Japan approves record military budget to counter Chinese threat by Reuters @FortuneMagazine January 14, 2015, 4:51 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Japanese Prime Minister Shinzo Abe’s government approved a record $42 billion military budget on Wednesday, with outlays rising for a third year to counter China’s rising military might. It’s a development which could spell windfalls for U.S. defense contractors who are starting to feel the squeeze after a decade of generous government orders against a backdrop of wars in Iraq and Afghanistan. Japan’s draft budget for the fiscal year from April includes a 2.8% rise in defence spending to 4.98 trillion yen ($43 billion), for items such as planes, naval vessels and fighting vehicles to guard waters bordering China, which has a long-running dispute with Tokyo over Japanese-held islands in the East China Sea. “The situation around Japan is changing,” Defense Minister Gen Nakatani said on Sunday. “The level of defence spending reflects the amount necessary to protect Japan’s air, sea and land, and guard the lives and property of our citizens.” Abe has reversed a decade of military spending cuts as he seeks a more robust posture for the long-pacifist government, although his modest increases are dwarfed by China’s double-digit rises in defence spending. Beijing said last March it was raising annual defence spending by 12% to $130 billion, with much of the extra money earmarked for high-tech weaponry and cyber-warfare capabilities, according to the Pentagon. Japan’s new outlays will help pay for troop-carrying Boeing Co. BA Osprey tilt-rotor aircraft, Northrop Grumman Corp. LMT F-35 stealth fighters, and Kawasaki Heavy Industries Ltd’s KWHIY P-1 submarine hunting planes and stealthy Soryu submarine. Abe’s budget is his first since a resounding re-election in December, and one that aims to complete the task of overcoming deflation. The economy slowed badly last year after a sharp rise in value-added tax, but has started to recover as the cheap yen and falling oil prices have supported Japan’s exporters. The broader budget projects that tax revenues will rise to their highest level in 24 years this year, narrowing the country’s chronic deficit by 11%, thanks to the VAT increase and to a rebound in corporate profit taxes. However, Abe has taken on board the lessons of last year and postponed the second stage of the VAT increase, which was originally scheduled for October this year. The budget also includes spending to relocate U.S. troops away from Okinawa island, where locals have protested a heavy American presence.