Japan stuck with $1.6bn bill after scrapping Aegis Ashore system

TOKYO — As Japan prepares to officially halt deployment of the Aegis Ashore missile defense system, it faces the question of what to do about previously signed contracts with the U.S. worth 70% of its estimated total procurement costs.

Defense budgets through fiscal 2019 included 173.2 billion yen ($1.6 billion) in related contracts. Japan has signed a $320 million-plus contract with Lockheed Martin for radar systems, while the physical installations are being purchased through the U.S. government.

The total cost of planned procurements for the two batteries, including the radars and other components such as launch equipment, comes to about $2.3 billion. Having such a huge deal evaporate is unlikely to sit well with the U.S., which has under President Donald Trump pushed Japan to make big defense purchases.

Defense Minister Taro Kono told a lower house national security committee Tuesday that Tokyo and Washington would “properly discuss” the matter but made clear that Japan would be on the hook for some expenses.

“We don’t expect the expenditures to be zero. I apologize,” he said.

The fiscal 2020 budget earmarked more than $90 million for procurement of launch equipment. The remaining $600 million-plus for the installations that has not yet been budgeted will be put on hold.

Because of the limited number of players in arms manufacturing, prices tend to run high, and contracts are often paid out over several years. This is the case with Aegis Ashore. Payments for previously signed agreements are included in each year’s defense budget in much the same way as loan repayments.

Japan is procuring everything but the radars and launch equipment through Washington’s Foreign Military Sales program, which usually requires payment in advance rather than in exchange for goods received. Tokyo has paid about $115 million toward Aegis Ashore-related FMS purchase agreements.

The Defense Ministry estimates the total cost of the project, including 30 years of operating expenses, at roughly $4.2 billion.

Kono cited the cost of necessary overhauls as a major factor behind the suspension.

At one of the planned installation sites, the Defense Ministry had initially offered assurances that booster rockets carrying interceptors would fall within a Ground Self-Defense Force training ground rather than nearby residential neighborhoods. But it has since become clear that this cannot be guaranteed without significant modifications. Kono put the cost at more than $1.8 billion.

With negotiations with local authorities at both sites going nowhere, the government has not budgeted for land development and building construction for the batteries, for fear of a further backlash.

And the government’s cost estimates do not include missiles, which reportedly carry a price tag of nearly $30 million each. Adding in that expense could push the total cost of the project into the tens of billions of dollars, by some estimates.

In 2017, when the project was still in the decision-making stage, the ministry put the cost of each Aegis Ashore installation at about 80 billion yen. This was cheaper than a cutting-edge Aegis-equipped ship, which was one of the ministry’s selling points for the land-based batteries.

The Aegis Ashore project has highlighted issues with Japan’s defense procurement system. The price and delivery date of purchases through the FMS program are set at Washington’s sole discretion, which has contributed to Tokyo’s swelling defense spending. Japan’s defense budget topped 5.3 trillion yen in fiscal 2020, a sixth straight record high.

The Aegis Ashore deployment was a top-down decision by Prime Minister Shinzo Abe and Trump, who has pressured Japan to make pricey defense purchases to rebalance a bilateral relationship he has decried as unfair.

Relying on American-made gear carries risks, as any flaws could leave gaps in Japan’s defenses that Tokyo cannot address on its own.

“If we don’t make [defense equipment] in Japan, this sort of thing will keep happening,” former Defense Minister Gen Nakatani said Tuesday in a meeting of Abe’s Liberal Democratic Party.

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