Financial Resources Unclear for Japan’s Defense Spending Increase

The Yomiuri Shimbun
A law to secure financial resources for increased defense spending is passed by a majority vote at a plenary session of the House of Councillors on Friday.

Plans to dramatically strengthen Japan’s defense capabilities were essentially endorsed by the Diet on Friday, when it approved a law for securing financial resources for the government’s plan amid an increasingly severe security environment.

But a key point — where the money will come from — remains unclear. Nor can the timing of a related tax hike be foreseen. A mountain of challenges looms ahead.

Counterstrike capability

“In the most severe and complicated security environment since the end of World War II, we are determined to protect the lives and peaceful existence of the people,” Defense Minister Yasukazu Hamada said at a press conference on the same day, expressing the government’s resolve.

To deal with North Korea’s nuclear and missile development, Russia’s armed aggression in Ukraine, and China’s high-handed maritime expansion, it is a matter of urgency for Japan to drastically strengthen its defense capabilities.

On Thursday, at least two ballistic missiles were launched by North Korea into Japan’s exclusive economic zone (EEZ).

In beefing up Japan’s defense capabilities, a decisive element would be the possession of “counterattack capability,” meaning the capacity to strike targets such as an enemy’s missile bases in self-defense.

Lying behind the need to boost such capability is that it would be impossible to respond to the threat of North Korean missiles with only the present ballistic missile defense system.

The budget for fiscal 2023 includes ¥211.3 billion earmarked for the purchase of U.S.-made Tomahawk cruise missiles. From now on, the Defense Ministry will work on the development of a longer-range domestically produced Type 12 surface-to-ship guided missile and do research on hypersonic missiles.

Learning from the situation in Ukraine, the ministry will also purchase ammunition, strengthen facilities, and develop unmanned aerial vehicles to raise the overall level of its “ability to sustain military operations” for a long time.

New fund to be set up

The law for securing financial resources will endorse the measures that will be taken on the basis of the three security-related documents, including the new National Security Strategy, approved by the Cabinet last December.

The main pillar of the law is the “fund for reinforcing defense capabilities,” which is to be newly established. This fund will enable the government to spend nontax revenues, such as gains from the sale of national property, exclusively for defense purposes over multiple fiscal years.

In the fiscal 2023 budget, ¥3.4 trillion was earmarked for the fund. This was accomplished by scraping together the profit on the sale of Otemachi Place — a high-rise office building in Otemachi, Tokyo — and reserve funds of independent administrative institutions that have ballooned thanks to unused subsidies for measures against the COVID-19 pandemic.

Yet, such money is just temporary income. It remains unclear whether the government will be able to continue securing enough money for the fund in fiscal 2028 and beyond.

Another source of revenue is the government’s annual closing-account surplus. Over the past 10 years it has averaged about ¥1.4 trillion, but can hardly be considered a stable financial source. The government intends to allocate half of it — about ¥700 billion — to the new defense spending.

However, the Public Finance Law requires that more than half of the closing-account surplus be used to redeem government bonds.

Since the amount of the retained surplus is affected by factors such as tax revenues rising and falling from year to year, it fluctuates significantly. In fact, the amount in fiscal 2020 was ¥4.5 trillion, but in fiscal 2015-17 it was less than ¥1 trillion each year.

If that surplus, much of which has been used for the supplementary budget, is reduced by the amount allocated to defense spending, the government may have to resort to issuing deficit-covering government bonds.

In addition to this, the government plans to gain money for defense by trimming ¥200 billion each fiscal year from elsewhere in the budget through expenditure reform. But it is unclear which specific budget items will be targeted for the reform.

Going forward, the timing of a tax hike to finance the increase in defense spending will also become a focus of attention. The government is considering putting it off until 2025 or later. It had earlier said it would be “in 2024 or later.”

Takero Doi, a professor of public finance at Keio University, said, “The government should refrain from postponing the tax hike if there is no prospect of accumulating funds from nontax revenue. And to secure a stable financial source, it needs to make a decision on the timing of the tax hike as soon as possible.”