Japan: 2019 consumption tax increase – effect on the economy

As we know, the consumption tax rate in Japan increased from 8% to 10% in October 2019.

This increase was introduced to cover the cost of social security spending on pensions, medical and old age care and support for childbearing and child rearing.

There were fears surrounding the increase of the consumption tax – the last time this tax was increased in 2014, the economy shrank.

Negative growth due to increased consumption tax

Japan’s GDP from October to December decreased by 6.3% compared to the previous year – resulting in a negative growth for the first time in five quarters.

The Minister of State for Economic and Fiscal Policy mentioned the negative growth can be put down to the increased consumption tax rate and also because of the effects of the mild winter and typhoon. Many people are arguing that the decrease in GDP is a direct and obvious result of the increased consumption tax rate to 10% in 2019.

COVID-19 outbreak may cause a recession 

Officials were optimistic that the effects of the typhoon and tax increase would ease and the country could begin to grow at the beginning of 2020. Now, Japan’s economy is facing its biggest challenge in over a decade due to the COVID-19 outbreak and if the economy shrinks again in the first quarter of 2020, the country will technically fall into a recession.

The government are considering various measures to deal with the economic damage from the COVID-19 outbreak. Earlier in March, there were talks of reversing, eliminating and cutting the 10% consumption tax but the government has not confirmed they will make changes to the consumption tax at this time.

Extensions made on payment due dates for some taxes

Japan’s national tax agency has announced the introduction of extensions on payment due dates for individual income tax and individual consumption tax due to COVID-19. The individual income tax is now due 15 May 2020 and the individual consumption tax is now due on 19 May 2020.