Japanese PM Takaichi vows to proceed with temporary cut in sales tax

TOKYO - Japanese Prime Minister Sanae Takaichi announced on July 30 her intention to proceed with a two-year cut on an 8 per cent sales tax on food items, a move set to strain the country’s worsening finances.The decision came amid a slump in approval ratings for Takaichi’s administration, with households facing rising living costs from a weak yen currency and the Middle East war-induced energy shock.“We will lower the sales tax on food items to 1 per cent for two years from April (2027),” Takaichi told reporters after ordering ruling party executives to prepare for the cut.“We will not rely on debt issuance to maintain market trust in Japan’s finances,” she said. “I will be responsible to make sure the tax rate goes back up after two years.”To fund the tax cut, the government will seek to tap non-tax revenues, such as proceeds from state funds and foreign reserves as well as spending reforms, Takaichi said.The government is likely to finalise the tax cut plan at a Cabinet meeting in early August, and submit relevant legislation in a Parliament session set to begin in autumn.The news on July 30 helped drive up the benchmark 10-year Japanese government bond (JGB) yield by 5.5 basis points to 2.8 per cent as investors saw prospects of more debt issuance.The impact on the yen was muted, as investors awaited the Bank of Japan’s policy meeting concluding on July 31.Doubts over effectJapan levies an 8 per cent consumption tax on food and a 10 per cent rate on other goods and services, key sources of funding for rising social welfare costs among a rapidly ageing population.If adopted, the measure would be the first time that Japan has lowered the sales tax since it was introduced in 1989.Takaichi delivered a historic election win for her ruling party in February with a pledge to ease household living costs by suspending the 8 per cent food sales tax for two years.After much wrangling among ruling and opposition parties, Takaichi decided to proceed with a cut to 1 per cent, instead of a suspension, to avoid the lengthy time needed to fix cash register systems to recognise a zero tax rate.The move will be a temporary step before introducing a new payout system targeting low and middle-income households, as part of steps to cushion the blow from rising living costs.The tax cut idea has drawn pushback even from ruling party lawmakers due to concerns over the impact on Japan’s worsening finances, as the administration has not explained how it plans to fill the revenue shortfall.Of Japan’s record 122 trillion-yen (S$962 billion) 2026 budget, about a quarter is funded by debt issuance and nearly 22 per cent by consumption tax, the biggest tax revenue source.There are also questions over whether the tax rate could be moved back up to 8 per cent in 2029, months before an expected upper house election in the summer of 2028.Some analysts warn the tax cut will do little to ease the burden on households as companies, already keen to pass on rising raw material costs, could use the opportunity to raise prices.The tax cut could also accelerate inflation by increasing households’ purchasing power, running counter to the Bank of Japan’s efforts to tame price pressures, said Tsutomu Watanabe, emeritus economics professor at the University of Tokyo.“The one thing that could cause too-high inflation in Japan would be fiscal policy,” he said. REUTERS