High prices are forcing tax cuts! Japan plans to drastically cut food consumption tax, fiscal and inflation risks are heating up

The Zhitong Finance App learned that despite opposition from the former Prime Minister of Japan and other party officials due to concerns about the source of tax cuts, Japan's ruling Liberal Democratic Party (LDP) is still proceeding with the plan to suspend consumption tax on food as planned. Itsunori Onodera, chairman of the Liberal Democratic Party's tax investigation committee, said after meeting with party lawmakers on Monday: “Currently, many people are under pressure from rising living costs. We intend to design a mechanism to essentially reduce the consumption tax rate to zero in order to fulfill the promises we made during the election.”

The background of the Takaichi government's push for tax cuts is that Japan is facing a severe cost of living crisis. Japan's core consumer price index has been rising year on year for 58 consecutive months. The core CPI rose 1.6% year on year in June 2026, and the increase continued to expand. Food prices became the main factor driving up prices. Excluding fresh food, food prices rose 3.1% year on year. Among them, the prices of coffee beans, tuna, and bento surged 23.3%, 17.9%, and 10.6%, respectively.

Meanwhile, the outlook for Japan's economy is getting bleak. On July 30, the Cabinet Office drastically lowered the real economic growth forecast for the 2026 fiscal year to 0.9% from 1.3% in January, and the private consumption growth forecast from 1.3% to 0.9%. Over 90% of households expect prices to continue to rise in the coming year, and 49.9% of households expect economic conditions to deteriorate, the highest level since December 2008.

Under the double impact of high prices and a weak economy, Takaichi Sanae's approval rating continued to decline. According to the latest poll in July, its approval rating has dropped below 50%. Analysts pointed out that the high market's push for tax cuts was intended to salvage the declining approval rating, and was criticized as “only looking at the present, without an overall view.”

Some members of parliament within the party clearly expressed their opposition. The main concern was Japan's fiscal sustainability. According to Shigeyuki Goto, a senior member of the Liberal Democratic Party who presided over the meeting, 65 members of parliament spoke in favor, 9 against, and 1 held a neutral position.

Despite this, opposition within the party is expected to be difficult to shake the momentum of the tax reduction plan. Former Minister of Internal Affairs and Communications Seiichiro Murakami said, “Implementing this policy without clear financial resources is very worrying for Japan's fiscal situation.”

Former Prime Minister Ishiwari Shigeru also expressed concern about how to close the tax gap. After the meeting, he said, “Even if temporary funding sources are assumed, can these be considered stable financial resources?” He stressed that the cost of social security brought about by the declining birthrate and aging population is rising rapidly.

The international community's concerns about Japan's financial situation are also heating up. S&P Global Ratings warned as early as January of this year that the food tax reduction plan proposed by Takaichi would depress Japan's fiscal revenue and damage the country's finances in the long run. In February, the International Monetary Fund (IMF) clearly proposed after concluding Article IV negotiations with Japan: “The authorities should avoid cutting consumption taxes. This is an imprecise measure that will erode fiscal space and increase fiscal risk.”

What is even more worrisome is that Bank of Japan Governor Ueda Kazuo has sent a clear hawkish signal, warning that the risk of inflation exceeds expectations, and that it is not ruled out to speed up the pace of interest rate hikes. Under the new normal of “high prices, high interest, and high debt,” there is a clear “misalignment” between the fiscal expansion brought about by tax cuts and the central bank's policy orientation to contain inflation.

Itsunori Onodera will rule on the specific way to proceed with the tax reduction plan. The decision is expected to be approved by the Liberal Democratic Party at a higher decision-making level within this week, in order to meet the “reach a conclusion in early August” schedule set by Prime Minister Takaichi Sanae.

The current plan is to reduce the food consumption tax from the current 8% to 1% starting in April 2027 for a period of two years. The resulting annual tax losses are expected to exceed 4 trillion yen (about 25.5 billion US dollars).

During the two-year tax reduction period, the government will begin to establish a cash disbursement mechanism for low-income households to mitigate the impact that may be caused by subsequent tax rate increases.