The fiscal credit card Ms Takaichi is not prepared to pay back

TAX CUTS in Japan are as rare as they are politically explosive. The consumption tax has been raised three times since its introduction in 1989, and many prime ministers who presided over an increase suffered electoral retribution, earning it the nickname "the gateway to misfortune". On July 30th Ms Sanae Takaichi, Japan's first female prime minister, became the first to propose lowering it. Her plan would slash the rate on food and beverages from 8% to 1% for two years, starting in April 2027, and add cash payments to bring the effective burden to zero for low- and middle-income households. The LDP's 316 seats in the lower house - a two-thirds supermajority - mean the measure will sail through parliament. That, unfortunately, says nothing about whether Japan can afford it.

The immediate cost is large. The tax cut would erase an estimated 4.4trn yen of revenue a year. Adding the cash handout brings the total annual cost to 5trn yen, or 10trn yen over two years. Ms Takaichi has pledged to fund this through fiscal "reforms" and without issuing deficit-covering bonds. She has not said what those reforms are. The government's cross-party tax council spent months in deadlock on the very question of funding and produced no consensus. The prime minister has simply overridden the impasse.

To be sure, the political logic is obvious. Ms Takaichi won a landslide in February's snap election largely on a promise to slash the food tax, a pledge she shared with almost every other party in a campaign dominated by the cost of living. The consumption tax accounts for about 30% of Japan's national tax revenue and is deeply unpopular. The plan is labelled a "transitional measure", a bridge to a new income-linked relief system the government says it will introduce in fiscal 2029. The two-year horizon makes it look temporary, hence containable.

But the arithmetic does not cooperate. Japan's central government debt stood at roughly 200% of GDP as of March 2026, according to CEIC data. Fitch Ratings, a credit-rating agency, projects the fiscal deficit will widen to 3.7% of GDP by 2027, up from 2.4% in 2025, even before this cut. Interest payments - already consuming a quarter of the fiscal 2026 budget - are projected to rise from 13trn yen in 2026 to 21.6trn yen by 2029 under the Finance Ministry's own 3% nominal-growth scenario. The 10-year government bond yield is trading around 2.85%, near a multi-decade high. Any further loosening of fiscal guardrails risks pushing these costs higher still.

The consumption tax also funds social security, a point Ms Takaichi's own party has not forgotten. Hiroshi Moriyama, the LDP secretary-general before the February election, put it bluntly: "What part of social security could we ask people to give up?" The IMF warned against the cut in its 2026 country report, calling it "an untargeted measure that would erode fiscal space and add to fiscal risks". The fund-raising mechanism, in other words, is not merely vague. It is the entire problem.

Ms Takaichi's answer is to trust growth to catch up. She is coupling the tax cut with an investment plan that envisions 370trn yen of public and private spending across 17 sectors through fiscal 2040. The government has said this will more than double Japan's annual economic growth to over 1%, expand the tax base, and make Japan's debt burden more manageable. Reuters's Breakingviews described it as "all hype and no substance". Only 10% of the projected investment is expected to come from the public sector; the rest depends on private capital that may not materialise. A higher-growth future is a better way to service debt than lower tax revenue today, but it is not the same thing.

Then there is the politics of timing. Ms Takaichi's tenure as LDP leader expires in the autumn of 2027. Even if she secures another term, the tax reverts in spring 2029 - well after the next upper-house election in the summer of 2028. Restoring the rate would be a political risk that may fall on someone else's shoulders. This is textbook fiscal moral hazard: the benefits are immediate and visible, the costs are deferred and diffuse.

Former LDP ministers have warned that the measure could undermine confidence in Japan's fiscal position, push yields higher and weaken the yen, which was near a four-decade low of 163 to the dollar in late July. If that happens, imported energy and food become more expensive, and the very households the tax cut is meant to help see their relief eaten by inflation. The measure would be self-defeating.

Ms Takaichi has removed the pledge to restore fiscal health that appeared in previous prime ministers' economic blueprints, replacing it with the vaguer promise of "fiscal sustainability". The change signals how seriously she intends to treat the numbers. A better approach would be targeted support for low-income households through the cash handout alone, which achieves the same relief for those who need it without gutting a revenue source that funds pensions and healthcare. The IMF's objection - that the tax cut is untargeted - is also its prescription.

The consumption tax is Japan's most reliable source of revenue for an ageing population. Lowering it to buy popularity in the short term is a familiar political calculation. But a government that cannot explain how it will pay for its flagship pledge should not be trusted to manage the rest of the budget. That bargain is not transitional. It is expensive.