Japan Moves to Cut the Food Sales Tax to 1 Percent for Two Years

Prime Minister Takaichi's plan to ease living costs would widen a budget gap in a country whose population has now fallen below 120 million.

Prime Minister Sanae Takaichi instructed ruling-party leaders to proceed with cutting the sales tax on food to 1 percent from 8 percent for two years starting next April, according to Jiji Press and confirming reports carried by international outlets. The government plans to finalize the measure in a cabinet meeting in early August and submit legislation in the autumn parliamentary session. The plan is intended to protect households from rising living costs, though lawmakers across parties have questioned how Tokyo will make up the revenue shortfall.

The fiscal pressure comes as Japan's demographic base shrinks. The Japan Times reported that the population of Japanese residents has fallen below 120 million, declining for 17 consecutive years since peaking in 2009. A smaller working-age population narrows the tax base that any future government must rely on to service one of the world's largest public debt loads.

A temporary tax cut financed without offsetting revenue effectively adds to that debt. Analysts cited in market coverage have warned the plan risks pressuring the yen and Japanese government bonds.

What this means

This is fiscal easing occurring alongside a central bank that has only recently begun normalizing policy, in a country where the government relies on the central bank and domestic institutions to absorb its debt. Cutting the food tax without a funding plan raises the supply of government bonds and pressures the yen, which raises inflation through higher costs for the energy and food that Japan buys abroad. Japanese bondholders and yen holders are most exposed, while households get short-term relief that a weaker currency can reduce.

What to watch

The yen exchange rate and long-dated Japanese government bond yields, because further weakness would show markets pricing the unfunded cut as added debt.
Whether the Bank of Japan adjusts policy in response, which would reveal the tension between fiscal easing and monetary normalization.

Japan Moves to Cut the Food Sales Tax to 1 Percent for Two Years

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