Japan's global defense business may be on the cusp of a big breakout

LivestreamMenuMake ItselectUSAINTLLivestreamSearch quotes, news & videosLivestreamWatchlistSIGN INCreate free accountMarketsBusinessInvestingTechPoliticsVideoWatchlistInvesting ClubPROLivestreamMenu Japan easing decades-old restrictions on arms exports opens a big opportunity for the country's defense industry in a world increasingly hungry for weapons. The global conditions seem favorable. On April 27, SIPRI reported that global military spending hit a record of $2.89 trillion in 2025, the 11th straight year of increase. Countries are "desperate" to acquire weapons such as air defense missiles, artillery shells and armored vehicles, areas where Japan Inc. might expand its market share in the international defense economy, Hirohito Ogi, senior research fellow at the Tokyo-based Institute of Geoeconomics, told CNBC in an interview. South Korea may offer a template — defense companies there have had a roaring few years producing arms cheaper, faster, and of comparable quality to U.S. weapons, benefiting as the Russia-Ukraine war drags on — and the Iran war is likely to fuel demand even further. What's more, traditional U.S. partners are now looking for alternative defense suppliers amid surging demand and doubts over American alliance commitments. Japanese engineering is "top-tier," and its "crown jewel" will be the next-generation Global Combat Air Programme fighter jet developed with Britain and Italy, said Stephen Nagy, professor of politics and international studies at Tokyo's International Christian University. The new fighter aircraft will reportedly replace the Eurofighter Typhoon in the U.K. and Italy, and the Mitsubishi F-2 fighter in Japan. Japan's near-term opportunities are likely to be concentrated in areas where the country already has clear technological strengths. The country will have a heavy initial focus on maritime domain awareness and air defense like "advanced radar systems, patrol vessels, and co-produced interceptor missiles," Nagy said. In April, Australia signed contracts for its first three general-purpose frigates, which will be built by Mitsubishi Heavy Industries and based on the upgraded Japanese Mogami-class design. There has also been increasing foreign interest in Japanese defense systems, with Indonesia expressing interest in high-speed patrol boats. The Philippines is in discussions for the possible transfer of defense equipment from Japan, as well as New Zealand, which also reportedly wants the upgraded Mogami-class frigates that the Australians have ordered. However, challenges remain. ICU's Nagy said that Japanese firms currently lack international marketing experience and cost-competitiveness. "They will likely carve out specialized, high-tech niches among trusted allied partners rather than immediately dominating the global arms bazaar," he added. And a prior loosening of export restrictions in 2014 showed lackluster results, according to IOG's Ogi, a former official in Japan's Ministry of Defense. Many people associate this outcome with Japan's inexperience in promoting defense products in the international market, he said. The International Institute of Strategic Studies reported in May that since 2014, exports of finished products have only been three fixed air surveillance radars and one mobile air surveillance radar to the Philippines before the Australia shipbuilding deal. But the biggest constraint may be production capabilities. For decades, Japanese defense manufacturers largely served one customer: the Self-Defense Forces. That limited incentives to build export marketing teams, reduce unit costs, or invest in spare production capacity, despite Tokyo increasing spending on defense. Japan itself recorded a 9.7% increase in defense spending to reach $62.2 billion in 2025, equivalent to 1.4% of GDP — the highest share since 1958. The country's ministry of economy, trade and industry said in a February report that the defense business was less attractive than the civilian business due to its lower profit margins and limited growth potential. That prompted companies to withdraw from the sector, the report added. Still, the lifting of the arms export ban is also set to increase Japanese production capacity by incentivizing companies to produce weapons at scale during peacetime, according to IOG's Ogi. This will also bolster Japan's wartime readiness, as defense companies will not have to surge production to such a great extent if needed during wartime, he said. In terms of stocks, ICU's Nagy said the traditional domestic heavyweights stand to gain the most from the lifting of the lethal arms export ban. Mitsubishi Heavy Industries is the "anchor" of the industry, while Kawasaki Heavy Industries, IHI Corporation and Mitsubishi Electric possess the scale required for international procurement. But even before the lifting of the lethal arms export ban, other analysts were optimistic about the sector. A Wisdomtree report in November pinpointed J

Japan's global defense business may be on the cusp of a big breakout

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