in extra strategic spending, mainly for overseas expansion.
It spent about $0.78 billion to buy a U.S. plant from German rival ThyssenKrupp with ArcelorMittal in the $1.55 billion deal that was completed in February.
Some analysts say cheap acquisition targets may arise for Japanese firms as foreign competitors are suffering from prolonged oversupply and falling steel prices.
Japanese steel executives say they need to boost their output outside of Japan to grab a bigger slice of growing overseas markets over the long term.
They have benefited from a falling yen over the last year and a half, which boosted volume and margin of exports for their biggest customers, the automakers, but that is unlikely to last.
"We need to be able to supply materials in Asia and the rest of the world as the globalisation of Japanese automakers won't stop even after the yen turned weaker from the super high levels," JFE Executive Vice President Shinichi Okada said at an earnings briefing late last month.
JFE plans to focus on expansion of overseas processing facilities for now, but it is also willing to look into any good opportunity in owning a blast furnace abroad, he said.
JFE has said it was considering taking a majority stake in a project to construct a plant in Vietnam with steel sheet production capacity of 3.5 million tonnes that could go onstream in 2016, but decisions have been pushed back due to the oversupply.
Earnings results released by Friday showed Nippon Steel's recurring profit - pretax and before one-off items - jumping 4.7-fold to 361 billion yen ($3.55 billion) for the year through March on solid demand for construction and automobiles at home, while JFE's profit grew 3.3-fold to 174 billion yen.
Kobe Steel Ltd, Japan's No.3 steelmaker, returned to the black with 85 billion yen in recurring profit, against a loss of 18 billion yen a year earlier.
By contrast, South Korea's POSCO last month cut forecast for sales and investment for this year after its first quarter profit missed estimates.
China's Baoshan Iron & Steel Co Ltd posted a 7 percent fall in its first-quarter net profit due to a weak economy and over-capacity.
Japanese mills, about 30 percent of whose demand comes from automakers, have been gradually boosting overseas production in the wake of the yen's jump after the 2008 financial crisis as it pushed manufacturers to transfer their plants outside of Japan.
A strong yen raises operating costs at home and makes Japanese exports less profitable, while making overseas investments more affordable.
To cope with rising demand in Asia, Nippon Steel built processing plants for automotive steel in Thailand and Mexico last year. Its annual overseas output capacity of automobile steel sheet, combined with the recently purchased U.S. plant, is expected to hit 9 million tonnes this year, surpassing domestic capacity of 8 million tonnes.
JFE also added processing plants in Thailand and India over the past year and is building another one in Indonesia by 2016. Nippon Steel and Kobe Steel plan to add new facilities in China by 2015 and 2016, respectively.
($1 = 101.6050 Japanese Yen)
(Editing by Aaron Sheldrick and Tom Hogue)