Japan risks financial instability - Early elections, Prime Minister: 2-year exemption from consumption tax
Japanese Prime Minister Sanae Takaichi called a snap election on the promise of suspending an 8% food tax for two years, despite the potential pressure on the country's already precarious finances.
Japan imposes an 8% consumption tax on food and a 10% tax on other goods and services, helping to boost the well-being of an aging population.
Takaichi said a two-year exemption from the 8% tax on food will cushion the blow from rising living costs. The growing prospect of a sales tax cut and expectations that she will use the victory to tighten her fiscal policies pushed the government's 10-year bond yield to a 27-year high.
Aware of complaints about inflation, the opposition has also called for the consumption tax to be lowered or abolished ahead of the February 8 election. Inflation has exceeded the Bank of Japan's 2% target for nearly four years, driven largely by high food prices.
Takaichi's ruling Liberal Democratic Party (LDP) has long opposed cutting the tax, saying it would erode market confidence in the fiscal system. Eliminating the 8% sales tax on food would reduce government revenue by about 5 trillion yen ($31.71 billion) a year.
Her government has drawn up a record $783 billion budget for the next fiscal year, in addition to a stimulus package focused on easing hardship from the rising cost of living.
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