TOKYO: Japan’s government is distancing itself from tax cuts in its annual policy guidelines, amid heightened volatility in the government debt market driven partly by concerns about the country’s tattered finances.
The draft of the annual economic and fiscal policy guidelines, presented on Friday, stated that Japan will aim to achieve higher disposable household income through wage growth that consistently outpaces inflation, “not through tax cuts.”
The statement highlights the government’s efforts to keep fiscal discipline amid growing calls from politicians for tax breaks to appease voters hit by rising living costs, ahead of an upper house election set for July.
The opposition Constitutional Democratic Party of Japan and Japan Innovation Party both have been pushing for a zero consumption tax rate on food for certain periods to cushion the impact of U.S. tariffs and inflation on households.
Japan applies an 8% consumption tax for food and 10% for other items, with the proceeds mostly used to fund social welfare costs for a rapidly ageing economy.
Komeito, Japan’s junior ruling coalition partner, said on Friday it would discuss a potential reduction in the consumption tax rate for food as a key policy topic, though it decided not to include the potential tax cut in its election campaign pledge.
Prime Minister Shigeru Ishiba has signalled more stimulus measures to come, but has so far resisted calls for tax cuts, arguing that such breaks would benefit high-income earners more and strain an already tattered budget for social welfare.
But some lawmakers even within his Liberal Democratic Party also support the idea of tax cuts, fearing a major LDP defeat in the upcoming election with the support rate for Ishiba’s cabinet stuck at around 30%.
In an apparent sign of consideration to those voices, the government tweaked the wording on tax cuts in the process of compiling the draft, deleting the original criticism of tax breaks that lack funding sources.
The debate on potential tax cuts has fuelled concerns over Japan’s worsening public finances and helped boost volatility in the Japanese government bond (JGB) market, with super-long yields having spiked to record highs last month.
The draft of the policy guidelines, which will form the basis of budget planning, stressed Japan must work to improve public finances while ensuring an environment where government bonds are issued in a stable manner.
It also said Japan should promote domestic ownership of government bonds to avoid further rises in long-term interest rates caused by supply-demand imbalances.
Meanwhile, the government effectively pushed back the self-imposed deadline for delivering a primary budget surplus from fiscal 2025 to “as early as possible during fiscal years 2025 to 2026,“ according to the draft.
The primary budget balance, which excludes new bond sales and debt-servicing costs, is a key gauge of the extent to which policy measures can be funded without resorting to debt.
Japan’s public debt stands at more than twice the size of its economy, by far the worst in the industrial world.
