Earlier speculation that Japan could double its defense budget over the next five years is being pinpricked by grim new fiscal realities
Prime Minister Kishida Fumio has promised to “substantially increase” Japan’s defense budget by the end of 2022. While some observers expect Japan to double defense spending over the next five years, the jury is still out. The ambitions of Japan’s defense spending hawks are at odds with certain fiscal realities.
Kishida himself has so far prudently avoided numerical targets, making no mention of a target of “2% of GDP” in his official remarks. During his meeting with US President Joe Biden and keynote speech at the Shangri-La Dialogue, Kishida only expressed his desire to “fundamentally reinforce Japan’s defense capabilities within the next five years and secure a substantial increase of Japan’s defense budget.”
In April 2022, the ruling Liberal Democratic Party (LDP) suggested the government increase the defense budget while “bearing NATO’s 2% target in mind.” The LDP’s proposal was already ambiguous, but the 2022 Basic Policies for Economic and Fiscal Management report released on June 7 receded from the LDP proposal, simply introducing the NATO members’ efforts of spending at least 2% of GDP.
On the one hand, security realists advocate a 10 trillion yen increase in defense spending within five years to counter imminent security challenges, especially from China. Former prime minister Shinzo Abe, who was killed during a recent campaign speech, said that “Japan would become a laughing stock” if it increased its defense budget by a negligible amount. He instead suggested increasing spending from 5.4 trillion yen (US$40.7 billion) to 6–7 trillion yen in the 2022 budget.
The National Institute for Defense Studies cites the 3:1 rule in conventional warfare — that the attacker needs three times the forces of the defender to win battle — and points out the need to consider increasing the defense budget to 10 trillion yen given the gap in military expenditure between Japan and China.
The Defense White Paper published on July 22, 2022, introduced the concept of “per capita defense budget”, symbolically relativizing Japan’s 40,000 yen per person to the United States 210,000 yen, South Korea’s 120,000 yen and China’s 20,000 yen.
On the other hand, fiscal realists including the Ministry of Finance and key figures within the Kishida administration are cautious of dramatic increases in spending given Japan’s difficult fiscal situation.
The May 2022 report on Fiscal Management at a Historical Turning Point acknowledges the need to address Japan’s emerging security challenges while ensuring the fiscal sustainability of the defense budget. It warns that exacerbating financial instability “may result in vulnerabilities that will undermine the [government’s] defense capability.”
This contradicts proponents of the modern monetary theory which states that “the Japanese government will never collapse financially if it increases expenditures (by borrowing money) in its own currency.”
Before the crisis in Ukraine, modern monetary theorists’ argument was more convincing as Japan’s long-term interest rate had stayed under .25% despite consistent monetary easing and fiscal stimulus as well as Japan’s accumulated national debt which was equivalent to 260% of GDP. If that situation had continued, some form of special stimulus package for the defense budget could have been an option.
But Japan’s inflation rate reached 2% in April 2022. While the interest rate is still low, if the interest rate rises by 1% across all bonds in the future, the Japanese government may have to pay an additional 3.1–3.7 trillion yen in annual debt repayments.
Further monetary easing will promote currency depreciation, increasing the cost of arms purchases and oil and gas for military use. The yen’s value dropped by 15% in three months — from 115 yen per US$1 in March 2022 to over 135 yen in June 2022.
If the Kishida administration aims to increase the defense budget to the level advocated by the LDP conservative factions, the necessary average annual increase over the next five years would be 11–15%.
In 2027, Japan’s GDP is expected to be 609.2 trillion yen — 2% of that is 12.2 trillion yen. It means that the Japanese government has to procure almost 6 trillion yen to the defense budget which was 6.1 trillion yen in 2021.
While the majority of people support increasing Japan’s defense budget, public concern over fiscal sustainability is high. 51.7% of respondents in a poll by the conservative Sankei Shimbun newspaper said that the government should redistribute the budget to defense rather than issue bonds or increase taxes.
The progressive newspaper Tokyo Shimbun, which gave respondents an extreme binary choice between government spending on defense or daily life-support, revealed different priorities. 69.6% of respondents chose life support, compared to 21.3% who chose defense.
But a redistribution of current spending is unlikely as the total national budget (106.6 trillion yen) is spent predominantly on social welfare (35.8 trillion yen), national bond redemption and interest payments (23.7 trillion yen) and local subsidies (15.9 trillion yen). Japan’s aging population means that spending on these items cannot be reduced without a political backlash.
Reinforcing Japan’s defense capabilities requires more than an ambitious target for defense spending. Japan’s aging society and fiscal constraints will force Tokyo to adopt a different security policy — one that utilizes new technologies to complement human labor.
After the upper house election, Kishida stated that it was important “to discuss the content, budget and financial resources as a package toward the end of the year.” Kishida should advance this debate by tackling traditional taboos, such as capital investment in defense industries, government support for arms exports and the transformation of Japan’s Self Defense Force and bureaucracy.
Ryosuke Hanada is a Higher Degree Research Student in the Department of Security Studies and Criminology at Macquarie University.
This article was first published by East Asia Forum, which is based out of the Crawford School of Public Policy within the College of Asia and the Pacific at the Australian National University. It is republished under a Creative Commons license.