Japan's record tax haul leaves questions over Ishiba's handout pledge

Japan Times

04-07-2025

Japan's tax revenues hit a record of around ¥75.2 trillion ($524 billion) in the fiscal year that ended in March, surpassing government forecasts by ¥1.8 trillion. But the windfall still left questions over how Prime Minister Shigeru Ishiba will fund his cash handouts, a key election pledge.
The total marks a fifth consecutive year of record tax receipts, up from ¥72.1 trillion the previous year and ahead of the earlier estimate of ¥73.4 trillion, the Finance Ministry said Wednesday. Robust corporate earnings and persistent inflation were key drivers. Yet a ministry official explained that the government's proposed handouts won't be funded by money left over from last year's account, but instead from what's left in this year's accounts.
Ishiba's plan to distribute cash handouts of ¥20,000 per adult, — with additional money for children and lower-income households — is expected to cost around ¥3.5 trillion, according to his Liberal Democratic Party (LDP). How much Japan's tax revenue will increase in the current year remains unclear, given the hit from U.S. tariffs and the income from other streams are also difficult to accurately predict.
"It's hard for Ishiba to explain the logic behind using an as yet unclear source of funding for the cash handout,' said Takuya Hoshino, chief economist at Dai-ichi Life Research Institute. "¥3.5 trillion is quite a large amount, and with the yen getting stronger recently, it's honestly questionable whether we'll see that level of surplus this year.'
The economist added that it's hard to imagine the government being able to cover the cash handouts and other needs without taking on debt.
"The funding should come from higher-than-expected tax receipts, unused budget funds or non-tax income,' Ishiba said Monday during a debate with other party leaders. "We're not going to rely on unstable sources,' he said, ruling out the possibility of issuing any debt-covering bonds.
The total amount of money additionally available from last year's accounts will be about ¥2.3 trillion, according to the Finance Ministry. Half of that will be allocated to debt repayment, while the other half will go to Japan's increased defense spending, according to a ministry official.
Consumption tax revenue rose 8.4% to about ¥25 trillion from the previous fiscal year in the year that ended in March, while corporate tax receipts reached ¥17.9 trillion, up nearly 13%. Income tax revenue declined to ¥21.2 trillion from ¥22.1 trillion in the previous year, after former Prime Minister Fumio Kishida introduced a temporary tax rebate from June last year.
Persistent inflation played a key role in boosting revenue, lifting both corporate profits and consumer spending in nominal terms. Japan's overall inflation rate stood at 2.7% on average last fiscal year.
The Bank of Japan's interest rate hikes also improved banks' lending margins, while the weak yen has helped exporters and tourism. Net profit among Japanese companies in the Topix 500 index rose by roughly 8% to ¥54.9 trillion in the fiscal year 2024, marking a record, according to calculations.
Opposition parties have countered Ishiba's plan with calls to cut the sales tax, with one even suggesting the possibility of debt-covering bonds to fund the measure. A recent poll by Kyodo News suggested voters prefer using excess tax revenue for a tax cut over one-time payments.
Experts warn that cutting the sales tax would be difficult to reverse and riskier for public finances in the long run.
"I see some possibility that the LDP-proposed cash handout could be fiscally sound,' said Takero Doi, an economics professor at Keio University. "It's a defensible policy if it helps halt the cycle of expansive extra budgets,' he added.
Japan engaged in aggressive fiscal stimulus during the pandemic, spending more than a combined ¥140 trillion in supplementary budgets over three years and financing them with debt. Even in 2023, the government compiled an extra budget exceeding ¥13 trillion as it sought to boost public support ahead of elections.
Ultimately, another year of record tax revenue does little to ease Japan's overall finances. The country has the highest public debt burden among developed economies, with total debt projected to reach 235% of gross domestic product this year, according to the International Monetary Fund.
Last year the tax receipts came back higher than expected as well, showing a surplus of around ¥2.5 trillion. But the amount of actual money left available from the national account ended up being around ¥851.7 billion, after accounting for additional debt issuance.
The challenge Japan faces is compounded by BOJ rate hikes that spur debt servicing costs. The Finance Ministry has estimated that debt servicing costs could jump by over ¥7 trillion if long-term yields rises by 2 percentage points.
"Japan can still pay interest on its debt, but it will crowd out policy spending,' said Doi, pointing out that a ¥6.7 trillion increase in debt-servicing costs would be equivalent to the nation's annual budget for education or public infrastructure projects. "It would pose serious challenges for the country's fiscal management.'