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Are these guys useful in defence as well as attack? I know they are essential to destroy enemy fortifications in attack.

Depends what you mean. In defence they are basically counted as regular infantry squads (in terms of final AV calculation at least. There will be likely some small diffs in firepower compared to line infantry - see their device stats). However afaik they give no special fort/anti-fort benefits when fighting in defence so it may be not best use of these precious assets.

Yes that's what I thought. So for Japan they are essential while in the attacking phase but after that just fill in for real infantry or construction engineers.

Yeah, but because Japan is very weak in terms of engineering capabilities in general and because high fort levels (esp. on Pacific islands and atols) are essential to stop/delay offensive of us monster I would say engineers (of all kinds) are priceless for Empire to the very end. Sure, ideally most of them should be moved out of the base to build up defences in the rear just before enemy invasion starts.