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Will tax cuts for eco-friendly cars work?

Automakers in two minds

  • April 13, 2009

Will the Japanese government's new tax breaks for buyers of fuel-efficient and environmentally-friendly vehicles encourage domestic consumers to buy more cars, as predicted?

On April 1 the government introduced a new set of tax breaks for environmentally-friendly vehicles as a part of its economic-stimulus package. Under the new tax system, the vehicle weight tax and vehicle excise tax on environmentally-friendly vehicles, such as hybrid cars, will be reduced by 100%, 75% or 50%, depending on how environment-friendly and fuel-efficient the car is.

Purchasers of the Toyota Prius gasoline-electric hybrid car for example, would be exempt from paying both the weight tax and the excise tax. This would mean a saving of between 150,000 and 200,000 yen depending on the grade of the vehicle purchased.

The pre-tax retail price of the Prius is between 2.22 million and 3.19 million yen so savings of between 150,000 and 200,000 yen are not insignificant.

The fall in domestic car sales in Japan has accelerated even further since the shock of the Lehman Brothers bankruptcy in September 2008.

According to results compiled by the Japan Automobile Dealers Association (JADA) and others, 550,000 vehicles were sold in Japan in March (including mini cars), down 25.3% year on year.

The prevailing view in the automotive market is that, if the slump continues, even Toyota dealers could go into the red.

The Japan Automobile Manufacturers Association (JAMA) is predicting that the tax break will push up annual domestic car sales by approximately 310,000 units.

The tax break is designed to bring some relief to the hard pressed Japanese automotive industry and Japanese automakers are going all out to promote sales of new cars. Toyota is promoting its fuel-efficient gas-powered vehicles, as well as its hybrid cars, such as the Prius, while Honda is working to boost sales of their hybrid cars, including the new Insight, which was launched in February.

From April 23, Nissan will improve the fuel-efficiency of seven of the models (including the Cube compact car) it currently sells in Japan in order to take advantage of the tax break.

The Nissan range does not include any hybrid vehicles but the company is emphasizing the superiority of its fuel-efficient vehicles equipped with continuously variable transmission, or CVT.

JAMA has predicted that the tax break will boost domestic car sales by 310,000 units a year and JAMA chairman, Satoshi Aoki, who is also the chairman of Honda, expressed his hope that the tax cuts would have a significant effect.

Some car dealers, however, are cautious about the effectiveness of the tax incentives. An executive from a major car dealer in the Toyota group looked worried when he said "We are grateful for the tax break, and we will take advantage of the opportunity to boost sales but we are not sure just how effective it will be". His wariness is due to the fact that the tax relief scheme will run for three years, from FY2009 through FY2012.

Since the incentive program will last until the end of March 2012, consumers won't feel the need to purchase their new cars in a hurry and there will probably be a surge in car sales just before March 2012 when the tax break ends. The tax cuts won't necessarily encourage consumers to make immediate purchases.

There is another reason consumers are holding back on changing their cars

Even before these doubts about the effectiveness of the temporary tax break have been addressed, another more pressing problem has arisen for automakers.

It has become clear that the Japanese government is considering the introduction of 'scrap incentives', where the government offers subsidies to people who replace cars they have had for a long time, with new more environmentally-friendly cars.

The German government has already introduced a similar system, whereby it offers subsidies of up to 2,500 Euros (about 330,000 yen) to those who scrap their old cars and buy newer, more energy-efficient ones. As a result, sales of new cars have risen sharply.

The subsidy system would probably work well in Japan where people have been hanging on to their cars longer before replacing them.

So what is the problem?

Nissan's Chief Operating Officer, Toshiyuki Shiga, explained with a wry smile, "The subsidy system would probably be an excellent way of stimulating domestic demand but it could mean that people put off buying a new car until it is implemented".

Automakers realised that consumers would probably put off buying new cars until after the end of March, given that the tax break scheme was scheduled to start from April, and in order to help their dealers get over the difficult period they provided them with a various kinds of assistance, including the funds necessary for selling cars at discount prices.

However, no sooner had the tax break started on April 1, than the possibility of the subsidy system arose and the fear is that consumers will continue to hold back from purchasing new cars until the situation is clarified.

Measures to stimulate consumption are clearly necessary but it is vital that the government moves from the planning phase to implementation as rapidly as possible. Otherwise, the measures could be counterproductive. (Takahiro Hosoda)

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