Japan’s New Defense Export Policy: Will Industry Seize the Day?

On April 21, Prime Minister Sanae Takaichi announced long-anticipated changes to policy governing defense exports, effectively eliminating restrictions on sales—including lethal weapons—to Japan’s closest security partners. For Japan watchers, this is a historic policy change, adding to the list of post–World War II constraints on defense that the country has steadily cast aside over the last decade. Japan is now positioned to develop a more “normal” defense industrial profile, in which arms sales, technology transfers, and coproduction arrangements play a visible role in Japan’s foreign and security policy. However, whether the Japanese defense industry will take the opportunity to become a global player in defense remains in question. Industry actions will depend on further steps by the Japanese government to encourage sales, other transfers, and joint programs.

An Enduring Taboo

Japan’s strict approach to arms exports originated in the postwar antimilitary ethos and the political constraints imposed under Article 9 of the Constitution of Japan. In 1967, Prime Minister Eisaku Satō announced the original Three Principles on Arms Exports, which prohibited arms exports to communist bloc countries, countries subject to a UN embargo, and countries involved in international conflicts. This policy was broadened in 1976 into an effective ban on all exports of defense equipment. Even as Japan’s technological base grew stronger, arms exports remained taboo. Japan’s substantial but largely isolated defense industry was limited to supplying the Japan Self-Defense Forces with high-cost, licensed, or bespoke equipment, which constrained growth and innovation in the sector.

Tokyo began to make minor exceptions to this policy late in the Cold War, allowing defense technology transfers to Washington starting in 1983. However, transfers of hardware—let alone exports to third countries—remained off-limits. From the early 2000s, the Japanese government began to implement more substantial export policy changes in response to growing regional threats from China and North Korea. The Japanese government responded with incremental change. A policy revision in 2004 allowed for the transfer of jointly developed missile defense technology to the United States, initially to support the codevelopment of the Standard Missile-3 Block IIA missile defense interceptor. In 2011, under Prime Minister Yoshihiko Noda, the Japanese government began to allow transfers of defense-related equipment for peacekeeping and humanitarian operations; it also allowed conditional participation in international development and production efforts—a move to enable Japanese industry workshare in the F-35 program.

Prime Minister Shinzo Abe, in 2014, was somewhat bolder, formally replacing the original export principles with a new Three Principles on Transfers of Defense Equipment and Technology. More incrementalism followed, first allowing transfers of license-produced items back to the United States. A 2023 policy statement authorized transfers of defense equipment produced under license to countries of origin—a response in part to U.S. pressure on Tokyo to supply Patriot missile rounds manufactured in Japan to the war effort in Ukraine. This policy statement also included explicit language permitting the export of defense equipment in five nonlethal capability areas, including transportation, reconnaissance and surveillance, and rescue.

In practice, two decades of creeping policy adjustments produced little actual change. Under Abe, Japan aggressively pursued a high-profile submarine procurement in Australia in 2016, overriding Japanese industry’s caution and concerns about technology transfer. When Australia ultimately chose a French competitor, the experience left deep scars on major players in Japanese industry, who had invested significant effort in the campaign at the Japanese government’s behest. More broadly, Japan’s defense export record through the late 2010s and early 2020s remained modest, with only the transfers of an air surveillance radar and patrol aircraft to the Philippines.

A New Day . . .

Two major international defense programs, pursued by Tokyo initially as policy exceptions, forced the more fundamental change that Prime Minister Takaichi announced last week: (1) the Global Combat Aircraft Program (GCAP), a cooperative effort with the United Kingdom and Italy to build a next-generation fighter aircraft, and (2) Japan’s decision last year to provide the Mogami-class frigate to the Royal Australian Navy. These programs have served as pathbreakers for Japanese industry and the Japanese public, normalizing the prospect of major defense sales and strengthening industry support for broader change. The success of these programs will hinge on an export policy that allows seamless transfer of defense technology, components, and systems to these partners.

Japan’s latest policy revisions open the door to exports of lethal systems to a defined list of international partners. Consistent with past practice, the Japanese government will assess the merits of each proposed sale on a case-by-case basis, overseen as before by an interagency body of senior-level officials. For now, lethal exports will be limited to 17 countries that have signed defense equipment and technology transfer agreements with Japan—provided they are not actively engaged in conflict. That list currently includes Australia and several European partners; much of Southeast Asia, as well as Bangladesh and India; and the United Arab Emirates. Agreements with Canada, Finland, and Spain are near conclusion or currently being negotiated; notably, the list does not include Ukraine. The first export case under the new policy is likely to be the transfer of a retired Maritime Self-Defense Force ship to the Philippines, which Defense Minister Koizumi will highlight during a planned visit to Manila in May.

. . . If Japan Can Seize It

In framing the case for these changes to the Japanese public, Prime Minister Takaichi argued that partner countries must support each other with defense equipment “in an increasingly severe security environment.” Chief Cabinet Secretary Minoru Kihara noted that expanding defense exports will help to strengthen Japan’s defense industrial base as Japanese defense firms will generate greater economies of scale with increased production to meet overseas demand.

In reality, the government’s export policy revisions alone will be insufficient to achieve the strategic goals it has set out. Reactions to the latest policy announcement that express fear of how the removal of export restrictions will lead to Japan arming the world miss a critical point—it is not enough to just unlock a policy door for defense exports. Japan’s defense industry must be determined to compete internationally. Potential customers and partners must be willing to engage them. Japanese government agencies will have to provide essential facilitating support. A sustained whole-of-government effort, in collaboration with industry, will be needed for Japan to become a significant player in the international defense market. To achieve success, Japan will need to overcome at least three key challenges:

1. Industrial Structure: Japan’s historical focus on limiting defense production to domestic procurement has resulted in a defense industry unique in the industrialized world. There are no true defense “primes” in Japan—large manufacturers whose primary business is defense. Rather, for even the largest players in Japan’s defense sector—such as Mitsubishi Heavy Industries (MHI) or Kawasaki Heavy Industries—defense is a relatively small part of the companies’ overall business, although its relative share has grown rapidly since Japan launched a defense buildup in 2023. For MHI, the largest player, defense accounts for around 20 percent of overall revenue—up significantly from a few years ago, but still small as a share of the company as a whole. Shares for other major defense producers are lower.

   This structure means that defense has had to compete for resources with other parts of the company. Historically, defense units in these companies were secondary, struggling to attract personnel and capital for investment. The best talent was assigned to other, more profitable and growing parts of the company. This has begun to change. MHI is increasing its workforce in aerospace, space, and defense by nearly 30 percent between 2024 and 2027, adding both new and mid-career hires in this sector; the company has also indicated plans to double investment in defense manufacturing facilities. NEC Corporation and Mitsubishi Electric have announced similar plans. But doing so is not easy—for example, work in the defense sector often requires technical specialization and security clearances—and the hurdles cannot be quickly overcome. Defense-focused start-up firms are virtually nonexistent. The legacy of defense as an industrial second citizen remains strong, and the sector is playing catch-up.

2. Capacity Constraints: Even as some firms are responding to the increasing profit potential of the defense sector, the reality of Japanese demographic decline represents a significant challenge to growth. A major recent survey of the Japanese defense industry indicates that defense subcontractors in particular struggle to meet labor needs. Japanese ship builders face labor shortages and slowing production rates; MHI reports a four-year backlog in orders. Japanese industry representatives routinely say that capacity is already strained by the demands of Japan’s defense buildup. Japanese defense spending has grown more than 60 percent in four years, and further growth is likely coming. There is little capacity left over to support an ambitious export program without complex tradeoffs. For example, Japan decided to prioritize deliveries of the first three Mogami-class frigates to Australia ahead of deliveries to the Maritime Self-Defense Force.
3. A “Follow Your Lead” Mindset: The combination of limited experience, capacity constraints, and high demand at home has generated deeply rooted caution within the Japanese defense industry about business overseas. Given the isolation of Japanese defense production from the international defense market, it is not surprising that many industry stakeholders view international defense exports as inherently riskier than other business—or that industry officials tend to follow the lead of the Japanese government, rather than to pursue business independently. Japan’s Ministry of Defense (JMOD) pushed industry to participate in the frigate competition in Australia; without leadership from the JMOD, Japanese industry almost certainly would have stayed out.
    

Looking Ahead

Despite these impediments, Japanese industry could over time become increasingly competitive in the international defense market—particularly in areas of established strength, such as shipbuilding and electronic systems. Government officials and National Diet members recognize that closer engagement with the international defense community is essential for strengthening Japan’s industrial capabilities.

The Japanese government will release a new defense industrial strategy along with the government’s revised National Security and Defense Strategies to be announced in December 2026. Japanese officials plan to establish an interagency organization to promote defense sales abroad. Part of this agenda may be the strengthening of overseas representation in both the procurement and export of defense systems—for example, a defense-focused version of the Japan External Trade Organization.

Other steps, such as new government authorities to acquire, own, and lease manufacturing facilities for defense equipment, may help the industry reduce up-front capital investment costs and provide a stronger manufacturing base at home to support exports. If successful, the GCAP program could promote aerospace business with partners seeking to diversify sources of supply and technological cooperation. The Mogami experience in Australia, which featured high-level Japanese government engagement throughout the competition, indicates growing comfort with the advocacy needed to successfully promote defense sales.

More broadly, Japanese companies appear to be shedding long-standing concerns about reputational risks associated with the defense business. In the end, it will be up to Japanese industry to determine whether it moves beyond the occasional development or equipment sale to become a sustained international player in the defense sector. Success will depend on aggressive government support for industry, up to leadership levels; an ability to identify and pursue comparative advantages in the international marketplace; and openness to invest in technology transfer and production overseas to mitigate constraints at home.

Above all of these factors will need to be a willingness to take risks in pursuing international business, based on a realistic understanding of where Japan can best be competitive in collaborating with overseas partners. In the end, the emergence of true Japanese defense firms, focused solely or at least primarily on the sector, will be critical to success.

Christopher B. Johnstone is a senior associate (non-resident) with the Japan Chair at the Center for Strategic and International Studies in Washington, D.C., and a partner at The Asia Group. Gregg A. Rubinstein is a senior fellow (non-resident) at the Sasakawa Peace Foundation USA.