2026 POLLS: Little Discussion on Paying for Consumption Tax Cut

Tokyo, Jan. 30 (Jiji Press)–The likelihood of Japan adopting a consumption tax reduction following the upcoming general election is high, with most major parties proposing related measures, but discussions on how to foot the massive bill are lacking. With some even doubting the measures’ ability to boost the economy, a possible tax cut may result in a loss of financial market confidence in Japan’s fiscal discipline, fueling higher interest rates and inflation. Under Japanese law, consumption tax must be used to finance social security measures such as pensions, medical care and nursing care. In fiscal 2024, revenues totaled about 32 trillion yen. The country’s consumption tax currently stands at 10 pct, excluding food and some other items for which the tax rate is 8 pct. Ahead of the Feb. 8 election for the House of Representatives, the all-important lower chamber of Japan’s parliament, the ruling coalition of the Liberal Democratic Party and the Japan Innovation Party proposed lowering the consumption tax rate on food to zero for two years, while the opposition Centrist Reform Alliance has called for such a decrease to be permanent. The Finance Ministry has estimated that these measures would result in an annual tax revenue loss of roughly 4.8 trillion yen. Meanwhile, proposals by the Democratic Party for the People and the Japanese Communist Party to lower the consumption tax on all goods to 5 pct are seen denting tax revenues by around 15.3 trillion yen per year. Reiwa Shinsengumi and Sanseito each advocate abolition of consumption tax. LDP leader and Prime Minister Sanae Takaichi has said that a tax cut could be financed without issuing special deficit-financing bonds if it is limited to two years. In a party leaders’ debate, she expressed her aim to implement the reduction during fiscal 2026, which starts in April. She has not gone deeply into details of this measure, however, only explaining that it would be considered at a national congress to be established in the future. Takaichi said that reviewing special tax benefits and subsidies could be one way Japan pays for the tax cuts, but this was also given as a possible way to finance the abolition of the provisional gasoline tax surcharge during tax system reform talks at the end of last year. Reviews have yet to free up the level of funding hoped by the government. The Centrist Reform Alliance has called for financing a consumption tax reduction with investment proceeds from government assets, but one economist said that this was not a stable source of funding as “investment performance can change depending on market conditions.” DPFP chief Yuichiro Tamaki has also avoided giving specific plans for paying for the tax cut, only saying he would “use any and all funding.” Keiji Kanda, senior economist at Daiwa Institute of Research Ltd., estimates that lowering the consumption tax on food to zero would ease annual tax burdens by 88,000 yen per household, but would boost overall private spending by only about 500 billion yen. “The effects are small relative to the massive fiscal spending required,” Kanda said. While the prime minister has said that the tax reduction would be a transitional measure until the introduction of a refundable tax credit program, a senior official of an economy-related government agency voiced concern that Japan may not be able to lift the tax rate back. The end date of the measure could be postponed, and the government may end up relying on deficit-covering bonds. The market reacted immediately to the insufficiently discussed tax cut plans. On Jan. 20, a day after Takaichi announced her tax cut pledge, the yield on 10-year Japanese government bonds, considered a key long-term interest rate, briefly rose to a 27-year high of 2.38 pct. “The government may lose its self-restraint on protecting funding for social security, and that could set a precedent for unscrupulous tax cuts,” Hideo Kumano, chief economist at Dai-ichi Life Research Institute Inc., warned. END [Copyright The Jiji Press, Ltd.]