Japanese Prime Minister Sanae Takaichi has reaffirmed her commitment to reducing the sales tax on food, following a landmark election win that paves the way for new stimulus measures. The decisive victory for Takaichi’s Liberal Democratic Party (LDP) in Sunday’s polls was largely attributed to her promise to suspend the 8% tax on food for two years, a policy she described as a “long-cherished dream.”
At a press conference on Monday, Takaichi highlighted the importance of “responsible, proactive fiscal policy” at the heart of her administration’s shift, pledging to implement the tax suspension “at the earliest date possible.” She assured that no new government debt would be issued to fund the initiative, signalling a departure from excessively tight fiscal measures and a lack of investment that she says has held Japan back.
Financial markets responded with confidence to Takaichi’s fiscal approach. Japanese stocks soared to record highs, super-long government bonds recovered from early losses, and the yen strengthened after Japan’s top currency official issued a verbal warning to deter currency speculators.
Despite initial investor concerns about how Japan, which carries the highest debt burden among developed nations, would finance the proposal, Takaichi’s plan has eased fears and stabilised the yen, which had been approaching historic lows against other currencies.
Some analysts previously speculated that Takaichi’s strong mandate might allow her to reconsider the tax suspension. However, opposition parties pushing for even deeper tax cuts suffered significant electoral defeats, reinforcing support for Takaichi’s policy. She indicated that cross-party discussions would be key to establishing a timeline and devising funding strategies, including potential reliance on non-tax revenues and reductions in existing subsidies.
Takaichi also announced plans to overhaul the government’s budget planning process, aiming to ensure sustainable long-term funding for corporate investment in growth sectors. In media interviews on election night, she emphasised her intention to move quickly to fulfil her pledge.
Analysts believe Takaichi’s strengthened leadership will diminish opposition from fiscal conservatives within the LDP. “While some members of the LDP have reservations, the election outcome has increased the likelihood of a consumption tax cut,” said Ryutaro Kono, chief Japan economist at BNP Paribas. “Past fiscal policy has been too tight; it’s clear she favours major reform away from the finance ministry’s current approach.”
The primary challenge now facing Takaichi is finding alternative revenue sources to offset the tax suspension, which is estimated to cost around 5 trillion yen ($32 billion) annually—approximately equivalent to Japan’s entire education budget.
Attention has turned to Japan’s foreign exchange reserves, totalling $1.4 trillion, as a possible funding option. However, excessive use of these reserves could spark concerns about Japan selling part of its U.S. Treasury holdings, potentially destabilising markets and raising alarms in Washington.
