The jury is still out on Japan’s defense spending

Author: Ryosuke Hanada, Macquarie University

Prime Minister Kishida Fumio has promised to “significantly increase” Japan’s defense budget by the end of 2022. While some observers expect Japan to double its defense spending over the next five years, the jury has still not been judged. Japan’s hawkish defense spending ambitions are at odds with some budgetary realities.

Kishida himself has so far cautiously avoided numerical targets, including a “2% of GDP” target in his official remarks. During his meeting with US President Joe Biden and the opening speech of the Shangri-La dialogue, Kishida only expressed his desire to “fundamentally strengthen Japan’s defense capabilities over the next five years and ensure an increase of Japan’s defense budget”.

In April 2022, the ruling Liberal Democratic Party (LDP) suggested the government increase the defense budget while “bearing in mind NATO’s 2% target”. The LDP’s proposal was already ambiguous, but the 2022 report on basic policies for economic and fiscal management published on June 7 departed from the LDP’s proposal, simply introducing NATO members’ efforts to spend at less than 2% of GDP.

On the one hand, security realists advocate a 10 trillion yen increase in defense spending within five years to counter looming security challenges, particularly from China. Former Prime Minister Shinzo Abe, who was killed during a recent campaign speech, said “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 to 6-7 trillion yen in the 2022 budget.

The National Institute for Defense Studies cites the 3:1 rule in conventional warfare – whereby the attacker needs three times the forces of the defender to win the battle – and stresses the need to consider increasing the defense budget at 10 trillion yen given the gap in military spending between Japan and China. The White Paper on Defense published on July 22, 2022 introduced the concept of “defense budget per capita”, symbolically relativizing Japan’s 40,000 yen per person to the United States’ 210,000 yen, South Korea’s 120,000 yen South and 20,000 yen from China.

On the other hand, budget realists, including the Ministry of Finance and key figures in the Kishida administration, are wary of dramatic increases in spending given Japan’s tight fiscal situation.

The May 2022 report on fiscal management at a historic turning point recognizes the need to address Japan’s emerging security challenges while ensuring the fiscal sustainability of the defense budget. It warns that worsening financial instability “may lead to vulnerabilities that will undermine the [government’s] defense capability. This contradicts the proponents of modern monetary theory who assert that “the Japanese government will never collapse financially if it increases its spending (by borrowing money) in its own currency”.

Before the crisis in Ukraine, the argument of modern monetary theorists was more convincing because Japan’s long-term interest rate had remained below 0.25% despite constant monetary easing and fiscal stimulus, as well as the national debt. accumulated from Japan, which was equivalent to 260% of GDP. . Had this situation continued, some form of special stimulus package for the defense budget might have been an option.

But Japan’s inflation rate reached 2% in April 2022. Although the interest rate is still low, if it increases by 1% on all bonds in the future, the Japanese government may have to pay 3 .1 to 3.7 trillion additional yen. in annual debt repayments. Further monetary easing will promote currency depreciation, increasing the cost of purchases of arms and oil and gas for military use. The value of the yen has fallen 15% in three months, from 115 yen per US dollar 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 conservative LDP factions, the average annual increase needed over the next five years would be 11 to 15 percent. In 2027, Japan’s GDP is expected to reach 609.2 trillion yen, or 2% of this figure, or 12.2 trillion yen. This means that the Japanese government must provide nearly 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 about fiscal sustainability is high. 51.7% of respondents in a poll by conservative newspaper Sankei Shimbun said the government should redistribute the budget to defense rather than issuing bonds or raising taxes. The progressive Tokyo Shimbun newspaper, which offered respondents an extreme binary choice between government spending on defense or support for daily life, 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 because the total national budget (106.6 trillion yen) is mainly spent on social welfare (35.8 trillion yen), repaying national bonds and paying interest (23.7 trillion yen). yen) and local subsidies (15,900 billion yen). Japan’s aging population means spending on these items cannot be reduced without political backlash.

Strengthening Japan’s defense capabilities requires more than an ambitious defense spending target. Japan’s aging society and budget constraints will force Tokyo to adopt a different security policy, one that uses new technologies to complement human labor. After the upper house election, Kishida said it was important “to discuss content, budget and financial resources as a whole towards 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 an advanced degree research student in the Department of Security Studies and Criminology at Macquarie University.