[TOKYO] The growth of Japan’s GDP may sound like good news for the country, but it also means it will have to pay more to reach its target to spend 2 per cent of GDP on defence, adding to the woes of a nation already under pressure from US President Donald Trump to boost its military output.
Japan’s economy expanded to a record 609 trillion yen (S$5.46 trillion) in nominal terms last year, according to a government report released on Tuesday. Should the expansion continue, the percentage of the defence budget in comparison to GDP would shrink and could imperil Japan’s target to spend 2 per cent of its GDP on defence by 2027.
The report also comes a week after Elbridge Colby, Trump’s pick for the top policy job at the Pentagon, said Japan should spend at least 3 per cent of GDP on defence at a Senate confirmation hearing.
If Japan, which currently spends about 1.4 per cent of GDP on its military, were to heed Colby’s comments, it would add over 9 trillion yen to an already stretched budget. That’s on top of headaches the country faces over the largest debt pile among developed economies.
“Japan will decide how much it spends on defence,” Prime Minister Shigeru Ishiba said when asked about Colby’s statement. “It’s not something we would decide based on what another country said.”
This comes as Ishiba’s minority government struggled to finalise the country’s regular budget for the upcoming fiscal year starting next month, entangled in months of talks with opposition parties clamouring to boost spending for a range of issues. As a result, the budget was revised in parliament for the first time in 29 years this month.
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In 2022, Japan pledged 43 trillion yen to a military build-up that would span five years, aiming to double its defence spending in a departure from its long-held stance of keeping spending to 1 per cent of GDP.
On Thursday George Glass, Trump’s pick to become US ambassador to Japan put additional pressure on that front in a Senate committee hearing, referring to the costs of the US military presence in Japan.
Weapons systems and command and control that need upgrading are “very expensive,” Glass said. “Undoubtedly, I do believe we’re going to have to go to the Japanese and talk about an increase in that support,” he said, while also touching on how Chinese sophistication has grown since Trump’s first term.
Japan’s nominal growth underscores the normalisation of the country’s economy thanks to the end of deflation, boosting tax revenues and helping build momentum for wage increases. At the same time, it reveals a fiscal challenge for Ishiba with the nominal GDP a standard measure to gauge the level of defence spending for each nation.
Japan’s 30-year government bond yield climbed to its highest level since 2006 earlier this week, partly due to concerns over how defense spending increases could impact Japan’s finances, according to analysts.
“Japan may have to concede to an increase of defence spending by weighing threats of higher tariffs,” said Ataru Okumura, senior rates strategist at SMBC Nikko Securities. “That would have a significant impact on Japan’s finances – bond market participants must pay close pay attention to it.” BLOOMBERG