September 30, 2010 - On October 1st, cigarette taxes in Japan will rise for the first time in four years, forcing smokers to shell out about 3.5 yen (0.042 USD) per cigarette -- a sharp increase.
The tobacco tax hike will probably not be the last, as the Ministry of Health, Labor and Welfare is looking to keep bumping the tax up until Japanese rates are on par with those in Europe and North America. The Ministry of Finance, on the other hand, is less keen to see further increases, as it worries overall tax revenue will fall as people give up smoking in the face of rising prices per pack.
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So which has higher priority, health or tax revenue? The debate on this question looks to continue well after the coming tobacco tax hike, but one thing is certain: Japan Tobacco Inc. (JT) -- formerly a government-owned tobacco monopoly -- is nervous. 50% of JT is owned by the Japanese government.
Including the hike set for October, tobacco taxes have been raised four times since 1998. That year, the price of a single cigarette went up 0.82 yen, followed by rises of 0.82 yen and 0.852 yen in 2003 and 2006. However, the coming increase is different from the past three in two major ways. First, the hike is being backed by the health ministry, not the finance ministry, and second it is much larger, exacerbating a 1.5 yen per cigarette increase from high tobacco leaf prices. The end result is a per-pack price increase of between 110 yen (1.32 USD) and 140 yen (1.68 USD).
Under the WHO Framework Convention on Tobacco Control, Japan and the some 170 other signatory nations are expected to establish taxes on tobacco. Though it's well known that tobacco causes serious health problems, a 2008 health and nutrition survey found that 36.8 percent of Japanese men smoked, outstripping North American and European figures by more than 20 points.(Japan Tobacco - annual survey, smoking incidence continues to fall..) Perhaps not coincidentally, a pack of cigarettes costs the equivalent of about 1,008 yen (12.07 USD) in the United Kingdom and about 757 yen (9.06 USD) in Canada -- significantly more than the Japanese price. The health ministry is determined to close the gap, stating, "There is room to increase prices to around 700 yen (8.38 USD) per pack, in line with Western nations."
Though the Finance Ministry may be fretting over losing tax-paying smokers, Japan is also facing a steadily increasing load of medical expenses. According to the results of a health ministry survey released in 2002, medical costs for ailments connected to smoking and second-hand smoke inhalation totaled an estimated 1.3 trillion yen in fiscal 1999. Meanwhile, the survey said hospitalization and death caused by such ailments cost the Japanese economy some 7 trillion yen in lost labor and other damages.
"Because of resistance from tobacco industry groups and Diet members with connections to that industry, Japan has not built a comprehensive tobacco regulation system," says Ryuzo Ono, a professor of oncology at Aichi Shukutoku University's Faculty of Medical Welfare. "The world trend in tobacco regulation policy cannot be stopped, and the government needs to show resolve on the issue."
Meanwhile, faced with a future of higher tobacco taxes at home, JT has been looking to overseas markets. In 1999, JT bought up all of tobacco giant RJR Nabisco Inc.'s operations outside the United States, and acquired British tobacco company Gallaher Group in 2007. JT is also venturing into markets in emerging nations.
Japan Tobacco counts on Russia and other markets in eastern Europe to spur earnings as it expects domestic sales to fall 16 percent this fiscal year because of a planned tax increase on October 1st. The region accounts for almost half of Japan Tobacco’s overseas cigarette sales by volume, according to the company.
References: Japanese tobacco taxes marching upwards as gov't aims to discourage smoking, Mainichi Daily News, 9/24/2010; VIDEO - Japan Tobacco Says Demand Is Recovering in Russia, Ukraine and Neighbors by Naoko Fujimura (email@example.com) - editor responsible for this story: Frank Longid at firstname.lastname@example.org, Bloomberg, 9/29/2010.