Japan's government has decided to reduce the consumption tax on food from the current 8% to 1%. If the bill passes, it will mark the first tax cut since the consumption tax was introduced in 1989. The move aims to alleviate the burden on households struggling with high prices, but the government has not provided a concrete plan for the necessary funding, estimated at 10 trillion yen (about $90 billion) over two years. Concerns have been raised that worsening fiscal conditions could lead to rising long-term interest rates and further depreciation of the yen, potentially offsetting the benefits of the tax cut.
The Japanese government confirmed this policy during a temporary cabinet meeting on August 5. The tax reduction will apply to food items, excluding alcohol and dining out, and will be in effect for two years starting in April 2027. The relevant legislation will be submitted to the extraordinary Diet session this fall.
Support payments equivalent to the 1% food consumption tax will be provided to low- and middle-income households based on their income levels. Eligible recipients will include individuals with a certain level of earned income who pay taxes and social insurance. The government aims to effectively reduce the food consumption tax burden for these households to 'real 0%'. This tax relief and support will be temporarily implemented until the income-linked support system is fully introduced in the 2029 fiscal year.
Prime Minister Sanae Takaichi emphasized the necessity of this measure, stating, "Reducing the burden on low- and middle-income households struggling with taxes, social insurance, and high prices is our most pressing task right now," and expressed her intention to push for the early passage of the related bill in the upcoming extraordinary Diet session. The government estimates that this tax cut will relieve the annual burden on each citizen by approximately 36,000 yen.
According to the Yomiuri Shimbun, food prices continue to rise. In June, the nationwide consumer price index showed that food prices, excluding fresh produce, increased by 3.1% compared to the previous year. The Engel coefficient, which indicates the proportion of household consumption expenditure spent on food, reached 28.6% in 2025, the highest since 1981. The government explains that lower-income households tend to have higher Engel coefficients, making tax relief a means to support their living conditions.
The Asahi Shimbun reported that households with an annual income of 3 million to 4 million yen will see their tax burden decrease by about 47,000 yen annually due to the tax rate cut. However, if the costs of raw materials, labor, and logistics continue to rise, food prices may not decrease by the same amount as the tax rate reduction.
Concerns have also been raised that the benefits of the tax cut may not be evenly distributed. For dual-income households, the burden of the food consumption tax is approximately 46,000 yen annually for those earning under 2 million yen, while it is about 88,000 yen for households earning over 15 million yen, nearly double. However, the burden as a percentage of income is 2.2% for households earning under 2 million yen, compared to just 0.5% for those earning over 15 million yen, indicating that lower-income households bear a significantly larger burden. A uniform tax rate reduction could disproportionately benefit higher-income households.
The key issue remains funding. According to the Nihon Keizai Shimbun (Nikkei), the reduction in the food consumption tax and support for low- and middle-income households will require an annual budget of 5 trillion yen, totaling 10 trillion yen over two years. The Japanese government has stated it will seek to secure funding through a review of corporate tax reductions and subsidy programs without relying on deficit bonds, but no specific plans have been announced.
Within the government and ruling party, there are discussions about using surplus funds from the foreign exchange fund special account, which manages funds for foreign exchange market interventions, as tax reduction resources. The surplus for the 2025 fiscal year is estimated at 5.065 trillion yen, of which 70% has already been transferred to the general account for defense spending and other uses. The government plans to increase defense spending in line with the revision of the national security strategy at the end of the year, indicating that additional funding will be necessary. Some voices within the ruling party are hopeful about revenue from dollar sales due to currency interventions, but Chief Cabinet Secretary Minoru Kihara has stated that this cannot be used as funding.
The funding issue is also affecting the market. The Yomiuri Shimbun pointed out that without a concrete plan for securing funding, concerns over fiscal deterioration could lead to rising long-term interest rates and further depreciation of the yen. A decline in the yen's value could increase import prices, potentially offsetting the household burden relief from the consumption tax cut.
The United States has also reacted negatively to the tax cut. According to Nikkei, a senior official from the Trump administration, speaking on condition of anonymity, stated regarding Japan's consumption tax cut, "The choice is either to implement a tax cut or to pursue inflation control measures. If it were me, I would prioritize the latter." U.S. authorities are more concerned about the potential for Japan to sell off government bonds than the depreciation of the yen. This official noted that Japanese interest rates have historically acted as a 'anchor' for global rates, and a rise in Japanese rates could risk pushing up long-term rates in other major economies. Kihara stated at a press conference on August 5 that he would respectfully explain the purpose of the tax cut and the funding plan to seek U.S. understanding.
Concerns are also growing in the restaurant industry. While a 1% tax rate will apply to takeout meals and packaged foods from supermarkets, the current 10% rate will remain for dining in, potentially putting restaurants at a competitive disadvantage. According to the Asahi Shimbun, some restaurants are developing takeout-only products. Four industry groups, including the Japan Food Service Association, are urging the government to support the costs of changing cash register systems and to promote demand through the issuance of premium gift certificates.
Farmers are also facing increased burdens. Many Japanese farmers, classified as tax-exempt businesses with annual sales below 10 million yen, do not pay consumption tax on agricultural products. With the reduction in the food consumption tax, their sales may decrease while the consumption tax on fertilizers and agricultural equipment remains unchanged, leading to greater financial strain without a refund system in place. The Japanese government is also considering support measures for agricultural workers and the restaurant industry.
Whether the consumption tax rate can be raised back to 8% in two years is also a political issue. Prime Minister Takaichi stated, "In two years, I will take responsibility for returning the tax rate to its original level." However, there are predictions that it will be challenging to gain voter support for what would effectively be a tax increase ahead of the summer 2028 House of Councillors election.
The immediate passage of the tax cut bill is also uncertain. The ruling party does not hold a majority in the House of Councillors, making it likely that the bill will face difficulties in the upcoming extraordinary Diet session this fall. There are also remaining disagreements within the ruling Liberal Democratic Party. While the party unanimously approved the policy during a temporary general meeting on August 5, some members who have opposed the tax cut did not attend the meeting, with nine out of 25 members absent.
* This article has been translated by AI.
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