S&P Global Warns Japan of Critical Tax Cuts

Warning from International Credit Rating Agency

The international credit rating agency S&P Global Ratings has issued an important warning regarding Japanese Prime Minister Sanae Takaiichi's plan to reduce taxes on food products. S&P emphasized that this step could permanently reduce public revenues in Japan, one of the most indebted developed economies in the world, and negatively affect fiscal balances.

Tax Cuts and Economic Risks

S&P Sovereign Ratings Director Rain Yin stated in an interview with Bloomberg that tax cuts carry a risk of a sustainable decline in government revenues, rather than just temporary costs. Yin warned that if there is a structural increase in public spending alongside a weakening of economic growth and tax revenues, the government's financial position could further deteriorate.

Impact of Tax Cuts on Markets

The announcement of Prime Minister Takaiichi's plan to reduce the food tax for two years if she wins the early election scheduled for February 8 caused significant selling in the Japanese bond market. As a result, 40-year Japanese bond yields reached their highest level since the first issuance in 2007. Analysts highlight the difficulties experienced in raising consumption taxes in the past and argue that this reduction may not be temporary, which could weaken fiscal discipline.

Finance Minister Calls for Calm

In response to the market fluctuations, Finance Minister Satsuki Katayama urged investors to remain calm in statements made at Davos, claiming that Japan's financial situation has improved. Katayama mentioned that he had contacted U.S. Treasury Secretary Scott Bessent, and following this statement, a limited pullback was observed in 40-year bond yields. S&P, on the other hand, refrained from making a current evaluation regarding the credit rating.