Japan Enjoys a Nicotine Buzz

A man walked into Yusuke Sato's tobacco store in Atsugi, southwest of Tokyo, last month and bought 100 cartons of Mild Seven cigarettes. While that may not be good for his health, it did save him almost $1,300 in potential cigarette taxes. Hoarding by Japanese smokers, who stocked up ahead of a big tax increase on cigarette manufacturers that took effect on Oct. 1, may have also given Japan the economic equivalent of a nicotine rush.

A big spike in cigarette sales may add as much as 1.4 percentage points to the projected annualized economic growth rate for the July-to-September quarter, according to estimates from the Japan Research Institute. That's more than four times the expected economic oomph of Prime Minister Naoto Kan's 915 billion yen ($10.9 billion) proposed stimulus package. "We were afraid we would run out of stock," says Sato, who started taking reservations for cartons in August. "Thirty cartons has been the norm." The cigarette tax hike this month, Japan's biggest ever, effectively increased the price of a pack by a third.

Former Prime Minister Yukio Hatoyama, who stepped down in June, proposed the tax increase last year to discourage tobacco use in a country where 2008 Labor Ministry data showed 36.8 percent of men and 9.1 percent of women regularly smoked. The average Japanese smoked 2,028 cigarettes in 2007, according to U.K.-based market researcher ERC Group. That's about twice as much as Americans and Germans and almost three times as much as Swedes. (In volume terms, Japan is the fourth-largest market for the world's tobacco makers, after China, the U.S., and Russia.)

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 Mild Seven brand will cost 410 yen, up 110 yen. In dollar terms, that's still far cheaper than the $10.80 average price for a pack in the U.S.

Japanese smokers don't face the same social stigma as their counterparts in the U.S. While the New York City government 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 nonsmoking sections, and government buildings still include smoking rooms.

The Institute for Health Economics and Policy, a nonprofit health-care research group, estimates the total 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 lit 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, predicted before the tax went into effect that last-minute purchasing of cigarettes in August and September would boost consumer spending by 0.2-to-0.6 percentage points in the third quarter. 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. 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.

Much like the temporary lift one gets from a cigarette, the economic gain from tobacco hoarding, as well as government financial incentives for Japanese car buyers that expired at the end of September, likely will prove fleeting. "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," says Azusa Kato, an economist at BNP Paribas in Tokyo.

It may take additional increases in tobacco taxes to lower smoking rates in Japan, researchers suggest. Some 10 percent of smokers in a survey by the Kansai Institute for Social and Economic Research said they would stop smoking if the price of a pack of cigarettes became 50 yen higher, and half said they would quit in the face of a 200 yen increase.

The bottom line: Japan's economy probably got a temporary lift in the third quarter from a spike in tobacco sales ahead of a big tax increase.

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