Weak yen forces Japan to shrink historic military spending plan

According to eight individuals familiar with the situation, Japan is being compelled to decrease their ambitious 43.5-trillion-yen defense expansion plan, which spanned five years, due to the extensive depreciation of the yen. This plan was initially intended to bolster Japan’s military capabilities as a deterrent against a potential Chinese invasion of Taiwan.

According to sources, Tokyo had to revise its defense procurement plan, which was initially estimated to cost $320 billion, after the yen’s value declined by 10% against the dollar since the plan was revealed in December.

Reuters spoke to three government officials and five industry sources who have firsthand information on defence procurement. According to them, Japan plans to reduce its aircraft purchases starting in 2024, which is the second year of the build-up. This decision is primarily because of the weak yen.

The specific information about Japan reducing their military purchases because of currency fluctuations has not been made public before. Eight individuals who were involved in several meetings regarding these purchases have shared this information anonymously, as they are not allowed to speak to the media.

According to eight individuals, Tokyo initially considered an exchange rate of 108 yen to the US dollar, the same rate observed in the summer of 2021, when creating its purchase strategies in December. However, by early November, the value of the yen fell to 151 against the dollar. On Tuesday, the Bank of Japan made a slight move towards concluding the decade-long monetary stimulus that led to the devaluation of the yen, by making adjustments to bond yield controls.

One government official in Japan’s defense ministry stated that, in contrast to multinational corporations conducting international business, they do not take measures to protect themselves from changes in currency exchange rates. This implies that they have limited options to address the increasing expenses in yen for Tomahawk cruise missiles and F-35 stealth fighters.

Christopher Johnstone, the Japan chair at the Center for Strategic and International Studies think tank, suggests that if there are any indications that Prime Minister Fumio Kishida’s military spending spree will not yield the expected results, it could cause concern in Washington about Japan’s capability to assist in curbing Beijing’s influence.

Johnstone, who previously served as the director for East Asia in the Biden administration’s National Security Council, stated that currently, the effect is not significant. However, it is undeniable that if the yen continues to decrease in value in the long term, it will weaken Japan’s progress and potentially lead to reductions and postponements in crucial acquisitions.

When asked for comment, the Ministry of Defence in Japan stated that it avoids discussing specific information about procurement planning.

The U.S. Embassy in Tokyo stated that it was unable to provide any comments. There was no immediate response from the Pentagon when a comment was requested.

BUILD-UP

Kishida characterized Japan’s significant increase in defense efforts, the largest since World War Two, as a crucial moment in history. This spending is intended to prepare the country for potential conflicts in the region near its extensive chain of islands that stretch along the East China Sea towards Taiwan, as stated in defense white papers. Tokyo also bears the responsibility of safeguarding American bases on its territory, which could be utilized by the United States to launch counter-attacks on Chinese forces if they were to attack the democratic island of Taiwan.

Two years ago, analysts and lawmakers believed it was unlikely for Japan to double annual defence spending to 2% of gross domestic product, therefore becoming the world’s third-biggest military spender. However, in December, Kishida made a pledge to do just that, surprising many.

Tokyo is concerned that the invasion of Ukraine by Russian forces in February 2022 could strengthen Beijing’s confidence to attack Taiwan.

In August, China caused concerns among the Japanese once again as they launched missiles near their territory. This action was in response to Nancy Pelosi, the former U.S. House Speaker, visiting Taiwan. Prior to this incident, China had been increasing its activities in East Asia, even conducting joint missions with Russian forces.

China, while not dismissing the possibility of employing military action to gain control over Taiwan, has voiced apprehension regarding Japan’s intended increase in military expenditure, alleging it reflects a mindset reminiscent of the Cold War era.

CHINOOKS AND SEAPLANES

According to the eight individuals, Japan has made the decision to allocate its reduced budget towards purchasing advanced frontline weapons from the United States. These weapons, such as missiles, are intended to counteract the progression of Chinese forces. As a result, there will be a decrease in funding for support aircraft and other less important equipment, many of which are manufactured by Japanese companies.

According to two sources, officials from the defence ministry held discussions in December regarding the purchase of 34 Chinook transport helicopters with twin rotors. The estimated cost for each aircraft is around 15 billion yen.

The government’s defense budget request for April 2024 included an order for 34 aircraft. However, in August, the order was reduced to 17 due to a significant increase in the cost of each aircraft, amounting to approximately 5 billion yen since December. One government source, who was closely engaged in the discussions, stated that half of this cost increase was a result of the weakened yen.

BA). The assembly takes place at Kawasaki’s facility in Gifu, Japan. The partnership between Kawasaki and Boeing allows for efficient production and delivery of aircraft to customers worldwide.BAA representative from Kawasaki Co. has confirmed that the increase in unit costs has led to a decrease in the number of Chinook orders.

According to two individuals knowledgeable about Japan’s spending plans, Japan has also decided not to proceed with a plan to purchase two ShinMaywa Industries US-2 seaplanes for search and rescue activities. This decision was made due to a nearly doubled price per aircraft of 30 billion yen, in comparison to three years ago.

A spokesperson for the company mentioned that the price has increased significantly due to the weaker yen and inflation, resulting in higher costs. However, the spokesperson did not provide any information regarding the defence ministry’s potential cancellation of the seaplane order.

INDUSTRY BACKLASH

Analysts stated that for Kishida, who is facing difficulties dealing with competing ruling-party groups that are currently debating whether to borrow money or increase taxes to finance his defense expansion, reducing equipment purchases might be a politically less complicated option compared to requesting additional funds from legislators.

Yoji Koda, a retired admiral of the Maritime Self Defense Force who led the Japanese fleet, suggests that Kishida’s decision to either increase the budget or take no action will be influenced by his support rate in Japan. Koda anticipates that the Japanese leader will likely choose to reduce or delay procurement instead, as it would be more difficult to convince taxpayers to contribute additional funds.

However, by avoiding that obstacle, Kishida is also triggering a negative reaction from Japanese businesses that are concerned about shouldering the majority of the financial burden to enable Tokyo to purchase Raytheon’s Tomahawks and the F-35 jets it has requested. Lockheed Martin (NYSE: ).

According to one source, the Japan Business Federation, which is considered the most powerful corporate lobby in the country, showed increased dissatisfaction by collaborating with various defense industry associations in October. Their goal was to urge the defense ministry to allocate additional funds for military procurement in a supplementary budget, which is currently being debated in parliament.

A representative from the ministry stated that the companies handed over a letter to Defence Minister Minoru Kihara on October 25, in which they encouraged the government to move forward with the planned defence procurement.

The business lobby declined to comment.

According to Kevin Maher from NMV Consulting in Washington, who previously led the U.S. State Department’s Office of Japan Affairs, defense companies will face difficulties in obtaining additional funding as the government wants to wait and observe if there are any changes in the currency situation before increasing the 43 trillion-yen plan.

He mentioned that if they believe it will have an effect on capabilities, it could happen. However, he believes that the soonest this would occur is in the penultimate year of the five-year plan.

($1 = 150.4000 yen)