Japan’s defence spending

Prime Minister Kishida Fumio has promised to ‘substantially increase’ Japan’s defence budget by the end of 2022. While some observers expect Japan to double defence spending over the next five years, the jury is still out. The ambitions of Japan’s defence spending hawks are at odds with with certain fiscal realities.

Kishida has so far prudently avoided numerical targets, a but provided a target of ‘2 per cent of GDP’ in his official remarks. During his meeting with US President Joe Biden and the keynote speech at the Shangri-La Dialogue, Kishida only expressed his desire to ‘fundamentally reinforce Japan’s defence capabilities within the next five years and secure a substantial increase of Japan’s defence budget’.

In April 2022, the ruling Liberal Democratic Party (LDP) suggested the government increase the defence budget while ‘bearing NATO’s 2 per cent target in mind’. The LDP’s proposal was already ambiguous, but the 2022 Basic Policies for Economic and Fiscal Management report released on 7 June receded from the LDP proposal, simply introducing the NATO members’ efforts of spending at least 2 per cent of GDP.

On the one hand, security realists advocate a 10 trillion yen increase in defence 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 defence budget by a negligible amount. He instead suggested increasing spending from 5.4 trillion yen 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 defence budget to 10 trillion yen given the gap in military expenditure between Japan and China. The Defense White Paper published on 22 July 2022 introduced the concept of ‘per capita defence budget’, symbolically relativising 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 defence budget. It warns that exacerbating financial instability ‘may result in vulnerabilities that will undermine the [government’s] defence 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 0.25 per cent despite consistent monetary easing and fiscal stimulus as well as Japan’s accumulated national debt which was equivalent to 260 per cent of GDP. If that situation had continued, some form of special stimulus package for the defence budget could have been an option.

But Japan’s inflation rate reached 2 per cent in April 2022. While the interest rate is still low, if the interest rate rises by 1 per cent 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 per cent 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 defence budget to the level advocated by the LDP conservative factions, the necessary average annual increase over the next five years would be 11–15 per cent.

eastasiaforum