Japan has the twin problems of an aging population and persistent low inflation. In order to tackle these problems (in part, at least) the nation decided to increase the tax take from discretionary spending by raising the sales tax from five percent to ten percent. The rise to 10% was due to come in back in 2015 after a hike to 8% in April of the previous year, but was delayed due to fears of it causing an economic slowdown in Japan’s domestic economy in the prevailing global economic climate of the times. Critics of the move would point out that the same economic headwinds persist today, of course.
The increased tax will increase the funds that the government has available to deal with social security costs related to its aging population and it will cause a rise in inflation whilst the hike works its way through the system.
The new sales tax is not being applied across the board with food and (non-alcoholic) drink purchases, for example, remaining at the old rate of 8% in a bid to ensure that the new tax’s impact is mitigated for the poorest families in Japan, but it does not extend to all essential purchases and has come in for criticism for its scope and supposed complexity (for retailers). In some cases, consumers making (certain) transactions at small retailer will be eligible for a 5% rebate – larger than the new take hike of 2%! Japan is a slow adopter of electronic payment systems and the move is intended to boost take-up in Japan’s cash-reliant economy.
Part of the increased revenue (possibly as much as half) has been earmarked to provide free childcare schemes, with funding also promised for social welfare spending.
Inflation in the Japanese economy is still very weak and indeed it fell to just 0.3% in August (year-on-year), down from 0.5% in July.