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

Prime Minister Sanae Takaichi intends to proceed with a significant two-year cut to Japan's sales tax on food items, reducing it from 8% to 1% starting in April 2027. This decision, announced by a senior ruling party official, aims to alleviate the financial strain on households grappling with increased living costs driven by a weak yen and global energy shocks. The move marks a potential first for Japan in lowering its consumption tax rate since its introduction in 1989.

The prime minister ordered preparations for the tax reduction, signaling the Liberal Democratic Party (LDP) to begin discussions within its tax panel to build consensus. The government is reportedly seeking to secure funding for the cut without resorting to debt issuance, potentially relying on an anticipated overshoot in tax revenues. The plan is expected to be finalized in a cabinet meeting in early August, with relevant legislation to be submitted to Parliament in the autumn.

This policy shift follows Takaichi's February election pledge to ease household burdens. Initially, a suspension of the food sales tax was considered, but a reduction to 1% was chosen to avoid the complexities of adjusting cash register systems for a zero-tax rate. The tax cut is envisioned as a temporary measure before implementing a new payout system for low and middle-income households. However, the plan has encountered internal resistance from some LDP lawmakers concerned about the potential strain on Japan's already worsening public finances, as the administration has yet to fully detail how the revenue shortfall will be addressed.

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The premier said the government will secure funding that does not rely on debt issuance, adding an overshoot in tax revenues will help fund the cut to the food levy.