Defense stocks have already seen significant gains, with valuations now looking stretched. The key question is whether there’s still room for further upside.
Recently, NATO announced a policy urging each member country to allocate at least 5% of their GDP to defense budgets as a response to evolving global security challenges. This represents a significant increase from the previous expectation of 2% of GDP and signals a clear intent to bolster collective defense capabilities among member states.
Japan’s Defense Spending: Historical Constraints and Recent Changes
Japan is not a NATO member, but as a close ally and a major player in international security, NATO’s decisions often influence Japanese policy discussions. Historically, Japan has maintained a self-imposed limit of around 1% of GDP for defense spending since the late 1970s. This policy reflected both constitutional pacifism and public sentiment after World War II.
However, in recent years, amid growing regional tensions and increased security concerns—particularly regarding North Korea and China—Japan has begun to reconsider this limit. In 2022, the Japanese government announced plans to increase its defense budget significantly, aiming to reach around 2% of GDP by 2027. Achieving this involves substantial political negotiation and shifting public opinion, as even raising the cap from 1% to 2% has been contentious and required justification in terms of national security needs.
Will Japan Adopt the 5% Defense Spending Target?
At present, there is no indication that Japan will adopt the 5% of GDP defense spending target. The move from 1% to 2% already represents a dramatic shift in Japan’s defense posture, requiring a major increase in spending and political capital. A leap to 5% would be unprecedented in modern Japanese history and would likely face significant legal, political, and societal hurdles.
- Legal constraints: Japan’s pacifist constitution (notably Article 9) restricts the country to maintaining self-defense forces and prohibits the maintenance of traditional armed forces for warfare. Any drastic increase in defense spending could prompt constitutional debates domestically and internationally.
- Political will: Securing political consensus for even the current increase to 2% has proven difficult, with various parties and segments of the public cautious about militarization.
- Public opinion: Japanese society remains sensitive to issues of remilitarization, and large-scale increases in defense spending are often met with skepticism or opposition, especially if perceived as excessive.
Conclusion
While NATO’s new benchmark may influence global defense spending discussions, it is unlikely that Japan will move toward a 5% GDP target in the near term. The current focus is on achieving the 2% goal by 2027, a significant departure from past policy. For now, Japan’s defense policy will continue to balance constitutional limits, regional security needs, and public opinion—making any further large-scale increases unlikely without significant changes in the security environment or national consensus.
Despite uncertainty around the exact target, many investors appear convinced that Japan’s defense spending will rise beyond the current 2% of GDP. With that expectation in mind,
I’ve put together a curated list of potential beneficiaries, exclusively available to my clients. Interested in exploring what else I’ve developed? I’d love for you to try out my service and see the full scope of insights I offer.
Mitsubishi Heavy Industries is a notable contender, but far from the only one poised to gain.