Now’s the Time to Invest in Japan’s Defense Spending Boom

For decades, Japan’s military spending was tame compared to other developed nations with comparably sized economies. But in recent years, the Land of the Rising Sun kicked defense spending into high gear.Those changes, which are proving to be durable, open the door to opportunities with select ETFs. But advisors and investors need to be selective when it comes to the Japan defense expenditures theme. Enter the WisdomTree Japan Opportunities Fund (OPPJ A-) and the WisdomTree Asia Defense Fund (WDAF). Both tactical funds merit consideration today as Japan ramps up defense spending, which hit 2% of GDP in fiscal 2022. And is expected to grow significantly in the years ahead. “Since then, the pace has picked up. Under Prime Minister Sanae Takaichi, a longstanding defense hawk, Japan reached that target in FY2025, two years ahead of schedule, helped by a supplementary budget,” according to WisdomTree research. “As the previous target is fixed to 2022 GDP and includes related items such as coast guard spending, the ratio on current GDP is slightly lower than 2%, but the direction is still clear.”Politics MatterAs advisors and investors who are well-versed in domestic defense stocks and related ETFs know, this is a politically sensitive industry. For market participants considering OPPJ and WDAF, the positive news is that Japan’s current political environment is hospitable to expanding defense spending. Speaking of expansion, it’s possible, if not likely, that the country will Japan will join NATO allies in lifting military expenditures to 3.5% of GDP. That’s a big number because Japan’s GDP is nearly $4.4 trillion. “The February general election strengthened the political foundation. The Liberal Democratic Party won a two-thirds majority in the lower house on its [own. And] together with its coalition partner, the ruling bloc holds a commanding position,” added WisdomTree. “The main opposition alliance, which includes Komeito, a longtime brake on defense expansion, lost around two-thirds of its seats. Japan’s buildup began before the vote. But the result gives the government room to go [further. And it] plans to revise its security policy by December 2026.”Japan's Defense Spending Ambitions Rooted in CredibilityJapan’s defense spending ambitions, which could prove to be clear catalysts for OPPJ and the geographically broader WDAF, are rooted in credibility due to favorable tax schemes. Those include a defense-specific levy that went into effect in April. “The first measures took effect on April 1, 2026. The Defense Special Corporate Tax is charged at 4% of a company’s corporate tax bill, after a deduction of ¥5 million,” concluded WisdomTree. “For a large company paying the standard 23.2% national rate, that adds just under 1% (23.2% × 4%). The deduction means most small companies are exempt. The Finance Ministry expects the tax to raise ¥923 billion in 2027. Tobacco tax also rose in April, with a second increase due in October. Another new tax is the Defense Special Income Tax. From January 2027, individuals will pay a surcharge equal to 1% of their income tax bill.” For more news, information, and analysis, visit the Modern Alpha Content Hub.Disclosures This article was prepared as part of WisdomTree’s general paid sponsorship of VettaFi | ETF Trends. This specific content within and any opinions expressed therein belong solely to VettaFi and do not reflect the opinion or analysis of WisdomTree, its employees, or its affiliates. Content published on VettaFi | ETF Trends is provided for educational purposes only and should not be considered investment or tax advice. For investment or tax advice, please consult a financial professional. WisdomTree is an independent company, unaffiliated with VettaFi | ETF Trends. WisdomTree has not been involved with the preparation of the content supplied by VettaFi | ETF Trends. It does not guarantee, or assume any responsibility for its content.