Japan approves its food tax cut, with the funding still a promise

Japan’s government approved on Wednesday the most significant tax change in nearly four decades: the consumption tax on food falls from 8 percent to 1 percent for two years starting in April 2027. It is the first reduction in a tax that has only ever gone up since it was introduced in 1989. On the same day, a government spokesman said Tokyo would work to gain markets’ confidence in the plan. The order of those two statements matters.

The approval came at an extraordinary cabinet meeting, after the governing alliance of the Liberal Democratic Party and the Japan Innovation Party completed its internal procedures earlier the same day. The cut is paired with cash benefits for families on lower incomes, which would bring their effective rate on food to zero. The government plans a broader tax package in September and a bill in the autumn extraordinary Diet session.

Politically, the move fulfills a pledge from the LDP’s February election campaign. Prime Minister Sanae Takaichi has called the food tax cut a long-cherished goal, and it is her answer to a slide in public support driven by rising living costs: her approval rating fell to 57 percent in July from 69 percent in June. But the cut has split her own party. A majority of the LDP backs it, yet prominent veterans have publicly opposed lowering the rate, fearing economic and political chaos, and the dispute has opened a rift between Takaichi and senior party figures.

The arithmetic is the unresolved part. Cutting the food tax is expected to cost several trillion yen a year, and estimates of the full revenue shortfall run to tens of trillions of yen. The government says it will avoid deficit-financing bonds and draw on surplus tax revenue instead, but it has not presented a concrete funding roadmap. That gap is why the spokesman’s promise of market confidence was necessary in the first place.

The markets are watching through a specific lens. The yen trades near its weakest levels in about four decades, pushing up the price of imported food and fuel, and bond yields have been climbing. The Bank of Japan met under this pressure at the end of July, and the government has spent weeks reassuring investors that it respects the central bank’s independence, with Finance Minister Satsuki Katayama stressing that the relationship is normal and smooth. A large tax cut announced without clear funding complicates that message.

Business leaders have said as much. The head of the Japan Federation of Economic Organizations, Yoshinobu Tsutsui, has called for the funding sources to be clarified through the budget process, with maintaining market confidence as a fundamental prerequisite. The head of the Japan Association of Corporate Executives, Akio Yamaguchi, has warned that effectively zeroing out the tax on food could trigger significant unease in the market. The Japan Chamber of Commerce and Industry has focused on the practical side, noting that restoring the rate in 2029 will require public and business buy-in.

There is also the matter of what the cut does to everything else Takaichi is trying to do. Her government is built around a 370 trillion yen investment roadmap for strategic industries, and a tax cut that needs tens of trillions of yen in funding will compete with it for credibility. If the markets accept the plan, the yen may hold; if they read it as expansionary policy without a payer, the yen weakens further, imported prices rise, and the relief the tax cut was meant to provide gets eaten by inflation.

The bet is that voters will notice the lower food prices before the markets notice the missing revenue. The spokesman’s promise suggests the government knows the order of attention may be reversed.

Source