To Increase or Not Increase: That's Japan’s Consumption Tax Question

Robert Gallagher
May 16, 2016

The Proposed Changes to Japan’s Consumption Tax

In Japan, consumption tax is paid by consumers when they purchase goods and services. Presently, Japan’s consumption tax rate is 8%. On March 29, 2016, the Japanese Diet (National Parliament) approved the Fiscal Year 2016 Budget, including various tax reforms. The reforms include an increase in the consumption tax standard rate from 8% to 10% and the introduction of a reduced rate of 8%, effective April 1, 2017.

The reduced rate of 8% will apply to the sale of food and beverages. “Food” will be defined under the Japanese Food Labelling Law. The provision of dining or restaurant services and the sale of alcoholic beverages are excluded, and will remain taxable at the standard rate.

Sales of newspapers under a subscription agreement are also eligible for the reduced rate of 8%. Only certain titles of newspapers which feature information on general society such as politics, economics, and culture, and are issued at least twice a week, are eligible. All other publications that do not meet these criteria will be subject to the standard rate of 10%.

Prior Rate Increases

A 3% consumption tax was introduced in Japan in 1989. The rate was increased to 5% in 1997 and to 8% in 2014. In 1997, the rate increase kicked a recovering economy back into recession. In the second quarter of 1997 alone, Japan’s national Gross Domestic Product shrank by 3.9%. In 2014, the rate increase resulted in a deep slump in consumer spending.

Should Japan Increase its Consumption Tax Rate?

Currently, there exists a great difference of opinion on whether Japan should continue its plan to increase the consumption tax standard rate from 8% to 10% in April 2017.

In late March 2016, Prime Minister Shinzo Abe reaffirmed his commitment to the rate increase, stating that he would press ahead unless there was a natural disaster or economic event on the scale of the global financial crisis of 2007-2008. In mid-April 2016, just weeks after Prime Minister Abe made this statement, a series of powerful earthquakes occurred in Japan. The Government plans to assess the damage in the coming weeks, but significant detrimental effects on industrial production and foreign tourism are expected. After a detailed assessment has been performed, Prime Minister Abe will decide if the latest earthquakes will lead to a delay in the tax increase.

Various international financial organizations have publically stated their support of an increase in Japan’s consumption tax rate. The International Monetary Fund (IMF) stated that Japan should proceed with the increase in order to secure funds for further economic stimulus and to convince other nations that it is committed to reducing its national debt. The Organization for Economic Cooperation and Development (OECD) recently suggested that Japan should raise the consumption tax rate all the way to 15% at some point in the future.

There are, however, notable opponents to the planned rate increase to Japan’s consumption tax. Nobel laureate economists Paul Krugman and Joseph Stiglitz have publically stated their belief that Japan should delay the rate increase. Krugman, who met with Prime Minister Abe to discuss the issue, stated that fiscal policy should be used to reinforce monetary easing, and that Japan has not yet emerged from a deflationary period. Additionally, recent polls have estimated that 60% to 65% of Japanese citizens favor delaying the rate increase.

Should there be a delay when it comes to increasing Japan’s consumption tax? Stay with Sovos and sign up to our blog for more developments!

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Robert Gallagher

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