Japan, Prime Minister Takaichi speeds up the cut of VAT on food and beverages from 8% to 1%

The Japanese government has presented a plan aiming to reduce the VAT rate on food and beverages from 8% to 1%, effectively zeroing it for two years starting from April 2027. A choice strongly desired by Prime Minister Sanae Takaichi.

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At the end of July, the conservative prime minister made the plan official, aiming for a government decision next week, with the law’s approval in Parliament in autumn. The measure would cost about 10 trillion yen (55.10 billion euros), and the prime minister excludes resorting to government bonds to finance it and promises that the cut will remain temporary, without clauses allowing its extension. However, within the Liberal Democratic Party (LDP), consensus is not unanimous, the progressive newspaper reports. In a meeting of the internal tax commission on July 31, opposition to the plan prevailed over supporters by about 6 to 4. Among the critics is former Defense Minister Tomomi Inada, who says “no financial coverage” has been found for the measure. Before reaching the floor, the text must still obtain unanimous approval from the LDP general council.

According to the daily Mainichi Shimbun, the program desired by the Tokyo government would be a short-sighted choice, risking leaving new problems to the country without solving current ones. According to the newspaper, the measure – the first reduction of the consumption tax since its introduction in 1989 – is not the result of an in-depth debate on the structural challenges Japan must face, starting with the decline in births and the aging population. VAT, Mainichi recalls, is an essential revenue source to finance the continuously growing social spending, and its reduction risks fueling, rather than containing, inflation: producers and distributors could indeed take advantage to raise prices, as has already happened in some European countries that adopted similar measures.

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In this context of increased public spending, a few days ago Japanese authorities intervened in the currency market, buying yen and selling dollars, after the Japanese currency slipped to its weakest level in 39 years, nearly reaching 164 against the greenback. According to estimates based on Bank of Japan (BoJ) data, the amount of the operation would be between 6,000 and 7,000 billion yen, equivalent to about 32-37 billion euros. This is the first direct intervention since the one carried out between April and May, when Tokyo spent a record 11,700 billion yen. Also in this case, the move had Washington’s support: US Treasury Secretary Scott Bessent called the yen “very undervalued,” emphasizing that excessive volatility “is not healthy” for markets. In this scenario, on the night between Thursday and Friday, in about 50 minutes, the Japanese currency reached 157.80 against the dollar before weakening again in Asia. Finance Minister Satsuki Katayama did not confirm the intervention but assured “maximum vigilance.”

Meanwhile, the Bank of Japan kept the reference rate at 1%, the highest in 31 years after the June hike, but Governor Kazuo Ueda announced the possibility of “accelerating” future increases, citing among the risk factors precisely the weakness of the yen, along with demand related to artificial intelligence, and tensions in the Middle East. The rise in energy costs continues to inevitably impact importing economies, such as Japan’s, where the increase in crude oil prices, combined with the yen’s weakness, is already fueling inflationary pressures on consumer prices. The BoJ expects inflation “clearly above 2%” from the second half of fiscal year 2026 and economic growth of 0.6%. Markets are betting on a new rate hike by the end of the year.

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