Japan plans arms procurement agency to promote exports-sources

TOKYO Thu May 29, 2014 5:00pm EDT

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TOKYO May 30 (Reuters) - Japan plans to create an arms procurement agency to streamline Tokyo's spending on defence-related hardware that will also promote military exports and take charge of advanced weapons research, two people with knowledge of the developing plan said.

One immediate aim of the new agency would be to lower the outsized costs of buying equipment for Japan's military at a time when Prime Minister Shinzo Abe is looking to counter China's military build-up and bolster Japan's claims to disputed islands held by Tokyo in the East China Sea.

"The goal is to cut costs. It (the agency) is being created to improve how we buy things," said Akira Sato, a ruling Liberal Democratic Party lawmaker involved in formulating defence policy as Parliamentary Secretary of Defense.

Helping to win overseas business for defence contractors such as Mitsubishi Heavy Industries, the nation's biggest, would go some way to realising that ambition.

While arms procurement agencies exist in other nations, including South Korea and Australia, Japan's military purchases have been less coordinated because of legal and political limits on its military rooted in Japan's defeat in World War Two.

Abe has made a priority of initiating more robust armed forces and less apologetic diplomacy after decades of restraint under Japan's pacifist post-war constitution, and is calling for a review of legal limits on Japanese forces fighting overseas.

The new proposed agency taking shape under Abe would combine currently separate procurement activities for Japan's sea, land and air forces, according to the people involved in the planning, who asked not to be identified.

The yet-to-be-named agency will also include oversight of the Technical Research and Development Institute, Japan's main weapons research and development unit, with projects ranging from a home grown stealth fighter to electronic warfare systems.

Staffed by as many as 2,000 people, the agency could tap outside advisers at Japanese corporations and foreign consultants such as Deloitte and KPMG with expertise in managing global supply chains, according to a source involved in the planning.

Abe, pressing to give Japan's Self-Defence Forces a freer hand to come to the aid of allies in future conflicts, raised Japan's military spending by 2.6 percent over five years and invested in early-warning plans, beach assault vehicles and troop-carrying aircraft.

Because Japan's defence contractors have been largely barred from exports and restricted to selling small lots of aircraft, tanks and other equipment to Japan's armed forces, the costs per unit are often more than twice as much as those paid by other countries, according to industry experts in Japan.

BIGGER BANG FOR THE YEN

France's Direction générale de l'armement (DGA), which coordinates France's role in Europe-wide arms development projects such as the Eurofighter while supporting French exports and evaluating equipment for use by the nation's military, has been a model for the proposed Japanese agency, the sources said.

In March, Japan eased a ban on military exports that could open new markets for companies such as Mitsubishi Heavy and Kawasaki Heavy Industries.

One goal of that move, officials have said, was to bring down costs for Japan's military by creating a larger market for key equipment.

Japan's participation in international projects so far has been limited to a handful of exceptions to export restrictions.

Among the projects the new agency will likely inherit is Japan's participation as a supplier to Lockheed Martin Corp's F-35 fighter jet, a nine-nation consortium, including firms in the United States, Britain, Italy, Turkey, Canada, Australia, Denmark, Norway and the Netherlands.

One goal of a new procurement agency will be to win a bigger portion of work for Japanese companies on the project, one of the sources said.

Mitsubishi Heavy is expected to supply F-35 parts to Britain's BAE Systems, which builds the rear fuselage of the stealth jet, sources told Reuters in January, placing a Japanese company in an international military project for the first time.

Another major project is the joint development of an upgraded U.S. anti-ballistic missile, the SM-3 IIA, designed to destroy warheads above the earth's atmosphere. Japan is looking to deploy the anti-missile defence against a possible strike from North Korea, officials have said.

With flight tests set to begin soon, a final decision on production could hinge on Japan's willingness to allow sales to third countries deemed acceptable by the U.S. government, say defence industry analysts.

In the 20 years to 2012, Japan was the sixth-biggest military spender in the world, according to the Stockholm International Peace Research Institute. China, by contrast, leapt to second place from seventh after it hiked its defence spending more than five-fold. (Editing by Mike Collett-White)

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