Looking Beyond 1 Percent: Japan’s Security Expenditures

With the enactment of Japan’s FY2018 defense budget on April 1, Japan has had six consecutive years of increased defense spending. This trend contrasts with consecutive defense budget cuts between 2002 and 2012. (Japan is now back to 2002-levels of spending.)

Japan’s increased defense spending can be attributed to both internal and external factors. Prime Minister Shinzo Abe has advocated for Japan to be proactive in international peacekeeping and a more equal partner in the U.S.-Japan alliance. He seeks to “normalize” Japan’s military such that it has the capacity to defend its interests and citizens wherever they are threatened. Exogenous factors for increased defense spending include a rising China, a nuclear North Korea, and new stateless threats like terrorism.

Debates over Japanese defense spending are often framed around the “1 percent of GDP” threshold, which is an important indicator of a constraint on defense spending. From 1976-1986, Japan had a policy of limiting defense spending to 1 percent of its GNP. Although Prime Minister Yasuhiro Nakasone removed this official limit in FY1987, Japan’s defense budget has more or less stayed within 1 percent of its GDP. In 2017, Abe told the Diet that given security situation in the Asia-Pacific, he had no intention of limiting Japan’s defense spending to 1 percent of GDP.

At any rate, the 1 percent limit is an imprecise metric for understanding how Japan approaches its security. Many of the threats that experts point to are the same threats that concerned Japan during the decade of defense spending decline. Understanding how the money is spent can tell us more about defense priorities and strategies for combating the threats. More banal factors also determine the impact of security-related expenditures, such as personnel costs and purchasing power parity. Therefore, we contend that a more accurate assessment of Japanese security policy must not only examine the total spent, but how the budget is allocated and what is considered a security expenditure. Our assessment is that Japan spends less on traditional security than purported, but has also found creative outlets for defense-related spending amid severe political and budgetary restrictions.

Budget Breakdown

First, let’s review the approved FY2018 defense budget numbers, which came into force with the new fiscal year beginning on April 1, 2018. In December of last year, Japan’s Ministry of Defense (MOD) requested 5.02 trillion yen ($48 billion) for FY2018, which would have represented a 2.5 percent increase over FY2017, but it will actually receive 4.94 trillion yen — only a 0.8 percent increase. This increase is incremental, especially considering that it is lower than the 1.5 percent inflation rate.

Out of the 4.94 trillion yen defense budget, the greatest portion goes to personnel and provisions, which includes personnel salary, retirement allowance, and meals, at 2.19 trillion yen (44.2 percent of the budget). This figure has remained basically unchanged throughout the years. Japan then divides its material expenses (“program expenses”) into two categories — “obligatory outlays” and “general material expenses.” These figures don’t include SACO (Special Actions Committee on Okinawa) related expenses, U.S. Force realignment expenses (for mitigating the impact of U.S. bases on local communities), or the introduction of new government aircraft (replacements for Japanese Air Force One and Two, new Boeing 777s after 28 years with 747s). These excluded categories were respectively 5.1 billion yen (up from 2.8 billion yen in FY2017), 216.1 billion yen (up from 201.1 billion in FY2017), and 31.2 billion yen (up from 21.6 billion in FY2017). If you include these figures, Japan’s defense budget rises to 5.19 trillion yen.

Obligatory outlay expenses (defined as expenses paid in FY2018 for contracts concluded before FY2017) total 1.76 trillion yen, leaving only 994.9 billion yen for general material expenses (activity expenses) — these are described in the next paragraph. Of the obligatory outlay expenses, maintenance activities (including repair and training) form the lion’s share at 703.2 billion yen (40.0 percent), followed by equipment acquisition at 340.0 billion yen (19.3 percent), a near tie with aircraft acquisition at 335.4 billion yen (19.1 percent). Note that over the past four years, an average of 20 percent of military items have been foreign acquired. Shipbuilding constitutes a paltry 117.9 billion yen (6.7 percent), while facility improvements are 132.8 billion yen (7.6 percent).

Of the general material expenses (defined as expenses paid in FY2018 for contracts also concluded in FY 2018), as with obligatory outlay expenses, maintenance activities (including repair and training) make up the greatest portion at 431.1 billion yen (43.3 percent), then base measures (of which Host Nation Support of U.S. forces, otherwise known as “omoiyari yosan,” comprises almost half) cost 405.1 billion yen (40.7 percent). Only 42.4 billion yen (4.3 percent) remains for facility improvements, 27.2 billion yen (2.7 percent) for R&D, and 25.7 billion yen (2.6 percent) for equipment acquisition.

New Military Hardware

While most of Japan’s defense budget is tied up in personnel expenses, repair and maintenance, and support of U.S. forces in Japan, the MOD will be funding some new pieces of hardware in FY2018, in line with its Mid-Term Defense Program (MTDP). Major line items include construction of new multimission 3,900-ton class destroyers (2 ships for 92.2 billion yen) and the second of the FY2017 3,000-ton Soryu-class submarines (69.7 billion yen)

Japan’s MOD has also allocated 78.5 billion yen for six fighter aircraft (F-35A), 43.5 billion yen for two transport aircraft (C-2), 39.3 billion yen for four tilt-rotor aircraft (V-22), 26.7 billion yen for a new aerial refueling and transport aircraft (KC-46A), 18.2 billion yen for a Type-03 middle-range surface-to-air missile, 14.7 billion yen for an Unmanned Aerial Vehicle (RQ-4B Global Hawk), 13.7 billion yen for 18 Type-16 mobile combat vehicles, 12.9 billion yen for a Type-12 surface-to-ship missile, 8.7 billion yen to the development of next-generation warning and control radar equipment equipment, 3.6 billion yen for a Type-11 short-range surface-to-air missile, and 2.1 billion yen for a test version of the standard missile Raytheon SM-6. The SM-6 is in addition to acquisition of SM-3 Block IIA and SM-3 Block IB (62.7 billion yen) for ballistic missile defense, all part of the planned Aegis Ashore system.

And while the amount is small, it is significant that Japan has budgeted 2.16 billion yen ($20 million) for acquisition of its first-ever long-range cruise missiles, Norway’s Joint Strike Missile, which will be mountable on F-35A fighter jets. It has also budgeted 30 million yen for research on Lockheed Martin’s JASSM-ER and LRASM missiles. The missiles are a controversial capability for the country, whose war-renouncing constitution places restrictions on its defense forces.

Separately, the FY2017 supplementary budget provided another 243.5 billion yen, which will go toward Japan’s response to ballistic missile attacks (62.2 billion yen), including information gathering related to acquiring the land-based Aegis Ashore and acquisition of the PAC-3 MSE advanced interceptor missiles; plus sundry other items (172.3 billion), such as a new airborne early-warning aircraft (E-2D) for 24.7 billion. On average, MOD receives about 200 billion yen a year in supplementary budget via the Ministry of Finance.

Less Bang for the Yen

Several media outlets have called attention to Japan’s FY2018 Defense Budget, which, as noted above, did not meet the “record” request of 5.02 trillion yen ($48 billion). (For context, this “record” figure is still about a quarter of China’s defense budget and only 5.5 percent of the United States’ defense budget.) The slight actual increase in defense spending (0.8 percent) should allow for Japan to bolster its ballistic missile defense (BMD) and intelligence gathering capabilities. Japan has basically met the scheduled major procurements in 2018, the final year of its five-year Mid-Term Defense Plan (less nine planned multipurpose helicopters for the Maritime Self-Defense Forces due to a bidding scandal).

Nevertheless, a consideration of regional context suggests Japanese defense spending is not as impressive as it may seem. As an advanced industrial nation, Japan’s purchasing power parity is equivalent to the United Kingdom’s or Canada’s, at 0.90 to the U.S. dollar. Regional rivals China (0.50 to the dollar), South Korea (0.80), and Russia (0.40) are able to do more with less. South Korea has also boosted its defense spending ($39.7 billion); Russia’s spending ($42.3 billion) has remained close to Japan’s; and China ($174.6 billion) has outspent Japan at an increasing rate since 2005. Moreover, Japan’s defense budget increase for FY2018 does not keep up with inflation, as mentioned above. In other words, Japan gets much less for what it spends in comparison to other countries in the region. Much of the hardware expenses are also defensive in nature — not counting the new kinds of missiles described above.

Security Related Expenditures

Due to the various constraints on MOD, and the limited defense budget, Japan has found creative ways to enhance its security.

Japan’s primary threats are North Korea and China. North Korea’s nuclear and intercontinental-range ballistic missile programs are primarily countered by the missile defense described above. China poses a threat to Japan by way of incursions into its territorial waters. As a result, Japan has increasingly relied on the Japan Coast Guard. The Coast Guard FY2018 budget was 211.23 billion yen ($1.98 billion) and it has increased spending on patrol boats and maintenance. The spending relieves some pressure on the Maritime Self-Defense Forces, although the Coast Guard faces its own bottlenecks. For example, Japan lacks the base capacity to dock new ships and therefore, the Coast Guard will allocate 300 million yen in FY2018 and tens of billions more in upcoming years toward new bases.

Japan has also leveraged Official Development Assistance (ODA) to increase its security. Under the Fukuda Doctrine, Japan actively used aid to stabilizing vital regions and to curry favor among states. In total, Japan spent $324 billion on ODA from 1945 to 2015. In 2015, Japan revamped its Official Development Assistance Charter, including re-branding ODA as “Development Cooperation.” The new charter stated that Japan would utilize ODA strategically from the perspective of making a proactive contribution to peace and thereby pursue its national interest. Most controversially, the revised charter includes a provision that allows ODA to fund foreign troops, although only for nonmilitary operations such as disaster relief.

The ODA total for FY2018 is 553.8 billion yen ($5.24 billion). Japan’s ODA centers on Southeast Asia. Through its foreign aid, Japan has been able to donate patrol aircraft (retired TC90 trainer aircraft) and multipurpose vessels to the Philippines and used patrol ships to Vietnam. These donations serve at least two purposes — to boost Japanese strategic relations in Southeast Asia, and to help defend the South China Sea against Chinese incursions. Of course, these “gifts” are not included in Japan’s defense budget.

One other point to note in comparing Japan’s defense budget with that of other countries is that Japan includes a “retirement allowance” in its defense budget (paid just once, when an MOD staff retires). Some NATO countries include pensions (generally throughout retirement) in their defense budgets, but they have been criticized for inflating their defense expenditures to meet the “2 percent of GDP” target.

Conclusion

Japan’s defense posture and procurement strategy are grounded in the “National Defense Program Guidelines (NDPG)” and the “Mid-Term Defense Program (MTDP).” This year, FY2018, marks the end of Japan’s five-year MTDP and roughly 10-year NDPG plans. We can expect an update on both of these foundational documents around the end of this calendar year. They will set priorities that will then be reflected in the coming defense budgets.

We should monitor these plans and whether Japan actually allots funding to things Abe says are important, such as cyber and space security. For example, in FY2018, the total amount of defense budget for cybersecurity fell from 12.4 billion yen in FY2017 to 11.0 billion yen in FY2018 (although, to be fair, MOD did request 14.5 billion yen). MOD will have to find a way to increase its Cyber Defense Group from 110 to 150 people with a skimpier budget than it requested. Existing MOD personnel will transfer to this group, which will help add capacity under a lean budget, but does not bode well for bringing on veteran cyber expertise.

Another important question is if Japan will seek to obtain offensive strike capabilities in the future, and move beyond a defense-only security posture. The 2018 budget provides early indications that this may happen, but we should see if thinking on this topic is clarified in the new NDPG and MTDP.

A myriad of political, economic, and legal barriers mean that the Japanese government has found creative ways to meet its security needs. Increased support for the Coast Guard, investment in defense technologies, and strategic use of ODA have allowed Japan to increase its security beyond the defense budget. In sum, the 1 percent of GDP informal cap on defense spending and raw spending numbers tell us very little about Japanese security priorities.

Note: The exchange rate of Japanese yen to U.S. dollars for FY2018 is pegged by the Ministry of Finance at 112 yen/dollar.