Japan needs defence industrial revolution

The Foreign Policy magazine has published an article arguing that if Tokyo is serious about protecting itself, it needs to kick-start its military manufacturing sector. Caliber.Az reprints the article.

The ongoing Russo-Ukrainian War has dispelled the notion that any future military conflict will be fast, clean, or easy. Having watched this war closely, Japan is now rethinking many of its longstanding assumptions about its security environment, particularly concerning its supplies and equipment. Simply put, no country can win a war without enough of the right equipment. This is especially true for countries fighting a prolonged conflict. When it comes to getting the equipment they need, countries have two options: get it from someone else or make it themselves.

Because it shares land borders with several countries, Ukraine has been able to receive crucial shipments of foreign equipment when its supplies have run low. Japan is an island nation, however, and its waterways and ports would be cut off early in a conflict— likely with China or North Korea—making it incredibly difficult to replenish its stocks with foreign infusions once fighting were underway. Japan does make some of its own supplies, but having been hindered by self-imposed restrictions, its defense industrial capacity is too low to withstand a rapid increase in demand if a war were to break out, let alone to sustain a prolonged conflict.

Despite its longstanding policy of pacifism, Tokyo now seems to believe that beefing up its military capabilities may be its only path to long-term peace. Last December, Japanese Prime Minister Fumio Kishida’s government released three new national security strategy documents that, among other reforms, included the long-eschewed acquisition of long-range precision strike missiles and a major military spending boost that will give Japan the world’s third-biggest military budget, behind only the United States and China. But this influx of cash and capabilities will do little to fix the military’s wartime problems if it does not also reform its struggling defense industry.

Japan’s 2013 National Security Strategy contained only one mention of defense industry. In 2022, Tokyo determined that “strengthening the defense production and technology base” was “indispensable” to Japan’s national security.

For much of its post-war history, Japan limited its military capabilities solely to those needed to defend against small-scale invasions. As such, Japan has traditionally kept its defense industry to a minimum and instead relied on foreign suppliers for most of its physical needs. But over time, as Japan’s security objectives have shifted, Japanese companies have become responsible for an increasing share of the country’s military manufacturing, including ships, ammunition, and much of its land-based equipment.

Despite these developments, Japan’s military is still very much reliant on foreign suppliers. Japan procures most of its aviation equipment—including F-35 fighter aircraft, Global Hawk surveillance drones, and V-22 helicopters—from the United States through Foreign Military Sales agreements. This is a problem because, as foreign defense contractors have shifted their business strategy from being hardware suppliers to service providers, foreign products—even from friendly suppliers—increasingly come with strings attached. Parts, maintenance, and repair are now a key part of defense contractors’ business models. Under current agreements, Japan is unable to replace parts for equipment it purchased overseas and can only make minor repairs unless it is specifically authorized to do otherwise. When equipment needs repair or replacement, Japan can get the necessary parts and services from the prime contractor, but this process can be cumbersome and slow, even under the best of circumstances—let alone during times of war.

It makes sense, then, that Japan wants to reduce its reliance on foreign equipment. But as it stands, Japan’s defense industry isn’t up to the task. Defense-related sales account for only 4 percent of the total sales of major Japanese manufacturing companies, and in 2020, defense-related procurement from domestic manufacturers made up less than 1 percent of Japan’s total industrial production value. For comparison, roughly 10 percent of the United States’ factory output is directed toward defense manufacturing.

Compounding matters is that in Japan, defense manufacturing belongs to the private sector, unlike countries such as France and Italy, where the state is a predominant stakeholder in most of its defense companies. In theory, this model promotes innovation through market competition and shifts the burden of risk away from the government. However, it also creates a high barrier to entry for companies hoping to contribute—and a high turnover rate for companies who manage to get in. In the past 20 years, more than 100 companies have exited Japan’s defense sector due to a lack of business sustainability. Without reform, many promising companies will continue to withdraw or downsize their operations to invest elsewhere, and Japan will lose out not only on critical short-term production capability but also the expertise needed for long-term growth.

Facing this reality, Japan is considering bringing parts of the defense sector under government control. Kishida’s Liberal Democratic Party has pushed the idea of state-owned factories to reduce the investment burden on manufacturers while maintaining the private sector’s technical expertise. Under this model, the state would lease factories to manufacturers that possess relevant technology and clearances. The government would then assign the production of essential equipment, such as explosives used in ammunition, to these firms. This program would eliminate the cost of installing and maintaining equipment, which could be otherwise prohibitive to a company’s financial success. By shouldering some of the costs and risks of private companies, the government can prioritize its policy needs instead of being beholden to market pressures.

This would be a welcome change, but it’s not enough on its own. Japan’s long-term success will hinge on its ability to not only make its own equipment, but also sell it to others. The more Japan’s defense industry can expand its market internationally, the less costly it will be to make these products for the homeland. Increased production leads to lower prices and higher profit margins, which in turn improves the sustainability of these businesses and lower the risk of withdrawal. In other words, what Japan’s defense industry really needs is an economy of scale.

Yet again, there are barriers in the way of undertaking the kinds of reforms Japan so desperately needs. Part of this obstacle is cultural, and part is legal.

In the post-World War II era, Japan developed a strong culture of pacifism; even today, companies that make weapons aren’t generally accepted by the Japanese public. This can create hesitation among defense manufacturers, who are concerned about the reputational risk of being labeled merchants of death. The aversion to defense companies may be shifting, though, in light of the Russo-Ukrainian War. Public demonstrations against Japan’s new National Security Strategy were paltry—the largest gathering attracted only 1,100 people, compared to the estimated 120,000 that attended one such protest against the 2015 Peace and Security Law. Japanese society has traditionally been hesitant to accept the practice of defense equipment transfers, but many in Japan now support strengthening defense capabilities.

Legally speaking, however, under Article 9 of its constitution, Japan is prohibited from conducting or aiding in the act of war, which includes sending troops and weapons to other countries in conflict. In 2014, Tokyo lifted the ban on overseas defense transfers, hoping to capitalize on the lucrative export market. Japan still prohibits aiding countries in a state of war. However, when it comes to Ukraine, Japanese companies can still export non-lethal equipment and technology. That’s because the United Nations Security Council has not taken any action in the conflict, and thus Ukraine is not considered a party to war. Even with this flexibility, Tokyo’s hopes for increased defense exports have failed to materialize. To date, Japan has only completed one overseas transfer of finished equipment—a contract with the Philippine Department of Defense for four warning and control radars in summer 2020.

Longer term, if Japan wants to be an attractive supplier, it needs to make the defense transfer process easier and more accessible for potential buyers, particularly developing countries in the Indo-Pacific region. It has made progress toward this goal by establishing a fund to provide financial support to countries who may require it. The fund would also provide low-interest loans to Japanese defense manufacturers who participate in projects promoting the industrial growth of the partner country. To have a greater impact, the fund should allow for flexible payment methods to keep costs as low as possible for developing partner states, who might struggle to make high initial payments.

Alongside these efforts, Japan should also allow for and facilitate military-to-military channels of communication with potential buyers, which is far more efficient than handling deals through civilian government bodies, such as the Ministry of Foreign Affairs. To jumpstart this effort, Japan could also consider transferring used equipment to Southeast Asian militaries, as it has already done in the Philippines and Vietnam.

Despite its long-held pacifist hesitations, Tokyo clearly recognizes that defense transfers could be a powerful tool for creating a more stable and desirable security environment in its neighborhood—as it acknowledged in its latest National Security Strategy. Executing these changes, however, will be a tall order. Tokyo will need to act quickly if it wants to make up for lost time.