According to data from Defense News, it seems to casual observers that Japanese defense companies have been losing their international competitiveness in recent years. From 2000 to 2018, at least five Japanese firms were ranked in the top 100 defense firms in the world, except for 2002. In 2003, as many as 12 Japanese companies were ranked in the top 100. In 2019, only three Japanese defense companies were ranked in the top 100. In 2020, only Mitsubishi Heavy Industries was ranked in the top 100 defense companies (as the 21st). Have Japanese defense companies actually lost their international competitiveness in the defense market despite relaxation of Japan’s self-imposed arms export ban policy?
Japan’s Arms Export Ban Policy
After the end of World War II, Japan was forced to demilitarize itself, and arms production in Japan was prohibited by the Allied Powers as part of the process. As a result of the outbreak of the Korean War in 1950 however, Washington requested that Japanese industry provide U.S. forces with maintenance materials, and the Japanese government began producing defense equipment in the midst of the special procurement demand. On August 1, 1953, the Ordnance Manufacturing Act was promulgated, and arms export was permitted in accordance with the approval by the Minister of International Trade and Industry.
In the Cold War period however, Prime Minister Sato Eisaku announced the Three Principles on Arms Exports in 1967 in order to ban arms export to communist bloc countries; countries subject to arms export embargo under United Nations Security Council resolutions; and countries involved or likely to be involved in international conflicts. In 1976, Prime Minister Miki Takeo moreover pledged “not to permit the export of arms to the countries or regions restricted in the Three Principles” and “to refrain from arms export to other areas not included in the Three Principles.” The self-imposed restriction on arms export was somewhat relaxed during the Nakasone Yasuhiro and the Noda Yoshihiko administrationsn, but the policy basically prohibited Japan from transferring its defense equipment and technology to other countries.
During the Abe Shinzo administration, the restriction on arms export was officially lifted by the “Three Principles on Transfer of Defense Equipment and Technology” on April 1, 2014, replacing the Three Principles on Arms Exports. The first principle is “clarification of cases where transfers are prohibited.” Overseas transfer is not permitted when “1) the transfer violates obligations under treaties and other international agreements that Japan has concluded, 2) the transfer violates obligations under United Nations Security Council resolutions, or 3) the defense equipment and technology is destined for a country party to a conflict.” The second principle is “limitation to cases where transfers may be permitted as well as strict examination and information disclosure.” The transfer is permitted for contribution to “active promotion of peace contribution and international cooperation, or Japan’s security.” The third principle is “ensuring appropriate control regarding extra-purpose use or transfer to third parties.”
The deregulation of Japan’s arms export ban policy was expected to contribute to strengthening the Japan-U.S. military alliance. In addition, the Acquisition, Technology, and Logistics Agency (ATLA) was established as part of the Ministry of Defense on October 1, 2015 with a view toward facilitating and implementing the arms export policy.
Still, Japan has not necessarily been successful in the global defense market for the past five years. Immediately after lifting the arms export ban, Japan attempted to sell its P-1 maritime patrol aircraft to the United Kingdom, yet it ended up in failure as the United States won the bid. Also, Tokyo negotiated with Canberra over the transfer of Japan’s Soryu-class submarines to Australia. Australian Prime Minister Tony Abbott was enthusiastic about the defense deal, but Japan lost in the race with a French shipbuilder, Direction des Constructions Navales Services (DCNS) which assured Malcolm Turnbull, as a successor to Abbott, that the deal would create more than 1,000 local jobs in Adelaide. Unlike the DCNS, Japan’s defense companies, such as Mitsubishi Heavy Industries and Kawasaki Heavy Industries, insisted on building the submarines in Japan, and therefore it was perceived by the Australian side that Japanese defense firms were not enthusiastic about selling the submarines.
Multiple Factors Influence Japan’s Defense Industry
The case of the submarine deal with Australia must have been a traumatic experience for the Japanese side, and it was due to a lack of experience in the global arms export market. Another fundamental factor leading to the stagnation of Japan’s arms exports might be the longstanding influence of pacifism and antimilitarism over Japan’s security policy and defense industry. Even after the arms export ban was lifted, Japanese defense companies have been concerned about being called a “merchant of death,” since such labeling would negatively affect their images and sales. For instance, a defense equipment fair supported by ATLA for the purpose of the promotion of Japan’s defense industry was held on November 18, 2019, but it drew some 400 protestors, chanting “Don’t turn Japan into a merchant of death!”
Moreover, some Japanese companies have stopped producing defense equipment for the Ministry of Defense. Komatsu, for example, which developed light armored vehicles (LAVs) for the Japan Ground Self-Defense Force (GSDF) decided not to continue manufacturing the LAV. Komatsu LAVs were utilized in United Nations peacekeeping operations as well as postwar reconstruction and humanitarian assistance in Iraq, but the company was determined to withdraw from the LAV market due to “low demand and meager profits.” As well as LAV development, Komatsu’s ammunition business has declined, and it has been inferred that “Komatsu will withdraw completely from the defense business” despite the fact that the company has been one of the most important suppliers to the Ministry of Defense.
Japan’s Defense Industry Is Not Fading Into Oblivion
Having said that, it is premature to jump into a conclusion that Japan’s defense industry has been tapering off. According to top 100 arms-producing and military services companies in the world in SIPRI Fact Sheet 2019 compiled by the Stockholm International Peace Research Institute (SIPRI), six Japanese defense companies were ranked in the top 100. Notably, it has been pointed out that the data by Defense News “depend in large part on the willingness of contractors to provide sales data” and therefore “there are some omissions.” Accordingly, it is not logical to blindly judge that Japanese defense industry has been losing their international competitiveness.
Although the SIPRI data exclude Chinese companies, there are only eight Chinese companies ranked in the top 100 in 2020 according to Defense News. In other words, the entry of Chinese defense industry into the top 100 world ranking does not simply signify the decline of Japanese defense industry. Meanwhile, the increase of Japan’s expenditure on American defense equipment through the Foreign Military Sales (FMS) system, especially the purchase of F-35 Joint Strike Fighters, could be another influence over Japan’s defense firms. Yet, it has been observed that Tokyo might have begun reconsidering its arms deals with Washington, as shown in the case of Aegis Ashore system cancellation.
In sum, the world ranking of Japan’s defense companies by Defense News has been changing, but it does not mean that the country’s defense industry has been dwindling away. In the meanwhile, although the influence of COVID-19 pandemic over projects of Japan’s defense companies would be limited thanks to the allocation of defense budget as analyzed by Deloitte Japan, the existence of uncertainties and the occurrence of unexpected risks for defense industry due to the pandemic are inevitable. Small and medium-sized companies in Japan could be inevitably affected by the pandemic. Japan’s annual defense-related budgets have been on the increase since 2012, and therefore, the Suga Yoshihide administration is expected to protect the domestic defense industry and facilitate their defense equipment exports to countries of the Indo-Pacific region for the defense of Japan as well as the peace and security of the international community.