This article aims to contribute to an understanding of the Japanese defense industry, focusing mainly on its structural characteristics. To analyze this topic, it employs the structure-conduct-performance paradigm for industrial organizations. The article also examines Japan's national security policy in the postwar period as one of the factors that influences the formation of the industry. Journalists and scholars have researched the Japanese defense industry in the past; however, we are still in the earliest stages of being able to account sufficiently for the structural characteristics of the industry, which features close-nit relationships between the sole buyer and the very limited number of suppliers. In addition, this paper tries to combine a micro-level approach such as industrial analysis, with a security analysis which requires macro-level approach.
The first section examines the characteristics of the buyer (i. e., the Japanese government and the Japan Defense Agency) by reviewing the Japanese defense procurement system from the following aspects: regulations stipulated by the government and the agency, source selection, and contract type. These business terms and conditions, all of which are barriers of entry into Japanese defencse market, tend to restrict defense contractors to a limited number of firms. In other words, these firms are protected in the closed market where the fixed relationships between the government and the suppliers provide the noncompetitive mechanism of the procurement system.
The second section reveals the uniqueness of the Japanese defense firms. This paper points out, as the features of the Japanese defense industry, that; 1) the Japanese market is occupied by highly concentrated firms at the aggregated level; 2) major prime contractors have cooperatively and routinely shared works in accordance with policy implementation and administrative guidance by the Ministry of Economy, Trade and Industry and the Defense Agency; 3) business transactions between a prime contractor and subcontractors are likely to be made through the cooperative organizations which could lead to long and stable relationships between the upper-tier firms and the lower-tier firms. Judging from these aspects, it can be said that the Japanese defense industry is disposed to the noncompetitive structure, which is described as a rigid structure in this paper.
To determine the reason for the rigidity, the Japanese security policy in the postwar period is examined in the third section. In general a government which is a sole buyer in a defense market has a great influence on defense acquisition, and its intervention in the defense industry can be justified on the grounds of the importance of national security. The weapons acquisition process in Japan features budget primacy, followed by achievement of a quantitative target of a defense buildup plan within the restricted budget. New weapons systems are seldom acquired in Japan's defense buildup planning; rather the planning gives priority to the replacement of the obsolete systems with the new ones. Coupled with the small demand in the Japanese defense market due to the government's principle of banning export of weapons, the uniqueness of the weapons acquisition process would make the structure of the industry rigid. Estimation of the future demand for defense equipment would be easy and likewise, Japan's defense budget has been stable. These features enable the defense production programs to be deliberately allocated to a limited number of companies, leading to fixed relationships between the buyer and the suppliers.
The Japanese government has maintained the Security Treaty with the United States as the critical part of the fabric of Japan's security policy throughout the entire postwar period. The reliance on U. S. military capabilitgy and presence under the bilateral security system has directed Japan's defense
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