Japan will likely boost its defense spending to around 6.5 trillion yen ($47 billion) in fiscal 2023 from the current 5.2 trillion yen, sources close to the matter said Monday, in a five-year effort to double the expenditure to better respond to the changing security environment surrounding the nation.
The government is seeking to spend a total of 43 trillion yen over the next five years until fiscal 2027, when it aims to increase the annual defense budget to around 9 trillion yen, or about a level equivalent to 2 percent of gross domestic product.
The ruling coalition of the Liberal Democratic Party and Komeito are planning to finalize a tax reform plan later this week, bringing into focus how the nation will find stable funding sources.
The government is considering raising corporate and tobacco taxes in stages from fiscal 2024 or later to cover part of the substantial increase in defense spending. It is also weighing a plan to tap revenue from a special tax measure to fund the reconstruction of the quake-hit Tohoku region, people with knowledge of the matter have said.
Prime Minister Fumio Kishida has underlined the need to bolster the country's defenses in the face of mounting security threats, adding that a quarter of the expected funding needs will have to be met through tax measures. The plan, however, has prompted a backlash from ruling lawmakers and some Cabinet ministers, in a rare display of disunity.
To produce defense equipment speedily, the government plans to increase annual defense spending sharply and bring it close to 9 trillion yen in the first few years rather than taking an incremental approach, the sources said.
Japan's defense budget has long been capped at around 1 percent of GDP. The planned budget increase coincides with a review of three key documents on security and defense policy, which would mark a historic shift to acquiring "counterstrike capability."
China's assertiveness, North Korea's missile and nuclear development and Russia's war on Ukraine have led to calls, especially among conservative LDP lawmakers, for beefing up Japan's defenses.
Finding stable sources to achieve the substantial increase in defense spending remains a challenge. With Japan's fiscal health in dire straits, Kishida has ruled out new government bonds as an option and also targeting income taxes that would directly hit households.
Under one government plan to boost tax revenue, 700 to 800 billion yen would be secured through higher corporate taxes and around 200 billion yen by hiking the tobacco tax. Another 200 billion yen would come from the temporary income tax measure adopted in the aftermath of the 2011 major earthquake and tsunami in Tohoku, the sources said.
After the disasters, Japan imposed a 10 percent corporate tax surcharge. The government is considering limiting the rise in corporate tax burdens to a small increase this time and taking steps to soften the impact on small and midsize companies, the sources said.
For individuals, the government has a temporary 2.1 percent special reconstruction income tax until 2037 to aid reconstruction in the disaster-hit Tohoku region in the northeast. It is now weighing the possibility of extending the time limit and diverting part of that revenue to defense spending, according to the sources.