Yusuke Sato says a man walked into his tobacco store in Atsugi, southwest of Tokyo, this month and bought 100 cartons of Mild Seven cigarettes. While they may not be good for his health, he may have saved $1,300.
The man is one of thousands of smokers across Japan stocking up before Oct. 1 to beat a record 40 percent tax increase on tobacco. Their hoarding may add as much as 1.4 percentage points to this quarter’s annualized economic growth rate, according to estimates from the Japan Research Institute.
“We were afraid we would run out of stock,” said Sato, who started taking reservations for cartons last month. “Thirty cartons has been the norm.” Next month, customers would pay 110,000 yen ($1,300) more for the same 20,000-cigarette order after the price of a pack of 20 jumps by a third, he said.
Japan is the fourth-largest market by volume for the world’s tobacco makers, after China, the U.S. and Russia, according to a report from U.K.-based market researcher ERC Group. Retailers like Sato and JR East Retail Net Co. and producers including Japan Tobacco Inc. have gained from the rush of demand as they increased output and orders.
Japan Tobacco, the world’s third-largest publicly traded cigarette maker, which controls 65 percent of its home market, is raising prices on 103 of its 105 brands in October. A pack of its flagship brand Mild Seven will cost 410 yen, up 110 yen, as the government will raise the duty by 3.5 yen per cigarette, with tobacco companies charging an extra 1.5 yen each. That’s still less than half the $10.80 average price for a pack in New York City.
Japan Tobacco has slid 10 percent this year, compared with a 9.4 percent decline in the Nikkei 225 Stock Average. The stock gained 0.1 percent to 280,700 yen today.
12 Billion Cigarettes
Japan Tobacco expects 12 billion cigarettes of additional demand before the tax is introduced, and has increased production accordingly, said spokeswoman Yuka Sugimoto.
“Looking at the numbers, it looks like the frontloading already began in August,” she said. Japan’s cigarette sales by volume climbed 1.9 percent from a year earlier, the first gain since April 2008, according to the Tobacco Institute of Japan.
Former Prime Minister Yukio Hatoyama proposed the tax increase last year to discourage smoking in a country where 36.6 percent of men and 12.1 percent of women smoke, according to Japan Tobacco. The average Japanese smoked 2,028 cigarettes in 2007, according to ERC, almost twice as much as Americans and Germans and almost three times as much as Swedes.
“We’ve increased supply by about five times our regular amount,” said Mitsuko Matsui, 82, owner of a tobacco store in the Kanda business district of Tokyo. “I feel bad for the men who come here. They’re saying their cigarettes are going to be more expensive than their lunches.”
While New York City Mayor Michael Bloomberg is pushing to extend the city’s smoking ban in indoor workplaces to public parks and beaches, many of Japan’s restaurants don’t even have non-smoking sections and government buildings still include smoking rooms. The mayor is founder and majority owner of Bloomberg LP, the parent of Bloomberg News.
The Institute for Health Economics and Policy estimates the cost to society from smoking was 4.3 trillion yen in fiscal 2005, including fees for smoking-induced illnesses, lost productivity and fires started by cigarettes. The Finance Ministry, the majority shareholder of Japan Tobacco, estimates that the tax will raise 1.97 trillion yen this fiscal year.
Naoko Ogata, a senior researcher at the Japan Research Institute, a Tokyo-based think tank, predicts last-minute purchasing of cigarettes this month will boost consumer spending in the quarter ending Sept. 30 by 0.2 to 0.6 percentage points. With consumer spending accounting for about 60 percent of the nation’s economy, that results in a 0.5 to 1.4 percentage point increase to annualized growth in gross domestic product.
This isn’t the first time smokers hoarded before the government raised the levy. In June 2006, a month before the last time Japan raised the duty, spending on tobacco soared 49 percent from a year earlier, according to calculations made from statistics bureau data. The month the tax took effect, the figure slumped 40 percent.
Japan’s economy will expand at a 1.7 percent annual pace in the three months ending Sept. 30, according to 15 economists surveyed by Bloomberg. Growth slowed to 1.5 percent annual pace in the previous period, the slowest pace in three quarters as consumer spending stalled, prompting Prime Minister Naoto Kan to propose a new 915 billion yen stimulus package this month.
Some households this quarter also rushed to buy a new car before a subsidy was withdrawn, prompting the government to cut the program short as allocated funds ran out.
“With the cigarette tax and the end of the subsidies, we’re going to see a huge surge this quarter, followed by an unbelievable drop the next,” said Azusa Kato, an economist at BNP Paribas in Tokyo.
The long-term drop-off in tobacco demand will probably outweigh the temporary gain as the added costs encourage smokers to quit or cut back, said Japan Research’s Ogata. Cigarette consumption fell by about 20 percent after past levy increases, she said.
Some 10 percent of smokers said they would stop smoking if the price of a pack of cigarettes became 50 yen higher, a Kansai Institute for Social and Economic Research survey showed. Almost half of respondents said they would quit with a 200 yen increase.
Japan Tobacco may be looking abroad as it expects revenue in its home market to decline 16 percent this fiscal year because of the tax increase. The company said yesterday that demand in Russia, Ukraine and neighboring countries is recovering as the region emerges from the global recession.
Time to Quit
Still, analyst Mikihiko Yamato said the price increase will help Japan Tobacco’s profits hold up because of the additional 1.5 yen per stick for producers.
“No questions asked, I’d say ‘buy’ to the long-term investor,” said Yamato at Tokyo-based Japaninvest KK.
Meanwhile, smokers like Tomohiko Sato, 30, are stockpiling ahead of the deadline.
“This changes nothing,” said Sato, who saved up 20 cartons of Lucky Strikes. “I’m not going to quit, I’m not going to cut back. I love smoking.”
By Aki Ito