Final ''horse trading'' is under way for Japan's 1983 defense budget, with one eye firmly on Washington's reaction.
Washington should accept that the Japanese government is straining every muscle to fulfill its defense obligations, a senior Japanese Finance Ministry official argued.
Prime Minister Nakasone, seeking to accommodate American pressures on Japan to assume a larger responsibility for its own defense, supports increased defense spending. However, the Finance Ministry, concerned about domestic budget problems, has been attempting to allocate more evenly this year's small budget increase.
Even so, defense is getting the lion's share of the extra budget money. The extra spending, when adjusted for inflation, comes to about 3 percent. This is the target adopted by NATO for its members to increase their defense budgets each year.
The current allocation represents 0.97 percent of the Japanese gross national product. It is thus edging closer to the psychological 1 percent barrier, which previous administrations pledged not to break. It is a barrier not likely to survive too much longer.
An extraordinary Christmas Day Cabinet meeting approved a Finance Ministry draft ''austerity'' budget calling for general account expenditures of almost $ 211 billion, 1.4 percent more than the current year. The largest increase is for defense. The proposed defense allocation is $11.46 billion, about 5.1 percent more than this year.
Thus, the message being directed towards Washington on the controversial issue of defense spending is: ''We're doing our very best.''
Putting this message across is particularly important with Mr. Nakasone expected in Washington in mid-January to meet President Reagan. To sweeten the way, some diplomatic observers believe Mr. Nakasone will intervene at the last moment to order a bigger increase than envisaged by the tight-fisted Finance Ministry to promote his image as a decisive man of action.
This was hinted at by a Finance Ministry official who said: ''Between now and Dec. 30 there will be an intensive, nerve-wracking struggle over the allocations. The process of resurrection (of budget cuts) will work up through the structure until it reaches a high political level.''
The draft budget is far from being final.
As a senior Finance Ministry official explained: ''The draft proposal for each ministry and agency is deliberately kept on the conservative side. This allows us to give them a bit more during the bargaining process. . . .''
In recent years, the Defense Agency has obtained about 30 percent of the reserve money the Finance Ministry keeps aside to settle inter-agency disputes. If this can be taken as a precedent, therefore, the final increase in defense spending is expected to be nearer 6 percent.
On the surface, the figure is less than what the Defense Agency wanted (7.3 percent) and also falls short of the level desired by the United States to enable Japan to play a more meaningful role in guaranteeing regional security.
But the Finance Ministry has gone to great lengths to demonstrate that in terms of quality, the planned 5.1 percent increase more than equals previous years.
The key is personnel costs. As part of the austerity drive to cut chronic budgetary deficits, government workers - including the military - are being denied a wage increase in fiscal 1983. In the past, wage boosts soaked up a significant part of the increased defense budget. Thus, although the military spending increased by 7.8 percent this year, after deducting wages, there was only 5.4 percent left for new equipment and facilities.
Thus, the Finance Ministry argues, the Defense Agency will probably end up next year with more money for hardware than ever before. Only funds for defense, social security, overseas aid and energy are being increased. All other government agencies have been forced to accept cuts.