Why Japanese consumption tax needs to be included in the price.

Living in another country can be inconvenient in many ways and its often the ones you least expect that end up annoying you the most. I generally try not to be one of those people that look at other countries as weird or wrong. I avoid making the assumption that the way I’m used to things being done in my home country is the ‘right way’ or the way things should be done. That said after much consideration I have come to the unfortunate conclusion that the Japanese consumption tax system is bloody stupid.

Its not that I have a problem with taxes themselves consumption tax or otherwise. Its more the way the stores display prices and the way it seems to be calculated. For those of you either not living in Japan or who just aren’t very observant consumption tax in Japan is added to the price displayed rather than already being calculated into it. This seems pointless in several ways as firstly it results in lots of uneven and non-rounded prices leading to more small change but also because it makes calculating what you need to pay slightly more difficult. It would be a different matter if there were some people that didn’t need to pay this tax even if they were only a small minority. For example in the UK many office stationary, wholesale and hardware catalogues wont include VAT (British consumption tax) in the price but will list it separately. This makes sense as many of the consumers will be companies who potentially don’t need to pay the tax or will collect it from a secondary customer when they resell the product. When buying a bottle of coke in a Japanese convenience store though you will have to pay the tax regardless of your circumstances. So why then do all the stores insist on listing the prices as the non tax prices with the actual price either not displayed or displayed in tiny writing below the non-tax price. I’m fairly sure there isn’t a law saying they have to display it this way as many other stores and businesses don’t.

There are a whole host of problems I have with this odd way of displaying consumption tax. The first is simply the convenience for the consumer. I like to be able to know how much I’m going to need to pay before going to the till and this makes it more difficult to calculate in my head. Also many tills have the annoying habit of displaying the non tax price total first despite this being a totally irrelevant number that doesn’t need to be displayed. The actually total price only appears after the cashier pushes another button something they don’t always do right away. As a result I’ve had several embarrassing situations where I have put down the amount the till display shows only for the cashier to then push another button changing the price and looking at me like I’m an idiot. It would be annoying but manageable if every shop was the same but some actually display the correct price which leads to the equally embarrassing situation of me standing there doing nothing after the price has been totalled and the clerk once again thinking I’m an idiot for not paying fast enough.

Beyond this minor annoyance thought I have several larger reasons for disliking this system. First of all I think its bad from a societal prospective as it doesn’t give businesses an incentive to keep after tax prices the same after a tax rise. What I man by this is that when tax goes up in the UK prices for the consumer often don’t as the big businesses don’t want to risk losing businesses by raising prices if their competitors might not. As such big supermarkets and chain stores will often keep prices the same and take a small hit to their profits rather than pass tax rises on to the customer. When the tax rise from five to eight percent happened in Japan all the prices actually went up which hit overall consumption and reduced the amount of things people bought which could potentially lead to the government getting less tax overall despite the higher percentage tax.

The aim of a tax system is to get the money needed to run society with as little inconvenience as possible for the common people or at least it should be. By allowing businesses to display pre-tax prices they have taken away any incentive these businesses have to smooth the transaction or reduce their prices to keep the overall price the same.

The final reason I don’t like this way of displaying tax is that I suspect its actually leading to some form of over or underpayment of tax due to the need to have the price be a whole number. While on an individual transaction this is a meaninglessly small amount for a large business making millions of transactions each month is could result to a huge discrepancy is what tax should be paid and what is actually ending up in government hands.

Think of it this way, for a simple price like ¥ 100 it becomes ¥108. No problem but for a price like ¥99 it should be ¥106.92 (99+7.92) which is clearly unusable as you cant take payment of a fractional yen. As such the business needs to round the number and as it’s so close to being ¥107 they tend to round up. This means that on a great number of transactions the individual is actually being overtaxed by a tiny amount. The opposite will also happen with some prices being closer to the lower number so being rounded down. Its likely that overall the two differences mostly even out but there is still likely to be a difference. So either the business have overtaxed people overall or under taxed them. What happens with that difference? Does the business pass on the over collected tax to the government or do they keep it for themselves. If the tax has overall been slightly under-collected due to rounding does the government simply get less money or does it come out the businesses pocket. They is likely a very clever and intricate bureaucratic accounting system that resolves this problem but whatever overly complex system they’ve created isn’t really needed as they could have set the consumer price first then taken 8% of it leading the the non whole number being on the price before tax rather than the final price. As businesses and governments dealing with accounts can account for partial yen this would entirely remove the problem.

But wait. It gets even better from the societal prospective as changing to this system would see the government collect more tax from the same consumer price. If a product is to be sold at ¥108 then the tax on it would be ¥8.64 which is more than it is now. With the example above of the rounded up price to ¥107 it would instead become ¥8.56 in tax making a pre-tax price for the business of ¥98.44. The business would have their prices being the fractional ones rather than any rounding being involved. There’s no need for a business to have whole number pre tax prices as that’s not what they are going to collect from the consumer. If the business decides that it absolutely needs to get at least ¥99 from this sale then they can put the consumer price up to ¥108 instead and can deal with the consumer knowing that they have raised their prices to make a bigger profit rather than hiding behind the excuse of consumption tax. Best of all those cases mentioned earlier of underpaid tax would also be fixed by this change.

Businesses would get other advantages to compensate them for the slight increase they may end up paying. For example this change would allow businesses to set more rounded prices if they wished likely without the consumer complaining. Having a price of ¥108 is actually a bit odd. Why not use ¥105 or ¥110. Either price would be preferred by the consumer as they wouldn’t end up with one yen coins as change. It would also allow the Business to keep less one yen coins and reduce the number of smaller coins in their float. This would reduce the amount of work for businesses banking services which would hopefully lead to a reduction in costs which could be passed on to the business customers. Continue this line of thought to its logical conclusion across society and you could see less use of one yen coins overall which could lead to a reduction in the number that need to be minted each year. Given that small denominations often cost more to mint than their face value this would lead to another saving for the government and therefore the taxpayer.

I can see no major disadvantage of this system for either the government or the consumer. Ever for businesses I can see very little disadvantages as in many cases it will all even out and they will still end up with the same prices and tax. The difference is simply that the fractional yen end up being on the side of people who are actually able to deal with fractional yen.

While my academic and previous employment background is in accounting and tax I don’t claim to be an expert in the subject. If you can see a reason for the current system or a better way to resolve the problem please comment below.


Don’t spend dollars in Japan!

This is a bit of a pet peeve of mine. When with a group of friends half of whom are likely to be American the group as a whole seems to be expected to work in dollars. I find this both strange and annoying for several reasons none of which actually have to do with it not being my currency.

Firstly we are people who live in Japan. We work in Japan, pay rent in Japan and spend in Japan. Other currencies simply aren’t relevant to us anymore except when sending money home. It may still be useful to know the up to date exchange rate for the sake of knowing how much you can bring when you go home but day to day it doesn’t really matter.

“Ahhh,” you say “but how will we know if things are cheap or expensive if we don’t convert it at least in our heads.”

Well the fact is that converting amounts generally isn’t the best way to work out value.Firstly exchange rates are always changing so something you buy one day and think is cheap may seem expensive a few weeks later. Has its value changed? Has the amount in yen that you pay changed? Has the proportion of your disposable income that the thing cost changed? The answer to all of these is no and yet many people will change their ideas of what is affordable based on foreign currencies which don’t actually matter while you’re living here.

A better way to understand how much something is worth is to look at how many hours you are working to pay for it. You can use you gross pay as a quick guide or if you want you can work out you hourly net pay. An even better system is to work out your hourly desposable income or total disposable income. Any of these methods give you a much better way to assign values to things you are buying in a new country.

Many Americans when I tell them about this pet peeve will ask what difference it makes. A dollar as about 100 yen so surely saying g dollars when everyone knows what they mean isn’t a real problem. Well I think it is. It’s a bad habit to get into when you are going to need to use yen when speaking to Japanese people. In the same way you should drop romanji for hiragana as soon as possible to get more familiar with the new writing system there is no point in using your old currency when doing so will make your ability to deal with yen slower.

The main argument against using dollars though is that one dollar is not one hundred yen.In the last twelve months the dollar has ranged from ¥99 to ¥118 it’s currently at about ¥114. During the last year it was far more likely that one dollar was 10-15% different from one hundred yen. So when someone says “$100 is far to expensive.” They don’t realise that the ten thousand yen they are talking about is actually about eighty seven dollars.

Even over longer periods like five years the dollar is rarely actually one hundred yen. In the last five years it’s ranged from ¥77 to ¥125 or dollar.during that time it was within 10% of one hundred yen to the dollar less than a third of it. Even when it was within 10% there is a major difference between ninety yen and one hundred and ten yen to the dollar.

This tendancy to use dollars to mean yen is not only a bad habit to get into when adapting to a new culture but it also leads to bad financial decision making which could hurt you. It’s not all difficult to learn a new currency and generally only takes a few weeks when you start to actually use it instead of pretending you are using dollars.

Another day, another embarrassment. Damned if you do and damned if you don’t.

So I had a couple of embarrassing things happen on the way to work today. I don’t want want to to imagine something truly mortifying but nearly a bit uncomfortable. I’m not sure if you would feel the same way about these things. Maybe it’s just me and I’m some oversensitive freak but I don’t think so.

The first thing that happened was that I went to Macdonald’s for lunch (I know… Both unhealthy and a wasted opportunity to experience Japanese culture but I was in a rush) and when I got to the counter I realised I didn’t have any money in my wallet.

I must have spent my last thousand yen on food the night before and hadn’t been to the ATM. I realised as I was ordering b so had to say sorry and rush off. At least it wasn’t later as that would have been worse. While this was mildly embarrassing it’s the ki d of thing that occasional happens and I resolved to not let it bother me.

So now being g aware that I had no money and still needing g to buy lunch I headed to the ATM which led to my second embarrassment.

When I arrived at the ATMs it was at the same time as a Japanese businessman who was just ahead of me. There was already a women waiting to use a machine so we queued up behind her. The order being the women then the businessman then me. I noticed that one of the ATMs was actually free and had been since before we got there but for some reason the women was going to it. The businessman had also clearly noticed this and shifted around uncertainly. When another machine became avaliable the women went to use it. The businessman continued to wait as the women had and didn’t use the free machine. It’s likely he had assumed it was out of order as I had due to the women’s actions.

Another machine become free and the businessman takes it. At this point I’m at the front of the queue. Should I go for the free but potentially out of order machine or just wait on the assumption that the people before me had known what they were doing.

Before I could decide a big group came in together and joined the queue behind me. I could tell that they were giving me weird looks. ‘ why isn’t the tall foreigner using the machine? Is it broken?’ but they wait just as I had. When I go up to a machine the women behind me goes to the other free machine which it seems was working the entire time.

I left with the feeling that I’d done something stupid or embarrassing despite doing the same thing as the two people before me. I felt judged even though I knew most of those people didn’t really care and likely forgot in seconds. It wasn’t a major embarrassment or anything too upsetting but it did make me feel really awkward and stupid.

So what do you think? Would you have done the same and if you had would it have been embarrassing. I know there are some people that are unfazed by anything but I’m not one of them. How about you?