When American automakers expressed their opposition against Japan joining the Trans-Pacific Partnership negotiations due to its closed market, the U.S. makers also pressed Tokyo to end special tax treatment for the country’s unique “kei” super-minivehicle segment.
The outside pressure to end the low taxation for one of Japan’s most popular car segments has jolted the industry, which has protected the smaller end of the domestic car market for half a century.
Some industry observers point out that reviewing the tax rules for the super-mini segment would hit Japanese automakers hard. But others say a review would be a good thing because kei cars have received favorable treatment for too long.
Kei cars have an engine displacement of 660cc or smaller and are mostly produced by Japanese companies. The only foreigner in this category is the smart produced by German Daimler AG.
In 2010, kei cars accounted for 1.73 million of the 5 million autos sold in Japan.
Domestic automakers argue that changing the tax structure for kei cars would hurt consumers living in the countryside, where roads are sometimes too narrow for conventional sedans and public transportation isn’t always easy to access.
The kei category was created in the 1950s in a government effort to make cars more widespread amid the postwar recovery, when getting around was mostly limited to trains, buses and motorcycles. For many consumers at the time, even a cheap minicar with a much smaller engine than imported sedans was beyond their reach.
However, taxes on the kei segment have remained low despite Japan’s economic blossoming. For instance, a motorist typically pays the government ¥7,200 a year for a kei car, compared with ¥29,500 or more for bigger cars, depending on engine size.
Drivers are also required to pay more in taxes when they purchase a car priced at ¥500,000 or more.
The latest attack on the kei segment was made by the American Automotive Policy Council, representing Chrysler, Ford and General Motors, when it spoke out earlier this month against Japan’s interest in joining the TPP negotiations, arguing the Japanese auto market is overly protected.
“Japan’s kei . . . segment has consistently represented over 30 percent of the auto market but no longer has a clear policy rationale to be provided preferential treatment,” AAPC said in a statement submitted to the U.S. Trade Representative on Jan. 13.
“This special treatment for a unique nationally defined vehicle category, that solely benefits domestic automakers, should be ended,” it said.
Industry observers say if the lower taxes on the segment is changed, the kei would face harsh competition from compacts produced by both domestic and overseas automakers. Compacts have larger engines than their kei counterparts but often boast better fuel-efficiency.
“If the special treatment ends, the kei would have to compete with small cars similar to them, for instance those with 1,000cc engines,” said Nobuaki Fujioka, a researcher in charge of the domestic auto industry at Gendai Advanced Studies Research Organization.
The Japanese industry responded quickly to the criticism from its American rivals. The Japan Automobile Manufacturers Association argued that the auto market isn’t closed, saying tariffs on cars have been abolished since 1978. The U.S. tariff stands at 2.5 percent for cars and 25 percent for trucks.
AAPC also said Japan imported only 225,000 vehicles (including those made by Japanese companies overseas) in 2010, a mere 4.5 percent of the almost 5 million autos sold.
To this criticism, JAMA pointed out that there was a dearth of U.S. compacts — another popular segment — in the Japanese market. For example, it said, there was only one U.S. model with an engine 2,000cc or smaller in 2010, compared with 75 from European makers.
Yet it is uncertain whether the USTR will include the AAPC views when Japan starts negotiations with the U.S. about joining the TPP process.
Pressure from the council appears to have subsided, as the statement on its website currently doesn’t include a paragraph calling for an end to the kei’s special tax treatment.
Asked why AAPC dropped that passage, the group’s legislative director, Raphael Goodstein, replied by email that its stance remains intact.
“It is still our position, but not as high a priority as the other items posted on our site,” he wrote. Those items include the government’s “weak yen policy” that discourages imports.
Regardless of the outside pressure, some experts say the kei tax treatment should be reassessed.
“It is no longer healthy to exempt only the kei category,” said Takaki Nakanishi, an auto analyst at Merrill Lynch Japan Securities Co., adding that changing the way that segment is treated would instead result in boosting Japanese makers’ competitiveness.