Bloodgorgan
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What the heck are the men in this town doing? Isn't there supposed to be ten thousand people? That means there are several hundreds of healthy, fit, male adults between 16-30 who could fight as a militia. Instead they let a bunch of young teens and preteens, who have zero training, fight to their deaths instead?
I agree with the others, unless something occurs that might make Germany's tech advancements to freeze for a time (maybe the MC didisappea for 5 years due to something to do with the gods), I don't see Japan catching up at all. Unless Japan goes for the full navy route. I could possibly believe that Japan primarily focuses on developing a better Navy, and maybe even a Air Force, but then having a significantly weaker Army as a consequence.
The guards know of his operations in general. Just like with any real life prison. They likely do not know that he has the princess of France selling herself though. After all, the dude has guards on the take, how else does he get the goods smuggled into prison? Those guards would gladly sell him the information that he had a princess in his service, if they knew. Either no one there knows, so that she gets treated like any other, or only the warden knows.