Japan moves toward first-ever consumption tax cut, adds to fiscal strain
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TOKYO, June 17 : Japan is moving toward temporarily cutting its consumption tax on food to 1 per cent in what would be the first effective reduction of its kind, further straining its already worsening finances without any clear signal on how it would be funded.
The proposal, presented by a senior executive of the ruling Liberal Democratic Party (LDP) to a government panel on Wednesday, would slash the current 8 per cent food levy for two years from April next year and serve as a bridge until an income-linked benefit system is introduced.
It would also be paired with targeted cash benefits for low- and middle-income households worth about 600 billion yen ($3.75 billion) annually, broadly equivalent to the final 1 per cent of the food tax.
"Overall, we intend to effectively reduce the consumption tax on food and beverages to zero," Itsunori Onodera, an LDP lawmaker who chairs the working group of the government panel on the social security system, told reporters.
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The move is a notable shift in tax policy. Since the consumption tax was introduced at 3 per cent in 1989, it has been raised in stages to the current 10 per cent, with a reduced 8 per cent rate for food introduced in 2019, becoming a key pillar of social welfare funding.
Japan has never previously lowered the rate, making even a temporary cut a consequential step for policy and the public purse.
Prime Minister Sanae Takaichi faces pressure to deliver on an election campaign pledge made in February for a zero-rate tax on food to cushion households from rising living costs.
Takaichi has said the government aims to avoid relying on additional deficit-financing bonds, but has yet to present detailed alternative funding sources to offset the expected revenue shortfall.
Daiwa Institute of Research estimates that cutting the food sales tax to 1 per cent would reduce revenue by about 4.4 trillion yen for Japan's roughly 125 trillion yen ($780 billion) annual budget, while boosting GDP by only around 0.3 trillion yen.
Fiscal concerns have already been weighing on the yen, which has struggled to gain ground despite the Bank of Japan's interest rate hike this week, as investors worry that looser fiscal policy could offset the impact of monetary tightening.
($1 = 160.2100 yen)
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