Since fiscal 2020, the defence ministry has partnered with trading houses and defence companies to identify potential demand for defence equipment in countries like India and Vietnam. Ships and communications equipment are believed to be of particular interest.
The new fund is meant to help defence companies adjust such products designed for the Japanese Self-Defence Forces to better meet the requirements of overseas buyers. Industry players have been pushing the government to take a more active role in promoting defence exports.
“We will work with the private sector toward the smooth implementation of equipment transfers,” defence minister Yasukazu Hamada said Friday.
Japan eased restrictions on defence equipment transfers in 2014 but so far has exported only surveillance radars to the Philippines.
Accommodating buyer requests will be key to securing further deals. The United Arab Emirates and New Zealand have expressed interest in the SDF’s C-2 transport aircraft. The UAE requested the ability to take off and land on unpaved ground. Testing was conducted in Japan in 2020 in response, but no notable progress has been made since.
In the new National Security Strategy adopted in December, Japan said the transfer of defence equipment and technology is a key tool “to deter unilateral changes to the status quo by force” and “to create a desirable security environment for Japan.” It sees such transfers as a way to bolster security cooperation with partner countries.
The government also hopes to breathe new life into an ailing industry. Building a fighter jet involves input from around 1,000 companies, many with highly specialised products and technology. A destroyer involves 8,000 or so. But more than 100 Japanese companies have left the industry in the last two decades, and a continued exodus could impact the nation’s ability to meet production and maintenance needs in a crisis.
To open up further business opportunities, the government and the ruling Liberal Democratic Party will begin discussions this spring on tweaking operational guidelines on defence equipment transfers. One proposal would ease restrictions regarding potentially lethal equipment, which currently can be transferred only to countries Japan jointly develops them with.
The legislation approved Friday would also create a new framework for the government to shoulder defence companies’ costs for building stronger supply chains, improving production efficiency, bolstering cybersecurity and ensuring business continuity.
The initiative would help reduce the risk of supply chain disruptions, including from disasters and corporate acquisitions, by supporting research in alternative technologies. Efforts by companies to introduce artificial intelligence and 3D printing at production hubs would also be financially supported.
To preserve valuable know-how, the government would cover costs involved in taking over a business looking to exit the industry. It would assume ownership of production facilities if no other takers can be found and contract their operation out to the private sector.
Companies would be subject to criminal penalties for information leaks on defence equipment. They would be strongly encouraged to respond to the defence ministry’s supply chain surveys to identify potential weaknesses.
Japan’s defence contractors assume an average profit margin of 8% or so for equipment supplied to the SDF. But the actual figure often ends up at around 2% to 3%, owing to materials costs and other expenses. The new legislation would update how contract prices are determined to increase the margin to up to 15%.