Economists debate consumption-tax cut as Japanese politicians warm to the idea

Japan Times

08-05-2025

Cutting the consumption tax is gaining ground in Japan as a possible way to counter the effects of U.S. tariffs, although a debate is still raging as to whether such a policy, long seen as a taboo, would actually do much to help households or the economy in general.
Cash handouts have traditionally been the preferred way to quickly stimulate the economy during times of hardship, as they leave in place a fundamental pillar of government finance and ensure that collections key to old-age benefits are still made.
But following the implementation of tariffs by U.S. President Donald Trump, reducing the consumption tax — which is much like a sales tax and is set at 10% for most items and 8% for food and beverages — has been suggested as a way to protect the economy's fragile recovery.
Some economists argue that consumption-tax relief could be more effective in stimulating consumption than cash distribution, since people would not benefit from the policy unless they purchase something. Just pocketing the money is not an option.
High inflation in Japan is mainly related to the increase in food prices, so it's easier to justify making those items nontaxable, Toshihiro Nagahama, executive chief economist at Dai-ichi Life Research Institute, wrote in a report last month.
'Spending on food is necessary for everyone, and it represents a larger portion of spending for lower-income households, so it could also help reduce the regressive nature of the consumption tax," he wrote.
According to his estimates, eliminating the 8% consumption tax on food would increase Japan's economic growth rate by 0.4 percentage points. The government would need about ¥4 trillion to ¥5 trillion to fund the tax cut annually.
If the government were to implement a cash-handout policy with funding equivalent to the hypothetical consumption-tax cut, the economic growth rate would be increased by 0.2 percentage points.
Other economists argue that lowering the consumption tax would not be very effective, even though it might encourage people to spend more.
If a tax cut is temporary, consumption is likely to increase while the cut is in effect. This just brings future demand forward, so consumption would likely dip afterward, said Yutaro Suzuki, an economist at Daiwa Securities.
'When you include an expected decrease in consumption after the tax-cut period, I think it probably wouldn't make a significant difference compared to the cash handout policy," he said.
Suzuki also points out that it's unclear whether a tax cut would be introduced as an anti-inflationary measure or as more of an economic stimulus measure.
'The discussion around that point seems to be quite muddled. In terms of addressing the recent high prices, I think it would help reduce household costs temporarily,' Suzuki said.
"In terms of using it as an economic measure to boost the economy, it doesn't strike me as a particularly effective approach."
U.S. tariffs and election realities are pushing Japanese politicians more toward passing a consumption-tax cut, a move once seen as improbable.
'Given that many opposition parties are proposing policies to cut the consumption tax, the ruling parties must be thinking that they need to come up with similar moves; otherwise, they would lose again,' Suzuki said.
The Liberal Democratic Party-Komeito coalition lost its majority in the Lower House in the general election held last October, and it needs to avoid more losses in the Upper House election expected to take place in July.
The Constitutional Democratic Party of Japan, which is the largest opposition party and is led by former Prime Minister Yoshihiko Noda, is looking to make food nontaxable for one year.
Noda is considered to be on the side of fiscal discipline. Nippon Ishin no Kai is proposing a cut for two years, while the Democratic Party for the People aims to temporarily lower the rate of consumption tax on all products to 5%. Two smaller opposition parties — the Japanese Communist Party and Reiwa Shinsengumi — advocate abolishing consumption tax altogether.
About 80% of the LDP's Upper House members are now voicing support for a cut, and Komeito has said consumption tax relief is an option.
Prime Minister Shigeru Ishiba, who heads the LDP, has expressed caution about reducing the consumption tax, questioning the effectiveness of such a move as it would benefit high-income households as well.
And touching the rate of consumption tax has long been seen as taboo.
Higher rates are especially unpopular with voters. Cutting the rate may win voter support, but the ruling parties have been hesitant, as revenue from consumption tax is crucial to covering the costs of social welfare programs.
According to a survey by TV Asahi last month, only 30% of those polled said that a cash handout is necessary as a countermeasure for inflation and about 60% said it's unnecessary.
A full 60% said they support a temporary cut in consumption tax.