Key facts
- Japan's ruling LDP party approved a plan to cut the food consumption tax on food items to 1% from 8%.
- The tax cut is scheduled to take effect for two years starting April 2027.
- Prime Minister Sanae Takaichi championed the plan, securing cabinet approval.
- The initiative is expected to create an annual revenue shortfall of approximately 5 trillion yen.
- The government plans to fund the shortfall using non-tax revenues and spending reforms, not new debt issuance.
Japan's ruling Liberal Democratic Party (LDP) has approved a plan to slash the food consumption tax to 1% from 8% for two years, starting in April 2027. Prime Minister Sanae Takaichi secured cabinet approval for the flagship policy, which aims to ease household costs amid rising living expenses. The move proceeds despite concerns over Japan's already strained fiscal situation, with the tax cut projected to create an annual revenue shortfall of approximately 5 trillion yen ($31.71 billion).
To fund the shortfall, Takaichi has pledged not to rely on new debt issuance, instead looking for non-tax revenues. Daishiro Yamagiwa, a senior LDP tax panel lawmaker, suggested that proceeds from selling the Bank of Japan's 37-trillion-yen ETF holdings could be considered as a way to fill the gap. He noted that the central bank's current pace of selling ETFs, around 330 billion yen annually, would take a century to divest its holdings, and suggested speeding up sales given current high stock prices.
The Bank of Japan has been gradually selling its ETF holdings, accumulated during years of stimulus, to avoid disrupting the stock market. The government's fiscal pressures have contributed to the weakening of the yen and Japanese government bonds.