Japan's consumption tax raised to 10% amid swelling welfare costs

01, Oct. 2019

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TOKYO, Kyodo - Japan's consumption tax rate was raised to 10 percent from 8 percent on Tuesday, after twice being delayed, as the government is struggling to cover ballooning social security costs stemming from the country's aging population and falling birthrate.

The first hike in five years is likely to cause confusion among retailers and consumers as items deemed necessary in daily lives are exempted from the change, resulting in different rates for the tax, under the government's scheme aimed at minimizing its potential negative impact on spending.

The second round of the two-stage consumption tax increase was originally scheduled in October 2015 following the first stage from 5 percent to 8 percent in April 2014.

But the hike had been first postponed to April 2017 and then to this month, because of fears it could dampen consumer spending and hurt the whole economy, as was the case after Japan raised the tax previously.

Prime Minister Shinzo Abe's government has maintained its assessment that Japan's economy is experiencing its longest expansion phase since the end of World War II, noting that domestic demand remains solid.

But there are lingering concerns that the economy may be hard hit by downside risks abroad, including escalating U.S.-China trade tensions.

The government has taken a set of measures, ranging from a reduced tax rate system for food and other daily items to a reward points program for cashless payments, and tax breaks on cars and houses.

Nearly half of the expected additional annual revenue from the tax hike expected to total at 5.7 trillion yen will be used to improve social security programs, centering on free preschool education starting in October.

Some critics have pointed out that it is paradoxical that the government is aiming to achieve fiscal consolidation on the one hand and is boosting public spending on the other hand in an attempt to prop up domestic demand.

Japan continues to issue deficit-covering bonds to pay swelling welfare costs, including public pensions and medical care, making its fiscal health the worst among advanced economies.

Japan saw a surge in demand ahead of the previous hike in 2014 and a plunge afterward, drawing the economy into a slow-growth state.

Deputy Prime Minister and Finance Minister Taro Aso, as well as other senior government officials, have claimed that the government's steps are working effectively and there is no sign that the economy would be dented by the tax increase.

Some economists, however, have said that consumer spending, one of the key components of Japan's gross domestic product, was already sluggish prior to the hike and projected that the country's growth will shrink in the October-December quarter.

Beyond economic implications, social confusion over the two-tiered tax system seems inevitable.

Food and drink except alcohol will continued to be taxed at 8 percent. But non-food daily use items are taxed at 10 percent.

Tax rates also vary depending on where food items are consumed. A meal consumed at a shop or restaurant is taxed at 10 percent, but only 8 percent is applied to take-out food.

Meanwhile, reward points are given to cashless payments for nine months through June 2020. The rebate rates will be 5 percent at small and medium-sized stores and 2 percent at major chain stores, including convenience stores.

The complex scheme is also designed to promote cashless transactions in Japan, which is lagging behind other countries, including China and South Korea, in the domain.

The following is a chronology of major events related to the consumption tax in Japan

April 1989 -- Prime Minister Noboru Takeshita's government introduces a 3 percent consumption tax.

April 1997 -- Prime Minister Ryutaro Hashimoto's government raises the tax rate to 5 percent.

June 2012 -- Then-ruling Democratic Party of Japan, opposition Liberal Democratic Party and New Komeito party agree to raise the tax in stages to 10 percent and implement reforms to cut welfare costs.

April 2014 -- LDP-led government under Prime Minister Shinzo Abe lifts the rate to 8 percent.

November -- Abe delays plans for the additional hike, to 10 percent to April 2017 from October 2015, to safeguard economic growth.

December 2015 -- LDP-Komeito coalition agrees to exempt food and other daily necessities from the planned tax hike.

June 2016 -- Abe says the tax hike will again be postponed to October 2019.

October 2018 -- Abe orders his government to compile measures to mitigate the potential negative impact on the economy from the planned tax hike.

October 1, 2019 -- Government raises the tax rate to 10 percent.

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