Taiwan has demanded the Philippines apologise by midnight Tuesday (1600 GMT) over the killing of the 65-year-old fisherman by coastguards last week or face a potential freeze in sending workers to the island.
The defence ministry said the military was prepared to conduct an exercise in the waters where Hung Shih-cheng of the 15-tonne Guang Ta Hsin 28 was shot Thursday.
"We've prepared ourselves and staging an exercise in the Bashi Channel is one of the military's options," he told AFP.
"Whether or not to conduct the drill would be up to the reaction of the Philippine government."
Taiwan has also asked the Philippines to bring to justice the coastguards responsible and start negotiating a fisheries agreement.
Lo declined to provide details but the state Central News Agency said the exercise would be held Thursday and involved a Kidd-class destroyer, a Perry-class frigate and three coastguard frigates.
A number of fighter jets would also be involved in the drill which would for the first time target the Philippines as the enemy, it said.
The incident has sparked public outrage in Taiwan, where hundreds of angry fishermen burned Philippine flags and hurled eggs at Manila's de facto embassy in Taipei Monday.
Taiwan at the weekend sent four coastguard and naval vessels to protect its fishermen in waters near the Philippines.
US State Department spokeswoman Jen Psaki has urged all sides "to refrain from provocative actions" while Philippine President Benigno Aquino called for calm and guaranteed an in-depth investigation into the incident.
The Philippine coastguard has admitted firing at one of four Taiwanese fishing vessels it said had strayed into its waters, allegations denied by the victim's son who was with his father and two other sailors on the boat at the time.
Taiwan prosecutor Liu Chia-kai described the incident as "nothing but a slaughter", after examining the boat which he said was hit by more than 50 bullets.
The incident comes at a time of heightened tensions around the region over rival claims to the nearby South China Sea.
China, the Philippines, Taiwan, Vietnam, Malaysia and Brunei all have competing claims to parts of the sea.
Navy, DND mum on Taiwan threat
Both the Philippine Navy and the Department of National Defense (DND) refused to comment on Taiwan's move to conduct naval drills in waters near the Philippines following the killing of a fisherman by the Philippine Coast Guard.
Both the Navy and DND referred the matter to the Department of Foreign Affairs.
Lieutenant Commander Gregory Fabic, Navy spokesman, said the Navy has standby assets in Batanes which will monitor the situation.
The Coast Guard has yet to release the results of its investigation on the shooting of a Taiwanese boat off Balintang Channel last week which left an elderly fisherman dead.
AFP
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