The Journal The Authority on Global Business in Japan

Japan’s consumption tax, which increased from eight to 10 percent this month, is bringing back some painful memories.

The creation of the tax and subsequent increases have doomed prime ministers and severely dented the economy in the past. So, consumers, businesses, and the government have been scurrying to prepare for the twice-delayed move—all the while wondering whether this time would be different.

PREEMPTIVE PURCHASE
Takao Teramoto, 27, had been planning to look for a new apart­ment in the fall but raced to find a place in August. “Given that I have to buy all the appliances, which will cost over ¥500,000 ($4,690), a two-percentage-point hike is huge,” he said.

Teramoto is not the only one hurrying to the stores. Bic Camera Inc., a major electronics retailer, said big appliances such as televisions, refrigerators, and washing machines have been selling well this summer. Sales of OLED TVs, which go for ¥200,000–300,000 each, have doubled from last year.

“After getting bonuses, our customers tend to buy big things, probably because they have the hike on their minds,” a Bic Camera representative said.

PLAYING WITH PRICE
Businesses are preparing in their own ways—one of which is to change their price tags.

Mos Food Services, Inc., which runs the Mos Burger chain of fast-food joints, said in September that it would likely change its menus to show the prices without tax. Making the food look cheaper could help soften the blow, and the tax-exclusive pricing will also make it easier to manage a quirk of Japan’s system.

Until now, the consumption tax has been applied across the board, but certain goods and services will be exempt from October’s increase. Takeout food, for instance, will still be subject to eight percent tax, while restaurant customers who eat in will pay 10 percent. Rather than displaying different prices for takeout and dining in, Mos Burger is considering showing only the pretax amount.

Casual apparel retailer Shimamura Co., Ltd., on the other hand, said it plans to show both the pretax and tax-inclusive prices on its tags. When the tax was raised from five to eight percent in 2014, the clothier continued to include the levy in its prices for customers’ convenience. But this time, it decided the breakdown was necessary.

Large household appliances have been selling well at Bic Camera.
Photo: Rurika Imahashi

GOVERNMENT SUPPORT
Other companies are taking more drastic measures.

A supermarket operator in the southwestern region of Shikoku reduced its capital to ¥50 million from ¥98 million in May. This classified the retailer as a small or midsize entity, rather than a large one. A representative said the company wanted to take advantage of government support for small or midsize enterprises being introduced in October to cushion the impact of the hike.

This strategy seems to be catching on, even though com­panies risk hurting their credibility. Japanese credit research agency Teikoku Databank said the number of retail businesses that reduced their capital during the January–July 2019 period increased by 63.5 percent from the previous year.

“Retailers are eyeing government support, such as the point reward program [to encourage cashless payments] and sub­sidies for upgrading register systems and installing new regis­ters,” said an analyst at Teikoku Databank, explaining that the trend started to take hold in January.

To avoid a potentially disastrous decline in consumption, the government has planned a host of temporary fiscal measures.

Besides allowing a reduced rate on food, beverages, and newspapers, it will introduce free early-childhood education this fall. The government has also earmarked about ¥2 trillion for the cashless payment rewards, along with shopping vouchers for low-income households and families with young children. Support for home purchases, automobile tax breaks, and public infrastructure improvements are also on the way.

Furthermore, Japanese Prime Minister Shinzo Abe said on July 29 that his government “will be agile and take macro­economic measures without any hesitation,” vowing to avoid an economic downturn.

Abe speaks after his Liberal Democratic Party’s victory in the upper house election on July 21.
Photo: Kosaku Mimura

WHY NOW?
If raising the tax requires this much damage control, why is the government so determined to do it?

Abe’s team argues that the increase is the key to addressing one of the country’s biggest problems: ever-growing public debt, which is now more than double the gross domestic product.

Reflecting the nation’s aging population, social security expenses in fiscal 2018 surpassed ¥32 trillion, accounting for 33.7 percent of the general account expenditure—up from 18.8 percent in 1989. Tax revenue peaked in 1990, forcing the country to rely on government bonds to cover the costs.

But the pressure will only build. Baby boomers, those born between 1947 and 1949, account for 6.4 percent of the popu­lation and will all be over the age of 75 in 2025.

Proponents of raising the consumption tax see it as the most equitable solution. While corporate and individual income tax revenues depend mostly on working generations and fluctuate with the economy, the sales tax is seen as more stable and fairer, since everyone—including seniors—must pay.

Japan’s current tax rate is also far below the Organisation for Economic Co-operation and Development average of 19.3 percent as of January 1. Only Switzerland (7.7 percent) and Canada (five percent) have lower national sales tax rates.

Japan’s National Tax Agency notes that a number of Asian countries had higher rates as of January. These include China (16 percent), the Philippines (12 percent), and Indonesia (10 percent). Taiwan (five percent) and Singapore (seven percent) have rates below Japan’s.

While the tax hike will not immediately fix Japan’s public finances, some economists estimate it will begin contributing to fiscal rehabilitation in 2021, gradually resolving the debt problem. Yet, the government conceded at the end of July that its primary balance will still be in the red in 2025, when it had been aiming for a long-awaited surplus.

FUTURE PROSPECTS
The key question is how the economy will fare after the tax hits 10 percent.

History suggests Abe and the country may be in for a rough ride. In 1989, the government of Prime Minister Noboru Takeshita introduced the initial three-percent consumption tax despite howls of opposition. Months later, he was forced to resign, partly due to a separate scandal.

After Prime Minister Ryutaro Hashimoto’s government raised the levy to five percent in 1997, the country suffered a serious economic downturn, intertwined with a financial crisis. Hashimoto’s Liberal Democratic Party lost the upper house election in 1998 and he resigned to take responsibility.

When Abe raised the tax to eight percent in 2014, Japan entered a recession—though the government did not recognize it and the prime minister survived politically. Now, one worry is that, as in 2014, a surge in consumption before this October’s increase will result in a steep drop-off afterward.

Despite the brisk sales at Bic Camera, the Teikoku Databank survey in June found that nearly half of Japan’s companies said there had not been—and would not be—any last-minute rush. Only 30 percent said they felt or expected a demand spurt before October.

“It is most likely that last-minute demand this time will be smaller than in 2014,” Taro Saito, director of economic research at NLI Research Institute, wrote in a report in July. He cited the smaller increase: two percent rather than three.

BRACE FOR IMPACT
Some experts argue that, either way, the tax increase will hit Japan harder than the government is letting on, and that additional measures will be needed to offset the effects.

Takuji Aida, chief economist at financial services company Société Générale S.A., argues that Japan has been stuck with sluggish domestic demand since the 2014 tax increase as businesses have been in saving mode. “Companies laid people off [after the last hike] and continue to avoid borrowing money,” Aida said, calling for further fiscal steps to spur corporate investment. “Otherwise, Japan cannot get out of the deflation cycle.”

Aida suggested debt should not be the focus for now, because revenue will only rise when the economy improves. “It is true Japan should push its fiscal restructuring forward,” he said. “But the government’s approach is in question: Do we need to restructure even if it means bringing an economic downturn?”

All debates aside, there is always someone who finds an opportunity when the going gets tough.

In June, consumer electronics maker Casio Computer Co., Ltd., released a new calculator that can quickly calcu­late either eight or 10 percent tax on a price. “Sales of the calculator have exceeded our expectations,” said a company spokesperson, explaining it has been a hit with food wholesalers and restaurateurs who will need to add up different rates.