SAN ANTONIO, ZAMBALES, PHILIPPINES – APRIL 28: Japanese Self-Defense Forces personnel hold the Japanese national flag in front of missile systems, during the Integrated Air and Missile Defense (IAMD) exercise, as part of the ongoing Balikatan (Shoulder-Shoulder) international exercise, at the Zambales 26 military base April 26, San Antonio. The IAMD exercise, which sees the deployment of troops and missile systems from the United States and Japan, comes at a time of heightened tensions in the South China Sea and the Taiwan Strait, with the Chinese People’s Liberation Army increasing naval operations and Beijing criticizing Tokyo’s strong defense cooperation with the Philippines. (Photo by Daniel Ceng/Anadolu via Getty Images)
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Japan’s easing of decades-old restrictions on arms exports opens up a huge opportunity for the country’s defense industry in an arms-hungry world.
Global conditions seem to be good. On April 27, SIPRI reported that global military spending will reach a record $2.89 trillion by 2025, the 11th consecutive year of increase.
Countries are “desperate” to acquire weapons such as anti-aircraft missiles, artillery shells and armored vehicles, areas where Japan Inc. may increase its market share in the international defense economy, Hirohito Ogi, a senior researcher at the Tokyo-based Institute of Geoeconomics, told CNBC in an interview.
South Korea may provide a template — defense companies there have had a roaring few years producing cheap, fast, and high-quality weapons similar to US weapons, benefiting as the Russia-Ukraine war drags on — and the Iran war may drive demand.
In addition, traditional US partners are now looking for other defense suppliers amid growing demand and skepticism about America’s alliance commitments.
Japanese engineering is “top-notch,” and its “crown jewel” will be the next-generation Global Combat Air Program aircraft to be developed with Britain and Italy, said Stephen Nagy, a professor of politics and international studies at Tokyo’s International Christian University.
The new fighter jet will reportedly replace the Eurofighter Typhoon in the UK and Italy, and the Mitsubishi F-2 fighter in Japan.
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Japan’s near-term opportunities are likely to focus on areas where the country has clear technological strengths.
The country will focus more on naval base awareness and air defense such as “advanced radar systems, patrol vessels, and jointly produced missiles,” Nagy said.
In April, Australia signed contracts for three of its general-purpose frigates, to be built by Mitsubishi Heavy Industries and based on the advanced Japanese Mogami-class design.
There has also been growing foreign interest in Japan’s defense systems, with Indonesia expressing interest in high-speed patrol boats.
The Philippines is in discussions about the possible transfer of defense equipment from Japan, as well as New Zealand, which reportedly wants the upgraded Mogami-class frigates that Australia ordered.
Challenges
However, challenges remain. ICU’s Nagy said Japanese firms currently lack international marketing experience and cost competitiveness.
“They are likely to carve out specialized, elite niches among trusted partners rather than dominate the global arms market,” he added.
And an earlier reduction in export restrictions in 2014 showed limited results, according to the IOG’s Ogi, a former official at Japan’s Defense Ministry. Many people attribute this result to Japan’s lack of experience in marketing defense products to the international market, he said.
The International Institute of Strategic Studies reported in May that since 2014, exports of finished products have been three fixed-range air-surveillance radars and one air-surveillance radar to the Philippines ahead of the Australian shipbuilding deal.
But the biggest obstacle would be the production capacity. For decades, Japanese defense manufacturers have mainly served one customer: the Defense Forces.
Those limited incentives to build export sales teams, reduce unit costs, or invest in remaining manufacturing capacity, despite Tokyo raising defense spending.
Japan itself has recorded a 9.7% increase in defense spending to reach $62.2 billion by 2025, equivalent to 1.4% of GDP – the highest share since 1958.
The country’s Ministry of Economy, Trade and Industry said in a February report that the defense business is less attractive than the general business because of its low profitability and low growth. That has caused companies to withdraw from the sector, said the report.
However, the lifting of the arms embargo also increases Japan’s production capacity by encouraging companies to produce weapons in peacetime, according to Ogi of the IOG.
This would also strengthen Japan’s wartime readiness, as defense companies would not have to ramp up production on such a large scale if needed during wartime, he said.
Regarding stocks, ICU’s Nagy said domestic heavy metals would benefit the most from the lifting of the ban on the export of dangerous weapons. Mitsubishi Heavy Industries is the “core” of the sector, while Kawasaki Heavy Industries, IHI Corporation and Mitsubishi Electric have the scale required for imports.
But even before the ban on dangerous weapons exports was lifted, some analysts were optimistic about the sector. A Wisdomtree report in November identified Japan as “preparing to enter the export market in earnest.”
“For investors who believe in multi-decadal themes, Asia Defense is not a trade. It is a frontier for defense investment over the next 20 years,” the report said.
