2014 is shaping up to be an especially interesting year in Japan for new car sales on account of one short, inescapable and rarely popular three-letter word. That word is spelt T-A-X.

In Japan, the equivalent of VAT is just 5% yet the Japanese government raised that to 8% this April. Then, the intention is to move it again to 10% by October 2015.

That, on the face of it, shouldn’t seem such a ground shaking development, or so you would think. Japan however has what might be termed "previous" when a similar thing happened before, back in 1997.

The high price of tax

At that time, VAT (or consumption tax) was raised from 3% to 5% to address Japan’s less than healthy finances and two things happened.

One, it killed the growing car market in Japan stone dead. And two, that seemingly simple tax rise cost Japanese Prime Minister Ryutaro Hashimoto his job.

Japan’s car makers and importers are thus bracing themselves for a potentially big fall off in sales this year post April 1 as the consumption tax rise takes effect.

Indeed, the latest estimation is that car sales will drop to 4.85 million units in Japan this year, a big downturn compared to the 5.34m in 2012 and 5.38m in 2013.

Boom time for new car sales

Given the widespread publicity and controversy about the tax rise in Japan, it’s probably no surprise that car sales of late have been going through the roof.

Buyers (both retail and fleet) have been rushing to complete their orders to beat the tax deadline. It’s also a time, as end of the financial year approaches (Japan’s fiscal year runs from April-March) when makers and dealers traditionally pump a lot of extra volume through to maximize their final year numbers.

Since September 2013, it’s been heady double-digit growth every month in Japan, with sales soaring 25.0% year-on-year in December, then a further 29.4% in January.

Sales this February were up a further 18.4% as the momentum continued to build… March 2014 looks set to be an even bigger blockbuster (as we go to press).

Tax rise caused car sales crash in 1997

Many in the industry have bitter memories of what happened last time around. If we go back to 1989-90 and the peak of Japan’s "bubble economy", the market then hit an all-time record 7.77 million units. It was an extraordinary era when Japan’s confidence was a high, the nation was awash with money and anything seemed possible.

When the bubble burst, the market went into a tailspin, then stabilised and started to grow again. That was the good news. By 1996, we were back to 7.077 million units again, so not far off the all-time peak.

But in the big picture, Japan’s finances were still in a mess so the Government decided to go for a consumption tax hike from 3 to 5%. It didn’t work. Japan’s economy went into further decline, car sales nosedived (down to 5.88 million units within a couple of years) and Hashimoto himself was soon gone from office.

Record national debt

Fast-forward to today and the situation is the same, only different. Japan is still a hugely affluent country but its finances continue to look in desperate shape. Gross national debt is past 200% of GDP, and counting – the highest in the developed world.

Japan has an ageing population and shrinking market. Something has to give and Shintaro Abe, the current prime minister, having prevaricated, has now gone for the rise as part of its "Abenomics" whatever-it-takes programme to fix Japan’s finances now and in the future.

For the new car buyer in Japan, the tax rise is obviously less than welcome news because the tax burden was already extremely high. Japan, perhaps uniquely, levies a weighty burden of taxes on the would-be owner, with consumption tax only part of the highly complex picture.

True cost of car taxes in Japan now

Let’s start with a Toyota Corolla Axio 1.5x as an example. This is a wholly conventional "bread-and-butter" compact family saloon, the kind of car that, for generations, topped Japan’s best seller charts.

The base price for this is ¥1,551,429 (some €11,900 at current rates). Then comes the consumption tax, which up until April 2014 was 5% and took the ask up to ¥1,629,000.

Vehicle tax is ¥2800. Acquisition tax is ¥69,800. Weight tax is ¥36,900. Added to this, there is mandatory third party insurance (¥40,040), recycle fee (¥10,350) and sales charge (¥64,000). The grand total comes to ¥1,852,890 (€14,230).

Next come various admin charges to get licence plates and prove you have off-street parking (mandatory in all big cities now in Japan). But to keep things simple, let’s just stick with the tax charges…

Tax impact from April

In Japan’s post April 1, 2014 world, the consumption tax goes up to 8% but vehicle acquisition tax reduces from 5% to 3% for cars like the Corolla.

The good news: this acquisition tax, along with the weight tax, is set to be abolished altogether when consumption tax reaches 10%.

Japan, meantime, continues to push the sale of "green" cars through tax incentives so should you decide to buy a Toyota Prius, for example, then you still have to pay vehicle tax (¥3200). However, acquisition tax is already 100% rebated and so is weight tax. So some welcome savings there.

Likewise, with a model like the BMW i3, you are exempt from acquisition and weight tax and you also get a 50% break on annual vehicle tax, according to BMW Japan.

In Japan, tax incentives are available on EVs, PHVs, clean diesel and natural gas cars and in the last 2013-14 fiscal year, this would have taken around ¥400,000 (€3,070) off the price of an i3 EV and ¥750,000 (€5,760) from the i3 REX (range extender version) which is categorized as a PHV by the Japanese government.

More or less?

One fairly fundamental question, though – will a car like the Corolla or Prius be more or less expensive in the new 8-10% consumption tax era? Answer, yes, more costly, once all these (arcane) tax calculations wash through.

On paper, the Corolla will be around ¥20,000 dearer (some €150), estimates Toyota Japan, assuming no other data points change. The Prius will also be more expensive, so no real surprise that the market, pre April 1, had been so strong.

Green car tax cuts

Looking to the future, Japan intends to expand its range of eco car tax cuts to bolster the market and make the roads greener. No doubt, carmakers will also make a concerted effort ‘to support’ the market this year to keep it alive…

However, Japan’s consumption tax, or VAT, whether it’s 5%, 8% or 10% still looks unfathomably low by European standards (The Economist reckons it will eventually have to go up to 20% if Japan as a nation is truly to deal with all its structural financial issues).

There’s also a belief that the vehicle sector has been penalized far too much and for too long by the government. You could say, as in European countries, it’s an easy target for the taxman.

This is something that JAMA, (Japan’s equivalent of a national motor trade organisation) has long campaigned to put right, looking to streamline the whole process.

There again, when you look at revenues generated by vehicle taxation in Japan, the most recent estimate being a staggering ¥2658.7 billion, you can see how loath the politicians and bureaucrats might be to give some of that up.

It’s a truly huge number and in round figures, that might equate to something like €20.4 billion, but don’t quote me…