Analyst Urges Tokyo Not to Cut Consumption Tax

Japan's government has approved a plan to temporarily reduce the consumption tax on food and beverages, but economist Mana Nakazora argues that the measure should not go ahead, warning that Japan should instead use the current period to strengthen its fiscal position.

Japan's government plans to cut the consumption tax on food from 8% to 1% for two years beginning in April 2027, prompting debate over the policy's impact on inflation and public finances.

The government plans to reduce the consumption tax on food from 8% to 1% for two years beginning in April 2027.

A separate benefit equivalent to the remaining 1% would effectively bring the tax burden on food to zero. The proposal would represent Japan's first consumption-tax cut since the tax was introduced in 1989.

Nakazora, writing in an opinion piece for Mainichi Japan, argues that cutting the tax could stimulate demand at a time when Japan is already dealing with inflation.

She also questions whether a broad food-tax reduction is the most effective way to support low- and middle-income households because higher-income households, which generally spend more in absolute terms, would also benefit.

The proposed cut is expected to create an annual revenue shortfall of about ¥5 trillion.

The government has said it will avoid financing the measure with new deficit-financing bonds and will seek other sources of funding. The fiscal implications are significant because the government is simultaneously pursuing a large public-private investment program.

Japan has outlined a ¥370 trillion investment plan through 2040 covering strategic industries, while defense spending is also expected to remain elevated.

Nakazora argues that Japan's improved tax revenues and declining debt-to-GDP ratio provide an opportunity to strengthen public finances rather than reduce a major source of government revenue.

The debate comes as Japanese government bond yields have risen and investors have become increasingly concerned about the government's fiscal strategy.

Prime Minister Sanae Takaichi has said the government intends to cap new bond issuance for fiscal 2027 at about ¥40 trillion, while continuing to pursue measures to support households and investment.