By Timothy S. Donahue
Top Takeaways:
- Tax hike begins: Japan will increase taxes on cigarettes and heated tobacco starting April 1, with another hike in October.
- Gap narrows: The move will decrease the tax benefit historically enjoyed by heated tobacco products.
- Revenue target: Tobacco taxes are expected to raise ¥116 billion in 2027, supporting a larger defense expansion.
The priority is no longer public health; it’s national defense. Japan is turning to tobacco once again as a reliable revenue source—this time to help fund a massive increase in defense spending.
Tax increases on both traditional cigarettes and heated tobacco products will begin on April 1, marking the first step of a multi-phase plan aimed at supporting a ¥43 trillion (US$280 billion) defense buildup over five years.
A second round of tobacco tax hikes is already planned for October, with more increases expected to fully implement in fiscal 2027. The main change: reducing the long-standing tax difference between combustible cigarettes and heated tobacco products.
Historically, heated tobacco—such as IQOS from Philip Morris International—has gained from lower taxes in Japan, which has helped promote quick adoption among adult smokers. That advantage is now being trimmed.
In anticipation of the April hike, Philip Morris Japan announced it will raise prices by ¥40 to ¥50 per pack across 50 heated tobacco products. Meanwhile, Japan Tobacco plans to increase prices by ¥20 to ¥30 on 37 products. Neither company has yet outlined their pricing strategies for the second tax hike later this year.
The Ministry of Finance estimates that tobacco tax increases will generate ¥44 billion in fiscal 2026, rise to ¥116 billion in 2027, and eventually reach around ¥212 billion annually once all measures are in place. While tobacco accounts for a smaller portion of the overall funding plan, it maintains a steady role in Japan’s fiscal toolkit—especially as smoking rates decrease but per-pack taxes increase.
The broader package also includes a corporate tax surcharge and a planned income tax increase, both expected to generate around ¥1.3 trillion annually to fund defense spending.
