From 1948 to 1967, when a New Zealand soldier was killed while serving overseas they were buried in the nearest suitable Commonwealth or allied forces cemetery.
Mr Key acknowledged the issue was highly sensitive, but said it was complicated by differing views among families.
"It is a very delicate issue, and there is quite a range of views from families. Some families want their loved ones to lay where they are currently buried. Others do want to bring them home."
Asked why the decision could not be made simply on what each family wanted, Mr Key said changing the policy could lead to people who had lost relatives in other conflicts wanting similar action.
"You could take a broader view of that, there may be people who would want to go a long way back...we have an awful large number of New Zealanders buried overseas.
"It is difficult. And I fully accept it is very raw for certain individuals, but I think, on balance, it is right to continue with the policy."