The writer is a senior economist at JPMorgan
Over the past few weeks, Japan’s government bond yields have surged to highs last seen in the 1990s — raising eyebrows both in Tokyo and elsewhere in the world. Ostensibly, this latest jump was a reaction to the mulling of a temporary consumption tax holiday on food. Given the relentless rise in the cost of staples — rice prices have doubled — the tax cut strikes a chord in an economy where the cost of living has barely changed in a generation.
The food tax holiday could lead to an annual fall in tax revenues of around 1 per cent of GDP, on our estimates. Manageable in isolation but challenging in the context of potential social security contribution cuts, defence spending increases and other pro-growth policies. As other governments have found to their peril, lowering consumption taxes is the easy part; putting them back up is not. By pushing bond yields higher, markets are probably right to question whether any cut would indeed be temporary.