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Will Japan’s Defense Spending Hike Be Enough?

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Will Japan’s Defense Spending Hike Be Enough?

A weaker yen and recent price surges are causing headaches for Japan’s defense budget.

Will Japan’s Defense Spending Hike Be Enough?

A F-35A of the 301st Squadron takes off from the Japan Air Self-Defense Force’s Misawa Air Base, Mar. 1, 2021

Credit: Wikimedia Commons/ Cp9asngf

There is a growing debate today in Japan over whether the nation’s planned 43 trillion yen ($285 billion) limit for defense spending over the five years through fiscal year 2027 should be reviewed, amid a weaker yen and recent price surges. 

The person who sparked this debate is Sakakibara Sadayuki, former chairman of the Japan Business Federation, the country’s biggest business lobby, commonly known as Keidanren in Japanese.

At the first meeting of a Japanese Defense Ministry expert panel on February 19, Sakakibara proposed that the 43 trillion yen budget framework be reviewed with an eye on soaring prices and personnel costs, as well as the weak yen.

“Given the rising prices and exchange rate fluctuations, we need to reconsider from a realistic perspective whether we can really strengthen our defense capabilities and equipment as required within the 43 trillion yen limit,” Sakakibara said. 

“We should once again discuss more effective standards, the future of the public burden and permanent financial resources without rejecting the review as taboo,” he stressed.

Sakakibara, who is also honorary chair of the Japan Business Federation, heads the ministry’s panel, consisting of 17 members from such fields as economy, defense, and science and technology. Former Defense Minister Morimoto Satoshi is among them.

In December 2022, Japanese Prime Minister Kishida Fumio’s cabinet approved three key security documents, including plans to increase defense spending to 43 trillion yen from fiscal year 2023 to 2027 to fundamentally reinforce national defense capabilities. This will increase Japan’s defense spending to the NATO standard of 2 percent of the national GDP in 2027.

However, at the time these three security documents were decided upon, the necessary defense costs were calculated by assuming that from fiscal year 2024 onward, the exchange rate would be 108 yen to the dollar. However, currently, the yen is depreciating to around 150 yen to the dollar.

As a result, for example, the price of a single Lockheed Martin Lightning II F-35A Joint Strike Fighter has skyrocketed from 8.5 billion yen in 2021 to 11.8 billion yen at current prices. Japan is in the process of acquiring 147 F-35 fighters from the United States – 105 F-35As and 42 F-35Bs – over the coming decade, a move that will make the country the world’s second-largest F-35 operator after the United States.

Despite these difficult financial circumstances, it will not be easy to overturn any plan approved by the Cabinet just two years ago.

Chief Cabinet Secretary Hayashi Yoshimasa told a press conference on February 19 that the government will realize a fundamental beefing up of Japan’s defense capacities without overshooting the spending plan and has no intention to review it.

Defense Minister Kihara Minoru also expressed no intention of reconsidering the mid-term defense budget at a press conference on February 20. 

“The amount of about 43 trillion yen indicated in the Defense Buildup Plan is an amount approved by the Cabinet and represents a level at which the fundamental strengthening of defense capabilities can be achieved,” Kihara said.

“The Ministry of Defense’s role is to steadily strengthen the necessary defense capabilities within this framework, and we are not considering reviewing in the Defense Buildup Plan,” he added.

Finance Minister Suzuki Shunichi echoed Kihara’s view at a separate press conference on the same day, saying that the government “is not considering” a hike in defense spending until fiscal year 2027.

The government is likely hesitant to further increase the defense budget, as there are already concerns about how to fund the planned spending hike.

Still, the government’s cautious stance has been criticized by former members of the Self-Defense Forces.

“If the yen depreciates, not only imported parts but also the price of steel, aluminum, and labor costs will rise. When the yen weakens, the amount of procurement will be surely curtailed. Even if it had been a Cabinet decision, as minister of defense he should have made the right statement,” Koda Yoji, a retired vice admiral and former commander-in-chief of Japan’s Self-Defense Fleet, said on a BS-TBS television program on February 27.

Koda argued that the cost-cutting brought by the weak yen and high prices will mostly manifest in the reduction of ammunition, as has been the case in the past.

“If this situation continues, we won’t be able to increase the number of shells in case of an emergency. Also, there will be very few training sessions with live ammunition, and there will be only shooting training sessions with sand,” Koda said. “The lesson from the Russia-Ukraine war should be how important the supply of troops and ammunition is,” he added.

Meanwhile, Morimoto, a former defense minister, said on the same TV program that it is unthinkable for the government to change the 43 trillion yen budget. He argued that the initial goal of strengthening defense capabilities should be achieved through technological innovation, research and development, and economic growth, etc.

“The expert panel will discuss how to strengthen Japan’s defense capabilities by promoting rationalization and efficiency in defense buildup and making good use of the 43 trillion yen,” he explained.

What impact will a weaker yen have on the defense industry? Eguchi Masayuki, head of Integrated Defense and Space Systems at Mitsubishi Heavy Industries (MHI), explained the impact of exchange rate fluctuations on the defense industry at a press conference on November 22 last year.

Eguchi said when the ministry signs a contract with a defense firm, if there is a large purchase of foreign imports in the contract, there is a special clause that covers foreign exchange fluctuations. 

“For example, let’s say the yen depreciates and then the defense equipment we want to buy becomes extremely expensive in yen terms, but in this case, the Ministry of Defense will be responsible for paying the difference in price,” Eguchi said. “On the other hand, if the yen appreciates, the import price will be lower, and the difference will have to be refunded to the Ministry of Defense from the contract amount. Thus, all of this does not directly affect our profit margins.”

However, he continued, if the value of the imported item is not very large, the company has to be responsible for importing equipment. In this case, if the yen continues to depreciate, the company’s profits may fall, Eguchi said, probably impacting small contracts that do not go through the Foreign Military Sales (FMS) program, or a key U.S. arms transfer mechanism.

“If the yen’s depreciation continues, it will put pressure on the overall national defense budget. As a result, the Defense Ministry won’t be able to buy another product that it originally wanted to buy. In that case, if the product that can no longer be purchased is one of our own, there is a possibility that our sales will decline,” Eguchi cautioned.

Reuters reported on November 3 last year that a collapse in the yen was forcing Japan to scale back its historic five-year, 43.5 trillion yen defense build-up. It remains to be seen what will actually happen.