By Leika Kihara
TOKYO, Sept 15 (Reuters) – Japan’s government is set to finalise on Tuesday an outline for a consumption tax cut and payouts to households with no mention of how to fund the measures, a move that may keep alive market concerns over the nation’s already strained finances.
The cabinet approval of the tax cut outline would come as global fiscal and inflation concerns lifted the yield on the benchmark 10-year Japanese government bonds (JGB) to a 30-year high of 3.025% on Tuesday.
The tax cut would come on top of Prime Minister Sanae Takaichi’s ambitious spending plans that have triggered a bond sell-off and criticism from U.S. Treasury Secretary Scott Bessent.
Takaichi’s pledge to cap new government bond issuance around 40 trillion yen ($259 billion) for the fiscal 2027 budget is already facing scrutiny, with expenditure seen increasing from budget requests that already swelled to pandemic-era scale.
“It’s hard to pre-empt the total size of next year’s debt issuance, so markets will remain jittery until cabinet approval of the draft budget expected at the end of this year,” said Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
Japan currently applies a 10% consumption tax on goods and services except for food items, which are charged an 8% levy.
The outline will lay out a plan to slash the 8% levy on food to 1% for two years from April 2027, supplemented by payouts equivalent to the remaining 1% that effectively eliminates the tax burden on food purchases, according to a draft approved at a ruling party panel last week.
Japan will not rely on deficit-covering bonds to fund the tax cut, and instead seek funding from non-tax revenues as well as reviews of existing subsidies and tax breaks, it said.
“Markets are renewing their attention to the fact there’s lack of clarity over how to fund the tax cut, which is weighing on long- and super-long JGBs,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
The tax cut, a centrepiece of Takaichi’s efforts to ease the impact of rising living costs on households, creates a revenue shortfall of roughly 5 trillion yen.
If implemented, it would be the first cut in the rate since Japan introduced the consumption tax in 1989. The tax is a key source of revenue to fund increasing social welfare and pension costs for a rapidly ageing population.
The outline will serve as a basis for legislation for lowering the tax levy, which will be submitted to parliament, which is seen convening next month.
Japan’s public debt, at twice the size of its economy, is the largest among advanced nations. The cost of funding the debt is increasing as the central bank raises interest rates and slows bond purchases in an effort to wean the economy off decades of massive stimulus.
($1 = 154.6500 yen)
(Reporting by Leika Kihara; additional reporting by Tamiyuki Kihara and Yoshifumi Takemoto; Editing by Stephen Coates and Lincoln Feast.)
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