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Economy

Get ready for tax hike, Abe prods skeptical businesses

Japanese prime minister fears chaotic rollout, as preparations remain slow

A separate tax rate for food and beverages could cause confusion in Japan's supermarkets if they are not prepared by next October.
A separate tax rate for food and beverages could cause confusion in Japan's supermarkets if they are not prepared by next October.   © Reuters

TOKYO -- Frustrated with businesses' inaction ahead of a planned consumption tax hike next year, Prime Minister Shinzo Abe has spelled out in unequivocal terms that they must get moving on preparations to ensure a smooth start.

Abe told an emergency cabinet meeting Monday that the government plans "to raise the consumption tax in October 2019 from 8% to 10% as stipulated by law," eliminating any suspicion about the tax hike.

The two past postponements of a tax hike were fueling the public skepticism. But with the tax scheduled to go up in less than a year, concerns began to spread among government officials that delayed preparations could lead to last-minute confusion, casting a pall over the economy.

The government and the ruling coalition will now try to work out measures to blunt the impact, such as cashback rewards for consumers. To prevent a repeat of the 2014 hike, which caused a rush of demand and an following spending slump, guidelines will be drawn up to allow businesses to flexibly set prices.

Abe had been puzzled by the lack of progress. "Why won't they believe me?" Abe asked his aides recently, as repeated warnings about the upcoming tax increase failed to sink in.

The cabinet declared its intent to raise the tax hike in an economic and fiscal policy blueprint issued in June, writing that initial budgets for the fiscal years 2019 and 2020 would contain countermeasures. Abe's plan to boost social-security initiatives with fresh tax revenue from the increase was also a focal point of last year's parliamentary lower-house elections.

Yet the public appears only half-convinced. If the tax increase could be postponed twice, many figure, why not a third time?

The consumption tax was originally set to be raised to 10% in October 2015, but the deadline was pushed to April 2017 on economic concerns. After Japan hosted the Group of Seven summit in May 2016, Abe cited risks to the global economy that has led to "a new conclusion at odds with previous commitments," putting off the hike once more.

This time preparations could be particularly complicated because of a plan to keep the tax rate at 8% for food and beverage products, except for alcoholic beverages and service at eateries. Businesses will need checkout systems and cash registers capable of handling the two different rates. Yet about 80% of small and midsize businesses have not begun getting ready for the change, according to a survey by the Japan Chamber of Commerce and Industry.

The question of when the 8% rate will apply also looks likely to cause confusion and require thorough employee training, among other preparations. For instance, food and beverages bought at convenience stores and supermarkets would be subject to the lower rate unless eaten at dining areas in those stores, which would be considered "dining out" and taxed at 10%. On the flip side, carryout purchases at restaurants would not be considered dining out and would therefore fall into the 8% category.

If all businesses raise prices on the same day, the impact could be profound. The government hopes to let businesses adopt the hike more flexibly to spread out the pain.

When it raised the consumption tax to the current 8% from 5% in 2014, Japan unleashed 5.5 trillion yen ($49.2 billion, at current rates) in countermeasures to cushion the blow to the economy. But individual consumption for that April-June period nevertheless slowed by an annualized 17.2% from the previous quarter on a real basis, excluding the effects of goods prices. It took nearly four years for spending to regain the level of the October-December 2013 quarter, before the rush of demand that preceded the tax increase.

Next year's tax boost is expected to cause less of a shock, however, because it is smaller and measures such as the reduced food-and-drink tax rate are seen softening the impact. The burden on households is expected to total 2.2 trillion yen, far below the 8 trillion yen from the 2014 change, according to trial calculations by the Bank of Japan.

A key policy legacy that has remained elusive for Abe is defeating deflation. Raising the consumption tax is a major challenge to that goal. Without businesses and the markets preparing for higher taxes, economic uncertainty could derail its anti-deflation effort.

But the government has left itself room to delay the hike a third time. On Monday, Chief Cabinet Secretary Yoshihide Suga said the plan would go through "barring an event on the scale of the Lehman shock" -- referring to the 2008 financial crisis triggered by the collapse of Lehman Brothers -- adding that a decision would be made "while observing the situation."

With the global economy flashing signs of a possible downturn amid the U.S.-China trade war, the tax increase could be put off in the event of a serious economic retreat before next summer's parliamentary upper house elections.

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