Takaychi: Food tax cut won’t rely on deficit-financing bonds

Takaychi: Food tax cut won’t rely on deficit-financing bonds

Takaichi: Food Tax Cut Won’t Rely on Deficit-Financing Bonds

Japanese Prime Minister Sanae Takaichi has emphasized that her proposed two-year suspension of the 8% consumption tax on food will not depend on deficit-financing bonds, despite concerns over Japan's high public debt. The policy, a key campaign pledge, aims to alleviate cost-of-living pressures for households while maintaining fiscal sustainability, according to government statements.

Takaichi reiterated her commitment to the tax cut during a news conference on February 19, stating that discussions on implementation will proceed alongside a refundable tax credit system to offset revenue shortfalls. She called for collaboration with opposition parties to establish a nonpartisan panel to finalize details, with potential implementation as early as 2027 according to reports. However, analysts note that the timeline may stretch due to political and fiscal constraints.

The government's fiscal 2026 budget, released amid market volatility, demonstrates restraint in bond issuance, with new debt remaining below 30 trillion yen for the second consecutive year—a nearly three-decade low. This contrasts with initial market fears of aggressive deficit spending following Takaichi's election victory in February according to Reuters. The primary deficit for 2025 is projected to be smaller than pre-pandemic levels, supported by rising tax revenues and spending discipline, according to the IMF.

Nevertheless, the IMF has cautioned that Japan's high debt burden—among the developed world's largest—leaves the economy vulnerable to shocks and urged the tax cut to remain temporary and targeted according to Reuters. Bond markets have stabilized since Takaichi's election, but investors remain wary of her ability to balance proactive fiscal policies with long-term sustainability.

Takaichi has also emphasized coordination with the private sector to boost investment, rather than relying on direct government spending, to stimulate growth according to Reuters. Oxford Economics notes that her fiscal plans are unlikely to significantly alter Japan's primary deficit trajectory, which is projected to remain at 2%-3% of GDP through 2028 according to Oxford Economics.

While Takaichi faces pressure to deliver on populist pledges, her focus on fiscal responsibility—highlighted in her rhetoric shift from "proactive" to "responsible" policies—aims to reassure markets and avoid a repeat of recent bond and yen selloffs according to Reuters. The success of her agenda will depend on navigating political compromises and maintaining investor confidence in Japan's fiscal framework.