Japan plans to reduce the food consumption tax to 1% for two years, raising market concerns about fiscal expansion and financing pressures, with long-term government bond yields facing upward pressure.

(1) According to reports by Asahi Shimbun and Nikkei, Japanese Prime Minister Sanae Takaichi could request the launch of a food consumption tax reduction plan as early as Thursday. The proposal aims to lower the tax rate on food and beverages to 1% within two years, and may be officially announced as soon as this week. (2) The market is concerned that this tax cut plan will intensify fiscal expansion pressures, especially against the backdrop of high oil prices driving inflation risk. Investors are closely watching how the additional spending and tax reduction will be financed, and whether it will lead to increased government bond issuance, thereby adding to the fiscal burden. (3) SMBC Nikko Securities strategists pointed out that the tax cut plan could raise the fiscal risk premium on Japanese assets and weigh on the yen; meanwhile, long-term and super long-term government bond yields will face upward pressure, which could trigger a “bear steepening” of the yield curve (where long-term interest rates rise more than short-term rates).