Japan Consumption Tax rise to 8% 1 April 2014

Fri 28th Mar 2014

One of the most crucial elements of Japan’s latest economic reforms, a rise in Consumption Tax from 5% to 8%, is set to go ahead on 1 April 2014. There will be a second increase in October 2015 to 10% if the economy remains in recovery.

Consumption Tax was first introduced in Japan in 1989 at 3%. It rose to 5% in 1997, a hugely unpopular move which helped bring the government of the day down.

Abenomics Japanese revival policies

The increase in Japan’s sales tax (VAT) rate has long been discussed as its population rapidly ages leading to a ballooning welfare bill, exacerbating an already huge debt to GDP ratio. This rise was agreed back in 2012, but was conditional upon a sharp improvement in growth.

The newly elected premier, Shinzo Abe, launched a huge fiscal expansion plan at the end of 2012 to break the deflationary cycle which has held back Japan since the 1980’s property crash. This has proved highly controversial amongst economists who fear inflation, but it has so far been very successful. Growth has hit 4% on GDP in a number of recent quarters. This prompted the government to press ahead with the rise in Consumption Tax to 8%, as planned.

However, the Japanese economy remains fragile, and growth has slowed again recently. In particular exports have not been benefiting from a falling yen. This has spurred the government to schedule a 5.5 trillion yen stimulus injection to help keep the prices of basic foodstuffs low at the time of the April tax rise, and so help prevent a drop off in consumer demand. The government has also held out the prospect of reducing the Japanese corporation tax rate – second only to the US’ in the OECD club of rich countries.

A second reduced VAT rate

In order to see through the second Consumption Tax rise to 10% in 2015, the government will possibly have to introduce a second, reduced VAT rate. This could cover basic foods, public transport and domestic energy. Politically, this policy would also dampen the criticism that VAT-type taxes are regressive since all of the population, rich or poor, must buy for the basics. A decision on this proposal will be taken in the spring of 2015.