Tokyo considers raising cigarette tax, in threat to Japan Tobacco

Japan's new administration is considering raising cigarette taxes to European levels to help pay for an ambitious domestic spending plan, in a potential threat to partially state-owned Japan Tobacco Inc.
Shares of Japan Tobacco—the world's third largest cigarette company by sales volume, after Altria Group Inc. of the U.S. and British American Tobacco PLC of the U.K.—fell more than 4% Monday before recovering and ending down 0.9% to 254,300 yen, or $2,824.93.
The sharp moves followed comments Sunday by a top Japanese health official during a television interview that raised the possibility of the tax increase.
"Tobacco poses health problems. It may be necessary to raise [the tobacco tax] to the levels in Europe," said Akira Nagatsuma, minister of health, labor and welfare.
The health ministry already has asked the government's tax panel to increase the tobacco tax as part of tax reforms for fiscal 2010.
An increase of 10 yen per cigarette—10 times the amount of previous increases—is currently being debated.
Cigarettes in Japan are among the cheapest of any developed nation, with a pack of http://www.blogger.com/img/blank.gifMarlboro Lights costing 320 yen ($3.55). That compares with about 600 yen to 800 yen in the European Union.
For the Japanese government, a cigarette tax increase is a tricky proposition. While Tokyo has an incentive to reduce smoking to reduce national health-care expenses, the government also owns a 50% stake in Japan Tobacco.
The government also could hurt tax revenue if consumption drops too sharply.
"We believe the current excise tax is already at a high level," a Japan Tobacco spokesman said. "This is based on the fact that in the past, excise increases have shown that there hasn't been a corresponding increase in revenue, because sales volumes have declined."
Japan Tobacco, which sells the Mild Seven, Camel and Salem brands, has a 65% market share in Japan.
For decades, Japan has resisted imposing big tax increases on cigarettes, going against the global trend.
As a result, in an era where smoking rates have plunged in the developed world due to health concerns and cost, nearly 40% of all men in Japan still light up, according to Japan Tobacco. 
Smokers still puff away in restaurants and bars in Tokyo, unlike most states in the U.S. and most countries in the EU, which have imposed indoor smoking bans.
The new Japanese government, led by the Democratic Party of Japan, is mulling new spending programs that are estimated to cost as much as 16.8 trillion yen annually when they are fully implemented in the fiscal year beginning 2013.
It is debating where the money will come from, given that Japan's government liabilities—debts and other obligations—could approach 190% of its gross domestic product this year. The DPJ has already axed raising a broader consumption tax for four years.
"Raising cigarette taxes is not politically controversial," said the JT spokesman. "We are an easy target when the government is in short supply of revenue."
After the government raised cigarette taxes by one yen per cigarette in July 2006, sales volume at JT declined by 14.5 billion cigarettes to 174.9 billion in 2007, according to the company.
But the company offset the sales decline by raising prices on some of its top-tier brands, such as Mild Seven, by 10 yen per pack.
Analysts say that the revenue benefit for the government by doubling cigarette taxes would be marginal.
"This type of tax hike is not common—if the government doubled the taxes on cigarettes, it appears that cigarette volumes would decline by about 40%, resulting in 440 billion yen in additional tax revenues per year," said Toby Williams, an analyst at Macquarie in Tokyo. If Japan Tobacco "is able to raise prices, it would be positive for the company."
Government officials are also using a possible tax increase to dissuade people from smoking. Prime Minister Yukio Hatoyama told reporters on Friday that an increase in the tobacco tax is "possible" considering the adverse effects of smoking on public health.
The Japan Tobacco spokesman said "smoking is the choice of an informed adult. We provide the information of the health risks associated with smoking and that is their decision, rather than the state dictating their pattern of consumption."