Japanese Prime Minister Sanae Takaichi has announced a plan to lower the consumption tax rate on food and beverages from the current 8% to 1%. The cut will take effect next April. It will be the first consumption tax reduction since the tax was introduced in 1989.

It is difficult to believe this was the result of thorough debate over the course Japan should take as it faces a host of difficult problems, including its declining birth rate and aging population. It is a shortsighted decision that will leave problems for the future.

Japan faces a serious fiscal situation marked by heavy debt, and the nation's consumption tax is an important source of revenue that has supported steadily increasing social security expenditures. Even so, Takaichi has clung to the idea that "a tax cut is a long-cherished goal" and is pushing ahead with expansive spending -- an approach that leaves us with growing doubts.

Takaichi says the decision was made in response to an interim report by a cross-party national council on social security, but the 1% rate is a Liberal Democratic Party (LDP) proposal that many opposition parties were against.

After failing to build a consensus, the government is now trying to push the measure through with the "power of numbers" held by the huge ruling bloc. This is far too heavy-handed.

Tax cut may instead fuel higher prices

The prime minister has emphasized that the measure will "reduce the burden on low- and middle-income people suffering from high prices and realize a strong economy." If that is the objective, the proper course would be to provide prompt assistance targeted at those people. With a consumption tax rate cut, the higher a person's income, the greater the tax reduction becomes for them.

The prime minister has expressed her intention to provide benefits equivalent to the remaining 1% consumption tax to middle- and low-income earners, effectively making the tax rate zero for them. This appears to be nothing more than an attempt to make the policy consistent with the pledge she made in the House of Representatives election. Discussion of a refundable tax credit, regarded as the centerpiece of the policy, also remains incomplete.

Moreover, there is no guarantee that prices will fall by an amount corresponding to the tax rate cut. Manufacturers and retailers may use the tax reduction as an opportunity to raise prices. This is a phenomenon that has been seen in European countries that previously lowered consumption tax rates.

The loss of tax revenue will amount to about 4.3 trillion yen (roughly $26.74 billion) a year. The prime minister maintains that the government will not rely on deficit-financing bonds, but the source of funding remains unclear. She has also indicated that the government will support the food service industry and other sectors not covered by the tax cut, meaning fiscal spending will only swell.

Of particular concern is the possibility that the tax cut will not end after the "two-year limit" advocated by the prime minister. Restoring the tax rate to its original level would amount to a substantial tax increase. Some opposition parties are calling for the tax reduction to be made permanent, and it could become an issue in the House of Councillors election to be held in the year before the tax cut is scheduled to end. Many believe that ending it would be extremely difficult politically.

If a large amount of tax revenue is lost every fiscal year, confidence in the government will decline. Long-term interest rates, which remain high, will rise further, causing interest payments on government bonds to surge and exacerbating fiscal concerns.

A negative cycle could emerge in which the yen, already at historically weak levels, depreciates further, pushing up import prices and ultimately exacerbating, rather than easing, inflation and making life increasingly difficult for the public.

In the first place, the consumption tax was introduced to respond to structural changes in Japanese society.

For many years after World War II, Japan's tax system was centered on income taxes paid by the working-age population. Tax revenue grew along with high economic growth and population growth, but by the 1980s, the economy had matured and the arrival of a society with a declining birth rate and aging population had become a realistic prospect.

With the working-age population shrinking, social security costs that continued to balloon could not be covered if the system remained centered on income tax. A consumption tax, borne broadly by the public, was judged appropriate. Then Prime Minister Noboru Takeshita explained at the time, "Fundamental tax reform is something we cannot avoid when looking ahead to the aging society to come."

The consumption tax rate has been raised in stages from the initial 3%, and revenue from the tax now totals about 34 trillion yen (about $211.52 billion) for the central and local governments combined, exceeding income tax revenue. Even so, it is more than 10 trillion yen (about $62.22 billion) short of the amount needed to cover social security costs. The government relies on bonds to fill the gap, and the burden passed on to future generations continues to grow.

Is politics about chasing popularity?

The population aged 65 and over will peak in the 2040s, and social security costs will swell further. Measures to address the serious decline in births are also said to require substantial funding. Many believe that a certain increase in the public burden is unavoidable. In European countries with extensive welfare systems, tax rates of 20% to 25% are the norm.

The consumption tax has long been a perilous issue in politics. It has provoked public opposition, and the Takeshita Cabinet, as well as the Cabinets of Ryutaro Hashimoto and Yoshihiko Noda, which decided to raise the tax, were forced to resign. Prime Minister Takaichi likely believed that by proposing a tax cut as a measure against high prices she could appeal to public opinion.

However, it is irresponsible to use a revenue source that is essential for addressing the structural challenges of a declining birth rate and an aging population as a temporary economic stimulus measure. If short-term popularity is prioritized, fiscal management requiring a long-term perspective cannot be sustained.

What is needed is to achieve a balance between benefits and burdens and build a sustainable system. The role of politics is to pursue policies that support people's lives through the distribution of tax revenue, while gaining public understanding of the tax burden.

The government plans to submit the tax-cut bill to an extraordinary session of the Diet this autumn. Will the ruling and opposition parties approve a misguided measure that could shake Japan's future? They should carefully deliberate on the bill from a broad perspective.