Japan leaves no stone unturned as it prepares to cushion blow from Abe's 2019 sales tax hike to 10%

With Prime Minister Shinzo Abe determined to increase the sales tax next year, the government is testing public reaction to a string of potential measures to ensure people keep spending.

The most recent bump in the levy — from 5 percent to 8 percent in 2014 — underscores the risks to consumption. Spending spiked ahead of the change and then dropped sharply when it took effect, sending the economy into reverse for a quarter and damping inflation for even longer.

Things should turn out better next October, with more exemptions and offsets likely, and the tax to rise by a smaller increment to 10 percent. Below is a guide to plans announced by the government so far, and trial balloons floated via the media:

Food exemption

The government intends to exclude most food from the hike to reduce the impact on lower-income households. The tax on all food sold at supermarkets will stay at 8 percent, and the same will apply to food bought from convenience stores to take home, and food served at schools and old-age care homes. Food eaten at restaurants and alcohol will be taxed at 10 percent.

Free education

Abe’s ruling party has pledged a ¥2 trillion ($17.7 billion) spending package to expand access to education and cut waiting times at child care centers. The tax increase will help fund free preschool education for children age 3 to 5 and child care for those under age 2 for low-income families. As is the case with the exemptions on food, these measures will probably put downward pressure on inflation, which remains weaker than the government’s goal.

News break

Subscriptions for newspapers that are published at least twice weekly will be exempt, according to the government. This is significant given that Japan still boasts one of the highest newspaper subscription rates in the world. The combined daily circulation of the nation’s newspapers was 42 million in 2017, according to the country’s newspaper publishers association.

Car taxes

Purchase taxes on cars that come on top of the sales levy could be rolled back to zero, according to the Nikkei newspaper. Other possibilities suggested include postponing fuel taxes, originally scheduled for next October, and suspending annual vehicle taxes on cars with small engines for one or two years after purchase. Finance Minister Taro Aso has said relief for big-ticket items like cars and houses will be considered but that specific measures haven’t been decided. The car industry warns that jobs are on the line.

Cashless payments

Credit card companies may have to reduce processing fees, said trade minister Hiroshige Seko. The government is also mulling a system in which customers using cards or other cashless payments would receive points equivalent to the sales tax, the Sankei Shimbun reported. This would offset the tax impact while also reducing the dominance of cash payments in Japan. The ideas have hurt the share prices of credit card companies. The positive impact for households could be about ¥290 billion, according to a preliminary estimate from Bank of America Merrill Lynch.

Telephone charges

Mobile phone carriers are also in the cross hairs as the government seeks to reduce pressure on household budgets ahead of the tax. Chief Cabinet Secretary Yoshihide Suga suggested there’s room to cut phone bills by about 40 percent. NTT Docomo Inc. has already said it will make mobile plans 20 to 40 percent cheaper in the first quarter next year. This has been welcomed by consumers but is a bitter pill for shareholders of mobile phone companies. It could weigh heavily on inflation.

Housing support

The government may introduce a system of spending vouchers and points for people who build or renovate homes that help lower energy consumption, the Asahi Shimbun reported. Another idea is lowering income taxes for people with housing loans, the Asahi said. Support for housing and car purchases is already part of the government’s policy guidelines for 2018, announced in June.