TOKYO — The ministry has requested funding to establish a state-owned, contractor-operated system to ensure stable defense equipment production, involving government acquisition of factories and outsourcing manufacturing to private firms. This structural change aims to address historical instability in the sector, as dozens of companies have withdrawn from Japan's defense industry over the past decades due to poor profits, uncertain business outlooks, and reputational concerns.

Profits at major defense suppliers Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and IHI Corp. have risen as Japan builds up its military and expands arms exports. The shift toward a state-owned, contractor-operated model seeks to capitalize on this recent profitability while mitigating the risks that previously drove firms away from defense contracts.

Japan is seeking to develop hypersonic missiles that can be launched from submarines, with the budget request earmarking 16.3 billion yen for a submarine-launched guided missile program. Additionally, Japan plans to develop a stand-off missile launch module for Unmanned Underwater Vehicles. Officials cited U.S. defense company Anduril Industries’ Barracuda as a system under consideration for lower-cost stand-off weapons.

The ministry plans to introduce an integrated AI platform, termed an 'AI orchestrator,' in command and control to improve decision-making speed and accuracy. Japan is considering using existing foreign AI technologies, including those of the U.S. while also developing domestically developed AI. To support these digital initiatives, the ministry plans to build a 'Defense Ministry cloud' for highly sensitive data transmission and stable communications networks.

The Acquisition, Technology, and Logistics Agency requested 234 billion yen ($1.5 billion) for the Global Combat Air Program (GCAP) next-generation fighter development. The agency also requested 9.7 billion yen ($61 million) to accelerate research and development of collaborative unmanned aircraft equipped with deception and electronic warfare capabilities. Japan plans to develop a Ground Self-Defense Force Close-Range Air Defense System (CRADS) combining guided missiles, an autocannon, and lasers.

Infrastructure investments include funding for further modifications to Izumo-class destroyers and surveillance facilities on Kitadaito Island in Okinawa Prefecture. The ministry is studying the introduction of cargo-handling facilities on Iwo To to improve maritime transport. Approximately 160 entries in the budget request were marked as 'item requests' with no specific funding amounts assigned pending the revision of national security documents.

Prime Minister Fumio Kishida’s government plans to revise the National Security Strategy, National Defense Strategy, and Defense Buildup Program by the end of 2026. Under the five-year defense strategy set in 2022, Japan doubled its defense spending to approximately 2% of its gross domestic product. Beijing has criticized Japan’s defense buildup as 'new militarism.' The budget request will be sent to the Ministry of Finance for approval, with a decision expected in late December 2026.

Why It Matters

This budget submission continues a documented pattern of increased military expenditure that began with the 2022 strategic shift, which raised spending to 2% of gross domestic product. The scale of the 8.9 trillion yen request affects both domestic industrial policy and regional security dynamics, as evidenced by Beijing's characterization of the buildup as 'new militarism.' The inclusion of 160 unfunded item requests indicates that final procurement priorities remain contingent on the upcoming revision of national security documents.

The proposed state-owned, contractor-operated production system represents a direct response to historical market failures where dozens of companies exited the defense sector due to financial and reputational risks. By linking government factory ownership with private manufacturing, the ministry aims to stabilize supply chains for critical assets such as the MQ-9B SeaGuardian drones and hypersonic missile systems. The integration of AI orchestrators and cloud infrastructure further signals a transition toward network-centric warfare capabilities that rely on rapid data processing and decision-making.

Timeline

The budget request includes 292.2 billion yen ($1.8 billion) to acquire 17 General Atomics MQ-9B SeaGuardian drones for the Japan Maritime Self-Defense Force. The budget request seeks 7.6 billion yen to acquire interceptor drones, potentially including the TerraDrone Terra B1. The budget request earmarks 16.3 billion yen for a submarine-launched guided missile program.

The budget request flags the acquisition of additional Lockheed Martin F-35 fighters, Boeing KC-46 tankers, Kawasaki C-2 transport and P-1 anti-submarine aircraft, and improved Mogami-class frigates without revealing specific numbers or costs.

What's New

Additional reporting confirms that the budget request includes 292.2 billion yen ($1.8 billion) to acquire 17 General Atics MQ-9B SeaGuardian drones for the Japan Maritime Self-Defense Force. The requested budget represents a 15th consecutive annual increase and a 13th consecutive record high for Japan's defense spending. Further details show the budget request seeks 7.6 billion yen to acquire interceptor drones, potentially including the TerraDrone Terra B1.

The budget request includes funding to acquire Northrop Grumman’s AGM-88G Advanced Anti-Radiation Guided Missile-Extended Range (AARGM-ER).