Asia's Defense Spending Surge: Geopolitical Fiscal Policy and Market Implications

The surge in Asia's defense spending, driven by escalating geopolitical tensions and strategic realignments, is reshaping fiscal policies and financial markets across the region. From Thailand's procurement of Gripen-E/F fighter jets to South Korea's ambitious defense modernization goals, governments are prioritizing military readiness as a cornerstone of national security. This shift has profound implications for currency markets, equity valuations, and the broader dynamics of risk-on momentum, as defense budgets increasingly intertwine with economic policy.

Geopolitical Fiscal Policy and Defense Budgets

Asia's defense spending has surged to unprecedented levels, with 2025 global military expenditures projected to reach $2.48 trillion-a $88.4 billion increase from 2024. Thailand, for instance, has allocated THB60 billion for 12 Gripen-E/F fighter jets and THB35 billion for two frigates, reflecting a strategic pivot to bolster air and maritime deterrence. Similarly, South Korea aims to raise its defense budget to 3.5% of GDP by 2035, while Japan has committed to meeting NATO's 2% of GDP benchmark by 2026. These investments are not merely about military capability but also about reshoring defense production and stimulating domestic industries.

For countries with weak growth and robust defense sectors, such as South Korea, increased defense spending could act as a fiscal stimulus. According to a report by Capital Economics, such spending may soften the economic impact of external shocks by boosting domestic demand and industrial output. However, the broader regional fiscal implications remain modest, as defense budgets constitute a relatively small share of GDP in most Asian economies.

Currency Markets and Foreign Exchange Interventions

Asia's central banks are navigating a delicate balance between defending currencies and managing foreign exchange reserves. With regional forex reserves swelling to nearly $8 trillion, policymakers have ample tools to counter volatility, particularly as the U.S. dollar rebounds. The Indian rupee and South Korean won, however, have faced downward pressure due to trade deficits and capital outflows, prompting interventions such as verbal warnings and market purchases.

The challenge lies in avoiding accusations of currency manipulation. The U.S. Treasury has historically used such designations to justify tariffs, creating a trade-off between stabilizing domestic currencies and maintaining geopolitical goodwill. For example, South Korea's aggressive defense spending and currency interventions could draw scrutiny, complicating its trade relations with the U.S. and other partners.

Equity Markets and Risk-On Momentum

The equity markets have begun to reflect the rearmament cycle, with investors increasingly allocating capital to defense-linked sectors. The launch of the WisdomTree Asia Defense Fund (WDAF) in 2025 underscores this trend, offering exposure to companies in South Korea, India, and Japan that derive significant revenue from defense contracts. This fund capitalizes on the growing political consensus that defense modernization is both a strategic imperative and an economic driver.

Historically, defense spending announcements have triggered positive equity market reactions. Japan's pledge to expand its defense budget to 2% of GDP, for instance, has spurred investments in firms producing advanced fighter jets like the F-35 and KF-21 Boramae. Similarly, India's FY2024-25 defense budget of $72.6 billion-a 13% increase-has bolstered domestic manufacturers under the "Make in India" initiative. These developments highlight how defense spending is not only a geopolitical tool but also a catalyst for industrial growth and equity performance.

Conclusion: A New Era of Geopolitical Finance

Asia's defense spending surge is redefining the interplay between fiscal policy, currency markets, and equity valuations. As governments align military investments with economic strategies, the region's financial markets are adapting to a new paradigm where geopolitical risk and risk-on momentum are inextricably linked. While the immediate fiscal impacts may remain limited, the long-term implications-ranging from currency interventions to equity market realignments-signal a structural shift in Asia's economic landscape. Investors and policymakers alike must navigate this evolving terrain with a keen understanding of how defense budgets are reshaping the region's financial architecture.