The Japanese government is moving toward reducing the current 8 percent consumption tax on food to 1 percent, rather than eliminating it entirely as previously pledged, in order to implement the measure more quickly and address the rising cost of living. Sources indicate that under the 1 percent scenario, retailers could complete necessary cash register modifications as early as next spring, while a zero-rate would require up to a year for implementation. Prime Minister Sanae Takaichi is expected to make a final decision by late June. The government aims for a two-year suspension of the 8 percent tax, with the possibility of introducing the 1 percent rate within fiscal 2026, though the exact timing remains unclear. The estimated loss in tax revenue is around 4.3 trillion yen annually, and the government is considering reviewing subsidies, special tax measures, or using non-tax revenues to cover the shortfall, while ruling out the issuance of special government bonds. Economists have noted that such tax cuts would have limited impact on inflation, especially as Middle East conflicts continue to disrupt supply routes [1].
In addition to the tax cut, Prime Minister Takaichi announced that the government will compile a supplementary budget for fiscal 2026 exceeding 3 trillion yen (approximately $19 billion) to address higher energy prices resulting from ongoing tensions in the Middle East. The draft budget is expected to be submitted to parliament as early as next week. The government will also allocate 500 billion yen from reserve funds to help households with utility bills from July to September, a measure anticipated to reduce energy costs by about 5,000 yen per household over three months. This extra budget will be financed by additional deficit-covering bonds, but Takaichi stated that the total size of bond issuance will not increase, as the government no longer needs to issue around 3 trillion yen in bonds initially planned for fiscal 2025 due to increased tax revenue and other sources. Despite this, market concerns about Japan's fiscal health and inflation have pushed the yield on 10-year government bonds to levels not seen in about three decades [2].
The government is also establishing reserve funds to respond to the impact of the Middle East situation, such as surging crude oil prices. Takaichi emphasized that the budget is designed to minimize risks and ensure that people's lives and economic activities are not disrupted. She also mentioned that Japan's efforts to diversify oil suppliers will result in procurement reaching around 80 percent of the level seen a year earlier, with enough supplies likely secured through spring 2027. While Takaichi maintained a negative stance on urging the public to limit energy usage, she did not rule out revising ongoing subsidies for wholesalers to keep gasoline prices around 170 yen per liter [2].
Both the ruling and opposition parties have advocated for measures to reduce the tax burden and address rising energy costs, reflecting widespread concern over the impact of inflation and global events on Japanese households [1][2].
CONCLUSION
Japan is taking significant fiscal measures, including a planned reduction of the food consumption tax to 1 percent and a supplementary budget exceeding 3 trillion yen, to mitigate the effects of rising living and energy costs. While these steps aim to provide relief to households, concerns about fiscal health and inflation persist, as reflected in surging government bond yields. The government's actions underscore the urgency of addressing both domestic and global economic pressures.