Japan approves FY 2027 tax reform, paves way for food tax cut from April

The Japanese government has approved a tax reform package that includes a significant reduction in the consumption tax on food and nonalcoholic beverages. Starting in April 2027, the 8% tax rate will be cut to just 1% for two years, aiming to alleviate the burden of rising prices. This move will generate a loss of approximately 10 trillion yen ($65 billion), which will not be funded through deficit-busting government bonds.

Instead, the funding details will be determined by the end of the year. This will mark Japan's first consumption tax cut since its introduction in 1989, prompting retailers to commence preparations, such as upgrading their cash register systems. Prime Minister Sanae Takaichi's administration plans to introduce the related legislation during an extraordinary parliamentary session set for October.

The ruling Liberal Democratic Party and its coalition partner, the Japan Innovation Party, have pledged their support for small farmers and restaurants, who are anticipated to experience revenue declines due to the tax cut. As part of the package, an income-based benefit will be provided to low- and middle-income earners from fiscal 2027 onwards, amounting to around 600 billion yen annually.

This benefit will be expanded from fiscal 2029, with the exact eligibility and amount yet to be determined. The government adopted the basic policy for the tax cut and benefit program on August 5, and it is anticipated that the measure will face parliamentary scrutiny, with opposition parties raising concerns in a multiparty social security council.