Key facts
- Japanese ministries are proposing tax code changes to encourage bond purchases and wage hikes.
- A review of tax breaks found only one measure suitable for elimination out of approximately 120 examined.
- The government plans a consumption tax cut on food items from 8% to 1% starting April 2026.
- The 2026 Tax Reform Outline includes incentives for investment in production facilities and R&D tax credits.
- Increased compliance requirements are expected for inbound businesses.
Japan's government ministries are proposing significant tax code changes for fiscal year 2027, aiming to incentivize individuals to purchase government bonds and businesses to increase employee wages. These proposals come amidst a stalled initiative to eliminate ineffective tax breaks, which has yielded minimal results, raising concerns about funding for planned fiscal measures, including a consumption tax cut.
A review of approximately 120 special tax breaks, dubbed a "Japanese version of DOGE" after a U.S. initiative, found only one measure suitable for elimination: a reduction in registration and license tax for corporate restructuring, which has seen no applications since its introduction in fiscal 2024. Many ministries have been reluctant to propose eliminating tax breaks, even those with sparse uptake, arguing for their perceived policy effectiveness.
For instance, a reduction in property tax for docking stations, introduced to promote bike-sharing, was applied only four times through fiscal 2024, yet the transport ministry deemed it effective in catalyzing local bicycle policies. Similarly, a tax reduction for companies engaged in "smart agriculture" has been used only three times since fiscal 2024, but the agriculture ministry plans to raise awareness.
The government plans to reduce the consumption tax on food items from 8% to 1% for two years starting April 2026, a move that, combined with cash handouts, will require approximately 5 trillion yen in financial resources. The tax reform outline for 2026, released in December 2025, includes incentives for investment in specified production facilities and new R&D tax credits of up to 50% for strategic technologies, aiming to boost industrial competitiveness and attract foreign investment. Inbound businesses are advised to prepare for increased compliance requirements.