Japan Plans Corporate Tax Hike to Fund Defense Expansion
nashnova research
Japan is discussing another corporate tax hike to cover a ballooning defense-budget gap — and business leaders are pushing back hard, warning it will chill investment.
Why is Japan raising corporate taxes again?
In 2022 Japan revised its security documents, targeting defense spending at 2% of GDP with ¥43 trillion earmarked for equipment over five years.
Nominal GDP growth has since pushed the funding needed to hold that 2% target far above the original estimate — the gap runs into the trillions of yen.
This means → the revenue plan set three years ago no longer covers the bill, and the government needs new money.
How would the tax hike actually work?
Japan already introduced a special corporate defense tax in FY2026, set at 4% of a company's corporate-tax liability; voices inside the ruling coalition want to raise that rate further.
Their argument: FY2025 corporate-tax revenue hit ¥21.7 trillion, topping the 1989 bubble-era record for the first time.
In plain terms = corporate profits just set a new high, so the government's line is "you can afford to pay more."
Are there alternatives to a tax hike?
Japan's Foreign Exchange Fund Special Account (FEFSA) — a government account holding foreign-currency assets — has built up a sizable surplus, boosted by yen depreciation and widening interest-rate differentials.
That surplus, however, depends heavily on market conditions and its stability is questionable.
This means → the money suits short-term outlays (such as a two-year food-tax cut), but it is a poor fit for defense, which is a permanent budget line.
How is U.S. pressure compounding the problem?
Washington is pushing allies to lift core defense spending to 3.5% of GDP — well above Japan's current 2% target.
This reflects a pressure that goes beyond Japan's internal budget gap: allied demands could keep ratcheting the funding requirement higher still.
Why is the business lobby so opposed?
Keidanren chairman Yoshinobu Tsutsui said he is "fundamentally opposed" to funding defense through higher corporate taxes.
His core argument: the government cannot call for more public-private investment while simultaneously raising the tax burden on companies — the two goals contradict each other.
This means → business and the ruling coalition's pro-tax wing are now in open standoff. Whether they can reach consensus before the year-end security-document revision is the key marker for Japan's defense-fiscal trajectory.
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