(Jan 19): Japan’s Prime Minister Sanae Takaichi looks set to campaign on a temporary cut to the sales tax on food in a snap election next month, a policy move that has resonated with the public in the last two national votes.
Takaichi is set to lay out her plans at a press conference later on Monday for an election expected to be held on Feb 8.
A temporary cut to the sales tax on food is already included in a ruling bloc agreement that Takaichi’s Liberal Democratic Party (LDP) signed with junior partner Japan Innovation Party. The coalition is considering a two-year exemption on food and beverages, Chief Cabinet Secretary Minoru Kihara said on Monday, while a Kyodo report said there are plans to implement the cut as soon as January next year.
In contrast, a new opposition party said on Monday it’s aiming to permanently eliminate the food sales tax, giving Takaichi an opening to argue that the opposition proposal is more likely to worsen Japan’s fiscal health.
Soaring food costs are a key component driving broader inflation higher, with data on Friday expected to show consumer price growth has stayed above the central bank’s 2% target for four straight calendar years. The proportion of food spending within overall household consumption came to 28.9% in November, the highest for that month since comparable data became available in 2000.
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Voter frustration over costs of living was a major factor leading to setbacks for the LDP in the last two national elections. Currently Japan applies an 8% tax on most purchases of food and non-alcoholic beverages, compared with a standard consumption tax rate of 10%.
Reports of Takaichi’s plan emerged after the largest opposition party linked up with a former ruling coalition partner last week, forming a larger opposition bloc called the Centrist Reform Alliance (CRA), that has increased the riskiness of the prime minister’s election gamble. On Friday, co-leader Yoshihiko Noda said his party would look to cut the sales tax while maintaining fiscal discipline and not issuing additional deficit bonds.
The CRA aims to eliminate the food sales tax for good by generating the necessary financing through managing a new sovereign wealth fund, according to the Constitutional Democratic Party (CDP) and Komeito, which are forming the new party.
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The CDP believes a sales tax cut could be achieved as quickly as six months after passing the bill, its policy chief Satoshi Honjo also said, adding that such a cut would be funded by dipping into reserve funds. The sovereign wealth fund may take at least a year to establish, Honjo’s Komeito counterpart Mitsunari Okamoto added.
If Takaichi announces plans to suspend the sales tax on food, it looks likely that the two biggest forces in parliament will wind up campaigning on similar sales-tax platforms ahead of the election — with a difference over how long the cuts will last.
Okamoto also argued for correcting excessive yen weakness, by improving the governance code to make Japanese stocks more attractive, bringing in more overseas tourists and eliminating the country’s digital deficit.
If Japan’s giant pension fund could also be used to fund the sales tax cut by using some of its profits from managing overseas assets, the yen would be bought in the trillions each year, Okamoto added.
Japan’s government bond yields jumped as reports on the food sales tax cut renewed fiscal concerns. The yield on 30-year debt climbed 10 basis points to 3.61%, its highest level since its debut, while rates on 10- and 20-year notes rose to their highest levels since 1999.
The same reports lifted some food-related stocks in Tokyo on Monday morning as lower levies would spur demand. Yamazaki Baking Co shares rose as much as 7.4%, the most since Oct 2024, while 7-Eleven operator Seven & i Holdings Co shares gained 5%.
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Takaichi appears to be banking on her high personal approval ratings to consolidate her grip over the more powerful lower house of parliament, where the ruling bloc holds a slim majority. A win in the upcoming election would give Takaichi a public mandate to pursue expansionary fiscal policies.
“The Takaichi administration is taking risks regarding fiscal discipline,” said Hideo Kumano, economist at Dai-Ichi Life Research Institute. “While they claim the 0% consumption tax on food is only for two years, I believe it will be nearly impossible to revert to the original rate once implemented.”
A poll by the Asahi newspaper conducted over the weekend showed that support for Takaichi remained high at 67%, with 52% saying that the ruling bloc should win a majority.
Still, half of respondents disagreed with plans for a snap election, with 36% supporting the timing of the election and 50% disagreeing.
Although local media estimates based on the previous lower house poll in 2024 showed that the merger between the CDP and Komeito could tip the scales in some districts and make for a much closer election, the broader public appears sceptical about the new opposition alliance.
In the Asahi survey, 69% said the new party would not be a viable force against the ruling bloc, compared with 20% who thought it would be.
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