Japan has enacted increases in tobacco and corporate taxes as part of a broader strategy to finance a significant boost in defense spending, with an income tax hike scheduled for 2027. The government projects these tax measures will generate approximately 1.3 trillion yen in additional annual revenue [1]. The core event centers on the implementation of a 4 percent corporate surtax, after deducting 5 million yen from the corporate tax amount, which is expected to raise 869 billion yen. This surtax excludes small and midsize businesses with small incomes [1].
For tobacco products, a two-stage tax hike begins Wednesday, targeting heated tobacco products and aligning their rates with conventional cigarettes. Another increase will occur in October, followed by a three-stage hike for both heated and conventional cigarettes starting April 2027, raising the tax by 0.5 yen per stick. These tobacco tax increases are projected to expand revenues by 212 billion yen [1].
An income tax hike of 1 percent will take effect in January 2027, aiming to secure 256 billion yen. However, this will be offset by a 1 percent reduction in a special income tax currently levied at 2.1 percent for reconstruction efforts after the March 2011 disaster. Despite the offset, the overall financial burden on the public will increase as the taxation period for the special income tax is extended [1].
These tax hikes are a response to Japan's new security strategy, compiled in December 2022, which includes plans to cover 1 trillion yen annually through increased taxes. Defense spending has reached a record-high 9 trillion yen for fiscal 2026, marking the fourth year of a five-year, 43-trillion-yen defense buildup plan. Under Takaichi's government, the target of raising defense spending to 2 percent of GDP was moved forward by two years to fiscal 2025. The United States, Japan's key security ally, may also encourage further increases, having urged allies to raise defense spending to 5 percent of GDP in its January national defense strategy document. Historically, Japan's defense budget was capped at around 1 percent of GDP, or roughly 5 trillion yen [1].
CONCLUSION
Japan's tax increases on tobacco, corporate, and income taxes are designed to support a record surge in defense spending, reflecting a shift in national priorities amid a deteriorating security environment. The measures are expected to significantly increase government revenues and impose a greater financial burden on the public. The market impact is high, given the scale of fiscal changes and the potential for further defense spending pressures from international allies.