Key facts
- Japan's government plans to cut the 8% consumption tax on food to 1% for two years from April 2027.
- The tax cut is expected to create a revenue shortfall of roughly 5 trillion yen.
- The government will not use deficit-covering bonds for the tax cut, seeking funds from non-tax revenues and reviews of existing subsidies and tax breaks.
- The outline will be submitted to parliament next month.
- The 10-year Japanese government bond yield rose above 3% on Tuesday.
Japan's government is preparing to finalize an outline for a consumption tax cut and household payouts without specifying how these measures will be funded. This approach is likely to maintain market unease regarding the nation's already strained fiscal situation.
The plan, expected to be approved by the cabinet on Tuesday, comes as global fiscal and inflation concerns have pushed the benchmark 10-year Japanese government bond (JGB) yield above the 3% mark. Prime Minister Sanae Takaichi's ambitious spending plans, which include this tax cut, have already led to a bond sell-off and criticism from U.S. Treasury Secretary Scott Bessent.
Takaichi's commitment to cap new government bond issuance at around 40 trillion yen for the fiscal 2027 budget is under scrutiny, with expenditure expected to rise. "It's hard to pre-empt the total size of next year's debt issuance, so markets will remain jittery until cabinet approval of the draft budget expected at the end of this year," said Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
The proposed tax cut involves reducing the 8% levy on food items to 1% for two years starting April 2027, supplemented by payouts equivalent to the remaining 1%. This effectively aims to eliminate the tax burden on food purchases. The government stated it will not use deficit-covering bonds, instead seeking funds from non-tax revenues and by reviewing existing subsidies and tax breaks. The tax cut is a key initiative by Takaichi to alleviate the impact of rising living costs on households and is estimated to create a revenue shortfall of approximately 5 trillion yen. The outline will serve as the basis for legislation to be submitted to parliament, which is anticipated to convene next month.