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Japan ruling parties eye tax hikes for more defense spending

Yoichi Miyazawa, head of the Liberal Democratic Party's tax panel, arrives at the prime minister's office in Tokyo on Dec. 7, 2022. (Kyodo)

TOKYO (Kyodo) -- Japan's ruling parties agreed Wednesday that taxes should be raised to make up for an expected shortfall in funding to achieve a substantial increase in defense spending to cope with the severe security environment, dismissing an immediate hike in the next fiscal year.

    As part of Prime Minister Fumio Kishida's envisaged five-year plan from fiscal 2023 to boost defense spending to 43 trillion yen ($312 billion), the ruling coalition wants to secure around 1 trillion yen in fiscal 2027, the fifth year, by gradually raising tax rates, sources familiar with the plan said.

    The Liberal Democratic Party and its junior coalition partner Komeito will hash out details next week on securing the necessary funding, with the country's corporate tax viewed as the most viable target for increase. The 1 trillion yen would be about a fourth of the additional funding needed for the fiscal 2027 defense budget, the sources said.

    Still, senior ruling coalition officials agreed at their meeting Wednesday that priority should first go to spending reform and tapping surplus funds before turning to tax hikes.

    Finding stable funding sources is a daunting task. Japan already has debt that is more than twice the size of its economy, while raising taxes will likely face a backlash from businesses and the broader public.

    The recent development comes when Kishida, who has seen his public support ratings tumble, seeks to boost fiscal spending to support struggling households hit by inflation and the COVID-19 pandemic.

    Kishida has instructed his defense and finance ministers to target around 43 trillion yen in defense spending over the five years until fiscal 2027, up more than 50 percent from around 27.47 trillion for its current five-year plan from fiscal 2019.

    Russia's war on Ukraine, the rise of an assertive China and nuclear and missile threats from North Korea are prompting calls in Japan, especially within the conservative LDP, for more defense spending to rework the country's defense posture, which has been exclusively defense-oriented in the postwar era.

    The premier is seeking to boost defense-related expenditures, which have long been capped at around 1 percent of gross domestic product, to 2 percent in fiscal 2027. The 2 percent target is on par with North Atlantic Treaty Organization members.

    For the current fiscal year until next March, around 5.4 trillion yen was allocated for defense.

    Yoichi Miyazawa, who heads the LDP's tax panel, told a meeting on Wednesday that how to secure the funding will be on the agenda next week, as the ruling coalition seeks to finalize a tax reform plan for the next fiscal year on Dec. 15. He visited Kishida at the prime minister's office to discuss the tax reform plan.

    The drafting of the state budget for fiscal 2023 is currently under way, as is a review of three key national security and defense documents scheduled to be finalized later this month to justify the increased defense expenditure.

    The ruling coalition has agreed on the need for Japan to acquire an enemy base strike capability, or what they call a "counterstrike capability."

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