Future of the Japanese Defense Industry - Market Attractiven

1. Future of the Japanese Defense Industry - Market Attractiveness, Competitive Landscape and Forecasts to 2019

2. Summary • The threats of North Korea's long-range ballistic missiles and China's maritime intrusion have prompted Japan to focus on fortifying its own defense capabilities. Although Japan's defense budget registered a decline of 3.56% over the review period, this trend will change in the coming years. Over the forecast period, the Japanese defense budget will increase from US$47.5 billion in 2015, to US$49.1 billion in 2019. • The majority of the defense budget is to be spent on revenue expenditure, which includes personnel salaries, operational expenses, training, and development. Capital expenditure accounted for a 19.4% share of the overall defense budget in 2014, and includes the procurement of military equipment, material expenses, RandD expenses, aircraft acquisition, and shipbuilding. Over the review period, the army received 37.4% of the overall budget, while the navy and air force received shares of 23.4% and 22.3% respectively. • The remainder of the budget is allocated for other defense expenditure such as intelligence, joint staff, the National Defense Academy, the National Defense Medical College, the National Institute for Defense Studies, the Technical Research and Development Institute, the Equipment Procurement and Construction Office, and the Inspector General Office of Legal Compliance. • .

3. Key Benefits of this Report • The report provides detailed analysis of the current industry size and growth expectations from 2015 to 2019, including highlights of key growth stimulators, and also benchmarks the industry against key global markets and provides a detailed understanding of emerging opportunities in specific areas. • The report includes trend analysis of imports and exports, together with their implications and impact on the Japanese defense industry. • The report covers five forces analysis to identify various power centers in the industry and how these are expected to develop in the future. • The report allows readers to identify possible ways to enter the market, together with detailed descriptions of how existing companies have entered the market, including key contracts, alliances, and strategic initiatives. • The report helps the reader to understand the competitive landscape of the defense industry in Japan. It provides an overview of key defense companies, both domestic and foreign, together with insights such as key alliances, strategic initiatives, and a brief financial analysis.

4. Key Market Issue • The ban on exports imposed by the Japanese government has severely affected the defense industry. The ban restricted Japanese companies from the joint production of equipment and technology with other, more technologically advanced countries. Domestic companies are therefore unable to achieve economies of scale and related benefits, resulting in an increase in domestic production costs. • The Japanese government allocated 19.4% of its defense budget for equipment procurement in 2014. Defense equipment manufacturers in Japan are required to spend on RandD or purchase technology licenses from foreign OEMs, which increase the cost of the product. In addition, the low quantity of procurement contracts offered by the government reduces the number of units, which makes the equipment expensive and reduces the return on investment. Unless the government allows the export of arms or allocates funding for RandD, the high cost of production will continue to be a challenge for defense firms. • The ban on arms exports imposed by the government, made it difficult for defense companies in Japan to maintain profitability. Despite relaxation in the ban, Japanese defense companies still have limitations in terms of arms exports and are still subject to government approval.

5. Key Highlights • North Korea been identified by the Japanese government as a prime threat. This is primarily due to their testing of advanced ballistic missiles in 1998 and the more recent nuclear missile development initiatives in 2006, which violated the UN Security Council resolution. Also, the test-ring of Taepodong missiles and the third nuclear test in February 2013 have made the Japanese MoD boost its own defense capabilities to stay ahead in the arms race. This has pushed Japan to increase its own defense self-sufficiency via a number of missile development programs in collaboration with the US. By 2018, Japan is expected to begin full-scale production of a new generation of powerful missile systems, which will be developed with the US, thereby increasing Japan's defense expenditure. • One of the major concerns of the Japanese maritime security forces is the growing intrusion of Chinese forces into the nation's coastal areas. To counter this issue, Japan has deployed a number of forces around the Senkaku/Diaoyu Islands in collaboration with the US. The Japanese Navy and the Japanese Coast Guard are jointly responsible for protecting these islands. Both forces operate in collaboration with the US forces and regularly patrol Japanese maritime territory in order to protect vital sea lanes of communication. Over the forecast period, Japan is expected to strengthen surveillance capabilities in seas surrounding Japan and invest in the research and development of unmanned aerial vehicles as well as procuring patrol naval vessels and aircrafts.

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