TOKYO, July 30 : Japanese Prime Minister Sanae Takaichi announced her intention to proceed with a two-year cut on an 8 per cent sales tax on food items, a senior ruling party official said on Thursday, a move set to strain the country's worsening finances.The decision came as Takaichi saw her administration's approval ratings slump, with households facing rising living costs from a weak yen and the Middle East war-induced energy shock.In a meeting with ruling party executives, Takaichi ordered preparations to cut the levy to 1 per cent for two years from April next year, the official told reporters.With the premier's order, the ruling Liberal Democratic Party (LDP) will start discussions at its tax panel to seek consensus.
"The premier said the government will secure funding that does not rely on debt issuance," LDP Secretary-General Shunichi Suzuki told reporters after the meeting, adding an overshoot in tax revenues will help fund the cut to the food levy.The government will likely finalise the tax cut plan in a cabinet meeting in early August, and submit relevant legislation in a parliament session convening in autumn.The news helped drive up the benchmark 10-year Japanese government bond (JGB) yield by 5.5 basis points to 2.800 per cent on Thursday as investors saw prospects of more debt issuance. The impact on the yen was muted, as investors awaited the Bank of Japan's policy meeting concluding on Friday.DOUBTS OVER EFFECTJapan levies an 8 per cent consumption tax on food and a 10 per cent rate on other goods and services, key sources of funding for rising social welfare costs among a rapidly ageing population.If implemented, it would be the first time for Japan to lower the sales tax rate since its introduction in 1989.Takaichi delivered a historic election win for her ruling party in February with a pledge to ease household living costs by suspending the 8 per cent food sales tax for two years.After much wrangling among ruling and opposition parties, Takaichi decided to proceed with a cut to 1 per cent, instead of a suspension, to avoid the lengthy time needed to fix cash register systems to recognise a zero tax rate.The move would be a temporary step before introducing a new payout system targeting low and middle-income households, as part of steps to cushion the blow from rising living costs.The tax cut idea has drawn pushback even from ruling party lawmakers due to concerns over the impact on Japan's worsening finances, as the administration has not explained how it plans to fill the revenue shortfall.Of Japan's record 122-trillion-yen ($746 billion) 2026 budget, about a quarter is funded by debt issuance and nearly 22 per cent by consumption tax, the biggest tax revenue source.There are also questions over whether the tax rate could be moved back up to 8 per cent in 2029, months before an expected upper house election in the summer of 2028.Some analysts warn the tax cut will do little to ease the burden on households as companies, already keen to pass on rising raw material costs, could use the opportunity to raise prices.The tax cut could also accelerate inflation by increasing households' purchasing power, running counter to the Bank of Japan's efforts to tame price pressures, said Tsutomu Watanabe, emeritus economics professor at the University of Tokyo."The one thing that could cause too-high inflation in Japan would be fiscal policy," he said.($1 = 163.4900 yen)
