Faced with the deteriorating security situation in East Asia, the Japanese government has implemented a plan to strengthen its military. The country's defense budget for the 2023-2027 fiscal year is 43 trillion yen ($293 billion), 1.5 times higher than five years ago. This includes 5 trillion yen for purchasing long-range missiles and 9 trillion yen for replacing old systems and maintenance. In addition, Japan's defense budget in 2022 is the 10th largest in the world, accounting for 2% of the total global military budget, according to the Stockholm International Peace Research Institute (SIPRI, Sweden).
The F-35A fighter jet was unveiled after being assembled at Mitsubishi Heavy Industries' factory in Japan.
Eagles build nests in Japan
To get ahead of this plan, major defense companies are paying attention to Japan, according to Nikkei Asia on August 28. BAE Systems, a leading British aerospace and weapons company, will move its Asia operations from Malaysia to Japan by the end of this year, and appoint a general manager to run the entire Asia business strategy based in Japan. In January 2022, BAE Systems established a subsidiary in Japan. The British company is playing a core role in the Global Air Combat Program (GCAP), a project to develop a next-generation fighter jet between Japan, the UK and Italy.
Lockheed Martin, a major US defense contractor, also completed a similar transfer from Singapore to Japan recently. Lockheed Martin’s move comes amid rising tensions in Northeast Asia with repeated missile launches by North Korea and the growing risk of conflict over Taiwan. The US company has close ties with Japan through contracts such as the Patriot Advanced Capability 3 (PAC 3) missile defense system and the F-35 stealth fighter. Lockheed Martin Japan will also manage the company’s operations in South Korea, Taiwan and other markets.
L3Harris Technologies, an American defense technology company, also established a subsidiary in Japan in June 2022. Daniel Zoot, vice president of this unit, said that L3Harris will meet new needs in Japan such as unmanned aerial vehicles (UAVs) and electronic warfare equipment. The company has been in dialogue with the Japanese Ministry of Defense on many areas.
Italian military officials at the DSEI Japan defense exhibition in Japan in March.
French arms maker Thales also plans to increase its staff in Japan and strengthen ties with partners. The group has a partnership with Japan's Mitsubishi in the development and production of equipment such as mine detectors.
Meanwhile, Turkish defense contractor STM is also considering participating in a military exhibition that Japan’s Ministry of Defense plans to hold this fall. In March, STM displayed suicide drones and other weapons at the DSEI Japan international defense equipment exhibition in Chiba City.
Domestic companies face difficulties
The presence of foreign companies is expected to affect domestic Japanese companies. Currently, Japanese defense equipment production is barely at break-even point and diversified companies cannot afford to bear the costs of maintaining low profit margins in their defense businesses, according to Nikkei Asia . "It will be difficult for us to continue our business unless we secure increased profitability, in addition to increasing our budget," said an executive at a major Japanese contractor.
In March, Reuters reported that some major domestic corporations were reluctant to invest in the military sector due to concerns such as low profit margins, the financial risk of building factories and leaving them idle after the government’s military buildup is complete, and the impact on the company’s image. In a country where public disapproval of militarism is deeply entrenched, investing in the military sector is seen as difficult for some suppliers. At Mitsubishi Heavy Industries, Japan’s largest defense company involved in the GCAP project and the new long-range missile, military contracts accounted for just a tenth of its $29 billion in revenue last year.
GCAP fighter jet model jointly developed and produced by Japan, Britain and Italy
The Japanese government is said to have prepared regulations that would increase profit margins on military equipment to 15 percent and allow companies to use state-owned factories to expand production. However, these plans are said to be insufficient.
The entry of foreign companies could further reduce the profitability of Japanese companies due to price competition. Meanwhile, suppliers of mid-range components to major arms manufacturers are expecting a rise in orders if foreign companies come.
Japan's arms industry has a broad business base with about 1,100 companies involved in the production of fighter aircraft, 1,300 companies involved in the production of tanks and 8,300 companies involved in the construction of warships.
To catch up with foreign arms giants, Japan is focusing on small and mid-sized domestic companies and startups that produce parts and components. However, many companies are withdrawing from manufacturing due to low profitability, so Japan will face challenges in whether it can strengthen the foundation for this industry through public-private partnerships.
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