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

The Japanese government plans to cut the sales tax on food and drinks to 1 per cent for two years starting April 2027, according to local media reports, delivering one of Prime Minister Sanae Takaichi’s signature election pledges after months of political wrangling. Takaichi is expected to instruct the ruling Liberal Democratic Party as early as July 30 to start putting together the draft legislation needed to implement the measure, the Asahi newspaper reported on the evening of July 27, citing multiple senior government officials. Reports by TBS and Nikkei also pointed to a reduction to 1 per cent. Chief Cabinet Secretary Minoru Kihara said on July 28 that the government has yet to conclude its discussions on cutting the sales tax. Takaichi’s expected announcement is unlikely to answer how the government will finance the measure’s annual cost of more than four trillion yen (S$31.57 billion), leaving investors focused on Japan’s fiscal outlook and keeping upward pressure on government bond yields. “The decision has already largely priced in, but fiscal concerns still remain,” said Akane Yamaguchi, economist at Daiwa Institute of Research. The move would come after a cross-party panel, tasked to discuss the measure, abandoned efforts on July 27 to reach a consensus on the proposal. Members remained divided over how to finance the measure, whether a tax cut should be permanent or if the equivalent tax burden be paid in handouts as an alternative. The lack of progress on the sales tax cut is among the factors that have prompted a fall in Takaichi’s approval ratings from elevated levels. The government appears set to proceed broadly along the lines of a proposal put forward in June by the LDP’s Itsunori Onodera, chair of the panel. His plan would cut the food sales tax from the current 8 per cent to 1 per cent from April, while cash payments to eligible households totalling about 600 billion yen a year could begin in autumn 2027, broadly offsetting the remaining one percentage point of food taxes for those families. Takaichi pledged to work toward cutting the tax ahead of the February general election. In the 2025 upper house election, the ruling party campaigned without that pledge despite its adoption by most opposition parties. The LDP ended up losing its majority the house in a humiliating setback that ultimately led to the resignation of then Prime Minister Shigeru Ishiba. Detailed negotiations over the form the tax cut should take were delegated to Onodera’s cross-party panel. But the talks proved far more complicated than expected. The panel was initially tasked with submitting a summary by early summer, but ultimately took longer than expected and failed to reach a conclusion. Beyond questions over how to finance the measure, some opposition parties favoured cash handouts over a tax cut, partly to avoid the political difficulty of hiking the tax back to its original level after two years. Others argued that the government should address the impact on affected industries, including restaurants. The 1% per cent cut, rather than a reduction to 0 per cent, was chosen to reduce the burden of extensive reprogramming of cash registers for retailers. A working-level panel earlier estimated that implementing a 0 per cent rate would take about a year, while a number above zero could cut that timeline roughly in half. That helped drive policymakers’ decision to look at a 1 per cent rate. Daiwa’s Yamaguchi questioned whether the measure would meaningfully ease the burden on households. “Even if the consumption tax cut is implemented, prices may not fall as much as people expect, meaning the benefits for households could be smaller than hoped,” she said. That outcome could weigh on household sentiment and Takaichi’s popularity going forward.