Japan Tobacco Reacts Angrily to Tax Rise

Source from:  Financial Times (uk) 12/25/2009

Japan Tobacco on Tuesday attacked the government's Y3.5 per cigarette tobacco tax increase, warning it would be "forced to raise its product prices," by more than the tax rise. "It is regrettable that the government has reached such a decision, as JT has strongly requested that a balanced and rational debate on the tobacco excise be conducted," the group said in a statement. "The effects of such an unprecedented excise increase on consumers and the industry in this difficult environment [are] immeasurable," JT said. The tax on tobacco has never been increased by more than Y1 per cigarette, Japan's largest tobacco company said. The higher tax, part of the government's package or tax reforms approved by the Cabinet on Tuesday, will come into effect on October 1, 2010. The government also indicated it could relax or abolish a law requiring JT to buy domestically grown tobacco leaves, which are substantially more expensive than the global norm and would review its ownership of more than 50 per cent of JT. Investors reacted more positively than JT to the news, sending JT shares up by 5 per cent on Tuesday to Y308,000 in active trading. The tax increase was less drastic than feared, said Keiko Yamaguchi, analyst at Nomura in Tokyo. In 2008, under the opposition Liberal Democratic Party-led government, parliamentarians studied the possibility of raising the price of a pack of cigarettes from the current Y300 ($3.27) to Y1,000 ($11). If cigarette companies are able to raise prices sufficiently, "it will put an end to the trend of falling profits," Ms Yamaguchi said. JT said it would review its prices, "taking into account the future of the market and the state of the economy." However, in an unusual move, the government's tax council said on Tuesday that the overall price increase for cigarettes, including the tax rise, would be about Y5. This suggests JT and other cigarette companies, including BAT and Philip Morris, will have limited room to raise their prices much more than Y1.5 per cigarette, said Yoshiyasu Okihira, analyst at Credit Suisse in Tokyo. Mr Okihira thinks the tax rise will lead to a drop in sales of about 16 per cent and, considering that cigarette sales are falling about 4 per cent each year, even without the tax rise, "it is not clear whether the Y1.5 increase will be enough to cover the drop in sales," he said. The Japanese market, about 26m smokers, or 25 per cent of those over 20, was the fourth largest in the world in 2007, according to data published by ERC Group. But cigarette sales have been falling about 4 per cent each year, even without a tax increase. Enditem