Economy Japan to lift tax-free income threshold to ease cost-of-living pressure

Japan will raise the tax-free income threshold and expand deductions for middle-income earners following an agreement between PM Takaichi's minority government and a pivotal opposition party.

Yesterday, the ruling LDP and the DPP confirmed they had agreed to lift the minimum taxable income to 1.78 million yen from the current 1.6 million yen. The increase reflects a long-standing DPP policy priority, parts of which were already introduced last year but applied only to a narrow income range. Under the deal, deductions will also be expanded for people earning up to 6.65 million yen a year. Both measures are to be incorporated into the government's tax reform package for the next fiscal year, starting in April. According to DPP leader Tamaki Yuichiro, the changes would benefit roughly 80% of taxpayers, reducing income tax bills for middle-income earners by around 30,000 to 60,000 yen.

Tamaki said the threshold increase would amount to a total tax reduction of 1.8 trillion yen, including the effect of this year's earlier adjustment. The reform framework for the next fiscal year would also include additional tax breaks to spur corporate investment, while raising income taxes from 2027 to help pay for higher defence spending, domestic media reported. The tax reform framework will be announced on Friday, to be followed by the compilation of next fiscal year's draft budget. Total spending in Japan's draft budget for fiscal 2026 will likely exceed 120 trillion yen to hit a new record

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This is welcomed! However, it seems odd to reduce income tax in 2026 and then increase it the following year.