Japanese govt to financially support defense equipment makers, possibly nationalizing some plants

The Yomiuri Shimbun

16:11 JST, December 30, 2022

To maintain Japan’s domestic manufacturing of defense-related equipment, the government is planning to provide comprehensive financial support to the defense industry, which is on the decline, and even to nationalize manufacturing plants of firms that may find it difficult to continue operating even with such support.

In the latter case, the government would keep ownership of the manufacturing facilities while commissioning the production of equipment to firms willing to take over the business.

The plan is aimed at reducing fixed costs for such companies while maintaining domestic production of important equipment. The government intends to submit a required bill to the ordinary Diet session next year.

The bill is to be tentatively called a “bill concerning the strengthening of the foundation for the development and production of equipment which the Defense Ministry procures.”

According to the outline of the bill, it will specify comprehensive support measures for companies involved in the defense industry, including reinforcing their production base and extending subsidies for overseas exports.

As for “companies that manufacture equipment essential to the fulfillment of duties of the Self-Defense Forces,” the legislation will permit the facilities of firms that cannot continue their business even with such support to be nationalized “if there is no alternative.”

Specifically, the legislation will lay down a provision that will authorize the government to purchase the manufacturing facilities of such firms and commission the management of the facilities to other companies willing to take over the businesses.

The advantage for a company that takes over such a business is that it will not have to pay for the cost of production equipment. The government has concluded that it must become proactively involved in the declining sector, as it would be difficult to revitalize it if expertise were to be lost due to companies withdrawing from the defense equipment business.

However, the government envisages nationalization strictly as a last resort.

The bill will specify three comprehensive support measures:

■ Funding for “strengthening the production base,” such as improving the efficiency of manufacturing processes and beefing up cyber security.

■ Financial support for companies that export defense equipment.

■ Promotion of loans to be extended by the Japan Finance Corporation.

Support money for exports will come from a fund to be newly established, with approximately ¥40 billion to be appropriated in the budget for fiscal 2023.

The support will cover the cost of changing equipment specifications to meet the needs of export destinations.

Expanding the delivery of equipment to overseas destinations is expected to lower their prices and improve their profit margins by increasing production volume.

The Defense Ministry will be authorized to survey the defense industry so as to grasp the number of “companies that manufacture essential equipment” and the business activities of those companies that will be covered by the support.

The supply chains for defense-related equipment manufacturers are huge. For instance, approximately 8,300 companies are involved in the work related to the manufacturing of destroyers alone.

In conducting the survey, the ministry will also examine the management risks of companies, such as their dependence on foreign-made parts and components and any inadequate systems, to back up their production. Companies will be obligated to make a sincere effort in responding to the survey.

The market scale of the defense industry is small in Japan, as the three principles on defense equipment transfer limit the overseas exports of such equipment to cases in which they will contribute to peace and international cooperation. As a result, many companies have seen their profitability decline, and more than 100 companies are said to have withdrawn from the industry since 2003.