TOKYO - Japanese Prime Minister Sanae Takaichi on Thursday expressed her intention to seek a cut in the consumption tax rate on food and beverages to 1 percent from the current 8 percent for two years starting next April, according to an official of her party, as households continue to struggle with high prices.
The tax cut plan, which would be coupled with cash handouts to low- to middle-income earners to effectively eliminate the tax burden to zero, was conveyed during a meeting of ruling Liberal Democratic Party executives. It would be the first time that the consumption tax rate would be lowered since the system's introduction in 1989.
Takaichi directed senior LDP officials to accelerate preparations, aiming to have the plan endorsed by the Cabinet early next month and seeking the passage of related bills during an extraordinary Diet session likely to be convened in the fall.
Amid already high government bond yields and a weak yen, the tax cut could further fuel concerns over the fiscal health of the world's fourth largest economy as the measure would create a gaping hole in the financial source for social security, with the loss of tax revenues reaching about 10 trillion yen ($61 billion) in two years.
Takaichi, who is pursuing expansionary spending to spur economic growth, has yet to propose a concrete source of revenue to make up for the shortfall.
The LDP, led by Takaichi, scored a landslide victory in the House of Representatives election in February on pledges that included slashing the consumption tax rate on food and beverage products to zero for two years. Its coalition ally, the Japan Innovation Party, and many opposition parties made similar promises at that time amid elevated prices.
But the ruling parties decided to change course and seek a cut to 1 percent after learning at a cross-party meeting about taxation and social security that adjusting retailers' cash register systems to a zero rate would require more time.
To fulfill the campaign pledge of a zero tax, cash handouts to low- to middle-income households would total an annual 600 billion yen, which is equivalent to the revenue from a 1 percent tax rate on food and beverage items.
With opposition parties criticizing that a de facto tax rate hike eventually awaits the public because it is a temporary measure, the cross-party meeting, which is called the national council on social security, failed to reach a consensus following monthslong discussions, leaving it up to the prime minister to decide.
While Takaichi has vowed to reinstate the tax rate after two years, which may mean April 2029, it could become a politically risky move when the House of Councillors election is slated for the summer of 2028.
The ruling bloc refers to the two-year tax cut scheme as a "transitional measure" until the new income-linked relief program for lower-income workers is introduced in fiscal 2029. The program was approved during the cross-party talks.
Japan's consumption tax rate has gradually increased, mainly to finance mounting social security costs as the population rapidly ages. The rate started at 3 percent, increased to 5 percent in 1997, and rose to 8 percent in 2014.
Since 2019, the rate has been set at 10 percent, but a reduced rate of 8 percent has been applied to food and beverage sales, excluding alcoholic beverages and dining out.
