Japan's Cabinet clears 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 from April, and to pay an income-linked cash benefit to lower and middle earners. It would be the first cut in the consumption tax since the levy was introduced in 1989. The government wants the law passed in the current extraordinary Diet session, which runs to 12 December.

Prime Minister Sanae Takaichi has called the package the fastest way to help households facing inflation. Kyodo News put the expected loss of tax revenue at about 10 trillion yen over two years, roughly 63 billion dollars. Finance Minister Satsuki Katayama told a press conference that the government will identify the funding sources in the coming budget process. She did not name them on Friday.

The path to the bill is already written down. The Cabinet approved the plan for a consumption-tax cut in August. In September the government cleared a tax-reform package, and that package is the text the Diet will now debate. Friday's decision moves the measure from a policy paper to a bill. Passage is not automatic. The session ends on 12 December, which leaves about nine sitting weeks.

The design is narrow on purpose. The standard consumption tax is not the rate being cut. The reduced rate that already applies to food and drink, 8 percent, would fall to 1 percent. Other goods and services would stay at the standard rate. That choice avoids a full-rate cut, which would cost more and would be harder to reverse. It also creates a cliff in April 2028, when the food rate is due to return to 8 percent unless a later government extends the cut.

The cash benefit is the second half of the bill. It is income-linked, aimed at low and middle earners, and would be paid annually. Kyodo did not publish the income thresholds or the yen amount per household in the dispatch used here. Those figures will decide whether the benefit reaches the same families who gain from the food-tax cut, or a narrower group. A household that spends heavily on food gains from the rate cut whether or not it qualifies for the payment. A household that spends little on taxed food and sits above the income line gains from neither.

The fiscal hole is the argument the opposition will use. Ten trillion yen over two years is about 5 trillion yen a year, against a consumption-tax base that Tokyo has treated for three decades as the funding source for social security. Katayama's promise to "clearly identify" the funding in the budget draft is an admission that the bill, as cleared on Friday, does not yet say where the money comes from. Bond issuance, spending cuts and a later rise in another tax are the three usual answers. None is in the Friday text.

The political clock is Takaichi's. She is using the first months of her government to pass a tax cut she has described as relief from inflation, timed to start in April, the beginning of the Japanese fiscal year. If the Diet misses 12 December, the April start slips, and the two-year window slips with it. Retailers would also need months to retune registers, invoices and the reduced-rate bookkeeping that already separates food from other goods.

What is settled is the rate, the window and the venue. Food and drink would be taxed at 1 percent from April for two years. The revenue loss is about 10 trillion yen. The bill is in the Diet, and the session ends on 12 December. What is not settled is the funding, the exact benefit formula, and whether the votes are there before the recess.