Prime Minister Sanae Takaichi is advancing a plan to cut Japan's consumption tax on food, which would be the first reduction since the tax was introduced in 1989. The ruling Liberal Democratic Party has moved the bill through key committees, with Takaichi seeking cabinet approval this month and aiming to present it in parliament this autumn.
The proposed tax cut, effective from April 2027, is part of a broader economic strategy that includes a significant public-private investment plan estimated at 370 trillion yen through 2040. However, the plan has faced criticism from within her party, with former ministers warning that it could undermine fiscal confidence, increase interest rates, and weaken the yen.
The International Monetary Fund has also advised against the tax reduction, citing potential fiscal risks. Takaichi has pledged not to finance the tax cut through deficit bonds, instead suggesting a review of spending and subsidies, although details remain unclear.
Japan's public debt is already among the highest globally, projected at 204% of GDP by 2026, raising concerns about the sustainability of additional borrowing. Analysts note that the plan could lead to elevated long-term government bond yields, currently around 2.85%, as markets react to inflationary pressures and the Bank of Japan's monetary policy.
While the investment target could potentially improve fiscal health by boosting growth, experts emphasize that the effectiveness of the plan will depend on its ability to enhance productivity rather than merely support consumption