MELBOURNE, Australia — Japan is facing what appears to be an increasingly difficult choice, between a desire to keep its domestic defense industry in business, and getting more value for its defense spending while introducing much-needed capabilities by buying foreign off-the-shelf systems.

This conundrum comes as the U.S. ally continues to warily eye nearby China’s military buildup and North Korea’s missile and nuclear programs.

Japan’s defense industry came to being soon after the end of World War II, as it attempted to rebuild its shattered economy. According to Corey Wallace, a postdoctoral fellow at the Graduate School of East Asia Studies at Germany’s Freie Universität Berlin, Japan adopted what was known as kokusanka — a conscious and systematic attempt to domesticate technologies that Japan would need for an autonomous defense-industrial base.

Through licensing agreements and other methods of technology transfer and acquisition, the Japanese government in the post-war period identified the most important platforms it thought it needed and tried to domesticate them. Today, Japan’s local industry produces all of the country’s warships and submarines, albeit fitted with important systems like the Aegis combat system, radars and missiles from the United States as well as most of its land warfare systems.

Despite these capabilities, there are a number of hurdles for Japan’s defense-industrial base. Chief among these is the relatively small, domestic market that drives up unit prices as well as Japan’s own set of unique requirements that sometimes create a bespoke product difficult to market overseas.

The small, domestic market has also meant there is little competition. And when the price of a product is determined by what Japanese newspaper Asahi Shimbun calls the “cost calculation method,” in which a contractor’s profit is added to the prime cost that also includes that of materials and labor, it can lead to “an open invitation for soaring costs as contractors have few incentives for suppressing the prime cost.”

An example of this is the C-2 airlifter. Since 2016, Japan has ordered a total of seven C-2 aircraft out of an eventual requirement of 40. This slow production rate means the C-2 costs about $201 million per aircraft, according to the latest budget request from Japan’s Defense Ministry, which has asked to procure two aircraft in the next fiscal year.

This, coupled with the need to focus on the expensive missile defense systems against the North Korean ballistic missile threat, has put Japan’s defense budget under strain, to the point that earlier this year Japan’s Finance Ministry reportedly took the unorthodox step of urging its defense counterpart to consider the option of acquiring a cheaper airlifter instead of the C-2.

Given recent developments in the geopolitical and domestic industrial sphere, Japan has turned to what Wallace calls “selectivity and concentration” — the country accepts that its defense-industrial base cannot achieve absolute autonomy, particularly in areas like fighter jets and ballistic missile defense, where international cooperation is necessary in the development process.

Foreign partnerships

Cooperation with a foreign partner appears to be the way Japan is proceeding with two key aerospace programs: the development of a new air-to-air missile and its next fighter jet.

Japan is developing the Joint New Air-to-Air Missile, which will marry the active electronically scanned array radar seeker of Japan’s AAM-4B air-to-air missile with the European MBDA Meteor ramjet-powered beyond-visual-range air-to-air missile.

The missile is intended for use by the Japan Air Self-Defense Force, but the program appears to be on a long timeline. Reports indicate no technical work has been done, and the first prototypes are planned to be ready for test shots after April 2022, with a decision following on whether to go ahead with the program.

With regard to its next-generation fighter jets, following a request for information from several overseas manufacturers earlier this year, Japan is reportedly studying the feasibility of a joint development program. Local media has tracked the story, although official information is scant pending the release of Japan’s five-year midterm defense plan later this year.

It’s widely expected Japan will link up with a foreign partner for the development, however some are holding out hope for a wholly domestic fighter program despite the risks and higher costs involved. Japan has not locally built fighters since Mitsubishi F-2s rolled off the line in 2011.

However, Grant Newsham, a retired U.S. Marine Corps officer who is now a senior research fellow at the Japan Forum for Strategic Studies in Tokyo, says Japan should consider spending more on defense, telling Defense News earlier this year that figure should be about $5 billion to $7 billion more per year for the next five years.

As the world’s third-largest economy, he said, “Japan has all the money it needs to properly fund defense. And the amounts required are about the same as the waste and/or fraud in a couple of public works projects, but it chooses not to do so.”

Japan’s latest defense budget request for the next fiscal year is for $48 billion, which is a 2.1 percent increase from the previous year’s allocated budget and represents a new record-high defense budget for the country. The amount is roughly 1 percent of its gross domestic product, which, although not official policy, has essentially become a ceiling for its defense budget.

Notably, Japan is carrying out final assembly on most of its 42 Lockheed Martin F-35A Lightning II Joint Strike Fighters, which will eventually replace the upgraded F-4EJ Kai Phantom II aircraft currently in service. The government reportedly wants to buy more F-35s, with some suggesting it’s looking at the short-takeoff-and-vertical-landing F-35B to equip the flight decks of its helicopter destroyers of the Japan Maritime Self-Defense Force.

Export challenges

Under Prime Minister Shinzo Abe, Japan has ended its ban on defense exports, which his government sees as a way to boost Japan’s economy. Japanese defense companies have and continue to pursue several international acquisition programs ranging from Australia’s requirement for submarines to France and Germany’s requirement for new maritime patrol aircraft.

However, these export opportunities have presented their own set of challenges, not least the fact that Japanese companies lack the savvy of their more-experienced competitors at the higher end of the global arms market, and that they’re being priced out by cheaper alternatives at the lower end.

And despite their undoubted quality, Japanese offerings are sometimes hindered in the export market by the domestic market’s bespoke requirements. In the case of the C-2, there were no requirements for the aircraft to conduct operations on short or poorly prepared airstrips, and this is likely to hurt its prospects in New Zealand, which is seeking airlifters for both strategic and tactical airlift missions.

In this case, the ability to operate from poorly prepared runways is important given the Royal New Zealand Air Force conducts regular operations to South Pacific islands, particularly on humanitarian assistance and disaster response missions in the aftermath of natural disasters.

Newsham noted that despite the recent loosening of restrictions, there has not been significant effort by Japanese companies to dive into the international defense market, as most major Japanese companies don’t consider the defense business to be profitable.

Other sources in Japan who are familiar with the industry have corroborated that view in speaking to Defense News. And Newsham adds that despite being the administration that pushed for the loosening of defense export restrictions, the Abe government has not proactively supported Japanese defense companies seeking to do business overseas.

Mike Yeo is the Asia correspondent for Defense News.

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