By Rocky Swift
TOKYO (Reuters) – Japanese companies overwhelmingly support increased defense spending amid an escalating sword clamor in Asia, a monthly Reuters poll reported on Thursday, also showing that half of companies expect a weaker yen to hit profits.
North Korea has conducted seven ballistic missile tests since September 25 and last month declared itself a nuclear weapons state. Meanwhile, Chinese warships have made frequent raids in Japanese waters, and fears remain that Beijing will try by force to seize democratically governed Taiwan, which it claims is Chinese territory.
Amid these threats and escalating geopolitical tensions in the wake of Russia’s invasion of Ukraine, Prime Minister Fumio Kishida has pledged to “significantly” boost defense spending, which remains within his ruling party’s target of 2% of GDP.
The latest Reuters poll showed that 81% of Japanese companies support raising defense spending to this level. 67% of companies said they should pay for this with reallocation from existing funds, the most common answer among options that included options for various tax increases.
This was the first time the question about the size of the defense budget had appeared in a Reuters poll, but the result showed a marked change from an August 2018 poll when 23% of companies said defense budgets should be cut to pay for infrastructure investment.
A manager at an industrial ceramics company wrote, responding to his name on condition of anonymity: “In these turbulent times when some authoritarian states continue to carry out nefarious acts, there is no doubt that we must take action to protect ourselves.”
During the time period of the last survey, North Korea launched a ballistic missile that passed over the Japanese mainland for the first time in five years. And in a survey last month, three-quarters of companies said they were concerned about a geopolitical crisis over Taiwan.
The rapid depreciation of the yen continues to weigh on business sentiment at companies and their resources to consider wage increases that have served as a key platform for the Kishida management.
The yen has been hurt by the growing gap between US and Japanese interest rates, having lost about 20% of its value against the dollar since the beginning of this year. The yen topped 146 against the dollar on Wednesday, surpassing a 24-year low that prompted Japan to intervene in the markets last month to bolster its currency.
Half of the companies surveyed expected a weak yen to hurt profits through the end of January, compared to 29% who had expected it to increase profits.
That’s little changed from a Reuters poll in April, when 48% of companies expected a weaker yen to hurt earnings, versus 23% who expected an increase.
Among those affected by the weak yen, 64% said they were adjusting by raising prices, the most common response. Diversification of raw material sources was cited by 28% of companies, the same percentage that said they use energy and labor conservation efforts.
Three-quarters of companies, surveyed before the yen hit a new low this week, said they could not offset the currency’s decline beyond the 145 mark.
“Currently we are responding by passing on higher prices, but we have come to the point of tolerating higher prices, and this could be a major factor in declining profits in the future,” said a manager at a wholesale company.
With regard to employee wages, 61% of respondents said they were considering increases but had not yet decided on this level. The rest said they did not plan for wage hikes or increases of 5% or less.
Only 23% of respondents said current business conditions are good, with 21% expecting the business environment to be favorable during January.
The Reuters Corporate Survey, conducted by Reuters Research, included 495 large Japanese non-financial companies on the condition of anonymity, which allowed them to speak more freely.