Japan raises consumption tax to 8 percent to address the nation’s economic problems but British exporters need not worry say financial experts.
Japan raised its consumption tax – the equivalent of VAT – on April 1, the first day of the fiscal year, as part of Prime Minister Shinzo Abe’s broader plan to fix the nation’s economic problems.
The sales tax climbed from 5 percent to 8 percent and was the first such increase in 17 years. A further increase, to 10 percent, is scheduled to be introduced in October 2015.
And while any increase is inevitably unpopular with the public, there is a sense that it was necessary to help to deal with Japan’s massive national debt and financial concerns linked to the nation’s rapidly ageing population and climbing social welfare expenditures.
Consumers went on a spending spree in the weeks running up to the tax rise, with many replacing big ticket items, such as household appliances, and waiting until the last minute to stock up on groceries and perishables.
And while analysts believe that there will inevitably be a contraction in household spending in the coming months, Japan’s economy has been showing positive signs and will recover.
“I think that consumer confidence in the second quarter may be slow, but the expectation is that it will bounce back again,” said Sunil Sood, second secretary for economic affairs at the British Embassy in Tokyo.
“For British firms, this means that their exports to Japan will be slightly more expensive when they reach the shelf, unless shops or suppliers are willing to absorb the tax increase into their supply chain costs,” he said.
It is likely, however, that the tax rise on high-end and luxury goods will be passed on to the consumer.
“I think the message to British firms bringing their products to Japan is that they must not be discouraged, they must continue to pay the long game in doing business here and they have to continue to build relationships,” Sood said.
“Japanese consumers will pay for quality products and services and if a foreign firm is manufacturing something that is unique, of good quality and attractive, then there will be a market for it here,” he said.
“We must remember that Japan is still the third-largest economy in the world and that it’s really not as difficult to do business in Japan as most people tend to think,” he said, adding that that while the national finances might need attention, Japanese consumers are very asset-rich.
In 2013, the Bank of Japan estimated the Japanese public to be worth £10.8 trillion, with around 65 percent of that wealth in the hands of the elderly – who have proved to be keen spenders.
The tax increase is part of Prime Minister Abe’s aggressive economic reform measures, dubbed “Abenomics”, and based on the “three arrows” of fiscal stimulus, monetary easing and structural reforms to the broader economy.
To achieve those aims, the Abe administration has set an annual inflation target of 2 percent, imposed quantitative and qualitative easing, which has lead to the depreciation of the yen and stepped up public investment.
To ease the impact of the tax rise the government enacted a record ¥95.88 trillion budget (£563.79bn) on March 20, up from ¥92.61 trillion in the previous budget. Companies are also under pressure to raise wages to compensate for the rising cost of products.
“Mr. Abe really needs to fix Japan’s public finances because, at present, there is a huge imbalance,” said Martin Schulz, senior economist with the Fujitsu Research Institute. “The budget has been in deficit for the last 20 years or so and while we might not be at a crisis, something does need to be done.”
Analysts also point out that several other countries, including Sweden and Germany, have substantially higher rates of consumption tax and that is accepted as the price they pay for a comprehensive social welfare system.
Article by Julian Ryall, April 2014