Japan's 1.3 Million Yen Wall — Exit Design, Spouse Deduction Abolition, and Social Insurance Reform

The "Income Wall Support Package" launched in October 2023 as a temporary measure, and was made permanent through the Ministry of Health, Labour and Welfare (MHLW) notice dated 1 October 2025. At its core is the employer-certification scheme for flexible dependent-status assessment: when a spouse's annual income temporarily exceeds 1.3 million yen because of seasonal work peaks, the employer can certify that the increase is "temporary," preserving dependent status.

The design, however, retains a ceiling: "as a rule, two consecutive recertifications per person." Because dependent-status recertification occurs annually, this operates as a two-year cap in practice. From the third recertification onward, the worker falls out of dependent status under standard rules. Further, following the 13 June 2025 pension-reform law, the assessment method shifts in April 2026 from "recent-actual income" to "annual income projected by the labor contract." Temporary income spikes from overtime will no longer trigger automatic loss of dependent status. But the 1.3 million yen threshold itself is preserved.

The reform is therefore not "moving the wall" but "changing how the wall is measured." NRI's June 2025 analysis shows 60% of married part-time women adjust labor supply due to the income walls (an estimated 4.66 million people), and 80% of those adjusting say they would want to work more if the walls disappeared. The incentive to constrain working hours remains.

Meanwhile, the tax wall moved on a separate axis. The 2025 reform raised the spouse-deduction income threshold (wage-income basis) from 1.03 to 1.23 million yen, and raised the full-amount threshold of the special spouse deduction (the 380,000-yen deduction) from 1.5 to 1.6 million yen. The same reform also lifted the personal income-tax floor to the equivalent of 1.6 million yen (basic deduction 0.95 million + earned-income deduction 0.65 million). The result is a widening gap — "tax wall near 1.6 million yen, social-insurance wall at 1.3 million yen." Tax and social-insurance design are moving in opposite directions.

The number of Category 3 insured persons is also falling rapidly. According to MHLW's "Overview of FY 2024 Employees' Pension Insurance and National Pension," the count moved from 7.21 million at the end of FY2022 to 6.86 million at the end of FY2023 (-360,000, -4.9%) to 6.41 million at the end of FY2024 (-450,000, -6.5%) — an 11% decline in three years. This is the leading effect of the employee-insurance expansion discussed below. The article digs one layer deeper into three intersecting movements: the permanence of the provisional measure, the widening tax-social-insurance gap, and the rapid decline of Category 3 insured persons.

The "two-recertification rule" and the missing exit design

The Income Wall Support Package consists of three pillars: measures for the 1.06 million yen wall (encouraging short-time-worker enrollment in employee insurance), measures for the 1.3 million yen wall (flexible certification via employer attestation), and promotion of spouse-allowance reform. According to the MHLW Q&A, the core 1.3 million yen measure defines dependent-status flexibility around the concept of "temporary income increase."

The "two-consecutive-recertifications" line carries a clear intent: to operationalize the meaning of "temporary," with a return to ordinary rules when the increase becomes permanent. But once that ceiling is reached, only three options remain for the worker: (a) extend working hours to at least 20 per week and become a Category 2 insured person; (b) return income to below 1.3 million yen; or (c) leave dependent status and join National Health Insurance and the National Pension. Option (a) carries the risk of lower take-home pay (mitigated by up to 50% through the three-year transition); option (c) creates a new burden of roughly 200,000 yen per year. The provisional measure postpones the problem across two recertifications; it does not solve the structural question.

Industry-press and labor-and-social-security consultant reports describe the actual use pattern as concentrated around peak-season extensions and year-end adjustments. MHLW does not publish systematic usage statistics for the employer-certification process. The lack of clarity around what happens after the second recertification continues to generate uncertainty for both workers and employers.

Linkage with the 1.06 million yen wall abolition — relative weight of the 1.3 million yen wall increases

In October 2026 the employee-insurance wage requirement (monthly 88,000 yen, roughly annual 1.06 million yen) will be abolished. The corporate-size requirement is also phased out. The result is that short-time workers with 20 or more weekly hours will be automatically enrolled in employee insurance, accelerating the transition from Category 3 insured to Category 2 insured. The 11% three-year decline in Category 3 insured is the leading effect of this expansion.

A structurally important consequence is that, once the 1.06 million yen wall disappears, the 1.3 million yen wall becomes the sole remaining social-insurance wall. For short-time workers below 20 hours per week, employee-insurance enrollment is not required, but maintaining dependent status still requires staying below 1.3 million yen. The labor-supply-adjustment incentive persists, and the relative weight of this single wall rises.

The "dual wall" structure with the spouse deduction

The 1.3 million yen wall is a social-insurance dependent-status threshold. The tax system, however, moved on a different axis. The Ministry of Finance's FY2025 outline raised the spouse-deduction income threshold from 1.03 to 1.23 million yen and the full-amount threshold of the special spouse deduction (380,000-yen deduction) from 1.5 to 1.6 million yen. The personal income-tax floor was also lifted to the equivalent of 1.6 million yen (basic deduction 0.95 million + earned-income deduction 0.65 million).

The result is a divergence: tax design is moving toward individual-unit taxation, while the social-insurance system retains its household-unit logic. Workers must hold multiple thresholds in mind simultaneously, raising the behavioral cost. The split jurisdiction between the Ministry of Finance and the MHLW makes coordination structurally difficult.

Historically, the spouse deduction (introduced 1961) and the Category 3 insured system (introduced 1986) have functioned together as institutional anchors for the "male breadwinner, female homemaker" model. The Cabinet Office Gender Equality Bureau document points out that the design — under which the spouse of an employee can enroll in the National Pension without paying contributions, as long as annual income remains under 1.3 million yen — generates a labor-supply distortion. Major business federations (Keidanren, Rengo, Japan Chamber of Commerce, Keizai Doyukai, Kankeiren) have all issued statements favoring abolition or downsizing. The 2025 reform, however, did not abolish the system and chose instead the "de facto downsizing through expansion" route.

Spouse deduction abolition — arguments for and against

Debate over abolishing the spouse deduction is long-standing, and the points of contention are not simple. The case for abolition rests on correcting the labor-supply-adjustment incentive: surveys show 62.4% agreeing that "tax burden distorts working patterns" and that the system "channels women into low-wage part-time work." The case against rests on the shortfall in care infrastructure and the burden on single-earner households: 83.3% cite "people who would work but cannot due to childcare or elder-care gaps," and 66.7% cite "tax increases on single-earner households."

Both arguments rest on facts; neither is wholly wrong. This is why "abolition equals solution" oversimplifies. As Mari Osawa argues, Japan's livelihood-security system carries dysfunctions premised on the male-breadwinner model, and dissolving those dysfunctions requires the simultaneous adjustment of multiple institutions.

Threshold relaxation — limits of "moving the wall"

The second option is to move the threshold itself. The tax wall already moved in 2025–2026. Moving the social-insurance wall is technically possible. But two constraints apply.

First, the structure under which Category 3 insured persons pay no contributions does not change when the threshold moves. Raising the wall from 1.3 to 1.6 million yen would simply shift labor-supply adjustment to the new threshold. The structural question is untouched.

Second, from the social-insurance finance perspective, threshold relaxation means lower revenue. Expanding the benefit pool while contributions are not paid by the spouse worsens the balance. "Moving the wall" risks becoming a device that preserves the structural problem.

Social-insurance expansion — the October 2026 direction

The third option is the ongoing course — de facto downsizing through expansion. The October 2026 abolition of the 1.06 million yen requirement and the phased removal of the corporate-size requirement continue the transition from Category 3 to Category 2 insured. Taro Kono's January 2025 commentary frames expansion as "de facto downsizing of the Category 3 insured system."

The advantage of this path is comparatively low political friction: not explicit abolition, but downsizing by natural attrition. The weaknesses are three:

1. Workers outside the expansion (below 20 weekly hours) are unaffected
2. The 1.3 million yen wall remains, so labor-supply adjustment continues
3. Completion of downsizing takes a long period, during which the working-generation contribution structure remains fixed

Hybrid — the structural-transformation path

The fourth option combines a three-pronged reform — spouse deduction, Category 3 insured system, and dependent-status certification — with a transition to individual-unit taxation. Kitao & Mikoshiba (2022) simulate that abolishing the spouse deduction, the social-insurance contribution exemption, and the 75% survivor pension together would raise female labor-force participation by 12.5 percentage points, average wages by 27.7%, and consumption by 3.0%. Akabayashi (2006) and Bessho & Hayashi (2014, 2015) provide empirical evidence that the labor-supply elasticity of Category 3 insured women is higher than men's and strongly responsive to social-insurance contribution burdens.

A CEPR VoxEU column concludes that "tax and social-insurance benefits for low-income spouses stand as obstacles to women's labor-force participation and wage growth in Japan." The UK (moved to individual taxation in 1990) and Sweden (1971) offer historical evidence of the effect of structural transformation.

The political cost of this path is, however, the highest. The 6.41 million Category 3 insured and approximately 6.08 million spouse-deduction recipients (NTA "FY2024 Private-Sector Salary Survey") cannot be moved without friction. The path is not "abolish and done" but "abolish while building care infrastructure simultaneously." As Emiko Ochiai argues, while Europe and the United States moved toward "de-familialization" of care from the 1970s onward, Japan instead "reinforced the modern family" through institutions including the Category 3 insured system. Without simultaneous build-up of childcare and elder-care infrastructure, the "want-to-work-but-cannot" group cited by abolition opponents would become acute.

International comparison — paths to individual-unit taxation

International designs cluster into three families.

Nordic (individual-unit taxation): Sweden moved from household joint taxation to individual taxation in 1971. The equivalent of the spouse deduction was abolished, and taxation became individual regardless of spousal income. Public childcare was built up in parallel, advancing de-familialization. Female labor-force participation rose sharply, forming the foundation of the contemporary Nordic welfare-state model.

German / Continental European (joint-filing option): Germany's spouse income-splitting (Ehegattensplitting) retains the household model. The structure favors couples with income disparity, generating an incentive toward single-earner households. Recent reform discussions consider phased revisions to encourage labor-force participation by spouses.

French (N-part splitting): France's quotient familial system divides household income by the number of family members (children included) for taxation. The design ties tax to fertility policy, with significant tax relief for high-income families. Japanese proposals to import the system exist, but without simultaneous care-infrastructure investment, the incentive for spousal labor-supply adjustment could be preserved.

Japan's current design — retaining the household model while adjusting through individual deductions — fits none of these three families completely. As Hiromi Ishizuka notes, the impact of the income wall on labor supply has been empirically documented in economic research.

Three exit scenarios

Mapping the options together yields three exit scenarios.

Scenario 1 — Gradualism (status quo): De facto downsizing through expansion, continued use of the provisional measure. Wait for natural attrition of Category 3 insured. Minimal political friction but long lead time to resolve the structural question.

Scenario 2 — Stepwise dissolution: Raise the 1.3 million yen threshold in steps, abolish it eventually. Downsize the Category 3 insured system in parallel. Maintain consistency with the spouse deduction while preparing the move to individual-unit taxation. A medium-term structural adjustment.

Scenario 3 — Structural transformation: Implement the three-pronged reform — spouse deduction, Category 3 insured system, dependent-status certification — together with individual-unit taxation. The Kitao et al. simulations point to large gains, but care-infrastructure investment must run in parallel and political cost is highest.

The current course is Scenario 1, but the rapid decline of Category 3 insured and the forward movement of the tax wall suggest that the pressure to shift to Scenario 2 or 3 will grow in the 2030s.

Structural implication — from "household" to "individual" model

Returning to the starting point of the article: when the 1.3 million yen provisional measure is examined vertically rather than horizontally across the five-wall map, what emerges?

What emerges is the structural fact that postwar Japan's tax and social-insurance design was premised on a household model, and that premise has drifted away from the actual labor market and family structure. The spouse deduction (1961) and the Category 3 insured system (1986) were instruments anchoring the "male breadwinner, female homemaker" model. But the dual-earner share rose from 34% in 1980 to over 70% in 2024. The design premise of "the wife's part-time work" no longer matches reality.

The provisional measure postpones this drift across two recertifications. The exit beyond that is undesigned at the policy level. The "de facto downsizing through expansion" via social-insurance enrollment is advancing, but completion lies far ahead, and the labor-supply-adjustment incentive persists in the interim.

Moving from a household-model system to an individual model requires the simultaneous adjustment of tax, social insurance, survivor pension, and the spouse deduction. Without parallel build-up of care infrastructure (childcare and elder care), the "want-to-work-but-cannot" group cited by opponents of abolition would surface acutely. The "delay of de-familialization" and the "reinforcement of the modern family" that Mari Osawa and Emiko Ochiai have analyzed connect directly to the income-wall question at this point.

Thinking about the exit for the 1.3 million yen wall is, ultimately, thinking about the move to the individual-unit model that postwar Japan did not choose. This article does not serve as an entrance to the full wall map; it digs vertically into one point on that map. Readers are encouraged to move between the overview and this single deep cut.

Related columns

• Income Wall 103/130/150/201 — Five-Tier Structure
• Gender Wage Gap: International Comparison — Three Policy Typologies and 134-Country Child Penalty Data
• "There Is No Time" Is Not an Individual Problem — The 5.5× Unpaid-Labor Gap and Time Poverty

References

Response to the Income Wall — Ministry of Health, Labour and Welfare. MHLW

Income Wall Support Package — Ministry of Health, Labour and Welfare. MHLW

Overview of FY2024 Employees' Pension Insurance and National Pension — Ministry of Health, Labour and Welfare. MHLW

Outline of FY2025 Tax Reform — Ministry of Finance. MOF

The Category 3 Insured System — Cabinet Office Gender Equality Bureau. Cabinet Office

How Much Did the 2025 Reform Shift the Income Walls? — Nomura Research Institute. NRI

Why Women Work the Way They Do in Japan: Roles of Fiscal Policies — Kitao, S.; Mikoshiba, M.. RIETI

Tax and social insurance benefits for low-income spouses stand as obstacles for women's participation and wage growth in Japan — CEPR VoxEU. CEPR

Q&A on the Income Wall Support Package — Ministry of Health, Labour and Welfare. MHLW

Recommended reading

生活保障のガバナンス - ジェンダーとお金の流れで読み解く (Governance of Livelihood Security: Reading Through Gender and Money Flows)

Mari Osawa

Analyzes how Japan's livelihood-security system carries dysfunctions through the intersection of gender, tax, and social insurance. A key reference for theoretically situating the income-wall question.

View on AmazonPR

21世紀家族へ〔第4版〕 (Toward 21st-Century Families: Reading and Moving Beyond the Postwar Family System, 4th ed.)

Emiko Ochiai

Traces the historical formation of Japan's modern family and social-security institutions in comparison with the West. The 'delay of de-familialization' concept connects directly to the historical position of the spouse deduction and the Category 3 insured system.

View on AmazonPR

働き方と年収の壁の経済学 (The Economics of Working Styles and the Income Wall) — Hiromi Ishizuka. Nippon Hyoron Sha