The Malaysian leader said that in the past 25 years "overall military expenditure has grown by 187%" in the region.
He said that in 1988, Asian defence spending constituted 8 per cent of global military expenditure, but by 2012 the figure had risen to 20 per cent.
"Countries have every right to defend themselves," he said in a keynote address at the Nikkei International Conference on the Future of Asia held in Tokyo.
"But, regular arms replacement programmes aside, this trend indicates deeper concerns about security and conflict - concerns that could swiftly become self-fulfilling."
"To address this risk, we should reject the siren song of competitive armament, and seek wherever possible to strengthen the multilateral and diplomatic ties that check instability."
"Confronted with complex disagreements between states, Asia must place its trust in diplomatic solutions," he said.
China has been pressing claims to terrritory in the South China Sea into waters claimed by Vietnam, Malaysia the Philippines and Brunei, as well as Taiwan.
Beijing has been reclaiming land in the Johnson South Reef to allegedly build an airstrip in the area claimed by the Philippines.
It also deployed a mobile deep-sea oil drilling rig near the Paracel Islands claimed by Hanoi, triggering anti-Chinese protests across Vietnam that turned into riots and left two Chinese workers killed and more than 100 injured this month.
"We must affirm our commitment to rule-based solutions to competing claims," Najib said.
"International law - and not economic or military coercion - should guide the resolution of disputes over resources."