(Bloomberg) -- Japan loosened its restrictions on arms exports on Friday and officially approved a plan to export Patriot missiles to the US, fulfilling a request from its ally, the government said. 

Prime Minister Fumio Kishida’s government agreed to allow completed defense equipment manufactured under license in Japan to be exported back to the country of origin. The government is planning to sell PAC-2 and some more advanced PAC-3 interceptors made in Japan to the US, according to officials who asked not to be identified in line with government custom. 

The move to export lethal weapons for the first time comes alongside approval of a record annual defense budget, as the country pushes through its biggest military build-up since World War II and seeks to work more closely with the US and other partners to deter threats from China and North Korea. 

Read more: Japan Aims For Decision on Fighter Jet Exports by End-February

“Up until now, it was the US that provided technology to Japan,” former defense minister Itsunori Onodera said in an interview. “For Japan to be able to cooperate in the form of equipment is an important step for the alliance.” 

PAC-2 and PAC-3 interceptors are designed to be used for missile defense, and are reported to have been deployed in Ukraine. They will be provided from Japan’s existing holdings, and Japan has budgeted an unspecified amount for inspection of its missile stockpiles. 

Japan won’t permit the missiles to be transferred on to a war zone, but the sales will help replenish US stocks, potentially enabling it to provide further support for Ukraine, as aid for the country falters. 

Kyiv Is Running Out of Options to Fund the Fight Against Russia

Patriot interceptors are produced in Japan by Mitsubishi Heavy Industries under license from RTX Corp and Lockheed Martin Corp. Shares in MHI have risen about 48% over the past year, partly due to the increase in defense spending. Government officials said it had not yet been decided how many Patriot missiles would be transferred to the US, or the price tag. 

“I don’t see another country that’s adopted so many changes so significant to our deterrence and our security,” US Ambassador to Japan Rahm Emanuel told Bloomberg Friday. “The scale, the scope and the speed is unprecedented and really welcome.” The provision of missiles will “give us flexibility in our inventories,” he added. 

The cabinet the same day approved a 16.5% hike in defense spending to a record ¥7.95 trillion ($55.8 billion). Kishida has yet to make clear how the government will pay for the defense expansion going forward, while fears about the tax increases it will entail have contributed to growing voter disapproval for his unpopular administration. 

Those outlays were approved as part of an initial budget plan totaling ¥112.7 trillion for the fiscal year starting in April. The total tally marks a decrease from a year earlier, the first decline in 12 years, but only after factoring a contingency fund for pandemic-era stimulus into this year’s budget, which inflated current-year spending by ¥5 trillion.

The ruling Liberal Democratic Party and its coalition partner this month have already decided not to impose additional taxes to fund military spending next year. Kyodo News reported earlier this month that the government was considering putting the hikes off until 2026 or later.

Finance Minister Shunichi Suzuki said at a press conference following the cabinet approval that the fiscal situation remains severe. But the overall scale of the budget and the amount of new bond issuance is smaller, “and that shows a step toward fiscal health,” Suzuki said.

While the figures show a historic spending increase in yen terms, the budget comes amid a slump in the value of Japan’s currency. The 2012 defense budget was equivalent to $56.6 billion at the average exchange rate of ¥83.01 per dollar for that fiscal year. Next year’s budget will come to $55.5 billion based on an average exchange rate of ¥143.3 for the current fiscal year to date.

The bulk of Japan’s defense outlays are domestic, however about 20% of planned spending will be affected by exchange rates, according to the Defense Ministry.

The budget includes about ¥373 billion for two missile-defense ships equipped with Lockheed Martin’s Aegis combat system, as well as ¥240 billion for the company’s F-35 fighter aircraft. The budget was calculated at a rate of ¥139 per dollar.

Read more: UK, Italy and Japan Sign Treaty Formalizing Jet Fighter Plan

About ¥91 billion will be set aside for joint development of a new fighter jet with the UK and Italy, along with related projects, even though Japan hasn’t reached a decision on allowing exports of the new plane to other countries. Chief Cabinet Secretary Yoshimasa Hayashi said this week the government aimed for a decision on that by the end of February, with the main contractors set to establish a joint commercial venture and start divvying up the work in March.

--With assistance from Yuki Hagiwara and Erica Yokoyama.

(Updates with comment from finance minister)

©2023 Bloomberg L.P.