National tax revenue rises to record 84 trillion yen, still short of tax-cut funding

2026-07-03

National tax revenue for fiscal 2025 hit a record high. It came in 3.5246 trillion yen above forecast, but remains insufficient to cover future funding needs, including a possible consumption tax cut.

Tax revenue beats expectations by a wide margin

According to an outline of the fiscal 2025 final accounts released by the Finance Ministry on the 3rd, national tax revenue totaled 84.2226 trillion yen. That exceeded the 80.698 trillion yen assumed when the supplementary budget was enacted in December 2025 and was up 8.9905 trillion yen from the fiscal 2024 final accounts. The increase from the previous year was also a record.

Corporate and income taxes drive gains

Corporate tax led the upside, rising 11.0% from the forecast to 21.7449 trillion yen. Company earnings improved on stronger demand for semiconductors and artificial intelligence (AI), as well as higher overseas profits supported by a weaker yen. Wage increases and higher prices also provided a tailwind, lifting income tax revenue 2.4% to 25.2565 trillion yen.

Non-tax revenue rose 10.1% to 10.7352 trillion yen, helped by larger remittances from the Bank of Japan. The final-account surplus, combining the upside in tax revenue and non-tax revenue with unspent budgeted expenditures, came to 2.6088 trillion yen. Under the Public Finance Act, at least half of that must be used to redeem government bonds, with the remainder allocated to defense funding.

Funding gap remains large

The upside in fiscal 2025 may help underpin tax revenue from fiscal 2026 onward and support efforts by the Sanae Takaichi administration to secure funding for its policies. Still, expected spending needs continue to outstrip the increase in tax revenue.

The government and ruling coalition are arranging a plan to cut the consumption tax rate on food items to 1% for two years from April 2027, then return the equivalent of the remaining 1% in cash payments to make the effective rate zero. The required funding is estimated at about 5 trillion yen a year. Even for the abolition of the provisional surtaxes on gasoline tax and diesel oil delivery tax, decided in fiscal 2025, as well as free education measures, a 0.7 trillion yen funding gap remains.

The Takaichi administration has set out a policy of private-sector and government investment exceeding 370 trillion yen in 17 strategic fields by fiscal 2040. In a projection aimed at reducing the ratio of government debt to gross domestic product (GDP), the Cabinet Office assumed public spending of 10 trillion yen a year. The actual amount will be decided based on preliminary budget requests from each ministry.

Defense spending seen rising further

The government plans to revise the three national security documents during 2026 and set a new defense spending level. Combined initial and supplementary-budget defense spending for fiscal 2025 stood at 11 trillion yen, equal to 2% of GDP of about 560 trillion yen in fiscal 2022.

GDP for fiscal 2026, the benchmark for the next defense buildup plan, is projected at 690 trillion yen. Even if defense spending is kept at 2% of GDP, it would rise to 13.8 trillion yen, requiring an increase of 2.8 trillion yen from fiscal 2025. If Japan were to aim for 3.5% of GDP, the level set by NATO and South Korea, defense spending would need to rise to 24.1 trillion yen.

There are also limits to tax revenue growth. Since 20% to 30% of national tax revenue is allocated to local allocation tax grants, the central government cannot freely use all of the upside. Higher prices are also pushing up spending on social security and other items.

Higher rates to raise debt-service costs

Interest payments on government bonds are also expected to increase. The fiscal 2026 budget assumes an interest rate of 3%, lifting debt-servicing costs by 2.5 trillion yen from fiscal 2025. In April, the Fiscal System Council estimated that if rates rise to 3.6% by fiscal 2029, interest payments would increase by 2 trillion to 3 trillion yen a year through fiscal 2035.

Uncertainty over the Middle East is another factor. Finance Ministry officials see a possibility that events in Iran could weigh on tax revenue in fiscal 2026 through their impact on corporate earnings.

With year-end budget talks approaching, the government will work out funding for revenue losses from a consumption tax cut and for growth investment. The challenge will be how to balance fiscal discipline and growth without relying too heavily on non-recurring gains in tax revenue.

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