Takaichi administration seeks 5 trillion yen a year for food tax cut

2026-08-08

Funding and Market Attention

The Takaichi administration is pressing to secure about 5 trillion yen a year in funding for a consumption tax cut on food items that would run for two years from April 2027. Given past administrations that moved ahead with time-limited tax cuts before funding discussions caught up, a rushed launch could erode public trust.

On the 5th, when the government decided on the tax cut policy, concerns about fiscal management were voiced one after another at a meeting of business leaders. Comments included 'It is difficult to raise the rate back from 1% to 8% all at once' and 'It would be a problem unless the funding is clearly shown', while worries about rising long-term interest rates also spread.

Prime Minister Takaichi positions the consumption tax cut as a bridge until a new income-linked benefit system is fully introduced in fiscal 2029. She has said she will be responsible for restoring the tax rate two years after the start of the cut, while explaining that funding will be secured 'without relying on special deficit bonds so that market confidence can be maintained'.

Possible funding sources include reviewing tax incentives and subsidies, as well as using non-tax revenue such as surplus funds in the Foreign Exchange Fund Special Account, but specific measures are still being worked out.

Past Tax Cuts and Governance

Since the collapse of the bubble economy, successive administrations have repeatedly used tax cuts as a stimulus measure. However, there have been many cases in which shifting policies on deadlines and funding failed to bolster governments. In some cases, they ultimately relied on deficit-financing bonds to get by.

In February 1994, the non-LDP coalition led by Prime Minister Morihiro Hosokawa abruptly unveiled a plan to replace the consumption tax with a 7% 'National Welfare Tax'. The plan also included an early tax cut worth a total of 6 trillion yen, centered on income tax and local inhabitant tax, but the proposal was withdrawn amid backlash within the ruling camp. Special cuts in income tax and local inhabitant tax remained, but the Hosokawa administration stepped down in April that year.

In the coalition government formed in June that year by the Liberal Democratic Party, the Japan Socialist Party and Sakigake, Prime Minister Tomiichi Murayama continued the income tax cuts. The administration first implemented the tax cuts and then adopted an integrated tax increase and reduction approach, using the higher consumption tax rate in 1997 to fill the gap. In fiscal 1994 to 1996, before the consumption tax hike, it bridged the period by issuing about 8 trillion yen in special tax-cut bonds with short redemption periods.

Under the Ryutaro Hashimoto administration, confusion over tax-cut policy stood out as it was compounded by the Asian currency crisis in 1997 and the collapse of Yamaichi Securities. In December 1997, it announced a special tax cut worth about 2 trillion yen in total for income tax and local inhabitant tax, and implemented it in February 1998. In April that year, it added another 2 trillion yen or so. In the July 1998 upper house election, it referred to permanent tax reform, but later revised its remarks, leaving the explanation inconsistent. The LDP failed to dispel distrust, which led to defeat and resignation.

After that, Prime Minister Keizo Obuchi launched a proportional income tax cut in 1999, reducing income tax by a flat 20% as a permanent, no-deadline cut. The amount of deficit-financing bonds issued began to rise sharply around this time, and the proportional tax cut lasted for eight years until 2007 under the first Shinzo Abe administration.

Challenges for the Takaichi Administration

More recently, in October 2023, then Prime Minister Fumio Kishida led income tax and local inhabitant tax cuts under the banner of 'returning increased tax revenue to the public'. He said the cuts would be funded by revenue gains over the two years through fiscal 2022, but the delay of a defense tax increase also led to criticism that the policy was overly focused on near-term burden relief. In a Nikkei public opinion poll in October 2023, only 24% said it was 'appropriate' as a measure against higher prices, indicating limited public understanding. Cabinet support rates then stagnated in the 20% range from December that year, and he decided not to run in the 2024 LDP leadership race.

The Takaichi administration is sketching a growth strategy that would see the public and private sectors invest 370 trillion yen in 17 strategic fields by fiscal 2040. By year-end, it will revise three security-related documents and compile a new plan for increasing defense spending. As pressure to expand spending grows stronger, how to secure funding for the food tax cut will become the key issue.

Within the government and the ruling camp, a proposal to use surplus funds from the Foreign Exchange Fund Special Account has also emerged, but that account is already being used to finance higher defense spending, making coordination difficult. Decisions with an eye on the 2027 LDP leadership race and the 2028 upper house election will also be unavoidable.

A senior government official said the government does not plan to compile the large-scale supplementary budgets of more than 10 trillion yen that have become routine in recent years, adding that the funding needed for the consumption tax cut would be smaller than that. Takaichi has called for moving away from fiscal management dependent on supplementary budgets and said tighter spending control could keep new bond issuance below the previous year. However, following the Kumamoto earthquake that struck in late July, calls for a supplementary budget in the autumn extraordinary Diet session are growing among both ruling and opposition parties. Questions remain within the LDP, including how the government would manage without increasing the issuance of special deficit bonds.

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