Japan's defense contractors rush to tap government spending boost
Companies expand staff and facilities as US companies like Anduril eye market
Mitsubishi Heavy Industries is increasing production of missiles for Japan's Self-Defense Forces. (Photo from Ground Self-Defense Force's website)
TOKYO -- Japan's defense contractors are rushing to capitalize on the government's military spending boost, hoping to establish a solid profit structure based on dual-use technologies as companies from the U.S. and elsewhere eye the Japanese market.
Defense-related sales are rapidly expanding at Japan's three major heavy industry companies -- Mitsubishi Heavy Industries, Kawasaki Heavy Industries and IHI.
The combined revenue from their defense divisions, which include aerospace and other sectors, for the year ending March is expected to reach 2.68 trillion yen ($17.2 billion), according to Nikkei Value Search. That is more than double the figure for the year ended March 2022, before the government started making significant increases to defense spending.
"The first question I get from overseas investors is, 'What about the defense division,'" said IHI President Hiroshi Ide. The company manufactures such equipment as aircraft engines and missile rocket motors for Japan's Self-Defense Forces (SDF). It projects revenue from its defense-related division for the year ending March to rise 50% from the previous year to 230 billion yen.
IHI allocates hundreds of employees to its aerospace and defense business each year, but even then, staffing is not keeping up.
The defense divisions of heavy industry companies used to be low-profit businesses with little prospect for significant growth, but they have now become lucrative streams. Mitsubishi Heavy's aircraft, defense and space segment accounts for about 20% of its sales and roughly 30% of business profits.
Japanese tech company NEC, which manufactures radars, antennas and air defense systems, is also positioning its defense-related business as a growth area.
Within the year ending March, it will have increased its related workforce by 1,600 people compared to the year ended March 2021. It will also expand related production facilities at undisclosed locations by 20,000 square meters starting in the year ending March 2027.
Japanese companies are centering their growth strategy on dual-use technologies, which have applications in both the defense and civilian spheres.
Defense-related products are typically used for decades. Their long life cycle means it takes time to recoup development costs, and relying solely on the SDF limits the market. Companies are hoping to set up a virtuous cycle where profit earned from civilian sales of dual-use technologies is used to develop new defense technologies, which are also then adapted for civilian use.
IHI has leveraged the aircraft engine technology it developed for defense in civilian aircraft, fostering both its defense and civilian businesses. Heavy industry companies are also moving toward dual-use development of unmanned cargo transport aircraft, for example.
Oki Electric Industry, which makes sonar equipment, renovated its underwater acoustic testing facility for the first time in 33 years in 2023. The company is working to adapt its acoustic technology for civilian use.
While boosting stagnant domestic defense equipment sales, contractors are also looking to develop overseas markets, particularly in the Asia-Pacific region, over the long term.
Prime Minister Sanae Takaichi's government is looking to support these efforts, including by abolishing the rule limiting Japan's defense exports to five types of non-lethal equipment in the first half of 2026.
One challenge to expanding overseas business is a lack of sales structure. Mitsubishi Heavy, Japan's largest defense contractor, has not actively promoted its products overseas, seeing the transfer of defense equipment ultimately as a government-led initiative.
"Our policy will remain unchanged," said Mitsubishi Heavy President Eisaku Ito. The business community, arguing that private companies alone cannot handle overseas sales, is calling on the government to establish a support system.
Among other countries, nearby South Korea is increasing its presence in the global arms market. The government's Korea Trade-Investment Promotion Agency acts as a control tower to promote exports from defense-related companies like Hanwha.
Looking further abroad reveals defense contractors far larger than Japan's. Mitsubishi Heavy's defense division sales are less than one-tenth of those of U.S. leader Lockheed Martin.
Some global players are also eyeing Japan's increasing defense spending, including U.S.-based military drone manufacturer Anduril Industries, which announced its official expansion into Japan on Tuesday.
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