Tax Japan: Business and Government are Strong, but Households Are Burning

Corporate earnings in Japan have been strong, and tax revenues, a major source of revenue for the Japanese government, have also been increasing steadily. In FY2023, Japan recorded ¥72.08 trillion JPY (about $490 billion USD) in tax revenues. FY2024 is expected to reach around the mid-¥73 trillion mark, likely a record high for the fifth consecutive year.

In Fiscal Year 2023 (April 2023 to March 2024), the total net income of listed companies in Japan amounted to ¥47.94 trillion ($323 billion), plus 15.0% year-over-year (YoY). This is a record high figure for the third consecutive year. The following FY2024 (April 2024- March 2025) will also be strong. It is expected to reach ¥52.65 trillion (equivalent to $354 billion), a record high for the fourth consecutive year. The Nikkei 225 ended FY2024 at ¥39,894.54 ($268.37 ), the highest year-end value in 35 years.

In 2025 and beyond, Income tax, corporate tax, and consumption tax, the major pillars of tax revenues, are all expected to increase. Of these, the consumption tax, which is more familiar to households, is expected to reflect rising prices and strong consumption.

*One of Japan's opposition parties picks up the tax issue, demonstrating loudly against taxes, chanting, "Tax increase? No ♡ Absolutely not!" Suginami Ward, Tokyo on March 15, 2025.*

Skyrocketing Food Costs, Stagnant Salaries

However, there are persistent calls for a reduction in the consumption tax in Japan. We often hear people asking that at least the consumption tax on food products be exempted or lowered.

The Engel's coefficient indicates the ratio of food costs to consumption expenditures. According to a household survey by the Ministry of Internal Affairs and Communications, in 2024, the Engel's coefficient for households with two or more members was 28.3%. That is the highest level in 43 years, since 1981.

By comparison, the coefficients for the United States and Germany were 16% and 19%, respectively. In other words, it shows that income growth in Japan has not kept pace with food price hikes. In turn, this has put pressure on household finances.

*Rice on display at a supermarket in Koshigaya City, Saitama Prefecture in October 2024.*

Squeezing Family Budgets

Food price hikes have been triggered by soaring import prices and Japan's low food self-sufficiency ratio. Japan's Consumer Price Index (CPI) for January 2025 was announced to be +4% YoY. However, this figure excludes foodstuffs. The figures for food and rice were an astonishing +21.9% YoY and +70.9% YoY, respectively.

In addition to high prices, the burden of taxes and social insurance premiums has been increasing. Add to that the continuing YoY decline in the real disposable income of individuals since October 2022. Under these circumstances, the high Engel's coefficient in Japan means that food accounted for a high percentage of personal consumption expenditures as people became increasingly thrifty.

Life is especially difficult for pensioners. Pension payments to Japanese pensioners do not increase in line with rising prices. (The amount received by pension recipients is calculated based on the rate of change in prices and nominal wages. However, it is subject to downward adjustment based on the macroeconomic indexing rules established to improve the soundness of pension finances.)

Therefore, many pensioners are forced to save even more money. But the reality seems to be that they are unable to reduce the portion of their consumption that is spent on food.

*The cabbage section of a supermarket at the Bandai Shibukawa store in Higashiosaka City, Osaka Prefecture (©Sankei by Shigeru Amari)*

Taking On 'Engel's Coefficient'

When I was a child, I was taught in school that a low Engel's coefficient meant a higher standard of living. Meanwhile, a high Engel's coefficient meant a lower standard of living. In terms of nominal GDP, Japan was overtaken by China in 2010, moving from the second to the third place in the world. Then, it was overtaken by Germany in 2023, falling from third to fourth place. This indicates that Japan's economic power has been declining.

The fact that the Engel's coefficient is also rising amid soaring prices means that Japanese people are now forced to live harshly in an increasingly impoverished society.

While people's lives are becoming more and more impoverished, unfortunately, there is no indication that the government is cutting taxes. On the contrary, the Japanese government is working hard to increase tax revenues.

For example, inheritance tax is a tax imposed on property acquired through legacy. For this tax, the government further lowered the bar by reducing the basic exemption amount in its 2015 amendment. That further increased government tax revenues at the expense of families.

While revenues from Japan's inheritance tax account for a small 4% of total revenues, inheritance tax revenues have been rising steadily since 2015. Many people in Japan are troubled by the imposition of inheritance taxes after the death of a family member. This is very different from the US, where many people do not have to worry about estate taxes unless they are extremely wealthy.

*Prime Minister Shigeru Ishiba speaks at the House of Representatives Budget Committee on February 17, at the National Diet Building. (©Sankei by Ataru Haruna)*

Taxing Families After Death

Overall, inheritance taxes in Japan are very high. By comparison, in the US, the tax rate is 40% at the federal level. Below that, it varies from state to state, with a maximum of 16% in New York, for example. A comparison of basic deductions reveals even greater differences. The amount of inheritance tax actually paid is based on the amount of inheritance minus the basic exemption.

In Japan, until 2015, the basic inheritance tax deduction was ¥50 million ($336,000 ) plus ¥10 million ($67,000) x number of heirs. However, this was lowered in 2015 to ¥30 million ($ 202,000) plus ¥6 million ($40,400) x number of heirs. This significantly reduced the deduction. In other words, revision has increased, not decreased, the amount of inheritance tax payable since 2015.

The basic exemption amount in the US is $12 million (about ¥1.8 billion) at the federal level and $6.58 million (equivalent to ¥1 billion) at the state level in New York, for example. In the US, people who pay inheritance tax seem to be in the minority because of the large basic exemption amount.

Meanwhile, a great deal of energy is required for calculation, preparation of inheritance tax returns, and, in some cases, expensive outside professionals such as tax accountants. This places a heavy burden on heirs.

*Customers at a supermarket in Japan look at price tags of fruit.*

Tax Policy Leaves Families Behind

Recently, there was a government announcement that "The Japanese government will contribute ¥900 million ($6 million ) in economic assistance to Afghanistan. Meanwhile, the TV news showed elderly people lamenting, "After paying taxes and social insurance premiums from my meager pension income, how am I going to make ends meet for this one month?" This tax policy could turn Japan into a country where the nation and its corporations prosper and the people become poor.

Tourists coming to Japan from abroad may see Japanese people shopping in Ginza or Shinjuku in downtown Tokyo and feel that the Japanese are wealthy. In reality, however, there are quite a few Japanese who are struggling to make ends meet amid the high cost of living.

It is not uncommon for families to be unable to feed their children and have to rely on free meals provided by "children's cafeterias." These are private, volunteer-run meal facilities. The era when most Japanese thought they belonged to the middle class, the so-called "all-Japanese-are-middle-class" mentality, ended long ago with the bursting of the bubble economy in the early 1990s.

Author: Yoshifumi Fukuzawa