The OECD presented its first economic survey of Japan since January 2024 on Wednesday at the prime minister's office in Tokyo, and the headline finding was the most awkward kind for a host government: the central pillar of Sanae Takaichi's domestic-policy agenda is not cost-effective. The Takaichi cabinet has proposed cutting the consumption tax on food items to zero for two years to cushion households against persistent inflation. Secretary-General Mathias Cormann told Takaichi face-to-face on Tuesday that the OECD viewed the plan as "a blunt and costly response."
Cormann's critique landed alongside the survey's broader projections. Japanese growth is expected to moderate to 0.8 per cent in 2026 from a stronger pace in 2025, dragged by weaker external demand and the impact of the Middle East war on energy prices. Private consumption and investment are forecast to hold up, supported by gradually rising real wages and persistent labour shortages.
On the fiscal side, the picture is worse than the previous administration had projected. Japan is on track to miss its primary-balance target again in fiscal 2026, running a deficit of about ¥7tn in the current fiscal year ending March 2026. Earlier forecasts had pointed to a ¥3.6tn surplus by fiscal 2027; the OECD now expects a ¥0.8tn deficit instead, reflecting the cost of Takaichi's spending plans.
Takaichi, Japan's first female prime minister, took office in October after Shigeru Ishiba's resignation and has built her early agenda around inflation relief and defence spending — a combination that has unsettled bond markets despite the Bank of Japan's cautious normalisation. JGB 10-year yields have ticked higher through April and May.
The OECD recommended that any consumption-tax relief be targeted at lower-income households rather than applied uniformly to food, and urged Tokyo to publish a credible medium-term consolidation path. Cormann praised the government's steps on female labour-force participation and noted that Japanese inflation, while still above the BOJ's target, was beginning to ease.
Takaichi told reporters after Tuesday's meeting that her government would "carefully consider" the OECD's recommendations but defended the food-tax plan as politically necessary, given the squeeze on household budgets ahead of a possible early election.