Japan shoppers see first sales tax rise in 17 years

TOKYO — Prices rose across Japan Tuesday as a controversial sales tax rise came into effect, with everything from beer to washing machines costing more, sparking fears a drop in consumer spending will derail a nascent economic recovery.

Tokyo hiked the levy to 8 per cent from 5 per cent as it looks to control a public debt mountain, but corporate Japan's concerns were highlighted by a closely watched survey of business sentiment showing bosses are cautious about the future.

In a country beset by years of deflation, critics warn that already thrifty consumers would snap their wallets shut.

Millions of shoppers made a last-minute dash to stores in recent weeks, while nervous retailers are now watching for signs of falling sales.

The last time Japan rolled out a higher sales levy, in 1997, it was followed by years of deflation and tepid growth, although other factors, including the Asian financial crisis, were also blamed.

Among those waking up to the higher prices was 18-year-old university student Hibiki Ishida, who was not impressed when he bought his favourite chewing gum on Tuesday.

"I get this gum every morning and I know the price is 120 yen ($1.15)," he said. "But I handed 120 yen to the shop clerk today and she told me it was now 123 yen — that unnerved me."

Others, like a 20-year-old graduate surnamed Yoshida — who is set to start a new job and live on her own — have been planning for the hike, with some help.

"My mother has given me lots of daily stuff like tissue paper and plastic cling wrap," she said.  "So I can survive for the time being."

The rise has presented a huge challenge for Prime Minister Shinzo Abe since he swept to power in late 2012 on a ticket to drag the world's number-three economy out of a cycle of falling prices and tepid growth.

Nervous retailers 

On Tuesday, defending the rise — which could be followed by another, to 10 per cent — Abe pointed to spiralling healthcare and social welfare costs, which are straining the public purse in a rapidly ageing society.

The rise "is meant to offset increases in social security costs over the years and to maintain the country's trust", he told reporters, adding that the battle to defeat years of growth-sapping deflation would continue.

But a Kyodo news agency poll earlier this year said about three quarters of Japanese felt no impact from the growth efforts, which included an unprecedented monetary easy programme by the Bank of Japan (BoJ) that helped sharply weaken the yen and boost company profits.

Retailers launched special deals to keep customer traffic steady, such as offering more points on shopping cards or promising a boost to the quality — and in some cases, volume — of their pricier products.

"There is a risk that my sales will drop," said Masayuki Komatsubara, who runs a small Tokyo shop that sells seaweed and other dried food products. "I'm going to try to find cheaper stuff with the same quality...so that my prices don't rise too much."

Grocery store giant Inageya said it had to temporarily shut half its 130 locations Tuesday, after technical problems tied to adjusting cash registers for the rate hike.

Earlier in the day, a closely watched BoJ survey showed that business confidence soared to a more than six-year high in the January-March quarter.

However, companies were cautious about the future as the survey of more than 10,000 firms pointed to lukewarm investment and slumping sentiment for the April-June quarter.

"Firms are cautious about the future course of the economy as the impact of the tax hike remains uncertain," said Hideki Matsumura, an analyst at Tokyo's Japan Research Institute.

While Toyota, Panasonic and other major companies are boosting wages for the first time in years, exports are still struggling and Japanese factories logged a surprising drop in February output.

Tokyo's bid to stoke lasting inflation appear to be taking hold which, together with higher prices due to the tax rise, has exacerbated concerns that the economy could lose its momentum.

The government has launched a special budget to help counter any slowdown while some are looking to the BoJ's easing campaign to help soothe the impact of a fall in consumer demand.

"I believe in three months' time we will be saying the impact on the economy from the tax increase wasn't that bad," Yuki Endo, an economist at Hamagin Research Institute, told Dow Jones Newswires. "The economy will overcome the tax hike."