Where to begin

Japanese Prime Minister Sanae Takaichi is pushing forward a plan to reduce the consumption tax on food. If implemented, this would mark the first time Japan has lowered this tax since it was introduced in 1989. On Tuesday, the ruling Liberal Democratic Party submitted the relevant bill to a key committee for review. Reports indicate that Takaichi wants the cabinet to approve the plan this month, with a view to submitting it to parliament in the autumn.

Why just a 10-point reduction?

Takaichi stated last Thursday that Japan plans to cut the consumption tax on food from 8% to 1% over two consecutive years starting in April 2027, while simultaneously providing cash handouts to specific groups to offset the impact of the 1% rate. Lowering the food consumption tax is a central bet in Takaichi's economic agenda: Japan is deliberately forgoing tax revenue in the hope that a revival in consumer spending, combined with a public-private investment plan totaling 370 trillion yen ($2.35 trillion) by fiscal 2040, will drive economic growth. This tax cut proposal is expected to reduce government revenue by 4.4 trillion yen and has already drawn criticism within the LDP, with former cabinet ministers such as Taro Kono and Takeshi Iwaya raising objections. Reports also suggest that former Prime Minister Shigeru Ishiba walked out of a meeting in protest. Kono, who served as defense minister under the Abe administration, warned on X that the plan could damage market confidence in Japan's fiscal health, push up interest rates, and weaken the yen. Iwaya, who served as foreign minister from 2024 to 2025, also opposed the tax cut, reportedly saying: "The risks are extremely high. If the market reacts negatively, the yen will weaken further, pushing up import prices." The International Monetary Fund, in its 2026 Japan country report, also urged the government not to lower the consumption tax, calling the move "poorly targeted, would compress fiscal space, and increase fiscal risks."

Takaichi has pledged not to issue deficit-covering bonds to fund the policy. The Japanese government says it will review fiscal spending, tax breaks, subsidies, and public funds, but the specifics of the plan remain unclear. She has also made it clear that the tax cut would last only two years, after which the food consumption tax would return to 8%. Even so, Japan already carries one of the highest levels of public debt in the world. The IMF forecasts that Japan's government debt will amount to around 204% of GDP in 2026, and new borrowing would further damage fiscal health. Justin Heng, Asia-Pacific rates strategist at HSBC Global Investment Research, said Takaichi's latest economic blueprint "essentially establishes" an expansionary fiscal stance. By abandoning the government's budget primary surplus target, it effectively relaxes fiscal discipline. "The funding channels are still unclear, so issuing more debt remains a highly likely outcome," Heng warned. He also cautioned that Japan's long-end government bond yields could stay elevated. In Tuesday's trading session, Japan's 10-year government bond yield was around 2.85%, approaching multi-decade highs.