Japan Prepares Tax Cut Plan Without Clear Funding Details

The Japanese government is finalizing an outline for a consumption tax cut and payouts to households without specifying how it will fund the measures. This move may keep alive market concerns over Japan's already strained finances.

The cabinet approval of the tax cut outline comes as global fiscal and inflation concerns have 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, which have triggered a bond sell-off and criticism from U.S. Treasury Secretary Scott Bessent. Takaichi has pledged to cap new government bond issuance around 40 trillion yen ($259 billion) for the fiscal 2027 budget.

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. 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.