Tax Increases on Corporate, Tobacco Rates in Japan in April to Fund Greater Defense Spending, Income Tax Will Rise Next Year

By Yui Orita and Taku Mukoyama / Yomiuri Shimbun Staff Writers

2:00 JST, March 26, 2026

The rates for tobacco and corporate taxes will be raised from April to secure financial resources to strengthen defense capabilities, and income taxes are also expected to be increased from January next year.

Despite the projected increase in revenue from the three taxes of more than ¥1 trillion, the government’s efforts to secure financial resources are only halfway toward its funding goal, with additional hikes to the defense budget looming.

The government will implement two-stage tax hikes on heated tobacco products in April and October, aligning them with conventional cigarettes at a unified rate of ¥15.244 per cigarette or stick.

Furthermore, the tax rate for both conventional and heated cigarettes will increase in three annual stages beginning in April 2027, with each hike adding ¥0.5 per unit.

In line with the tax increase, Philip Morris Japan Ltd. will raise the retail price of 66 IQOS heated tobacco products on April 1. Prices for the Terea series will increase from ¥580 to ¥620, and prices for the Sentia series will rise from ¥530 to ¥570.

Japan Tobacco Inc. will raise the prices of 37 heated tobacco items, including its Ploom series, by ¥20 to ¥30, effective the same day.

British American Tobacco Japan Ltd., the maker of the glo series, is also expected to announce price revisions shortly.

6% of firms affected

The corporate tax increase will take effect for companies’ fiscal years beginning in or after April. A 4% surcharge will be added after deducting ¥5 million from the corporate tax amount.

To ease the burden on small and midsize enterprises, companies with a corporate tax amount of ¥5 million or less will be exempt. The additional levy will apply to those with an annual corporate income of about ¥24 million or more, affecting about 6% of all corporations.

The government plans to impose a 1% surcharge on personal income tax amounts starting in January 2027. The government has submitted related bills to the current Diet session, and they are highly likely to be enacted within this fiscal year.

For the time being, the actual burden on households will not increase, as the tax rate for the special income tax for reconstruction — which was introduced to fund recovery from the 2011 Great East Japan Earthquake — will be lowered from 2.1% to 1.1%.

However, the total financial burden on the public will ultimately swell as the taxation period for the special income tax for reconstruction — originally set to expire in 2037 — will be extended by 10 years through 2047.

¥1.3 trillion revenue gain

The Finance Ministry estimates that the tax revenue increase from the defense-related tax rises will total ¥1.3 trillion in fiscal 2027.

The government has set total defense spending for fiscal 2023 through fiscal 2027 at ¥43 trillion, intending to finance it through the sale of state-owned properties and revenue from defense-related tax hikes.

The security environment surrounding Japan is becoming increasingly severe. In a policy speech in February, Prime Minister Sanae Takaichi said it is necessary to proactively promote the strengthening of the country’s defense capabilities.

The government aims to revise three security-related documents within the year, and an increase in security-related expenses, including defense spending, is expected to be outlined.

Kohei Okazaki of Nomura Securities Co. noted that, given global trends, the government may increase security-related spending to 3% of the nominal gross domestic product by fiscal 2031.

Okazaki noted that such a scenario would require nearly ¥10 trillion in additional spending, underscoring the need to explore new funding sources, including tax increases.

However, discussions on further tax increases are likely to face significant challenges, given the potential impact on people’s livelihoods and business operations.