Japan’s ruling coalition, led by Prime Minister Sanae Takaichi, is considering a rise in income taxes from 2027 as part of a broader effort to secure long-term funding for increased defence spending, marking a potential end to a three-year political stalemate on the issue.
According to a draft of the Liberal Democratic Party’s (LDP) tax reform proposals, the government is weighing a one percentage point increase in income tax rates across all income brackets starting January 2027. However, the overall tax burden would initially remain unchanged, as the proposed hike would be offset by a simultaneous reduction in the reconstruction surtax introduced after the devastating 2011 earthquake.
The proposal is still under discussion within the ruling coalition. The LDP’s partner, the Japan Innovation Party, was reportedly undecided on backing the measure as of last week. The ruling parties are now in the final stages of compiling their annual tax reform package, which is expected to be signed later this week, sent to the cabinet for approval, and then taken up for parliamentary debate early next year.
If approved, the move would allow the government to finalise its long-delayed blueprint for funding expanded defence outlays. Under former Prime Minister Fumio Kishida, Japan committed in 2022 to raising defence spending to 2% of gross domestic product by fiscal year 2027 — a significant shift for a country that has traditionally capped military spending at around 1% of GDP. The plan entails total defence outlays of ¥43 trillion (approximately $277 billion) over five years.
Prime Minister Takaichi earlier this year accelerated the timeline by two years, pledging to reach the 2% target in the current fiscal year. To bridge the funding gap, the government allocated ¥1.1 trillion from an additional budget. As a result, Japan’s defence spending this fiscal year is expected to exceed ¥10 trillion, including the supplementary outlays.
Last year, the government decided to begin raising tobacco and corporate taxes from April 2026 but postponed any decision on income tax hikes due to strong public opposition. Growing geopolitical risks, however, have added urgency to the debate.
Concerns over Japan’s security environment have intensified amid rising tensions in the region and questions about the country’s long-standing reliance on the United States for defence. Earlier this year, US President Donald Trump urged allies to increase defence spending to 5% of GDP, while also pressing Japan to shoulder a greater share of the costs associated with hosting US military bases. Talks on the host nation support treaty, which expires in March 2027, are expected to begin next year. Japan currently pays an average of ¥211 billion annually under the agreement.
Geopolitical anxieties have further escalated following remarks by Prime Minister Takaichi in parliament last month, where she warned that a crisis involving Taiwan could constitute a “survival-threatening situation” for Japan. Such a scenario could provide legal grounds for Tokyo to deploy its military alongside partner nations. Tensions rose again this month after Japan reported that a Chinese fighter jet had locked its fire-control radar onto a Japanese aircraft — a claim Beijing has denied, instead accusing Japan of interfering with Chinese military exercises.
Beyond income tax changes, the upcoming tax reform package is expected to include several other measures. These may involve tightening taxes on high-income earners by halving the tax-exempt threshold for an additional income levy to ¥165 million and raising the top rate to 30% from 22.5% by fiscal 2027. The move is aimed at offsetting roughly ¥1.5 trillion in revenue losses from planned gasoline tax cuts.
Other proposed reforms include extending mortgage tax breaks by five years, allowing minors under 18 to invest through tax-free NISA accounts, doubling the tax-free cap on company meal subsidies to ¥7,500 per month, and introducing incentives for large-scale corporate investments. The government is also considering raising the departure tax to ¥3,000 from ¥1,000 starting July 2026.
With Takaichi’s coalition holding only a razor-thin majority in the lower house and lacking control of the upper chamber, the ruling parties are increasingly open to accommodating opposition demands to ensure smooth passage of the budget. While the prime minister’s cabinet maintains solid public support, weaker polling for the LDP has limited its ability to push through controversial measures unilaterally.
Some of the proposed tax cuts and incentives could strain public finances further, at a time when Japanese government bond yields are hovering near multi-decade highs. Despite unveiling the largest supplementary budget since pandemic-era restrictions were lifted, Takaichi and Finance Minister Satsuki Katayama have sought to reassure investors, stating that total bond issuance this fiscal year will remain below last year’s levels.