The Japanese government plans to reduce the food consumption tax to 1% for two years, but the lack of a clear funding source has raised concerns in the bond market.

(1) According to local media reports, the Japanese government plans to lower the consumption tax on food and beverages from 8% to 1% starting April next year, for a period of two years, to fulfill Prime Minister Sanae Takaichi's signature campaign promise. Takaichi is expected to instruct the Liberal Democratic Party to draft the relevant bill as early as Thursday.(2) This measure will result in an annual funding gap of more than 4 trillion yen (about $24.4 billion), but the government has not yet clarified how it will be filled. The cross-party group previously responsible for discussing the measure abandoned consensus efforts on Monday, with members deeply divided over the funding source and whether the tax cut should be permanent. Investors are concerned about the fiscal outlook, and government bond yields remain under pressure.(3) The government has nevertheless decided to generally proceed according to the plan proposed by the group chair in June: the tax reduction will be implemented starting in April, and from autumn 2027, cash subsidies of about 600 billion yen per year will be distributed to eligible households to essentially offset their remaining 1 percentage point food tax burden.