TOKYO (AFP) - The price of everything from beer and sushi to cars and dishwashers will rise across Japan on Tuesday as shoppers are greeted by the first sales tax rise in 17 years, which has prompted fears of a drop in consumer spending.
Tokyo approved the move to hike the levy from 5.0 per cent to 8.0 per cent as of April 1 in a bid to tame a massive public debt burden. The government is also mulling another rise to 10 per cent, still modest compared some nations' consumption tax.
But the rise has presented a huge challenge for Prime Minister Shinzo Abe since he swept to power in late 2012 on a ticket to nudge the world's number-three economy out of a cycle of falling prices and lacklustre growth with a policy blitz, dubbed Abenomics.
The last time Japan brought in a higher sales levy, in 1997, it was followed by years of deflation and tepid economic growth that defined the country's protracted slump.
Tokyo's recent efforts to stoke lasting inflation appear to be taking hold which, together with higher prices due to the tax rise, may prompt consumers to snap their wallets shut.
A key worry is that Japan's last tax rise deterred spending and foreshadowed the drop into years of deflation - although other factors, including the Asian financial crisis, were also blamed.
Aggravating fears over the economy were fresh figures on Monday that showed a surprising drop in factory output in February. The disappointing data came just before the Bank of Japan publishes its influential Tankan business confidence survey on Tuesday.
"When an increase in sales tax was introduced in 1997, the overall fall in demand contributed to a prolonged downturn, and there will be concern of something similar happening again," said Ms Amy Brownbill, an economist at financial data firm Markit.
Falling or static prices may sound great for household budgets, but Japanese wages have barely moved over the years and the cycle has meant shoppers often held off buying in the hope of getting goods cheaper down the road. That, in turn, hurt producers and slowed growth in the wider economy.
Tokyo has launched a special budget to help counter any slowdown while some are looking to the Bank of Japan's unprecedented monetary easing campaign to soothe the impact of a fall in consumer demand.
"We will mitigate the impact on the economy to the greatest extent possible," Chief Cabinet Secretary Yoshihide Suga, the government's top spokesman, told reporters Monday.
"We think we've done enough, but it's important to closely monitor the situation to avert an economic slowdown," he added.
Mr Suga pointed to Japan's spiralling health-care and social welfare costs which are straining the public purse in a rapidly ageing society.
"We hope people will understand" why the tax rise was necessary, Mr Suga said.