- Senior LDP official signals chance of temporary sales tax cut
- Most opposition parties also call for consumption tax cut
- Official of new opposition coalition pledges permanent tax cut
- Concern over Japan's finances push bond yield to 27-year high
TOKYO, Jan 19 (Reuters) - A snap general election expected in Japan is increasingly likely to bring a cut in the consumption tax rate, as ruling and opposition party executives stress the need for efforts to protect households from rising living costs.
The growing prospect of such a cut, which would cause a huge hole in state revenues and worsen Japan's already precarious finances, sent the yield on the 10-year Japanese government bond to a 27-year high of 2.275% on Monday.
Japan levies an 8% consumption tax on food and a 10% rate on other goods and services, key sources of funding for rising social welfare costs among a rapidly ageing population.
Shunichi Suzuki, secretary-general of the ruling Liberal Democratic Party (LDP), pointed to the party's earlier agreement with its coalition partner, Ishin, to aim at scrapping the 8% levy on food sales for two years.
"It's our basic stance to sincerely achieve what's written in the agreement," he told a television programme on Sunday.
Prime Minister Sanae Takaichi is set to hold a news conference at 6 p.m. (0900 GMT) on Monday to say she intends to call a snap election in February, capitalising on her strong approval ratings.
Takaichi, upon calling a general election, may pledge to temporarily scrap the 8% levy on food sales, the Mainichi newspaper said on Saturday.
A cut in the consumption tax "isn't ruled out as an option", the top government spokesperson, Minoru Kihara, said on Monday.
A new political party, formed last week from two major opposition parties, went further by pledging to abolish the tax of 8% on food sales.
Japan could create a new sovereign wealth fund to generate revenue for the permanent cut, it said in a campaign policy platform on Monday.
"People of all generations talk about their worries and struggles from inflation caused by a weak yen," the new party's executive, Mitsunari Okamoto, told a news conference. "It's something we strongly feel needs addressing."
A weak yen has become a headache among policymakers by pushing up import costs and broader inflation.
Other major opposition parties, including the Democratic Party for the People, have also called for lowering or eliminating the consumption tax.
BLOW TO COFFERS
For nearly four year, inflation has surpassed the Bank of Japan's target of 2%, fuelled largely by stubbornly high food prices, prompting calls from more politicians for major spending and tax cuts to cushion the blow for households.
The LDP has long pushed back against opposition calls for a consumption tax cut, saying that doing so would erode market trust in Japan's resolve to get its fiscal house in order.
Since taking office in October, Takaichi has ruled out a cut, believing it would take too long to pass necessary legislation, while payouts and subsidies would more quickly deliver benefits to households.
But Takaichi, known as an advocate of aggressive fiscal spending, once said she would prefer cutting the tax if the government could find a sufficient source of revenue.
A cut in the 8% food sales levy would reduce government revenue by an estimated 5 trillion yen ($31.71 billion) a year, according to government data, roughly equivalent to Japan's annually expenditure on education.
A permanent cut would strain Japan's already shaky finances and heighten the risk of a bond selloff as investors focus on Takaichi's expansionary fiscal policy, analysts say.
Her government has compiled a record $783 billion budget for next fiscal year, on top of a stimulus package focused on easing the pain from a rising cost of living.
"I can't see why Japan needs a consumption tax cut after compiling a significant stimulus package to counter rising inflation," said Keiji Kanda, a senior economist at the Daiwa Institute of Research.
"I'm worried these steps could accelerate inflation and lead to further rises in bond yields."
($1=157.6900 yen)
Reporting by Leika Kihara; additional reporting by Makiko Yamazaki; Editing by Paul Simao, Thomas Derpinghaus and Clarence Fernandez
Source: Reuters