Japan raised VAT at the beginning of the month. The excise tax rose from eight to ten percent. The trigger is the rapidly growing proportion of older people in the Asian country. The last increase is only five years back.
At that time, the economy was severely weakened by the higher excise tax (five to eight percent), as well as by the 1997 increase (three to five percent). In Japan, private consumption expenditure, which is affected by VAT, accounts for around 60 percent of the country's economic output.
Concerned that an increase in the tax could once again stall the economic recovery of the heavily indebted industrialized country, Prime Minister Shinzo Abe twice postponed the decision. But now he saw the step as inevitable.
The Japanese population has been shrinking for years due to the rapid aging at low birth rates. As a result, the social costs rise, which the higher excise tax will serve to finance. For example, Abe wants to finance the cuts in long-term care insurance premiums, help for older people with low pensions and free pre-school education.
Japan's economy is already weakened
Government and central bank expect that the consequences of the tax increase will be less clear than in 2014. However, the economic climate in Japan is already clouded. The sentiment among big business executives is even worse than it has been since 2013, according to a recent quarterly poll, the Federal Reserve's Tankan report, of some 10,000 companies.
At the same time, the sentiment index for large production companies was down from plus 7 to plus 5 in September. After all, a positive index means that the optimists are still in the majority.
To mitigate the negative effects of the tax increase on consumers' willingness to buy, different rates have been applied to different products since Tuesday. Thus, the increase to 10 percent affects most goods and services such as clothing, household appliances or medical bills. For house or car purchases, tax rebates apply. In addition, food for low-income households is excluded from the tax increase.
In Germany, VAT amounts to 19 percent - which is rather low in the EU comparison. In France and the United Kingdom it is 20 percent, in Italy 22 percent, in Sweden and Denmark 25 percent. However, many countries also provide for a reduced tax rate. In Germany, for example, food is only taxed at 7 percent.