Japan’s Takaichi to order food tax cut to 1%: Reports

The Japanese government is reportedly preparing to cut the sales tax on food and drinks to 1% for a two-year period, beginning in April 2027. This move aligns with a signature election pledge by Prime Minister Sanae Takaichi, following months of political deliberation.

According to reports from the Asahi newspaper and other media outlets like TBS and Nikkei, Takaichi is expected to direct the ruling Liberal Democratic Party (LDP) to draft the necessary legislation soon. This proposed reduction would bring the tax down from the current 8%.

However, significant fiscal concerns persist. Chief Cabinet Secretary Minoru Kihara confirmed that discussions are ongoing and the government has yet to finalize its decisions. A major question remains unanswered: how will the government finance the measure's substantial annual cost, estimated at over four trillion yen (approximately $25 billion USD)? This uncertainty is keeping upward pressure on government bond yields and investors are closely watching Japan's fiscal outlook.

The path to this decision has been complex. A cross-party panel tasked with discussing the proposal abandoned efforts to reach a consensus on July 27 due to divisions over financing methods and whether the tax cut should be permanent or offset by handouts. The lack of progress has been cited as a factor in Takaichi's declining approval ratings.

The government appears likely to proceed along the lines of a proposal from the LDP's Itsunori Onodera. His plan suggests cutting the food sales tax to 1% from April 2027, with cash payments to eligible households totaling about 600 billion yen annually starting in autumn 2027. These payments would broadly offset the remaining one percentage point of food taxes for those families. Takaichi had pledged to pursue this tax cut before the February general election, a pledge that was notably absent from the LDP's campaign for the 2025 upper house election, which resulted in the party losing its majority.

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The decision has already largely priced in, but fiscal concerns still remain.