Oxford Economics says Japan’s planned food consumption tax cut will widen the
fiscal deficit and lift JGB yields. Economist Norihiro Yamaguchi estimates the
cut would reduce annual tax revenue by about ¥5 trillion and is unlikely to be
fully offset by other measures. The firm assumes part of the shortfall will be
covered by non-tax receipts and spending cuts, but that roughly half will be
financed by debt, pushing the primary fiscal deficit to about 3% of GDP. It
expects the deficit to begin improving from 2029 as debt/GDP rises and fiscal
consolidation intensifies. Oxford Economics forecasts 10-year JGB yields will
rise to around 3% by end-2026, from roughly 2.8% today. Market reaction so far
has been limited, but the firm warns markets will increasingly price in the
fiscal impact as policy details emerge.
