Japan Tobacco shares jump on report of smaller tax hike

Shares of Japan Tobacco (2914.T) gained the most in 13 months on Thursday as investors were relieved by a report that the government would hike taxes on cigarettes by less than expected.

The Japanese government plans to raise the tax on tobacco by a few yen per cigarette, Kyodo news agency reported, a much smaller increase than the 10-20 yen anticipated by some market participants.

“It’s positive if the tax hike is only 2-3 yen per cigarette, as there have been concerns about a much heftier hike, like pushing up prices to 500 yen a pack or more,” said Takeshi Osawa, senior fund manager at Norinchukin Zenkyoren Asset Management.

A pack of 20 cigarettes in Japan costs around 300 yen ($3.40), including a tobacco tax of about 175 yen or 58 percent.

While a higher tax on tobacco was not among the key campaign pledges by the Democratic Party, which took office in September, Prime Minister Yukio Hatoyama is advocating one to curb smoking.

Some government officials have said tobacco prices in Japan are not high enough to discourage smoking compared with other developed countries, fuelling speculation about a large tax hike.

JT controls 65 percent of the Japanese market and the government still owns half of the former state monopoly.

UNCERTAINTIES WEIGH ON JT SHARES

Market participants had already expressed doubt that the government would carry out a drastic tax hike in the short term due to fears about a sharp fall in tax revenue amid concerns about the country’s fiscal health and implications for tobacco farmers.

Still, many investors had shied away from Japan Tobacco shares given uncertainties over the new government’s tax policies. By Thursday, the stock had lost about a fifth of its value since its recent peak in late September.

“Uncertainties over the size and timing of a tax hike and the impact on demand make us hesitant about the shares,” Shigeo Sugawara, senior investment manager at Sompo Japan Asset Management, said earlier this week.

Mizuho Securities analyst Hiroshi Saji has said Japan Tobacco shares are likely to rise once the government settles for a relatively moderate tax hike. He rates the stock “outperform”.

Some analysts said incremental tax hikes are positive for Japan Tobacco for the additional reason that this would provide an opportunity to raise prices like it does in Russia and other overseas markets.

“JT has to raise tobacco prices to offset declines in volumes. But a tobacco price hike is a bit difficult in Japan, given cheap tobacco prices and the current deflationary trend,” he said. “A tax hike is a good opportunity to raise prices.”

Japan Tobacco shares ended up 9.7 percent at 282,200 yen, far outperforming a 3.8 percent gain in the benchmark Nikkei average. .N225. ($1=87.53 Yen)