Tax cut that benefits the rich: The Takaichi Fallout and Japan's economic dilemma

Editor's note: Cai Guiquan is an associate research fellow at the Chinese Academy of International Trade and Economic Cooperation, China's Ministry of Commerce. The article reflects the author's opinions and not necessarily the views of CGTN. 

Recently, Japanese Prime Minister Sanae Takaichi has been promoting a two-year policy to eliminate the food consumption tax, by planning to reduce the current reduced 8% tax rate on food items to zero, in order to combat inflation and ease people’s living pressure. However, this policy, which is advertised as benefiting all people, actually hides many risks. Instead of truly benefiting the middle class, it further exacerbates Japan’s wealth gap and hinders the economic recovery process.

The food tax cut policy was a core promise made by Sanae Takaichi in the House of Representatives election. After her coalition won the election, the relevant agenda was advanced rapidly, and the cabinet plans to complete a mid-term report and promote legislative preparations by June. The policy covers food and beverages subject to the 8% reduced tax rate, but does not include alcohol and eating out. It is aimed at reducing household daily expenses and easing the living pressure caused by inflation, and according to estimates by the Daiwa Institute of Research, the average household could save about 88,000 yen per year after the policy is implemented, which seems to benefit all households. However, data on income stratification shows that the problem of uneven distribution is very prominent.

Specifically, the top 20% of households by annual income receive much greater benefits than the rest. Low-income households have limited income, and although the proportion of their food expenditure is high, the absolute consumption amount is low, so the actual benefit from the 8% tax reduction is very meager. In contrast, high-income households have a large scale of food purchases and a wide variety of categories, so they receive a much larger share of the actual benefit under the same tax reduction rate. This policy not only fails to correct the inherent regressivity of the consumption tax, but also amplifies tax injustice, further solidifies the class gap, and delivers large benefits to high-income groups that do not need additional support, violating the basic logic of targeted relief and protecting the vulnerable.

More importantly, the current escalating situation in the Middle East is exacting a heavy cost on Japan's economy, further intensifying the negative impact of "The Takaichi Fallout" and making the already inefficient tax cut policy even less effective in safeguarding people’s livelihoods. Japan relies on the Middle East for more than 90% of its crude oil imports, of which about 73.7% must pass through the Strait of Hormuz. The intensification of regional conflicts has continuously increased the risks to this critical energy transportation artery. Kono Yuki, a researcher at the Japan Research Institute, warned that if the strait is blocked for a long time, Japan's GDP may decrease by about 3%, equivalent to the impact of a medium-sized economic crisis.

The direct impact of the Middle East situation is reflected in the surge in oil prices and the intensification of imported inflation. The Nomura Research Institute estimates that if the conflict continues, oil prices may rise to $87 dollars per barrel, and the average gasoline price in Japan may exceed 200 yen per liter; if the strait is completely blocked for a long time, gasoline prices may even rise above 300 yen per liter. Notably, oil prices have already exceeded $100 dollars per barrel. For every $10 dollar increase in oil prices, Japan’s annual import costs increase by 1.3 trillion yen. Against the backdrop of the continuous depreciation of the Japanese yen, the surge in energy prices directly pushes up electricity, gas, and logistics costs for various commodities, seriously eroding real wages—which have been in continuous negative growth—and stifling household consumption vitality. The meager benefits of the food consumption tax reduction are completely offset by the rise in energy and living costs, and the living pressure on low-income groups doesn't decrease but rather increases.

In terms of policy effectiveness, the food tax cut has extremely low economic stimulus efficiency, which is seriously mismatched with its huge fiscal cost. Data shows that eliminating the food consumption tax will cause an annual tax loss of 4.8 trillion yen, but it can only drive 0.5 trillion yen in personal consumption and 0.3 trillion yen in GDP growth, resulting in a serious imbalance in the input-output ratio. The core reason is that food, as a daily necessity, has extremely low price elasticity of demand. Most of the tax cut funds are converted into household savings, making it difficult to form a virtuous cycle of consumption, production, and employment.

The Japanese business community has generally taken a dim view of this policy. A survey of 1,546 companies by Teikoku Databank shows that only 25.7% of companies believe the tax cut will bring significant positive effects, nearly half believe it will have no obvious impact, and the remaining hold negative attitudes. There is a clear industry divide: large supermarkets benefit from the policy, while the catering industry faces enormous pressure. The widening tax gap between home-cooked meals and eating out may lead consumers to switch to pre-made food in supermarkets, squeezing restaurants' operating space. Small and medium-sized enterprises also need to bear additional costs from system transformations and accounting adjustments, while most manufacturing and service enterprises say the policy has little relevance to their operations and cannot drive order growth or employment improvement.

In addition, this policy will exacerbate both Japan's fiscal and social risks. Japan already has the highest government debt ratio among the world’s developed economies, with total debt exceeding twice its GDP. While implementing the tax cut policy, the Takaichi administration has continuously increased defense spending and industrial subsidies. The practice of reducing revenue while increasing expenditure has continuously squeezed fiscal space, which may push up government bond yields and thus reduce investment in social security and public services. In the end, ordinary people will bear the fiscal costs, forming a reverse transfer payment.

At the social level, the tax cut policy further divides the interests of industries and groups. Catering practitioners, low-income workers, and social security-dependent groups lose, while high-income households and large retail enterprises are the main beneficiaries. The gaps between the rich and the poor, between industries, and between urban and rural areas expand simultaneously. Currently, Japan is already facing severe challenges such as a low birth rate, an aging society, a shrinking middle class, and class solidification. This universal tax cut not only fails to solve these predicaments but also becomes a catalyst for social division.

Compared with international mainstream experience, the reasonable way to address food inflation is to implement targeted subsidies for low-income groups—such as issuing food subsidies or cash assistance—rather than full tax exemption. The Takaichi administration abandoned targeted relief and chose a costly, unfair, and inefficient full tax cut, which is essentially a short-term political maneuver aimed at winning votes. At a deeper level, this policy reflects a serious imbalance in its economic governance: prioritizing political performance over people's livelihood effectiveness, and short-term votes over long-term reforms.

In fact, Japan's real economic dilemma lies in stagnant wages, weak domestic demand, and slow industrial transformation—not simply tax burden issues. The current food tax cut policy avoids the crux of the problem, exchanging fiscal overdraft and unfair distribution for short-term political gains, treating the symptoms but not the root cause. Under the dual impact of internal inefficient policies and external shocks such as the Middle East crisis and the yen's depreciation, the negative impact of "The Takaichi Fallout" will continue to expand, and the imbalances in Japan's economy and society will further intensify.