Hike in Consumption Tax and its Effect on Cost of Living in Japan

The Japanese economy has been shrinking and it showed negative growth this year for the third consecutive year. One of the reasons attributed to this phenomenon is reduced spending in the market by consumers. Government authorities blame this on the global economy, which is sluggish and has been uncertain for the past many years. Since the Lehman collapse, the global economy perspectives have never been promising. In an effort to bring up the Japanese economy, the Government has devalued the Yen manually, which helped the exporters to make more profit. How these measures helped the economy is still under debate as there should always be a trade-off between the imports and exports.

It is a fact that ever since the Government hiked the consumption tax from 5 percent to 8 percent, many people have started putting control on their spending. This control over spending in the market has created less money flow from consumers the direct impact of which has been visible in the form of shrinking the domestic business. People are more cautious now as they expect one more hike in the consumption tax, which is due on April 2017. The Government had delayed the hike, which was supposed to get implemented in October 2015. The consumption tax is 8 percent now, which will be raised to 10 percent. To compensate the effects of the tax hike, Government has been putting pressure on companies to increase the wages of employees. Many Japanese companies have taken a conservative approach to the increase in salary. Salary has not been increased up to the expectation of economic  policy makers.

The practical effects of consumption tax hike is like this;

Prior to 2014 April, if a consumer buys a furniture having a displayed price of 100,000 Yen, the consumer had to pay 105,000 Yen.
Now in 2016, if that consumer buys that furniture having a displayed price of 105,000 Yen, then he has to pay 108,000 Yen.
Expected after April 2017: 110,000 Yen for that same furniture.

Effectively, there would be an increase of 5,000 Yen for that same furniture. But in practical things won’t work that simple. The manufacturer has to increase the price of that item since he has to increase the salary of his employees. The shop-owner needs to increase the price of the furniture as he also needs to increase the salary of his employees. Overall, the buyer need may need to pay something around 115,000 Yen, which is an increase of 10,000 Yen.

For example, an average person, who used to spend something around 300,000 Yen per month in 2014, needs to pay 330,000 Yen month for living. His salary might have increased by around 20,000 Yen during these periods. For him, there is only one way to adjust his earnings-spending-savings, that is reducing the spending. The Government needs to focus on real causes of economic growth such as shrinking population and increasing the ageing population.      

When Japanese Government increased the consumption tax from 5 percent to 8 percent in 2014 April 1, it was the first hike after seventeen years. The second phase of the hike from 8 percent was expected in October 2015 but delayed. The Government stepped up the tax to cover the rising social welfare costs, which is attributed to the ageing population in the country. Japan has one of the lowest birth rates in the world and the recent population survey revealed that Japanese population has decreased. Japan has the world’s highest ratio of elderly to young people, a fact that raises serious concern about the country’s economic growth.

Author: Jayaprakash

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