Photo/Illutration The Law for Strengthening the Defense Industry was passed June 7 during a plenary session of the Upper House. (Koichi Ueda)

A law was passed last week to support the domestic defense industry by enabling the government to prop it up financially.

The law needs to be administered precisely to ensure it remains cost effective and to prevent it from becoming a tool for selective corporate bailouts or pampering the industry. In this respect, the Diet has a significant role to play in monitoring how the tax money is spent.

Under this law, companies recognized as makers of equipment “indispensable” to the Self-Defense Forces’ pursuit of their missions will receive direct subsidies from the government to offset the costs of improving their manufacturing process and cyber security measures.

A fund will also be established to promote exports by subsidizing expenses for altering product specifications to meet overseas requirements.

Low profitability is causing a steady drain of Japanese corporations from the defense sector. Alarmed by the situation, the government in December took the unprecedented step of bolstering the sector by re-defining it as “Japan’s defense capabilities per se” in the revised national security strategy.

The move was backed by the ruling coalition as well as opposition parties the Constitutional Democratic Party of Japan, Nippon Ishin (Japan Renovation Party) and the Democratic Party for the People.

Support is growing for the view that Japan’s defense capabilities are in need of fundamental reinforcement. But there also may be cases where imports are superior to domestic products in terms of performance and cost. Exactly what items have to be of manufactured at home is still not clear, even from Diet deliberations on the definition of indispensable equipment.

Also under the new law, a system has been created to temporarily “nationalize” companies whose deficits render their continued operation difficult. However, even though the government intends to transfer such companies to private businesses as soon as possible, there is no guarantee this will work as expected. There may be no takers, in which case the taxpaying public will be stuck with a growing financial burden.

If the industry’s reliance on government subsidies deepens, no progress can be expected in the improvement of operational efficiency with the prospect of the industry becoming a high-cost structure.

Some opposition lawmakers who supported the legislation contend that excessive financial support will mark the “start of the decline” of the defense industry.

Outlays of 36.3 billion yen ($259 million) for corporate support and 40 billion yen for the export promotion fund have been approved for this fiscal year’s budget. The government must be willing to disclose all pertinent information. This is the only way to ensure the Diet and the public will be able to monitor these outlays and determine if they are truly appropriate and effective, as well as to avert any suspicion of misappropriation or government-business collusion.

A criminal penalty system is now in place for contractor company employees who leak highly sensitive information. But the system must be applied carefully so it does not inhibit legitimate economic activities or lead to unjust concealment of information that the public is entitled to know.

It has been noted that businesses are being encumbered by orders involving specifications required only by the SDF, or by the repetition of multiple small orders. During Diet deliberations, questions were raised about most of the profits going to so-called prime corporations and not reaching thousands of subcontracting companies.

Instead of just providing financial support, the government should also deal simultaneously with improving structural issues related to order placement, industry practices and other matters.

--The Asahi Shimbun, June 14