Landslide Election Win Clears Path for Japan's Takaichi to Deliver Tax Cuts

• Japanese Prime Minister Sanae Takaichi renewed a pledge on Monday, February 9, 2026, to cut sales tax on food, after a historic election win brightened chances for stimulus measures that have rattled financial markets.
• Takaichi romped to victory in Sunday's poll, aided by a pledge to ease household living costs by suspending for two years the tax of 8% on food. "We must pull Japan out of excessively tight fiscal policy and a lack of investment," Takaichi told a news conference.
• In an apparent vote of confidence in Takaichi's fiscal policy, stocks swept to all-time peaks, while super-long bonds reversed early weakness. However, earlier, investors wary of uncertainty about how Japan, labouring under the developed world's highest debt burden, would fund the proposal, had triggered a selloff in government bonds, pushing the yen towards historic lows against other currencies.
• Takaichi's challenge is to find revenue to offset the tax suspension, which would cost about 5 trillion yen ($32 Bn) a year, or roughly Japan's entire annual budget for education. Her past hints at tapping non‑tax revenues have drawn attention to Japan's foreign exchange reserves of $1.4 trillion, held largely as ammunition for yen intervention. However, dipping into them too deeply could fuel fears that Japan might sell part of its U.S. Treasury holdings, a prospect in turn likely to unsettle markets and raise concern in Washington.
• Prolonged uncertainty over funding risks another bond market sell‑off, analysts warn, with investors already sensitive to Japan's deteriorating fiscal outlook. A sharp rise in government bond yields would increase the cost of servicing public debt that is roughly twice the size of Japan's economy. Additionally, worries over fiscal sustainability could also trigger further yen weakness, inflating import prices and broader inflation, which would dilute benefits to households from tax cuts.

(Source: Reuters)