US Air Force photo/Samuel King Jr.
- A 10% drop in the yen since December has forced Japan to scale back defense spending, Reuters reported.
- The currency's decline has boosted the cost of US-made weapons that Japan plans to procure.
- In response, Japan is prioritizing frontline weapons and spending less on support systems.
Japan is scaling back plans for its largest military build-up since World War II, after weakness in the yen raised the cost of US-made defense equipment, sources told Reuters.
When the $320 billion budget plan was first announced in December, its estimated price tag was based on a 108 yen-to-dollar exchange rate, according to the report. But the currency has since slid more than 10%, dipping to 151 earlier this week.
And because the defense ministry doesn't hedge against foreign-currency volatility, it must shoulder higher costs for top acquisition programs like the F-35 stealth fighter and Tomahawk cruise missile, the report said.
In response, Japan is prioritizing outlays on US-made frontline weapons that would be key in any conflict with China, sources told Reuters.
The tradeoff is less money for secondary equipment, such as support aircraft. For instance, an expected order of 34 twin-rotor Chinook transport helicopters was pared to 17 in next year's budget request, given that their cost rose by about 5 billion yen each. Around half the increase was due to the weak yen.
And the purchase of two ShinMaywa Industries US-2 seaplanes was also scrapped as the aircraft's price almost doubled from three years ago.
The historic military build-up is in response to rising geopolitical tensions that require the US ally to prepare for any potential conflict with China.
Meanwhile, the yen's plunge results from ultra-loose monetary policy in Japan, as record low yields in the country have pulled down its competitiveness against other global markets. That's as other central banks like the Federal Reserve have become more hawkish, making overseas assets more attractive.
Though the Bank of Japan has recently eased its yield curve control — a unique measure that restricted yields from climbing — analysts have suggested that this isn't enough. In a recent note, Deutsche Bank outlined that yen volatility will continue until the central bank lifts interest rates and sheds its quantitative easing campaign.
Since the start of this year, the yen has plunged 12% against the dollar.