The International Monetary Fund has warned Japan against cutting its consumption tax, cautioning that the move could weaken fiscal stability at a time when borrowing costs on the country’s vast public debt are expected to rise sharply. The advice comes as Prime Minister Sanae Takaichi considers accelerating debate on a proposed two-year suspension of sales tax on food, a key campaign pledge following her recent electoral victory.
In its latest Article IV consultation statement, the IMF said authorities should avoid reducing the consumption tax, describing it as an untargeted measure that could erode fiscal space and heighten financial risks. Rahul Anand, the IMF’s mission chief for Japan, told reporters that loosening fiscal policy would be ill-timed given rising debt-servicing and welfare costs tied to the country’s rapidly aging population. He added that borrowing costs would likely climb further as the Bank of Japan continues to normalize monetary policy, with the IMF expecting two rate hikes this year and another in 2027, bringing the policy rate to around 1.5 percent.
Takaichi has argued that temporarily suspending the food tax would not require additional bond issuance to offset the estimated ¥5 trillion annual revenue loss, seeking to reassure investors wary of Japan’s already heavy debt burden. The IMF acknowledged that a narrowly targeted and time-bound measure could soften the fiscal impact but urged the government to adopt a budget-neutral approach focused on vulnerable households and businesses.
Japan’s public debt remains the highest among major economies, and the IMF projects interest payments on that debt will double by 2031 compared with 2025 as maturing bonds are refinanced at higher yields. The country’s Finance Ministry has issued similar estimates, forecasting debt-servicing costs could reach ¥21.6 trillion by fiscal 2029 under moderate growth assumptions. “High and persistent debt levels, together with a deteriorating fiscal balance, leave Japan’s economy exposed to a range of shocks,” the IMF warned.
Finance Minister Satsuki Katayama said the government remains committed to balancing economic growth with fiscal sustainability while taking the IMF’s recommendations into account. The fund also urged Tokyo to rein in supplementary budgets to prevent volatility in the Japanese government bond market, where yields on long-dated bonds recently climbed above 4 percent amid concerns over expansionary fiscal policies.
Despite those pressures, domestic investors still hold the bulk of Japan’s public debt, although foreign investors now account for nearly 30 percent of purchases in the 10-year bond segment, supporting liquidity as the central bank gradually reduces its market presence. The IMF welcomed the Bank of Japan’s cautious approach to tightening, noting it paused rate increases during global uncertainty linked in part to trade tensions before resuming policy normalization.
