The new cabinet of Japanese Prime Minister Takaichi Sanae recently overturned a longstanding national ban on exports of the category of military equipment that the government defines as ‘lethal’. The lifting of the ban only applies at present to a list of 17 allies including Australia, the United Kingdom and the United States though there is a mechanism for further countries to be added in the future at the government’s discretion.
The policy change is another blow to the legal pacifism central to Japan’s post-war constitutional order and represents a significant loss for the liberal political parties that performed so poorly in the general election held earlier this year. However, this political novelty has distracted from the deeply conventional economic logic that underpins this policy change. Since its post-war revival Japan has been an export-oriented economy centered on the high value-added secondary manufacturing sector. Central to this economic model from the 1950s to the 1980s was a generous peg between the US dollar and the Japanese yen, which made the US an ideal final destination for Japanese commodities. As the Cold War wound down, the US became less tolerant of trade deficits with its allies and in the 1985 Plaza Accords it renegotiated its pegs to the German, French and Japanese currencies. The subsequent appreciation of the Yen led to a speculative real estate bubble and, in 1992, a deep recession from which Japan has never fully recovered.
Japan has remained trapped in McKinnon’s famous “ever higher yen syndrome” ever since. The widespread use of the Yen as a secondary global reserve currency places constant upward pressure on its value. However, Japan has never transitioned its economic structure away from export manufacturing and so relies on a devalued currency. Decades of quantitative easing by the Bank of Japan have done little to alleviate the situation.
So, whilst arms exports may be politically novel, they fit precisely into a preexisting economic model that has been stalled since the early 1990s. The first deal quickly announced under the new policy was a 7bn USD agreement under which Japan will provide the first three of a planned 11 Mogami class frigates for the Australian navy. Who will build the ships? A dinosaur of the Japanese economy – Mitsubishi Heavy Industries. Rather than contribute to a long-term increase in Mitsubishi’s ship building capacity, the remaining 8 warships will be built in Perth by Australian defense contractor Austal.
The Japan-Australia deal represents the first step in an attempted policy pivot from Takaichi’s government, one that will align defense policy more closely with economic development, leveraging existing geo-political alliances into deeper trade partnerships. However, this plan ignores the fact that Japan’s trade relationships no longer mirror the structure of its military alliances. The growth of the Chinese economy has increased the share of Asian countries as final markets for Japanese primary and secondary commodities. According to data from the Harvard Atlas of Economic Complexity exports to Asia now claim a larger share of Japan’s overall outgoing trade than Europe and North America combined. China (including Hong Kong) was the final destination for 17.83% of Japanese physical commodity exports in 2024, eclipsing the United states at 13.3%. Japan’s other defense partners rank even lower. Australia was the final destination for only 1.65% in the same year and United Kingdom only 1.17%. The US has also contracted as a source of incoming foreign direct investment (FDI) for Japan, with the Japan External Trade Organization reporting that as of the end of 2024 Asian FDI sources, at 25.9% of all incoming FDI, had overtaken North American sources at 22%. The awkward reality facing any attempt to align Japan’s defense and trade strategies is that Japan’s neighbors are no longer simply its export competitors, increasingly they are its most important export markets and sources of investment.
There is a paradox at the heart of the new Japanese arms trade. By challenging the taboo of state pacifism that has held since the end of the second world war it represents a decisive break with Japan’s past. However, as an economic strategy it is entirely backwards looking. It is an attempt to build on an existing export-oriented economic model that no longer works, based on defense relationships with countries that play a diminishing role in the structure of Japan’s current trade relationships. East and South-East Asia have a new economic structure, one of deepening trade and financial integration. Japan will never revive its economy if it continues to prioritize its allies at the expense if its neighbors.
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