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Hideo Tamura

【#988】Defense Bonds are Stable Resources for Defense Buildup

Hideo Tamura / 2022.11.29 (Tue)

November 28, 2022

The biggest focus of attention regarding the government’s formulation of a fiscal 2023 budget late this year is how to secure financial resources for Japan’s defense buildup. Priority should be given to a debate whether to issue defense government bonds as proposed by the late former Prime Minister Shinzo Abe. The issuance of defense bonds could be a deciding factor in recovering national power that includes economic strength and defense capability. Nevertheless, recommendations by an expert panel to Prime Minister Fumio Kishida have denied the defense bond issuance and suggested tax hikes instead, retaining an austere budget policy that has reduced domestic demand and invited zero growth of economy and defense spending. Such policy could weaken national power.

Truth and falsehood of expert panel recommendations

The expert panel notes that defense capability as national power may be nullified without economic strength and financial capacity. This is true but ignores the fact that Japan’s national power has continued to be nullified for the past 25 years.

Japan’s gross domestic product (GDP) representing its economic strength has posted an average growth rate of zero in the past quarter century since 1997. Net general government debt as a percentage of GDP, which indicates financial strength, increased from some 30% in 1997 to 130% in 2021. Defense spending has been limited to 1% of GDP, failing to grow in the absence of GDP growth. During the same period, China boosted both GDP and military spending 16-fold. The United States increased GDP 2.9-fold and military spending 2.8-fold. Britain expanded GDP 2.5-fold and defense spending 2-fold. Germany raised GDP 1.9-fold and defense spending 1.7-fold.

GDP has failed to grow because deflation has led domestic demand to shrink. Nevertheless, the government has implemented consumption tax hikes, spending cuts and social insurance premium increases, boosting deflationary pressure.

The expert panel emphasizes that present generations as a whole should share the burden of the defense spending growth and that a wide range of taxes should be raised to cover the growth. It then denies any government bond issuance for the defense spending growth, citing wartime government bonds that cost people their assets. Japan’s defeat in World War II destroyed not only government bonds, but everything including human lives, production facilities, infrastructure and national land. However, the panel intimidate people by citing only government bond loss.

Utilize abundant surplus money

How are government bonds today? More than 90% of Japanese government bonds are held by domestic financial institutions. Supporting the stable government bond market is abundant surplus money, including 1,100 trillion yen in household cash and deposits and more than 500 trillion yen in corporate internal reserves. If defense capabilities are enhanced only within the range of tax hikes, authoritarian states may take advantage of Japan’s vulnerabilities in an emergency situation. Japan selling will trigger a free fall in financial assets prices.

Defense government bonds could become true stable financial resources to boost national power including defense capability and secure deterrence. Defense spending, even if being doubled, would be around 11 trillion yen. By absorbing abundant surplus money, the government can easily achieve fundamental increase of defense capabilities including cyber warfare capabilities within five years. This may trigger private sector investment in advanced technologies, creating economic dynamism.

Hideo Tamura is a Planning Committee member at the Japan Institute for National Fundamentals and a columnist for the Sankei Shimbun newspaper.