Potential tax rise adds to Japan Tobacco woes

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Japan Tobacco has already had its fair share of bad news this year.

But the world’s third-largest cigarette company, with brands such as Camel and Benson and Hedges, is likely to face further turbulence in the months ahead.

The beleaguered JT began the year inauspiciously with a tainted food scare, which battered sales in its food division.

Then came the launch of “Taspo” last month, an age verification card that aims to crack down on under-age smoking but is also expected to be a significant factor behind a forecast 5 per cent fall in JT’s cigarette sales.

More recently, the company has been hit by perhaps its biggest threat – a potential tax increase that could more than triple prices, from about Y300 ($2.77) for a pack of its cigarettes currently to as much as Y1,000.

Cigarette prices in Japan are among the lowest in the industrialised world.

The potential tax rise adds to JT’s headaches in Japan, where the number of smokers is steadily declining, and highlights its need to seek growth in overseas markets.

Last Thursday, JT unveiled first-quarter results which showed a 42 per cent increase in earnings before interest, tax, depreciation and amortisation to Y180bn, largely as a result of overseas growth.

But net sales in the company’s home market fell 1.6 per cent.

In its home market, where there is little good news for JT, the tax increase is being pushed by a suprapartisan group of politicians, which has jumped on the idea that higher taxes would not only discourage smoking but also boost tax revenues and help the government avoid having to raise the consumption tax.

The Science Council of Japan, which advises the Cabinet Office, forecasts tobacco tax revenues will rise to Y6,260bn and the smoking population fall 14 per cent if the price is raised to Y1,000.

Yoko Komiyama, a Lower House Diet member from the Democratic Party of Japan, the opposition party, points out that medical and other costs associated with cigarette smoking came to Y7,154bn in 1999. That is more than triple the Y2,300bn in revenues from tobacco taxes, according to a government-sponsored study.

Armed with such statistics, the group aims to incorporate a substantial cigarette tax hike into tax reforms to be agreed later this year and implemented next year. JT, with a 65 per cent share of the market, has been reeling from the impact of this latest campaign. Its share price has fallen by about 28 per cent from Y681,000 at the start of trading this year.

The company, which is still 50 per cent owned by the Japanese government, argues that higher taxes would not only hurt its own bottom line but would also devastate the 300,000 cigarette shops in the country and the 13,000 tobacco-growing families in Japan from which JT buys its leaves.

JT, which is dependent for more than half its revenues on the domestic market, says Japanese smokers are already burdened with high taxes, at about 63 per cent of the price of a pack of cigarettes.

Hiroshi Kimura, president of JT, wrote in a protest letter to the ruling Liberal Democratic party (LDP): “Why are smokers, who already contribute Y23,000bn in tax revenues, being singled out for a further tax burden? It must be said that this is a simplistic argument that goes against fair taxation.”

JT points out that when cigarette taxes were raised in 2006 and 2003, consumption fell and tax revenues did not rise.

Philip Morris, number two in the Japanese market with a 25 per cent market share, argues that a sharp rise in taxes could hurt tax revenues and lead to other adverse consequences.

In the UK, sharp tax increases in the 1990s did not result in a major drop in smoking but created a black market in cigarettes, which resulted in a loss of tax revenue, says Peter Nixon, director of corporate affairs at Philip Morris in Tokyo.

Analysts say raising taxes will not be easy, given the impact on retailers and tobacco farmers – who are traditionally LDP supporters – and the government’s 50 per cent stake in JT.

The political dimension means that any rise is likely to be moderate, says Hirohisa Shimura, analyst at UBS in Tokyo.

But if taxes are increased, the crucial point for cigarette makers is not only how large the increase will be but whether they will be allowed to raise prices as well.

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