Japan’s ruling party says it won’t rule out any options for funding defence boost

By Tetsushi Kajimoto and Takaya Yamaguchi

TOKYO (Reuters) – Japan’s government will not rule out any measures to fund increases in defence spending, the ruling Liberal Democratic Party’s policy chief Koichi Hagiuda said on Wednesday, when asked about possible additional debt issuance.

Hagiuda however told reporters after a meeting with his coalition partner Yosuke Takagi of the Komeito party that the government would not raise taxes in the next fiscal year when the five-year defence spending plan kicks off.

“We are not considering funding all the spending with tax hikes,” Hagiuda said. “We must curb spending (in other areas) and make every effort. If that’s not enough, we must consider tax (hikes).”

Hagiuda added that the ruling coalition and government officials will meet on Thursday to further discuss details. A final decision will be made by year-end on the source of the funding, including any tax hike plans.

Prime Minister Fumio Kishida has announced plans to lift defence spending to an amount equivalent to 2% of gross domestic product within five years, from 1% now.

The boost in defence spending stems from an increasingly assertive China and unpredictable North Korea in addition to growing geopolitical risks due to the Ukraine crisis and the tension in the Taiwan Strait.

Kishida ordered the government on Monday to earmark around 43 trillion yen ($313.69 billion) for the upcoming five-year mid-term defence buildup plan, compared with the current five-year plan worth 27.5 trillion yen.

The ruling parties are assuming around 1 trillion yen of the defence spending rise will be paid for through tax hikes by fiscal 2027, Kyodo news agency cited an anonymous source as saying.

Any big spending plan in Japan stokes worry about worsening one of the industrial world’s worst debt burdens, which amounts to twice the size of the country’s annual economic output.

In securing financing, Japan will consider steps such as cuts in already existing spending plans, non-tax revenue such as surplus money from the foreign reserves special account, money left over from COVID-19 funds, or more debt issuance, government sources have said.

(Reporting by Tetsushi Kajimoto and Takaya Yamaguchi; Additional reporting by Daniel Leussink; Editing by Toby Chopra and Raju Gopalakrishnan)