Kan's comments come amid heightened tensions with China over disputed islands and growing military activities by the rapidly developing Asian giant and follow a report that North Korea may be preparing for a third nuclear test.
"The security situation surrounding Japan is becoming more severe, seen in concerns over North Korea's missile and nuclear arms development and in China's increasing naval activity along with its military modernisation," Kan said at an inspection parade of troops in suburban Tokyo.
"The Self-Defence Forces need to be poised to deal with various situations effectively," Kan said, using the official name of the Japanese troops.
Kan also stressed the importance of strengthening the decades-long alliance with the United States, saying: "I'd like to deepen the alliance into an appropriate form for the 21st century."
The prime minister attended the parade for the first time as the premier of the government led by the centre-left Democratic Party of Japan, which ousted a conservative government last year.
In the latest development in the bitter spat between China and Japan, Tokyo on Sunday urged Beijing to normalise rare earth exports that are crucial for high-tech Japan after shipments were blocked last month.
Japanese trade minister Trade Minister Akihiro Ohata said he had urged Chinese Vice Minister of Commerce Jiang Yaoping to "make improvements so that exports of rare earths will be carried out smoothly," amid continued interruptions caused by strict inspections by Chinese customs officials.
The Chinese navy has increasingly been deployed to areas near Japanese territorial waters in a show of force by China.
In an incident in April this year, a large Chinese flotilla ventured near a group of Japanese islands in the East China Sea and sent out a helicopter that buzzed Japanese navy ships monitoring their movement.
The increased Chinese activity in its southern waters has sparked a defence rethink in which Japan plans to deploy more forces to its scattered southern islands and away from Cold War-era locations in the north near Russia.
Beijing's increased assertiveness, particularly in the South China Sea, has caused jitters among other neighbouring nations as well as the United States, which is also at odds with China over trade and currency issues.
South Korea's Unification Minister Hyun In-Taek said Friday the chances of another nuclear test by the communist North could not be ruled out, although the likelihood was low.
Source: AFP Asian Edition