Japan's defence spending is a gamble, not a growth strategy

JAPAN'S GOVERNMENT is selling its military build-up as a road to economic prosperity. Prime Minister Sanae Takaichi has pledged "proactive fiscal moves", accelerated the target of spending 2% of GDP on defence by two years, and framed the rearmament as a way to stimulate industry, create export revenue and strengthen national security all at once. The claim is seductive: throw money at the defence sector and get jobs, innovation and security in return. The trouble is that the arithmetic, incentives and constraints of Japan's situation make this an implausible growth strategy. It is a bet on rent extraction disguised as industrial policy.

The numbers behind the build-up are large. SIPRI, a Stockholm-based thinktank, recorded Japan's defence spending at 1.4% of GDP in 2025, the highest share since 1958. Ms Takaichi's supplementary budget pushed the fiscal year's total to approximately 11 trillion yen, or around $70 billion, exceeding the 2% threshold two years ahead of the plan her predecessor set. The approved FY2026 budget tops 9 trillion yen, a further 9.4% increase, funding long-range cruise missiles, unmanned drones for coastal defence and a next-generation fighter jet jointly developed with Britain and Italy. Defence contracts awarded to domestic firms surged from 300 billion yen in 2022 to 1.4 trillion yen in 2025, according to Nikkei. That is real money. Whether it is good money for Japan's broader economy is a different question.

To be sure, there is a case on its face. Japan has a genuine technological pedigree in shipbuilding, radar and precision engineering. Mitsubishi Heavy Industries, the country's largest defence contractor, secured a multi-billion-dollar deal to supply upgraded Mogami-class frigates to Australia in August 2025, and has attracted interest from New Zealand and the Philippines. The government has eased arms-export restrictions, hoping to replicate the template of South Korean defence firms, which have thrived by producing weapons faster and cheaper than their American counterparts. Global military spending hit a record $2.89 trillion in 2025, the 11th consecutive year of increase, per SIPRI. The market for buyers exists.

Yet the gap between rhetoric and reality is wide. Japan's defence exporters have been in the global business for a while now. When export rules were first relaxed in 2014, the results were feeble: the International Institute for Strategic Studies counted only four finished products-three fixed radars and one mobile radar, all sold to the Philippines-before the Australian frigate deal. The structural reason is not a lack of engineering talent. It is that Japanese defence manufacturers have spent decades serving a single customer, the Self-Defence Forces, with no incentive to build export marketing teams, drive down unit costs or invest in spare capacity. Stephen Nagy, a professor at Tokyo's International Christian University, put it plainly: Japanese firms will "carve out specialised, high-tech niches among trusted allied partners rather than immediately dominating the global arms bazaar". That is a polite way of saying the export story is a fraction of the build-up and not a substitute for domestic stimulus.

Then there is the more fundamental problem. Defence spending is among the least effective forms of public investment for economic growth. A European Commission review in 2024 found that the relationship between military expenditure and growth in advanced economies is indeterminate at best. RAND Corporation estimates that defence spending in America generates between $0.60 and $1.20 of GDP per dollar spent, while civilian infrastructure produces at least $1.50. The logic is intuitive. Rail systems, power grids and broadband networks create lasting connections that reduce the cost of every other economic activity. Missiles and frigates destroy or scare their targets; they do not generate recurring productivity. The economic output of defence spending is limited to employment and procurement, which is a dead end rather than a multiplier.

This matters especially for Japan, whose fiscal position is already strained. Government debt stood at roughly 249% of GDP in 2025, by far the highest ratio among advanced economies, according to Japan's Ministry of Finance. Defence spending is rising while growth languishes. The FY2026 budget also channels state-led investment across 17 priority sectors, from artificial intelligence to semiconductor manufacturing, broadening the fiscal burden even further. The question is not merely whether Japan can afford its defence ambitions. It is whether the resources devoted to them are the ones that would do the most for a shrinking, ageing economy.

That last point cuts the deepest. Japan's population has fallen for 15 consecutive years, now standing at around 125 million. The Self-Defence Forces are already understaffed. Ms Takaichi's government has acknowledged this, hence its investment in unmanned systems, including the SHIELD programme for coastal drone surveillance due in 2028. But a military of machines does not solve a broader workforce crisis. The same young engineers and skilled workers that the defence sector needs to modernise are also needed to sustain the civilian industries-healthcare, manufacturing, services-that constitute the bulk of the economy. Every yen spent on a missile is a yen not spent on something that produces more than a target.

The real lesson is not that Japan should not defend itself. The security environment in the Indo-Pacific has genuinely deteriorated. China's naval activity near the southern islands has intensified; two Chinese aircraft carriers were sighted near Iwo Jima simultaneously for the first time in 2026. The case for credible deterrence is sound. The question is whether the government is honest about what the money buys.

It is tempting to think that defence spending can do double duty as economic stimulus. That was the argument of every government that ran up military expenditure during the Cold War, and it never held water for long. The incentive structure of defence procurement is also the wrong one for innovation: it rewards monopoly contractors with guaranteed revenue rather than competitive firms with a need to improve. Japan's own Ministry of Economy, Trade and Industry acknowledged in a February 2026 report that the domestic defence business was less attractive than civilian alternatives, a confession that cuts against the prosperity thesis.

A wiser approach would separate the two arguments. Fund the minimum credible deterrent, accept the fiscal cost, and be clear that it is a transfer rather than an investment. Then direct the remainder of the state's capital spending towards things that actually produce growth: the grid, the trains, the hospitals and the schools that a 21st-century economy needs. Japan can be secure without pretending that missiles are an engine of prosperity. Better to tell the truth about what it is buying, and to pay for it without delusion.