Summary:
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Japan election boosts chances of consumption tax cut
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LDP and opposition back temporary removal of food tax
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10-year JGB yield hits highest level since 1999
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Inflation pressures intensify political push for relief
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Fiscal risks worry bond investors
Japan election risks revive sales tax cut debate, rattling bond markets
Japan’s looming snap general election is sharply increasing the likelihood of a temporary cut to the country’s consumption tax, as both ruling and opposition politicians signal support for easing the cost-of-living burden on households, a move that is already unsettling bond markets, Reuters reported.
Senior figures from the ruling Liberal Democratic Party (LDP) said on Sunday that cutting the 8% consumption tax on food purchases is now firmly on the table, reflecting growing political pressure ahead of a potential February election. Japan currently applies an 8% sales tax to food and a 10% rate on other goods and services, with the levy forming a critical pillar of funding for social welfare in an ageing society.
LDP secretary-general Shunichi Suzuki pointed to an earlier agreement with coalition partner Ishin to aim for scrapping the food tax for two years, saying the party intends to honour commitments already made.
Market concerns over Japan’s fiscal trajectory intensified as the yield on the 10-year Japanese government bond climbed to 2.215%, its highest level since 1999, reflecting fears that tax cuts would be financed through additional debt issuance.
According to Japanese media, Prime Minister Sanae Takaichi is considering pledging a temporary food tax cut when she announces a snap election, expected later this month. The proposal has also gained traction across the political spectrum, with the Constitutional Democratic Party of Japan and other opposition groups backing similar measures.
Supporters argue that tax relief is needed after inflation has exceeded the Bank of Japan’s 2% target for nearly four years, driven largely by persistently high food prices. Critics, however, warn that scrapping the food levy would cost roughly 5 trillion yen ($31.7bn) annually, exacerbating Japan’s already strained public finances and raising the risk of a sustained bond market sell-off.
This article was written by Eamonn Sheridan at investinglive.com.