Japan ruling party defers decision on food tax cut proposal

Japan's ruling Liberal Democratic Party (LDP) has deferred a decision on a controversial proposal to slash the consumption tax on food, leaving the final say to its tax policy chief.

The party's tax and social security research commissions met on August 3, with most members supporting the plan. Prime Minister Sanae Takaichi aims to reduce the consumption tax on food from 8% to 1% for two years, starting in April 2027. This measure is intended to alleviate the burden of inflation on the public.

The LDP had pledged to expedite discussions on eliminating the food consumption tax as a key promise for the upcoming House of Representatives election. The Cabinet is expected to approve the tax measure around August 5, following the party's internal procedures. This potential reduction, the first since the consumption tax's introduction in 1989, would be coupled with cash handouts for low- and middle-income earners before a new income-linked relief program for lower-income workers begins in fiscal 2029.

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There was considerable support for the consumption tax cut we campaigned on as a way to help the public cope with rising prices.

However, the proposal faces significant pushback from fiscally conservative LDP lawmakers. They are concerned that the tax cut could create a funding shortfall of approximately 10 trillion yen (S$81.8 billion) over two years for social security. This concern is amplified by rising government bond yields and a weakening yen.

Acting Secretary-General Yoshihisa Furukawa, also a deputy chair of the LDP tax panel, submitted a written objection. He warned that "if a decision is made without a clear prospect for securing funding, Japan will lose the confidence of the markets."

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if a decision is made without a clear prospect for securing funding, Japan will lose the confidence of the markets.