Reuters

A collapse in the yen is forcing Japan to scale back a historic five-year, 43.5-trillion-yen defence build-up aimed at helping to deter a Chinese invasion of Taiwan, according to eight people familiar with the matter.

Since the plan was unveiled in December, the yen has lost 10% of its value against the dollar, forcing Tokyo to reduce its ambitious defence procurement plan, which was then-calculated to cost $320 billion, the sources said.

Reuters interviewed three government officials with direct knowledge of defence procurement and five industry sources, who said Japan will begin cutting back on aircraft purchases in 2024, the second year of the build-up, due to the weak yen.

Details of how Japan is paring back military procurement due to currency fluctuations have not been previously reported. The eight people, who attended numerous meetings on the purchases, spoke on condition of anonymity because they were not authorised to talk to media.

Tokyo assumed an exchange rate of 108 yen to the dollar - a rate last traded at in summer 2021 - when it began formulating purchase plans in December, the eight people said. By early November, the currency dipped to 151 to the dollar. The Bank of Japan on Tuesday took a small step toward ending the decade-long monetary stimulus, which has driven yen depreciation, by tweaking bond yield controls.

Unlike large companies that do business overseas, Japan`s defence ministry does not hedge against currency rate fluctuations, one of the government officials said, meaning it has few means to mitigate the rising cost in yen of Tomahawk cruise missiles and F-35 stealth fighters.

Any sign that Prime Minister Fumio Kishida will get less bang than anticipated from his military spending binge could stir unease in Washington about its key ally`s ability to help contain Beijing, said Christopher Johnstone, Japan chair at the Center for Strategic and International Studies think tank.

"For now, the impact is modest. But there is no question that a long-term depreciation of the yen would sap the impact of Japan`s build-up, and force cuts and delays to key acquisitions," said Johnstone, a former National Security Council director for East Asia in the Biden administration.

Japan`s Ministry of Defence said it does not discuss details of procurement planning when contacted for comment.

The US Embassy in Tokyo said it was unable to comment. The Pentagon did not immediately return a request for comment.