2023.04.07 NEWS ARTICLES

How Japan’s Defense Budget Increase Became Possible

The Diet enacted the biggest ever budget in the history of Japan for the new FY2023, on 28 March. A record budget, 114.38 trillion JPY, which is 870 billion USD, includes 6.82 trillion JPY for the defense budget. Kishida administration and the ruling LDP have committed to a five-year plan for the defense buildup, which amounts to 43 trillion JPY.

Although this decision was welcomed with a relief by Japan’s most important ally, the U.S., there still exists some doubts among journalists and policymakers. Is Japan really a different country from the past? Wasn’t the Kishida administration dovish? Here is the story about how the defense buildup package passed in a difficult domestic political environment, and how it is being received by the public.

From “Incrementalism” to…

The definitive characteristic of Japanese defense policy lead by LDP administrations close to 70 years is its “incrementalism.” On the one hand, the LDP have been the champions of “realistic” security thinking and have adopted to the requirements of the time. Although due to the constraints of the pacifist Constitution and general “dovish” tendency of the Japanese electorate, any change that has occurred has always taken a painfully long period of time, and uses a lot of domestic political capital.

This has been true during the Cold War when Japan’s role in security was much smaller. And also true in post-Cold War era where Japan’s role has grown slowly but steadily. There was a huge national debate back in the time when Japan’s defense spending first exceeded 1% of GDP back in the 80s.

All major changes in Japanese defense policy have basically followed this pattern. Japan first commits change internationally, namely to the U.S., then there is lengthy domestic political process to enable such change. This was true in the 90’s after the Gulf War, as well as during other UN peace keeping operations where Japan’s self defense force (SDF) took on a bigger role internationally.

Recently, the change driven by the late Prime Minister Shinzo Abe in 2015 regarding the “security law” was such a change, where for the first time Japan recognized that it could exercise collective self-defense, and protect U.S. forces (and perhaps her allies) if need be, provided Japan itself was threatened. This was epic to Japan-U.S. relations.

Increasing Japan’s defense budget to 2% of GDP (*to be more precise, the commitment made by the government is to bring defense spending to the 2% level of GDP in 2022, which was a small victory by the Ministry of Finance) is symbolic as well as it is substantial. It commits Japan to the same standard as NATO and other U.S. major allies. Also, as Japan still has the third largest GDP in the world, it is also significant from a quantitively.

The domestic political process to pass the defense budget increase was of course split according to political camps. In December last year, when the debate was at its most heated, one of the polls suggested that 48% were in favor, and 41% against. The political confusion associated with the change was not as significant compared to past changes in my opinion, considering the magnitude of the change. It was largely due to Kishida administration’s conciliatory and consensus building approach, a much less divisive administration compared to the Abe and Suga days.

Examining The Trump Effect and the Abe Effect

The directional track to increase defense spending to 2% of GDP were laid during the Trump administration. It was no secret that many of U.S.’s allies, Japan included, were reluctant to increase defense spending. The highlighting of the issue by then candidate Trump during the 2016 campaign was very controversial.

The PM Abe had just passed a politically divisive security law reform, and although Abe believed that change was needed for Japan at some point, he knew the Japanese public were not ready at the time. Thus, although Abe built one of the best relationships among major international leaders with Trump, the issue did not materialize during the two leaders’ tenure.

The invasion of Ukraine by Russia changed the landscape completely. Although the contrast in Japan and Asia was not as drastic as in Europe, the political path was paved for such change by President Putin. Japan’s biggest threat is China and not Russia, but the willingness of the public to swallow such change ideologically and fiscally was changed overnight.

Of course, there was still in-fighting within the government after February 2022, towards December 2022 where the increase itself was ultimately decided. The main camps involved were the conservative factions of the LDP pushing for the change lead spiritually by former PM Abe and his “wants-to-be” successors, Minister Takaichi, Minister Nishimura, and Chairman of the Policy Research Council for the LDP Mr. Hagiuda. The other side were the deficit hawks lead by the Ministry of Finance itself.

PM Kishida, although generally recognized as a “security dove” and “fiscal hawk,” was mostly driven by where the likely consensus within the LDP. Recognizing that the international and domestic public opinion was in favor of the defense spending increase, the issue became how to fund such an increase.

How to fund it?

Former PM Abe, the driver of the spending increase is also known for his economic policy of “Abenomics”. There is a lot of debate over what constitutes Abenomics, but the consensus view is that it is a combination of the famous three arrows:

• dovish monetary policy
• reasonably dovish fiscal policy (although Abe famously raised the consumption tax twice…)
• structural reform

Abe argued based on his second arrow of reasonably dovish fiscal policy that defense spending increase should be funded through the issuance of government bonds and not through tax increases. Before his assassination in July 2022, the combination of defense spending increase and the funding of such not through tax increases was the basis in which Abe’s legacy seemed to be manifested within the LDP. Obviously, the assassination of Abe had a profound effect on this debate. For the record, he himself had a reasonable idea about raising taxes and was merely acting as a spearhead within the party to change political gravity, but since the assassination made it impossible for him to correct the course, the line of “His will,” in which everything should be covered by government bonds, prevailed for a while.

The Kishida administration was, in my opinion, generally reactive in handling of the issue. Taking a definitively negative stance towards Abe’s will was risky since Abe’s faction still controls the biggest number of delegates within the LDP. It allowed the debate to go on while not taking a clear stance.

Towards the end of the debate and as the deadline to set tax policy approached, it floated a compromise of funding 1 trillion a year of the increase through tax increases, a combination of corporate tax, income tax, and tax on cigarettes.

Assuming that Japan’s GDP is 500 trillion JPY, 2% of GDP amounts to 10 trillion JPY, and increase of approximately 4 trillion JPY from today. Thus approximately 25% of defense spending increase will likely be funded through tax increases and 75% through the issuance of government bonds. Typical decision making seen in the LDP and characteristic of the Kishida administration. Of course, based on next years budget, Japan’s intake is around 69.4 trillion JPY, while its spending is 114.3 trillion JPY, owing 35.7 trillion JPY to government bonds. The level of government debt has surpassed 200% of GDP, and is by far the worst among the major developed nations. The biggest risk to Japan’s defense is likely fiscal.

The public sentiment

As mentioned above, polling conducted in December 2022 by Mainichi Newspaper showed 48% in favor and 41% against defense spending increase. Support for the increase was higher during the initial days of the Ukraine crisis. According to the poll conducted by NHK in May 2022, 52 % supported defense spending increase, and only 7 % said the government should decrease defense spending. But the debate about tax increase affected the public sentiment obviously, so the recent poll conducted by NHK in February 2023 shows a split between ayes and nays. 40% in favor and 40% against defense spending increase.

There may be a bit of crisis fatigue among the public as well as ideological differences along old party lines, however, the main reason the support for the defense spending increase dropped in just 8 weeks was because of tax increase plan. What was interesting about the Mainichi poll was 23% were in favor of the tax increase, while 69% was against it. Also, only 20% of the public supported “cutting” other spending such as welfare, and 73% were against it. What is even more puzzling is that 33% were in favor of the issuance of government bonds, while 52% against it.

In short, Japanese electorate in essence is marginally supportive of defense spending increase while they don’t want to pay for it. Perhaps not atypical democratic polling, but it does cast serious doubts toward the people’s commitment towards defense. Defense policy increase and the partial tax increase combined with it will likely be one of the core issues if an election is called this fall. Although the issue will likely energize the opposition party’s left leaning base, past data suggests that the LDP does well when security issues are put in center during an election (see Japanese Values Today 2019 report).

This is because the LDP is seen as being practical and realistic in its approach to security, and so long as it is not seen as being too hawkish, the electorate tends to follow its leadership. A majority of the Japanese public supports the Japan-U.S. alliance, and recognizes the need for Japan to take a more proactive role in its security over time.

Perhaps, PM Kishida being perceived as a security dove, and a consensus-oriented leader also adds to the lack of “outage” from the opposition. Kishida being a much less divisive politician compared to Abe is likely a plus in this context.

If a snap general election is held this fall, and the LDP struggles, it won’t be because of a defense tax increase. Rather, a challenge from the same security realist party, Ishin. Domestic politics and debate over reform will be key to whether the Kishida administration can enhance political stability.