TOKYO -- Japan raised its national sales tax to 10% from 8% on Tuesday, risking short-term pain for the sake of the country's future financial stability as it copes with a fast aging and shrinking population.
Previous tax increases, a 2-point increase to 5% in 1997 and another to 8% in 2014, brought on recessions. Prime Minister Shinzo Abe twice delayed the move out of fears it might derail the tenuous expansion of the world's third-largest economy. But he said this time it was unavoidable.
"We are pursuing social security reforms to ensure everyone is covered, that all generations from children to senior citizens can feel secure. This is going to be a first big step," Abe told reporters.
The sales tax increase covers most goods and services from clothes, electronics to transportation and medical fees. But the government sought to soften its impact with tax breaks for home and car purchases, while launching a rewards program for credit card and other "cashless" purchases at small- to medium-size restaurants and other retailers through next June. The tax for groceries is unchanged for low-income households, and the government is providing free pre-school education to families and a one-time payout to low-income pensioners.
After decades of fiscal deficits that have taken the debt to more than twice the size of the economy, Abe has promised a return to balance by 2025. That will require growth is sustained at a healthy pace.
The sales tax hike coincided with the release of data showing business sentiment among large manufacturers deteriorated in September to its worst level since 2013.
The result was better than expected, but the outlook is forecast to weaken further by December's quarterly report of the Bank of Japan's survey, called the "tankan."
"Particularly affected are producers of basic materials, reflecting recent commodity market movements, as well as producers of general-purpose and production machinery, who are exposed to risks posed by recent re-escalation of US-China trade frictions," Oxford Economics said in a commentary.
Other data released this week have shown industrial output decreasing in August, while unemployment remained at a 26-year low of 2.2%.
The economy expanded at an annual pace of 1.8 percent in April-June, faster than anticipated. But slowing exports and rising prices for oil are expected to drag growth lower in coming months.
Analysts say the tax hike poses an extra deflationary risk at a time of growing uncertainty over tensions between the U.S. and China — the country's two biggest export markets — and over Japan's own dispute with neighboring South Korea.
It follows years of ultra-loose monetary policy aimed at convincing businesses to invest and frugal Japanese families to open their wallets.
"Considering the current economic conditions, the timing is bad," said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.
The economy has slowed since late last year and demand generated by the construction boom for the Tokyo 2020 Olympics is fading, he said. The fear is that might undo years of efforts to escape a deflationary rut where falling prices due to slack demand depress investment, a main driver of growth.
It's been more than six years since Bank of Japan Gov. Haruhiko Kuroda launched his "big bazooka" injections of billions of dollars of cash into the economy through central bank asset purchases, aimed at prying the country out of its deflationary doldrums.
Spending remains lackluster, held back by sluggish wage growth.
The tax hike will put an estimated additional burden on households of more than 2 trillion yen ($18 billion).
Critics say the exceptions and incentives built into the new sales tax regime are bound to cause confusion. For instance, purchases "to go" at Starbucks Coffee outlets are still taxed at 8%, while customers choosing to dine in have to pay 10%.
Still, shoppers seemed to be taking the changes in stride.
One elderly woman, coaxed by a clerk into trying out her credit card at a Tokyo supermarket, appeared delighted with the 5% discount from her 905 yen ($8) grocery bill.
"This means I paid 45 yen less, right?" she asked, smiling, as she was interviewed by NHK television. "If you do the math and think about it, it's rather significant."
Businesses are adapting with price cuts and rewards for cashless payments to attract customers.
"Stores seem to provide discounts, so I will go for those, plus, I don't plan to buy luxurious goods with big price tags," Junko Matsumoto, a homemaker in her 60s, said as she walked past a Tokyo train station. "I must admit the tax increase was unavoidable."
Toru Yokoyama, a 31-year-old office worker, was less upbeat.
"Before resorting to a tax increase, the government could have taken other measures, but it's already done and there is not much I can do at this point," Yokoyama said. "I don't think my shopping patterns would change very much, but I may not be able to go on trips as often as used to."
AP video journalist Haruka Nuga contributed to this report.
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