TOKYO -- Japan's government is weighing a proposal to hike corporate taxes to fund greater defense spending, while the business community argues that such a move could threaten the growth trend of investment.

Japan will revise its three key security documents at the end of this year. The government and the ruling coalition agree that raising defense spending is unavoidable, but rising prices and China's military buildup will make boosting defense capabilities more expensive.

"If a shortfall remains after reviewing spending, tax increases should not be ruled out," said one participant at a meeting of experts discussing the security document revisions on Tuesday.

"We will discuss potential sources for the required funding with full consideration to fiscal sustainability," Chief Cabinet Secretary Minoru Kihara said of the proposal at a press conference on Wednesday.

The security documents as revised in 2022 call for Japan to bring its budget for defense capabilities, including complementary initiatives, to 2% of the country's gross domestic product. Growth in nominal GDP since that revision means that maintaining the 2% level now would require an increase of trillions of yen (1 trillion yen equals $6.3 billion).

The documents lay out an allocation of 43 trillion yen to buy defense equipment and related items over the five years through fiscal 2027. At the end of 2022, the government decided to raise taxes on corporations, income and tobacco, which added just over 1 trillion yen in funding toward that target.

Meanwhile, the U.S. is pushing allies to raise core defense spending to 3.5% of GDP. Washington has made no direct demands of Tokyo in this regard since Prime Minister Sanae Takaichi took office, according to a senior Defense Ministry official, but it is unclear what U.S. President Trump may do between now and the end of the year.

Japan introduced a special corporate defense tax, equal to 4% of businesses' corporate tax liabilities, in fiscal 2026. Some within the ruling coalition have called raising corporate taxes a viable option for a stable source of funding, and they may consider raising the rate of the special corporate defense tax.

In fiscal 2025, corporate tax revenue stood at 21.7 trillion yen, beating the asset-bubble era high of 1989 for the first time. Some argue that improved earnings mean companies are better able to shoulder a greater tax burden.

There are also some who see a surplus in the country's Foreign Exchange Fund Special Account (FEFSA), mainly used for currency interventions as a promising source of funds. The government has been using this account to fund the defense spending boost required by the security documents.

The weak yen and interest rate gaps with other countries have resulted in higher returns on foreign currency assets. But the FEFSA surplus is also seen as a strong candidate for a funding source to make up for the two-year reduction in the country's consumption tax on food, which will likely take effect in April 2027.

Yet the dependence of FEFSA's surplus on market conditions makes it less than stable as a funding source. The account may work for the temporary consumption tax reduction, but some argue it is unsuited to funding a permanent budget item such as defense spending.

Japan's business community is strongly opposed to corporate tax hikes. Last week, Japan Business Federation chairman Yoshinobu Tsutsui said he is "basically against" raising corporate taxes to fund defense spending, arguing that it would undermine government-led efforts to expand public-private investment.