Takaichi's Food-Tax Cut Plan Clears Ruling Party Hurdle Amid Market Uncertainty

Takaichi's food-tax cut plan has cleared a major hurdle in Japan's ruling party, but it comes with significant risks and uncertainties.

The Liberal Democratic Party's General Council unanimously approved the government's proposal to reduce the consumption tax on food from 8% to 1% for two years from April 2027. The move is part of Prime Minister Sanae Takaichi's plan to address rising living costs and boost public support.

The estimated revenue shortfall from this policy is around 5 trillion yen, with the government pledging not to rely on deficit-financing bonds. Instead, it plans to use non-tax revenue, state funds, foreign reserves, and spending reforms to cover the cost.

However, critics argue that the funding may not be durable enough for a two-year nationwide tax cut, and that the timing is politically challenging. The policy's impact on the yen and long-term bond yields also raises concerns about market reactions and potential pressure on the Bank of Japan (BOJ) to support government financing.

The BOJ's independence has become increasingly important as Takaichi's administration seeks to promote a 370 trillion yen public-private investment roadmap through fiscal 2040. The BOJ's governor, Kazuo Ueda, reportedly acknowledged a request from Takaichi to increase government bond purchases if needed to control rising long-term interest rates.

The opposition now has a clear line of attack, arguing that Takaichi is promising tax relief while quietly leaning on the BOJ to contain market consequences. The government will respond by emphasizing the need for household relief and highlighting the benefits of strategic investment in key sectors.