Japan eyes defence spending worth 3.5% of GDP after US pressure

TOKYO – Japan is considering a new midterm defence spending target of 3.5 per cent of GDP in line with NATO and other US allies, a move that could send a shockwave through financial markets concerned about Prime Minister Sanae Takaichi’s spending plans.Japanese defence officials have already signalled a willingness to sharply increase defence spending in meetings with their US counterparts, according to people familiar with the matter.One scenario under consideration is to match a commitment made by South Korea to increase defence spending to 3.5 per cent of gross domestic product over 10 years, according to the people.A lower target, such as 3 per cent, is also possible, according to one of the people.Like other US allies, Tokyo has been under pressure from the Trump administration to boost its defensive strength and reduce its reliance on the American military.Takaichi has already accelerated defence spending to almost 2 per cent of gross domestic product in the financial year ended in March 2026, two years ahead of schedule. Until 2022, Japan had an informal cap on defence spending around 1 per cent of GDP, an indication of how quickly thinking on defence has changed in recent years.A new five-year defence spending plan is expected at the end of 2026.Committing to 3.5 per cent could unsettle market players wary of large debt issuance, even though Takaichi has pledged to follow a “responsible, proactive fiscal policy.” Borrowing costs for the Japanese government are rising with bond yields hovering near three-decade highs.The benchmark 10-year note’s yield hit 3 per cent earlier in September for the first time since 1996, driven by concerns over inflation and fiscal spending as well as expectations the Bank of Japan may need to raise interest rates more quickly.The yield was half that level around this time in 2025.US defence officials have largely avoided public pressure on Japan to commit to a 3.5 per cent defence spending goal, but they have made clear that they expect significantly more investment.“We are anxiously looking for Japan to step up,” US Under Secretary of Defence for Policy Elbridge Colby said in August of Tokyo’s defence spending.In June, Takaichi’s ruling Liberal Democratic Party noted that 3.5 per cent had become a global standard for defence spending, but didn’t provide recommendations on how Japan could pay for such a level of outlays.In meetings between defence officials from both nations, Japan has indicated it will most likely align with other US allies but it has avoided discussing details, according to the people, who requested anonymity because of the sensitivity of the matter.Some Japanese officials have said they aren’t ready to make a formal pledge and would deny the existence of such a goal if it was made public, according to these people.In public, Defense Minister Shinjiro Koizumi has said spending will be determined by military needs rather than monetary targets. Japan’s Defence Ministry didn’t immediately provide a response to a request for comment. The Pentagon declined to comment.Behind Japan’s caution over specifying a goal is concern over the amount of funding needed to reach 3.5 per cent.When Japan set its 2 per cent goal in 2022 it said it would continue to measure spending in comparison to GDP that year.Koizumi said in April that defense spending and related expenditures for this fiscal year of ¥10.6 trillion (S$87.15 billion) were equivalent to 1.9 per cent of nominal GDP in 2022. Measured against the Cabinet Office’s nominal GDP forecast for this fiscal year, spending would come to 1.5 per cent, he said.A budget of 3.5 per cent using that forecast would amount to ¥24 trillion, more than double the current amount.Spending 3.5 per cent of GDP on defence has become a global benchmark for US allies since North Atlantic Treaty Organisation members pledged last June to reach that level by 2035. As a national security hawk and strong advocate of the US-Japan alliance, Takaichi has made clear she wants to further boost the military. “Japan needs to proactively pursue a fundamental strengthening of its defence capabilities,” she said in Parliament in 2026.But she also has ambitious plans for the economy.Takaichi in 2026 announced a growth plan targeting more than ¥370 trillion in combined public and private investment by 2040, a programme that may strain the nation’s finances.Ramping up defence spending at the same time may test investors’ confidence in Japan’s ability to keep a lid on its debts.After lifting its informal cap on defence spending in 2022, Japan has made significant investments in long-range strike capabilities such as land and ship-launched Tomahawk missiles.In its budget request for the fiscal year starting next April, the Defence Ministry requested a record ¥8.9 trillion for the next fiscal year, up 0.9 per cent from the current year.But many items in the budget request haven’t been given a projected cost, meaning the budget is likely to be much higher.Yen weakness has also eroded Japan’s spending power for weapons from overseas. Even if Japan commits to 3.5 per cent, it would lag behind NATO countries.For NATO, the target is for so-called “core” defence spending, such as weapons and troop salaries.Members have also pledged an additional 1.5 per cent of GDP for defence-related spending, such as protecting critical infrastructure.Japan bundles core and non-core spending in its defence budget, meaning that it would be spending less on its military as a percentage of GDP than NATO countries even at 3.5 per cent defence spending.Robert Ward, Japan Chair at the International Institute for Strategic Studies, said the groundwork had been laid among policymakers and bureaucrats in Japan for a big jump in defence spending. It’s now mostly a matter of timing of when Japan goes to 3.5 per cent, he said.“Whether it’s over five years or 10 years, I don’t see any alternative given how important the US alliance is,” Ward said. BLOOMBERG