Reuters
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Japan’s Prime Minister Sanae Takaichi called a snap election on Monday, pledging to suspend the 8% food tax for two years, echoing the proposals of his rivals, despite the potential strain on already precarious public finances.
At a time when concerns about Japan’s fiscal health have pushed government bond yields to their highest levels in decades, the consumption tax cut, which is also being proposed by many opposition parties, would leave a gaping hole in national revenue.
Japan imposes an 8% consumption tax on food and a 10% consumption tax on other goods and services, which helps finance rising social security costs as the country’s population ages rapidly.
Takaichi said waiving the 8% grocery tax for two years would help soften the blow to household budgets from rising living costs. He said the government had no intention of issuing debt to fund the suspension, adding that other measures could include a review of existing subsidies.
Takaichi said at a press conference, “We will completely review the economic and fiscal policies that have been in place to date.My administration will put an end to excessive fiscal tightening and a lack of investment in the future.”
The yield on 10-year Japanese government bonds hit a 27-year high of 2.275% on Monday, on rising prospects for a consumption tax cut and hopes that Mr. Takaichi will use his election victory to step up expansionary fiscal policy.
“I don’t understand why Japan would need a consumption tax cut when it has put together an important economic stimulus package to counter rising inflation,” said Keiji Kanda, senior economist at Daiwa Institute of Research.
“We are concerned that these measures will accelerate inflation and lead to further increases in bond yields.”
Bearing in mind the public’s dissatisfaction with inflation, opposition parties are also calling for the consumption tax to be reduced or abolished ahead of elections on February 8th.
Last week, a new political party formed from the two main opposition parties called for an end to the 8% tax on food sales. Japan may establish a new sovereign wealth fund to collect revenue from permanent cuts, it said in its election policy platform on Monday. Other major opposition parties, including the Democratic Party of the People, are also calling for the consumption tax to be lowered or abolished.
Inflation has been above the Bank of Japan’s 2% target for nearly four years, driven largely by persistently high food prices, prompting calls from politicians for big spending and tax cuts to cushion the blow to household budgets.
Takaichi’s ruling Liberal Democratic Party has long resisted opposition demands for a consumption tax cut, arguing that it would undermine market confidence in Japan’s resolve to improve its fiscal health.
Eliminating the 8% food sales tax would reduce government revenue by an estimated 5 trillion yen ($31.71 billion) a year, roughly equivalent to Japan’s annual education spending, according to government data.
Analysts say a permanent rate cut would strain Japan’s already fragile finances and increase the risk of bond selling, as investors focus on Mr. Takaichi’s expansionary fiscal policies. Her government has put together a record $783 billion budget for next fiscal year, in addition to a stimulus package focused on easing the pain of rising living costs.
This story has been updated as developments occur.
