Government Decides to Cut Food Consumption Tax Rate to 1% from Next April, No Clear Path for 5 Trillion Yen in Funding
Macro
The government has decided to reduce the consumption tax rate on food to 1 percent from April next year. It will also begin providing benefits equivalent to 1 percent to low- and middle-income earners, with the total fiscal burden expected to reach around 5 trillion yen annually. Consumption tax revenue is a key source of funding for social security costs such as pensions and healthcare, but concrete measures to cover the revenue shortfall have yet to emerge, leaving Japan's social security system at a crossroads. Prime Minister Sanae Takaichi stressed that she will properly address the impact on social security, and Finance Minister Satsuki Katayama indicated that she will consider using non-tax revenues such as surpluses from the foreign exchange special account and Bank of Japan contributions as funding sources, but these have limited uses and it will be difficult to fill the entire gap. The tax cut and benefit measures are positioned as a bridge to the full-scale introduction of income-linked benefits in fiscal 2029, but there are strong concerns about whether the consumption tax rate can be restored in two years, and securing permanent funding will become an even more difficult path. Government estimates also highlight the regressive nature of the tax cut's effects, and Finance Minister Katayama indicated that it will take until December this year to finalize the funding details.
