Similar to other countries, child care plays an important role in determining labor participation of

married women in Japan. In addition, Japan’s current lower female labor force participation could also

be attributed to its spousal and tax deduction policies that provide disincentives for married women to

work. To examine these issues, this paper employs a dynamic general equilibrium model with heterogenous

households, which are differentiated by the main taxpayer’s income, spouse’s education level and

preference on leisure. We find that the 2004 tax reform in Japan had minor effects on encouraging married

women’s labor participation. Based on the baseline economy with the 2004 tax reform, we further

conduct policy experiments. We conclude that the effect of changing tax structure on encouraging married

women’s labor supply is larger than providing more child-care subsidies. Besides, heterogenous

households response to policy reforms in different ways. Therefore, it is important to understand who

are the policy target in order to formulate appropriate policies.