Japan's government has approved a plan to reduce the food consumption tax rate from 8% to 1% for two years starting in April 2027. The initiative aims to eliminate the tax burden for low- and middle-income households by providing subsidies equivalent to the remaining 1%. The tax cut and subsidy program will require approximately 5 trillion yen (about $44 billion) annually, but specific funding sources have been postponed until the end of the year.
According to the Yomiuri Shimbun on September 16, the approved plan includes a reduction in the food consumption tax and a subsidy system that varies based on income. The plan outlines a temporary measure until the new subsidy program is fully implemented. From April 2027 to March 2029, the food consumption tax will be set at 1%, with about 600 billion yen (approximately $5.29 billion) allocated annually to support low- and middle-income households. While the tax reduction will apply to all consumers purchasing food, the subsidies will only be available to those in lower income brackets. The subsidies will be distributed regardless of the amount spent on food, meaning individuals will not receive a direct refund of the consumption tax they paid.
The government plans to implement both the tax reduction and subsidy payments during the 2027-2028 fiscal years, with a return to the 8% tax rate starting in April 2029, alongside an expansion of the subsidy program. The plan is designed to increase the net income of low- and middle-income workers, who face significant tax and social insurance burdens, thereby enhancing their work motivation. Additional payments will be provided for households with dependent children, although the income thresholds and amounts for the subsidies have yet to be determined. The Asahi Shimbun reported that if this tax cut is realized, it would mark the first reduction in the consumption tax rate since its introduction in 1989.
According to the Yomiuri, the government and ruling party aim to submit a combined bill for the tax cut and subsidy program to the extraordinary Diet session, which is expected to convene as early as October 5, with a goal of passing it by November.
The key issue remains funding. The Yomiuri reported that approximately 5 trillion yen is needed annually for the tax cut and subsidies. The government has stated it will seek to secure funding without relying on deficit bonds, proposing adjustments to subsidies and tax reductions in specific sectors. However, concrete plans will be determined during the budget formulation process for the 2027 fiscal year, which will continue until the end of the year. Among about 120 tax special measures set to expire by the end of March 2027, only three have been proposed for elimination by various ministries, and no significant cuts to subsidies have been suggested during the budget request phase.
The Yomiuri noted that if the government fails to present a concrete funding plan by the end of the year, market perceptions may lead to increased bond issuance, potentially driving up long-term interest rates. The yield on Japan's 10-year government bonds, a key indicator of long-term rates, has risen from around 1.6% before the Takaiichi administration to approximately 3% currently. Toke Eiji, chief bond strategist at SBI Securities, estimated that at least 0.5 to 0.6 percentage points of the 1.4 percentage point increase in long-term rates since the administration took office can be attributed to concerns over fiscal deterioration related to the consumption tax cut.
The Japanese government bases its budget for bond interest on market interest rates, meaning that rising rates will increase the burden of interest payments. According to the Yomiuri, the government is projected to spend about 16.5888 trillion yen on bond interest in the 2027 fiscal year, an increase of approximately 3.5 trillion yen compared to the initial budget for the 2026 fiscal year. As interest expenses rise, less funding will be available for other policies.
Experts have differing opinions on the feasibility of securing funding. According to the Yomiuri, Professor Doi Takero of Keio University expressed concern that merely adjusting tax special measures and subsidies may not generate the necessary funds, potentially leading to reliance on increased tax revenues. Conversely, former Bank of Japan Policy Board member Kataoka Koshi believes that rising tax revenues due to inflation and economic growth, combined with non-tax revenues, could yield the required 5 trillion yen annually.
Passing the legislation also poses a challenge. The ruling Liberal Democratic Party and the Japan Innovation Party hold 120 seats in the House of Councillors, just four short of a majority, meaning cooperation from the opposition is necessary for the bill to pass. However, no opposition parties have yet expressed support for the legislation. The government and ruling party are hoping for cooperation from Komeito, which holds 21 seats in the House of Councillors. On September 15, Democratic Party for the People leader Tamaki Yuichiro identified the lack of clarity regarding income thresholds for subsidy eligibility as a major issue.
It remains uncertain whether the food consumption tax rate can be reverted from 1% to 8% after the tax cut ends in April 2029. The Asahi reported that to alleviate the household burden from the tax increase, the government plans to provide half of the subsidy for 2029 to those who received subsidies during the tax cut period earlier than the original payment date in the fall, specifically in April. The plan does not include a 'economic clause' that would allow for delaying the tax increase in the event of poor economic conditions. This decision follows Takaiichi Sanae's assertion that she would take responsibility for ensuring the tax rate is restored.
However, the Asahi noted that the Abe administration previously delayed the increase of the consumption tax rate to 10% even after removing the economic clause. Given that the current situation requires a significant 7 percentage point increase from 1% to 8%, the restoration of the tax rate is likely to become a contentious issue in the summer 2028 House of Councillors elections.
Toke warned in the Yomiuri that if the tax rate is not restored to 8% while the subsidy program is fully implemented, there is a risk of a downgrade in Japan's government bond credit rating.
Meanwhile, the restaurant industry is concerned that the tax cut may lead to a decline in customers. While takeout meals will be taxed at the reduced rate of 1%, dining in will still incur the full 10% tax. According to the Nihon Keizai Shimbun, when a similar low tax rate was introduced for food in 2019, the number of customers in restaurants dropped by about 5% at one point. The plan also includes measures to support restaurants in diversifying their businesses, such as expanding takeout sales.
* This article has been translated by AI.
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