Japan Tobacco - reacts angrily to governments decision to raise cigarette tax..

December 23, 2009 - Japan Tobacco (JT) yesterday reacted angrily to the government's decision to raise the tax on tobacco by Y3.5 per cigarette, saying it would be "forced to raise its product prices" by more than the tax increase.

Companion news brief: Japan - tax increase, a pack of 20 cigarettes will increase by an average of 33%..

"It is regrettable that the government has reached such a decision, as JT has strongly requested that a balanced and rational debate on the tobacco excise be conducted," the group said.

"The effects of such an unprecedented excise increase on consumers and the industry in this difficult environment [are] immeasurable."

The tax on tobacco has never been increased by more than Y1 per cigarette, Japan's largest tobacco company added.

The higher rate, which is part of the government's package of tax reforms approved by the cabinet yesterday, will come into effect on October 1, 2010.

The government yesterday indicated it could relax or abolish a law requiring JT to buy domestically-grown tobacco leaves, which are substantially more expensive than the global norm. It also said it would review its controlling stake in JT, in which it owns more than 50 per cent.

The tax increase was less drastic than feared, said Keiko Yamaguchi, analyst at Nomura in Tokyo.

Last year, under the then Liberal Democratic Party government, the idea was mooted to raise the price of a pack of cigarettes to Y1,000 from Y300. Back on October 2008 JT enlisted customers in a campaign to stop the government from raising cigarette taxes. (Japan Tobacco Starts Petition To Fight Tax Increase..)

If cigarette companies are able to raise prices sufficiently "it will put an end to the trend of falling profits", Ms Yamaguchi said.

JT said it would review its prices "taking into account the future of the market and the state of the economy".

However, in an unusual move, the government's tax council said yesterday the overall price increase for cigarettes, including the tax hike, would be about Y5. This suggests JT and other cigarette companies, including BAT and Philip Morris, will have limited room to raise their prices much more than Y1.5 per cigarette, said Yoshiyasu Okihira, analyst at Credit Suisse in Tokyo.

Mr Okihira estimates the tax rise will result in a drop in sales of about 16 percent. Combined with the 4 per cent underlying fall in sales, he said JT's price increase might not "cover the drop in sales".

The Japanese market, which has about 26m smokers, or 25 percent of those over 20, was the fourth largest in the world in 2007, according to data published by ERC Group, a UK-based research group.

Reference: Japan Tobacco to review prices after tax rise by Michiyo Nakamoto, Financial Times (FT.com), 12/23/2009.