China has an aircraft carrier -- and it's making Japan nervous.

As you've probably heard by now, Japan's prime minister Shinzo Abe announced a plan for massive rearmament of the island nation earlier this year. Through the end of the decade, Japan intends to invest more than $240 billion building up its Self-Defense Forces.

Boeing's P-8A Poseidon. If it looks a lot like a 737, there's a good reason for that. Source: Boeing.

Already, Japan has started buying Boeing's (NYSE:BA) new superfast subhunter, the P-8A Poseidon maritime surveillance aircraft. And this week, Japan confirmed what had previously only been speculated -- that it will be buying billions of dollars worth of additional military hardware from the U.S.

According to a statement from Japan's Ministry of Defense, Japan will also be buying:

  • At least 17 MV-22 Osprey tiltrotor aircraft, manufactured by a Boeing-Textron (NYSE:TXT) joint venture.

Japan thinks the Bell Boeing MV-22 Osprey might be just the right aircraft it needs to outfit its new fleet of "helicopter destroyers." Photo: U.S. Navy.

  • An unspecified number of Northrop Grumman's (NYSE:NOC) newest eyes in the sky -- the E-2D Advanced Hawkeye airborne early warning aircraft.

Two eyes in the sky -- E-2D Advanced Hawkeyes in flight. Photo: Northrop Grumman.

  • And a handful of Northrop's unmanned spy birds, as well -- Global Hawk drones.

Northrop Grumman's RQ-4 Global hawk drone is a lot bigger than you think. This lineup helps to lend some perspective. Photo: Northrop Grumman.

Look out Santa -- Japan's shopping list is getting bigger
And that's just for starters -- just the acquisitions that made the headlines on websites such as Flightglobal and Avionews this week. Elsewhere in Japan's now-published fiscal 2015 Defense Budget Request, we see mention of Japanese interest in acquiring:

  • "Ship-based" unmanned aerial vehicles -- apparently Fire Scouts from Northrop Grumman.
  • A half dozen of Lockheed Martin's (NYSE:LMT) stealthy F-35 fighter jets.
  • New, as-yet-undetermined, combat helicopters and amphibious coastal attack vehicles.
  • Additional PAC-3 Patriot missile defense systems from Lockheed and Raytheon (NYSE:RTN).
  • A brand new, Aegis air defense system-equipped guided missile destroyer (and the outfitting of a second, existing destroyer, with Aegis.

In short, there's a weapons-buying bonanza going on in Japan. And there are opportunities aplenty for U.S. defense contractors to profit from Japanese rearmament.

What it means to investors
Which defense stocks will benefit most from this new, more militarized stance in Japan? In large part, it depends on which weapons systems Japan ultimately buys, how many of them it buys -- and how much they cost. But all else being equal, we can at least give you a general idea of how profitable these defense businesses are, relative to each Japanese defense spending dollar they ultimately capture.

According to the financial analysis specialists at S&P Capital IQ, the most profitable U.S. defense contractors named above are, in order:


Operating Profit Margin

Projected 5-Year Earnings Growth Rate




Northrop Grumman



Lockheed Martin









* Boeing gets the bulk of its revenues from its Commercial Airlines business. The firm's defense businesses, in general, are somewhat more profitable than Boeing as a whole -- 9.7% operating profit margin.

As you can see, Raytheon currently operates the most profitable defense business in the industry while Textron is the defense contractor with the greatest room for growth. If you're looking for a way to play the growing trend of Japanese rearmament by making some timely investments in the defense industry, I suspect these two stocks will be a great place to start.