Prime Minister Sanae Takaichi faces immediate pressure to translate her landmark electoral win into promised relief for households, as her Liberal Democratic Party (LDP) secured a decisive victory in Sunday’s poll. Central to the LDP platform was a pledge to suspend the 8% sales tax on food for two years, a measure Takaichi has called her "long-cherished dream." The scale of the win has increased the political latitude for moving forward with the proposal, but it has also amplified scrutiny from investors and market participants concerned about how such relief would be financed.
Financial markets registered a pronounced response to the election outcome. Japanese equities jumped, government bonds fell, and the yen, which had been under pressure, recovered some ground on Monday after the result was interpreted as clearing the way for decisive fiscal stimulus. Top government spokesperson Minoru Kihara told a Monday news conference that Japan is closely monitoring rapid moves in foreign exchange markets with a high sense of urgency, reflecting official concern over recent volatility.
Despite market jitters, some analysts say the strengthened mandate reduces the influence of fiscal conservatives within the LDP who had been skeptical of the tax suspension. Ryutaro Kono, chief Japan economist at BNP Paribas, highlighted that while reservations remain within the party, the election result has raised the probability of a consumption tax cut. He said: "The premier has repeatedly said past fiscal policy has been too tight. It’s clear she strongly favours overhauling fiscal policy from the current one driven by the finance ministry and fiscal experts within the LDP." The comment underlines an intra-party shift in fiscal philosophy that the election appears to have validated politically.
Yet the fiscal mechanics remain a central obstacle. Officials estimate the tax suspension would cost about 5 trillion yen a year - roughly equivalent to Japan’s annual education budget. Takaichi has ruled out issuing new government debt to cover the gap and has been vague on alternative funding approaches, saying details would be worked out through cross-party discussions on social welfare and taxation.
Her references to non-tax revenue sources have prompted observers to point to Japan’s substantial foreign exchange reserves, valued at around $1.4 trillion, as a potential source of funds. But analysts warn that substantial use of those reserves could stoke fears that Tokyo might liquidate portions of its U.S. Treasury holdings. Such a move, they argue, could unsettle global markets and trigger concern in Washington, given the potential implications for international financial stability.
Market participants are also alert to the risk that lingering uncertainty over funding could prompt additional selling in the government bond market. That is significant because a sharp rise in yields would increase the cost of servicing Japan’s already large public debt, which is roughly twice the size of national output and is the largest among developed economies. Rapidly rising yields could feed into broader concerns about fiscal sustainability and, in turn, depress the yen further - a dynamic that would push up import prices and could raise inflationary pressures, potentially offsetting some of the intended relief from the tax cut.
Shinichi Ichikawa, senior fellow at Pictet Asset Management Japan, captured the tension between political mandate and market acceptance when he said: "She might have won the public’s mandate but not the market’s yet." Ichikawa warned that if concern over worsening public finances drives unintended falls in the yen, higher import costs could lift food prices and erode popular support for the policy.
Takaichi, who took office in October of last year, has already moderated earlier, more expansive proposals for spending and tax relief to avoid unsettling investors. That caution was evident in her demeanour in television interviews after the election result, where she appeared notably sombre despite the apparent landslide. When questioned about how she would take responsibility should her administration fail to deliver on its pledges, she bristled and responded: "It’s pretty mean to ask that of someone who’s about to give it everything."
The prime minister is expected to hold her first major post-election press conference later on Monday. Officials say the suspension of the levy would be temporary, and Takaichi has emphasized her commitment to responsible fiscal management even as she pursues measures aimed at easing household living costs.
For households, the suspension of the 8% food sales tax is intended to provide immediate relief from elevated living costs. For markets, however, the proposal raises questions about Japan’s fiscal trajectory and the potential knock-on effects for government bond yields, the yen, and import-driven inflation. The combination of strong political backing and unresolved funding solutions sets the stage for a delicate policy path in which the pace and clarity of policy design will be closely watched by investors and international observers alike.
Summary
Sanae Takaichi's decisive election victory strengthens the political case for suspending Japan's 8% food sales tax for two years, a policy she has championed as a priority to ease household costs. Markets reacted sharply to the prospect of the tax pause, lifting stocks and pushing down bond prices while the yen moved to historic lows; authorities say they are closely monitoring foreign exchange volatility. The central practical hurdle remains identifying non-debt funding to cover the roughly 5 trillion yen annual revenue shortfall without triggering further market turbulence.
Key points
- The LDP's commanding win increases the likelihood the government will move to suspend the 8% food sales tax for two years, a flagship pledge of the campaign.
- Financial markets responded quickly: stocks rose, government bond prices fell, and the yen experienced renewed weakness before partially recovering, prompting official concern about FX moves.
- The proposed suspension would cost about 5 trillion yen per year; Takaichi has ruled out issuing new debt and has not specified firm alternative revenue sources, leaving funding plans to be negotiated across party lines.
Risks and uncertainties
- Funding gap - The absence of a clear revenue plan risks further bond market sell-offs, which would raise government borrowing costs and strain Japan's already large public debt burden. Sectors affected: sovereign bond market, banking and financial institutions.
- FX and inflation feedback - Continued uncertainty could weaken the yen, raising import prices and pushing up food inflation, which would blunt the intended benefit of the tax cut for households. Sectors affected: consumer staples, food and beverage, retail.
- Global market reactions - Any perception that Japan might liquidate foreign exchange reserves or U.S. Treasury holdings could unsettle global markets and draw international scrutiny, complicating policy implementation. Sectors affected: foreign exchange markets, global sovereign bond markets.