Japanese Prime Minister Sanae Takaichi has pushed forward with her plan to slash the consumption tax on food, which reportedly would be the first time the tax will be cut since its implementation in 1989 if she succeeds.
On Tuesday, the ruling Liberal Democratic party advanced the bill through key committees, with Nikkei reporting Takaichi wants cabinet approval by this month, and for the bill to be tabled in parliament in the autumn.
Takaichi said last Thursday that Japan would cut the tax on food to 1% from 8% for two years from April 2027, and offer cash payments to offset the impact of that 1% on select groups.
The food-tax cut captures the central gamble behind Takaichi's economic agenda: Japan is giving up revenue now in the hope that stronger consumption and an estimated 370 trillion yen (2.35 trillion) public-private investment plan through to the 2040 fiscal year will help boost growth.
The plan, which will cut an estimated 4.4 trillion yen in revenue from the government's coffers has already drawn criticism from her own Liberal Democratic Party, including former ministers Taro Kono and Takeshi Iwaya. Nikkei also reported that former Prime Minister Shigeru Ishiba walked out of the meeting halfway.
In a post on X, Kono, former defense minister under the Abe administration, warned that the plan could undermine confidence in Japan's fiscal position, push interest rates higher and weaken the yen.
Iwaya, who served as foreign affairs minister in 2024 and 2025 has also argued against the cut, reportedly saying "The risk is very high. If the market reacts negatively, the yen will weaken further and import prices will rise."
Even the International Monetary Fund urged Tokyo to not reduce the consumption tax in its 2026 country report, saying it was "an untargeted measure that would erode fiscal space and add to fiscal risks."
Takaichi has pledged not to use deficit-financing bonds to fund her schemes, instead the government has said it will review spending, tax breaks, subsidies and public funds, but details are scarce. She has also made it clear the the cut will be just for a 2-year period, after which the consumption tax will revert to 8%.
Still, Japan grapples with one of the highest public debt levels in the world, with the International Monetary Fund projecting government debt at roughly 204% of gross domestic product in 2026, making any additional borrowing detrimental to its fiscal health.
Justin Heng, APAC rates strategist at HSBC Global Investment Research, said Takaichi's latest economic blueprint had "effectively cemented" an expansionary fiscal stance, while the government had loosened its guardrails by moving away from a primary-surplus target for its budget.
"With limited clarity on funding channels, additional debt issuance remains a plausible outcome," Heng said, warning that long-end Japanese government bond yields were likely to remain elevated.
Japan's 10-year government bond yield was around 2.85% in Tuesday trading, close to multi-decade highs.
Yields are rising because Takaichi's program is highly inflationary and markets fear the BOJ is behind the curve on inflation, Jesper Koll, expert director at Monex Group, said.
The BOJ's commitment to continue raising interest rates and reduce JGB purchases is also likely to push up Japan's interest costs, which will constrain fiscal room.
Debt-servicing costs already account for about a quarter of Japan's fiscal 2026 budget, with interest payments projected to rise from 13 trillion yen in the 2026 fiscal year to 21.6 trillion yen in the 2029 fiscal year under the Finance Ministry's 3% nominal-growth scenario.
A possible silver lining is that the government's target of more than 370 trillion yen in investment could help support its fiscal health, while higher yields might draw some investors.
Koll said the government's role would largely be to backstop projects, with around 90% of the financing expected to come from the private sector. If it draws in investment, raises productivity and expands the tax base, stronger growth could make Japan's debt burden more manageable, he added.
Stefan Rittner, senior portfolio manager at Allianz Global Investors, said markets were more likely to accept measures that improve productivity, labor supply and long-term growth than spending aimed mainly at supporting consumption.
"Japan's debt story is ultimately a growth story ... If fiscal spending lifts growth and productivity, markets will be more forgiving. If it merely supports consumption, investors may become more skeptical," Rittner said. "The market is not worried about one spending package. It would worry about a pattern."
Another ray of hope is that higher yields could start drawing investors. John Li, head of Asia fixed income credit strategy at J.P. Morgan Private Bank, said the gap between long-term yields and the BOJ's 1% overnight rate could attract domestic buyers, including Japanese life insurers.
