TOKYO (Reuters) - Japan Airlines Co (>> Japan Airlines Co Ltd) said on Thursday that it has agreed to buy 32 Mitsubishi Regional Jets worth around $1.5 billion, giving Japan's first domestically manufactured commercial passenger plane in half a century a needed sales boost.

Japan Airlines, which also ordered 15 regional E-jets from Brazil's Embraer (>> Embraer SA) for delivery from 2015, said it will start deploying the MRJs on domestic routes in 2021.

The MRJ venture - 64 percent owned by Mitsubishi Heavy Industries (>> Mitsubishi Heavy Industries Ltd) and a tenth owned by Toyota Motor Corp (>> Toyota Motor Corp) - has struggled to win orders amid production delays and withering competition from the world's two leading regional aircraft makers Embraer and Bombardier Inc (>> Bombardier, Inc.).

The venture, which has a $1.9 billion development budget, risks repeating the commercial flop of its made-in-Japan predecessor, the YS-11 in the 1960s, unless it can garner more demand. With fewer than 200 confirmed orders, the 70 to 90-seat jet is likely still far away from breaking even, industry analysts say.

Japan Airline's rival home carrier ANA Holdings Inc (>> ANA Holdings Inc) has ordered 15 of the Mitsubishi aircraft with options for 10 more and plans to fly the aircraft from 2017.

The aircraft maker says the jet will burn 20 percent less fuel than comparable jets. That however is mostly the result of fuel-efficient Pratt & Whitney (>> United Technologies Corporation) PurePower engines rather than innovations in the air frame design.

Dulling the fuel-saving sales pitch for the MRJ, both Embraer and Bombardier have said they use the same engines for their next generation of aircraft.

Delays in development also mean MRJ is losing its edge in getting to market before those new versions from Embraer and Bombardier take to the skies.

STILL BULLISH

The MRJ's manufacturer remains bullish about potential demand for regional jets, predicting sales of as many as 5,000 in the 70 to 90-seat class over the next two decades.

That forecast, however, is almost double the demand predicted by Embraer and Bombardier. It also far exceeds the market size estimated by the Japan Aircraft Development Corp, an industry association which includes Mitsubishi Heavy.

Japan's government is not however measuring the projects success by commercial orders alone.

Like the YS-11, the MRJ is meant to help the aerospace industry retain engineers and learn new skills that could help it win new business from the likes of Boeing Co (>> The Boeing Company), which already builds large portions of its planes in Japan, accounting for around 22,000 jobs.

The orders for the MRJs, which have financial backing from the Japanese government, comes in an increasingly politicised atmosphere for Japan Airlines and rival ANA Holdings.

Since Japan Airlines' bankruptcy and bailout by a rival administration, the former state-owned flag carrier has fallen out of favour with Prime Minister Shinzo Abe's Liberal Democratic Party, which returned to power at the end of 2012.

The political cold-shoulder was blamed by the carrier for a lower allocation than ANA of valuable landing rights at Tokyo's crowded Haneda Airport last year.

More recently, the government awarded the contract for maintenance of two Boeing 777s that it has ordered for government use to ANA, ending an agreement with Japan Airlines, which currently services two Boeing 747s used by the prime minister and other senior figures for overseas travel.

(Editing by Ryan Woo)

By Tim Kelly