Pacifist Japan Starts Investing in Defense Startups

Testing an AirKamuy drone.

(Bloomberg Markets) — Near the Japanese city of Nagoya, Takumi Yamaguchi pulls on a motorcycle helmet and sprints along an asphalt track before releasing a drone that looks like a 6-foot-long model airplane. It crashes shortly after takeoff.

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Yamaguchi’s startup, AirKamuy, can afford such mishaps because it makes cheap, mass-produced drones—out of cardboard, of all things. He sets off another test run, which goes much better. The drone buzzes around an artificial island not far from Nagoya’s main airport before returning for a landing. Engineers will gather data from the flights to adjust the device before producing the final model. If all goes well, Japan’s Ministry of Defense will buy these so-called origami drones for missions that could include surveillance and swarm attacks in which the device would carry small bombs.

Like many younger Japanese, Yamaguchi, 29, says he feels the need to do more to protect his country, which has long been attached to the ideal of pacifism. Concern is rising about China seizing nearby Taiwan, as well as threats from a volatile North Korea and a belligerent Russia, just to Japan’s north. “We’re surrounded by these problems,” he says.

In many other countries, Yamaguchi’s startup would be unremarkable. Venture capital money is pouring into drones because they’ve been so successful in the Ukraine war. But risk-averse Japan has long had few startups and a taboo against the defense industry, including severe restrictions on arms exports. After its defeat in World War II, the country renounced the right to wage war and even maintain a military, adopting a US-written “peace constitution” that’s remained unchanged to this day.

By the 1970s, Japan had, in fact, rebuilt its military, now one of Asia’s largest and best equipped. But it’s called the Self-Defense Forces, or SDF, and is more strongly associated with helping out during the country’s frequent earthquakes and other natural disasters. Only a handful of Japanese contractors supply weapons and other equipment to the SDF, which also imports weapons from the US. As recently as 2017, the Science Council of Japan, representing scholars advising the government, issued a statement expressing opposition to military-research programs.

But opinion surveys show public support growing for a stronger defense. The new leader of the ruling Liberal Democratic Party, Sanae Takaichi, is a security hawk who’s called for more military spending, as have fast-growing smaller right-leaning political parties. Takaichi, who’s set to become prime minister, has also pledged to make a new push to amend the constitution to state Japan’s right to have a military.

In 2022 the government said it would lift defense spending from an informal cap of 1% of gross domestic product to 2% over five years. Japan has also been under pressure from the US, its only security treaty ally, to rely less on American protection. Billions of dollars have been earmarked to pay for new equipment, such as long-range missiles to deter potential aggressors and military satellites to monitor enemies, as well as to help build a stronger domestic defense industrial base.

Interest is also growing in a once-languishing eight-year-old government program to support research initiatives that could contribute to national defense. Although the program’s budget remains small—¥11.4 billion ($77.1 million)—134 private companies filed applications this year through June, up from the recent low of 49 in all of 2021.

In October 2024, Japan started the Defense Innovation Science and Technology Institute, modeled on US Department of Defense agencies that seek to use emerging technologies to bolster national security. The Defense Ministry is also playing a role in helping startups connect to venture capitalists. “It is crucial to build a mutually beneficial relationship with startups,” says Rumiko Ichikawa, principal senior coordinator at the Defense Ministry’s Acquisition, Technology and Logistics Agency.

In a landmark for defense exports, Australia announced in August that it would buy a fleet of warships from a Japanese consortium led by Mitsubishi Heavy Industries Ltd. It would be just the second major defense export deal Japan has secured since World War II—possible only because of a special exemption from an array of restrictions on exporting weapons overseas, including a prohibition on lethal military equipment.

In part because these rules limit possible markets, private money remains relatively scarce. Total funding for all startups in Japan last year reached $5.3 billion, 2.5% of the amount in the US, according to Japan Investment Corp., one of the country’s sovereign wealth funds. Japan’s VC industry mostly consists of firms owned by financial institutions or other big businesses. Many VC funds have internal restrictions on investments in companies working on military-related technology. “The venture capital environment is weak in Japan,” says Kousuke Saito, an international security specialist at Sophia University in Tokyo. “But defense innovation is very expensive.”

The Japanese government is pushing for products with both civilian and military applications. Such dual-use products might include autonomous navigation systems that can guide cars or missiles, or even materials such as high-strength fibers usable in clothes or fighter aircraft.

The Tokyo VC firm Coral Capital has invested in two dual-use companies: Oceanic Constellations, a sea-drone maker, and Ookuma Diamond Device, which produces energy-efficient semiconductors from diamonds that could have defense applications. “We know it will take time to get people here educated on defense tech,” says James Riney, Coral’s chief executive officer and founding partner. Japan’s strengths in advanced engineering and technology could give it a competitive advantage in the defense startup sector, he says.

Another startup, ElevationSpace, is developing reusable modules to transport payloads to orbiting space stations. The technology could help defend against hypersonic weapons. Chief Operating Officer Kazunari Miyamaru came up with the idea after studying aerospace engineering at the National Defense Academy of Japan. “Japan and allied countries need to work together to react to new types of air threats,” says Miyamaru, who adds that he’s approached the Defense Ministry and France’s MBDA Missile Systems Services SAS, Europe’s largest missile maker.

Yamaguchi (right) and a colleague retrieve a drone after a flight.Photographer: Alastair Gale/Bloomberg

Yamaguchi, the origami-drone maker, studied aeronautical engineering in college in Nagoya. In 2022 he was working in a division of Mizuho Bank Ltd. that provides financial support for startups. A client who was passionate about using drones for mountain rescues invited him to take part in a contest on the northern island of Hokkaido that sought to find which unmanned devices could find a target the fastest. Yamaguchi was hooked and decided to set up his own company. His parents expressed concerns about job security; the cultural preference for stable employment at an established company has stymied startup culture.

AirKamuy was originally formed as a venture to make drones to help find missing people in the mountains. means “God” in the language of the Ainu ethnic group, who live mostly in Hokkaido. The company name also nods to the idea of a drone saving a lost person. After a meeting with Defense Ministry officials at a drone exhibition several months later, the company pivoted to work on national security—along with civilian—applications.

In May, AirKamuy announced it had raised ¥100 million through the issuance of shares to three Japan-based funds, as well as loans from one commercial bank and the state-run Japan Finance Corp. Yamaguchi says about two-thirds of the venture firms he approached turned him down, some of them citing internal restrictions on investing in defense-related businesses.

The company’s main drone, the AirKamuy 150, is made of rain-resistant cardboard and designed to be manufactured at a low cost on a large scale. Yamaguchi says the drone’s price would likely start at $2,000, compared with millions of dollars for the high-end reconnaissance devices used by the US military and others. About 500 of the origami drones can be flat-packed into a regular shipping container, and they offer flight times of more than two hours, far longer than most devices. The company is in talks with the Defense Ministry about a contract, he says.

In August the agency said it was seeking more than $2 billion in its budget for the fiscal year starting in April to procure fleets of air, sea-surface and underwater drones. It said it would look at both foreign and local sources.

After the recent test flight, Yamaguchi takes off his motorcycle helmet, a safety precaution to avoid injury from the drone’s front-mounted propeller during launch. The work is challenging; still, he expects to have the product ready in the spring. “We have had various failures,” he says. “But the accumulation of lessons from that process is important.”