Tokyo has just approved its largest-ever budget — roughly ¥122.3 trillion (about $785 billion) — and tucked inside that headline figure is a clear, expensive bet: fortify Japan’s military posture while trying hard not to spook markets.
The cabinet plan, unveiled at the end of December, lifts defense spending to a new high of more than ¥9 trillion (about $58 billion) for the coming fiscal year. That’s part of a multi‑year push to double annual arms spending and hit roughly 2% of GDP sooner than originally planned. The move is as much about deterrence — particularly toward an increasingly assertive China — as it is about rebuilding Japan’s defense industrial base.
A military pivot with a price tag
The new budget sharpens two trends: longer-range strike capability and a turn to unmanned systems.
- Nearly ¥970 billion is earmarked to boost “standoff” missile capabilities, including a ¥177 billion purchase of domestically upgraded Type‑12 surface‑to‑ship missiles with about 1,000 km range. The first batteries are being rushed into southwestern bases a year earlier than planned.
- Tokyo plans to spend around ¥100 billion to field an integrated network of unmanned air, surface and underwater platforms under a program called SHIELD, scheduled to begin phased deployment in 2028. Officials say imports — possibly from Turkey or Israel — will speed initial fielding.
These choices reflect hard realities: a shrinking, aging population that makes it harder to maintain large standing forces, and a desire to keep soldiers out of the most dangerous first‑contact roles. At the same time, Japan is pursuing collaborative projects — including a ¥160 billion contribution to a next‑generation fighter jointly developed with Britain and Italy — to strengthen domestic industry and win export orders. Recent procurement wins, such as Australia selecting Mitsubishi to upgrade frigates, show those ambitions have traction.
The defense build-up also leans on software and autonomy. Planners are explicitly looking to integrate artificial‑intelligence tools into sensor networks and drone swarms. Debates about how AI shapes public life and commercial tools have become louder — from new model launches to platform controversies — and those same issues will follow military AI into the open, where accountability and rights questions are unavoidable. For more on how fresh AI models are reshaping visual and operational capabilities, see the industry rollout of Microsoft’s MAI image model and the wider debates over AI products landing on mobile platforms, which have already provoked questions about deepfakes and brand control in the case of Sora’s Android release.
Markets, debt and political trade-offs
Tokyo insists the surge in defense outlays will be funded while keeping the public debt picture under control. The broader national budget — the ¥122.3 trillion package — includes measures to raise revenue: higher corporate levies and new tobacco taxes, plus an income tax adjustment scheduled from 2027. Lawmakers must still pass the full bill by March.
Markets are watching closely. Prime Minister Sanae Takaichi’s administration is pushing a large fiscal footprint on top of stimulus plans, and that prospect has already moved the bond market. Short- and medium‑term yields have climbed in recent weeks after the Bank of Japan shifted policy and raised its policy rate, while super‑long government bond yields — which hit record highs amid supply worries — softened after Reuters reported the government may trim next year’s issuance of long‑dated bonds.
The yen’s recent weakness and official warnings about possible intervention added another layer of volatility. Investors are parsing whether Japan can both ramp defense spending and keep borrowing costs manageable without repeating past debt crises.
The geopolitics behind the numbers
Tokyo’s domestic debate is inseparable from the region’s drama. The cabinet cited growing Chinese activity across the Pacific and in the East China Sea — including carrier drills and reported radar locks on Japanese aircraft — as justification for a more forward‑leaning deterrent. Prime Minister Takaichi’s November comment that Japan could become involved if China acted against Taiwan amplified tensions and prompted diplomatic protest from Beijing.
To prepare, the Defense Ministry plans a new office focused on operations and equipment specifically tailored to Beijing’s expanding reach. That’s tectonic for Japan’s post‑war security posture: decades‑old limits on offensive power have steadily loosened, and this budget cements a long‑term shift toward layered strike, surveillance and autonomous systems.
There are also practical hurdles. Building missiles and AI systems is one thing; training personnel, establishing secure data links, building maintenance and supply chains, and navigating export controls are another. Tokyo’s recent easing of weapons export restrictions is intended to help, but the upshot will be a more complicated industrial and diplomatic balancing act.
The budget is unmistakably ambitious: it tries to answer a strategic threat, shore up an industrial base and calm worried markets all at once. Whether it succeeds will depend on politics, on how rapidly new systems can be fielded and integrated, and on the global economic backdrop — not least interest rates and investor appetite for Japanese debt. For now, Japan is betting that a bigger, smarter defense posture can be bought without breaking the bank. The coming months will tell whether that bet pays off.