Landslide election win clears path for Japan's Takaichi to deliver tax cuts

By Leika Kihara and John Geddie

TOKYO, Feb 9 (Reuters) - Japanese Prime Minister Sanae Takaichi renewed a pledge on Monday to cut a sales tax on food, after a historic election win brightened chances for stimulus measures that have rattled financial markets.

Takaichi's ruling Liberal Democratic Party (LDP) romped to victory in Sunday's poll, helped by a pledge to ease household living costs by suspending for two years the tax of 8% on food, a move she has called a "long‑cherished dream".

"Responsible, proactive fiscal policy is at the core of the ... policy transition," Takaichi told a news conference, promising "the earliest date possible" for the tax suspension, while ruling out fresh debt issuance to achieve it.

"We must pull Japan out of excessively tight fiscal policy and a lack of investment."

In an apparent vote of confidence in Takaichi's fiscal policy, stocks swept to all-time peaks, while super-long bonds reversed early weakness. The yen rose after a verbal warning by Japan's top currency diplomat held currency bears in check.

Earlier, investors wary of uncertainty about how Japan, labouring under the developed world's highest debt burden, would fund the proposal, had triggered a selloff in government bonds, pushing the yen towards historic lows against other currencies.

Some analysts had suggested that Takaichi's strong mandate might give her leeway to retreat from the plan, with heavy defeats at the ballot box handed to opposition parties calling for even bolder tax cuts.

CROSS-PARTY DEBATES TO DECIDE TIMETABLE, ALTERNATIVES

Takaichi said cross-party debates on social welfare and taxation would help thrash out a timetable and ways to fund the suspension, as the government considered alternatives such as non-tax revenues and cuts to existing subsidies.

The government would overhaul its approach to planning the budget, she added, so as to smooth long-term funding for corporate investment in growth areas.

In television interviews the previous day as results rolled in, she had said she would move speedily to realise the pledge.

Analysts say Takaichi's stronger grip on power will sideline resistance from fiscal hawks within her own party.

"While there are some within the LDP holding reservations over the idea, the election outcome has heightened the chance of a consumption tax cut," said Ryutaro Kono, chief Japan economist at BNP Paribas.

"The premier has repeatedly said past fiscal policy has been too tight. It's clear she strongly favours overhauling fiscal policy from the current one driven by the finance ministry and fiscal experts within the LDP."

CHALLENGE IS TO HOW TO OFFSET TAX SUSPENSION

Takaichi's challenge is to find revenue to offset the tax suspension, which would cost about 5 trillion yen ($32 billion) a year, or roughly Japan's entire annual budget for education.

Her past hints at tapping non‑tax revenues have drawn attention to Japan's foreign exchange reserves of $1.4 trillion, held largely as ammunition for yen intervention.

But dipping into them too deeply could fuel fears that Japan might sell part of its U.S. Treasury holdings, a prospect in turn likely to unsettle markets and raise concern in Washington.

Prolonged uncertainty over funding risks another bond market sell‑off, analysts warn, with investors already sensitive to Japan's deteriorating fiscal outlook.

A sharp rise in government bond yields would increase the cost of servicing public debt that is roughly twice the size of Japan's economy.

Worries over fiscal sustainability could also trigger further yen weakness, inflating import prices and broader inflation, which would dilute benefits to households from tax cuts.

Takaichi may have won the public's mandate but not yet that of the markets, said Shinichi Ichikawa, a senior fellow at Pictet Asset Management Japan.

"If concern over worsening finances causes unintended yen falls, that could push up food prices via higher import costs. This may hurt her popularity."

($1=156.7500 yen)