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 Chinook

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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Fool contributor Katie Spence has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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