Prime Minister Sanae Takaichi bows after the dissolution of the Lower House of the National Diet at 1:04 pm on January 23.
The next Lower House election was formally announced on January 27. Parties from all sides, including the ruling and opposition parties, are already focusing on the economy. Rising prices are taking a heavy toll on the daily lives of average Japanese households. Additionally, there are concerns about foreign relations, including unfair Chinese economic coercion.
In the campaigns, each of the nation's political parties will be expected to explain how it proposes to overcome these challenges. Achieving a growth-oriented economy is the country's necessary goal.
The ruling Liberal Democratic Party (LDP) has pledged to reduce the consumption tax. As a result, voters are faced with the unusual situation in which most of the ruling and opposition parties are calling for a reduction in the consumption tax burden.
With real wages stagnating, it is true that a consumption tax cut would help households. However, the consumption tax provides the core funding for the expansion of the social safety net. This should not be forgotten.
How do these politicians plan to mitigate the negative impact of reducing the consumption tax on social security? Without convincing explanations, this tax cut populism will inevitably be criticized as pandering to public opinion. Ruling and opposition parties have a responsibility to the voters to thoroughly discuss this problem.
Stable Financial Resources
The LDP has pledged to speed up consideration of reducing the consumption tax on food and beverages to zero. Initially, this would be for two years. However, it has not indicated an alternative funding source or an implementation date for the proposal.
Meanwhile, eliminating the consumption tax is expected to cost ￥5 trillion JPY (over $32 billion USD) annually. Going forward, the LDP has promised to hold a national conference to discuss reforming the social security system.
Nippon Ishin no Kai, the LDP's coalition partner, takes the same position. Based on the coalition agreement reached in October 2025, both parties have proposed this as a campaign pledge. Their agreement stated that the plan would be considered for implementation over two years.
In the past, Prime Minister Sanae Takaichi, who is president of the LDP, has also favored a zero consumption tax on food and beverages. Nonetheless, since becoming prime minister, she has adopted a cautious stance, citing the time it takes for businesses to respond, among other factors. Therefore, the Prime Minister must explain how she reconciles her past words and actions in this regard.
Recently, the Constitutional Democratic Party of Japan and Komeito formed the new Centrist Reform Alliance. It calls for permanently reducing the consumption tax on food products to zero, starting in the autumn of 2025.
Elsewhere, the Democratic Party for the People (DPP) wants to maintain the tax rate at a flat 5% until wage growth reaches a level equal to a stable inflation rate of 2%.
Other opposition parties are competing for votes by calling for a reduction in the tax burden. The Japanese Communist Party, for example, is calling for an immediate drop in the consumption tax rate to 5%, while considering abolishing it in the future.
Clarifying the Roadmap
Nevertheless, there are concerns about the content of proposals being offered by both the ruling and opposition parties.
Japan's ruling parties frame their plan as a two-year temporary measure. Nevertheless, won't it be politically difficult to restore the tax once it has been cut to zero? All parties need to clarify the roadmap for accomplishing their tax strategy.
It is also unclear how the government expects to secure the funds it needs for essential social services and national security programs. Prime Minister Takaichi has said she intends to proceed with a thorough review of all expenditures and revenues. Those include subsidies and special tax measures, although she does not want to rely on deficit bonds. But it will not be easy to ensure the enormous revenue sources required to fund the government.
New opposition party, the Centrist Reform Alliance, has promised to raise revenue by establishing a government fund that could invest money from budget surpluses and other measures. However, could such a fund really ensure stable revenue?
Analyzing the 'What Ifs'
If the consumption tax on food and beverages goes to zero, the lost revenue would amount to ￥5 trillion (over $32 billion) per year. And if the tax rate were to be set at a flat 5%, that would result in an even greater loss of revenue. Prioritizing tax cuts while not spelling out how the revenue gap is to be filled leaves anxiety about the sustainability of Japan's social security system.
Consumption tax cuts are proportionately more beneficial for high-income earners than for middle- and low-income earners. That is because high-income earners generally spend more, while lower-income earners need more support. Ultimately, the question is how to reduce the tax and social insurance burden on middle- and low-income earners. For that, a tax credit system that combines tax cuts and cash benefits needs to be designed expeditiously.
Various political parties, including the LDP and the Centrist Reform Alliance, have included such ideas in their campaign pledges. Therefore, they will hopefully engage in an in-depth discussion of the issues during this election campaign.
Winning the Markets
Recent movements in financial markets are worrying as they reflect concern about the nation's deteriorating finances.
Although long-term interest rates have risen sharply, the yen is showing signs of further weakening. Rising interest rates affect business operations and also increase the burden on households, including mortgage payments. Nevertheless, the weak yen is a factor in the rising prices of imported goods.
If markets lose confidence in the government's fiscal management, it would significantly impact the economy. Not only the Takaichi administration, which advocates a "responsible and proactive fiscal policy," but also the opposition parties need to keep this in mind.
Daily Lives
In addition to the consumption tax, each party's campaign pledges include several policies intended to improve people's daily lives. It is natural for politicians to respond to the voices of people who don't feel affluent. However, unlike the economy's deflationary period when there was a serious lack of demand, there are now supply-side weaknesses. For example, the labor shortage.
It is also important to note that blindly stimulating consumption through fiscal policy could exacerbate inflation.
Growing the Economy's Supply Side
Even regarding Prime Minister Takaichi's proactive fiscal policy, the key issue is how to increase the economy's supply capacity.
At the same time, it is appropriate for the Takaichi administration to emphasize crisis management investments, which would enable the government to proactively tackle issues that cannot be resolved by the private sector alone. These include strengthening economic security and food and energy security.
It is also significant that there is planned investment in 17 strategic fields, such as artificial intelligence (AI) and semiconductors. These sectors are sources of growth that will enhance the nation's international competitiveness. Joint public-private efforts to strengthen growth sectors are also a prominent international trend in Europe, the United States, and China.
Will these steps lead to a stronger economy and further improvements in income, such as through wage increases?
The Centrist Reform Alliance is promoting the concept of "investment for the future." It calls for significant increases in the budgets for education and science & technology. Meanwhile, the DPP is calling for the introduction of a tax system that will boost strategic and growth areas.
Who can come up with the most concrete and effective growth strategies for Japan? We expect the ruling and opposition parties to fully air these issues during the campaign.
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(Read the editorial in Japanese.)
Author: Editorial Board, The Sankei Shimbun
