Key Facts
• December 19, 2025: Ruling parties finalize 2026 tax reform outline.
• Income tax threshold raised from ¥1.6 million to ¥1.78 million.
• Environmental performance tax on vehicle purchases to be abolished.
• Defense-related income tax increase to begin January 2027.
• ¥1.2 trillion to be secured annually for education and fuel tax reforms.
• Tax cuts dominate the reform, despite rising long-term interest rates.
• National debt reliance expected to increase in 2026 budget.
Summary
On December 19, 2025, Japan’s ruling parties, the Liberal Democratic Party and Japan Innovation Party, approved the 2026 tax reform outline. Key changes include raising the income tax threshold from ¥1.6 million to ¥1.78 million, addressing a request from the Democratic Party for the People. The environmental performance tax on vehicle purchases will be abolished, while a defense-related income tax increase is set to begin in January 2027. To fund education reforms and the removal of temporary fuel taxes, ¥1.2 trillion will be secured annually through tax policy adjustments. Despite these measures, the reform emphasizes tax cuts, raising concerns about increased reliance on national debt in the 2026 budget amid rising long-term interest rates.
