Foreign researchers participating in a symposium on smoking in Japan, held by the Institute for New Era Strategy Institute. November 7, Minato, Tokyo. (©Sankei)
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Japan will raise the tax on heated tobacco products to the same rate as standard cigarettes to fund growing national defense costs. Heated tobacco has been regarded as less harmful than cigarettes. It is sometimes used as a harm-reduction option for those unable to quit immediately. Nevertheless, it has emerged as a key target to help cover rising defense spending.
This echoes past tax hikes on low-malt and third-category beer. Discussions on the timing of the tax hike are expected during the year-end tax commission meetings. Notably, as these discretionary products have gained popularity, they have been increasingly singled out as tax targets. However, some caution that the practice could stifle corporate innovation.
¥200 Billion Defense Budget
In the tax reform outline approved by the Kishida Cabinet in late 2023, the government proposed aligning the tax rate for heated tobacco with that for standard cigarettes. This move would raise the overall tobacco tax by ¥3 per heated tobacco cigarette. It would also help secure approximately ¥200 billion JPY ($1.29 million USD) for defense spending.
Heated tobacco was introduced in Japan 10 years ago in 2014. At the time, it did not have a dedicated tax category. Instead, it was taxed under the "pipe tobacco" rules based on the amount of tobacco used. Since fiscal year 2018, it has undergone five rounds of gradual tax hikes.
According to the Ministry of Finance, the current tax level was designed to match the heated tobacco and standard cigarette tax rates based on the quantity of tobacco content. Under this system, when the amount of tobacco leaf (including solution) used per heated tobacco stick was 0.4 grams, the tax rate would match that of regular cigarettes at ¥15.244 JPY ($0.099 USD). However, many cases emerged where the tobacco leaf contained in a heated tobacco stick was less than 0.4 grams. As a result, the tax rate for this vice became roughly 10% lower than that of traditional cigarettes.
The ministry highlighted that the tax system has created an unfair disparity despite being the same tobacco product.
A Game of Cat-and-Mouse
Taxing vices and pleasures has a history. The beer industry, for example, has been a target in a constant game of cat-and-mouse. In 1994, Suntory introduced "Super Hops (now out of production)," a low-malt beer. One reason was to avoid Japan's high beer taxes, which are among the highest globally. Following the bubble economy's collapse, other companies followed suit, and low-malt products quickly became a sensation. However, two years later, the government singled the category out for a tax hike following a revision to the liquor tax law.
"We created a new market through innovation," a beer company executive recalls. "Once our product became profitable, however, the government started targeting it. We were frustrated and strongly opposed it."
This cycle of innovation, followed by tax hikes, continued with third-category beers. "It became a repetitive cycle. We would invest heavily in development, strike gold, and then face tax hikes," the executive relates.
In the 2017 tax reform, the government began gradually closing the significant tax gap between beer and beer-like beverages. At one point, there was a difference of ¥49 per 350 milliliters between them. By 2026, the government will unify the tax rate for all 350-milliliter beer-like beverages at the same ¥54.25 ($35).
Equal Treatment for Similar Products
Unifying tobacco and alcohol taxes is based on the principle of equal treatment for similar products. This approach, which calls for similar products to bear the same tax burden, leads the Ministry of Finance to view any deviation as creating inequity.
While similar, heated tobacco is considered less harmful than traditional cigarettes. That is because it does not produce smoke containing dangerous substances. Research by tobacco companies suggests that toxic chemicals are reduced by around 10%. Clinical trials have shown that individuals who switched from cigarettes to heated tobacco have a reduction in harmful substance intake. The levels were similar to those who quit smoking entirely. However, their impact is not zero.
The Ministry of Health, Labor and Welfare's 2022 National Health and Nutrition Survey showed that heated tobacco use is growing. Among smokers, some 30.1% of men and 34.4% of women use it. Without incentives, though, some in the tobacco industry observe that smokers who switch to heated tobacco may return to conventional cigarettes.
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Author: The Sankei Shimbun
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