TOKYO (Kyodo) -- Japan's ruling parties on Friday approved their tax reform plans for the next fiscal year starting April aimed at funding a scheduled defense budget hike through increases in corporate and tobacco levies from 2026.

In an attempt to increase people's disposable incomes, the Liberal Democratic Party and its junior coalition partner Komeito also agreed to raise the annual income threshold on earnings of individuals aged 19 to 22 with jobs, at which their parents lose income tax deductions.

The approval came as Prime Minister Shigeru Ishiba's ruling coalition, which lost its House of Representatives majority in October's general election, accepted some income expansion plans proposed by the small opposition Democratic Party for the People to gain its support to pass a supplementary budget for fiscal 2024.

Analysts said restoring Japan's fiscal health, the weakest among major advanced economies, will become even more challenging, as Ishiba's government will have to increase spending to incorporate policies of the opposition parties, while implementing tax cuts under the reform plans.

Facing security challenges in the region, Japan plans to allocate 43 trillion yen ($273 billion) in defense-related spending to achieve its target of doubling the defense budget over the five years through fiscal 2027.

The government has targeted an increase in annual tax revenue of 1 trillion yen through higher corporate, income and tobacco levies to help cover the expanded defense expenditure, without specifying a timeline to achieve the goal.

Among the taxation items, the ruling parties agreed to raise revenue from corporate and tobacco taxes starting April 2026, but put off a decision on raising income tax as Komeito, a self-proclaimed "peace party," remained reluctant.

Based on the ruling coalition's proposals, the government will formalize its tax reform plans for submission to parliament early next year.

Easing the tax burden on workers became one of the key issues in the tax reform talks after the small opposition DPP quadrupled its tally of lower house seats in the election with a platform to boost incomes by raising nontaxable income thresholds.

Despite concerns about a potential decline in tax revenues, the ruling camp made concessions in lifting the income threshold on earnings by a householder's dependent offspring to 1.50 million yen from 1.03 million yen from next year.

The LDP and Komeito also agreed to raise the tax-free annual income threshold to 1.23 million starting next year from 1.03 million yen, another measure seen as an obstacle for part-time workers.

Responding to concerns about a potential decline in tax revenue, LDP tax policy chief Yoichi Miyazawa said at a news conference that raising the income threshold is expected to reduce Japan's fiscal earnings by 600 billion to 700 billion yen.

But the new threshold is far less than the 1.78 million yen demanded by the DPP. Earlier Friday, the secretary generals of the three parties confirmed they will continue negotiations with the aim of achieving the 1.78 million yen target.