Japan’s Defense Spending Conundrum

Facing “the most severe and complex security environment since World War II,” the Japanese government is determined to raise defense spending to 2 percent of GDP by 2027. On November 28, Prime Minister Kishida Fumio committed to spend a total of 43 trillion yen ($315 billion) over the next five years. His cabinet has started down this path by approving a 26.3 percent increase in Japan’s defense budget from fiscal year 2022 to fiscal year 2023. This budget, worth 6.82 trillion yen ($51.4 billion), amounts to 1.19 percent of Japan’s GDP.

The increase in defense spending is not overwhelmingly popular, but many Japanese are coming to see the necessity of it. In a December Yomiuri poll, 51 percent of respondents supported the defense spending increase while 42 percent opposed it. In a December 18 Kyodo News poll, 53.6 percent were in support with 38 percent opposed. In a January Yomiuri poll – after the public had more time to process the details – the majorities flipped: 43 percent supported the increase while 49 percent were against it.

In addition, how Japan will finance this defense spending increase is still dogged by questions and plagued by controversies. Japan’s debt-to-GDP ratio is 232 percent, the highest of any OECD country. Kishida has advocated for increasing taxes instead of increasing debt, as the cost to service the debt is already 22.6 percent of the annual budget. Kishida supported a tax increase, arguing that “it is our generation’s responsibility to future generations.” However, this is not a popular opinion.

Tax increases will always be unpopular – especially when half the country is not in support of what the increased taxes will be spent on. Concerned about the effect that this tax increase could have on the Liberal Democratic Party’s (LDP) chances in the April local elections, several LDP politicians have spoken out against it, including Hagiuda Koichi (former minister for economic trade and industry), Takaichi Sanae (minister for economic security), and Sato Masahisa (former head of the LDP’s foreign affairs committee).

On December 8, Kishida announced that Japan would need 1 trillion yen more in annual tax revenue by fiscal year 2027 to fund the defense spending increase of 17 trillion yen over the five-year period from fiscal year 2023 to fiscal year 2027. The Research Commission on the Tax System responded to this call by the December 15 deadline, proposing to increase the personal income, corporate, and cigarette taxes.

Personal income tax will be raised by 1 percent to pay for defense, while the special tax for reconstruction of the Tohoku region will be cut from 2.1 percent to 1.1 percent – though the special reconstruction tax will need to be extended past its original deadline of 2037 (more on this below). Corporate taxes will be raised by between 4 and 4.5 percent, with an exemption for small businesses, and the cigarette tax will be gradually raised to a total increase of 3 yen per cigarette. For fiscal year 2027, the goal is to secure about 200 billion extra yen in personal income tax, between 700 billion yen and 800 billion yen in corporate taxes, and about 200 billion yen in cigarette taxes.

Critically, however, the commission failed to specify when the taxes would be raised. Voters do not need to worry about tax hikes for at least another year, as the commission proposed the implementation date of “an appropriate period in 2024 or thereafter.” With no date set, voters might not have to worry about tax increases for a while, but defense planners will have to worry about where their money is coming from – and when.

A December 18 Kyodo News poll found that 64.9 percent of respondents disapproved of this plan to raise taxes to pay for increased defense spending. Even before the plan was announced, the December 2022 Yomiuri poll found that of the 51 percent that supported the increase in defense spending, opinion on how to pay for it was divided – with increased taxes being the least popular solution. According to the poll, 38 percent of supporters of the defense hike want the government to issue more bonds, 30 percent want the defense spending increase to be supported by cuts to other budgets such as social security, and 27 percent support tax increases (5 percent provided no answer).

In the January Yomiuri poll, 63 percent opposed the government’s plans to raise taxes to pay for increased defense spending, compared to 28 percent who supported it. Even focusing on just the 43 percent of respondents who supported increasing defense spending, 49 percent were opposed to paying for the increased spending with higher taxes.

The goal of having most of the increase be raised by corporate taxes was to lessen the tax burden on the individual voter. Exemptions for small business are expected, but, for obvious reasons, the business community is cool on this idea.

In addition to raising corporate taxes, there is some creative license being taken with Kishida’s instructions to not increase personal income taxes. There is currently a 2.1 percent special tax as part of the personal income tax that is being used to generate revenues to pay for reconstruction of Tohoku, the region devastated by the March 11, 2011, earthquake and tsunami. One proposal is to reduce the rate of taxation for reconstruction (but extend it for a longer period) and use the revenue from the surplus rate to pay for defense.

In other words, individuals would continue to pay 2.1 percent personal income tax, but while all 2.1 percent used to go to reconstruction, now 1.1 percent would go to reconstruction and 1 percent would go to defense. Furthermore, voters would still wind up paying more taxes overall, as the special tax for reconstruction will be extended past 2037.

Politicians from the affected region were understandably upset. As Azumi Jun, the Diet Affairs Committee chairman of the main opposition Constitutional Democratic Party of Japan argued, “Switching the special tax for reconstruction to pay for defense is an act of betrayal directed at the public as well as residents of disaster-stricken areas.”

The use of construction bonds is also being considered. Construction bonds are usually used for public infrastructure (e.g., public roads) and have not been used for anything defense-related in the post-war era. The proposal is to use the money from construction bonds to build barracks for the Self-Defense Forces (SDF), warehouses on SDF bases, and ports in the Nansei islands chain. The proposed 434 billion yen in construction bonds may also be used for warships and other vessels.

Critics of the plan are concerned that if construction bonds are allowed to be used in this – initially limited – way, the government will start sliding down a slippery slope, and construction bonds will be used to fund more and more explicitly military ends as Japan’s defense budget continues to increase.

Kishida has floated the possibility of calling a snap election before the tax hike (the current term of lower house members expires in October 2025). The results of the snap election – if favorable for Kishida and LDP – could be used to claim a public mandate for increasing taxes for the purpose of defense. It is a gamble, but perhaps a necessary one to force the Japanese people to accept that it’s not enough to want to increase defense spending. Increasing defense spending means having less money to spend on other priorities.

As if the challenges of raising additional funding for defense were not enough, Kishida has other priorities for the government, including halting the declining birthrate. Kishida wants to increase the volume of assistance given to parents for raising children and the number of recipients who can receive such assistance, but this also will cost money – and a lot of it. The government would need to pay over 1 trillion yen ($75 billion) every year to finance Kishida’s vision.

How to fund increased defense spending is not a challenge unique to Japan – just look at Germany or even the United States. After years of being branded a pacifist oddity, this may be the first signs of Japan becoming a “normal” country, with all the debates and public discussion that come with being a state that is responsible for its own security.