Naohiko Abe, who heads the sprawling conglomerate’s defense and space business, told the Financial Times that Russia’s invasion of Ukraine had crystallized the security risks to Japan posed by China and North Korea, generating more public support for a larger defense budget. Recent polls have shown that a majority of the Japanese public favors an increase. “It was a big factor that everyone, including the general public, started to feel that something similar to Ukraine could happen around Japan. Leaving aside the actual amount of how much the defense budget will increase in percentage terms, action must be taken,” Abe said. But beyond a simple increase in military spending, Abe argued that a broader overhaul was needed, saying the country’s defense industry was not sustainable if it could generate little margin from defense ministry contracts. “More companies are pulling out of the defense sector because they are chronically losing money,” he said. “Industry players are all saying they need more profitability, continuity as well as predictability. We have to do something to support the industry because companies have been pulling out over the last five years.” He even warned that additional military spending would not necessarily provide a greater business opportunity for MHI’s defense business, which accounts for about 10 percent of the group’s ¥3.8 trillion ($29 billion) in revenue in the year to March. . However, he added that the situation may improve now that the defense ministry is in the process of reviewing contracts to improve profitability for companies. While companies can theoretically expect a profit margin of up to 7 percent on supplying the government with military equipment, the actual margin was often zero or even negative given the sporadic nature of the contracts as well as other cost factors. Increased reliance on imports from the US has also led to a decline in the supply of home appliances. As a result, Japanese companies have pulled out of defense activities in recent years. Last year, Mitsui E&S exited its marine and government shipbuilding businesses, selling the division to MHI. In 2018, Komatsu announced it would stop development of wheeled armored personnel carriers sent to Japan’s Ground Self-Defense Force. Japan’s largest business lobby Keidanren warned in April of a “crisis” in the domestic defense supply chain and urged the government to “position the defense industry as an important partner for national defense.”

The audit of the country’s defense industry comes in a pivotal year for Japan. By the end of December, Prime Minister Fumio Kishida is expected to release a new national security strategy, guidelines for the national defense program and a five-year procurement plan that will form the basis of the defense strategy. In the wake of the war in Ukraine, the ruling Liberal Democratic Party said Japan must increase its military spending in line with a NATO pledge for member states to spend 2 percent of gross domestic product. For nearly half a century, Japan has limited its defense budget to 1 percent of its GDP. In the current financial year, this amounts to ¥5.4tn. Japan is expected to increase its military budget, but analysts are split on how far Kishida can go given the fiscal pressures the economy faces from rising health care costs for its aging population.