Japan Food Tax and Prices: Ideas Later.

Japan's consumption tax suspension may not result in lower food prices

Article source: https://mainichi.jp/english/articles/20260228/p2g/00m/0na/022000c

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TOKYO (Kyodo) -- Prime Minister Sanae Takaichi aims to suspend the country's consumption tax on food to alleviate the pain of persistent inflation, but some experts, drawing on overseas precedents, are questioning whether it will substantially reduce consumer prices.

Some businesses that have not passed on higher import costs driven by the weak yen may also see the tax suspension as providing room for them to do so.

Following its landslide victory in the Feb. 8 general election, the ruling coalition led by Takaichi wants to lift the current 8 percent tax on food for two years.

A cross-party debate began on Friday to hash out the details, with Takaichi aiming to submit legislation as early as this fall to implement the tax suspension.

Japan previously raised the consumption tax rate in 2019 to 10 percent from 8 percent but left the rate on food at 8 percent.

According to a government survey in 2019, 31 of 40 items, including those subject to the lower 8 percent rate, actually saw price hikes.

As households grapple with inflation, small and medium-sized companies that have not passed on higher costs are wary of consumer expectations of cheaper goods.

The National Conference of the Association of Small Business Entrepreneurs, which has around 47,000 business owners across the country, has said it would be "unrealistic" to expect retail prices to fall by 8 percent when the tax is suspended.

"There will be cases in which (businesses) use it to offset rising raw material costs, logistical costs and labor costs that they have absorbed," the body said earlier this month.

Previous tax cuts overseas may offer some lessons for Japan, according to experts.

A 14 percentage point cut in value-added tax for hairdressing services in Finland had only a limited impact between 2007 and 2011, while the suspension of Argentina's 21 percent tax on food products led to an average price drop of 10 percent.

In Portugal, however, the suspension in 2023 of 6 percent tax on some food products was directly reflected in retail prices, according to the experts.

Makoto Hasegawa, an associate professor of finance at Kyoto University, said prices in Portugal were already deflationary at the stage of production and businesses were facing pressure from consumer groups and the media to lower prices.

It remains unclear whether Japan will also see similar results if the tax suspension is implemented, according to Hasegawa.

Hasegawa said the benefits of the suspension for consumers would be muted if prices rise drastically afterward. "It will also impose a burden on businesses if they are prevented from raising prices. Those risks should be considered," Hasegawa said, with the cross-party panel seeking to compile an interim report in the coming months.