Japan’s Foreign Military Sales
Considering a Japanese Version of Foreign Military Sales: Is FMS Needed to Enable Japanese Defense Exports?
Kenjiro Hattori | 2023.04.13
Japan faces a globalized defense industry in which international joint development and production of defense equipment have become mainstream.
If this trend continues, Japan’s defense industrial base will continue to decline. How can Japan reverse this trend and increase exports of defense equipment? This paper explores possibilities for Japan by comparing the defense export systems of other countries, including the U.S. foreign military sales (FMS) program, and assesses whether Japan needs its own version of FMS.
The International Environment
As Japan’s 2022 National Security Strategy highlights, the security environment around Japan is “as severe and complex as it has been since the end of World War II.” Some nations (such as China, North Korea, and Russia) are
increasing their own national interests at the expense of others . . . , expanding their influence through both military and non-military means, attempting to unilaterally change the status quo, and accelerating actions to challenge the international order. Such moves have sharpened competition and confrontation among states in wide-ranging areas, including military, diplomatic, economic, and technological fields, and have shaken the foundation of the international order. As a result, the current international security environment has become complex and severe, one where inter-state relations and interests of each and every nation are intertwined with each other in a mosaic-like manner.
Specifically, there are worsening risks that these countries could impede free access to and utilization of the cyber, maritime, space, and electromagnetic domains. In the field of international trade, some nations are using economic tools — such as “restricting the exports of mineral resources, food, and industrial and medical supplies, as well as providing loans to other nations” that cannot sustain that level of debt — to influence and coerce other nations. As balances of power shift, there is a lack of strong leadership within the global governance structure to address these issues. The international community is therefore struggling to take on shared challenges such as climate change, arms control, disarmament, nonproliferation, terrorism, food and energy security, and preventing the spread of infectious diseases.
These dynamics are particularly prominent in the Indo-Pacific region. China has been expanding its military power, including nuclear capabilities, and has intensified its attempts to use force to unilaterally change the status quo in the East and South China Seas around Taiwan and the Senkaku Islands. It is also “strengthening its strategic ties with Russia and attempting to challenge the international order.” Meanwhile, Chinese development finance is taking advantage of countries’ reliance on China to exert economic pressure on them. These activities, which are worrying Japan and the international community, present “the greatest strategic challenge in ensuring the peace and security of Japan and the international community, as well as in strengthening the international order based on the rule of law.”
North Korea’s efforts to rapidly expand its nuclear and missile capabilities also pose a graver and more imminent threat to Japan’s national security than before. Meanwhile, Russia’s aggression against Ukraine has “shaken the very foundation of the international order.” Not only is Russian aggression the most significant and direct threat to security in Europe, it has also raised concerns in Japan about how Beijing’s ties with Russia could impact security in the Indo-Pacific region.
In response to potential adversaries’ growing capabilities in new and traditional forms of warfare, the government of Japan has concluded it is necessary to fundamentally reinforce Japan’s defense capabilities to protect its citizens. Japan’s new National Defense Strategy, also released in December 2022, notes the importance of both integrating all forms of national power to reinforce Japan’s defense capabilities and enhancing deterrence by strengthening the U.S.-Japan alliance and other forms of security cooperation with like-minded countries.
Japan’s Dwindling Defense Industrial Base
Despite the decision to revise the Three Principles in 2014, only one transfer of a complete system has occurred since then, while the defense industrial base has shrunk as Japanese companies withdraw from the sector for several reasons.
First, even though the Three Principles allow defense equipment transfers in principle, the strict conditions in place effectively render exports the exception. Second, because most Japanese defense equipment is produced only for domestic procurement, it would be challenging to ensure they meet a purchasing country’s price, usage, and performance requirements. Third, the benefits of licensed production are no longer available: as defense systems have become more sophisticated and costly, international joint development and production have become the norm, and countries have become more reluctant to issue licenses for defense equipment containing sensitive technologies. In short, early licensed production of mature systems raised few technology-transfer problems, but newer, advanced defense systems naturally raise more releasability challenges. This has resulted in an increase in equipment imports from the United States through FMS, depriving domestic defense firms of opportunities to participate.
If more domestic defense companies withdraw from the market, there is a risk of hindering the capabilities of the Japan Self-Defense Forces ( JSDF). Masashi Murano of the Hudson Institute has documented a case that captures the risk: In 2017, Japanese contractor Sumitomo Heavy Industries was able to quickly and affordably repair damage to the guided-missile destroyer USS John S. McCain. But if Japan’s defense industry shrinks further, this resilient logistics support capability will decline even in peacetime, slowing the operational tempo of both U.S. and Japanese forces — especially air defense, which requires faster turnaround times.
To address this situation, Japan’s ruling Liberal Democratic Party (LDP) Diet members introduced a proposal noting that since the defense industry is the foundation of Japan’s security, the government should assume the responsibility of sustaining and strengthening it — not just as part of industrial policy, but as a national security policy in and of itself. As it becomes more difficult to maintain a defense industrial base solely through domestic procurement, it is essential for Japan to find a way into overseas markets, both to make the industry more competitive and to boost national security. Furthermore, the overseas transfer of defense equipment — not only complete systems but also repair and maintenance of critical parts — would help promote defense cooperation with other countries in the Indo-Pacific, thereby securing the defense supply chains of partner countries and enhancing Japan’s strategic posture in the region.
According to the LDP Diet members’ proposal, although the overseas transfer of defense equipment would require proactive efforts by the private sector, the government would have to guide these industry efforts. In deciding whether to allow defense equipment exports, Japanese defense agencies should not only factor in the price, usage, and performance of potential exports, but also the overall state of defense cooperation with the purchasing country. The government would also be responsible for offering training on and maintenance of the equipment, something private companies cannot handle alone, especially in developing countries that have local-content requirements. When bidding on international opportunities, competitors will likely be companies from other advanced countries, whose bids will reflect defense exports supported by national policy and public-private partnerships. As Japan is less experienced with defense equipment transfers, preparing competitive proposals will require Japan’s public and private sectors to build a new cooperative framework in which the government takes the lead in guiding collaboration with the private sector. The LDP Diet members put forth a Japanese version of FMS as one possible model for a “new system of public-private partnership.”
The business community has voiced similar concerns. According to the Japan Business Federation’s proposal for a new National Security Strategy, Japanese defense-related companies should “implement domestic development with overseas transfers in mind and to build a system of public-private cooperation.” The government could support defense exports by providing capital investments to lower initial costs and usage fees, by expediting the transfer of information and equipment, and by providing operational support and training to recipient countries. To mitigate associated risks, the Japan Business Federation concluded:
t is necessary to consider the establishment of a system under which the Japanese government receives orders for defense equipment from foreign governments, Japanese defense-related companies deliver the equipment to the Japanese government, and the Japanese government transfers the equipment to foreign governments (a Japanese version of the FMS system).
Benefits of FMS
FMS is a form of government-to-government (G2G) transaction in which (as the name implies) the government becomes a contracting party to the purchase and sale of equipment. This is especially prevalent in the international defense market, where — contrary to all the other sectors of the globalized economy — legitimate purchasers are exclusively states, most suppliers are authorized to sell by their respective governments, and the state often directly or indirectly controls the defense industrial sector.
While government support for defense sales is not new, the past 20 years have witnessed a dramatic acceleration of government activities in this area. The globalization of defense markets, together with increased international competition and demand from outside Europe, has led traditional defense suppliers to use G2G agreements more frequently. G2G transactions feature several advantages:
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By strengthening their respective military capabilities, purchasing countries can deal more effectively with common threats. Russia and China similarly use sales of military equipment as part of “wider politico-military collaboration agreements.”
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Purchasing countries can implement a defense acquisition process faster through G2G transactions than through a commercial tender. Since the government is the contracting party, the approval of export licenses may be faster than for commercial contracts.
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G2G transactions entail a public guarantee. Since the government is the contracting party, it facilitates the transfer of equipment. If there are problems with the equipment, the government — not just the supplier company — will be obligated to provide support.
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Supplier companies can “set limits on the requests from purchasers to transfer technologies and know-how under the sales contract.” In fact, the U.S. FMS system restricts technology transfer as much as possible.
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G2G transactions enable the transfer or sale of surplus equipment held by supplier country armed forces, shifting the costs of storing it to the purchasing country. This helps promote closer cooperation and integration between the countries’ militaries. A supplier country can also use free transfers to encourage the recipient to buy more advanced equipment in the future — as when Germany gave surplus Leopard tanks to other European countries, “paving the way for further acquisitions of later versions of the same tanks.”
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Under G2G transactions, supplier companies also have an advantage during offset negotiations. The government of the supplier country can negotiate offsets on their behalf, and the scope of the offsets can more easily be broadened to include the entire domestic industry, thus reducing the burden on the supplier company.
FMS operations in the United States further illustrate the benefits for both supplier and recipient countries.
For U.S. suppliers, participation in the FMS system reduces administrative burdens. Not only are export licenses incorporated in the FMS process — with the Defense Security Cooperation Agency (DSCA) managing all required paperwork and permissions — companies can rest easy that all transactions are in accordance with U.S. law, and recipient countries are assured that the acquisition process will be subject to the U.S. Department of Defense’s (DOD) standards through every step of the process. This also dramatically reduces U.S. companies’ risks: because they sign contracts with the DOD, not with a foreign customer, they are guaranteed to get paid and do not have to worry about being sued by recipient countries. This makes it easier for small and medium-sized U.S. defense companies to participate in the FMS system. FMS also creates opportunities for private suppliers to build on U.S. government sales. Since the U.S. government is essentially procuring goods on behalf of a foreign government, the defense companies they are sourcing from may more readily sell these products under FMS, especially those already registered as standard military parts and catalogued with a National Stock Number (NSN). This helps supplier companies expand into international markets.
For the United States as a whole, FMS strengthens relations with recipient countries by nurturing long-term military relationships, including through access to joint training and doctrine and increased opportunities for standardization with U.S. forces. The United States generally tends to prefer FMS transactions over general exports because the U.S. government has more control over them, which is required for defense exports of sensitive technologies. In practice, defense equipment exports to major countries are a mix of FMS and Direct Commercial Sales (DCS).
For the customer, FMS purchases of equipment tend to be cheaper because orders can consolidated and/ or sourced from older U.S. military inventories. (Conversely, this creates a disadvantage in that the product is not new and cannot be customized for the recipient country. This is an increasingly serious problem in cases where customers prefer that sellers build “exportability” into future defense system development.) In addition, the total package approach FMS uses means that the purchase of a major system includes training, spare parts, and other support.
Moreover, the U.S. government — unlike with G2G transactions in other countries — does not participate in offset negotiations, preferring a “don’t ask, don’t tell” policy on negotiations between U.S. defense companies and recipient countries. This means that FMS recipient countries do not have to negotiate with the U.S. government, but nevertheless have access to sensitive equipment not available through DCS.
FMS and G2G transactions are the same in that the government of the supplier country becomes a party to the contract. For convenience, this paper will refer to FMS as a system in which the government is more involved or acts as an intermediary — in effect becoming the customer for an industry supplier. This role applies not only to sales but also to the entire package, including technical support and services such as training.
Feasibility of FMS in Japan
Can Japan adopt an FMS system that has these advantages for both the supplier and recipient countries?
The government of Japan has facilitated some transfers of defense equipment as a form of security assistance to regional neighbors. However, with little experience in international defense operations or exports, it is not able to replicate the complex U.S. FMS process. Many organizations are involved in the U.S. FMS network; DSCA alone employs more than 1,000 people. In addition, the United States holds a dominant share of the international defense market, with approximately 189 nations and international organizations participating in FMS procurements. The United States maintains alliances with many countries with whom it can use FMS transfers to promote standardization — which further contributes to these relationships.
Furthermore, the United States has a defense budget and armed forces much larger than those of Japan, as well as established export markets that support its defense industrial base. In comparison, Japan’s defense industry is not investing in large-scale manufacturing facilities. Even if such facilities were built, it is not clear whether their products would be marketable. Other countries might not be willing to purchase Japanese equipment, which (unlike U.S. equipment) has not been proven through operational experience. In addition, there are no “pure” defense companies in Japan. Mitsubishi Heavy Industries (MHI) is the largest Japanese defense contractor, but defense comprised only 12 percent of its business in 2021. Defense is also (rightly) viewed as a low-margin business by companies operating in more profitable commercial sectors.
However, perhaps there is another equipment export system besides the U.S. FMS model that Japan can use as a reference. Similar G2G transaction processes adopted by other countries may offer useful examples.
France
Current Status of Defense Exports
According to data from the Stockholm International Peace Research Institute (SIPRI), in the 2017–2021 period, France’s global share of defense equipment export value was 11 percent, ranking it third in the world. This value grew by 59 percent compared to the previous five-year period (2011–16). Between 2001 and 2020, the total value of French defense exports to Europe declined, while those to all other regions grew.
Background of Defense Exports
France has a higher degree of government involvement in defense equipment exports than other countries. The French state and the defense industry are also structurally interdependent. According to an International Institute for Strategic Studies (IISS) report, French defense manufacturers are “in the privileged position of facing little competition in producing major weapons systems and selling them to the government.” The Direction Générale de l’Armement (DGA) in the French Ministry of Defense plays a key role by purchasing weapons and controlling defense industrial policy.
FRANCE’S DEFENSE EXPORT PROMOTION AGENCY
The most important instrument for promoting arms exports is the Direction du Développement International (DI), a department within the DGA that is tasked with
coordinating interministerial initiatives; maintaining contacts with foreign officials with a view to opening new markets to French defense manufacturers; supervising exports by state-owned companies; . . . organising arms fairs in France; coordinating financial assistance for the defense industry; participating in contract negotiations [G2G]; and also offering an after-sales service that includes technical assistance for arms purchasers.
CONSISTENT ARMS-EXPORT DOCTRINE
Upon returning to power in 1958, President Charles de Gaulle insisted that France “should be independent from the two superpowers dominating the Cold War.” This required “an autonomous capacity to build weapons systems for the needs of its armed forces.” “Arms sales sustained an independent defense industry, which in turn sustained the French independent posture.” Thus, “success in the arms trade became a symbol of France’s capacity to defend itself — or the business ‘model of our sovereignty.’”
The doctrine that arms sales are indispensable to French sovereignty persists: “Arms exports were also regarded as benefiting the French economy as a whole, not only through their direct contribution to the balance of payments and job creation but also through spillover effects for civilian industry.”
“The absence of political debate about the direction of France’s arms-export policy means that, to a large extent, the bureaucracy has been allowed to be the arbiter of export controls.” This has made it easier for the French government to address increased competition in the global arms market by simplifying the export-control system and streamlining the processes by which defense companies receive authorization to export. This trend has continued throughout the post–Cold War era.
FLEXIBLE DEFENSE EQUIPMENT EXPORTS
The IISS report notes that in addition to offering proven equipment, France sought to attract customers by “depicting itself as a country that did not attach political conditions to arms sales and would not cease deliveries if a customer’s political or military situation changed.” For example, France was “one of the main suppliers of arms to South Africa during the apartheid era.” In addition, “the lack of response from [Emmanuel] Macron’s government to mounting criticism over arms sales to countries involved in the war in Yemen – primarily Saudi Arabia and the United Arab Emirates – suggests that the French arms-export doctrine is being maintained by the current president.”
PUBLIC INVESTMENT BANK
The public investment bank Bpifrance provides state guarantees, insuring companies against the risk of non-payment. Through Bpifrance, “the state also secured credit provided by private banks to arms purchasers,” which “benefits the arms buyer by making it unnecessary for them to immediately pay the French manufacturer the full price of their acquisition – instead they can repay the bank in instalments.” Moreover, a defense manufacturer that wants to tailor a product to a particular foreign client can receive a government loan to do so.
FRENCH VERSION OF FMS
A separate IISS report describes Belgium’s 2019 purchase of 442 French Griffon and Jaguar armored vehicles as “France’s first attempt to sell equipment using its own version of the U.S. FMS system.” This program, in which France purchases vehicles on Belgium’s behalf along with purchases for the French army, not only takes some of the pressure off the Belgian defense ministry but also leverages the French military’s economies of scale to lower the cost for Belgian equipment.
Provisions for the Belgian program include close cooperation with France on education and training. However, unlike the U.S. FMS system, France makes no obligations or guarantees on behalf of Nexter, the French company producing these armored vehicles, regarding the price, time, and performance conditions set by the contract. Furthermore, “no liability of France is incurred in the event of termination of the agreement or of the supply protocol, or of the failure of one party, or the occurrence of an external event that permanently and irrevocably opposes the execution of the contract.”
Comment
In France, in addition to the conventional G2G program centered on DI, there is a recent agreement with Belgium to export CaMo, a new generation truck-mounted artillery system. This has been called a French version of FMS because production for export is carried out in conjunction with production for the French army. However, this is not the same as the U.S. FMS system because of the lack of large government guarantees. France’s own version of FMS still benefits from the country’s flexible export policy, use of an investment bank for financing, and security environment that motivates other countries to purchase its equipment.
Australia
Current Status of Defense Exports
According to SIPRI data, during the 2017–21 period, Australia’s global share of defense equipment export value was only 0.6 percent, ranking it sixteenth in the world. However, compared to the 2011–16 five-year period, this value rose 97 percent, the third largest increase in the world.
Background of Defense Exports
DEFENSE EXPORT STRATEGY
Australia has a Defense Export Strategy dedicated to the export of defense equipment, which is rare. The 2018 strategy “builds on the 2016 Defence Industry Policy Statement by setting out a comprehensive system to plan, guide, and measure defense export outcomes.” It has four parts: (1) crafting a strategic approach to defense exports; (2) understanding the global defense market; (3) establishing the new defense export system; and (4) implementing defense export success.
This strategy notes that exports will boost future investment in Australia’s defense industry and create high-end manufacturing jobs. As it strives to make this industry stronger, more sustainable, and more globallycompetitive, the government has set five goals to reach by 2028:
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“strengthen the partnership between the Australian Government and industry to pursue defence export opportunities;
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sustain Australia’s defence industrial capabilities across peaks and troughs in domestic demand;
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enable greater innovation and productivity in Australia’s defence industry to deliver world-leading Defence capabilities;
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maintain the capability edge of the Australian Defence Force and leverage Defence capability development for export opportunities; and
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grow Australia’s defence industry to become a top ten global defence exporter.”
This strategy shows the government’s commitment to working with Australian companies to expand export opportunities.
AUSTRALIA’S DEFENSE EXPORT PROMOTION AGENCY
The Australian Defense Export Office (ADEO), established in April 2018 as part of the Defense Export Strategy, is the focal point for coordinating whole-of-government support for the Australian defense exports. ADEO is responsible for delivering the initiatives outlined in the Defense Export Strategy; working closely with an international network of defense attachés and business development managers in key markets; and engaging in G2G transactions.
AUSTRALIAN MILITARY SALES (AMS)
Under the ADEO, the AMS office plans and executes G2G sales of matériel, sensitive technology, and services of the Australian defense industry. Its role is in “support[ing] Australian sovereign capability and military sales programs as well as promoting the Australian defence industry through:
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International Government-to-Government sale, gifting or other transfer of surplus Australian Defence Force (ADF) articles
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International Government-to-Government purchase of Australian origin, sensitive technology, and ADF articles
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Supporting Australian defence industry to export to foreign government customers.”
The AMS office also publishes the Australian Defense Sales Catalogue, which provides information on ADF equipment and defense industry products and services sold to foreign governments. As part of these G2G transactions, surplus equipment is offered on an “as is, where is” basis, but new equipment can also be purchased. Prices may be specifically quoted or left to the market to decide, and payment is generally made in advance, but with flexibility in terms of delivery schedules.
Comment
Australia has prepared a strategy document specifically for defense equipment exports; based on this, Australia is using AMS, a type of standardized G2G transactions, to expand defense equipment exports. This AMS is similar to the U.S. FMS model and would be very helpful for Japan.
Israel
Current Status of Defense Exports
According to SIPRI data, during the 2017–21 period, Israel’s global share of defense equipment export value was 2.4 percent, ranking it 10th in the world. However, this value decreased by 5.6 percent compared to the 2011–16 period. Nonetheless, Israel remains a major arms exporter.
Israel’s economy depends heavily on defense-related exports. It has “extensive military relations with 130 countries that have been investing in Israel for decades through imports, exports, training and other security and military cooperation.” Increasingly, exports are going to Southeast Asia and the Indo-Pacific, areas of rapid military modernization.
Background of Defense Exports
ISRAEL’S DEFENSE EXPORT PROMOTION AGENCY
SIBAT, the International Defense Cooperation directorate within Israel’s Ministry of Defense, maintains close ties with local defense companies, interfacing between industry and the defense establishment and staying on top of both technological developments and the operational needs of the Israeli Defense Force (IDF). Its mandate includes:
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“[Signing] Government-to-Government agreements
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Initiating official foreign delegations
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Identifying business opportunities with Israeli defense industries
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Finding technological solutions for specific operational requirements
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Establishing joint ventures
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Conducting advanced training seminars
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Managing the sales of IDF inventory
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Providing quality assurance & technical support services for G-to-G agreements
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Providing in-depth information on Israel’s defense industry using a biennial directory
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Producing conferences; showcasing Israel’s technologies and capabilities under one roof at the Israel National Pavilion; attending global fairs & exhibitions and facilitating contact with participating industries”
PROACTIVE UTILIZATION OF G2G TRANSACTIONS
Despite its limited resources compared to the United States, Israel excels at promoting G2G transactions that support exports by its small and medium-sized defense companies. The Israeli government recognizes that it cannot sustain its defense industry solely through domestic orders. As such, it has turned to G2G transactions to support its defense industrial base while still “preserving strategic autonomy and innovation potential.” By 2021, the value of G2G defense exports reached $3.365 billion, compared to $911 million in 2020.
Israel can export defense equipment through DCS under a government export license, but any exports that contain sensitive technology or are driven by national interests require the government to enter into a G2G arrangement with the purchasing country. For these large G2G deals, “the terms negotiated at a ministerial level enable both sides to reach agreements faster and at lower costs than commercial tender processes.”
The involvement of the Israeli government in arms sales benefits Israeli defense companies by allowing them to rely on the government in the event of trouble and benefits the purchasing country, which receives not only the equipment, but also education, training, and long-term maintenance by the IDF. Israeli G2G transactions differ from the U.S. FMS system in that the Israeli Ministry of Defense does not directly buy weapons from Israeli defense companies (such as Rafael Advanced Defense Systems and Elbit Systems) and export them to purchasing countries.
FLEXIBLE DEFENSE EQUIPMENT EXPORTS
Israel has adopted a flexible approach to arms exports and military assistance programs, using them to advance the country’s broader foreign policy objectives. It has supplied defense systems even to countries with human rights concerns, such as the Philippines under President Rodrigo Duterte and Myanmar, and to countries experiencing conflict.
Comment
Israel is promoting government-led equipment exports by making full use of G2G transactions, although not to the same extent as the U.S. FMS system. In addition, Israel’s experience in actual warfare and its flexible equipment exports are also contributing to the growth of its defense exports.
South Korea
Current Status of Defense Exports
According to SIPRI data, during the 2017–2021 period, South Korea’s global share of defense equipment export value was 2.7 percent, ranking it eighth in the world. However, compared to the 2011–16 period, this value rose by 177 percent, the biggest increase of any country. South Korea’s arms exports have multiplied more than sixfold since 2005; in 2021 they exceeded imports for the first time. Beyond North America, regions targeted for exports now include Asia, the Middle East, and Latin America.
Background of Defense Exports
SOUTH KOREA’S DEFENSE EXPORT PROMOTION AGENCY
In South Korea, a lack of transparency, dispersed organizational management, and insufficient management of financial resources in the existing acquisition system had led to inefficiency and weakened the competitiveness of the defense industry. As a result, as of January 1, 2006, the defense acquisition structures of eight different defense institutions — including the Ministry of Defense, Joint Chiefs of Staff, each military branch and the Defense Procurement Agency — shut down, and these functions were brought under the new Defense Acquisition Program Administration (DAPA), an administrative center with the role of “improvement of defense capabilities, promotion of the defense industry, [and] procurement of munitions.” To make Korean defense exports more competitive, DAPA is also “designing regional strategies for strengthening export competitiveness and actively carrying out international cooperation.”
STRONG LEADERSHIP, UTILIZATION OF TOP SALESPEOPLE
In South Korea, the success or failure of policies to promote the domestic defense industry and proactively export equipment overseas have largely depended on the leadership of President Moon Jae-in, who served from 2017 to 22. The strength of South Korea’s equipment export project stems from the fact that under President Moon’s leadership, political leaders, the government, industry, and the military have come together under a unified structure. “Top sales,” in which the president directly pitches to other heads of state, are now commonplace, and defense industrial cooperation is often an important issue on the agenda during diplomacy with partner countries.
UTILIZATION OF NATIONAL DEFENSE DIPLOMACY
South Korea has long used “defense diplomacy,” both passive forms such as military exchanges and cooperation and “active military diplomacy, such as political ties with allied countries or the deployment of military forces abroad at the request of allied nations or international organizations.”
South Korea is using this defense diplomacy to sell equipment. For example, it deployed troops to Iraq from 2003 to 2008 and in December 2013 concluded a sales contract with Iraq for T-50 training aircraft, following the improvement of bilateral ties based on the reputation of the South Korean military there. In 2013, South Korea participated in typhoon relief efforts in the Philippines and held an event commemorating its participation in the Korean War, thereby establishing friendly relations and paving the way for a March 2014 contract to sell the Philippines FA-50 light attack aircraft.
CUSTOMIZED EXPORTS
South Korea is seizing commercial opportunities through “customized” exports based on meticulous market research. This sales approach “thoroughly examines the security environment, financial situation, and industrial structure of the customer and flexibly considers sales methods.” Sometimes, this results in “joint production with local companies, second-hand sales, and financial support,” tying negotiations to government economic assistance.
UTILIZATION OF DCS
South Korea does not use G2G transactions for defense sales. Given the country’s history of military coups, this is to avoid a public backlash against direct military involvement. The South Korean government has been limited to providing follow-up services such as training and maintenance after equipment sales, as it has done in Iraq.
However, it is expected that G2G transactions will be adopted in the future. That is why it is difficult for one company alone to promote exports, as defense trades are generally based on mutual trust between the governments involved. Since its establishment in 2006, DAPA has taken the role of directly selling defense articles as requested by a purchasing government. These kind of G2G transactions enable follow-on logistics support for an exported weapon system and serve as a starting point for secondary exports.
ADVANTAGES FOR PURCHASING COUNTRIES
South Korea’s $15 billion defense acquisition framework agreement with Poland “could become Seoul’s most lucrative defense export package to date.” According to the Polish minister of national defense, the contract was concluded because of the excellent level of quality, speed of shipment, and of involvement of Polish industry.
In general, South Korea has supported defense exports with license production and technology transfer arrangements, including in Indonesia (amphibious vessels and submarines), Egypt, and India (K9 self-propelled howitzer).
HIGH DEFENSE R&D EXPENDITURES
In the 2022 fiscal year, South Korea had a high research and development (R&D) expenditure of approximately 400 billion yen ($3 billion), or 100 billion yen ($0.75 billion) more than Japan did. This high R&D investment is likely the reason behind the development of numerous competitive products such as the K9 artillery system and the FA-50 and T-50 aircraft.
Comment
South Korea has not yet introduced G2G transactions. However, under strong presidential leadership, DAPA has taken the lead in a whole-of-government approach to defense exports, which have been increasing at a breakneck pace as a result. This trend is due not only to the cost performance of the equipment, but also to the other promotions included in the sales package. The introduction of G2G transactions will make it easier for South Korean companies to participate in equipment exports, as they will be guaranteed by the government.
Germany
Current Status of Defense Exports
According to SIPRI data, in the 2017–2021 period, Germany’s global share of defense-equipment export value was 4.5 percent, ranking it fifth in the world. However, compared to the 2011–16 period, this value fell by 19 percent. Nonetheless, German arms exports hit a new record in 2021.
Background of Defense Exports
UTILIZATION OF DCS
Germany also does not use G2G transactions for defense sales, given the nation’s history during World War II and public concerns over the direct involvement of the military. However, the German government certainly provides support for such exports. For example, it backs sales of German submarines and tanks with training by the German armed forces.
STRONG DEFENSE INDUSTRY
Germany has traditionally been a manufacturing powerhouse, with its products known for their high quality and reliability. This is also true for defense systems: the Leopard 2 tank is highly valued by various countries, and conventional submarines of German design are in service throughout the world. The efficiency and competitiveness of its defense industry places Germany in a very favorable position in the international market.
EXPORT POLICY BECOMING MORE FLEXIBLE
German arms-export policy is governed by EU law (such as Council Common Position 2008/944/CFSP of December 8, 2008, which sets criteria for member states to use in issuing export licenses), the German Constitution (in particular, Article 26 (2) of the Basic Law, which requires licenses for all manufacture, transportation, and distribution of weapons), other national laws (including the War Weapons Control Act, the Foreign Trade and Payments Act, the Foreign Trade and Payments Ordinance), and the Political Principles of the Federal Government for the Export of War Weapons and Other Military Equipment. Exports are strictly controlled by export licenses issued in accordance with these regulations.
Germany’s legal framework has made it difficult to directly export defense equipment to countries with human rights violations. However, according to the Bonn International Center for Conversion (BICC), “in 2019, Germany approved arms exports to 55 states whose human rights situation were classified as ‘very poor.’” Germany’s Enable & Enhance Initiative allows for the export of dual-use technologies to support crisis management and post-conflict and peace-building operations, generally destined for countries considered unstable. In addition, German companies are increasingly relocating production of defense equipment abroad and then exporting to third countries via subsidiaries to circumvent arms-export regulations. Further, German companies also are allowed to support the development of defense industrial capacity abroad in less sensitive defense fields, which also facilitates the international production of defense equipment.
In addition to complying with the letter of EU and other international agreements, Germany has generally avoided exporting arms to parties to a conflict. However, Germany recently reversed this long-standing policy to provide Ukraine with defensive weapons. This may set a precedent for future defense exports to warring countries.
Comment
Germany has not adopted formal G2G transactions for defense exports. In part due to negative popular views on the arms trade, Germany has generally followed strict arms-export rules. However, even with these strict restrictions, “loophole-like practices” have been expanding under the guise of contributing to international peace. Germany is also expanding its arms exports due to the capabilities of its outstanding defense industry.
▲ Figure 1: Models for Government Support of Defense Equipment Exports. Note: Each of the major arms-exporting countries examined above has been categorized based solely on the author’s individual opinion. Practices of a country may overlap in more than one category. The categories listed reflect increasing levels of government involvement and guarantees; they may overlap on detailed points but reflect an evolution in favor of government involvement in defense equipment exports. The degree of government involvement does not depend on G2G contracts (for example, South Korea has become a heavy promoter of defense exports even though it exclusively uses DCS). Source: Author’s research and analysis.
Policy Recommendations for Japan
Based on the export-promotion strategies of these major exporters of defense equipment, this paper presents eight recommendations — listed in order of priority — for expanding Japan’s own such exports.
1. Utilize G2G Transactions (Make the Japanese Government a Contracting Party)
The policy of promoting overseas exports of defense equipment under national leadership is clearly stated in the new Defense Buildup Plan, to which the government should make a firm commitment. Even if Japan does not introduce an FMS system like that of the United States (or France), where the government is more involved, it should utilize G2G transactions and become a contracting party negotiating directly with the government of the purchasing country. (The 2020 transfer of air surveillance radar systems to the Philippines was not a G2G transaction as defined in this report because the contract itself was between Mitsubishi Electric Corporation and the Philippine Air Force.)
In the defense industry, both supplier and purchasing governments are involved to varying degrees. In such a unique market, it would be unreasonable for Japanese defense companies to negotiate with the government of the purchasing country. Negotiations under G2G transactions would reduce this burden for Japanese defense companies and allow them to concentrate on improving their performance, such as by engaging with companies in the purchasing country — as neither government nor industry talks will work without the other.
In addition, it is common in the defense market for the purchasing country to insist on offset conditions. Since negotiations on these may extend beyond the defense industry, government involvement would benefit both suppliers and purchasers. It would also facilitate sales because the government will be providing a sense of security by endorsing the defense equipment being exported.
G2G transactions also make it relatively easy to sell associated services. In the case of the F-35, for example, Mitsubishi Heavy Industries hosts the maintenance, repair, overhaul, and upgrade depot for the Indo-Pacific region. Similarly, Japan should do the maintenance of F-15s, U.S. fighter jets deployed by other Asian countries. It is difficult to transport the engines to the United States every time to conduct maintenance. The only Asian countries that can service the engines of fighter jets are Japan, South Korea, and Australia, so selling this service would be profitable.
2. Establish a New Equipment Export Promotion Agency
A new specialized agency in charge of G2G transactions for defense equipment exports should be established within the Japanese government akin to South Korea’s DAPA, France’s DI, or Israel’s SIBAT.
Since the export of defense equipment involves various government bodies such as the Ministry of Foreign Affairs (MOFA); Ministry of Economy, Trade, and Industry (METI); MOD; the Acquisition, Technology, and Logistics Agency (ATLA); and the National Security Secretariat (NSS) in the prime minister’s office, it would be most effective to place export authority under an interagency organization such as NSS. This would help overcome stovepiping and bureaucratic rivalries among government agencies. Housing such an agency under the NSS would also give the public the impression of a whole-of-government approach like South Korea’s.
The new export promotion agency should create a Japanese Defense Export Strategy like Australia’s. This would help explain the strategy to the Japanese public, which is still resistant to exporting defense equipment, and gain support from the defense industry and other government sectors. The new agency should also draw on private sector businesses experienced in defense transactions, such as trading companies. As evidenced by the failure of Japan’s attempt to export Soryu submarines to Australia in 2016, close coordination with the defense industry is essential.
3. Strengthen R&D Related to Security
Until recently, defense R&D expenditures in Japan were limited. However, in the proposed 2023 budget, defense R&D expenditures rose significantly to 896.8 billion yen, a threefold increase from the previous fiscal year. While this is commendable, the government should further strengthen support for technology research. This could include establishing a defense-focused think tank that can ask industry to carry out technological research based on a clear definition of requirements and attendant capabilities for defense operations.
It is also essential to have an R&D hub inside the government. For example, MOD, METI, and the Ministry of Internal Affairs and Communications (MIC) are working to create a joint research institute to develop quantum and cyber-related technologies with national security applications. Since MOD lacks enough personnel with the expertise to identify important civilian technologies, it benefits from coordinating with METI and MIC, which are more familiar with these technologies and their potential military applications. One engineer from the private sector called for the government to inject 1 trillion yen in funds every year for research that these officials can conduct at their own discretion, noting that, “If the government takes the initiative with a budget, we [engineers] would do anything.” Japan is generally praised for engineering capacity that generates advanced capacities, but it lacks a mechanism for applying such ingenuity to the realm of security. In contrast to industrial policy, where fear of failure often leads to risk aversion, it will be important to encourage taking risks in defense technology research and accept failure even when large amounts of money are allocated.
For a country with no recent combat experience, the development of defense equipment using cutting-edge technology will help Japanese industry become more internationally competitive. Japan’s new National Defense Strategy states that “Japan will establish a new research institution in MOD to find multi-use cutting-edge technologies that contribute to defense equipment development, and to produce equipment that leads to defense innovation.” This should be an urgent priority.
4. Promote Deregulation
Since export criteria should be transparent and supportive of Japanese industry, the Three Principles for arms exports should be further revised to clarify the government’s strategy and criteria for defense equipment exports. Currently, the government can make exceptions on a case-by-case basis, but the principles do not include a transparent process for Japanese defense companies to follow. For example, current rules state that fighter aircraft cannot be exported to countries not involved in their joint development, but this should be made possible to support the defense industrial base. Not counting international joint development and production, equipment considered for transfers is essentially limited to five categories of use (rescue, transportation, warning, surveillance, and minesweeping).
Furthermore, under the current policy, defense equipment cannot be transferred to a country engaged in conflict, but countries responding to aggression — such as Ukraine — should be able to receive support from Japan. As mentioned above, Germany, France, Israel, and other countries have increased their sales partly by exporting defense equipment to parties involved in conflicts.
Moreover, the Three Principles note that “prior to overseas transfer of defense equipment and technology, the Government will in principle oblige the Government of the recipient country to gain its prior consent regarding extra-purpose use and transfer to third parties in order to ensure appropriate control of the defense equipment and technology after the overseas transfer.” Japan should make this policy more flexible by giving purchasing countries the responsibility for overseeing their use for other purposes. As mentioned above, South Korea allows purchasing countries to resell equipment to other buyers without approval, an approach that has increased sales. Japan should establish an efficient process for reviewing transfer requests and relax requirements for end users.
Japan’s new National Security Strategy and National Defense Strategy state that the Three Principles, their implementation guidelines, and other procedures should be revised to promote the smooth transfer of defense equipment and technology and international joint development in a broad array of fields. Deregulation and flexibility will prove critical in this regard.
5. Encourage Low-Interest Government Loans
In the international defense market, it is common for developing countries to request low-interest loans as a condition of purchase. However, since private financial institutions are often unable to agree on interest rates and other terms, these purchases are sometimes abandoned. The Japanese government should provide low-interest loans to developing countries — perhaps modeled on those of Bpifrance — to increase defense equipment exports. Japan could encourage its defense companies to use the government-funded Nippon Export and Investment Insurance (NEXI) system, which provides insurance for high-risk overseas transactions that are not covered by private insurance companies, to support financing for defense equipment exports to developing countries.
Japan’s new National Defense Strategy states that “Japan will carry forward with the transfer of defense equipment and technology in the joint public and private efforts by establishing a fund, and implementing measures including providing corporate assistance as necessary to smoothly promote such transfers.” Such efforts should also prioritize supporting developing countries.
6. Utilize High-Level Government Representation
Japan should consider adopting the “top sales” model used by South Korea and various European countries. Staff from the proposed defense equipment export agency could accompany the prime minister on overseas trips to actively promote defense products. The ministers of foreign affairs; defense; and economy, trade, and industry should do the same when they travel abroad, as should officials from other relevant agencies.
Japan should also exercise defense diplomacy. This does not mean that Japan should actively participate in conflicts (which is constitutionally prohibited) but that it could take advantage of its involvement in UN-led and other multinational peacekeeping operations to promote its defense equipment. For example, outdoor bathing systems, water supply vehicles, and water purification vehicles used for disaster relief could prove attractive, as could Japan’s expertise in de-mining using its Type 92 Mine Rollers.
Export promotion should also be assigned to Japanese defense attachés and other embassy staff (e.g., defense teams) stationed overseas. (These same offices will also need to be strengthened to enable more effective management of Japanese defense procurement.) It will be important to designate a point of contact in charge of defense exports within Japanese embassies or other government institutions, as Japanese defense companies sometimes do not know with whom to talk about defense equipment exports. These officials should also be tasked with gathering information on host-nation defense requirements that would be suitable for Japanese exports. Efforts should initially focus on researching the demand for Japanese equipment in Southeast Asian countries, which is important for countering China in the Indo-Pacific.
7. Encourage Corporate Restructuring
After the end of the Cold War, many Western countries reduced their defense budgets, leading to widespread consolidation and restructuring of related industries. However, in Japan, there has been no integration and restructuring among defense contractors. Consolidating and integrating major firms like MHI and Kawasaki Heavy Industries (KHI) would be difficult, but this approach could prove successful for smaller companies. In the future, Japan should seek to consolidate major defense contractors into companies that are not just departments within large corporations. In other words, Japan should create companies more like Lockheed Martin, BAE Systems, Diehl Defence, and Saab AB — whose work is primarily focused on defense.
The production of ammunition provides a good example of Japan’s dilemma: “A rifle cartridge consists of a bullet, a shell casing, an ammunition belt, and a primer. Each of these is manufactured by a different company. Of course, the gunpowder is [manufactured by] another company.” If any one company in this inefficient supply chain fails, the manufacture of ammunition is delayed. It seems possible to integrate and reorganize these companies or have them be incorporated into major firms such as MHI and KHI.
8. Champion Two-Way Flows of Investment
To help the Japanese defense industry, the government should promote collaboration with foreign companies that have international expertise, starting with small components and then gradually transitioning to larger systems. In this context, it is important that there be two-way flows of investment with foreign partners in the defense industry. For example, foreign defense manufacturers should be allowed to invest in Japanese defense companies — which, in turn, should be able to work with international partners on projects beyond those commissioned by the JSDF. Realizing this objective will require a marketing license process, which would enable Japan’s defense industry to engage potential international partners beyond the country’s existing joint defense programs. The Japanese government should learn from the U.S. Department of State’s efforts to support the activities of defense companies by clarifying the DSP-5 marketing license process. Without such measures, Japan’s defense industry will never be competitive and defense exports will remain limited.
Conclusion
A whole-of-government strategy is needed in order for Japan to better promote defense equipment exports. This export strategy should include measures to manage export controls and information security; create an export-promotion agency; strengthen government expertise and representation overseas; and promote not only exports but also support services. In addition, Japan’s defense industry cannot remain passive and should engage with the international community through marketing, joint R&D, and overseas investment activities.
Measures should be modest at first, focusing on a realistic level of support for defense equipment export activities before expanding as the capabilities and experience of the Japanese government and defense industry develop. At some point, the government will also have to consider introducing a Japanese version of FMS and restructuring the defense industry as a whole.
Kenjiro Hattori was a visiting fellow with the Japan Chair at the Center for Strategic and International Studies (CSIS) from the Acquisition, Technology, and Logistics Agency (ATLA) of Japan’s Ministry of Defense (April 2022–March 2023).