Japan’s Brewing Debate Over How to Cover Defense Spending

There is a hot debate going on among Japan’s ruling lawmakers over how to finance an expected huge increase in Japan's defense spending. It is true that there is already a broad consensus that the government needs to fundamentally reinforce Japan's defense capabilities within the next five years in the face of growing serious military threats from China, Russia, and North Korea. But views are split on how to secure a permanent source of reliable revenue to cover the nation’s defense spending rise in coming years.

The ruling Liberal Democratic Party (LDP) has pledged to double the country’s defense spending from 1 percent to 2 percent of GDP within five years to cope with an increasingly severe security environment around Japan. The initial budget for fiscal year 2022 came to about 1 percent of GDP at 5.4 trillion yen ($35.6 billion), meaning the government would need to come up with another 5 trillion yen to meet its goal.

However, Japan’s government debt had already reached 263 percent of GDP last year – the worst among major industrialized economies. As a result, lawmakers who want to avoid making the financial situation any worse have called for raising corporate and household income taxes to keep up with the cost of defense. Among them are Finance Minister Suzuki Shunichi, son of former Prime Minister Suzuki Zenko, and Miyazawa Yoichi, head of tax policy in the LDP and the son of former Prime Minister Miyazawa Kiichi.

Suzuki and Miyazawa have both argued that the idea of covering the added costs of defense spending with government debt is irresponsible. They believe that, in addition to raising taxes to pay for the defense budget hike, cutting spending elsewhere should be a priority.

In Japan, those who want to maintain fiscal discipline also widely believe that just relying on government bonds without any consideration could weaken the nation’s economic competitiveness. If companies and people can easily borrow money at low interest rates, they may succumb to moral hazard as a result of loosening of both fiscal discipline and monetary policy.

At the same time, the flip side of this fiscal discipline approach is that any tax hike could hinder Japan’s economic recovery from the COVID-19 pandemic.

In a recent interview with the Nikkei Shimbun, Ishida Shigeru, a veteran LDP lawmaker and a former defense minister, argued that corporate and income taxes should be considered as financial sources for increased defense spending because the business community would also benefit from the increased defense budget.

By contrast, those lawmakers who want to drastically increase defense spending show almost no compunction about issuing new government debt. Among these lawmakers are Onodera Itsunori, chairman of the LDP’s Research Commission on National Security and a former defense minister, and Sato Masahisa, head of the LDP's foreign affairs committee and a former Ground Self-Defense Force official who commanded the GSDF unit first dispatched to Iraq during the Iraq War.

These lawmakers prefer to stress the dire situation of Japan’s defense due to historically low funding. For example, they revealed the fact that the Japan Self-Defense Forces have some aircraft with low operating rates because there have been cases of “cannibalism” in which equipment from fighter planes and helicopters is used by other aircraft due to a lack of sufficient funding and resources to supplement missing parts.

The Kishida administration has not ruled out issuing government debt to meet its defense spending target.

“Our goal is to drastically strengthen Japan’s defense by tapping various sources of revenue. We’ll be flexible on the funding and won’t rule out any options,” Japan’s Deputy Chief Cabinet Secretary Kihara Seiji said in a television program in mid-September, echoing Onoedra’s and Sato’s views.

In May, Prime Minister Kishida Fumio told visiting U.S. President Joe Biden that his government would substantially increase defense spending, making this an international commitment.

Kishida may be trying to find a way to let Japan’s defense budget approach the NATO level of 2 percent of GDP – and keep his word to Biden – without actually doubling defense spending. On October 21, Kishida instructed government ministries and agencies to consider a new, broader framework under which budgets related to public infrastructure and research projects would be counted in the nation’s defense-related expenditures.

But some lawmakers, such as former Defense Minister Kishi Nobuo, younger brother of the late Prime Minister Abe Shinzo, disagree with this overhaul of how to categorizes defense spending.

“In the discussion about an increase in defense spending to the NATO level of 2 percent of GDP, some have argued that budgets related to the Japan Coast Guard and science and technology should be included in the defense budget, but this kind of magic trick with numbers is not important,” Kishi tweeted on September 30. “What is important is whether we can increase fiscal spending that the Self-Defense Forces can truly use.”

Interestingly enough, Kishi currently serves as the special advisor to the prime minister for national security policy and nuclear disarmament issues.

The late Abe Shinzo, who was assassinated on July 8, had strongly advocated increasing the national defense budget to the NATO level of 2 percent of GDP. It remains to be seen whether Kishida will follow Abe’s defense policy.

Kishida’s administration will finalize Japan’s updated national security strategy and the fiscal 2023 draft budget by the end of 2022.