Kawasaki Heavy Industries has upheld its optimistic earnings forecast for the fiscal year ending March 2025, despite being embroiled in a scandal involving fictitious transactions related to submarine contracts with Japan’s Self-Defense Forces. Local media reports allege that Kawasaki Heavy recorded false transactions to mask expenditures on gifts and meals for the Maritime Self-Defense Force (MSDF) submarine crews at its Kobe shipyard.
Despite this controversy, the company has experienced a surge in its stock value, doubling at one point due to expectations of benefiting from increased global defense spending. Kawasaki Heavy reaffirmed its guidance issued in May, predicting record sales and a tripling of net profit to 78 billion yen ($535 million), driven by robust defense orders. The company reported a record first-quarter net profit of 15 billion yen, aided by a weaker yen.
Kawasaki Heavy, Japan’s second-largest defense contractor, produces various military equipment and has been commissioned to produce anti-ship cruise missiles. This aligns with Prime Minister Fumio Kishida’s strategy to enhance Japan’s defense capabilities amid geopolitical tensions.
The slush fund allegations were initially uncovered by tax authorities, resulting in a surcharge of 600 million yen for unreported income between 2017 and 2022. In response, Kawasaki Heavy has established a third-party panel to investigate the issue, with findings expected by year-end. The Defense Ministry is conducting a parallel investigation.
The scandal raises concerns about transparency within Japan’s defense sector, especially as the government considers tax increases to support defense spending. Meanwhile, Mitsubishi Heavy Industries (MHI), Kawasaki’s competitor, reported no such irregularities in its submarine contracts, highlighting the need for scrutiny across the industry.
