`This situation cannot go on forever.' DEFENSE AGENCY OFFICIAL On cooperation in the industry

This is the last in a three-part series on the Self-Defense Forces and the munitions industry in Japan.

With billions of yen on the line, defense contractors eagerly gathered at an Air Self-Defense Force base in Gifu this month to view endurance tests on new engines of the PX patrol planes.

The next-generation PX aircraft and CX transport planes--projects worth a total 340 billion yen from the Defense Agency's development budget-are seen as the last opportunities for aircraft makers to win major domestic defense projects.

The end of the Cold War, the rigid rules of the government and the wave of global military transformation are now affecting Japan's so-called last protected industry.

However, Masahiro Yasue, director-general of the Defense Agency's Technical Research and Development Institute, enthused optimistically about the aircraft.

``We have bright expectations for the future that domestic production will continue to grow with the PX and CX,'' he said.

But a serious shift in the current trend must occur before overall defense production increases in Japan.

The number of contracts signed for front-line weapons peaked in fiscal 1990 at 1.07 trillion yen. But after the end of the Cold War, they have dwindled steadily. Contracts for this fiscal year, excluding those for a ballistic missile defense system, fell to 690 billion yen.

Many companies, like Doryo Co. of Fujisawa, Kanagawa Prefecture, are feeling the effects.

At Doryo's plant surrounded by farmland and rural residential neighborhoods, five of its 37 workers can detect irregularities on metal surfaces of just 1.5 micrometers with their fingernails.

The surface smoothness of wheel axles for tanks must be less than 3 micrometers. But machinery for private-sector products can only achieve a smoothness of 10 micrometers. The rest of the procedure requires the painstaking handiwork of such highly skilled workers.

Sales at Doryo grew throughout the 1980s. Its current sales, however, are about half of what they were in 1990.

The company has been approached about working on the next generation of tanks, a potentially lucrative project that a struggling defense company would jump at. But Doryo has yet to accept the deal because the project would require investing several hundreds of millions of yen in a new facility.

``For a company with only 600 million yen in total sales, failure would mean bankruptcy,'' said Yoshihiko Horaguchi, the Doryo president.

Another defense company that has seen revenue fall is Daikin Industries Ltd.

Sales at its Yodogawa plant, which manufactures artillery shells, have fallen by 20 percent from their peak--a decline of about 4 billion yen.

In an attempt to make up the losses with private-sector products, the plant has been revamping shell casings into oxygen cylinders for home use since 1996.

Company officials had hoped to cut costs by using down time for shell production to produce the cylinders. But their hopes were dashed after they learned they had to pay a ``defense-sector rental fee'' for using the production line and its workers on private-sector products.

Oxygen-cylinder sales also stalled at about 1.6 billion yen.

``While I can understand the need for thorough control because we receive tax money (for national defense products), the regulations become a hurdle to cutting costs,'' said Kenji Fukunaga, who heads the defense systems division at Daikin.

It is just one example of how stifling the state's control on the industry can be.

In 1970, the Defense Agency's basic policy for manufacturing and developing equipment was aimed at promoting domestic production. As a result, the list of top companies that receive Defense Agency contracts is virtually written in stone.

Of the top 20 companies, including perennial leader Mitsubishi Heavy Industries Ltd., only five have been replaced on the list over the past 15 years.

Because of the limited market, domestically made weapons are also more expensive than foreign products, but the extra costs have been accepted under the banner of ``maintaining the foundations for national security.''

One high-ranking Defense Agency official described the nation's defense industry as a communal bathhouse.

``The temperature of the bath that everyone is in together has been decreasing by 1 degree every year,'' the official said. ``But everyone says `let's stick it out a little while longer.' However, this situation cannot go on forever.''

Yuzo Murayama, business professor at Doshisha University, says Japan's defense industry has been slow to keep up with the times.

``Although reorganizing the industries with an eye toward survival has been proceeding at a rapid pace in Europe and the United States, nothing has occurred in Japan,'' Murayama said.

Of the 60 major defense firms in the United States in 1990, only four remained in 2001.

In September 2003, Japan's Defense Agency set up a committee chaired by its director-general to review the policy on producing domestic weapons and equipment.

The committee decided domestic production would only be maintained if a weapon met one of four conditions: It has a specific strategic nature; is classified; has special characteristics; or there is a need to maintain its production base.

Next summer, the committee is expected to decide on the specific areas and items covered by the new guidelines.

Industry officials, however, are pessimistic that the government can take the initiative to push through reforms.

That sentiment highlights the vast gap that exists between global trends and the situation in Japan.(IHT/Asahi: December 7,2004)