Measuring the Impact of Consumption Tax on the Cost-of-Living Index from Japanese Household Survey

Japanese households experienced both the introduction of price consumption tax and two tax hikes from 1989 to 2014. According to a Bank of Japan report, the consumption tax hike (from 5% to 8%) in April 2014 was expected to increase the consumer price index by about two percentage points. In this study, we measure the impact of the consumption tax hike on the cost-of-living index, using the panel cointegrated demand system. We find that two consumption tax hikes in both 1997 and 2014 effectively raised the cost-of-living index. That is, it seems that the timing of two tax hikes was appropriate for Japanese households.