Bolstering Japan’s defence industry, national security and opportunities for partnerships

When Asia’s largest naval and maritime exhibition wrapped up in Singapore earlier this month, more than 250 companies from 25 countries and regions had shown off their latest tech and gear.

But one would have been hard-pressed to find Japanese firms.

In fact, just one company — Tokyo-based ship classification society ClassNK — had a stand at IMDEX Asia 2023, while eight other countries, including Australia, Italy, Denmark and the United States, set up entire pavilions at the three-day event.

Although Japan is a large maritime nation and is set to have the world’s third-largest military budget by 2027, the limited presence of domestic firms at international defence exhibitions — except for the recently launched DSEI Japan — raises questions about the state of the country’s defence industry.

The absence is not due to a lack of know-how or potential demand for Japanese products. On the contrary, experts such as Jeffrey Bloom, president of the Bloom Pacific consultancy, believe there would be demand, particularly in Indo-Pacific countries such as India, the Philippines and Vietnam, for Japanese dual-use, nonlethal equipment and technologies, such as ships, surveillance and communications systems.

But without government support, boosting defence exports will remain an almost impossible task for pacifist Japan’s historically sheltered defence industry. Such exports remain politically sensitive despite Tokyo’s recent overhaul of its defence posture.

Until 2014, military exports were essentially prohibited, meaning that the defence Ministry was the only customer for domestic defence firms for about six decades.

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And even after Tokyo eased some restrictions under the so-called three principles on defence transfers, the few items exported so far, mostly to Southeast Asia, have been the result of government-brokered deals.

“Unless there is a strong likelihood of capturing a program, corporate approval and return on investment for international marketing might be difficult to justify,” said Bob Morrissey, head of Japan defence & Aerospace Consulting Services.

Low profitability has been the main reason why dozens of smaller domestic firms have withdrawn from the defence business over the past 20 years. Even conglomerates that operate in the sector as prime contractors don’t put military production at the core of their business.

As the defence companies fail to meet sales targets, they become less of a priority for their parent firms in terms of allocating research and development resources, ultimately affecting technical skills and innovation.

Morrissey also noted that Japanese conglomerates fear reputational damage, as public sensitivities about military exports could impact their much larger business sectors.

On top of cultural factors and institutional constraints, Japanese defence exports face other challenges, including cost competitiveness and the operational track record of its gear and systems.

Japanese defence contracts are based on a fixed markup over expenses. This creates little incentive to reduce cost, meaning that equipment costing twice or more the global norm for items has been justified as necessary to maintain an indigenous defence industrial base, said Bloom.

Japan’s platforms and systems are customized for specific Self-defence Forces requirements, meaning adapting them for other markets is not considered in the design, said Morrissey, a former head of Raytheon in Japan.

On top of that, modifications that would accommodate other markets can be expensive, he added.

Another factor is that Japan can’t attest to how its equipment will perform, as it has not been operationally deployed since World War II.

“This is critical in the evaluation of defence systems, especially advanced platforms and weapons,” said Gregg Rubinstein, a Japan expert at the Center for Strategic and International Studies think tank.

Foreign defence firms have also been cautious about partnering with Japanese companies due to limits on transferring products to third countries and concerns about industrial security in Japan.

This is only starting to change now, said Rubinstein, as Japan joins other countries besides the United States in developing defence equipment. An example of this is the Global Combat Aircraft Program that will see Japan jointly build a next-generation fighter aircraft with the United Kingdom and Italy by 2035.

But concerns go beyond profitability.

Given the worsening regional security situation and the lessons being drawn from Russia’s invasion of Ukraine, maintaining a robust defence industry is increasingly being recognized as a matter of national security for Japan, as its defence-industrial capacity must be able to meet a rapid increase in demand to sustain involvement in a conflict.

Should Japan lose its capacity to develop cutting-edge tech, it could eventually become fully dependent on foreign governments and defence industries.

The government understands this, which is why Tokyo’s new National Security Strategy describes defence transfers as key in helping “deter unilateral changes to the status quo by force” and creating a “desirable security environment for Japan.”

Exports can help reduce industry costs by increasing volume and spreading administrative, labor and material costs over more products and customers. This, in turn, will bolster research and development (R&D).

Experts agree that without substantial government support, including subsidies and a whole-of-government defence export strategy, Japan’s defence industry will fail to make competitive bids in international markets and continue to decline.

To help resolve some of the issues, the government has outlined a series of steps, including plans to loosen the operational guidelines on defence-equipment transfers and allowing defence exports to countries “facing aggression,” such as Ukraine.

In April, Tokyo also unveiled guidelines for an “official security assistance” program for like-minded countries such as the Philippines, Malaysia and Fiji in the form of grants, rather than loans — a move that breaks with its previous policy of avoiding the use of development aid for military purposes other than disaster relief.

The defence Ministry also aims to set higher profit margins — up to 15% — for defence equipment contracted from domestic manufacturers. As for customizing gear to meet the needs of foreign customers, the government is looking to create a special fund to help cover costs.

While all these are steps in the right direction, experts also are encouraging Tokyo to cooperate more closely with like-minded countries, arguing that Japan’s ability to compete will be limited if its defence industry is structured in isolation from international partners.

“The best opportunities for Japanese industry are to partner with the U.S. or other friendly nations that are far more experienced in developing, producing and marketing defence equipment,” Bloom said.

To reduce export sensitivities, Japan could assist with the basic platforms, surveillance and even battle-management systems, while partners provide weapons and munitions.

Guy Boekenstein, an Indo-Pacific adviser to the Australian Strategic Policy Institute, said Japan could develop a mutually beneficial defence-industrial base with the United States and Australia, and potentially the U.K. — the current member states of the AUKUS security pact.

“This can help share technology, lead to more collaborative and less costly R&D, help keep emerging technology businesses in the allied network and build a workforce that could potentially be shared,” Boekenstein said, noting that such cooperation would be particularly useful to foster defence innovation, including with regards to emerging technologies.

Analysts also say Tokyo should not only make the export-licensing process easier and more transparent, but also provide guidance to defence companies on entering the international market.

“There needs to be a government-led defence export strategy, along with processes that support such strategy — such as export controls, technology transfers, information security — and government-industry teaming on export-promotion activities,” Rubinstein said.

But setting up a system to support Japanese defence business interests within targeted markets will take much more than an agency similar to the U.S. defence Security Cooperation Agency, said Bernice Kissinger, vice president of the Pacific Impact Zone.

It will also require Japan to leverage existing entrepreneur support programs to include defence-tech companies, while mirroring U.S. support via a new defence Industrial Base Accelerator, Kissinger added. This will provide access to rapid contracting for military and civilian innovators by providing opportunities for Japanese companies to participate in international partnerships, which can help create more demand for their products, thereby allowing companies to then provide them at lower cost to Japan’s defence Ministry.

James Angelus, president of the International Security Industry Council, said Japan “needs what other allied nations need, to accelerate change or lose.”

Citing U.S. Air Force chief Gen. Charles Brown, Angelus noted that evolving may be Japan’s only choice.

“With three nuclear armed dictatorships next to the Japanese islands, partnering and interoperability are not matters of choice, but of survival.”

This was originally published in The Japan Times and has been republished with permission.