Impact of Consumption Tax Increase on Regional Cost-of-Living Index in Japan

(Pages: 18-30 )

Manami Ogura*

Department of Economics,Otemon Gakuin University, 2-1-15 Nishiai, Ibaraki City, Osaka, 567-8502, Japan. 

Abstract:

In this study, I focus on the impact on the cost-of-living index caused by temporary price rises due to the consumption tax increase from 5% to 8% in April 2014 in Japan. To accomplish this, I first create tax-adjusted prices that do not depend on tax rate fluctuation by dividing the increments by tax increase, in order to measure the movement of price itself. Second, I measure the difference between regional cost-of-living indices occurred by estimating tax-adjusted and unadjusted data. I find that the tax increase is attributed to rising cost-of-living index, but it does not actually rise when I remove the influence of tax increase. In the regional dimension, the positive change in the cost-of-living index due to the tax increase is observed in most cities belong to the Tohoku, Chubu, and Chugoku regions, but in the Kinki regions the result is opposite. In addition, the decline of sub-indices in food is attributable to the decline in regional cost-of-living index.

Keywords:

Demand system, Regional cost-of-living index, Sub-index by commodity, Consumption tax hike. 

JEL CODES: D12; R21.