Japan's ruling parties endorsed Friday a plan to raise taxes to fund a substantial increase in defense spending but postponed deciding when to do so amid turmoil caused by Prime Minister Fumio Kishida abruptly floating the idea.
The government plans to increase corporate and tobacco taxes, alongside imposing a defense tax to boost defense spending to a total of 43 trillion yen ($312 billion) over the next five years, bringing it to a level equivalent to 2 percent of annual gross domestic product.
Kishida's announcement last week he would consider hiking taxes sent ripples through his Liberal Democratic Party, prompting opposition from some party lawmakers calling for government bond issuances instead, with questions also raised by his Cabinet members.
As part of the 43 trillion yen defense spending target for fiscal 2023-2027, the government will likely earmark 6.5 trillion yen in the next fiscal year from April, up from 5.2 trillion yen this year, but no tax hike is planned. Kishida said it will increase further to around 8.9 trillion yen in fiscal 2027.
Under the plan set out by the LDP and coalition partner Komeito, a corporate tax surcharge of 4.0 to 4.5 percent will be imposed, generating around 700 billion yen. Small firms earning 24 million yen or less will be exempted.
The current tobacco tax will be raised to 3 yen per cigarette, meaning that around 200 billion will be created.
The government will also modify a special reconstruction tax implemented in the aftermath of the 2011 major earthquake and tsunami that hit the Tohoku region in northeastern Japan.
Japan will allocate half of the revenue generated from the existing 2.1 percent additional income tax imposed through 2037 to defense purposes. The expiration date of the additional income tax will be extended by up to 13 years to ensure that funding for reconstruction will not be cut.
The government is expected to implement the tax measures "at an appropriate time" in fiscal 2024 or later, as agreed on by the ruling coalition. In all, the steps will mean Japan can secure around 1.1 trillion yen by tax hikes alone in fiscal 2027.
The tax reform plan and a set of policy documents on defense and security scheduled to be approved Friday will serve as the basis for the government to draw up a fiscal 2023 state budget before year-end.
Finding stable funding sources is a challenge for Japan, which has debt worth more than twice the size of its economy at around 540 trillion yen.
Kishida defied calls from LDP lawmakers, including its policy chief Koichi Hagiuda, for government bond issuances to meet the defense spending needs.
"I hope active discussions will begin under the policy chief early next year on other funding sources than the taxes," Hagiuda told a meeting before the tax plan was formally approved.
The government is separately considering using construction bonds to develop Self-Defense Forces facilities, sources close to the matter have said, in a major shift from its decades-old stance that such bonds are not suitable for such infrastructure that can decay rapidly and become a target of foreign attacks.
Construction bonds are used mainly to fund public works projects to build roads and bridges. Both construction bonds and deficit-covering bonds are treated the same as Japanese government bonds in the market.
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