Rifts Open Over Axing of Environmental Vehicle Tax as Japan’s Auto Industry Grapples with U.S. Tariffs

By Shuntaro Murase and Taku Mukoyama / Yomiuri Shimbun Staff Writers

17:04 JST, September 19, 2025

Calls for abolishing an environmental performance-based tax paid when a vehicle is purchased have pitted a major automobile industry group against the government, but also caused divisions between government ministries.

As Japan’s auto industry grapples with the ramifications of tariffs imposed by the administration of U.S. President Donald Trump, the Japan Automobile Manufacturers Association (JAMA) and the Economy, Trade and Industry Ministry are demanding the tax be immediately axed. However, the Internal Affairs and Communications Ministry and the Land, Infrastructure, Transport and Tourism Ministry are reluctant to take this step, which would lead to a drop in tax revenue.

The association announced Thursday its key requests for tax system reforms for fiscal 2026, which starts in April. These requests included a call for the environmental performance-based tax to be abolished.

“Taxes imposed on automobiles are becoming a heavy burden,” JAMA Chairman Masanori Katayama, who is also chairman of Isuzu Motors Ltd., said at a press conference, as he explained the significance of the proposed change. “We want to have this burden reduced and to shore up the domestic industrial base.”

The environmental performance-based tax was introduced in 2019 in place of the vehicle acquisition tax. This tax of 0% to 3% of the purchase price is calculated based on the vehicle’s attainment of fuel efficiency and emission standards. The tax is applied to new and used vehicles, but electric vehicles and plug-in hybrids are exempt.

Automobile taxes are paid at three stages – when a vehicle is purchased, while it is owned, and when it is being used, such as through fuel taxes. These taxes generate about ¥9 trillion in combined annual revenue. The determined push by JAMA and the industry ministry to abolish the environmental performance-based tax comes at a time when new vehicle sales are slumping.

In 2024, about 4.42 million new vehicles were sold in Japan, a huge drop from the 7.77 million units sold in 1990. The average length of vehicle ownership was about nine years in the 1990s, but this has grown to about 13 years in the 2020s. Rising car prices and tax increases are believed to be factors behind people owning vehicles for longer.

Although the United States has reduced the tariff imposed on vehicles imported from Japan to 15%, the financial burden on domestic automakers is still considerable. Axing the environmental performance-based tax is intended to encourage people in Japan to get a new car and to prop up the auto industry.

“How we can maintain and strengthen domestic production are urgent issues to be addressed so that the auto industry’s competitiveness and jobs aren’t lost,” Katayama said.

Current system ‘unfair’

However, the environmental performance-based tax is a local tax and a crucial revenue source for municipalities. Revenue from this tax is estimated to reach about ¥190 billion in fiscal 2025.

“If this tax gets abolished, a replacement source of funds will be needed,” an internal affairs ministry official told The Yomiuri Shimbun.

The land ministry, which is responsible for road management, is also reluctant to scrap the tax due to concerns that doing so could lead to a shortage of funds needed to repair and upgrade aging infrastructure. The tax is not imposed on electric vehicles, so there is the view it should be kept to help the nation’s decarbonization efforts.

However, electric vehicles are typically heavier than gasoline-powered cars, so they are more likely to damage roads as they drive along. Electric vehicle owners do not pay any gasoline tax, and they also pay less of the tax calculated based on a vehicle’s exhaust emission volumes. Some observers have pointed out that this has created a sense of unfairness.

Consequently, the industry ministry and the association have called for the introduction of a new tax system during the vehicle ownership stage that would account for vehicle weight and environmental performance. The Finance Ministry is poised to consider this issue as well.

Attention will be focused on whether the ruling parties can present concrete details, such as when such a tax would be introduced, in the tax system reform outline to be wrapped up by the end of the year.