Japan's ruling Liberal Democratic Party (LDP) is pushing forward with a plan to suspend the consumption tax on food, despite opposition from former Prime Minister Shigeru Ishiba and other party officials who worry about the lack of funding sources. LDP tax research chief Itsunori Onodera stated after meeting with party lawmakers on Monday, "Many people are currently struggling with rising living costs. We aim to design a mechanism that effectively reduces the consumption tax rate to zero, fulfilling our election promises."
The government's push for tax cuts comes amid a severe cost-of-living crisis in Japan. The core consumer price index has risen year-on-year for 58 consecutive months. In June 2026, core CPI was up 1.6% year-on-year, with the pace of increases accelerating. Food prices are a key driver of inflation, with food prices excluding fresh items rising 3.1% year-on-year. Coffee beans surged 23.3%, tuna 17.9%, and boxed lunches 10.6%.
Meanwhile, Japan's economic outlook is dimming. On July 30, the Cabinet Office sharply cut its real economic growth forecast for fiscal year 2026 from 1.3% in January to 0.9%, and lowered its private consumption growth projection from 1.3% to 0.9%. Over 90% of households expect prices to continue rising in the coming year, and 49.9% anticipate a worsening economy, the highest level since December 2008.
Under the dual pressures of high prices and a weak economy, Prime Minister Sanae Takaichi's approval ratings have been sliding. A July poll shows her support has fallen below 50%. Analysts suggest Takaichi is pushing tax cuts to rescue her falling ratings, a move criticized as "short-sighted and lacking a broader perspective." Within the party, some lawmakers have voiced opposition, primarily citing Japan's fiscal sustainability. According to senior LDP lawmaker Shigeyuki Goto, who chaired the meeting, among the lawmakers who spoke, 65 were in favor, 9 opposed, and 1 was neutral. Despite this, internal opposition is unlikely to derail the tax cut plan's momentum.
Former Internal Affairs Minister Seiichiro Murakami stated, "Implementing this policy without clear funding sources is, I believe, very concerning for Japan's fiscal situation." Former Prime Minister Shigeru Ishiba also expressed worry about how to cover the tax revenue shortfall. He noted, "Even if we assume temporary funding sources exist, can they be considered stable revenue?" He emphasized that social security costs are rising sharply due to the aging population and declining birthrate.
International concern over Japan's fiscal health is also growing. As early as January, S&P Global Ratings warned that Takaichi's proposed food tax cuts would reduce government revenue and harm national finances over the long term. In February, the International Monetary Fund (IMF), after concluding its Article IV consultation with Japan, explicitly recommended, "The authorities should avoid cutting the consumption tax, which is a non-targeted measure that would erode fiscal space and increase fiscal risks."
Adding to the complexity, Bank of Japan Governor Kazuo Ueda has sent clear hawkish signals, warning that inflation risks are greater than expected and not ruling out faster interest rate hikes. In the new normal of "high prices, high interest rates, and high debt," the fiscal expansion from tax cuts creates a clear "mismatch" with the central bank's policy of curbing inflation.
Itsunori Onodera will make a ruling on the specific way to proceed with the tax cut plan. The decision is expected to be approved at a higher LDP decision-making level within the week, in line with Prime Minister Takaichi's timeline of "reaching a conclusion by early August." The current plan proposes reducing the consumption tax on food from the current 8% to 1% for two years, starting in April 2027. The annual tax revenue loss from this measure is expected to exceed 4 trillion yen (approximately $255 billion). During the two-year tax reduction period, the government will also work on establishing a cash handout mechanism for low-income households to mitigate the impact when the tax rate is later reinstated.
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