Uncertainty surrounding Japan’s tax revenues is raising significant concerns regarding the government’s ability to finance an increased defense budget deemed essential in the face of escalating threats from an assertive China and North Korea’s strengthening military relations with Russia. In late 2022, Japan’s administration committed to a substantial investment of approximately 43 trillion yen (around $272 billion) over five years, concluding in fiscal year 2027, aimed at enhancing national security. To support these expenditures, plans were initiated to generate an additional 1 trillion yen in revenue by raising income, corporate, and tobacco taxes by fiscal 2027. Recently, the government announced an increase in corporate and tobacco taxes, scheduled to take effect in April 2026.
However, the decision to postpone raising income taxes reflects mounting public pressure for financial relief amid an ongoing cost-of-living crisis. A senior official from the ruling party expressed confidence in achieving the 1 trillion yen revenue target, citing that corporate tax revenues are exceeding expectations. However, the sustainability of these revenue streams remains in question, as tax increases can provoke considerable public discontent and may carry political risks. The issue is further complicated by the outcome of the October 27 general election, where the ruling coalition lost its majority, prompting a more cautious stance towards tax hikes.
Takahide Kiuchi, an executive economist at the Nomura Research Institute, noted that the minority government is particularly wary of potential backlash during the upcoming House of Councillors election in the summer of 2025. Traditionally, Japan has capped its defense spending at approximately 1 percent of its gross domestic product (GDP) due to its pacifist constitution. However, increasing this figure will be challenging in a nation already grappling with significant fiscal constraints, the worst among major developed economies. With a goal to elevate defense spending to 2 percent of GDP by fiscal 2027, Japan is aligning itself with a broader global trend of nations bolstering their military capabilities in response to heightened geopolitical tensions.
For fiscal year 2025, which marks the third year of this five-year defense plan, the government has allocated a record 8.7 trillion yen for defense, anticipated to represent roughly 1.4 percent of GDP. Economist Toshihiro Nagahama from the Dai-ichi Life Research Institute suggested that funding for expanded defense expenditures may necessitate the issuance of government bonds, a strategy commonly employed worldwide to finance national security objectives.
Yet, analysts remain divided on the prudence of relying on debt, especially when revenue generation appears uncertain. Concerns are raised about the potential erosion of investor confidence, which could deepen fiscal vulnerabilities and destabilize the government bond market over time. A Finance Ministry spokesperson cautioned against the overreliance on debt for funding defense initiatives, emphasizing that “it is our generation’s responsibility to create a sound system for national security” and warning that “heavy reliance on debt merely transfers the burden to future taxpayers.” Critics of the current trajectory are urging the government and the ruling coalition to re-evaluate their defense spending plans if they struggle to secure stable funding sources.
However, altering this course appears unlikely. Saisuke Sakai, a senior economist at Mizuho Research & Technologies, remarked, “While it is theoretically feasible to revise defense spending commitments, making such a choice is politically impractical.” Kiuchi has called on the government to prioritize the establishment of long-term funding mechanisms for defense, noting that the costs associated with addressing regional security issues and military advancements are poised to rise. He advocated for “effective measures, such as cost reductions in other sectors,” and stressed the importance of presenting specific proposals transparently to taxpayers.
