TOKYO (Kyodo) -- Prime Minister Sanae Takaichi's decision to go ahead with a much-debated consumption tax cut is expected to do little to help consumers but rather possibly worsen the inflation-plagued economy, economists argue.

Takaichi on Thursday instructed her ruling Liberal Democratic Party to accelerate formalizing the plan to slash the tax rate on food and beverages to 1 percent from the current 8 percent for two years from April next year. The move came after months of deliberations between the ruling and opposition parties failed to reach a consensus.

Japan's household spending fell for the sixth consecutive month in May, reflecting concerns over a surge in oil prices following the conflict in the Middle East. The tax cut is estimated to help households save 80,000 yen ($490) a year, according to Daiwa Institute of Research.

Companies are expected to continue to raise prices to cope with hefty costs and to increase pay to secure workers. The yen is poised to weaken further from a 39-year low against the U.S. dollar, pushing up import costs.

Economists say the tax reduction itself is also expected to worsen inflation by stimulating private consumption and bolstering the outlook for an increase in prices.

"Reducing the consumption tax on food and beverages may lower their prices, but that (saved) money that ends up being spent elsewhere would lead to prices of other goods going up," Tomohisa Ishikawa, chief economist at the Japan Research Institute, said.

"As a result, I think it is very possible that overall prices would still go up," he said.

The tax cut was one of the LDP's key pledges in the February House of Representatives election. Takaichi has said realizing the plan is "a long-held ambition" as consumers have been grappling with rising prices of everyday goods.

"I think it is necessary to have a sufficient cut in the consumption tax on food and beverages that voters can be satisfied with," Takaichi told reporters as she vowed to implement the cut, which would mark the first reduction in the consumption tax rate since its introduction in 1989.

Consumers would notice cheaper food and beverage prices after the tax cut. However, continued price hikes by companies could offset the benefits of the measure shortly thereafter, and prices may rise above pre-tax cut levels in less than six months, according to some economists.

Given Japan's tight labor market, "an excessive tax cut may overheat the economy and further accelerate inflation," Japan Research's Ishikawa said. "Attention must be paid to this risk."

In 2024, Japanese companies agreed to offer the first wage increase of more than 5 percent in 33 years. Since then, the pace of their average pay raise has remained above the threshold for three consecutive years.

Japan's inflation has exceeded the Bank of Japan's 2 percent target for the past three years. Meanwhile, Takaichi is seeking to stimulate the economy through aggressive fiscal spending.

Japan's economy expanded an annualized real 1.8 percent in the January-March quarter in the second consecutive quarter of growth. But economists say the prolonged Iran war will likely hinder growth in the April-June quarter by fueling inflation, slowing consumer spending and disrupting petroleum product supplies.

Pressure on the Japanese currency has increased due to concerns that the BOJ may not respond quickly enough to the upside risks to inflation and the outlook for Japan's fiscal health under Takaichi's economic policy.

The dollar recently reached its highest level against the yen since November 1986, bolstered by uncertainty surrounding the U.S.-Iran peace talks.

A weaker yen hurts resource-scarce Japan by driving up the cost of purchasing petroleum products from other countries.

Economists say that as long as demand remains strong, companies' attempts to increase prices will not slow, even if a rise in input costs slows.

"Companies are now clearly starting to think about raising sales prices if demand is strong," said Shinichi Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting.

Proactive price strategy has been notable since the coronavirus pandemic, he said.

"After COVID, companies have tended not to lower prices once they're raised," Kobayashi said, citing the risk of resurgence of oil prices and higher labor costs.

According to data from Teikoku Databank, prices for more than 2,500 food and beverage items increased in July, up from 1,078 in June. More than 20,000 food and beverage products are expected to see price hikes in 2026.

In June, the BOJ's Tankan survey showed that all companies increased their one-year outlook for selling price increases to 3.7 percent, up from 3.1 percent in the March survey. They also increased their three-year outlook to 5.1 percent, up from 4.6 percent.

(By Junko Horiuchi)