The relationship between China and Japan is continuing to rapidly deteriorate. So it's no surprise that Japan approved a budget that'll increase defense spending for the second consecutive year, and "build a comprehensive defensive posture that can completely defend our nation."
More importantly, Japan's defense budget calls for an increase in intelligence, surveillance, and reconnaissance, or ISR, which could include the acquisition of three of Northrop Grumman's (NYSE:NOC) Global Hawk drones. One of the reasons Japan wants to improve ISR? China is building nuclear submarines, capable of launching a ballistic missile.
Submarines and drones
According to Defense News, a draft report from the U.S.-China Economic and Security Review Commission found that China's sea-based nuclear deterrent is nearing initial operational capability. Further, Defense News reported that China is building "two new classes of nuclear submarines -- the Type 095 guided-missile attack submarine (SSGN) and the Type 096 SSBN. The Type 096 will likely 'improve the range, mobility, stealth, and lethality' of the [People's Liberation Army Navy's] nuclear deterrent." In other words, China is building nuclear submarines capable of firing ballistic missiles.
Additionally, the International Institute for Strategic Studies, or IISS, states, "Between 2001 and 2011, real annual increases in [China's] defense budget averaged 10.3%." Further, in 2013, China's defense budget was second only to the United States. Consequently, Japan is taking action.
According to Japan's 2014 defense budget overview, Japan's objectives include "strengthening ISR capabilities; responding to attacks on remote islets; responding to ballistic missile and guerilla/special force attacks; responding to cyber attacks." To help, The New York Times reports, "Japan will station more early warning aircraft in Okinawa and buy three unarmed Global Hawk drones for surveillance." That's great news for Northrop.
In addition to the drones, Japan plans to upgrade its Airborne Warning And Control System, or AWACS, which benefits Boeing (NYSE:BA), and purchasing Lockheed Martin's (NYSE:LMT) next-generation F-35A.
What to watch
The deteriorating relationship between China and Japan is no laughing matter. Further, Japan stated that "China is attempting to alter the status quo by force in the skies and seas of the East China Sea and South China Sea and other areas based on assertions that are incompatible with the established international order." That's why Japan is responding by strengthening its own military. Where this will end is anyone's guess, but the good news is U.S. defense contractors are likely to see a number of orders for their products. So while it's not good that China and Japan are at adds, it's still beneficial to defense contractors -- specifically Northrop Grumman, Boeing, and Lockheed.