Updated

Updated · Financial Times · Jul 23

Japan's Honebuto Drafts Lift 10-Year Yields Toward 3% as Yen Slides on ¥370 Trillion Plans

Updated

Updated · Financial Times · Jul 23

Japan's Honebuto Drafts Lift 10-Year Yields Toward 3% as Yen Slides on ¥370 Trillion Plans

Q: Amidst a crashing yen and record debt, why did Japan's government delay a popular food tax cut?

Japan delayed the food tax cut because it was politically popular but fiscally and technically hard to execute at a moment of acute market stress. The immediate backdrop was a sliding yen, rising bond yields and Japan’s huge debt burden, around 230% of GDP. A full two-year cut in the food consumption tax would cost roughly ¥5 trillion a year, at a time when the government was already running large budgets, facing higher debt-servicing costs and trying to avoid further alarming investors. With the yen near a 40-year low and markets already nervous about fiscal slippage and possible pressure on the Bank of Japan, an unfunded tax cut risked worsening confidence in both the currency and government bonds. That is why the cabinet’s policy plan stressed BOJ autonomy and left the tax issue unresolved. The government wanted to reassure markets that it would not mix looser fiscal policy with political interference in monetary policy, especially after earlier draft language had triggered a yen and bond sell-off. There was also a practical obstacle. Retailers’ cash-register systems were widely reported to be unable to handle a 0% food tax without major reprogramming, making a full abolition slow to implement. A cut to 1% was seen as faster and cheaper, which is why it emerged as a compromise option. In short, the delay reflected three pressures at once: the high fiscal cost, the need to calm markets during a yen slump, and the technical difficulty of introducing a zero-rate tax quickly.

3 articles · Updated · Financial Times · Jul 23

10-year Japanese government bond yields have climbed toward 3%—their highest in 30 years—while the yen has kept weakening after draft Honebuto policies signaled much looser fiscal settings.
The drafts floated ¥370 trillion in investment by 2040, energy subsidies worth about 0.5% of GDP, a food tax cut from 8% to 1%, and defence spending rising to 3.5% of GDP.
Those proposals have stirred fears of a UK-style credibility shock because Japan's gross public debt already exceeds 200% of national income and higher rates would raise debt-servicing costs.
Tokyo has since softened language seen as pressuring the Bank of Japan, and investors expect the BOJ to keep gradually normalizing policy after lifting rates to 1% last month.
The market anxiety comes even as Japan's economy looks more resilient than fragile, with inflation near 2%, steady wage gains and AI-linked demand helping end decades of deflation.