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SECURITY > Self-Defense Forces

Japan’s loan balance exceeds annual budget for SDF equipment

  • August 2, 2022
  • , Nikkei , p. 4
  • JMH Translation

The Self-Defense Forces (SDF) procure less than 20% of its equipment from overseas, with a majority coming from the U.S. As a result of purchasing equipment at the U.S.’s asking prices, the loan balance has begun to exceed the annual budget. Merely increasing the budget will neither end Japan’s dependence on the U.S. nor develop the domestic industry. Therefore, solutions developed together with private companies will become important.


Generally, pricey equipment is bought on an installment plan for several years. So a large part of the procurement cost is included in the budget for the next fiscal year or later as “expenditures charged to future fiscal years.”


In fiscal 2022, a record 2.9022 trillion yen was newly added as expenditures in past fiscal years. The balance of payments including contracts made in or before fiscal 2021 stands at about 5.8 trillion yen, exceeding the defense spending in the beginning of fiscal 2022.


The balance of payments exceeded the initial budget for the first time in fiscal 2019.


That is one year after then-Prime Minister Abe Shinzo promised U.S. President Donald Trump that Japan would actively buy American equipment and decided to purchase a further 105 F-35 stealth fighters. The cost exceeded three trillion yen, including related costs, and was called a “shopping spree.”


Then questions have been raised as to whether an increase in the defense budget will reduce the balance of the expenditures rolled over to future fiscal years. But it is not necessarily appropriate to say that the balance will be reduced, because Japan will continue to “depend on the U.S.” for equipment it can’t develop with its own technologies.


There is the Foreign Military Sales (FMS) system for purchasing advanced equipment from the U.S. Under the system, countries deal with the U.S. government, not trading houses and defense companies, based on the U.S.’s Arms Export Control Act.


The system enables Japan to introduce the state-of-the-art equipment. But it also enables the U.S. to sell equipment for its asking price, change deadlines for delivery, and cancel contracts. Under the system, the most important part of technologies are not disclosed.


European nations and South Korea also adopt the FMS. But it is pointed out that Japan in particular does not have a proper price negotiation mechanism.


There is also equipment that has not been delivered yet due to the U.S. missing delivery deadlines and the unliquidated excess payments arising from higher estimated prices than actual costs. According to data compiled by the Acquisition, Technology & Logistics Agency (ATLA), equipment purchased under 132 contracts (worth 32.6 billion yen) has not been delivered yet and excess payments under 263 contracts (worth 49.3 billion yen) have not been liquidated as of the end of fiscal 2018.


Nevertheless, Japan continues to buy equipment from the U.S. because of the increasingly severe security environment and greater significance of the latest equipment. Japan has procured E-2D early warning aircraft and a Global Hawk unmanned surveillance plane.


Procurement under the FMS exceeded 370 billion yen in the budget for fiscal 2022, roughly a three-fold increase from a decade earlier.


Then how to solve this problem? The answer is a reduction in the government’s “dependence on the U.S.” The government will shift its policy from Japan-U.S. joint development to Japan-UK cooperation for the next-generation fighter of the Air Self-Defense Force (ASDF) it plans to deploy in fiscal 2035.


Another thing that can solve the problem is co-existence with the domestic industry. Japan is home to thousands of equipment manufacturers, ranging from such major companies as Mitsubishi Heavy Industries to subcontractors. But many of these companies are withdrawing from the business because it is not profitable as the SDF is their only customer.


The Three Principles on Transfer of Defense Equipment and Technology set by the Japanese government stipulate that fighters and other large pieces of defense equipment can be provided only to the countries with which Japan jointly developed them.


Production costs rise if the number of customers is limited. Therefore, Japan will get caught in a vicious circle in which it has to rely more on the U.S. as a result of more and more companies exiting the defense industry.


The Japan Business Federation (Keidanren) insisted in its policy proposals issued in April, “The government should stipulate [in the National Defense Program Guidelines] the formulation of a plan to transfer defense equipment and technology overseas.” The business lobby also called on the government to make such efforts as a leader-to-leader sales promotion.


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