Japan Weighs Corporate Tax Hike as Annual Defense Spending Seen Exceeding 10 Trillion Yen
Key Facts
Japan’s government is considering a further increase in corporate tax to fund defense spending, Bloomberg reported, citing the Sankei newspaper and unnamed government sources. The proposal remains under consideration, and the government has not decided how to finance the increase. Finance Minister Satsuki Katayama said, "No specific method has been approved at this stage." She added that the government would consider the necessary measures while taking fiscal sustainability into account and ensuring stable funding sources. The debate comes as Tokyo prepares a new defense strategy that is expected to raise annual spending to more than 10 trillion yen.
That would be up from about 9 trillion yen in the current fiscal year, according to Reuters, while Bloomberg reported that total spending under the new five-year plan could range from 70 trillion to 80 trillion yen. The plan is due to be issued at the end of 2026, according to the report, which cited unnamed government sources. In the previous fiscal year, defense spending and broader security items, such as the coast guard, totaled about 11 trillion yen, or 1.9% of gross domestic product. These figures show the scale of the commitments tied to the new plan compared with spending recorded in the previous fiscal year. They also put the choice of funding source at the center of the fiscal debate ahead of the plan’s details.
The potential tax increase faces opposition over the costs it could impose on companies. Bloomberg warned that a higher tax could affect wage increases and Japan’s international competitiveness, and face opposition from the business community. Wages are a concern as an S&P Global analysis said higher energy prices and a weaker yen raised the cost of inputs, raw materials and wages during October. The analysis said these price pressures hurt demand and business confidence. The search for a tax source for defense thus coincides with cost pressures that S&P Global said are weighing on activity and business confidence.
The debate is not starting from scratch: Japan previously approved tax increases earmarked for defense funding that were expected to raise revenue by about 1 trillion yen in the year beginning in April 2027, according to a Reuters report published in December 2024. The report said the plan faced political opposition that delayed its implementation. That differs from the additional proposal now under consideration, as the government has yet to identify a new funding method. Tokyo is also facing pressure from the United States to raise defense spending to 3.5% of gross domestic product, a level Washington said should be a global benchmark for allies, according to Reuters. This external pressure adds to the importance of defining the scale of the defense commitment and how it will be funded in the next plan.
Against the backdrop of the fiscal debate, Katayama said on October 27 that Japan was ready to take decisive action in the currency market if necessary. On the same day, the yen fell to 157.73 against the dollar, after reaching a one-month high the previous week, according to Reuters. The Bank of Japan is holding its policy meeting on October 29 and 30, and is due to issue its outlook report on October 30. S&P Global analysts said the bank could consider another rate increase at its October meeting before acting again in December. The bank is due to publish a summary of opinions from the meeting on November 10, while markets await the five-year defense plan at the end of the year.