Japan’s consumption tax cut would widen the fiscal deficit and push JGB yields higher

Japan’s Takaichi government approved a plan to cut the food consumption tax to 1% from 8% without resorting to debt finance in FY2027-2028 (Q2 2027-Q1 2029). However, we now assume that a primary balance will deteriorate to a 3% of GDP deficit and the 10-year Japanese government bond yield will rise to 3% by the end of 2026, as it will be challenging to fully make up for the lost tax revenue.