Japan hikes sales taxes to 10 percent after two delays

The tax increase risks further deteriorating consumer spending and tipping Japan’s economy into a recession.

Japan shoppers in a Tokyo supermarket.
Japan's sales tax increase, effective October 1, drove shoppers to spend more in the days leading up to its implementation [File: Yuya Shino/Reuters]

Japan rolled out a twice-delayed increase in the sales tax to 10 percent from eight percent on Tuesday, a move that is seen as critical for fixing the country’s tattered finances but that could tip the economy into recession by dampening consumer sentiment.

The government has already applied measures to mitigate the pain on consumption, mindful of avoiding the effects of the last increase, in 2014, which led to a severe economic downturn.

Television broadcasters showed images of crowds buying items such as wine, cosmetics and jewellery before the increase hit.

“I was a bit worried whether I can buy this at eight percent tax rate, but now I’m relieved that I made it,” a 45-year-old woman told public broadcaster NHK after buying a 70,000-yen ($647) bed at a department store in Tokyo.

When the government raised the tax to eight percent from five percent in April 2014, a last-minute buying spree and a subsequent pullback in demand caused a big downward swing in consumer spending.

The bitter memory led Prime Minister Shinzo Abe to twice delay the increase to 10 percent until October 1. But the higher tax rate will still hit an economy suffering from slowing global demand and bitter trade tensions.

The government and central bank policymakers expect the effect from the two-percentage-point tax hike to be much smaller than that of the previous increase.

To ease the pain on low-income households, some food and non-alcoholic beverages will be exempt from the higher tax rate.

The government has also set aside two trillion yen ($18.49bn) for discounts and shopping vouchers as well as public works spending. Another 300 billion yen ($2.77bn) will be spent on tax breaks for housing and car purchases.

But that may not be enough to boost consumption.

“The reduced tax rate and reward points system may limit the pain to shoppers,” said Koya Miyamae, a senior economist at SMBC Nikko Securities. “Still, consumer sentiment tends to deteriorate before and after a tax hike, which will, in turn, dampen economic activity.”

If the pain proves bigger than expected, the government has said it was ready to deploy additional measures.

“I’ll take the initiative to check the economic situation closely and take additional economic measures flexibly, if necessary,” Economy Minister Yasutoshi Nishimura said on Monday.

Source: Reuters