Lintman:
Yes, the Japan/US war in the Pacific didnt end too well for Japan, but the capacity for large scale annihilation of the enemy's industry didnt exist yet.
I'm not sure if the AI knows your military or not (they say it doesnt cheat, so I'm inclined to say 'no'). However many of it's decision making algorithms are based on a 'score comparison' between the empires, so it at least knows that much.
Maybe two different 'scores' should be kept with a one beign heavily weighted on military. Then the AI could use 1 or the other or both scores in determining its policies? I'm just thinking out loud here...
I've made some tweaks to the AI and when playing on 'Hard' with 'Low Bonus' I've seen it do some really nice buildups. The problems arise in that they fail to inhibit the player build-ups as well. Still, I'm fairly pleased with my current AI in terms of expansion. I just wish I could figure out how to make it more hostile.
Talenn