Regulatory Developments The reforms of the Government have not reached the field of defence where no improvements have been observed over the period. On the contrary, the new regulations governing investments in 137 key technologies sectors threaten to stifle European investments and technology transfer efforts. Japan's current 5-year defence plan includes an arms procurement budget of around 4 trillion Yen, of which an estimated 85% will be spent on weapon systems developed and built locally. Products built under licence from US manufacturers or directly imported from the US make up most of the remaining 15% of Japan's defence hardware market. With a few exceptions, European defence sales to Japan have consisted mainly of minor equipment or components for Japanese-made weapon systems, a situation that has yet to improve. As with many other sectors of the Japanese economy, the European defence industry faces a number of non-tariff barriers to trade that limit European involvement in the Japanese market. The Japanese defence procurement process lacks transparency, creating difficulties for foreign companies to understand the timing, parties involved, and requirements of new programmes. This is compounded by a lack of fair competition, and often a reluctance of the Japanese defence establishment to receive product information. The defence establishment remains relatively uninformed about European products, and this lack of exposure leads to narrow views on defence and procurement policy. As a result, European defence firms face an uphill battle in their efforts to increase cooperation in product development with Japanese companies. US political pressure surrounding the trade imbalance, financial incentives to buy US products through the Foreign Military Sales programme, and unfounded Japanese fears of non-interoperability of EU products with US products have further restricted European access to the Japanese defence market. Prospects for EU-Japan Economic Integration For the time being, Japan
prohibits co-development involving the exchange of defence-related
information, including specifications for military equipment, with all
countries except the US. Modifications to the three principles of Japanese
defence (no technology exports, no product exports, no exchange of
information related to armaments) are now being considered, but no
conclusion has yet been reached. However the unstable global situation is
pushing Japan in the direction of a greater interaction with other
countries in defence-related matters. Priorities
Key Issues and Recommendations ■ Promoting competition Japan's current economic climate, combined with increasing tensions in the region, the expanding international role for Japan's defence forces, and major projects such as the Missile Defence programme, are placing tremendous pressure on defence procurement budgets, even though these have been modestly increased. The large number of key projects to be implemented in the near term cannot be accommodated within the present fiscal budget without significant re-evaluation of procurement policy and a much greater focus on cost-effectiveness. Notwithstanding the success of Rolls-Royce with the Ministry of Defence (MOD) over the years, and also of AgustaWestland with the JMSDF (Navy), there have been few encouraging signs recently that Japan is prepared to select a European solution, even when such a solution meets a unique requirement or provides best value for taxpayers' money. The EBC would like to increase the European presence in the Japanese defence sector. However, the procurement process still lacks a true level 'playing field' and the assessment of European equipment remains deficient, as many recent examples have shown. Further improvement is still necessary before European firms can truly compete on an equal basis with Japanese and US firms. While recognising the important role the US plays in the Japanese security structure, the EBC feels that the Japanese attitude towards interoperability is often exaggerated. Limiting foreign procurement to American products has not guaranteed interoperability with the US. Instead, this policy has restricted Japanese access to innovative European solutions to inter-operational problems. As a counterexample, the closest ally of US, the UK, has fully interoperable forces equipped almost entirely with European-designed systems. Recommendation:
■ Promoting industrial cooperation World use of new partnership approaches to procurement, like PFI (Private Finance Initiative) or LCS (Life Cycle Support) contracts have yet to be considered by the MOD. The EBC recommends that the Japanese procurement authorities consider these opportunities in the interest of more flexible and cost-efficient use of the defence budget. For the time being, Japan prohibits co-development involving the exchange of defence-related information, including specifications for military equipment, with all countries except the US. Modifications to the three principles of Japanese defence are now being considered. Recommendation:
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