Japan Raises Cigarette and Corporate Taxes to Fund Defense

Japan is starting to raise cigarette taxes and corporate taxes to cover the growing defense spending needs. (Beacukai Doc)

Japan has started raising cigarette and corporate taxes to cover the growing defense spending needs. The move officially came into effect on Wednesday, April 1, while the increase in income tax will follow in 2027.

Citing Kyodo News reported Wednesday, April 1, the Japanese government estimates that this series of tax increases will increase revenue by around 1.3 trillion yen or around 8 billion US dollars per year. The policy was taken when Japan's defense spending soared to a record 9 trillion yen per year, amid deteriorating security situation in the region.

Starting Wednesday, the government imposed an additional 4 percent tax on corporate taxes after deducting 5 million yen. This policy is expected to increase revenue by 869 billion yen. Small and medium-sized businesses with low income are exempt from the policy.

Taxes on heated tobacco products are also being raised in two stages, in April and October, to be equivalent to the current higher conventional cigarette rates. After that, starting in April 2027, taxes on regular cigarettes and heated tobacco cigarettes will be raised again in three stages, 0.5 yen per cigarette. From this post, the government is targeting an additional 212 billion yen in revenue.

For income tax, the government will increase the rate by 1 percent starting January 2027 to secure 256 billion yen. The increase is indeed offset by a 1 percent cut in special income tax that has been collected for post-earthquake reconstruction and the March 2011 tsunami. However, the total burden will still increase because the period of collection of special taxes will be extended.

This increase in taxes related to defense is a follow-up to the new security strategy drawn up in December 2022. In the document, the government targets an additional 1 trillion yen per year from tax increases.

For fiscal year 2026, Japan has allocated a record defense budget of 9 trillion yen. This figure is the fourth year of a five-year defense development plan worth 43 trillion yen.

As reported by Kyodo News, the Takaichi government also advanced the defense spending target and related programs to the equivalent of 2 percent of gross domestic product in fiscal year 2025, two years earlier than originally planned. At the same time, the United States, Japan's main ally, could also continue to pressure Tokyo to increase defense spending, after in its national defense strategy document urged allies to aim for a level of 5 percent of GDP.

Before this five-year defense development plan was implemented, Japan's defense budget had been maintained for years at around 1 percent of GDP, or about 5 trillion yen per year.