Takaichi's Tax Cut Plan Sparks Market Pressure as BOJ Meets

Japanese Prime Minister Sanae Takaichi has unveiled a plan to cut the sales tax rate on food and soft drinks from 8% to 1% for two years starting in April 2027. The move aims to ease the burden on households facing higher food prices due to the weak yen, which has risen its value by nearly 40 years.

The government will seek to avoid issuing deficit-financing bonds by using surplus tax revenue, a pledge that is politically important as investors question whether the administration can balance household relief with long-term investment and fiscal discipline. Takaichi's approval rating dropped to 57% in July from 69% in June, with rising living costs and the weak yen weighing on voter sentiment.

The BOJ meeting has given the issue wider significance as investors await a signal on whether Japan's central bank will hike rates later this year. A more hawkish BOJ could support the yen and reduce import-driven inflation but raise borrowing costs for the government, businesses, and households. The food-tax cut complicates the reassurance that the government has provided to markets about its respect for BOJ independence.