Despite concerns that increasing sales tax would have an adverse impact on the domestic economy, Japan has stuck to its earlier announcement of increasing consumption tax on goods for the first time in the last five years. The decision had been delayed for more than once for a multitude of reasons.
The Japanese government increased sales tax in the country across the board to 10 per cent from 8 per cent and it will be applicable for almost all goods and services in the country even though most of the food products would be exempt from the hike.
Domestic spending had been hit the last time that the third largest economy of the world had increased sales taxes.
Taking a cue from past experience, the government this time however has been careful and has included and implemented certain measures to keep consumption and domestic consumer spending at current levels which include making offering rebates for the use of electronic payments.
The additional revenues that would be generated from the increase is planned to be used for financing social welfare programmes in the by the government such as more spending on pre-school education. The Japanese government also wants ot use the additional funds to repay some of its public debt which has touched huge amounts.
“The government has already pledged about half the revenues to fund free childcare,” said Marcel Thieliant, Japan economist at Capital Economics.
A range of goods and services would come under the regimen of the increased sales tax – from electronics to books and cars.
There will be a 5 per cent discount on all purchases by consumers if they make the payment through electronic modes at some smaller retailers. That would be greater than the 2 per cent tax hike. The aim of introducing this new measure is to try and suppress the impact of the increase in taxes as well as to induce consumers to increase electronic payments because the Japanese economy is very cash reliant.
The rebates are designed “to make the economy more productive”, said Martin Schulz, senior research fellow at the Fujitsu Research Institute.
While there has been strength in the Japanese economy in recent months, the growth outlook is being weighed down because of the tax hike as well as the uncertainty in the global economy.
Business confidence in Japan has suffered because of the ongoing trade war between the United States and China as well as in the slowdown of the Chinese economy. The export dependent Japanese economy has been struggling in recent times with low global demand for its products – including cars and electronic products, and in key markets like China and the US, s
Earlier rises in sales tax had resulted in sharp falls in spending in the country. However economists expect that this time the impact on consumer spending would be of a more modest nature.
“The impact will almost certainly be smaller,” Thieliant said. This assumption was based on data that suggested that there was little hurry among consumers to make purchases before the imposition of the hike for big products like big items like televisions and cars as had been seen in the case of previous hikes. Economists believe that the implementation of the rebate for electronic payments could also have played a role in it.
“The economy is comparatively strong. Next year it may be strong because of [Japan hosting] the Olympics… but it very much depends on the external environment and the trade war,” he said.
(Adapted from BBC.com)