TOKYO – Prime Minister Sanae Takaichi will seek to introduce a two-year freeze on the consumption tax on food, a key pledge in the run-up to her ruling camp’s sweeping election victory, but the step may have little economic impact after an initial boost to spending.
While Takaichi has described the tax freeze — intended to ease the burden of inflation on households — as a “long-cherished personal ambition,” she is set to face greater market scrutiny over how she will manage the finances of the debt-laden nation after hopes for more fiscal stimulus lifted stock markets.
A cross-party “national council” will be established to advance talks on reducing the consumption tax on food, currently at 8 percent, to zero. The measure would lead to a drop in tax revenue of 5 trillion yen ($33 billion) annually, making it a priority for the government to find an alternative funding source.
The council plans to compile an interim report on the issue in June, in time for an annual economic policy blueprint that serves as a guide for compiling the next state budget, lawmakers said.
Amid concerns that the country’s fiscal rehabilitation will be further pushed back, Takaichi has made clear that the tax break is only a temporary measure until a refundable tax credit system is implemented, although designing a system that accurately reflects precise household income levels is expected to take time.
Finance Minister Satsuki Katayama has also said that the consumption tax suspension should last “a maximum of two years” and that the government will switch to a refundable tax credit system, viewed as an effective mechanism to ease inflation burdens on low- and middle-income households, as soon as it is ready.
“The implementation of the consumption tax reduction will only push up spending temporarily…its effect will likely only be for a year,” said Yuichi Kodama, chief economist at the Meiji Yasuda Research Institute, warning of a subsequent decline in consumption.
Kodama also noted that since the step is likely to be introduced in early 2027 at the earliest due to the time needed for discussions at the national council and for retailers to install new systems, there would be no immediate effect on curbing inflationary pressures.
“What is the purpose of discussing measures to combat rising prices a year from now?” he said.
While inflation remains entrenched, it has been easing. The government expects the pace of increase in the nationwide consumer price index to slow to 1.9 percent in fiscal 2026 from 2.6 percent the previous year.
A recent survey by Teikoku Databank Ltd. showed only one in four firms view the consumption tax freeze positively, mostly retailers who expect a boost in private consumption. Nearly half responded that they expect no impact on their businesses.
Among those who see the tax cut as negative, some cited concerns about the complexity in changing their systems for the tax rate change, which will only cover food and beverages and last two years. They are also worried about how to secure the necessary funding, according to the survey.
Takaichi said the government will not rely on issuing special government bonds to implement the tax cut and will instead secure the funds by reviewing subsidies and special tax measures or by tapping non-tax revenues.
Katayama has said the utilization of foreign exchange funds in the government’s special account could be among funding options to be discussed at the national council.
The special account refers to government-managed assets used for market intervention. A weak yen, for instance, can increase returns on such holdings and part of the income is transferred to the general account as a surplus.
Naohiko Baba, chief Japan economist at Barclays Securities Japan, said if policymakers rush to reduce economically important subsidies that are easier to cut politically for the purpose of going ahead with the tax cut in fiscal 2026, the fiscal situation could deteriorate more severely than if it were financed by government bonds.
“Identifying which subsidies and special tax measures to cut would face political obstacles, including opposition from industry groups, making it unclear whether reviews can proceed swiftly,” he said.
He also noted that using non-tax revenue could lead to drawing down state-owned assets that could otherwise serve as sources for debt redemption.
Japan’s fiscal health is already the worst among the Group of Seven nations, with state debt more than twice the size of the economy.
AloJapan.com