Japan has warned defence contractors of deep cuts to expected orders as fiscal constraints threaten to scale back a military buildup that Prime Minister Sanae Takaichi's government says is needed to counter China, according to four people familiar with the matter.

Finance ministry officials last week proposed spending between 50 trillion and 60 trillion yen, or about 313 billion to 376 billion dollars, on defence over the five years starting in April 2027, the people said.

That figure would exceed the current 43 trillion yen five-year plan but fall well short of the 80 trillion yen advocated by some defence officials and lawmakers from the ruling Liberal Democratic Party. The gap could mean cuts of as much as half in planned purchases of some missiles and aircraft, including US-made F-35 stealth fighters, the sources said.

Contractors told to expect smaller orders

Japan's biggest defence contractors include Mitsubishi Heavy Industries, Mitsubishi Electric and Kawasaki Heavy Industries. Mitsubishi Heavy Industries and Mitsubishi Electric declined to comment, while Kawasaki Heavy Industries did not immediately respond to a request for comment.

The sources asked not to be identified because they were not authorised to speak to the media. The finance and defence ministries did not immediately respond to requests for comment.

Finance Minister Satsuki Katayama declined to discuss the specific figures when asked by reporters, saying the advisory panel on security and defence had not yet discussed matters at that level of detail. A defence ministry spokesperson said nothing had been decided on the size of the next defence buildup plan, adding that the government's position was to determine what Japan needed for its defence and build up the budget accordingly.

Short of the two per cent target

The revised spending proposal would leave Japan short of its target of raising defence outlays to two per cent of gross domestic product, according to Reuters calculations, as US President Donald Trump presses Washington's allies to spend more on their militaries.

The 2026 US National Defense Strategy calls for allies worldwide to spend 3.5 per cent of GDP on their armed forces and a further 1.5 per cent on broader security needs.

Japan is bolstering its military to counter China's growing military power, amid concern about the possibility of a Chinese attack on Taiwan. Tokyo worries such a conflict could threaten its nearby islands and vital sea lanes. Takaichi has pledged to accelerate the buildup, and her government is expected to unveil a revised national security strategy and defence plan by the end of the year. Japan is seeking to expand munitions stockpiles and deploy military drones to deter attacks and prepare for a prolonged conflict. Drone orders would not be affected by the revised funding proposal, one of the people said.

Sales tax cut squeezes revenue

Finance ministry officials argue that a steeper increase in defence spending would be difficult to fund alongside Takaichi's commitments to invest in economic growth and cut the sales tax on food, which would squeeze government revenue, three of the sources said.

The sales tax cut would leave an annual revenue shortfall of 4.3 trillion yen that Takaichi would need to fill through other funding sources, potentially including foreign exchange reserves.

The finance ministry's defence proposal is, however, likely to face resistance from security hawks in Takaichi's party, setting up a clash over how much Japan can afford to spend to bolster its defences.

One ruling party official familiar with the discussions said a contingency could occur at any time, and that if the goal was to build the capabilities necessary to deter and prevent such a contingency, a figure in the 50-trillion-yen range was out of the question.