Increasing the sales tax in Japan

- Why does the Japanese government intend to increase the sales tax and what will happen if it is raised? –


Before the Lower House election in 2010, Prime Minister Naoto Kan, the Democratic Party of Japan (DPJ), announced to raise the 5 percent sales tax to 10 percent. Although this proposal was previously suggested by the Liberal Democratic Party (LDP) which is the main opposition force, Kan’s remarks had an effect on public opinion. As a result, DPJ drastically lose the number of seats and suffered a severe defeat in the election. Thus, the public always pay attention to reform the tax system and discuss the pros and cons of the tax hike plan, because it directly affects all our livings.


Regarding the sales tax, how much do you know about it? Japanese sales tax is imposed on certain transactions at the flat rate of 5 percent (4 percent for national and 1 percent for local tax). The current sales revenue accounts for about 10 trillion yen as the financial resources, which is the third largest tax revenue following income and corporate taxes. However, why does the Japanese government intend to increase sales tax now? In this matter, there are several reasons to increase in tax revenue.


First, it is said that Japan has national debts about 900 trillion yen in 2009. Although these debts are used for social security cost, the deficit is estimated more than 180% of GDP. This can not make a simple comparison, but it may be no exaggeration to say that Japan face a financial crisis like Greek. Under these circumstances, the lawmakers consider a raise in sales tax because they expect into be a generally stable source of revenue. If the plan succeeded, the tax revenue will estimate roughly about 2.5 trillion yen by 1 percent increase. Therefore, if the 5 percent consumption tax is raised to 10 percent, 12.5 trillion in total will be possible to reduce from the debts. Secondly, the purpose of this tax increasing is not only to redeem national bonds, but also to fund for social security. According to The Ministry of Economy, Trade and Industry, Japan has to strengthen the industries in medical, nursing and child-care fields for the sake of the nation's future, therefore, it is said that Japan should increase the number of employee in these fields for tackling deflation. Consequently, Japanese will be able to make money by being employed as well as paying the raised tax.
Finally, the current Japanese sales tax is very low compared to other countries. For example, in Northern Europe such as Demark, Sweden, and Norway, the VAT is 25%. Since the tax is high, they do not pay for any social security services like medical care or school fee. In addition, because of well-financed pension system (not like Japan), they don’t need to worry about their old age.

However, there is a lot of opposing opinions on the tax hike. What will happen if the sales tax rate is raised to 10 percent and what will be the effects of that?


First of all, Japanese current sales tax is said to be a regressive taxation, which means that low income families pay a greater share of their income in sales taxes than families with high incomes. Even though Prime Minister Kan insisted on any rise in the sales tax must be accompanied by lower tax rates for daily goods like Europe’s VAT system and refunds for low income families, they must feel under the burden of taxation. As a result, it will seriously widen economic disparities. In addition, if Japanese government intends to deduct the other taxes such as corporate or income taxes while the sales tax is raised, the total revenue will not increase. Likewise, the increased revenue will be offset by any refunds, which Prime Minister Kan strongly proposes. Therefore, it may be difficult to expect such revenue increases. Lastly, some analysts point out that the higher sales tax could dampen recovery. After changing the tax rate from 3 percent to 5 percent in 1997, it has actually caused deep deflation. As there are a lot of economic problems with tax increases, the allocation of sales tax revenues should be discussed before launching.

To sum up, it is not easy for the government to put for increasing in consumption tax. Not only does the DPJ need to gain consensus with other parties, but also DPJ should explain the details of their plan to the public.


In my opinion, the sales tax increase may be inevitable matter if we think about our future life. As far as I’m concerned, the government should also keep cutting in expenditures through a budget screening ”SHIWAKE” or other activities to cut wasteful spending.