Japan to sidestep funding in tax cut outline, keep fiscal concern alive

TOKYO, Sept 15 : Japan's government is set to finalise on Tuesday an outline for a consumption tax cut and payouts to households with no mention of how to fund the measures, a move that may keep alive market concern over the nation's already strained finances.

The cabinet approval of the tax cut outline, expected later on Tuesday, would come as global fiscal and inflation concerns lifted the benchmark 10-year Japanese government bond (JGB) yield above the key 3 per cent mark 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.

Takaichi's pledge to cap new government bond issuance around 40 trillion yen ($258.7 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 is charged an 8 per cent levy.

The outline will lay 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, according to a draft approved at a ruling party panel last week.

Japan will not rely on deficit-covering bonds to fund the tax cut, and instead seek funding from non-tax revenues as well as reviews of existing subsidies and tax breaks, it said.

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.

The outline will serve as a basis for legislation for lowering the tax levy, which will be submitted to parliament that is seen convening next month.