Last month, the consumption tax in Japan had seen an increase from 8% to 10%. Although the effect was said to be milder than the increase from 5% to 8% in 2014, about 70% companies stocked up their products or materials before the new rate came effective and private consumption was expectedly hit by a blow. This increase has been brought up in 2014 but was postponed twice due to unwillingness of the public.
The authority explained that this increase on tax will help with the national debt. But on the other side of the balance are the drop of consumption and decline in real income, albeit the anticipated milder impact. Indeed, there has been an increase in wages in September, so was the private consumption in that month. However, this offers only a temporary relief as most of the companies surveyed plan to keep the same wage level as before. Some companies plan to reduce the workforce or even lower the payroll wages.
Most services and goods are now subjected to the 10% tax, including some public services such as water, gas and electricity supplies. It is estimated that this tax hike should bring in 5.7 trillion yen (approx. 47 billion euro) to the government. According to the government planning, this income from tax will be used to cover social security expenses. Basic preschool education and care have been made free of charge since 1st October. Subsidies to the retired elderly group are said to be increased.
Considering the negative impact on the low-income population, some items are kept under the 8% cap, including fresh produce, vegetables, rice, meat, fish, food delivery and paper-based news subscriptions. In addition, the government did issue provisional policies offering a total of 2.3 trillion yen (approx. 19 billion euro) to small businesses and individuals. Non-cash payments are particularly encouraged in this relief measure, because extra 2% in value will be rewarded to consumers to ease out the increase in tax. The businesses will be subsidised by the government on this 2% value. To boost the economy, buying properties, getting housing mortgages and car purchases are also included in subsidized category.
One could compare this tax increase with the VAT increase in the Netherlands at the beginning of 2019, when most of the goods and services would be levied with 9% of VAT instead of 6%, except some basic consumptions remained in 6% category. In the case of the Japanese economy, the issue of aging and shrinking population is a difficult one to overcome than balancing the increase of tax burdens. More taxes generally lead to less hiring and low consumptions, which will create a dead loop to hinder the recovery of the economy. Japan is the world third-longest economy, keeping it stably growing is both important and challenging.
Global Connect Admin B.V. | Xuan Hao