Japan vs. China: Tensions Rise and the Race to Arms Surges

F-35A. Photo: Lockheed Martin via Northrop Grumman.  

Recently, Japan approved a budget that'll increase defense spending for the second consecutive year. This news, of course, didn't go over well with China. However, considering the International Institute for Strategic Studies, or IISS, estimates that China's defense spending is second only to that of the United States -- and could eventually surpass it -- China's complaint is reminiscent of the pot calling the kettle black.

China doesn't see it that way, as the tension between Japan and China has continued to escalate. How will this all end? For now, we don't know. But one thing we do know is the race to arms is great news for defense contractors. Here's what else you need to know.

Pile on the weapons
China and Japan have been at odds for quite some time, thanks in part to a hostile dispute over the Senkaku Islands. This dispute has led to a number of confrontations between Japanese and Chinese ships in that area. Further, tensions took a turn for the worse following China's recent declaration a maritime air defense zone over the East China Sea.

Boeing's Chinook. Photo: Ronnie Macdonald via Wikimedia Commons.

In response to the deteriorating relationship between China and Japan, Japan announced the need to improve its national security. This includes, but is not limited to, improving its Airborne Warning and Control System, purchasing the CH-47J Chinook, and upgrading its F-15s -- all of which would benefit Boeing (NYSE: BA  ) ). Japan also plans to purchase Lockheed Martin's (NYSE: LMT  ) next-generation F-35A and acquire a number of PAC-3 missiles, also built by Lockheed.

In all, Japan plans to raise its defense spending by almost 5% over the next five years, and as The New York Times reports, "Much of the new spending will go to strengthen Japan's ability to monitor and defend southwestern islands, including those in dispute with China."

China throws a fit
None of that is what China wants to hear, and it responded by strongly condemning Japan's defense budget increase. But considering IISS reports that "[b]etween 2001 and 2011, real annual increases in [China's] defense budget averaged 10.3%," the outrage China's expressed over Japan's increased budget seems a bit two-faced. Still, China's outrage remains, and tensions continue to build.

What to watch
China isn't considered a U.S. ally, and the extent of China's military force is unknown. That makes the deteriorating relationship between Japan -- which is a U.S. ally -- and China all the more problematic. However, the good news is that Chinese Premier Li Keqiang said at the East Asia Summit in Brunei, "China and ASEAN [the Association of Southeast Asian Nations] have agreed that the disputes in the South China Sea should be resolved peacefully through consultations and negotiations between countries directly concerned." Still, until a peaceful agreement is met, these are just words. In the meantime, the tension between China and Japan is good news for defense contractors. And if things escalate, it could prove to be even more lucrative. Consequently, this is something to watch.

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Read/Post Comments (18) | Recommend This Article (27)

Comments from our Foolish Readers

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  • Report this Comment On January 04, 2014, at 2:40 PM, Rolland wrote:

    Well what's good enough for Japan should be good for Germany.

  • Report this Comment On January 04, 2014, at 4:48 PM, quacker wrote:

    and we are right in the middle of it

  • Report this Comment On January 04, 2014, at 7:37 PM, Sharad wrote:

    I use my PC laptop because I can write and print things, watch movies on DVD's, listen to CD's. How could anyone use anything smaller with ease and comfort if they kill the PC in the market? I cannot imagine anyone typing at the work place on a small hand held gadget with any comfort as a PC. Please someone describe to me this new invention that will replace the PC. If the corporate moguls and stock market kill the PC, they are phasing out something that I am very comfortable with. I believe this article and other's are brokers trying to get allot of people to invest in some new product with the " kill the PC" propaganda. Please correct me if I am wrong.

  • Report this Comment On January 04, 2014, at 7:41 PM, monrovia1847 wrote:

    Japan increasing its military spending and trying to rebuild it powerful military is bad news, not just for China, but for the US. History keeps repeating itself and our leaders keep repeating their mistakes... After Japan shall increase its military and build its capacipity to supremacy, next thing you know, they want the US out of Japan... Remember 50 years ago we were ally to China and Japan was the enemy, now China is our major threat and Japan is now the supposely friend...An arm race in Asia is bad news for the world.

  • Report this Comment On January 04, 2014, at 7:53 PM, Sharad wrote:

    I am amazed at the wealth of wisdom China once had that they should be two faced. They should be embarrassed internationally to sit and criticize Japan for building up its defense when they have been continually doing that same thing. China has some idea that everyone else in the world has to follow ethical World Trade regulations but they do not; involved with corporate espionage; cities air and aquifers and surface water supply extremely polluted, toxic levels of pesticide in produce. China must try and learn how to be friends with their neighbors in the world. They have been locked off for a very long time and now that other countries made them the second largest economy, they are stepping on everyone recklessly. They are still the poorest country in the world when you take into consideration 1 billion people in abject poverty. Only about one fifth the population of 1.4 billion are living an average income life.

  • Report this Comment On January 04, 2014, at 9:30 PM, wxianshu wrote:

    In year 2012,

    us military spending: 682.5 billion

    us population: 0.317 billion

    us territory area: 9.6 million

    us dollar per person: 2153

    us dollar per square kilometers: 71093

    China military spending: 166.1 billion

    China population: 1.363 billion

    China territory area: 9.7 million

    China dollar per person: 122

    China dollar per square kilometers: 17123

    Japn military spending: 59.3

    Japan population: 0.127 billion

    Japn territory area: 0.377 million

    Japan dollar per person: 467

    Japan dollar per square kilometers: 157294

    These numbers are provided for reaching your own more valid conclusions.

  • Report this Comment On January 04, 2014, at 9:59 PM, Kisorchand wrote:

    I wish everyone passing comments here in real facts. First I am a neutral Asian not a Chinese from the Indian ocean island. I just feel that everybody here seems to be superficial in passing thier comments here. The fact of the matter is that China is engaged intensively to upgrade its Defence related arsenals to be at par with the US and in the sideline, Japan comes in the picture with seeming tensions over the small islands in the China sea. But the loser in the long run will be Japan without any war but economic waste and its mismanagement of the its struggling economy. Ofcourse to some extent, US defence contractors will get boost in thier profits out of this. But the world has to realise that given the nature of its ongoing tension with Sino-jap tensions will give a clear legitimate reason to enhance more upgradation of its advanced arsenals from the Chinese side and China itself would find easier to manage with the comments of other powers with its legitimate reasons etc. so, finally its a real boost for China but loss of Japan economically in future by wasting its resources with no application

  • Report this Comment On January 04, 2014, at 10:25 PM, acoolguy wrote:

    To be fair, Japan provoked the tension first by nationalizing the islands. China responded by sending military vessels and declare air defense zone.

    In order for China to catch up with US defense budget, 100% of Chinese budget will have to be defense budget.

  • Report this Comment On January 04, 2014, at 10:27 PM, masterca44 wrote:

    Why not make a new country out of the islands, where both Japan and china will benefit? The islands have resources which both sides want. So instead of escalating a "playground monkey bar" war, wouldn't it be better to share and build relations between the two Countries? But in the end its a great excuse to build more Jets and weapons, I guess that's good.

    I for one promote making a new country on the islands and share the resources for the world to benefit.

  • Report this Comment On January 04, 2014, at 11:32 PM, knaplan wrote:

    Our government"s decision to arm Japan is very short-sighted. While our recovering economy might get a little boost from the arm sales, but those weapons may landed back on our Pear Harbor again in the future when Japan get back on its old military path. Look, the Chinese taught Japanese everything from agriculture to how to write, but Japanese turned around and killed so many Chinese during War Would II. Now we help Japan and arm them, when they are ready they will have no mercy to us just like they did to Chinese as well as to us in War Would II. Japan hate us for the War World II defeat. They never forget to revenge day. We need to elect someone who knows the history.

  • Report this Comment On January 05, 2014, at 9:34 AM, Mav2014 wrote:

    @acoolguy -

    To be fair? Those islands have been a part of Japan since before WWII, and were granted to Japan by NATO agreement following WWII.

    Yes, a private Japanese citizen who owned the property sold the islands back to the government. But that is hardly provocation to a nation that has no legitimate claim to the islands.

  • Report this Comment On January 05, 2014, at 1:50 PM, alanzee wrote:

    Chinas 9dash-line in south china sea is contrary to the United Nation Convention Law of the Sea or U.N.C.L.O.S..Now China is moving to East China Sea. China is referring to thier admiral Zhang who travelled these oceans in 15'th century but that dos'nt mean admiral Zhang fleet mastered these oceans but a deluded power hunger. Admiral Zhang a muslim re-settled in China. The chineese think that these ocean belong to china and it's even named by the English. Now the question is why the chineese want these oceans? Simple' China is already occufy Scarborough shoal which contain 250 Billion barrels of oil not including the Gas deposits of trillion of cubic feet.......

  • Report this Comment On January 05, 2014, at 2:09 PM, AmericanGuy wrote:


    The good indication should be based on the ratio of GDP versus military expense rather than population. Trying to provide others with wrong information is the method that China and other evil countries used in media, don't trust them.

  • Report this Comment On January 05, 2014, at 4:31 PM, piasabird wrote:

    Good thing China is not incresing its military budget and testing aircraft carriers in Indo-China International waters scaring everone by claiming all the Airspace as their territory.

    Oh well, I guess they are doing all those things. So why are we trading with China? Arent we feeding a beast?

  • Report this Comment On January 05, 2014, at 6:48 PM, Rasec101 wrote:

    Japan approved its defense budget aim at increasing its military machine to get even with the humiliating and unforgivable manslaughter of 800,000 Japanese lives committed by the US military during World War II when they carpet bombs cities of Japan for 100 days without let up and drove the final nails on the coffin by dropping Atomic bombs one in Nagasaki and Hiroshima to avenge the surprise Pearl Harbor carpet bombings which killed 10,000 US citizen.

  • Report this Comment On January 06, 2014, at 12:11 AM, Leek12345 wrote:

    China wants to rule the world again - WWII: Redemption.

    This exact same scenario happens with Vietnam and China over Maritime Defense and Islands -just that no one knew about it and it was 1000 times the intensity.

    If Ito was still alive, give him the fair share of 5S- Save some sources shock souvenirs

    At least the world is talking about this one...and the editor gets $50 bucks for this article written to be know.

    Fair share, fair game -everybody knows and help.

  • Report this Comment On January 06, 2014, at 12:50 AM, buffrat wrote:

    Before anyone "compares" Chinese defense expenditures to the US please consider that in the US military, pay and benefits take up approximately 60-65% of the budget. In addition, the construction of our equipment is undertaken by highlt trained and experienced individuals. Comparison of the pay scales (in US dollars)for soldiers and defense workers for monthly salaries are as follows.

    Chinese Private: Approximately 140 dollars

    American Private: Approximately 1,516 dollars

    Chinese Major: Approx. 1,400 dollars

    American Majors: Approx. 7.284 dollars

    Chinese 4 Star General: Approx. 2,400 dollars

    American 4 Star General" Approx. 15,000 dollars

    Chinese Defense Workers: Approx. 290 dollars

    American Defense Workers. Approx. 7,416 dollars

    Chinese Defense Industries: Primarily Government Owned

    American Defense Industries: Primarily Privately Owned

    (Sources: 2013 US Military Pay Charts , Asian News, and Bloomberg Magazine)

    When you consider the other benefits, overhead and other factors that go into privately owned business versus government owned business, the difference is quite significant.

    In essence, figures from China showing a much lower defense budget are misleading.

  • Report this Comment On January 06, 2014, at 8:19 PM, omalisa wrote:

    Simple... First come, first serve. No monkey business.

    The next thing after comparing is what.....WAR

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Katie Spence

Katie Spence has been a financial journalist for The Fool since 2011. She specializes in defense companies, “green" technology, autos, and robots. Follow her on Twitter for breaking news in the defense, auto, and robot industry.

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