GLOBAL DEFENSE MARKET
Japan’s Defense Industry Faces Challenges as China Threat Looms
Wiki Commons photo via user Suga
Confronting economic and security challenges, Japan aims to boost its defense industrial base and sell more military equipment overseas to allies and partners. However, it must overcome a number of problems to realize its goals, analysts say.
Over the past decade, Tokyo has rolled out new guidance including: a new National Security Strategy (2013), Strategy on Defense Production and Technological Bases (2014), and a revised policy on defense exports (2014). In 2015, it also stood up a new Acquisition, Technology and Logistics Agency to enable more cost-effective acquisition and promote international outreach. The moves came amid growing concerns about China’s military modernization and aggressive behavior toward Japan and other nations in the Asia-Pacific region.
“In order to develop, maintain and operate defense capability steadily with limited resources in the medium- to long-term, Japan will endeavor to engage in effective and efficient acquisition of defense equipment, and will maintain and enhance its defense production and technological bases, including through strengthening international competitiveness,” the National Security Strategy stated.
However, the nation is hindered by a number of factors. One is that, unlike the United States and other developed countries, it has few defense-focused firms, noted retired Lt. Gen. Shinichi Iwanari, former commander of Air Development and Test Command for the Japanese Air Self-Defense Force.
“Most defense companies in the U.S. focus … on the military sector strategically. They have market penetration strategies and product development strategies,” he said through an interpreter during a recent panel hosted by the International Security Industry Council Japan, a Tokyo-based nonprofit.
In contrast, Japanese companies that supply military equipment to the nation’s Self-Defense Forces are still more focused on the civilian sector, Iwanari noted.
Japan’s defeat in World War II — and subsequent adoption of a pacifistic foreign and defense policy that lasted for 70 years — created conditions that led to the country’s current situation, he said.
“Military work disappeared and civil work took center stage,” he explained. ”That diversification predominates as a business strategy” today, he added. “Looking at the composition of Japan’s defense industry, most of the companies have many business divisions, and defense accounts for only a few percent of their business.”
Gregg Rubinstein, a Japan expert at the Washington, D.C.-based Center for Strategic and International Studies, said the country’s defense industry is characterized by inefficient, high-cost production, and research-and-development efforts that “mostly reinvent” foreign products with little innovation.
Meanwhile, it has to contend with relatively flat procurement funding and increased imports of high-cost advanced equipment, he noted.
Japan ranked ninth in the world in defense spending in 2020 at $49.1 billion, according to the Stockholm International Peace Research Institute, which tracks global military expenditures. Its defense budget grew just 1.2 percent from 2019 to 2020, and 2.4 percent over the past decade, according to SIPRI.
Meanwhile, the nation was a top 12 importer of military systems in 2020, according to the institute. Ninety-seven percent of those imports were supplied by the United States, Japan’s closest ally.
Tokyo purchases much of its equipment through foreign military sales, which increased from about $1.7 billion in 2014 to about $6.4 billion in 2019, according to Michihiro Akashi, an analyst with the Mitsubishi Research Institute, a Japanese think tank.
“FMS is a quick and effective way for Japan to secure the means to counter new threats,” he noted in a presentation earlier this year titled, “Toward Sound Development of the FMS System and Japan’s Defense Technology and Industrial Base.”
However, “the increase in FMS costs has raised concerns that Japan’s difficult financial situation will put pressure on the number of orders placed with the domestic defense industry,” he said. “The contribution of the Japanese defense industry to imported equipment is low and this puts pressure on the value of orders.”
An example of a high-end foreign system purchased by Tokyo is Lockheed Martin’s F-35 joint strike fighter. Japan has a final assembly and check-out facility in-country but, unlike a number of European nations who operate the jet, was not involved in the joint development of the platform or the program’s vast international supply chain.
The country has built other aircraft, including F-15s, under license.
Rubinstein said Japan’s defense industry can “survive” on licensed production and support of imported systems, but that won’t be enough for it to grow.
International trade and investment are critical to Japan’s future defense industrial base, he said. To remain competitive, it must market its products and technologies to the outside world.
It has a lot of work to do in this regard. The nation did not even make it onto SIPRI’s list of the top 25 arms exporters for the 2016-2020 time frame.
“Government and industry often seem to work at cross purposes on international engagement. Industry tends to blame government for lack of guidance while the government of Japan blames industry for not trying hard enough to take initiatives,” Rubinstein said. “Each awaits action by the other, and often nothing happens as a result.”
Protectionist R&D efforts continue to discourage international collaboration and isolate Japan, overly complex export control processes lack transparency and offer little guidance for industry, and information security measures lack central oversight as well as effective coordination with industry, Rubinstein said.
“This situation unavoidably has a negative impact on international partners and customers,” he said. “Japan today remains almost invisible to the international defense community. There is little awareness or appreciation for Japanese industrial and technology capabilities. There is a continued perception that Japan is difficult to work with and possibly not worth the effort to engage.”
Government and industry must work together to address the problem, analysts say.
Japanese military products and R&D capabilities must become more attractive to potential partners and customers, Rubinstein noted.
However, efforts to boost international engagement must start with an effective export strategy.
The government and industry must develop a better approach to military exports and joint technology development that balances industrial capabilities with arms control and security concerns. Tokyo should prepare guidelines for industry engagement of foreign partners that include appropriate mechanisms for government-industry consultations, Rubinstein said.
Expanding the government’s overseas presence is also viewed as critical.
“The government of Japan needs to strengthen its overseas representation on defense acquisition interests in a manner similar to defense procurement offices used by other governments that engage heavily with the U.S. and advanced defense industrial countries,” Rubinstein said.
Masamitsu Morimoto, a lecturer at Keio University and former deputy director of security export control policy at the Ministry of Economy, Trade and Industry, said Japan’s Acquisition Technology and Logistics Agency in particular needs to deepen its ties with foreign nations to aid industry.
“They need to build long-term relationships in order to do that,” he said through an interpreter, adding that potential sales and joint development opportunities should not be viewed as “one-off matters.”
But the government isn’t the only organization that needs to do more. Industry also needs to play a more active role, analysts say.
“Engaging international defense markets means more than simply selling equipment,” Rubinstein said. “Industry must have overseas presence. Representative offices are only a start; companies must invest in overseas facilities to gain visibility in the international community. Industry initiatives will in turn need government guidance and support.”
Morimoto said the Japanese defense industry needs to have more of a “sales-oriented philosophy.”
“It is something that I think we can clearly say is missing,” he said. “There wasn’t a need for sales [promotion] in some sense until now, because we were selling to the Japanese government” almost exclusively.
Further measures from government and industry that could help include: providing financial guarantees; allowing industrial “offsets” for recipient countries; conducting more joint development of technologies with allies; and offering training and operational support for exported systems, analysts say.
Rubinstein said there must also be greater allowance for foreign investment in Japan. “Laws, regulations and thinking on this subject must adjust to current day reality,” he said.
Analysts criticize the nation’s export control regime. In 2014, when former Prime Minister Shinzo Abe was promoting a more muscular foreign and defense policy, the Three Principles on Transfer of Defense Equipment and Technology replaced the nation’s previous guidelines on arms exports, which had largely banned overseas sales of military equipment.
“Surrounded by an increasingly severe security environment, it has become essential for Japan to make more proactive efforts in line with the principle of international cooperation,” the Ministry of Foreign Affairs stated in a press release. “Japan cannot secure its own peace and security by itself, and the international community expects Japan to play a more proactive role for peace and stability in the world commensurate with its national capabilities.”
According to the updated principles, arms transfers can be permitted if they: promote “peace,” international cooperation, or Japan’s security; don’t violate international treaty obligations or UN Security Council resolutions; and there is “appropriate control regarding extra-purpose use or transfer to third parties.”
Proposed transfers still must undergo a strict review by the Ministry of Economy, Trade and Industry, also known as METI, before they are approved. In some cases, they must also be reviewed by the National Security Council. Additionally, the recipient of the weapons must seek Tokyo’s consent.
There is a lack of transparency, and it is still unclear to many in industry whether certain proposed military technology transfers are likely to be deemed “acceptable” after review, Morimoto said.
“For the purpose of people who would be exporters, this is a very difficult thing to understand,” he said. “From the viewpoint of industry, there is still a low level of predictability on export approvals.”
There are also issues with other aspects of the process such as application forms, he added.
“People don’t know how those work,” Morimoto said. “For the exporter, it’s impossible to judge what the risk is. That I think is leading to a chilling effect, or may lead to a chilling effect, on industry willingness to participate or to approach METI.”
An insufficient understanding of these processes could hinder talks with would-be buyers, he noted.
“Is the defense industry prepared to explain export control matters to its foreign partners?” Morimoto asked.
There are market opportunities for Japan, particularly when it comes to dual-use items, according to analysts.
However, considering the needs of customers, provision of finished products and services will be difficult, with some exceptions, Iwanari said.
Some in the Japanese defense community have viewed international engagement as a threat to indigenous capabilities, but experience in other countries shows that the gains will likely outweigh the risks, Rubinstein said.
“Today, Japan’s defense industry faces a critical challenge: how to ensure that its defense industrial and technology base remains an effective national resource,” he said. “Laws mean very little without effective implementation, and … there has so far been little change in the defense industry situation” in recent years despite government efforts.
Topics: Global Defense Market