Japan's ruling parties approved their tax reform plan for fiscal 2026 on Friday, featuring measures to support households struggling with rising living costs, after incorporating opposition proposals. The plan aims to boost workers' net earnings.
Japan's ruling parties, the Liberal Democratic Party (LDP) and the Japan Innovation Party (JIP), approved their tax reform plan for fiscal 2026 on Friday (December 19, 2025). Compiled by Prime Minister Sanae Takaichi's LDP and its junior coalition partner JIP, the plan raises the tax-free annual income threshold to 1.78 million yen ($11,400) from the current 1.60 million yen to support households facing soaring living costs.
With prices rising not only for new but also existing homes, income tax deductions for buyers of pre-owned houses using housing loans will be expanded. To offset the expected revenue drop from abolishing the provisional gasoline tax at year-end, the blueprint pledges to secure 1.2 trillion yen annually by reviewing tax incentives, including those promoting company wage hikes.
Amid plans to significantly boost defense spending due to a worsening security environment, income tax will be increased from January 2027 to fund it. A levy previously used for Tohoku region reconstruction efforts will now be redirected to defense.
Raising the nontaxable threshold is a flagship policy of the Democratic Party for the People (DPP), incorporated following Thursday's agreement with the LDP. The LDP, concerned about potential tax revenue declines, accepted the DPP's demand to gain its support for future bills and budgets. The JIP (Nippon Ishin) and Komeito party endorsed the LDP-DPP deal.
Since taking office in late October, Takaichi, who advocates "responsible yet aggressive" fiscal policies, has struggled with parliamentary management. The LDP-JIP coalition holds a slim majority in the House of Representatives but is a minority in the House of Councillors, requiring opposition cooperation to pass legislation.
The plan also introduces a 7 percent corporate tax deduction for capital investments to encourage private-sector spending. The Cabinet will approve the tax plan next Friday alongside the draft initial budget for fiscal 2026 starting in April. Related bills are set for submission during next year's 150-day ordinary Diet session beginning in January.
"The discussion was grounded in a citizen’s perspective," LDP tax committee chief Itsunori Onodera told reporters. "This tax reform is imaginative."
