TOKYO, JAPAN — On May 14th, Stephen T. Ganyard, President of Avascent Global Advisors, was published on the opinions page of Japanese economic newspaper SankeiBiz. This journal frequently publishes well-known and highly placed Japanese economic experts such as as ex-Vice Minister of Finance for International Affairs, Eisuke Sakakibara known as “Mr Yen”, ex-Senior Vice-Minister of MITI (now the METI) Shinji Fukukawa, and Governer of JBIC Hiroshi Watanabe. The English translation of Mr. Ganyard’s piece is below.
An Alternative Path to Greater Japanese Security
Prime Minister Abe is leading Japan through an unprecedented period of change that includes an assumption of greater leadership in regional defense and security. He believes that Japan must take a leading role in Asia by fortifying a rules-based international order that protects not only the interests of Japan, but of the region as well.
However, Japan has a dangerous over-reliance on other countries to provide its material defense capabilities. Few of Japan’s indigenously produced defense articles are of world-class caliber and, more disturbingly, many are falling behind Chinese capabilities in both quality and quantity. With a defense budget that will likely remain flat in the future, there is little opportunity for Japan’s defense industry to develop new capabilities that will deter growing threats from countries such as China.
This unique path would have Japan…buy its way into a position of global defense sector competitiveness through mergers, acquisitions, and the purchase of defense related intellectual property.”Yet there is an alternative approach to creating strategic deterrence from a strong defense industrial base. This unique path would have Japan, with the cost and supply of money at unprecedented low levels, buy its way into a position of global defense sector competitiveness through mergers, acquisitions, and the purchase of defense related intellectual property.
Although Japanese firms have cash-heavy balance sheets, until the recent relaxation of Tokyo’s ban on arms exports, there was no opportunity or incentive for defense sector expansion. Business lines were essentially determined by the government, had little exposure to market discipline, and were spread around without competition in order to create diversification of suppliers. For understandable policy reasons, defense spending has been historically more focused on jobs and domestic production than on creating a vibrant, indigenous defense capacity.
Thus, most Japanese CEO’s still see defense work as a constrained, government managed part of their company’s business portfolio. Even with the relaxation of the so-called “3 Ps,” the lack of a clear arms export and investment policy continues to create an uncomfortable degree of risk for any firm contemplating investing in expanding its defense portfolio. There is a lot of risk but very little economic incentive for any Japanese company to invest in the defense sector.
Fortuitously, given the low cost and surplus supply of money, Japan has an alternative option that focuses on growth through acquisition. Japan is in the distinctive position of being able to globally source, through acquisitions and partnerships, the intellectual property and manufacturing capacity needed to create a world-class defense industrial base.
The advantage to acquiring international defense companies is clear. High technology firms can be kept overseas but the technology itself becomes a pool of intellectual property that can be leveraged in Japan. Global sourcing of cutting edge business sectors like cybersecurity, command and control, surveillance, electronics, and unmanned vehicles will be of particular importance to the defense of Japan, and will have the added advantage of supporting the public sector technology and industrial base.
But incentives and assurances that will encourage acquisitions by industry must first be put in place by the government. These steps are two-fold. The first requirement is a clear defense industrial policy based on national security priorities, which includes both detailed export, and investment, guidelines. Second, the government must provide risk sharing and mitigation mechanisms that will encourage Japanese industry to acquire advanced defense and security capabilities.
The government must provide risk sharing and mitigation mechanisms that will encourage Japanese industry to acquire advanced defense and security capabilities.”
In particular, target technologies ought to be the result of a detailed strategic assessment that takes into account the threats Japan faces, and the roles Japan might play in a regional security context. From this, a defense industrial policy could be constructed that would support the acquisition of key capabilities and technologies.
The second step involves the means by which the government can help reduce risk for the private sector. In order to overcome reticence by the senior leadership of Japanese companies, the Japanese government should put “skin in the game.” This could come in various forms of loan guarantees, default protections, or advantageous lending rates. The mechanisms to do this already exist, most notably within the Japan Bank of International Cooperation. JBIC could be given the clear mandate to support those international acquisitions that would be supportive of the security policies and defense industrial base of Japan.
Japan is at a historic turning point in its history as it assumes a greater role in regional security and faces up to growing threats, without excessive dependence on the US. But to reach this goal, new initiatives will need to be undertaken. Through a process of establishing a clear defense industrial policy that supports national strategic objectives, and then creating mutually supporting incentives to make overseas acquisitions, the government of Japan and Japanese industry can work together to enhance Japan’s security.
Stephen T. Ganyard (Colonel, USMC, Ret.) is president of Avascent Global Advisors. Ganyard’s civilian and military career includes experience in a variety of high-level leadership, managerial and staff positions dealing with complex technologies, strategic planning, foreign policy, intelligence, homeland security and global operations.
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