Japanese Prime Minister Fumio Kishida said Tuesday that securing stable funding sources for a hefty defense spending boost is the "responsibility" of the current generation, amid signs of discord among his Cabinet and party members over how to fund the ballooning budget.
Hiking taxes is one option to help Japan raise defense spending to a combined 43 trillion yen ($312 billion) over the next five years through fiscal 2027, as Kishida aims to bring it to a level equal to 2 percent of gross domestic product.
But the plan has created more headwinds for Kishida, who has seen his public support ratings tumble, with his economic security minister raising questions about the timing and business leaders pushing back against tax hikes that would target the corporate sector.
The ruling coalition of the Liberal Democratic Party and Komeito are working out how to secure stable funding sources before the compilation later this month of a tax reform plan and budget for the next fiscal year.
"We must consider what responsible funding sources are. It is the responsibility of people living in this era to take on the heavy burden and respond," Kishida told a meeting of LDP executives.
As Russia's war against Ukraine drags on, Kishida said, "It is more important than anything for citizens to be aware of the need to protect their own lives and the country."
Higher corporate and tobacco taxes and the diverting of revenue from a temporary income tax on households designed to fund reconstruction in the disaster-ravaged Tohoku region are under consideration, sources with knowledge of the plan said.
Defense spending will grow to 6.5 trillion yen in the first year of the intensive period, and the use of construction bonds to develop Self-Defense Forces facilities is being floated in a major departure from the government's stance that such bonds are not suitable for infrastructure that rapidly decays and could be the target of foreign attacks.
Kishida has dismissed the possibility of issuing government bonds for the increased budget, and the use of construction bonds, mainly used for public works projects to build roads and bridges in Japan, would call into question his consistency.
Some LDP lawmakers have been calling for government bonds to be issued at a time when beefing up the nation's defense capabilities is urgent amid China's assertiveness, North Korea's nuclear and missile development and Russia's war in Ukraine.
A potential headache for Kishida comes from within his Cabinet. Economic Security Minister Sanae Takaichi has criticized the prime minister for the move that would hurt corporate sentiment.
Takaichi said Tuesday she had posted her comments on Twitter with the understanding that she could be "dismissed" for the remarks.
The minister, who competed against Kishida in the LDP leadership race last year, said she explained her view directly when she held a roughly 10-minute talk with the prime minister.
Industry minister Yasutoshi Nishimura again took a cautious stance Tuesday about higher taxes due to their negative impact on corporate investment and wage hikes.
Finding stable funding sources is not easy for Japan, which has a debt already more than twice the size of its economy, and whose fiscal health is the worst among developed nations.
Kishida has said the government needs to secure an additional 4 trillion yen yearly for the expanded defense budget. A quarter of the amount will be funded through tax increases while spending reforms and the use of surplus money will back the rest.
Viable options include increasing corporate tax revenue, which makes up a large portion of the country's funding source, by introducing a 5 percent surcharge, according to people with knowledge of the discussion.
"There is no doubt that (a higher corporate tax burden) will put a damper" on companies raising wages or increasing capital expenditure, said Kengo Sakurada, chairman of the Japan Association of Corporate Executives.
He cast doubt on zeroing in on "wherever (they think) they can target" as legitimate tax theory.
Another potential source of funding is to use part of the revenue from the special reconstruction tax introduced in the aftermath of a 2011 major earthquake and tsunami, extending the time limit beyond 2037.
The idea of using construction bonds came about as the government estimated that around 4 trillion yen would be needed to expand and improve SDF facilities.
Relying on construction bonds would mark a departure from the past stance, clarified in 1966 by then Finance Minister Takeo Fukuda, that there should be a line drawn between defense spending and expenditures on public works.
Related coverage:
Japan to boost defense spending to 6.5 tril. yen in FY 2023
Japan PM negative about gov't bonds to finance defense spending hike
