Japan election divides on Consumption Tax cut imid inflation and U.S. tariffs nerves
Japan’s ruling coalition is struggling to resist a Consumption Tax cut in a row over how to address rising living costs and economic uncertainty triggered by U.S. tariffs. The junior coalition partner, Komeito and opposition partners are calling on the Liberal Democratic Party for a temporary cut to the consumption tax (similar to VAT), particularly on food items. All three leading opposition parties back some form of consumption tax cuts, with the populist, right-wing Sanseito proposing a phase-out of Consumption Tax altogether.
The 20 July 2025 election has boiled up a cut in the indirect tax as a key issue. Oppoistion JCP leader, Tomoko Tamura, said her party will lower the consumption tax rates to 5% at first as an emergency measure, which would bring about an average of ¥120,000 of benefit a year to households.
Government bonds are already rising this week in anticipation of the LDP losing control of the coalition and a cut being implemented. This could damage Japan’s credit rating.
Japan’s current standard Consumption Tax rate is 10%, with an 8% reduced rate for food. Similar to VAT, Consumption Tax rose to 10% in 2019 to meet the costs associated with an ageing population.
Elections puts CT rate cut on table
As the country gears up for the Upper House election and the Tokyo Metropolitan Assembly election this summer, internal tensions within the Liberal Democratic Party (LDP) and its partner Komeito are intensifying. While some lawmakers support direct tax relief for households, others remain staunchly opposed due to concerns over fiscal sustainability.
At the heart of the debate is whether to cut the consumption tax or to offer cash handouts instead. Officials worry that even a temporary cut could trigger political chaos when the time comes to raise rates again.
Komeito leader Tetsuo Saito has strongly advocated for a temporary reduction in the sales tax on food, describing it as “the most effective measure” to ease the burden on households and companies amid inflation and rising import costs. Speaking at a party meeting, Saito also suggested supplementing the tax relief with ¥100,000 cash payouts to households, recognizing that legislative procedures to implement tax cuts could delay immediate relief.
Consumption Tax revenues vital to meet social costs
Within the LDP, however, caution is high. Secretary-General Hiroshi Moriyama and other senior figures are resisting tax cut proposals, citing the consumption tax’s critical role in funding Japan’s ballooning social security costs. “What part of social security could we ask people to give up?” Moriyama questioned, highlighting the difficulty of sacrificing a revenue source essential for an ageing population.
Despite this resistance, several LDP Upper House lawmakers—especially those up for re-election—have welcomed Komeito’s tax-cut push, viewing it as a necessary move to avoid electoral backlash. A mid-career LDP lawmaker critical of Moriyama accused party leadership of lacking urgency: “To win the elections, we have no choice but to cut taxes.”
Further complicating the issue is Prime Minister Shigeru Ishiba’s wavering stance. After initially stating he had no intention of categorically denying the idea of a tax cut, Ishiba reversed himself, calling a reduction not appropriate. Yet, days later, he again left the door open during a TV appearance, saying he would consult party members further.
Economists remain divided. They warn that acting prematurely could lead to policy missteps. Government chould first consider support like loans to small businesses rather than rushing into tax cuts or cash handouts, especially as the long-term economic fallout from U.S. tariffs remains uncertain.
The Finance Ministry also raised concerns, estimating that a zero tax rate on food items alone would cost around ¥5 trillion in lost revenue.
