Key facts
- Japan's ruling Liberal Democratic Party has approved a plan to cut the consumption tax on food items.
- The tax cut would reduce the rate to 1% from 8% for a period of two years.
- The plan is scheduled for implementation in April 2027.
- The initiative is expected to create a revenue shortfall of roughly 5 trillion yen ($31.72 billion).
- The government intends to fund the shortfall through non-tax revenues and spending reforms, not debt issuance.
TOKYO, Aug 5 (Reuters) - Japan's ruling Liberal Democratic Party (LDP) has approved a significant consumption tax cut on food items, a key policy championed by Prime Minister Sanae Takaichi, despite mounting concerns over the nation's strained fiscal situation. The plan, which will be put to cabinet endorsement later today, aims to lower the tax on food to 1% from the current 8% for a period of two years, starting in April 2027.
This initiative is intended to alleviate the impact of rising living costs on households. However, it is projected to create a revenue shortfall of approximately 5 trillion yen ($31.72 billion). Government officials, including Takaichi, have stated that the shortfall will be addressed through non-tax revenues and spending reforms, rather than increased debt issuance.
The proposed tax cut comes at a time when Japan is already facing substantial fiscal commitments, including a large public-private investment strategy and anticipated increases in defence spending. These fiscal pressures have contributed to the weakening of the yen and Japanese government bonds, even after a rare coordinated intervention by Tokyo and Washington to support the currency. The benchmark 10-year Japanese government bond yield has recently climbed to as high as 2.87%, raising concerns about future debt servicing costs.