By Leika Kihara
TOKYO, June 2 (Reuters) - Japan is considering rolling out a two-year cut to its tax on food sales from April next year, the Mainichi newspaper reported, a move that could draw renewed investor attention to the country's worsening finances.
The government is considering lowering the 8% levy to 1% from April next year, the newspaper said on Monday, citing an unnamed government executive, a timeframe that would allow dovish Prime Minister Sanae Takaichi to promote the move ahead of municipal
elections slated that month.
Key to the move would be knowing how to fund the temporary tax cut as bond vigilantes continue to test Takaichi's resolve to pursue her expansionary fiscal policies without relying too heavily on new debt issuance.
"The biggest problem with this tax cut debate is that there has been almost no progress in discussions on how to fund it," said Takahide Kiuchi, an economist at Nomura Research Institute.
"Pushing the tax rate back up again after two years may also prove difficult as households may oppose the move as a de-facto tax hike," he said.
Back in January, Japanese government bond yields spiked on concern over additional debt sales when Takaichi pledged to scrap the 8% levy on food sales for two years to help households weather the pain from rising living costs.
Since then, details of the plan have been discussed in a meeting of ruling and opposition parties with the findings expected to be announced by the government this month.
The sales tax rate is likely to be cut to 1% instead of the initially planned 0% to avoid the lengthy time needed to fix cash register systems to recognize a zero tax rate, the paper reported.
Economy Minister Minoru Kiuchi declined to comment, when asked about the media report in a news conference.
FOCUS ON HOW TO FUND TAX CUTS
Japan levies an 8% consumption tax on food and a 10% rate on other goods and services, key sources of funding for rising social welfare costs among a rapidly ageing population.
Of Japan's record 122-trillion-yen ($764 billion) 2026 budget, about a quarter is funded by debt issuance and nearly 22% by consumption tax, the biggest tax revenue source.
Suspending the 8% food sales levy, which Takaichi described as her "long-cherished dream," would cost 5 trillion yen per year, roughly equivalent to spending on education. A cut to 1% would likely cost 4 trillion yen annually.
The bond market selloff in January was also driven in part by the lack of clarity on how Japan would fund the tax cuts.
The Nikkei newspaper reported on Tuesday the government may seek to fund the sales tax cut with an expected increase in overall tax revenues, to avoid issuing additional debt.
Japan's economic recovery and inflation have led to a steady increase in tax revenues. The government expects to reap tax revenues of 83.7 trillion yen in the current fiscal year ending March 2027, up 25% from five years ago, the Nikkei said.
($1 = 159.6800 yen)
(Reporting by Leika Kihara; additional reporting by Yoshifumi Takemoto; Editing by Sam Holmes)
