Ahead of a snap election in Japan, Prime Minister Sanae Takaichi has pledged to scrap a tax on food, but a lack of clear funding is unnerving markets and voters. As she announced the dissolution of parliament last week ahead of a February 8 vote, the ultra-conservative leader promised to exempt food products from an eight percent consumption tax for two years in response to soaring living costs. It’s a measure also strongly supported by opposition parties.But her comments immediately rattled the bond market, worried by the prospect of fiscal slippage, with yields on 30- and 40-year Japanese bonds jumping to record highs. That evoked fears of a repeat of the turmoil seen in Britain in 2022 when Prime Minister Liz Truss unveiled massive unfunded tax cuts that triggered a sharp spike in bond yields — eventually leading to her resignation. Takaichi is far from that point: markets calmed in the following days, and Japan’s modest budget deficit allows it to absorb shocks. “Japan is able to secure financing without relying on foreign money” thanks to its vast domestic savings, said Hideo Kumano, an economist at Dai-ichi Life. And unlike the UK at the time, it posts a sizeable current account surplus, he told AFP. Takaichi has repeatedly said Japan will post a primary budget surplus, which excludes the cost of servicing debts, for the first time in 28 years. A “Truss shock” is only one risk scenario, Kumano said, although the underlying danger “has been rising”.-‘Fiscal sustainability’-The tax break is expected to cost around 5 trillion yen ($32.8 billion) per year, but Takaichi has outlined no funding source or offsetting measures. Markets were already anxious over a colossal $135 billion stimulus package adopted at the end of 2025.That aims to support households through energy subsidies, even at the risk of inflating Japan’s gargantuan national debt, which is expected to exceed 230 percent of GDP in the fiscal year 2025-26.Under pressure, Takaichi defended her measure on Monday, saying she wanted to set up a public committee to discuss the issue, insisting she was paying “considerable attention to fiscal sustainability”.But a bigger majority in parliament could give her coalition free rein for expansionary fiscal policy. In the event of a landslide victory, UBS experts warned that Takaichi’s policies could even exceed market expectations and that renewed anxiety could push bond yields back up.  In that case, “Takaichi may be forced to offset some of the expansionary fiscal measures announced recently with tightening elsewhere”, noted Marcel Thieliant, an economist at Capital Economics. The government could also opt to issue shorter-maturity debt, and, as a last resort, the Bank of Japan (BoJ) “could step up its bond purchases yet again”, he added. But it’s complicated. Any intervention in the bond market risks triggering a depreciation of the yen, making imports more expensive and putting further upward pressure on inflation.The foreign exchange market is already jittery. The yen has come under pressure amid renewed concerns over fiscal discipline, before it rebounded amid rumours of a possible joint Japan–US monetary intervention to boost its value. – ‘Election tactic’? -It’s unclear whether the tax break is even a vote-winner, although inflation is a top concern among voters.Consumer prices, excluding fresh food, rose 2.4 percent year-on-year in December.According to a poll published Monday by the Nikkei newspaper, 56 percent of those surveyed believe the promised tax exemption would not be effective against rising prices. “You can’t help wondering whether it’s just an election tactic,” Kanamu Kashima, a 23-year-old student, told AFP. The BoJ itself has slightly raised its inflation forecasts through 2027, pointing to pressure from labour shortages in the ageing country. That might lead to an increase in long-term yields, which adjust to these expectations. In the short term, Dai-ichi Life’s Kumano warned that structural reforms are being sidestepped. “A question must be asked about the real nature of the tax cut and… if it alone would do the job (of restoring the economy),” he said.”These policies are rather short-sighted.”

Presiding over the signing of a major trade deal alongside Indian Prime Minister Narendra Modi on Tuesday, EU chief Ursula von der Leyen broke into a large smile.A diplomatic and economic coup, the EU-India pact comes as a welcome piece of good news for Brussels after a tumultuous few weeks dominated by US threats over Greenland.Addressing a press conference in New Delhi, von der Leyen described it as a tale of “two giants who choose partnership” and “the best answer to global challenges”.In spite of its eye-tickling pollution, the Indian capital must have felt like a breath of fresh air for von der Leyen and European Council president Antonio Costa, who co-led the EU delegation.As they flew away from Brussels over the weekend, the pair left behind a just-defused crisis in transatlantic relations and internal squabbling over another trade deal with South American nations.In New Delhi, authorities rolled out the red carpet for the pair, who were feted as guests of honour at India’s Republic Day parade.Posters emblazoned with their faces adorned lampposts across the city.Costa, whose family hails from Goa, proudly flashed his Indian identity card at a press conference where Modi celebrated him as “the Gandhi of Lisbon”.Meanwhile local media praised von der Leyen’s burgundy and gold brocade outfit — a nod to Indian fashion.It was a far cry from the scorn and threats reserved for Europe by its traditional ally the United States at the World Economic Forum in Davos last week.European officials had been hoping to make progress on Ukraine at the Swiss ski resort — a goal drowned out by US President Donald Trump’s push to wrest control of Greenland from EU member Denmark.- ‘Difficult job’ -Trump made an about-turn after talks with NATO chief Mark Rutte — a change of heart EU officials were keen to credit to Europe’s firm response — and the climbdown took the sting out of an emergency summit called on the Greenland issue.One year into Trump’s second term, Costa said the European Union has “learned how to manage” the ups and downs, and not to “react to each message”.”We need to keep calm and continue to have a polite, respectful relationship,” the council chief told AFP. “At the same time, we need to diversify our relationships”.But few in Europe believe the Greenland crisis was a one-off bump in the road, with the unpredictable US leader at the helm.Maros Sefcovic, the EU’s trade chief, told AFP he scours through newspaper headlines each morning in anticipation of “what else might happen”.”It’s indeed a difficult job,” he quipped.Yet he said the same was true for most other countries, which in turn found renewed appeal in what Europe has to offer: partnership, predictability and stability.India, for one, was left bruised by tariffs slapped on it by the White House over its purchase of Russian oil as New Delhi and Washington were negotiating a — so-far-elusive — trade deal.”The last year has turbocharged the European trade policy,” Sefcovic said.Pushing to reduce its dependencies on the United States and China and lower the cost of US tariffs, the EU was negotiating or looking to open talks with an array of nations including the Philippines, Malaysia, the United Arab Emirates and Australia, he said.- ‘New opportunities’ -By cutting or eliminating tariffs on almost 97 percent of European exports, the deal struck in New Delhi will help ease access to India’s 1.4-billion-people-strong market for cars, wine, pasta and other EU products.But the signing also allowed Brussels to turn the page after a just-sealed pact with South American bloc Mercosur was cast into limbo by a legal challenge in the European parliament.That setback added to rancorous divisions among member states over the deal’s impact on European farmers, who remained deaf to the EU’s arguments and staged months of tractor-mounted protests against the accord.European officials hope the new India deal will also help bring the South Asian giant diplomatically closer to Europe.Neutral on Ukraine, New Delhi has relied on Moscow for key military hardware for decades, but has tried to cut its dependence by diversifying imports and pushing its own domestic manufacturing base.Modi said a security partnership struck alongside the trade deal would provide “new opportunities” for defence companies.While denying a pivot away from Russia, foreign secretary Vikram Misri said India was interested in hosting the joint production of European military kit.Monday’s Republic Day parade featured Russian helicopters and planes, alongside dancers and motorcycle daredevils.But, in perhaps a hint of things to come, it ended with a squad of French-made Rafale fighter jets zooming overhead.