Japan's cabinet approves a bill to cut the food consumption tax from 8 percent to 1 percent

Japan's cabinet on Friday approved a bill to cut the consumption tax on food and drink from 8 percent to 1 percent for two years, starting in April 2027. The reduction would be the first cut in the tax since it was introduced in 1989. Prime Minister Sanae Takaichi has called the measure, paired with an income-linked cash benefit, the best way to help households facing higher prices.

The government aims to pass the bill during the current extraordinary session of the Diet, which runs until 12 December. Finance Minister Satsuki Katayama said the funding sources would be identified clearly in the forthcoming budget process. The tax cut and the benefit programme together are expected to cost about 10 trillion yen, or roughly $63 billion, over two years. The legislation states that the government does not plan to issue deficit-financing bonds to cover the cost.

Details that remain open include the exact eligibility rules for the cash benefit and the specific spending cuts or revenue measures that will replace the lost tax. Opposition parties, which control the upper house, have criticised the eligibility criteria as vague and have demanded a clearer account of the money. A cross-party social security council did not produce consensus around the 1 percent rate when the idea was discussed earlier.

Takaichi's Liberal Democratic Party included a food tax cut in its platform for the February lower house election. The cabinet approved an outline of the plan in August and a tax reform package in September. Friday's decision turns that outline into a bill that can be debated and amended. Takaichi told the Diet this week that combining the tax cut with an income-linked benefit was the best method from the point of view of both sufficiency and speed.

The consumption tax is Japan's main broad-based levy. The standard rate is 10 percent. Food and non-alcoholic drink have been taxed at the reduced rate of 8 percent. Dropping that rate to 1 percent for two years would remove most of the tax from grocery bills and restaurant meals for the duration. From April 2029 the government intends to replace the temporary cut with a benefit for low- and middle-income households. Under one version of the benefit, the payment would be equivalent to the revenue from a 1 percent tax on food, which would effectively take the rate to zero for eligible households.

Japan's public debt is already among the highest in the advanced economies relative to the size of the economy. The decision to forgo new deficit bonds means the 10 trillion yen must come from elsewhere in the budget or from higher revenue in other categories. Katayama's commitment to identify the sources during the budget drafting process leaves that argument for the next two months. If the upper house blocks the bill, the cut will not take effect in April and the government will have to return with a revised proposal or abandon the pledge.

For households the arithmetic is straightforward if the bill passes. A family that spends 100,000 yen a month on food currently pays 8,000 yen in consumption tax on those purchases. Under the proposed rate that figure falls to 1,000 yen. Over two years the difference is large enough to be felt in monthly budgets, which is the political point of the measure. The open question is whether the Diet will accept a revenue loss of that size without a fully specified replacement, and whether the upper house, where the opposition holds the majority, will let the bill through before the session ends in December.