By Noriyuki Suzuki,
Japan's pledge to boost defense spending to 43 trillion yen ($312 billion) over the next five years has become a high-stakes gambit for Prime Minister Fumio Kishida, who has decided to push through tax increases to fund it.
Experts see his preference for tax increases rather than bond issuance as reasonable given the country's fiscal health, the worst among developed nations, and beefing up defenses benefits Japan's people.
But the question of whether boosting defense spending to that target is truly necessary and appropriate for Japan remains unanswered. Implementing the tax hikes could also mark the beginning of a tumultuous period for Kishida, now in his second year in office, with his grip on power at stake, they said.
The plan to hike corporate and tobacco taxes, and rework a special tax measure designed to fund post-disaster reconstruction from fiscal 2024 or later, is a critical step in covering the increase in defense spending.
The goal of roughly doubling its defense spending to 2 percent of gross domestic product itself is symbolic of how Japan, long committed to its exclusively defense-oriented policy, is waking up to the need to do what was previously unthinkable -- acquiring a "counterstrike capability."
"Hiking taxes is the right course of action. But the question is the timing," said Takuya Hoshino, a senior economist at the Dai-ichi Life Research Institute.
"It's wrong to say fiscal discipline is maintained as long as revenue and spending are balanced. The content of defense spending is more important. It doesn't mean that the government can do whatever because they can secure funding through tax increases," Hoshino added.
Under the five-year plan, the government aims to spend a total of 43 trillion yen, with around 6.5 trillion yen likely to be allocated in the first year from next April, up from 5.2 trillion yen in fiscal 2022.
In the fifth year, the government estimates about a quarter of the estimated 4 trillion yen in additional funding required should come from taxes, while the rest would come from spending cuts on other items and tapping surplus money.
Russia's war in Ukraine has added to a sense of urgency among policymakers and ruling party lawmakers who see the need for Japan, faced with the rise of an assertive China and a nuclear-armed North Korea, to increase defense spending.
The 2 percent target is in line with that of NATO members.
Defense spending accounted for some 3.1 percent of GDP in the United States, a NATO member, 2.7 percent in Russia, and 1.2 percent in China in dollar terms. The corresponding figures for France and Germany were just shy of 2 percent in fiscal 2021, according to the Japanese Defense Ministry.
The Russian war has prompted Germany to step up defense spending. Sweden, which wants to join the NATO collective security framework, is also planning to boost its defense spending by hiking taxes.
Japan's move to increase its defense budget coincides with a review of key defense and security documents designed to reflect the increasingly severe security environment.
Even with the envisaged jump in spending, Finance Minister Shunichi Suzuki has made it clear that Japan will not waver in its goal of fiscal restoration by attaining a surplus in the primary balance, tax revenues minus spending, except debt-servicing cost.
"Many people appear on the same page that they feel security threats are there, but they are still doubtful that what is feared to happen will actually become a reality. This is a hard part of boosting defense spending and gaining support," Kimiko Terai, an economics professor at Keio University, said.
"The fact that the prime minister is increasing defense spending to boost deterrence, and doing so by raising taxes, is a big step," said Terai, an expert on public finance, adding that Japan should still maintain its goal of fiscal restoration.
From the perspective of who would benefit from the bolstered defenses, targeting corporate taxes is reasonable. "It may look as if ordinary people would not be affected, but companies' earnings are distributed in the form of wages and dividends, meaning that individuals will also be affected eventually (by higher corporate taxes)," she said.
The country's budget has been swelling since the COVID-19 pandemic and accelerating inflation, partly blamed on Russia's invasion of Ukraine. About half of Japan's spending in the annual state budget is for social security and debt-servicing costs.
Despite the nod from the ruling coalition to the tax hike plan, the divide between Kishida and the conservative, pro-bond issuance quarters of the ruling Liberal Democratic Party remains wide.
Political analysts say the cards look increasingly stacked against the prime minister, who has been struggling to stop a downtrend in public support ratings.
"There are LDP lawmakers who think, 'How dare you play a dangerous game when you can turn to bond issuance,'" said Naoto Nonaka, a professor of comparative politics at Gakushuin University.
"It is not just an issue that marks a departure from former Prime Minister Shinzo Abe's era, when fiscal spending increased even if it meant more debt, but could divide the LDP longer. Kishida's leadership could also be called into question," Nonaka added.
Abe, who was prime minister when the country adopted its first national security strategy in 2013, took the view that Japan could issue government bonds to cover an increase in defense spending, which has been avoided in postwar Japan.
Economic Security Minister Sanae Takaichi, who had raised questions about the timing of Kishida's tax increase plan, said the prime minister believed it would be better for the public to know that they should shoulder more burdens in the future.
"Defense spending will likely continue rising beyond the five-year period, which would also require reviewing ballooning social security costs. We know from experience that once a budget gets bigger, it's difficult to trim it," Hoshino of Dai-ichi Life said.
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