TOKYO — Japanese Prime Minister Sanae Takaichi’s proposed Japan tax cut on food has rattled investors, sending government bond yields sharply higher and reopening questions about how Japan will fund spending in the run-up to a Feb. 8 election, Jan. 21, 2026.
The pledge to suspend the 8% consumption tax on food for two years has become a market flashpoint because it would carve a hole in revenue while Japan already carries the heaviest debt burden among major developed economies.
Japan tax cut sends yields higher, tests market confidence
The selloff pushed the 10-year Japanese government bond yield to a 27-year high of 2.38% earlier this week, with traders reporting thin demand across the curve as investors demanded higher compensation for fiscal risk.
Longer maturities moved even more violently. The 20-year yield jumped above 3.4%, while 30-year and 40-year yields breached 3.8% and 4%, levels dealers described as record territory for super-long debt.
Takaichi has argued the Japan tax cut would cushion households against rising living costs and said the government would not issue debt to pay for the suspension. “We will overhaul past economic and fiscal policy,” she said at a press conference announcing the snap election.
But investors want specifics. A Reuters analysis warned the premier may “struggle to calm” markets without a clearer funding plan as the Bank of Japan tapers bond buying and keeps its benchmark rate at 0.75%, limiting its appetite for emergency support.
Why the Japan tax cut is politically potent — and fiscally risky
The proposed Japan tax cut targets the reduced-rate levy on food and nonalcoholic beverages, a politically sensitive slice of a broader system that taxes most goods and services at 10%. Government data cited by Reuters put the cost of scrapping the 8% food levy at about 5 trillion yen ($31.7 billion) a year, roughly comparable to annual education spending.
A Jiji Press report carried by Nippon.com said Takaichi is framing the measure as a two-year, targeted relief step and floated funding through expenditure and revenue reviews, including subsidies and tax breaks — while stopping short of details.
Bloomberg reported officials have tried to play down fears in recent days, but the speed of the repricing has amplified scrutiny of Japan’s fiscal guardrails and the government’s willingness to defend them during the campaign.
For bond traders, the unease is not just about one proposal, but about an election-year competition to promise more spending. “Markets (are) digesting the idea that all parties in Japan are in a race to see who can promise to spend more money,” Vanguard’s Ales Koutny said.
The consumption-tax debate has also been shaped by hard lessons. In 2016, then-Prime Minister Shinzo Abe delayed a planned sales tax hike amid growth fears, Reuters reported at the time. Japan later went ahead with a twice-delayed hike to 10% in 2019, a move widely seen as critical to shoring up finances despite worries about consumer demand, Reuters wrote.
And the market’s “Truss shock” comparisons are not academic. In 2022, UK Prime Minister Liz Truss defended a package of large, unfunded tax cuts after turmoil slammed sterling and gilts and forced emergency central bank action, Reuters reported. Japan’s debt dynamics differ, but the message from traders this week was simple: a Japan tax cut without a credible offset can move yields fast.
