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Policy Proposals  Industrial Technology Toward Successful Implementation of
the New National Defense Program Guidelines and
Medium Term Defense Program

Provisional Translation
April 16, 2019

1. Introduction

Japan continues to face an extremely difficult security environment. At the same time, rapid technological innovation has given the new domains of space, cyber, and electromagnetics, in addition to the traditional land, sea, and air, critical importance for the security of Japanese nationals. Furthermore, domestic social constraints, such as a rapidly aging population, low birthrates and severe fiscal restraints, have direct impacts on Japan's national security.

Under these circumstances, the Government of Japan renewed its National Defense Program Guidelines and Medium Term Defense Program in December last year to present three pillars of its basic defense policy: the strengthening of Japan's own architecture for national defense, strengthening of the Japan-U.S. Alliance, and strengthening of security cooperation. The Japanese government also showed its intention to make its defense industrial base, an essential foundation for the basic defense policy, more advanced, efficient, and resilient.

The new Guidelines stress that, "amid the realities of a security environment it has hitherto never faced," Japan will "proactively and strategically promote measures with added variety" to achieve its national defense objectives. It is the highly advanced indigenous defense industrial base that enables the government to execute such initiatives. Now that technology plays much greater roles in maintaining national security, the Japanese government must develop and implement measures for defense systems and technologies as the core of its diplomatic and international security policies, and strengthen its defense industrial base to meet the security needs of today and tomorrow.

Therefore, for the successful implementation of the new Guidelines and Medium Term Defense Program, Keidanren presents the following policy measures to strengthen the industrial base for defense.

2. Strengthening Japan's own architecture for national defense

The new Guidelines express the goal to build truly effective defense capability, a "Multi-Domain Defense Force," which is capable of the sustained conducting of flexible and strategic activities in all domains of land, sea, air, space, cyber, and electromagnetics. To this end, the Guidelines stress the need to engage in a transformation at a pace that is fundamentally different from the past. They also state that, under the current severe fiscal situation, thorough rationalization is indispensable while undertaking a defense capability buildup. Meanwhile, the Guidelines reiterate the importance of the role of Self-Defense Forces in effectively responding to large-scale disasters and proactively contributing to international peace cooperation activities.

In order to meet these demands and requirements, Japan needs a variety of initiatives to strengthen technological- and cost- competitiveness. In particular, appropriate assistance should be provided for small and medium sized enterprises, which play an indispensable technological role in defense production supply chains, since recent market conditions may force them to make harsh business decisions.

(1) Research and development (R&D)

The Multi-Domain Defense Force consists of highly advanced, leading-edge technological capabilities in many fields. In particular, cybersecurity and telecommunications, core technologies in constructing the defense force, have played a major role in upgrading people's standards of living and promoting economic growth. Therefore, government agencies, corporations, and others inside and outside Japan have vigorously conducted their own initiatives to promote further innovations in these areas.

Including collaboration with overseas research institutions, Japanese government efforts to develop these critical technologies should be efficient and strategic enough by organically linking a variety of projects directed by government agencies including the Ministry of Defense. A wide range of companies and researchers, including high-tech startups, should actively participate in the efforts.

To ensure the successful promotion of defense-related R&D projects, the Japanese government should encourage companies to aggressively take their own initiatives or to strategically invest their financial resources to prepare future R&D contracts. To this end, as the new Guidelines point out, the government needs to increase the foreseeability of R&D activities; it should promote multi-level public-private dialogues to share appropriate understanding on the future direction of advanced technological developments. Processes to formulate the "R&D visions" and to revise the "future direction of medium to long-term R&D" will provide opportunities to engage in such dialogues based on future operational needs. At the same time, the government should strategically utilize the "design proposal-based competition scheme" and negotiated contact system to ensure the continuity of business activities from R&D and prototyping to production.

(2) Efficiency of defense R&D and production

¥27,470 billion is the approximate expenditure target for the defense capability build-up set by the new Medium Term Defense Program. The program also indicates ¥25,500 billion as the estimated accumulated amount of annual defense budgets over the next five years. This requires defense R&D and production to improve their efficiency to save ¥2,000 billion, almost three times more than the efficiency requirement set by the previous medium-term program (almost ¥700 billion).

Today, the price of defense equipment, when it is subject to multi-year procurement, is calculated to fall every year based on the premise of the progression of the learning curve of production activities. The business community will actively contribute to further efficiency improvement of defense R&D and production.

The government measures to increase efficiency should be well designed to incorporate the facts and realities of business activities: long-term or multi-year contracts, which generally contribute to cost reductions in the procurement of defense equipment, will not bear enough fruit if the annual volume of the procurement undergoes large fluctuations.

Moreover, the government should share a reasonable part of the cost increases beyond the control of companies, such as design changes, additional specifications based on R&D technical assessments, consumption tax hikes, major price increases in materials and imported items, rises in expense ratios agreed between sub-contractors and the Defense Ministry's relevant sections or departments, drastic exchange rate fluctuations, and government costs required for re-testing to resume production.

(3) Supply chains

With the new Guidelines, the government shows its intentions to review the equipment structure, to suspend the use of less important equipment, and to discontinue projects with low cost-effectiveness. When the government makes such decisions, it should take appropriate measures, such as providing grace periods and financial assistance to the companies affected, especially in consideration of the many small and medium enterprises engaged in defense production.

Recently, there has been a decreasing trend in domestic procurement affected by factors such as the expansion of imports of defense equipment. Today, a pressing issue is to ensure the continuation or appropriate succession of the businesses of small and medium enterprises that play an important role in defense production. To this end, the government should grasp the state of supply chains for major equipment and key components, utilizing diverse resources and effective and smooth public-private collaboration, to provide appropriate assistance to these companies, referring to the relevant initiatives in the United States and other countries.

(4) Collaboration among companies

The Japanese defense industry has structural differences from its counterparts in the United States and Europe in terms of the share of defense sales in the total corporate revenue and the profit ratio of the business. All companies in the industry must make optimal use of their own comparative advantages for Japan' national security, while making management decisions to fulfill their accountability to shareholders at all times. Only such comprehensive judgments will lead to the realignment and consolidation of defense businesses. The Japanese defense industry continues to study a variety of measures to the improve efficiency and resiliency of the industrial base in order to meet the expectations of the new Medium Term Defense Program.

(5) Future fighter

Future fighter aircraft must have the capabilities and functions to meet Japan's own operational requirements. Moreover, fighters must be designed to secure both the optimum expandability to next-generation technologies and Japan's autonomy to upgrade and improve the system. The new Medium Term Defense Program states that the government will "launch a Japan-led development project at an early timing with the possibility of international collaboration in sight." For the successful implementation of this policy, the government should first clarify its operational requirements and the fighter's basic specifications. It should then carefully define the best ways of promoting international collaboration and make detailed explanations to the countries concerned.

Japan's defense industry is eager to make the best possible contribution to the development and production of future fighters by aggressively mobilizing its own technological strengths, knowledge and experience. To this end, the industry will deepen collaboration among its companies by clarifying and centralizing leadership and responsibilities towards successful outcomes of the program.

3. Strengthening the Japan-U.S. Alliance and security cooperation

The new Guidelines stress that Japan's own initiative to strengthen the Japan-U.S. alliance is an essential prerequisite for the further reinforcement of the alliance. The same applies to bilateral defense equipment and technology cooperation, of which enhancements have been repeatedly called for by the U.S.-Japan Defense Cooperation Guidelines and others. Japan's indigenous efforts to increase its own technological strength and its active utilization of these efforts will lead to the advanced industrial and technological collaboration only accomplished by the United States and Japan, who are both allies and technological superpowers in the world. The fruits of this bilateral cooperation could be used widely and internationally to increase security in space and cyberspace and to save people's lives at times of disasters. Now is the time to advance a truly win-win Japan-U.S. partnership.

The new Guidelines also show a clear government intention to strategically promote multi-faceted and multi-layered security cooperation based on the vision of a "free and open Indo-Pacific." The business community should actively contribute to security cooperation, especially to develop capacity building assistance for Southeast Asian countries.

(1) International defense equipment and technology cooperation as a core part of Japan's diplomatic policy

International defense equipment and technology cooperation will contribute to Japan's national security as an embodiment of its diplomatic policy. Therefore, the public and private sectors must appropriately share and continuously confirm the roles and functions of the international cooperation, which Japan's broader diplomatic policy requires. These should include tangibles of the international cooperation, such as the initiatives Japan should develop, including government-led transfers of defense equipment and concrete rules and rubrics applied to strengthened cooperation. Furthermore, the public and private sectors should closely work together to make individual projects, including capacity building assistances, more effective and sustainable. To this end, the government should lead research efforts to gain a better understanding of recipients' needs for equipment to be transferred and the necessities of operation and maintenance assistance, including human resource development.

(2) Japan-U.S. cooperation

The Guidelines for Japan-U.S. Defense Cooperation were revised in 2015 to enhance joint research, development, and production of defense equipment and to facilitate reciprocal defense procurement. The public and private sectors in Japan should work together more proactively and flexibly to achieve these objectives emphasized in the Guidelines. In particular, the government should explore the maximum possibilities of industrial and technological contributions to the production of U.S. equipment subject to the Foreign Military Sales (FMS) program.

(3) Information security

The appropriate management and control of technological information is an essential foundation of international defense equipment and technological cooperation, including those between Japan and the United States. At the same time, it has a critical importance for all businesses, regardless of their sizes, which play roles in defense production supply chains. The Ministry of Defense has already led a relevant initiative in line with an information security standard in the United States. In addition, to grant security clearance, the U.S. industrial security program has been applied to some Japan-U.S. bilateral joint programs.

In preparation for the future expansion of international cooperation, Japan should also establish defense-related information security programs, compatible with those in the United States and other friendly nations. At the same time, the Japanese government should provide assistance for small and medium sized enterprises to properly protect their information security.

4. Promoting public-private partnership

The new Guidelines are the first National Defense Program Guidelines to be compiled by Japan's National Security Council. The new Guidelines repeatedly emphasize the need for coherent, all-government efforts, not only by the Ministry of Defense and the Self Defense Forces. They also stress the need for the public-private partnership to build comprehensive architecture for national defense. Coherent government efforts and close public-private partnerships are indispensable to accomplish the goals set by the new Guidelines and Japan's defense capability build-up.

(1) Government-industry discussions on defense contract systems

The Japanese defense industry is at a watershed moment, facing severe requirements to improve cost effectiveness, strengthen international competitiveness, and appropriately respond to a changing security environment. Government-industry discussions on contract systems are becoming more important today to improve efficiency and to upgrade the technological capabilities of the industry. To this end, meetings or forums should be organized to provide opportunities for the public and private sectors to bring reform proposals together and constructively exchange views on various issues regarding defense contracts. The defense procurement systems of major countries, especially the United Sates which could set the "de facto" international standards of the system, should be studied with regard to the public-private cost distribution and basic conceptions of profit margins and remuneration. This study could also serve to facilitate international defense industrial cooperation.

(2) Public-private dialogue for successful implementation of the new Guidelines and Medium Term Defense Program

A public-private dialogue should be established as part of the periodic, systematic evaluation of the implementation status of the new Guidelines; government and industrial representatives should meet on a regular basis to discuss issues to fulfill the new Guidelines and Medium Term Defense Program, including measures for further public-private cooperation. A common recognition and understanding of the current status will surely contribute to their smooth and steady realization. We at Keidanren will actively contribute to the management of such a forum.

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