Proposal for the new National Defense Program Guidelines
July 20, 2010
Nippon Keidanren
Nippon Keidanren published the “Proposal for the establishment of defense industry policyof Japan” on July 14, 2009 for the Japanese Government’s National Defense Program
Guidelines and the Mid-Term Defense Program, but then, due to change of the administration,it has been decided that the National Defense Program Guidelines and the Mid-Term Defense
Program will be developed toward the end of this year.
The security environment in Northeast Asia is tense and the need for the improvement ofdefense capabilities remains high. The threat of North Korea’s nuclear weapons and ballistic
missiles is large, and especially at the moment, tensions continue in the Korean Peninsula
because of the sinking of the South Korean patrol boat. Moreover, foreign submarines andother ships are increasingly active in the sea around Japan.
Internationally, the range of activities of the Japan Self-Defense Forces has been expanding
such as the dispatch of destroyers and patrol aircraft for anti-piracy operations off the coast ofSomalia and in the Gulf of Aden based on the Anti-Piracy Law that came into effect in Julylast year and participation in the international disaster relief operations to help victims of theearthquake that hit Haiti in January this year.
The Government has set up “The Council on Security and Defense Capabilities for a New
Era” in February this year to hold discussions and review. A report is soon to be released forthe new National Defense Program Guidelines.
Accordingly, Nippon Keidanren newly developed Proposal for the new National Defense
Program Guidelines, taking the results of the “Fact-Finding Mission on Defense Industry
Policies to Europe” in March this year into consideration.
1． Current state of the defense industry and environmental changes(1) Current state
Defense capabilities are the key for national security to ensure the safety of Japanesecitizens and it is the defense industry that takes a major role in the development andproduction of defense equipment and the support for the operation of the Self-Defense Forces.
Not only major companies, but also many SMEs are involved in the industry. There are, forexample, about 1,200 fighter aircraft-related companies and as many as 1,300 combat
vehicle-related companies (See Figure 1).
As Japan’s defense-related budget has continuously been reduced, however, the value of newcontracts of major equipment, which peaked at 1.07 trillion yen in FY1990, has gradually
decreased and dropped to about 680 billion yen in FY2010, which is about 60% of the peak1

value. In accordance with the decrease in the volume of production, companies have worked toreduce the workforce and make use of resources in the civilian sector. It can be said, however,that companies’ efforts are stretched to the limit, when the maintenance of personnel andfacilities for the operational support of respective equipment is taken into consideration. Someof the companies are forced to withdraw from the production of defense equipment and the baseof the Japanese defense industry is weakening. Moreover, the total volume of procurement
specified in the Mid-Term Defense Program has not been achieved and the future prospect is
not clear.
It takes a long period of time to develop defense equipment and nurture engineers, andtherefore, once lost, it is extremely difficult to recover the defense industry base. In the midst of
the gradual decrease in the value of new contracts of major equipment, there is a threat that thedecrease in the number of engineers and skilled workers will lead to the loss of the defense
industry base.
Especially regarding the fighter aircraft whose production is scheduled to end in FY2011,
the maintenance of production and technological bases will be a major issue because of theperiod of non-production that will follow.
Figure 1: Structure of the Defense Industry

Ministry of Defense
Contract

Delivery
Number of related companies

Major contract
companies

Fighter aircraft-related companies:
About 1,200(One to several companies)

Contract

DeliveryDestroyer-related companies:
About 2,500
Combat vehicle-related companies:
About 1,300

Subcontract companies
Producing parts, components, etc.
based on orders received from major
contract companies(Prepared based on materials from the Ministry of Defense)(2) Environmental changes
The defense industry has achieved effective development and production by sharing
development and production facilities and personnel with the civilian sector based on
advanced civilian technologies. Under these circumstances, the following environmental
changes are taking place, which has made it necessary to maintain and strengthen the defense2sector’s own operations. A clear defense industry policy of the Japanese Government isrequired for the development of the defense industry without depending on the civilian sector
and for maintaining and strengthening the defense production and technological bases.
Firstly, offering of the latest defense technologies is being restricted even to an ally.
Introduction of technologies from the U.S., which Japan has implemented mainly for major
equipment, is increasingly difficult due to the restriction on the outflow of technologies. The
issue of operational autonomy is becoming a matter of concern, as seen in the black-boxing ofcore technologies of equipment, and accordingly, the improvement of Japan’s own
technologies is being required.
Secondly, the severe business environment that started with the global economic crisis
continues in a time when company rating, stock price, and profitability of respective business
operations are regarded as important. Therefore, the management of defense business
operations using technologies and resources in the civilian sector is becoming difficult to thepoint that it is no longer possible to fully achieve accountability to stakeholders regarding thesignificance and potentials of defense business operations.
2. Significance of defense production and technological bases and measures forstrengthening bases taken by the U.S. and European countries(1) Significance of defense production and technological bases
The defense industry plays a role in the entire lifecycle of defense equipment. The
maintenance and strengthening of the defense production and technological bases is the criticalresponsibility of a nation and the significance of the bases is as follows:
1) Securing of deterrent capabilities and autonomy based on advanced technologicalcapabilities
The procurement of defense equipment by possessing high-level technological capabilities
to ensure better deterrent capabilities and diplomatic bargaining power to inhibit invasion byother countries contributes to securing national autonomy without dependence on othercountries.
2) Speedy procurement, provision of operational support and improvement of equipment
performance
Defense bases make it possible to implement speedy procurement activities in an emergency,
respond quickly to check and repair equipment failures, and upgrade and improve equipment
and its performance in line with technological advancement. As a result, higher operational
availability 1 and safety can be ensured. In the case of imported equipment, some of the repairs
require sending the equipment back overseas, which is time-consuming, and more often than not,various spare items required during the time result in a higher expense.
1

The percentage of time that the equipment is operating properly when it is needed to operate. In the case of fighter
aircraft: Air capabilities (Number of operable aircrafts) = Number of deployed aircrafts×operational availability.

33) Development and production of equipment suited to national geographical characteristics
and state of affairs
To develop and produce equipment and provide operational support best for national defense
to suitthe geographical environment of the Japanese Islands, surrounded by sea in all

directions and replete with mountainous areas and isolated islands, and the exclusively
defense-oriented basic policy.
4) Technological and economic ripple effects
Development and production through domestic investments by utilization of defense bases
will lead to the development of domestic industries and creation of employment. The
development of defense technologies, which are among the most advanced technologies, willbring about new technological breakthroughs and major technological ripple effects to thecivilian sector.
5) Securing of bargaining power for imports and licensed production
It will lead to the securing of national bargaining power in negotiating prices andtechnological disclosures for the import of equipment from other countries and licensed
production in Japan.

(2) Measures for strengthening bases taken by the U.S. and European countries
Amid mounting security issues, including terrorism, proliferation of weapons of mass
destruction, and piracy, the U.S. and European countries are promoting measures to strengthen
defense production and technological bases.
The U.S. pointed out for the first time the need to strengthen the base of the defense
industry in the QDR (Quadrennial Defense Review: Review of the defense program of theUnited States conducted every four years) released by the Department of Defense (DOD) in
February this year. Moreover, the Review evaluated the abilities of the defense industries of
the allies and requested deepening of cooperation.
Nippon Keidanren’s Fact-Finding Mission on Defense Industry Policies to Europe
investigated how respective governments develop the defense industry policy and work tostrengthen bases based on the significance of defense production and technological bases.
European countries, for example, the U.K. and France, have clarified the areas on which tofocus investment as a nation and to promote international joint development and havesuccessfully established an environment that enables the business community to set up a
long-term vision. Moreover, they are enhancing the competitive capabilities of the defense
industry by, among others, promoting joint programs of member countries within theframeworks of NATO and the EDA (European Defense Agency), which is an organization of
the EU.
Thus, European countries have clearly established procurement policies for respective
equipment. They either efficiently and preferentially acquire the most advanced equipment

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through the framework of international joint development or depend on imports from othercountries, while maintaining the domestic bases through a focused investment in research anddevelopment of those for which it is necessary to maintain production and technological bases
within the country.
Japanese defense-related industry companies would be able to efficiently and stably develop
and produce equipment based on well-planned investments and employment by such a policy.
Activities of European countries serve as a very useful reference for the defense industry
policy of Japan.
3. Necessity of defense industry policy of Japan(1) Clarification of the areas of focused investment
In a severe financial situation, on the premise that a reasonable-size budget is secured andbased on the significance of defense production and technological bases, it is necessary to
clarify the areas of focused investment by our country as part of the defense industry policy.
Five areas may be listed as the areas of focused investment, consisting of system integration
capabilities, the most advanced component technologies, technologies to address specificoperational requirements, operational support capabilities, and technologies to ensureinternational advantage (See Table 1). The Government, on the premise of an equipment
system initiative to be required in the future, should define specific technologies andequipment in respective areas of focused investment.
Table 1: Areas of focused investment
ImportantExclusive use/Dual use
Reason why necessary
technological areas
To integrate individual component
System integration
technologies as a system of equipment
capabilities
and to ensure autonomy, taking
operations into consideration
Technologies
exclusively for defense The most advanced
Application of radars, sensors, new raw
use
componentmaterials, etc.
technologies(They require a sizable
To address operational requirements toTechnologies tolong-term investment
suit the national geographicaladdress specificand are difficult tocharacteristics and state of affairs such as
operational
recover once lost.)
the topography and defense-oriented
requirements
basic policy of our country
Operational support
Supply and support in peace andcapabilities
emergency
To ensure comprehensive international
advantage by making investments in
Dual-use technologies Technologies totechnologies for both civilian and defense
for both civil andensure international
defense purposes
advantage
purposes, as a nation based on thecreativity of science and technology

5Selection and concentration based on the clarification of the areas of focused investment are
essential as part of the defense industry policy. It is appropriate to develop in particulartechnologies for both civil and defense purposes under industry-government-academia
collaboration because of potentially large economic effects. Defense-related technologies should
be clearly positioned as technologies related to the safety and security of Japanese citizens in thedevelopment of the 4th Science and Technology Basic Plan as well.
Moreover, the size of the defense-related research and development budget of Japan is small
compared to that of other countries, and accordingly, it is necessary to increase the researchand development budget for the above-mentioned areas of focused investment.
Currently, the conversion to civil use of aircraft developed by the Ministry of Defense such astransport aircraft and amphibious planes is being discussed. Many dual-use technologies forboth civil and defense purposes are used for the development of aircraft, and therefore, it iseffective on a long-term basis to promote conversion to civil use from the viewpoint of themaintenance and strengthening of defense production and technological bases.
A clear policy for acquiring equipment should be set up by clarifying the areas of focusedinvestment and classifying equipment into groups: 1) Those for which production andtechnological bases should be maintained in Japan to maintain the ability to autonomously
operate equipment; 2) Those developed jointly with other countries or produced under license
through technological exchanges with and technological introduction from overseas; and 3)
Those imported from overseas (See Figure 2).
Figure 2: Policy for equipment acquisition
Clarification of the areas of focused investment

Development ofdomestic technologies
Domestic
development andproduction

Exchange of technologies with andintroduction of technologies from overseas
Joint development/Licensed
production

Import

Maintenance of defense production and technological bases(2) Establishment of new arms export control principles
Based on the Three Principles on Arms Exports in 1967 and the unified government view on

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arms exports in 1976 (hereinafter referred to as the Three Principles on Arms Exports, etc. 2 ),arms exports and arms technology transfer have essentially been totally banned except in certain
cases.
On the other hand, the Japan-U.S. joint development and production of the ballistic missile
defense system have been made an exception in the progress of security cooperation between
Japan and the U.S. Moreover, patrol boats to Indonesia, using the ODA, have been provided
from the viewpoint of contribution to developing countries to deal with terrorism and piracy. In
addition, provision of patrol boats to Yemen to address piracy off the coast of Somalia and in
the Gulf of Aden is being discussed.
Currently, multinational joint development projects of fighter aircraft and other equipment
are in progress, due to the sophistication of equipment and increase of development expenses.
Japan, however, is unable to take part in such international joint development because of theThree Principles on Arms Exports, etc., which renders our country in a state of so-called
national isolation in terms of technologies. Therefore, it should be made possible for Japan topositively take part in international joint research and development with the U.S., European
countries, etc. by focusing on the aspect that arms export and transfer of arms technologies
make it possible to strengthen the collaboration between allied countries and prevent conflicts tocontribute to international security and peacekeeping.
In such cases, it is essential to improve Japan’s own technological capabilities in order to play
an important role in international joint research and development, and accordingly, thestrengthening of technological bases through investment in research and development isrequired. Moreover, it is necessary to consider re-export from joint production partner countries
at the stage of joint production that follows the joint development stage. At present, it is notpossible to respond to any request from a licensing country to supply equipment produced underlicense from a U.S. or European company, and as such, handling of such requests should also be
reviewed.
Therefore, the Government should establish new arms export control principles to replace thecurrent Three Principles on Arms Exports, etc. The business community's attitudes toward theabove topic are as follows (See Table 2).

2“The Three Principles on Arms Exports,” stated by then Prime Minister Sato at the Committee on Audit in theHouse of Representatives in 1967, is the government’s policy not to permit arms exports to: (1) communist bloc
countries; (2) countries to which arms exports are prohibited under U.N. Resolutions; and (3) countries which are
involved in or likely to be involved in international armed conflict. In 1976, then Prime Minister Miki stated at theBudget Committee in the House of Representatives “the unified government view on arms exports” to refrain fromarms exports to areas other than those that are applicable to the Three Principles on Arms Exports.
are collectively called “the Three Principles on Arms Exports, etc.”

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The above twoTable 2: New Arms Export Control Principles
・To revise the state of an essentially total ban on arms exports and arms
technology transfer based on the Three Principles on Arms Exports, etc. andcomprehensively examine each case from the viewpoints of contents, final
Policydestination, and application of each item.
・To set up a system to control arms exports and arms technology transfer forthe prevention of the proliferation of weapons of mass destruction,
elimination of the threat of terrorism, etc. and to establish Japan’s own
activities within the international framework.
・To make decisions on a comprehensive basis from the viewpoints of theCriteria

security of Japan and international society and the contribution topeacekeeping.
・ The export control authorities should work for better information exchange

Controland collaboration between the ministries and agencies concerned and for thesystemimproved transparency of export control through the clarification of control
targets, announcement of concept of examination of each case, etc.

(3) Improvement of acquisition and procurement policy
Due to the lower production efficiency caused by the reduced volume of procurement ofdefense equipment and decreased procurement budget, companies in the defense industry arehaving difficulties in recovering the cost of equipment production, which is leading to a
reduction in company earnings. Therefore, the improvement of acquisition and procurement
policy is a major issue that should be addressed.
Contracts of much of the defense equipment are based on competitive bidding even after thestart of production, and accordingly, companies cannot make forecasts for the following fiscal
year and beyond nor make well-planned investments and employment.

Thus, companies find

it difficult to operate on a long-term perspective and make efficient production. At least for
major equipment, it is conducive for efficient production and cost reduction to keep thecontract with the company selected for the first contract for the following fiscal year andbeyond, and as such, it is necessary to introduce long-term equipment procurement plans andmulti-year contracts.
For contracts as well, the acquisition and procurement policy should be improved to lead tomore reasonably priced and higher-quality equipment by modifying the detailed audit andexamination of companies that are resulting in the complex contract system and increase ofindirect cost on the part of the companies and by encouraging the voluntary efforts ofcompanies for the improvement of management.

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4．Promotion of space development and utilization in defense
The role that space development and utilization play in ensuring security is becoming
increasingly large. In Japan as well, it is increasingly important to promote space development
and utilization for defense purposes due to the threat of North Korea’s ballistic missiles andother tense situations in Northeast Asia.
The Basic Plan for Space Policy developed in June last year based on the "Basic SpaceLaw” includes research of sensors for early warning capabilities, promotion of the use ofvarious satellites for dual use for defense and civil purposes, etc. as new space development andutilization in the area of security. As pointed out in the “Proposal for the promotion of spacedevelopment and utilization as a national strategy” by Nippon Keidanren (April 12, 2010), it isnecessary to include in the National Defense Program Guidelines and the Mid-Term Defense
Program, space development and utilization for the purpose of defense using early warning
satellites, intelligence satellites, communications satellites, rockets, etc. and improvement oflaunching sites as infrastructure. As for the budget, setting up a special budget for theGovernment to use positively should be discussed.
5．Expectations on the new National Defense Program Guidelines
The security policy is the basis of a nation and the Government should take responsibility
for the maintenance of defense production and technological bases to guarantee security. We
ask the Government to include in the National Defense Program Guidelines the developmentof defense industry policy based on a long-term perspective and implement the above policy,
after clarifying the basic security principles of our country.
In developing the defense industry policy, based on the above basic security principles, it isnecessary in the first instance to assume the future international security environment andclarify the necessary defense capabilities to address the environment. Based on the above, theGovernment should discuss and review the most advanced equipment to be required anddevelop a defense industry policy that will help maintain and strengthen the defense
production and technological bases through the clarification of the areas of focused investment.
The defense industry should work for close collaboration with the Government and positively
provide cooperation in the development of the defense industry policy through the provision of
information and technological review of the most advanced equipment.
It is time for Japan to take a step forward in terms of policy so that the defense industry will
have a sense of mission and be proud to play a role in defense to protect the safety and securityof Japanese citizens and contribute to the establishment of a rock-solid security system.
Moreover, the Government should work for the better recognition and right understanding of
the role and importance of the defense industry by the citizens.
Nippon Keidanren, on its part, will promote companies’ voluntary research anddevelopment and improvement of managerial efficiency, eyeing not only the strengthening of

9security but also economic effects through the advancement of the defense industry.

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