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Economy

Japan raises consumption tax to 10%

Country's economy faces major test, as all eyes fall on consumer confidence

The fare table is replaced at the JR Shinjuku station in Tokyo at the turn of midnight Tuesday. (Photo by Kai Fujii) 

TOKYO -- Japan hiked its consumption tax rate to 10% from 8% on Tuesday as the government scrambles to cover the ever-growing cost of supporting the country's aging population.

Tokyo has put extensive measures in place to prevent the move from squeezing consumption too hard, based on past experience. But it remains to be seen how deep an impact Tuesday's hike will have on Japan's economy.

At 1:20 a.m. on Tuesday, after all trains had ended service, the fare tables above railway ticket counters were changed to reflect the new taxes. The tables themselves had already been replaced, and temporary sheets showing prices under the previous 8% tax rate were attached on top. Station staff teamed up to peel off the temporary sheets at nine locations to reveal the new fares.

The new 10% taxes were applied from the morning trains on Tuesday.

Long lines had formed at train stations Monday as passengers rushed to buy commuter passes before the hike. "My wife told me to buy them while the rate was still 8%," said one man who took time out of his workday to line up at Tokyo's Shinjuku Station.

A worker at a Tokyo convenience store switches price tags as Japan's 10% consumption tax took effect on Tuesday.

Electronics retailer Bic Camera saw crowds all day at its Yurakucho location, as customers mulled big-ticket purchases. "Many of our major appliances are sold out," a company representative said.

The chain's sales of OLED TVs jumped fourfold in September from a year earlier, while sales of air conditioners, fridges and washing machines doubled.

Meanwhile, a gas station near one of Tokyo's main thoroughfares saw a steady stream of customers well into the night. "My company told me to fill up the tank before the hike," said a man in his 40s who came with a corporate car.

"Customer traffic has been up 30% from a regular weekday, and will probably keep increasing," said the gas station's manager.

The hike adds 4.6 trillion yen to the government's annual revenue, which is a crucial step in ensuring society-wide support for Japan's welfare system. But the additional burden will test the foundations of the Japanese economy, especially as the U.S.-China trade war weighs on the world as a whole.

Japan suffered major blows following past consumption tax hikes, which led the government to be extra careful this time around. Prime Minister Shinzo Abe is making a final decision regarding economic stimulus measures this month, which will be included in the supplementary fiscal 2019 budget to be submitted to the legislature in January, as well as the fiscal 2020 budget.

Senior officials are pushing for a major stimulus.

"The tax hike will heavily affect our citizen's lives and the economy," said Fumio Kishida, the policy research chair for the ruling Liberal Democratic Party. "We need to make plenty of preparations."

Japan first introduced a 3% consumption tax back in April 1989. This was raised to 5% in 1997 and to 8% in 2014. Abe has postponed the hike to 10% two times over concerns of the economic impact.

This time, the government launched a 5% rewards program for cashless transactions to coincide with the tax hike. About 500,000 small and midsize stores will take part in the scheme through June 2020.

The rewards program and tax relief measures are believed to have limited the number of consumers rushing to make last-minute purchases. But the 10% rate is nevertheless expected to have a far-reaching impact on spending patterns.

"I'm going to stop eating in at convenience stores," said one male 20-year-old student. Food items at convenience stores will be taxed at 10% if they are consumed on the premises, but 8% if taken out. The student said he will now be taking his purchases to his part-time job, instead of eating at his local store's eat-in counter.

"This was one of the few moments I could relax between school and work, so I'm disappointed," he said.

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