Evaluating Consumption Tax Cuts and JGB Issuance

Mizuho Securities expresses skepticism over government claims that a consumption tax cut for food and beverages can be funded without additional JGB issuance. The report warns that the required tax revenue windfalls are unrealistic and could lead to higher bond yields due to fiscal deterioration concerns.

Key Takeaways

• 1.The Japanese government is considering a two-year reduction in the consumption tax rate for food and beverages (likely to 1%) without increasing new JGB issuance.
• 2.Mizuho's simulations suggest a primary balance deterioration of approximately JPY 4.4 trillion per year, making it difficult to avoid increased bond issuance without extreme tax revenue elasticity.
• 3.Achieving the tax cut without new JGB issuance would require tax revenue elasticity of 2.6 to 4.6, significantly higher than recent levels (e.g., 1.7 in FY2025).

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