Outline for Tax System Reform: Put Japan’s Economy on New Growth Path by Promoting Investment

Editorial

16:04 JST, December 21, 2025

The Japanese economy now stands at a turning point to attract aggressive investment from companies and chart a new path for growth. It is hoped that motivated companies will be supported through the tax system.

The Liberal Democratic Party and the Japan Innovation Party have decided on the outline of the ruling coalition’s tax system reforms for fiscal 2026. The parties have drawn up measures prioritizing growth aimed at realizing the “robust economy” sought by the administration of Prime Minister Sanae Takaichi.

The outline calls for establishing a system that will allow companies in all industries to deduct 7% of their capital investments from their corporate tax. For cutting-edge fields designated as national strategic technologies such as semiconductors, it also envisages the introduction of a scheme to deduct up to 40% of research and development expenses from corporate tax.

Persistent rising prices have outpaced wage increases, making people’s lives difficult. To accelerate wage increases, it is indispensable for companies to grow and boost their profits.

These profits also need to be used effectively. As things stand, however, even if profits grow, they are not being channeled into investments. This has contributed to prolonged economic stagnation. Companies’ internal reserves have surpassed ¥630 trillion, hitting a record high.

The scale of the capital investment tax cuts deriving from the envisaged reforms is expected to reach about ¥400 billion. The ruling parties deserve praise for working out proactive tax-cut measures that will encourage companies to go on the offensive.

Importance should be also placed on the perspective of building a society in which people can live with peace of mind. Given the severe security environment, an increase in defense spending is unavoidable.

To secure defense funds, a measure to allocate 1% of income tax revenue to defense spending was under consideration, but its implementation was repeatedly put off. So, it is reasonable that a decision was made to implement it from January 2027.

Because the special income tax for reconstruction, which has been used for reconstruction from the Great East Japan Earthquake, will be lowered by 1%, the tax burden on the public will remain effectively unchanged for the time being. All possible efforts must be made to gain public understanding regarding the necessity of stable defense funding.

However, despite Takaichi advocating “responsible and proactive public finances,” the outline presents a list of tax-cut measures without securing financial resources to make up for the reductions. That is highly problematic.

The outline also includes plans to raise the so-called annual income barrier, the threshold at which income tax is levied, from ¥1.6 million to ¥1.78 million following the Democratic Party for the People’s demand. The amount of tax reduction for middle-income earners is also planned to be significantly increased for a limited period of two years. These measures are expected to decrease tax revenue by ¥650 billion.

In light of the severe fiscal situation, measures against rising prices should prioritize low-income earners, so these measures lack fairness.

Furthermore, the abolition of the provisional gasoline tax surcharge and other measures will reduce national and local tax revenues by ¥1.5 trillion annually. Certain financial resources have been secured by reviewing corporate tax incentives, but they remain insufficient. As it is increasingly important to maintain and manage infrastructure, measures to secure funding must be thoroughly pursued.

(From The Yomiuri Shimbun, Dec. 21, 2025)