On October 15, Japanese Prime Minister Shinzo Abe said at a temporary cabinet meeting that he plans to increase the consumption tax rate from the current 8% to 10% in October next year. This is the rate that Japan will raise again after raising the consumption tax rate from 5% to 8% in April 2014.
Raise taxes to support social security
At the interim cabinet meeting held on the same day, Abe officially announced the increase of the consumption tax rate, and asked the relevant departments to propose specific countermeasures to control the negative impact of the increase in the consumption tax rate on the economy.
For Japan’s third increase in consumption tax since 1989, Abe said: “The increase in taxes is for economic recovery and fiscal sounding.”
Japan’s Kyodo News said the tax increase is expected to bring in 5.6 trillion yen (about 346.8 billion yuan) in taxes. The new tax will be used preferentially for medical and nursing expenses that increase with the aging of the population, support for parenting costs, and expansion of free care and free education. It is expected that after the increase of the consumption tax, after deducting about 4 trillion yen of government loans, about 1 trillion yen will be allocated to promote the “generational social security” for medical care and long-term care.
According to the “Yomiuri Shimbun” report, Japan’s social insurance is mainly centered on annuities and medical care. Compared with other countries, it is relatively insufficient in terms of schoolchildren and family-oriented payment. The new system of “generational social security”, which is currently being promoted by Japan, includes diversified levels such as free early childhood education, tuition and fees for higher education, and long-term care for the elderly. The subsidy for the elderly is extended to all age groups. Therefore, the Abe government decided to supplement the cost of the social security system reform with consumption tax.
In addition, Shinzo Abe also said that after raising the consumption tax, half of the tax will be used to subsidize the cost of education.
The Japanese government has implemented the “social security and tax system reform” since 2012 and has decided to raise the consumption tax to 10% in stages. But since then, the parties have doubts about the impact of this decision on the economy. After the consumption tax was raised to 8% in 2014, it was originally planned to increase the tax rate to 10% in October 2015, but this process was pushed back.
Negative effects of economic stimulus
In order to avoid the upward adjustment of the consumption tax to hinder economic development, the Japanese government plans to introduce a number of economic stimulus measures in the formulation of the government budget and the implementation of the tax reform since 2019.
Japanese Chief Cabinet Secretary Yi Yiwei said at a press conference after the cabinet meeting that Abe said at the meeting that in order to raise the consumption tax rate, all policies will be mobilized to cope with the economy so as not to affect the economy.
Reuters reported that Abe said in a cabinet meeting that he would consider tax incentives for the procurement of durable goods and take measures to help small businesses cope with the burden of rising taxes. Abe said that it will introduce subsidies in the automotive and housing sectors that are affected by the increase in consumption tax. In addition, tax cuts and subsidies for some daily necessities are also measures that the Japanese government is exploring.
Japanese Finance Minister Taro Aso also said that the government must take the necessary measures to reduce the impact of tax increases.
According to Japanese NHK TV and Japan’s Fuji News Network reported on October 16, the Japanese government is worried that the sales of small and medium-sized retail stores will decline due to the increase in consumption tax, so consider introducing a “non-cash payment point return” system. According to this system, customers who use a non-cash payment method such as a credit card can earn 2% of the purchased amount, which can be used at the time of the next purchase. The expenses incurred by the merchant in returning the points are subsidized by the government. For some foods, beverages, and newspapers, the “tax reduction rate system” will be implemented. In the future, when purchasing specific products in supermarkets and choosing to take a take-away, the consumption tax is 8%; if it is consumed in the store, the consumption tax is 10%. Calling a takeaway or taking a hamburger home outside the fast food restaurant is within the scope of the light tax rate.
In addition, considering the increase in consumption tax, sales of high-priced goods such as housing and automobiles may fall into stagnation, and the government is also considering introducing relevant stimulus measures. In terms of housing, the Japanese government is considering expanding the scope of implementation of the “housing loan tax reduction” policy, and reducing the income tax burden according to the home loan balance of buyers. The Japanese government originally planned to issue a “purchase subsidy” of up to 500,000 yen to people with an annual income of less than 7.75 million yen when the consumption tax is raised to 10%. The scope of application of this subsidy policy may be further expanded in the future. In terms of automobiles, the Japanese government is considering reducing the various tax burdens when buying cars, and further promoting the “eco-car tax reduction” measures for low-burning vehicles.
In order to prevent consumers from thinking that they do not have to bear the consumption tax, the current Japanese law stipulates that merchants must not implement the promotion in the name of “returning consumption tax”. In the future, the Japanese government may consider introducing new measures to lift this restriction in some form.
In addition, the outside world is worried that travel to Japan will become more expensive. At present, the Japanese government is studying to relax tax exemption measures for tourists.
Subsequent impact remains to be seen
The current recovery of the Japanese economy is relatively satisfactory. Coupled with the stimulating effect of the 2020 Tokyo Olympics, it is a good time to adjust the consumption tax. However, the impact of the last adjustment of the consumption tax has not completely subsided, and the Japanese people still have doubts.
After Japan raised its consumption tax to 8% in April 2014, Japan released 5.5 trillion yen in funds to support the economy. However, personal consumption in Japan is still declining. It took Japan four years to bring personal expenses back to the October-December level of 2013. In the buffer period of two delays to increase the tax rate to 10%, Japan has introduced a number of countermeasures to maintain the personal consumption of the people.
Although the government said it will launch a series of stimulus measures to maintain the economy, less than 40% of the Japanese media polls in September favored a higher consumption tax on the existing basis.
According to the survey, after the increase in consumption tax, Japan’s disposable income per month (family (two labors) will fall by more than 9,000 yen (about 550 yuan). Moreover, the burden of living at all levels will increase to varying degrees, and the cost of living for the elderly and the poor will be greatly increased.
The Japanese retail industry will be the first to be affected by the increase in consumption tax, and the impact on luxury prices is also large. Some people also believe that the increase in consumption tax will affect Japanese real estate prices.
The estimates released by the Japan Automobile Industry Association at the end of September show that the increase in consumption tax, which is expected to be implemented in October next year, may result in a reduction of 300,000 annual sales of new domestic cars and an unemployment of 90,000 people. When the previous two consumption taxes were raised, domestic demand for automobiles fell. Akio Toyoda, president of the Japan Automobile Industry Association, expressed concern about the future development of the Japanese auto industry and stressed that it is necessary for the Abe government to completely adjust the auto tax system in order to stimulate demand.
In early October, the International Monetary Fund warned that Japan’s impact on raising the consumption tax will continue throughout 2019 and will have a negative impact on consumption and economic growth by 2020.
However, Bank of Japan Governor Haruhiko Kuroda believes that the impact of the consumption tax hike on the Japanese economy next year will be “a much smaller” than the previous one. He said that the Bank of Japan has clear forward-looking guidance and will consider the impact of uncertainty on the economy. The Bank of Japan will continue to implement policies to maintain prices. He is also optimistic that he will use interest rate adjustments to signal a withdrawal from easing.
Japanese Finance Minister Taro Aso said that Japan’s domestic economy is preparing for a tax hike, and Japan’s economic fundamentals are solid. It is difficult to believe that a Lehman-level crisis will occur.
The Japanese cabinet said that Japan’s budget for the 2019-2020 fiscal year has taken into account the response measures. At present, some people think that since the upward adjustment of the consumption tax has been postponed twice, the third extension is not entirely impossible, especially the impact of trade friction on the economy is still uncertain.