Japan Considers 7% Tax Deduction for Capital Spending to Boost Domestic Investment

Government Proposes Significant Tax Incentives for Corporate Investment

The Japanese government and its ruling coalition are actively considering a new tax incentive program that would allow companies to deduct 7% of their capital spending from corporate tax. This move is designed to invigorate domestic investments and is a key component of Prime Minister Sanae Takaichi's administration's efforts to bolster the national economy. The proposed measures are slated for inclusion in the tax system reform package for fiscal 2026.

In addition to the 7% tax deduction, the plan offers companies an alternative: the ability to fully book capital spending as depreciation costs in the initial year. This 'immediate depreciation' scheme would allow businesses to reduce their tax payments more quickly.

Eligibility and Scope of the Tax Breaks

The proposed tax deduction comes with specific eligibility criteria tailored to different business sizes and types of investments. For large companies, investments in manufacturing machinery, buildings, and software valued at 3.5 billion yen or more will qualify for the deduction. Notably, for investments in buildings, a 4% capital spending deduction will apply.

Smaller businesses are also targeted, with the deduction applying to investments of 500 million yen or more. The maximum amount that can be deducted from corporate tax under this scheme is capped at 20%. Companies that have been adversely affected by high U.S. tariffs will be granted the flexibility to carry forward the deduction for up to three years. To be eligible for these tax breaks, firms will need to submit their capital investment plans by the end of March 2029.

Economic Objectives and Broader Context

These tax incentives are part of a broader economic strategy by the Takaichi administration, which recently approved a substantial 21.3 trillion yen stimulus package. The overarching goal is to curb rising prices, stimulate economic growth, and strengthen the Japanese economy. The industry ministry estimates that the new tax measures could lead to a reduction of approximately 400 billion yen ($2.6 billion) in annual tax revenue.

The current considerations echo past efforts to boost investment. A similar initiative was introduced by former Prime Minister Shinzo Abe's administration in 2014, which offered a 5% tax deduction and immediate depreciation as a temporary measure over three years to encourage domestic investments.

Anticipated Implementation

The government and the ruling coalition intend to finalize these incentives as part of their tax system reform package for fiscal 2026. The tax reform outline, which will detail these and other measures, is expected to be published later this month. This strategic fiscal intervention underscores Japan's commitment to fostering a robust investment climate and ensuring sustained economic vitality.