The Japanese government is leaning toward the idea of cutting the current 8 percent consumption tax on food to 1 percent, rather than zero as pledged earlier, for faster introduction to tackle the rising cost of living, sources close to the matter said Monday.
Under the 1 percent tax scenario, retailers would be able to finish modifying their cash register systems as early as next spring, whereas the zero-rate could require as much as a year. Prime Minister Sanae Takaichi will make a final decision possibly late June, the sources said.
Takaichi has pledged to seek a two-year suspension of the 8 percent consumption tax on food and beverages and said prior to the February general election she aimed to realize the move during the current fiscal year through March.
While lowering the consumption tax rate to 1 percent may be realized within fiscal 2026, exactly when it could be implemented still remains unclear as the government needs to present ways to secure funds to cover losses in tax revenues, estimated at around 4.3 trillion yen a year.
Failing to come up with alternative financing sources could fuel concerns about the highly indebted country’s fiscal health, the worst among the Group of Seven advanced economies.
Takaichi has said the government intends to secure funds by reviewing subsidies and special tax measures or by tapping non-tax revenues, dismissing the need to issue special government bonds.
She has also stressed the zero-rate will only be for two years before replacing it with a refundable tax credit system, viewed as an effective mechanism to ease inflation burdens on low- and middle-income households.
The government as well as the ruling and opposition parties have been holding gatherings to discuss ways to cut the consumption tax as a temporary measure before introducing a refundable tax credit system.
Hearings with cash register upgrade vendors showed that system changes to respond to a 1 percent rate will require about three to six months. They said a zero-rate tax would take time for checks because the current registers were made assuming that food is taxed.
The cross-party gathering aims to compile an interim report by June, following which Takaichi’s Cabinet will submit legislation to the Diet to introduce the measure.
At a parliamentary debate with opposition party leaders on Wednesday, Takaichi acknowledged that various challenges face the planned consumption tax suspension and stressed that “speediness is important.”
Besides the Liberal Democratic Party, its ruling coalition partner, the Japan Innovation Party, and opposition parties have also pushed for reducing the tax burden to help households grappling with rising living costs.
But economists have said such measures would have limited impact in keeping down inflation as the Middle East conflict continues to disrupt traffic through the Strait of Hormuz and sends crude oil prices higher.
In Japan, which heavily relied on crude oil imports from the Middle East, businesses have already moved to pass on rising import costs to retail prices.
© KYODO
