Japan to sidestep funding in tax cut outline, keep fiscal concerns alive
Pedestrians make their way at a business district in Tokyo, Japan, December 7, 2020. REUTERS/Kim Kyung-Hoon/File Photo
TOKYO, Sept 15 : Japan's government finalised on Tuesday an outline for a consumption tax cut and payouts to households that included no specifics on how the measures would be funded, in a move likely to keep alive market concerns over the nation's already strained finances.
The cabinet approval of the tax cut outline comes as global fiscal and inflation concerns lifted the yield on the benchmark 10-year Japanese government bonds (JGB) to a 30-year high of 3.025 per cent on Tuesday.
The tax cut would come on top of Prime Minister Sanae Takaichi's ambitious spending plans that have triggered a bond sell-off and criticism from U.S. Treasury Secretary Scott Bessent.
"To maintain market confidence, we will fund the consumption tax cut without relying on deficit-financing bonds, by reviewing spending and revenue, including subsidies and tax breaks," Finance Minister Satsuki Katayama said at a news conference after cabinet approval.
Annual new bond issuance will be set at a level consistent with maintaining market confidence and putting the debt-to-GDP ratio on a downward path, she said. "We do not expect borrowing to become excessive or uncontrolled," she added.
Takaichi's pledge to cap new government bond issuance around 40 trillion yen ($259 billion) for the fiscal 2027 budget is already facing scrutiny, with expenditure seen increasing from budget requests that already swelled to pandemic-era scale.
"It's hard to pre-empt the total size of next year's debt issuance, so markets will remain jittery until cabinet approval of the draft budget expected at the end of this year," said Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities.
Japan currently applies a 10 per cent consumption tax on goods and services except for food items, which are charged an 8 per cent levy.
The outline lays out a plan to slash the 8 per cent levy on food to 1 per cent for two years from April 2027, supplemented by payouts equivalent to the remaining 1 per cent that effectively eliminates the tax burden on food purchases.
"Markets are renewing their attention to the fact there's lack of clarity over how to fund the tax cut, which is weighing on long- and super-long JGBs," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.
The tax cut, a centrepiece of Takaichi's efforts to ease the impact of rising living costs on households, creates a revenue shortfall of roughly 5 trillion yen.
If implemented, it would be the first cut in the rate since Japan introduced the consumption tax in 1989. The tax is a key source of revenue to fund increasing social welfare and pension costs for a rapidly ageing population.
The outline will serve as a basis for legislation for lowering the tax levy, which will be submitted to parliament, which is seen convening next month.
Japan's public debt, at twice the size of its economy, is the largest among advanced nations. The cost of funding the debt is increasing as the central bank raises interest rates and slows bond purchases in an effort to wean the economy off decades of massive stimulus.
Japan also faces the prospects of higher defence spending as the government reviews its defence strategy later this year.
Bloomberg news reported on Tuesday that the government is considering defence spending worth 3.5 per cent of gross domestic product in the medium term.
Katayama said she was not aware of the report, adding that the government would determine the appropriate scale of spending, including on defence, while ensuring the debt-to-GDP ratio remains on a steadily declining path.
($1 = 154.6500 yen)
