The political landscape in Japan has shifted dramatically as the nation approaches the February 8 general election. Prime Minister Sanae Takaichi, leading the Liberal Democratic Party (LDP), has placed a radical fiscal manoeuvre at the heart of her campaign: the complete removal of the 8% consumption tax on food and beverage items. This policy, once viewed with scepticism by her own party, has become a pivotal battleground issue as the government seeks a fresh mandate from an electorate weary of rising living costs.

In what has been described as a total reversal of previous stances, the LDP is now championing a temporary two-year suspension of taxes on groceries and non-alcoholic drinks. According to Nippon.com, Takaichi clarified during a January 25 televised debate that she intends to implement this zero-rate regime within fiscal 2026, which commences on April 1. This move follows a strategic alliance with the Japan Innovation Party, a junior coalition partner that has long advocated for such relief to cushion the impact of inflation on households.

The opposition has not been idle. The Centrist Reform Alliance (CRA), a new political entity formed by the merger of the Constitutional Democratic Party and Komeito, has gone even further. They are promising a permanent abolition of the food tax. CRA co-leader Yoshihiko Noda suggested on January 25 that their plan could be enacted as early as this autumn, funded not by debt but by investment returns from a massive state fund leveraging the expertise of the Government Pension Investment Fund.

This move represents a historic departure from Japan’s traditional fiscal conservatism, signalling a desperate attempt by the ruling coalition to maintain power against a backdrop of record-high national debt and a global market increasingly sensitive to Japanese fiscal stability.

Market jitters and fiscal reality

The scale of the proposed cuts has sent shockwaves through the financial sector. Al Jazeera reports that the prospect of a JPY5trillion (roughly $31.71bn) annual revenue hole has triggered significant volatility in the bond market. Yields on 40-year Japanese government bonds recently breached 4%, the highest level ever recorded, as investors expressed concern over Japan’s ability to service a debt-to-GDP ratio that already exceeds 230%.

Takaichi has remained steadfast, insisting that the government will avoid issuing new deficit bonds to cover the shortfall. Instead, she proposes a rigorous audit of existing subsidies and special tax exemptions to find the necessary funds. However, critics like Yuichiro Tamaki of the Democratic Party for the People argue that the plan lacks logistical depth. Japan Times reports that Tamaki has raised concerns about the administrative overhead for small businesses and the potential behavioural change that could see restaurants fail as consumers pivot to tax-free supermarket food or takeaway options.

Economic stimulus or fiscal hazard

While the Daiwa Institute of Research estimates that the tax cut could save the average household approximately JPY88,000 per year, analysts warn the benefits may be lopsided. A report cited by the Japan Times suggests that such broad fiscal spending often provides more assistance to wealthy households that do not strictly require it, while the overall stimulus effect on the economy might be a modest JPY500bn.

The Bank of Japan (BOJ) is currently attempting to normalise interest rates after decades of ultra-loose policy. Massive fiscal loosening at this juncture creates a policy contradiction that could weaken the yen further. As Al Jazeera notes, US Treasury Secretary Scott Bessent has already voiced concerns about the spillover effects on global markets, particularly given that Japanese investors are the largest foreign holders of US Treasuries, at $1.2 trillion.

As the February 8 poll nears, the debate over food taxes has evolved into a referendum on Japan’s fiscal future. While the promise of cheaper groceries is an alluring prospect for voters, the underlying risks to the nation’s bond market and its standing in the global economy are profound. Whether Takaichi’s resolve can bridge the gap between popular relief and fiscal responsibility remains the defining question of her premiership.