Japan delivers long-delayed consumption tax hike

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Train fares have risen following the tax hike

Japan has increased its consumption tax for the first time in five years, bringing the long-delayed policy into effect despite concerns it may knock the economy.

On Tuesday, the country raised its sales tax rate from 8% to 10%.

The new rate applies to nearly all goods and services, though most food will be exempt.

Past sales tax rises in the world’s third largest economy have hit spending.

This time, however, the government has introduced measures, including rebates for certain purchases made using electronic payments, in a bid to offset the blow.

It plans to use the extra revenues to fund social welfare programmes including pre-school education and to pay down its huge public debt load.

“The government has already pledged about half the revenues to fund free childcare,” said Marcel Thieliant, Japan economist at Capital Economics.

What will be covered?

The tax hike applies to most goods and services, from electronics to books and cars. Most food items will remain exempt.

Consumers will be eligible for a 5% rebate on purchases made using electronic payments at some smaller retailers – outstripping the 2% tax rise.

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The move is designed to mitigate the impact of the tax increase, as well as drive up the use of electronic payments in cash-reliant Japan.

Martin Schulz, senior research fellow at the Fujitsu Research Institute, said the rebates are designed “to make the economy more productive”.

How will it impact the economy?

Japan’s economy has performed strongly in recent months but the tax hike – along with uncertainty in the global economy – weigh on its outlook.

The slowdown in China and the trade war with the US have knocked business confidence in Japan, as it also grapples with softer global demand for its exports including electronic equipment and car parts.

Previous sales tax rises have seen spending drop off sharply. But this time around, economists expect the hit will be more modest.

“The impact will almost certainly be smaller,” Mr Thieliant said, as the lead-up to the tax rise saw fewer pre-emptive purchases of big items like televisions and cars than previous hikes. The rebate plan for electronic payments may also have helped.

Mr Schulz agrees spending will fall in the coming months but the economy should recover by the end of the year.

“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.