By Makiko Yamazaki
TOKYO, June 17 (Reuters) - Japan is moving toward temporarily cutting its consumption tax on food to 1% in what would be the first effective reduction of its kind, further straining its already worsening finances.
The proposal, presented by a senior executive of the ruling Liberal Democratic Party (LDP) to a key government panel on Wednesday, would slash the current 8% food levy for two years from April next year and serve as a bridge until a refundable tax credit system is introduced.
It would also be paired with targeted cash benefits for low- and middle-income households, effectively bringing the net burden close to zero.
The move marks a notable shift in Japan's tax policy. Since the consumption tax was first introduced at 3% in 1989, it has been raised in stages to the current 10%, with a reduced 8% rate for food introduced in 2019, becoming a key pillar of social welfare funding.
Japan has never previously lowered the rate, making even a temporary cut a consequential step for policy and the public purse.
The proposal comes as Prime Minister Sanae Takaichi faces pressure to deliver on an election campaign pledge made in February for a zero-rate tax on food to cushion households from rising living costs.
Takaichi has said the government aims to avoid relying on additional deficit-financing bonds, but has yet to present detailed alternative funding sources to offset the expected revenue shortfall, leaving questions over how the measure would be financed.
Daiwa Institute of Research estimates that cutting the food sales tax to 1% would reduce revenue by about 4.4 trillion yen for Japan's roughly 125 trillion yen ($779.93 billion) annual budget, while boosting GDP by only around 0.3 trillion yen.
Fiscal concerns have already been weighing on the yen, which has struggled to gain ground despite the Bank of Japan's interest rate hike this week, as investors worry that looser fiscal policy could offset the impact of monetary tightening.
($1 = 160.2700 yen)
(Reporting by Makiko Yamazaki; Editing by Shri Navaratnam)
