Japan to raise tax-free income threshold to ease inflation squeeze

Japan is set to raise the tax-free income threshold and expand deductions for middle-income earners under a deal between Prime Minister Sanae Takaichi's minority government and a key opposition party.

Japan's ruling Liberal Democratic Party and Democratic Party for the People (DPP) agreed on Thursday to lift the minimum taxable income to 1.78 million yen ($11,400) from 1.6 million yen.

The threshold hike has been a core DPP policy pledge since last year, when it was partially implemented for a limited income bracket.

The parties also agreed to boost deductions for those earning up to 6.65 million yen. The agreed measures will be included in the tax reform framework for the next fiscal year from April.

The steps would benefit about 80% of taxpayers, cutting income tax by roughly 30,000-60,000 yen for middle-income earners, DPP's leader Yuichiro Tamaki told reporters after a meeting with Takaichi.

"This will help those suffering from surging prices," he added.

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, two government sources familiar with the matter told Reuters.