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Japan delivers long delayed consumption tax increase



  Man replaces a map with train prices Copyright copyright
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Caption

Train prices have risen after the increase in fees

Japan has increased its consumption tax for the first time in five years, bringing the long-standing policy into effect despite concerns that it may knock the economy.

On Tuesday, the country raised the sales tax rate from 8% to 1

0%.

The new rate applies to almost all goods and services, although most foods will be exempt.

Earlier sales tax increases in the world's third largest economy have incurred spending.

This time, however, the government has introduced measures, including discounts for certain purchases made using electronic payments, in an effort to offset the impact.

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It plans to use the extra revenue to fund social welfare programs including pre-school education and to pay off the huge public debt burden.

"The government has already pledged about half of the proceeds to fund free childcare," said Marcel Thieliant, Japan economist at Capital Economics.

What is covered?

The tax increase applies to most goods and services, from electronics to books and cars. Most foods will remain exempt.

Consumers will be entitled to a 5% discount on purchases made through electronic payments from some smaller retailers – exceeding the 2% tax increase.

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The move is designed to dampen the impact of the tax increase, as well as increase the use of electronic payments in cash support Japan.

Martin Schulz, a senior researcher at the Fujitsu Research Institute, said the discounts are designed "to make the economy more productive".

How will it affect the economy?

Japan's economy has performed strongly in recent months, but the tax increase – along with uncertainty in the world economy – is weighing on the outlook.

The decline in China and the trade war with the United States have turned business confidence into Japan, as it is also struggling with a softer global demand for exports including electronic equipment and auto parts.

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Earlier sales tax increases have seen spending fall sharply. But this time, economists expect the hit to be more modest.

"The consequence will almost certainly be less," Thieliant said, as the drive to the tax increase saw fewer purchases of large items such as televisions and cars than previous trips. The online payment plan may also have helped.

Schulz agrees that spending will fall over the coming months, but the economy should recover by the end of the year.

"The economy is relatively strong. Next year it may be strong because of the [Japan hosting] Olympics … but it depends a lot on the external environment and the trade war," he said.


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