Japan - new government administration considering raising cigarette taxes..

November 2, 2009 - Back in August 2009 voters in Japan ousted the conservative Liberal Democratic Party, ending fifty-five years of nearly uninterrupted rule. The populist Democratic Party of Japan captured a record 308 of the 480 seats in the lower house of parliament. This was the first transfer of power from one party to another in postwar Japan. (Japanese Voters Oust Conservative Party, DemocracyNow.org, 8/31/2009)

Now the new administration is considering raising cigarette taxes to European levels to help pay for an ambitious domestic spending plan, in a potential threat to partially state-owned Japan Tobacco Inc.

"Tobacco poses health problems. It may be necessary to raise it [the tobacco tax] to the levels in Europe," said Akira Nagatsuma, minister of health, labor and welfare.
The health ministry already has asked the government's tax panel to increase the tobacco tax as part of fiscal 2010 tax reforms. An increase of 10 yen per cigarette – 10 times the amount of previous increases – is currently being debated.

Cigarettes in Japan are among the cheapest of any developed nation, with a box of Marlboro Lights costing a mere 320 yen (3.54 USD), compared with around 600 yen (6.64 USD) to 800 yen (8.86 USD) in the European Union (EU).

For the Japanese government, a cigarette tax increase is a tricky proposition. While it has an incentive to reduce smoking to curb national health-care expenses, it also owns a 50% stake in Japan tobacco. The government also could hurt tax revenue if consumption drops sharply.

"We believe the current excise tax is already at a high level," a Japan Tobacco spokesman said. "This is based on the fact that in the past, excise increases have shown that there hasn't been a corresponding increase in revenue, because sales volumes have declined."

Japan Tobacco, which sells the Mild Seven, Camel and Salem brands, has a 65 percent market share in Japan.

For decades, Japan has resisted imposing big tax increases on cigarettes, going against the global trend. As a result, in an era where smoking rates have plunged in the developed world due to health concerns and cost, nearly 40 percent of all men in Japan still light up, according to Japan Tobacco. Smokers still puff away in restaurants and bars in Tokyo, unlike most states in the U.S. and EU countries, which have imposed indoor smoking bans.

The new Japanese government, led by the Democratic Party of Japan, is mulling new spending programs that are estimated to cost as much as 16.8 trillion yen annually when they are fully implemented in the fiscal year beginning 2013. It is debating where the money will come from, given the fact that Japan's government liabilities -- debts and other obligations -- could approach 190% of its gross domestic product this year. The DPJ has already axed raising a broader consumption tax for four years.

"Raising cigarette taxes is not politically controversial," said the JT spokesman. "We are an easy target when the government is in short supply of revenue."

After the government raised cigarette taxes by one yen per cigarette in July 2006, sales volume at JT declined by 14.5 billion cigarettes to 174.9 billion in 2007, according to the company. But the company offset the sales decline by raising prices on some of its top-tier brands, such as Mild Seven, by 10 yen per pack.

Analysts say that the marginal revenue benefit for the government by doubling cigarette taxes would be marginal. "This type of tax hike is not common -- if the government doubled the taxes on cigarettes, it appears that cigarette volumes would decline by about 40%, resulting in 440 billion yen in additional tax revenues per year," said Toby Williams, analyst at Macquarie in Tokyo. "If JT is able to raise prices, it would be positive for the company."

Government officials are also using a possible tax hike to dissuade people from smoking. Prime Minister Yukio Hatoyama told reporters on Friday that a hike in the tobacco tax is "possible" considering the adverse effects of smoking on public health.

The Japan Tobacco spokesman said "smoking is the choice of an informed adult – we provide the information of the health risks associated with smoking and that is their decision, rather than the state dictating their pattern of consumption."

The previous Japanese government and the ruling parties decided on Thursday, December 11, 2008 to shelve a plan to raise the tobacco tax, one of the key elements of tax reform for fiscal 2009.

Reference: Japan Considers Higher Tobacco Taxes by MARIKO SANCHANTA (mariko.sanchanta@wsj.com), The Wall Street Journal, 11/2/2009.

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