Japan Cabinet OKs 2-yr consumption tax cut on food to 1% from next April

Prime Minister Sanae Takaichi's government aims to enact related legislation for the inflation-relief scheme, which will involve cash handouts to low- and middle-income earners to realize "effectively zero" tax burdens, during an extraordinary parliamentary session likely to begin in the fall.

While the plan is intended to support households facing persistent inflation, it has fueled concerns about Japan's fiscal health amid already high government bond yields and a weak yen. It has also drawn a backlash from many opposition parties and even from some members of the ruling Liberal Democratic Party led by Takaichi.

Takaichi, known for her dovish stance on fiscal policy, has yet to identify a specific revenue source to offset the tax cut but vowed to secure the necessary funding through budgetary reforms such as reviewing nontax revenues and subsidies "without relying on" the issuance of deficit-covering bonds.

The two-year tax reduction is estimated to result in around 10 trillion yen ($63 billion) in lost revenue, a vital funding source for social security.

After the Cabinet approval, Takaichi told reporters that the government will conduct a "zero-base" review of its budget to help make up for the loss of tax revenue and prevent any negative impact on social security.

"We will continue to firmly maintain the government policy of managing public finances with close attention to their sustainability and securing market confidence," she added.

Chief Cabinet Secretary Minoru Kihara told a press conference that "every revenue and expenditure" item will be subject to the review.

The LDP won a landslide victory on a policy platform that included a pledge to consider slashing the consumption tax rate on food and beverages to "zero" for two years.

Its junior coalition partner, the Japan Innovation Party, as well as many opposition parties, made similar campaign pledges.

The ruling parties later decided on the 1-percent plan after learning at a meeting of the cross-party "national council" on taxation and social security that modifying retailers' cash register systems to accommodate a zero tax rate would take more time.

On Thursday, Takaichi officially announced the tax cut to 1 percent, which was among the proposals written in a report compiled by the national council when it failed to reach a consensus the previous day, effectively leaving the decision on the matter to the premier.

Opposition parties have argued that a de facto tax rate hike eventually awaits the public since the cut is a temporary measure.

To fulfill the campaign pledge of a zero tax, the government will provide about 600 billion yen a year to low- and middle-income households, an amount equivalent to the revenue generated by a 1 percent tax rate on food and beverages.

Takaichi has said that the two-year tax cut will serve as a "transitional" measure until the new income-linked relief program for lower-income workers is introduced in April 2029 and that she will "take responsibility" for restoring the tax rate to its original level after the reduction period.

She has also said the government will take supportive measures for small farmers and restaurant operators, who could be negatively affected by the tax reduction.

The tax cut plan was approved at the LDP's decision-making General Council earlier on Wednesday, although some veteran lawmakers such as former Foreign Minister Taro Kono and former Defense Minister Gen Nakatani had expressed opposition.

Japan's consumption tax rate has gradually increased, mainly to finance mounting social security costs as the population rapidly ages. Starting at 3 percent, the rate rose to 5 percent in 1997 and 8 percent in 2014.

In 2019, Japan raised its standard consumption tax rate from 8 percent to 10 percent, while introducing a reduced 8 percent rate for food and beverages, excluding alcoholic beverages and dining out, which has remained unchanged since then.