Preface
The Opportunity Knocks Series spotlights emerging opportunities for collaboration between Australia and Japan, set against the backdrop of shifting economic and geopolitical currents. The Japanese saying Ku areba raku ari (苦あれば、楽あり'There are hardships and there are delights') aptly encapsulates this duality of challenges and opportunity.
The Series has emphasised Japan’s commitment to a new economic model that integrates technology, environmental and social dimensions and responsibility. It has focused, too, on Australia’s pivot towards renewable energy and efforts to enhance economic complexity moving beyond its reliance on traditional raw material exports. These developments have positioned both nations, already historically strong economic allies, to further enhance their bilateral relations.
The first three reports of the Series identified potential collaborations in startups and innovation, renewable energy and the trend towards expanding Japanese direct investment in Australia beyond traditional sectors. This fourth report focuses on opportunities within the defence industry, highlighting how progress in this area not only enhances mutual prosperity and security, but also strengthens the ties between Australia and Japan.
Value in Motion: Australia’s next boom
For the first time in modern economic history, Australia’s prosperity could hinge less on what it digs up, grows or builds—and more on how it reconfigures traditional industries into entirely new forms of value.
Introduction
Australia today lives in a less predictable international order.
Rising global tensions, the waning willingness of the US to act as a global peacemaker and the rise of territorial conflicts has nations across the world reviewing their defence capabilities.
The changing environment has countries looking to boost spending and kick-start homegrown defence industries, as well as looking to partners and allies to accelerate their capabilities through sharing knowledge and hardware.
Australia and Japan, traditionally reliant on the US defence umbrella, are now under growing pressure from the Washington to assume a greater share of joint defence responsibilities with the US recently calling on Australia to increase defence spending to 3.5% of the GDP from 2% currently1. Simultaneously, many nations face domestic calls to enhance their own defence capabilities, reflecting a shift towards increased self-reliance in a changing geopolitical landscape.
We argue that a collaborative approach will help.
“Over half a century ago, the transformative investment by the Japanese trading company Mitsui in Western Australia’s Pilbara region acted as a catalyst for the development of Australia's iron ore industry, which remains a cornerstone of the Australian economy and continues to underpin the nation’s prosperity today. Similarly, Japan has been pivotal in development of Australia’s LNG export industry. There is potential for defence to be the next area of mutually beneficial collaboration.”
As Japan increasingly focuses on developing an export market for its defence capabilities, Australia would benefit from a secondary defence partnership beyond the prominent AUKUS alliance with the US and the UK.
Expanding the growing defence co-operation between Australia and Japan to encompass industrial collaboration—alongside joint exercises, interoperability, and intelligence sharing—offers a logical pathway to bolster both nations' capabilities and foster long-term security and economic benefits.
Australia and Japan have previously explored defence material collaboration, encountering a notable setback when the Australian government opted, in 2016, to proceed with the now-cancelled $50 billion French tender for its new submarine fleet.
The selection in August of the Japanese government backed Mitsubishi Heavy Industries (MHI) bid to build Australia's planned fleet of 11 next-generation frigates shows both nations have put the submarines fiasco behind them and is clear proof of deepening collaboration and aligned strategic direction.
The views from the two governments on announcing the deal reinforce this view. Australian Defence Minister Richard Marles noted, “there is no country in the world with whom we have a greater strategic alignment, and that is being reflected in a really blossoming defence relationships.” Japan’s Defence Minister Gen Nakatani said the selection was “a testament to the trust in Japan’s advanced technological capabilities and the importance of interoperability between the Self-Defence Forces and the Australian military”. 2
Beyond this pivotal deal, there are significant opportunities for Australia and Japan to further expand their collaboration not only in defence-related areas such as drone technology and missile defence, but also across other key industry sectors in the Australian economy. It would be in Australia’s best interest to capitalise on this strengthened partnership to foster the development of new industries identified as of importance to Australia, such as space and advanced manufacturing.
After all, over half a century ago, the transformative investment by the Japanese trading company Mitsui in Western Australia’s Pilbara region acted as a catalyst for the development of Australia's iron ore industry, which remains a cornerstone of the Australian economy and continues to underpin the nation’s prosperity today. Similarly, Japan has been pivotal in development of Australia’s LNG export industry. There is potential for defence to be the next area of mutually beneficial collaboration.
This report examines the driving factors behind this nascent defence industry collaboration, outlines its likely outcomes, and identifies challenges that must be addressed to realise its significant potential.
Value in Motion: Defence industry
Optimised transformation in defence to maintain long-term resilience More
The global backdrop
The so-called Pax America, the era of US dominance in the Indo-Pacific, fostered a degree of complacency among other nations in the region in terms of maintaining their defence capabilities.
That’s now given way to a growing awareness of the threats and consideration of ways to counter them.
The rise of China economically and militarily had already created the impetus for a rise in defence spending in Asia, and Russia’s invasion of Ukraine and President Trump's direct pressure on NATO allies to re-arm have had the same effect in Europe.
The shift in posture under the second Trump presidency to a more transactional relationship with allies has put pressure on Australia and other nations to increase defence spending.
Ongoing and escalating tensions in the Middle East will also lead to increased weapons spending in the strife-torn region.
In the Asia Pacific, fears over a future conflict in Taiwan and the Korean peninsula are a key defence consideration for the US and its allies.
Not surprisingly, against this backdrop, global defence spending shot up by 7.4% in 2024 to total $US2.46 trillion, with the average share of defence spending to GDP now 1.94%, up from 1.8%, according to data from the International Institute for Strategic Studies.3
A recent paper from Australia’s Parliamentary Library found that the Stockholm International Peace and Research Institute (SIPRI) had highlighted a 37% global increase in military spending over the last decade, with 2024 marking the single largest increase since the end of the Cold War.4
SIPRI expects this record to be exceeded in 2025.
Japan’s defence capability and gradual shift towards exports
Japan has significant self-defence capability with a large and well-equipped maritime self-defence force. Japan has strength in shipbuilding, aeronautics, sensors, high tech materials and other areas.
Source: SIPRI Arms Industry Database6
Until recently, though, it hasn’t really exported its defence technology as it has been hamstrung by constitutional bans and legislative restrictions.
Amid the deterioration in the security environment, Japan has moved to revitalise its defence industrial sector with strong policy support and subsidies from government, and greater involvement of the private sector.
A series of legislative and policy changes, introduced amid a shift in sentiment from the Japanese public away from a purely pacificist approach, has allowed Japan to begin exporting defence equipment and joining joint defence projects such as the next-generation Global Combat Air Program (GCAP) fighter aircraft (with the UK and Italy) and joint missile technology development with the US.
Most recently Japan agreed to export used Japan Maritime Self-Defence Force destroyers to the Philippines allowing that nation to bolster its deterrence against China’s maritime expansion and territorial incursions.
This kind of deal in which Japan seeks to benefit commercially while achieving a strategic advantage by bolstering the capability of a broadly aligned nation, is expected to become more common.
But the Royal Australian Navy frigates deal is a step change in approach for Japan because it involves both technology transfer and joint productions. It’s a clear sign of Japan’s willingness and capacity to join the ranks of top tier defence export nations.
One advantage Japan has in exporting ships is the high capacity of its shipyards at a time when the US, in particular, is constrained in this respect.
The high-tech Mitsubishi Heavy Industries shipyard at Nagasaki is turning out two Mogami class frigates a year, whereas US shipbuilding infrastructure has been allowed to decay.
“Under current circumstances, the US cannot build a sufficient number of ships to export a significant number to its allies. This is unlikely to change, as the FY25 US defence budget is the lowest since 1940 relative to the US gross domestic product (GDP),” a 2024 Hudson Institute report notes.7
In reality, outside of the Second World War, the US has never been a major exporter of naval vessels and its own fleet is beginning to diminish in size.
The AUKUS agreement binding the US, the UK and Australia will see that change through the export of the Virginia class nuclear submarines, but already capacity constraints in the US are casting a shadow over the deal.
Source: S&P Global Market Intelligence8
*including all bulk carriers, dry cargo and passenger ships and tankers
Japan on the other hand is expanding its fleet – building 11 Mogami ships in the past six years - and has capacity and capability advantages that will allow it to pursue export sales to like-minded nations such as Australia.
Australia’s defence needs and how they are expanding
The conditions that allowed Australia to underspend on defence and run down its capacity are now firmly in the rearview mirror.
While Australia has only committed to modest rises in defence spending (from 2% to 2.4% by 2033/34) as a share of GDP despite President Trump’s exhortations, the reality is that it will inevitably have to climb steeply.
The AUKUS project involves spending some $368 billion over 30 years, while the project that offers the most immediate opportunity for Japan-Australia collaboration, the frigates project, involves a $10 billion commitment for the initial capability over the 10 years.
Australia’s defence capability has numerous holes that need to be plugged. A report by the Australian Strategic Policy Institute report on Australia’s defence readiness nominates a series of areas that need to be bolstered including:9
Recruitment and retention challenges in our defence forces
Expanding the defence industry workforce to boost sovereign capacity and import dependence
Insufficient stocks of guided missiles
Need for integrated air and missile defence systems for our northern bases
Japan may be well-positioned to help address some of these gaps for Australia, particularly in creating a larger and well-trained defence industry workforce. The MHI deal involves constructing eight Mogami-class frigates in Western Australia, which is expected to create a substantial number of the estimated 10,000 high-skilled jobs tied to the Australian government’s $55 billion investment over the next decade in the Royal Australian Navy’s surface combatant fleet program.
Source: Parliament of Australia10
Australia's decline in domestic manufacturing, particularly in the defence sector, poses a challenge to national security and economic resilience. Reliance on imported defence equipment leaves us at the mercy of supply chain disruptions and geopolitical shifts.
A localised defence manufacturing base can mitigate these risks by ensuring critical capabilities are readily available and maintained nationally with benefits including creating highly skilled jobs and revitalising local economies.
It is vital for the Australian Government to continue to facilitate local production as it accelerates its efforts to plug capability gaps for the defence of Australia. The Government’s $170 million Defence Industry Development Grants program is designed specifically to develop advance manufacturing capability in areas critical to Australia’s sovereign defence capabilities, and by doing so creating new highly skilled jobs and boosting innovation and developing independent defence manufacturing capabilities without heavy reliance on overseas providers.
And Defence must find a way to bring the smaller companies in Australia’s defence manufacturing sector into the tent so they share in the benefits of major transnational defence initiatives such as the AUKUS submarine project, the frigates project and other major procurements in the future.
Defence Supply Chain
The need for a streamlined and integrated supply chain is paramount to enhance operational efficiency and ensure the readiness of military forcesDownload
Key areas for Japan-Australia defence collaboration
There is obviously fertile ground for Australia-Japan collaboration in defence in replacing surface ships, which we detail extensively in this report. Other areas examined include drone technology and missile defence.
Surface ships
Australia has been caught napping in terms of the deterioration of the security environment in the region and, for an island nation, is very under-resourced in terms of naval assets.
Its three front line Hobart Class air warfare destroyers require updates that could take them out of the water for years, while its seven remaining ANZAC Class frigates have begun to be decommissioned.
It is belatedly moving to remedy this capability gap and move past the failures of naval projects of the past including the bungled submarines tender and the Hunter class project (the replacement for the ANZAC class ships) where the adaptation of a UK design has seen major cost blowouts and a decade of delays.
A key part of that is the AUKUS submarines project, where Australia is partnering with the US and the UK under a new defence framework to acquire Virginia class nuclear submarines.
Through the general purpose frigates tender, Australia is progressing with acquiring a fleet of vessels capable of guarding sea lanes, ports and merchant ships, with the majority to be built in Western Australia, creating a national hub for naval shipbuilding and valuable sovereign capacity in this area.
The selection of the Japanese bid for the general-purpose frigates program (in preference to the ThyssenKrupp Marine Systems bid from Germany) is a step-change in Australia-Japan defence collaboration. It will the strengthen the defence relationship and bind our destinies in a security sense. For Japan it is pivotal, as it will be first major bilateral defence export project of scale that will involve technology transfer. And Japan will want to make sure that this doesn’t end up as a once-off project.
The first of three ships will be built in MHI’s Nagasaki shipyard, with the maiden vessel in service and in Australian hands by 2029. Given burgeoning trilateral defence efforts involving Australia, Japan and the US – with US marines stationed in the Northern Territory in Australia and the three countries key to the growing program of joint military exercises – interoperability was a key focus in selecting the Mogami class.
Japanese journalist and defence scholar Kosuke Takahashi said [in an interview for this report] it was difficult to overstate how significant this project was for Japan.
“It will mean Japan-Australia collaboration will be significantly increased. The two nations will almost be allies,” Takahashi-san said.
“Given the degree of uncertainty in the region the two nations must work together because we can’t necessarily rely on the US.’’
MHI and Japan’s Ministry of Defence have promised there will be no delays or cost blow outs with the construction of the ships. MHI executives have made numerous visits to the Henderson shipyards since early 2024, assessing options for training and technology transfer needs.
Under the terms of the contract, after delivering of the first three frigates, production will be transferred to Western Australia’s Henderson shipyards for local builds.
The Mogami class frigate is known for its high degree of stealth (from a radar and infrared detection point of view), along with its automated systems (allowing for a crew of just 90 personnel) and anti-submarine and surface warship capabilities.
A recent research paper by a panel of defence scholars for the US Studies Centre at the University of Sydney said the deal with Japan would be a major boost for defence collaboration:
“No single step would do more to advance [bilateral] defence industrial cooperation and promote interoperability than Australia’s selection of Japan to build the RAN’s future frigate, to replace the aging ANZAC-class ships”. 11
Peter Yates, a prominent businessman who co-chairs the Australia Japan Business Co-operation Committee’s Defence, Security and Space Industry committee, said collaboration with Japan on export defence manufacturing was a win-win proposition.
“Australian and Japan have a proud track record of trade and investment collaboration going right back 1957.
“We’ve watched this relationship deepen in both the commercial and security spheres in recent decades.
"Working together on defence in a way that enhances Australia’s capability and helps put Japan on the map as a responsible and capable defence exporter is such an attractive proposition. The planets have certainly aligned for a collaboration that will bring our two nations even closer together."
Drones
The Ukraine war has provided numerous examples of the vital role drones will play in any modern conflict.
Drone technology is an area likely to receive focus in intensifying defence collaboration efforts between Japan and Australia, potentially involving the US. There have been discussions and indicative commitments on this front, but little concrete progress.
Subsea drones are reportedly being tested during the 2025 Talisman Sabre exercises being held in various parts of Australia and into Papua New Guinea during this southern hemisphere winter with Japanese forces among the 30,000 participating personnel.
Japan is anxious to leverage its capability with robotics, AI and sensors to enhance its role in creating so-called loyal wingman drones designed to fly alongside manned combat aircraft.
Australia has committed over the next 10 years to invest more than $10bn on the development and introduction of a range of cutting-edge airborne, surface and submarine drone systems.
While collaboration here clearly hasn’t moved beyond initial steps, drone and anti-drone technology is a fertile area for expansion of defence collaboration.
Missiles/missile defence
Iran’s recent missile attacks on Israel highlighted the importance of missile shield technologies with 90% of projectiles successfully intercepted.
In the Pacific theatre, the need is more for ship-borne missile defence and that’s based around the Aegis system developed by the US and deployed on US destroyers, as well as Japanese and South Korean naval vessels, and slated for Australia’s Hobart class destroyers.
Japan helped with development of the SM-3 Block IIIA interceptor missile which is deployed in their Aegis equipped ships and is likely to be in contention for the Hobart class vessels post upgrade.
With the need for Australia, the US and Japan to have the capacity to control sea lanes throughout Asia and the Pacific in the event of conflict erupting, having missile defence equipped naval vessels is vital and this is likely to be an area of collaboration.
Quantum technology
The Australian Army’s Quantum Technology Roadmap defines quantum technology as “a suite of emerging technologies that exploit the fundamental laws of nature to offer unprecedented capabilities in sensing, imaging, communications and computing”. 12
The Australian government actively invests in unlocking the transformative potential of quantum technology across various industries, including in defence where it offers decisive advantages in communication, cyber security and operation analysis and optimisation.
The 2024 Defence Innovation, Science and Technology Strategy calls for a collaborative approach in advanced capability development such as quantum technology by collaborating with industry, universities and research organisations from like-mined countries.13
The invitation extended last year by AUKUS partners to Japan for collaboration on advanced defence technology projects, including quantum technology under AUKUS Pillar II, presents a significant opportunity to deepen Australia-Japan partnerships in the development and application of quantum technologies within the defence sector.
Cultural challenges
Bridging cultural gaps is a vital part of any cross-border collaboration and these challenges are arguably magnified in a sector such as defence.
Marrying the Australian can-do approach to Japan’s more meticulous and risk averse approach has potential to create a winning formula for defence manufacturing.
But, taking the potential collaboration on frigates as an example, both sides will need to have a keen understanding of where the other side is coming from.
The now-cancelled Future Submarine Project between Australia and France’s Naval Group was marked by significant cross-cultural challenges that impacted operation and delivery, stemming from differences in both sides’ preferred ways of working and communicating.
“Part of the technology transfer baggage is having to explain what we do, why we do it this way, and it is not good enough to say you have to do it this way. If you said that, part of the know-how would have evaporated.” Jean-Michel Biling, Program Director, Naval Group, France
Source: SLDinfo.com14
For Australian contractors that will be about understanding the consensus-driven approach to decision making among their Japanese counterparts, and their keen focus on detail and mitigating a wide array of risks.
Source: PwC research
It will also be about being open-minded to the Japanese way – the success of MHI and other Japanese manufacturers is no accident, and buying into the way they do things can provide an uplift in quality and efficiency.
For Japan it may well be about taking a chance and recognising that some factors of the collaboration, as it shifts to local production, will be difficult to fully control. Without compromising on quality, ‘done’ sometimes beats ‘perfect’. Empowering local MHI staff to make decisions up to a particular level of criticality will be important.
Importantly, MHI - and the Mitsubishi Group more broadly – have a strong history and presence in Australia and the comments from their hierarchy and the Ministry of Defence clearly indicate a commitment to flexibility and making any collaboration work.
Conclusion
Australia is scrambling to address major deficiencies in its defence capabilities amid an ever more hostile global and regional security backdrop.
Japan has successfully enhanced its self-defence capabilities in recent years, as well as acquiring greater ability to project force in concert with allies. It operates a large, successful blue-water naval force and has significant advantages in defence technology and shipbuilding capability.
Japan is now positioned to help accelerate Australia’s defence capability with the most obvious and near-term example the frigates program. There is potential for future collaboration in drone technology and missile defence.
Japan has been late to the party in establishing a defence export industry, in part because of restrictions on exporting military IP and hardware.
Those barriers are being steadily dismantled and the frigates initiative gives Japan a landmark large and complex defence export project to stake out its position as a major defence exporter.
Australia has made a decision that will – all going well – rapidly plug a capability gap and enhance strategic collaboration with a trusted and active partner while boosting domestic defence manufacturing capabilities.
ESG in the defence industry
Can defence companies be compatible with an ESG investment focus?
By strengthening collaboration with like-minded nations such as Japan and its defence sector, Australia can tap into critical defence manufacturing expertise, paving the way to establish a sovereign defence industry base with “capable, resilient, competitive, and secure supply chains that integrate Australian businesses.”
Ideally, this will be the first step in a long journey of collaboration on defence hardware that leaves both nations safer and better equipped for the challenges that will come in a deteriorating security environment.
And the decision is poised to further cement Australia’s position as one of Japan’s premier destinations for investment, trade and technology sharing. It builds on the foundations of successful collaboration across mining and energy (spearheaded by Mitsui, Mitsubishi and other trading houses) and into retailing (Uniqlo and others), food and beverages (Lion and Asahi) and agriculture (various players). These ongoing transformative investments from Japan to Australia have delivered vital patient capital and foster innovation, driving reinvention across diverse industry sectors. Collaboration on defence shows just as much promise.
PwC’s Value in Motion research emphasises that future success will hinge on agility to harness new value pools, rather than relying on scale or legacy advantages. This insight is particularly pertinent to Australia’s defence industry and its ambition to build sovereign defence capabilities. Australia's geographical isolation, once considered a strategic advantage, is rapidly losing relevance in the face of advancing technologies and emerging threats – a perspective emphasised in the Australian Government's Defence Industry Development Strategy.15
By strengthening collaboration with like-minded nations such as Japan and its defence sector, Australia can tap into critical defence manufacturing expertise, paving the way to establish a sovereign defence industry base with “capable, resilient, competitive, and secure supply chains that integrate Australian businesses”. 16
Contact us
Jason Hayes
Partner, Asia Practice Leader and Ascent Program Lead, PwC Australia
Tel: +61 407 232 142
