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Japan Readies Major Sales Tax Hike

October 15, 2018

The increasing costs of supporting an aging population, increased natural disaster costs, and one of the highest debt-to-GDP ratios are all driving Japan to raise its consumption tax to 10% a year from now.

Prime Minister Shinzo Abe is announcing a proposal to raise the national consumption tax in Japan from 8% to 10%. It will go into effect in October 2019.

A major reason for the increased taxes – which amount to a 25% increase relative to the original 8% -- is to handle the ever-increasing costs of taking care of Japan’s aging society. This includes pension coverage, national health insurance, and other expenses associated with the elderly. There is also a plan to increase childcare support across the country.

Another concern for the country is its massive national debt. In 2017, the ratio of General Government Gross Debt to GDP (Gross Development Product) hit a record level of 253%. By comparison, among developed nations Japan was not just number one, it also exceeded the Debt-to-GDP ratio of the next highest developed country on the list, Italy, by almost a factor of two. (Italy closed 2017 with a Debt-to-GDP ratio of 131.8%.) Singapore, at a ratio of 110.6%. was third on the list. The United States, coming in at number four, was 105.4%.

The International Monetary Fund had previously put Japan on notice that it needed to do something about its Debt. IMF Chief Christine Lagarde had said that both the size of the Japanese economy and the population itself were projected to cut back by as much as 25% in the next 40 years. That poses many long-term problems for the economy.

The last tax rise took place in 2014. It was considered a major reason for a dampening in consumer spending then, which in turn created major problems for Japan’s economy. The current tax hike was originally scheduled to take place in 2015 but was pushed back multiple times because of concerns any new one could hurt the economy again.

This time the government is planning to provide tax breaks for buying houses and cars. It also plans a boost for small to medium-sized retail companies by offering rewards for payments via credit cards or other cashless solutions.

Prime Minister Abe's proposed consumption tax increase will be debated with his Cabinet this week.