Global Courant 2023-05-18 10:54:03
The government of Japanese Prime Minister Fumio Kishida dramatically increased Japan’s 2023 defense budget by 26.3% in 2022 to 6.82 trillion yen ($52 billion).
Under former Prime Minister Shinzo Abe’s leadership, the defense budget rose steadily to 5.3 trillion yen ($39 billion), but remained between 5 and 5.2% of the total government budget. Kishida has now increased the defense budget to 5.9%.
Future obligations regarding new contracts for the updated Defense Rebuilding Program amounts 7.06 trillion yen ($52 billion). Because the purchase takes several years, Japan as many contracts as possible in the first year of the program to rapidly deliver equipment to the units of the Self-Defense Force (SDF).
In May 2023, one month into Japan’s financial year, the government had already announced a 380 billion yen ($2.8 billion) contract with Mitsubishi Heavy Industries to upgrade and mass-produce Type-12 surface-to-ship missiles. The government also signed a 110.4 billion yen ($816 million) contract with the United States to 400 Tomahawk cruise missiles.
In the next five years, Japan plans to spend 43 trillion yen ($330 billion) on defense. In 2027, the defense budget will reach 9 trillion yen ($66 billion), equivalent to 2% of Japan’s gross domestic product (GDP) in 2023.
While this means Japan may miss its target of 2% GDP in 2027, Japan is about to become the third largest military publisher in the world.
Internationally, the administration of US President Joe Biden welcomes such Japanese effortsand there are already votes more questions. But domestically, Kishida balances carefully between Japan’s wallet and bullets.
To cover the new defense spending, the Kishida government squeezed 4.8 trillion yen ($35 billion) of the 2023 financial surplus, spending cuts, and fiscal year 2023 non-tax revenue.
Of this 4.8 trillion yen, 1.4 trillion yen ($10.3 billion) has been allocated to the 2023 budget and the remaining 3.4 trillion yen ($25 billion) will be saved for spending over the next four years.
Japanese Prime Minister Fumio Kishida rides a Japan Ground Self-Defense Force Type 10 tank during a review at JGSDF Camp Asaka in Tokyo on Nov. 27, 2021. Photo: JiJi
The Japanese government runs on one single fiscal year basis, which is incompatible with saving money for the future. Hence the government trying to pass a “bill on special measures for securing financial resources for the substantial strengthening of Japanese defense capabilities.”
With this legislation, the government can now Defense Reinforcement Fundthat will pool non-tax revenues for future defense spending.
While the Treasury Department is doing its best to finance the defense budget within its rights, these sources of revenue cannot be said to be reliable.
The Public finance law requires that at least half of the budget surplus in each financial year be used to pay off government bonds and that the rest is traditionally used to fund the next year’s supplementary budget.
Although the budget surplus has increased recently due to the unused Covid-19 emergency fund, there is no reason to appropriate unnecessary items to deliberately run a surplus.
This makes budget cuts more difficult aging society and increasing social security spending. Kishida also promises double the child budget. One of the government’s non-fiscal sources of income, the Foreign exchange fundposted a surplus due to last year’s depreciation of the yen and rising foreign currency interest rates.
But since the purpose of this account is to absorb the damage of foreign currency volatility, that is not the case guaranteed to increase the defense budget. Other non-tax income, including the Fiscal investment and loan program or capitalizing government propertyare also unsustainable.
The financing of defense spending has led to a constant struggle between the tax hike faction and the debt financing faction within Kishida’s ruling Liberal Democratic Party (LDP). In December 2022, the Kishida administration announced that it has mobilized a quarter of its defense budget increases from newly increased taxes along the lines of the Treasury Department.
This announcement frustrated LDP politicians who have criticism of tax increases and instead called for additional national bonds to be issued. Chairman of the LDP Policy Research Council Koichi Hagiuda said the government should do his best to find non-fiscal resources before talking about taxes.
LDP politician Shigeharu Aoyama as well argued that a tax increase for the defense budget cannot be justified by saying that national defense is the responsibility of the state, not the liability of the beneficiary. Aoyama also rejected the government’s labeling of tax revenue as a stable source of revenue, saying it is heavily affected by economic conditions.
The anti-tax hike faction pushes for the use of government bonds for defense construction, including construction bonds, which have been used for the Japan Coast Guard ship-building.
A Japanese naval vessel flying its flag. Photo: iStock
The government has to answer these demands tentatively approved using construction bonds for defense, including 245.4 billion yen ($1.8 billion) for the Ministry of Defense and SDF facilities and 188.8 billion yen ($1.4 billion) for shipbuilding.
But this is still only 1% of the 43 trillion yen ($330 billion). Other politicians have different fundraising ideas such as accepting donationsremoving the repayment period of government debt and issuance defense bonds, which Abe represented before his death. Still, Finance Minister Shunichi Suzuki is cautious about these measures and the Treasury remains hesitant to rely on bonds.
The government may have to choose between raising taxes or debt financing, including expanding construction bond coverage for more SDF facilities or issuing historic defense bonds for defense buildup if it cannot mobilize the necessary capital as planned.
While the Japanese government must make its economy resilient to higher inflation rates in the case of debt financing, it must also achieve economic growth in the event of a tax increase. The monetary policy of the Bank of Japanthose already holds almost half of all government-issued bonds may also be key.
While the debate over defense spending figures and SDF capabilities remains important, scientists should also continue to closely monitor the relationship between Japan’s economic situation and defense policy.
Ryosuke Hanada is a PhD candidate in the Department of Security Studies and Criminology at Macquarie University.
This article was originally published by East Asia Forum and has been republished under a Creative Commons license.
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