Japan - small tobacco tax increase to be announced soon..

December 16, 2009 - Japan, one of the last bastions of rock-bottom cigarette prices and smoking-friendly policies, is set to announce its biggest-ever tax increase on cigarettes in a move that could have long-lasting ramifications for Japan Tobacco Inc. (JTI), Philip Morris International Inc. and British American Tobacco PLC. (Japan’s government owns 50.01 percent of JTI; JTI also operates in foods, pharmaceuticals, agribusiness, engineering, and real estate.)

The move to raise taxes—in a country where 40% of the male population still smokes and a pack of cigarettes costs only 300 yen ($3.39)—comes as the companies grapple with a shrinking market and falling demand.

From our report of December 4, 2009 - The Japanese government plans to raise the tax on tobacco by a few yen per cigarette, Kyodo news agency reported, a much smaller increase than the 10-20 yen anticipated by some market participants.(Japan - cigarette taxes increase may be less than expected..)

Japan, a $38 billion tobacco market and the fifth-biggest in the world, still boasts one of the highest smoking rates—thanks to the low cost and because smoking indoors at bars and restaurants is allowed. Japan - tobacco control people upset with smoker-only cafes.. But fewer people are lighting up, because of health concerns and the country's shrinking population. [JSMOKE]

This means that the three big companies will only grow by taking market share from rivals. Japan Tobacco, the world's third-biggest tobacco maker, has a 65% share of the Japanese market, while Philip Morris, the global market leader, has about 25% and BAT the remaining 10%. We have to grow our share in this country through innovation," said Naresh Sethi, the president of BAT Japan, in an interview. "We need an iPod of cigarettes."

Japan's new center-left administration, led by Prime Minister Yukio Hatoyama, is set to increase taxes on cigarettes by two yen to three yen a cigarette. In deflation-riddled Japan, the Democratic Party of Japan's (DPJ) move to increase taxes—resulting in a 40-yen to 60-yen total increase on a pack of cigarettes—is monumental when salaries are shrinking.

An announcement could come as early as Friday or next week, according to a finance-ministry official. It would then have to be passed by Japan's parliament early next year, though this step is seen largely as a formality, with the difficult aspect being the consensus-building occurring now among the different parties regarding the size of the tax increase.

"For health reasons, the idea was to raise the tax rate by a greater level, but we had to raise it more gradually," said the finance-ministry official. "The new administration wants to raise health consciousness." (Japan - prime minister calls for tobacco tax increase..)

Japan is a unique market for cigarette makers, as the country's fickle smokers are less loyal to particular brands than their global peers. About 15% of Japanese smokers are amenable to trying new brands, a much higher proportion than in other markets, Mr. Sethi said.

"That's a huge opportunity for us," Mr. Sethi said. BAT aims to increase its market share in Japan to 20% by 2015 by launching new products. As a result, tobacco makers constantly inundate the Japanese market with new products or trendier designs for existing products to woo new smokers.

Japan Tobacco's Mild Seven, the top brand in Japan, comes in 23 different varieties, from Mild Seven Lights Charcoal Filter to Mild Seven Prime Super Light. Slims/superslims and menthol cigarettes, packaged in designer boxes, have been introduced and are intended to appeal to the growing number of female smokers.

Two years ago, BAT launched the "Kool Boost" brand in Japan (pmust be similar to R.J. Reynolds Camel Crush available in the U.S.), which features a menthol capsule in the cigarette's filter; smokers unleash the extra dose of menthol by squeezing the filter until the capsule bursts. The brand was so successful that it captured 1% of the entire market, and Mr. Sethi proudly refers to it as an "iPod product".

Though BAT and Philip Morris don't disclose their revenues and profits from Japan, it is a significant market for both. For BAT, the world's second-biggest cigarette maker, Japan is within its top 40 markets, though its "strategic importance" is much larger, according to a spokesman. The company has its own innovation center in Japan, where it tests new products and brainstorms for ideas.

Because cigarette prices are still very low in Japan, a tax increase could mean more to consumers," said Credit Suisse analyst Yoshiyasu Okihira, compared with markets such as the U.S. and Europe, where cigarettes are more than double the price in Japan.

But thanks to Japan's arcane Tobacco Business Law, cigarette makers can't increase their prices by as much as they want—they have to ask the government for permission. Thus, most cigarettes in Japan are priced between 300 yen (3.34 USD) and 330 yen (3.67 USD). "The new politicians in the DPJ get it, but they have to get out of the mind-set of price control. They should allow us to set our own prices," said Mr. Sethi.

The Democratic Party of Japan (DPJ) is also aiming to get more people to quit, but the tax increase may not work.

Akira Taguchi, 49 years old, has been smoking for nearly 30 years. "A hike to 400 yen a pack wouldn't make me change my habit," said Mr Taguchi, who alternates between the Kent and Marlboro brands. "If it rises to 800 yen, then I would have to seriously think about cutting back. Personally, I wouldn't disagree with a fairly big hike, because that would make me more conscious about when to smoke. Sometimes I find myself smoking when I don't even want to…especially when I drink."

Reference: Tobacco Firms Await Japan Tax Increase Could Hobble Japan Tobacco, Philip Morris and BAT as Government Tries to Curb Cigarette Smoking by MARIKO SANCHANTA (mariko.sanchanta@wsj.com) and JURO OSAWA (juro.osawa@dowjones.com), The Wall Street Journal, 12/15/2009.

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