Japan to Cut Food Consumption Tax to 1% for Two Years From April 2027

Japanese Prime Minister Sanae Takaichi announced on July 30 that the consumption tax rate on food and beverages would be cut from the current 8% to 1% for two years from April 2027, with cash handouts to low- and middle-income households to make the tax burden "effectively zero". This is the first cut since Japan introduced the consumption tax in 1989. The tax reduction was a campaign pledge made by the Liberal Democratic Party and Nippon Ishin in the February House of Representatives election. The government plans to replace the current benefit-linked tax credit system with an income-linked payment system for low- and middle-income earners from April 2029, at which point the food and beverage tax cut would be discontinued.

On financing, the government said it would not rely on deficit bonds and instead intends to raise funds by adjusting special tax measures. According to estimates, cutting the rate to 1% would require filling about 4.4 trillion yen per year in tax revenue, with an additional 600 billion yen needed for the cash handouts. The Cabinet Secretariat has asked each ministry to conduct self-assessments of expiring special tax measures, covering about 120 items worth about 1 trillion yen. Only one item was explicitly earmarked for abolition: the special business reorganization registration and licence tax reduction under the Ministry of Economy, Trade and Industry, which has received no applications since its launch in fiscal 2026. Larger items were allowed to continue under the heading of "adjustment and reinforcement", including 333 billion yen for the tax scheme promoting wage increases at small and medium-sized enterprises, 188.5 billion yen for the special corporate tax rate for SMEs, and 153.5 billion yen for the business succession tax scheme. The government and ruling parties will flesh out the specific financing plan during the year-end budget compilation.

According to the Tokyo metropolitan government's estimates, the tax cut's overall impact on national tax revenue would be about 4.3 trillion yen per year. Koike noted that the consumption tax is linked to social security-related spending, and the metropolitan government will support corporate cash flow and price pass-through while continuing to monitor the impact on local government finances.

Business leaders have also weighed in. Akio Yamaguchi, representative director of the Japan Association of Corporate Executives, welcomed the creation of the benefit-linked tax credit. Yoshinobu Tsutsui, chairman of Keidanren, stressed the importance of the two-year limit being clearly set. Ken Kobayashi, head of the Japan Chamber of Commerce and Industry, said that to avoid further yen depreciation and higher interest rates, alternative funding sources must be made clear and market trust secured. Yamaguchi also demanded that the government ensure credible implementation of the return to an 8% rate after two years.

According to Nomura Research Institute, if the rate falls to 1%, a four-person household with a couple and two children would see its annual burden reduced by about 62,500 yen; under a zero rate, the reduction would be about 71,500 yen. The tax cut announced by the prime minister is scheduled for April 2027, leaving time for the design and preparation of the necessary systems.