Japan turns to tobacco and corporate taxes to fund military build up

The measures are expected to generate about 1.3 trillion yen ($8 billion) in annual revenue. The government says the funds will support a sharp rise in defense outlays as security concerns around the country intensify.

Japan’s defense budget has climbed to a record 9 trillion yen per year. The higher spending forms part of a 5-year plan to build up military capabilities, with 43 trillion yen allocated for defense over the period. For fiscal 2026 alone, the defense budget is set at the record level.

Under the new tax rules, a 4% surtax will be applied to corporate tax bills after a 5-million-yen deduction. The measure is expected to bring in about 869 billion yen in revenue and will not apply to small and midsize firms with low incomes.

Taxes on heated tobacco products will also rise in two stages, starting Wednesday and again in October, bringing them in line with the higher rate already applied to conventional cigarettes. Beginning in April 2027, taxes on both heated and conventional cigarettes will increase further in three stages, adding 0.5 yen per stick and generating an estimated 212 billion yen in additional revenue.

An income tax surcharge of 1% will also be introduced from January 2027, expected to raise about 256 billion yen. However, this will be partly offset by a 1% reduction in a separate special income tax that has been in place since the 2011 earthquake and tsunami to fund reconstruction.

Despite that adjustment, the overall tax burden is expected to rise because the reconstruction tax will remain in place for a longer period.

The tax increases were approved following a new national security strategy adopted in December 2022, which calls for securing around 1 trillion yen annually through tax measures to support defense spending.

Earlier, Qazinform News Agency reported that Japan set up a working group to discuss securing critical goods.