National / Media | BIG IN JAPAN

Consumers look for ways to blunt impact of consumption tax hike

by Mark Schreiber

Contributing Writer

Japan’s consumption tax on goods and services has arguably been unpopular from the get-go. Introduced at 3 percent in 1989 as a means of improving public finances, the rate was raised to 5 percent in 1997, 8 percent in 2014 and, from Oct. 1 of this year, to 10 percent.

As we shall see, the latest tax hike is likely to have more far-reaching impacts on consumer behavior than before. A growing number of retailers, manufacturers and financial service providers are viewing the latest increase as an opportunity to harness information technology and customer relationship marketing to blunt the tax’s impact — such as by offering bonus points and other premiums, discounts and rebates.

The tax hike is also expected to hasten the general trend, already in motion, toward cashless transactions.

Japan has lagged considerably behind most major economies in its adoption of cash substitutes.

Its transition only increased by 6.2 percent in the decade from 2007 to 2016. Three years ago, only 18.9 percent of Japanese were utilizing electronic payment methods — a rate far lower than in South Korea (96.4 percent), the U.K. (68.7), Australia (59.1), Canada (56.4), Sweden (51.5), and the U.S. and France (both 46 percent).

To demonstrate the appeal of this new consumer paradigm, Flash (Oct. 22-29) produced a “Complete manual on consumption tax cashless rebates for IT weaklings.” Through astute electronic shopping and payment methods — pei-katsu being the new term for this activity — its reporter demonstrated how he harnessed discounts and bonus points from PayPay and Yahoo Card, claiming to have saved ¥355 off ordinary prices in a single day. The breakdown: ¥38 from shopping online for a musical instrument cable; ¥16 from purchasing his breakfast at a convenience store; a ¥100 reduction from a pasta lunch at an Italian restaurant; ¥174 from dinner at a gyōza restaurant; and ¥27 when drinking at an izakaya pub. Over the course of a month, he concluded, total savings over ordinary cash could easily come to as much as ¥5,000.

One major difference from previous tax increases is a two-tier system by which food items purchased at supermarkets, convenience stores, fast-food outlets and so on will be taxed at the previous rate of 8 percent, whereas customers at restaurants, bars and other eat-in establishments will pay 10 percent — even for what is essentially the same item.

This 2 percent disparity, discussed in the In-depth Business Economic Report in Shukan Jitsuwa (Oct. 17), is likely to boost demand for food delivery services such as Uber Eats, and may also spawn completely new types of business.

According to a source in the food and beverage industry, bolstered by demand from working couples and solitary male households, the food delivery market grew year on year by 5.9 percent to ¥404.8 billion in 2018. Further growth is anticipated.

“The Oct. 1 tax increase was not applied to living necessities (such as newspapers and foodstuffs),” a management consultant explained. “So both takeout and delivery types of food and beverage businesses, which charge the lower rate of 8 percent, can expect increased demand.”

Uber Eats, a food delivery service from the United States that began operations in Japan in 2016, stands to become one of the prime beneficiaries. It has presently tied up to deliver meals from some 1,500 food service companies.

Gusto, a chain of budget family restaurants, last April introduced its own line of pizzas with a chewy type of crust. It is hoping to parlay the popular new item so as to straddle both the eat-in and home delivery business models.

The new tax structure may also benefit the so-called ghost restaurants — another business that surfaced in New York around 2010 — which exclusively engage in outside deliveries.

As opposed to startup costs ranging from ¥10 million to ¥15 million for a new restaurant, a business like the new Kitchen Base chain can hold down initial investment costs to just a fraction of the above.

On Sept. 18, another ghost restaurant, 6curry, opened in Tokyo’s Ebisu district. It will rely exclusively on Uber Eats to make deliveries.

More difficult to gauge at this stage is how the tax rise might affect crime. Specifically, international gold smuggling, the main sources of which have been Hong Kong, South Korea and China.

Yukan Fuji (Oct. 6) reported that in the market for precious metals, 2 percent can make a significant difference. As an example, let’s say a person purchases 4 kilograms of pure gold, valued at ¥20 million, in a country that doesn’t tax sales. If legally imported into Japan, a 10 percent import duty will cost ¥2 million. So if a smuggler can avoid that payment and resell their 4 kilograms of gold at the same ¥22 million as a legal business, they profit by ¥2 million.

The correlation between the consumption tax and illicit gold becomes more evident when compared with earlier years. The year before 2014, when the tax was 5 percent, customs confiscated 133 kilograms; in 2017, three years after the tax had been raised to 8 percent, 6,277 kilograms had been intercepted.

Lured by the prospect of larger ill-gotten gains, smugglers have been hard at work to devise clever new methods. A photo supplied by Kansai International Airport customs showed the handle of a large calligraphy brush and a Chinese inkstone, both forged from pure gold, that were recently nabbed by customs agents.

Big in Japan is a weekly column that focuses on issues being discussed by domestic media organizations.

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