S&P Global Ratings has voiced concerns that Prime Minister Sanae Takaichi's proposal to cut the sales tax on food purchases could reduce Japan's revenues and undermine its finances in the long term. The remarks come amid a historic rise in superlong bond yields following Takaichi's announcement to lower the sales tax on food for two years if she succeeds in a snap election. Rain Yin, director of sovereign ratings based in Singapore, warned that such tax cuts are not a one-off impact and would exacerbate the fiscal situation if economic and revenue growth weakens amid structural increases in expenditures.
A new concern is casting a shadow over Japan's economic outlook. S&P Global Ratings has warned that Prime Minister Sanae Takaichi's plan to cut the consumption tax on food purchases could undermine the government's finances over the long term. The proposal, which would last two years if Takaichi succeeds in a snap election, triggered a historic surge in superlong bond yields upon announcement.
In a statement, Rain Yin, director of sovereign ratings based in Singapore, said: "The risk of tax cuts, such as on some sales tax items, is that this is not a one-off hit, and it would lower government revenues on a sustained basis." Yin added: "With a structural increase in expenditure components, this would further worsen the government’s fiscal situation if economic and revenue growth were to weaken."
This caution arises amid Japan's persistent challenges of massive public debt and rising social security costs due to an aging population. Takaichi's policy aims to ease household burdens through lower consumption tax rates and stimulate the economy, but as S&P notes, it risks widening fiscal deficits through reduced revenues. Other rating agencies like Fitch are also monitoring the Japanese economy closely, with consumption tax developments potentially affecting credit ratings.
The Japanese government emphasizes supporting fiscal health through economic growth and higher tax revenues, yet market reactions remain cautious.
