Be on alert! Kaohsiung City Government is considering a policy to reduce food consumption tax to zero. The storm of Japanese bond yields may once again sweep across global stocks and bonds.

The ruling party led by Japanese Prime Minister Takaichi Sanae is still focusing on discussing whether to reduce the consumption tax on food to zero, which means that the ruling party has basically shelved the potential proposal to reduce the tax rate slightly to 1%; the latter is easier for retailers to implement. The Japanese ruling party continues to discuss reducing the consumption tax on food from the current 8% to 0%, essentially using fiscal tax cuts to offset the pressure of living costs, boost residents' actual purchasing power and consumer confidence. For the long-term Japanese government bond market, which has repeatedly hit record high yields this year, the real risk is not whether to set the tax rate at 0% or 1% technically, but the credibility of the fiscal system and the growing expectations of the Japanese government bond market supply. If the food consumption tax is reduced to zero, a forecast data from the Japanese Ministry of Finance shows that it will result in an annual tax revenue loss of about 5 trillion yen. If the food consumption tax is reduced to zero, investors will demand higher term premiums, thereby pushing up long-term Japanese government bonds with maturities of 10 years and above again. The increase in yields of long-term Japanese government bonds may indirectly cause significant negative disturbances in the global stock market dominated by the AI super bull market. In short, if Japan's food tax is reduced to zero with credible financing arrangements, it is a favorable situation of "consumption stimulus + stock market re-inflation"; if there is a lack of funding sources, it may evolve into a "Japanese bond sell-off + global term premium rise" black swan-level risk event, and then cause discount rate disturbances to popular AI technology stocks and high valuation risky assets globally. Takaichi Sanae's government's fiscal easing inclination once again stirs up global financial markets "From the discussion scene I just heard, the focus is still on the zero tax rate," said Yamaji Hiroo, chairman of the Liberal Democratic Party's Tax Investigation Subcommittee, after a meeting with reporters on Monday. "There is no talk of 1%." During the February election campaign, the Japanese ruling party promised to speed up discussions on the significant issue of suspending the collection of the consumption tax on food for two years, with the goal of ultimately implementing it. "Many participants emphasized the importance of fulfilling this promise," Yamaji said. His latest remarks indicate that although there are concerns about the time it would take for retailers to update their cash registers and accounting systems, the ruling party may be more inclined to build consensus around a comprehensive suspension of the tax. These concerns have sparked intense debates within a bipartisan policy group, with some participants proposing a reduction to 1%, believing it is a more realistic alternative as it requires fewer changes. Whichever measure is taken, it may once again cause major concerns among global investors, namely that Takaichi's government is too loose in national fiscal expenditures. According to data estimated by the Japanese Ministry of Finance, reducing the food consumption tax to zero could result in an annual tax revenue loss of about 5 trillion yen (approximately $310 billion). Takaichi's government recently reiterated its support for the initial election proposal. Earlier this month, when she was questioned in parliament about the implementation of the food zero tax rate, she stated that she still strongly committed to fulfilling her election promise. Yamaji said that Monday's crucial meeting showed significant differences among participants on whether to implement and how to implement the measure, highlighting additional challenges. He emphasized that some ruling party members are calling for the introduction of refundable tax credits to be accelerated, while others are urging support for agriculture, fisheries, and catering businesses, as these sectors could be severely affected if the tax is actually suspended. If Takaichi's fiscal easing leads to an uncontrollable rise in Japanese government bond yields, global stock and bond markets will once again face an impact from Japanese yield shocks The Japanese ruling party continues to discuss reducing the consumption tax on food from the current 8% to 0%, essentially using fiscal tax cuts to offset the pressure of living costs, boost residents' actual purchasing power and consumer confidence. If the food tax rate is reduced to zero for two years, it will improve household disposable income in the short term, benefiting the Japanese domestic demand chain, including retail, food, catering, convenience stores, consumer services, and some tourism-related sectors; this is also why the "Takaichi trade" was able to boost risk appetite in the Japanese stock market before. It is understood that Takaichi Sanae reiterated the commitment to suspend the food tax for two years after winning the election, and stated that she would not use large-scale new debt issuance to achieve it; the market at that time was betting on fiscal stimulus benefiting stock assets while also alert to unclear sources of funding causing bond yield rebound. For the Japanese government bond market, the real risk is not whether to set the tax rate at 0% or 1% technically, but the credibility of the fiscal system and supply expectations. In the record-breaking 122 trillion yen budget for the Japanese fiscal year 2026, about a quarter relies on government debt issuance, about 22% comes from consumption tax; suspending the 8% food tax will result in an annual loss of about 5 trillion yen in revenue, while reducing it to 1% may also result in an annual loss of about 4 trillion yen. Therefore, if the government cannot clearly explain the source of funding, investors will demand higher term premiums, especially for medium and long-term and ultra-long-term Japanese government bonds that may come under pressure more easily. The previous tax reduction commitment by Takaichi has already caused tension in the bond market. Earlier this year, the yield on 10-year Japanese government bonds jumped a record 18.5 basis points to 2.380% in two days, setting a 27-year high; a research report recently released by Invesco pointed out that the yield on 10-year Japanese government bonds surged from 2.18% to 2.35% in just a few days, showing that bond investors are highly sensitive to Takaichi Sanae's government's combination of "tax cuts + increased spending". Under mild circumstances, Japanese tax cuts will enhance Japanese domestic demand, raise nominal growth expectations, along with expectations of corporate governance reform, AI semiconductor capital expenditure expansion, temporary stabilization of the Japanese yen, and may continue to support Japanese stocks and spillover into Asian risk assets; however, fiscal sustainability concerns may trigger further weakness in the Japanese yen, push up import prices, and dilute the positive effects of tax cuts on households. Investors should be aware that in an extreme negative scenario, if Takaichi Sanae's tax reduction policy is seen by the market as a lack of fiscal discipline and a lack of credible sources of funding, rising Japanese bond yields, a further depreciation of the Japanese yen, a rebound in import inflation, may force the Bank of Japan to tighten more or lean more hawkish, and greatly raise global long-term bond yields, especially a significant increase in long-term US Treasury bond yields, and a sharp rise in yields on 10-year and above US Treasury bonds, which may bring significant negative disturbances to the global stock market dominated by the AI super bull market.