Brace yourself: pushing for a tax cut could backfire on Japan’s finances. That’s the core warning from the International Monetary Fund, which cautioned on Tuesday that reducing the consumption tax—an untargeted response to rising living costs—could make the nation’s already fragile fiscal health even worse.
The alert arrives as Prime Minister Sanae Takaichi pursues a plan to suspend the 8% tax on food and beverages for two years, following her party’s historic election victory earlier this month.
The IMF said in a statement after completing regular talks with Japanese authorities that any help for vulnerable households and businesses hit by higher costs or external shocks should be budget-neutral, temporary, and precisely targeted to those groups.
The fund also warned that Japan’s public debt, the highest among advanced economies, is expected to rise over the long term. This comes despite some progress from spending restraint and a stronger tax collection stance that supported post-pandemic fiscal consolidation.
As an alternative, the IMF suggested that if well-designed, a system of refundable tax credits—something the government has considered after the two-year suspension—could deliver more targeted relief to the most vulnerable households.
Japan’s Finance Minister Satsuki Katayama told reporters in Tokyo that the government’s policy stance—striving for a robust economy alongside fiscal sustainability—remains unchanged, even while considering the IMF guidance.
In the February 8 general election, virtually every major party campaigned on suspending or scrapping the consumption tax on food amid voter frustration over rising living costs.
Takaichi is set to outline a policy speech this Friday in which she plans to push ahead with debates on the suspension and aims to reach an interim conclusion before summer, according to a government source in Tokyo.
The consumption tax, initially introduced in 1989 to fund expanding social security costs, is currently 10% for most goods and services, with the exception of food and some essentials.
Beyond fiscal matters, the IMF’s assessment of Japan’s economy covered a broad range of risks. It noted that downside pressures loom, including potential tensions in Japan–China relations, and highlighted that domestic demand remains the principal risk if real wage growth does not turn positive.
The IMF welcomed the Bank of Japan’s gradual pace of rate increases and described this monetary policy as appropriate, advocating a continued exit from ultra-easy measures.
The fund suggested that once policy tightening progresses, the policy rate could level off at a neutral stance by 2027, balancing growth without overheating the economy.
© KYODO
