Who is going to pay for Japan’s military build-up?

Japan has embarked on a historic military build-up in its boldest departure from the pacifist stance adopted at the end of the second world war. But one crucial question remains unresolved: who will be asked to shoulder the greater burden, households or companies?

Tokyo plans to acquire Tomahawk cruise missiles from the US, develop its own long-range cruise missiles and beef up cyber defences to address the threat of an increasingly aggressive China, according to people involved in discussions surrounding Japan’s new national security strategy.

The decision to significantly expand military spending has broad public support after Russia’s invasion of Ukraine crystallised fears of a possible conflict in Taiwan. Historically, public resistance to raising defence spending has been grounded in Japan’s constitution, whose Article 9 “peace clause” renounces the threat or use of force in settling international disputes.

But analysts said that the shift in public sentiment still left Prime Minister Fumio Kishida with a daunting challenge: convincing both a rapidly ageing society and cash-hoarding corporations to accept that the costs of fortifying Japan will be heavy.

If he succeeds, Kishida could increase his faltering popularity and reshape Japan’s security role as a stronger military partner for the US and its allies in the Indo-Pacific region.

“Public support for increased defence spending doesn’t necessarily answer the question of how Japan should pay for spending increases or what it should spend larger defence budgets on,” said Tobias Harris, political scientist and deputy director at the German Marshall Fund think-tank.

If Kishida fails to deliver, however, the political fallout would deepen internal division within the ruling Liberal Democratic party and threaten his hold on power.

“There is no solidarity within the government or the ruling party regarding this enormous rise in defence spending,” said Takao Toshikawa, editor-in-chief of the political newsletter Insideline. “It could determine the future of the Kishida administration.”

The government will aim to settle on a financing blueprint for military spending by the end of this week, when it releases its first national security strategy in almost a decade, which is set to describe China’s military activities as “an unprecedented and the greatest strategic challenge”.

Kishida has said Japan will set aside ¥43tn ($317bn) for its defence budget over the next five years, a 57 per cent increase from the current spending plan. This would also bring its annual defence expenditure to roughly 2 per cent of gross domestic product, matching Nato’s target for member states.

Japan is seeking a defence budget of more than ¥6tn for the coming fiscal year, which puts the country’s total military spending at roughly a fifth of China’s.

To fund the increase not covered by the existing budget plans, the government aims to raise an extra ¥4tn a year by cutting expenditures and generating non-tax revenue. The remaining ¥1tn is expected to come from tax revenue.

Kishida has ruled out raising basic income taxes for individuals or issuing government bonds, leaving options such as increasing corporate taxes or levies on cigarettes. Government officials are also reportedly weighing raising extra revenue by extending a special income tax programme that has been used to fund reconstruction of the Tohoku region following the 2011 earthquake and tsunami, or issuing a type of bond that has traditionally financed public works projects.

“The objective is not to raise taxes,” Kishida said at a recent news conference, adding that securing financing to “maintain and strengthen our defence capability” was “the responsibility of our generation towards the future generation”.

At the heart of the dispute over where to find the funding is a division within the LDP’s ranks. One faction, headed by Kishida and known for its emphasis on fiscal discipline, favours some form of tax increase, with Japan’s public debt already at more than 200 per cent of GDP. Supporters of former prime minister Shinzo Abe’s group have called for more issuance of government bonds rather than a tax rise.

In an unusual public display of discord within the cabinet, two ministers questioned Kishida’s instructions to study tax increases, arguing that raising corporate taxes would discourage companies from boosting wages at a time of rising living costs.

Narushige Michishita, professor at the National Graduate Institute for Policy Studies, said many of Kishida’s advisers were drawn from the finance ministry and were not natural proponents of big spending increases. Their strategy, he added, was to initiate a national conversation on tax rises and thereby flag where the strongest sources of resistance would lie.

“People may understand that Japan needs to increase the defence budget, but it would take a huge united effort to convince people into accepting a tax hike to achieve this,” he added.

Proponents of raising corporate taxes argue that an extra ¥1tn per year, which amounts to about 0.2 per cent of GDP, would be marginal considering that companies are expected to receive generous state subsidies when the government discloses details of its ¥150tn climate change investment plan this month.

“Until now, companies haven’t actually raised wages and increased capital spending,” said Toshikawa of Insideline, who believed Kishida was unlikely to be deterred by internal opposition to his tax plan. “In his mind, I think the prime minister has already decided to push this through,” he added.

But Jeffrey Hall, special lecturer at Kanda University of International Studies, questioned whether the tax debate was pre-emptive, coming before the government had laid out its defence spending plans.

“I think it is politically popular to be seen to be defending Japan more, but they still haven’t detailed the spending itself. They’ve just said ‘it’s an emergency, don’t look at the details’,” he said. “It is an ill-thought-out thing where you talk about tax increases before detailing how the money you are raising will make people safer.”