Overview
Japan is undergoing its most significant transformation in defense policy since World War II. Under Prime Minister Sanae Takaichi, reforms initiated under her predecessors are increasingly being translated into greater military capabilities and a more proactive security strategy. The shift reflects a changing Asia-Pacific security environment, growing US pressure on allies to share the defense burden and the growing convergence of economic and national security. For businesses, the transformation presents significant opportunities across Japan’s defense industrial base. But careful balancing will be needed against rising geopolitical risk, regulatory complexity and supply chain realignment to successfully leverage Japan’s burgeoning industry.
The Trajectory of Japan’s Defense Transformation
Since the end of WWII, Japan’s security policy has been defined by constitutional pacifism. Through the early 2010s, successive prime ministers largely adhered to maintaining a strictly defensive military posture, relying on the US-Japan alliance and the US nuclear umbrella for security, and keeping defense spending at around 1% of GDP. This postwar settlement shaped Japan’s security policy for nearly seven decades. Today, that model is undergoing fundamental changes.
Japan’s current defense posture is best understood as the culmination of structural reforms initiated under Shinzo Abe and expanded by former Prime Minister Fumio Kishida. Abe argued Japan’s security strategy had to adapt to China’s growing military power and North Korea’s advancing missile and nuclear programs. Notably, his government reinterpreted constitutional constraints to permit limited collective self-defense, eased restrictions on defense exports and joint weapons development, and strengthened the central government’s role in national security decision-making.
Kishida accelerated this trajectory. Russia’s invasion of Ukraine, just months into Kishida’s premiership, reinforced concerns in Tokyo that the use of force to alter the status quo could become a reality in East Asia. Against this backdrop and building on reforms introduced under Abe, Kishida committed Japan to raising defense spending to around 2% of GDP by FY2027, approved the acquisition of counterstrike capabilities, further relaxed defense export rules, and expanded investment in ammunition stockpiles and other military capabilities.
By the time Takaichi entered office, the strategic debate had already largely shifted from whether Japan should strengthen its military to how rapidly earlier reforms could be implemented and broadened. Her administration has prioritized accelerating defense modernization while placing greater emphasis on the industrial and technological foundations needed to sustain it. Takaichi reached the government’s 2% of GDP defense spending target ahead of schedule, brought forward the review of Japan’s three core strategic security documents, further liberalized defense export rules, and established Japan’s first centralized National Intelligence Bureau since WWII.
Japan has also looked to regional players to bolster its defense security network, including expanding defense ties with Australia, the Philippines and India. Japan strengthened security cooperation with South Korea, building on the momentum of the US-Japan-South Korea trilateral and commitments by President Lee Jae Myung and Takaichi (both recently elected) to engage in more frequent, informal bilateral meetings to sustain closer bilateral ties. Despite broad recognition of the practical need for closer defense cooperation, historical grievances stemming from Japan’s wartime past continue to complicate implementation of bilateral initiatives, including a proposed military logistics agreement.
Alongside these reforms, the Takaichi government has increasingly linked industrial policy with national resilience and defense. The government announced it will spread 370 trillion yen ($2.3 trillion) in public-private investment by FY2040 across 17 sectors, covering 62 key products and technologies determined to be critical to economic and national security. Alongside semiconductors and AI, the strategy identifies sectors such as shipbuilding, nuclear fusion and defense as essential to both economic growth and crisis preparedness. Core products identified for investment include naval vessels, dual-use technologies and unmanned aircraft systems, with Tokyo aiming to produce 80,000 drones annually by 2030. The result is a broader conception of national security in which industrial competitiveness, technological leadership and supply-chain resilience are increasingly viewed as necessary for sustaining Japan's defense capabilities.
The Strategic Environment of Japan Today
The pace of Takaichi's defense agenda is ultimately a response to a strategic environment that looks fundamentally different from the one that shaped its postwar pacifism. China has become one of the central drivers of Japan’s defense transformation, regarded as Tokyo’s “greatest strategic challenge” that must be responded to with “comprehensive national power.” Near-daily Chinese Coast Guard patrols around the Senkaku/Diaoyu Islands and escalated encounters with Japanese Coast Guard vessels, expanded operations in waters east of Taiwan and growing military exercises near its airspace and in what Japan claims to be part of its exclusive economic zone have reinforced concerns that Beijing is steadily normalizing a larger operational presence around Japan.
Beyond military pressure, Tokyo is facing sustained economic pressure and sharper diplomatic confrontation with Beijing. Under Takaichi, Japan has adopted more explicit language linking its own security to stability in the Taiwan Strait, including describing a Taiwan contingency as a “threat to Japan’s survival.” Beijing has responded with reimposed restrictions on Japanese seafood imports, travel advisories, tighter export controls on dual-use goods—including rare earths and advanced manufacturing equipment—and expanded export control listings targeting Japanese firms. Since the start of this year, 40 Japanese companies have been included on its official export control list and 40 more companies have been placed on its separate watch list. At the same time, China has intensified critical messaging of Japan, increasingly characterizing Tokyo’s military buildup as “remilitarization,” invoking Japan’s wartime history in a challenge to its expanding defense posture, and releasing a documentary this week on the disputed Senkaku/Diaoyu Islands. The cycle of Chinese military expansion fueling Japanese rearmament, and Japan’s rearmament driving Chinese pressure, is deepening the security dilemma between the two regional powers.
Beyond China, North Korea remains another immediate military concern for Japan. Pyongyang’s expanding nuclear arsenal and increasingly advanced missile capabilities leave Japan vulnerable to escalation with little warning. That challenge is compounded by North Korea’s growing military cooperation with Russia. While Moscow poses a less immediate direct threat, its expanding strategic partnership with both China and North Korea—including joint military activity near Japanese waters—contributes to a more complex regional security environment.
The challenge is not limited to conventional military threats. Reports that Russian intelligence networks have exploited Japan’s weak counter-espionage framework and advanced tech sector have highlighted vulnerabilities in Japan’s broader security architecture. This report was quickly followed by the announcement of Japan establishing its first centralized intelligence agency.
At the same time, uncertainty over the long-term trajectory of US regional commitments further encourages Tokyo to assume greater responsibility for its own defense. While the US-Japan alliance remains the cornerstone of Japan’s security strategy, Washington has shared its expectation that allies must shoulder a larger share of the regional defense burden.
Looking Ahead for Businesses
The dramatic speed of Takaichi’s defense buildup creates significant opportunities for businesses to support Japan’s defense industrial expansion. As of today, only five of the world’s top 100 arms-producing companies are headquartered in Japan, and none are dedicated defense firms; military production remains a secondary component of conglomerates’ broader commercial operations. As Tokyo directs greater capital toward domestic defense production, international defense firms are well positioned to take advantage of Japan’s relatively weak defense industrial base and pursue co-development partnerships across the value chain, and take advantage of its recent overhaul of lethal arms exports. The overhaul of restrictions on defense exports, including lethal weapons to Japan’s closest allies, addresses a longstanding constraint on Japan’s defense industry by expanding the customer base and making joint development projects more commercially attractive. While significant regulatory barriers for foreign companies remain, Tokyo’s push to rapidly strengthen domestic defense capacity could create incentives to improve market access and encourage greater international participation in Japan’s defense ecosystem.
Takaichi’s defense expansion has also accelerated a broader shift in Japan’s strategic debate, bringing previously sensitive issues into mainstream political discussion. Defense Minister Shinjiro Koizumi’s recently called for a “taboo-free” national debate on nuclear weapons, and Takaichi has signaled a renewed push to amend Article 9 of Japan’s constitution, which restricts the country’s use of military force. Such developments suggest Japan’s defense transformation may extend beyond conventional military toward a broader reassessment of national security policy. Nonetheless, the public remains divided on whether and to what extent its pacifist constitution should be revised to “reflect the demands of the time,” as Takaichi has framed it. While many Japanese have come to view Chinese pressure and North Korean nuclear threats as paramount threats to Japan’s security, protests against constitutional revision persist. The largest demonstration in support of Japan’s pacifist constitution took place this May. As of now, there are few signs suggesting this opposition will prevent the government from advancing defense-related reforms, suggesting businesses should consider the possibility of a longer-term expansion of Japan’s defense ecosystem into areas previously viewed as politically off-limits.
Geopolitically, however, Japan’s accelerated defense buildup may expose businesses to greater strategic risk. As Japan becomes more deeply integrated into a US-led security framework, companies operating in or through Japan may become increasingly exposed to US-China competition. China has already criticized Japan’s defense expansion, and Beijing’s use of economic pressure against Japanese firms tied to Japan’s defense buildup highlights the potential costs of deeper involvement in its defense sector. Greater participation by international companies could trigger more heightened Chinese scrutiny, ranging from expanded regulatory barriers and reduced market access to consumer backlash. These risks will be particularly significant for firms with substantial exposure to both Japanese and Chinese markets, requiring companies to balance opportunities from Japan’s defense transformation with the growing costs of geopolitical fragmentation.
