Japan's Tax Hike Eclipses Apple and Amazon's Rising Sun

Photographer: Tomohiro Ohsumi/Bloomberg

Customers inside the Apple's Omotesando store during its opening in Tokyo on June 13, 2014. Close

Customers inside the Apple's Omotesando store during its opening in Tokyo on June 13, 2014.

Photographer: Tomohiro Ohsumi/Bloomberg

Customers inside the Apple's Omotesando store during its opening in Tokyo on June 13, 2014.

Apple and Amazon.com reported weak sales in Japan last quarter, and they're blaming the tax man.

Prime Minister Shinzo Abe has lost some fans among Japanese consumers who are still fuming over an April 1 sales tax hike. Abe can add Apple and Amazon to his list of critics, who say the federal tax increase from 5 to 8 percent spooked customers into delaying purchases.

Japan was starting to become Apple's favorite developed-market success story toward the end of last year. On the earnings call reviewing the quarter that ended in December, the company said iPhone sales growth was "very strong" in Japan, thanks to the long-overdue addition of the country's largest mobile carrier, NTT Docomo. During the next quarter's call, Apple CEO Tim Cook and Chief Financial Officer Luca Maestri touted a 26 percent revenue increase in Japan and an iPhone sales jump of 50 percent there compared with the same period last year.

But on July 22, Apple reported a slowdown in Japan last quarter. Cook pointed his finger at the tax increase and new regulation discouraging cellular operators from giving steep hardware discounts to attract new customers. (China is also cracking down on carrier subsidies.) Cook said he didn't know how the new rule would play out, but he expects the tax scare to subside. Maestri said the two factors "affected smartphone sales" but not detrimentally.

The effect on Amazon was more severe. Japan dragged down overall earnings in an already rough quarter, Amazon CFO Tom Szkutak said on last week's conference call. The tax increase impacted the company's "total international growth rate," he said.

The Japanese didn't just stop buying iPhones and avoid shopping at Amazon. The world's largest luxury-goods company, LVMH Moet Hennessy Louis Vuitton, reported an 11 percent slump in one segment of sales in Japan. Weak performance for that company across Asia sent the stock plunging 6.8 percent on July 25, its biggest drop in almost three years.

Retail sales throughout Japan in April, when the 8 percent sales tax kicked in, plummeted 13.7 percent. That was the highest since 1997 — which also happens to be the last time Japan raised taxes. The drop in June was 0.6 percent, slightly higher than the forecast.

Abenomics isn't always easy to stomach, but the hope is that the mechanisms — of which consumption tax increases is just one — put Japan on a path to a healthier economy. If the country sees economic growth of at least 2 percent this quarter, Abe is expected to go ahead with his plan to increase the tax again next year to 10 percent, according to a Bloomberg News survey. Kaoru Fukuda, an analyst at research firm IDC in Japan, said he expects higher sales taxes to have minimal impact on big companies.

It's likely that the hit Apple, Amazon and other companies took last quarter was offset by gains in the preceding one. The tax hike wasn't a surprise. Japanese consumers probably made their large planned purchases before April. Cook nodded to this possibility in his comments last week, as did Amazon's CFO, who said the company saw "accelerated growth" in Japan just before the increase to 8 percent.

For the folks designing iPhones and Kindles in the U.S., 8 percent doesn't seem so outrageous. Sales tax in Cupertino, California, where Apple is based, is 8.75 percent. In Amazon's home town of Seattle, it's 9.5 percent.

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