Is Japan ready to say goodbye to tax-free shopping?

Japan Times

3 days ago

As Japan keeps smashing record after record of international arrivals, some policymakers say the country isn't profiting enough from the throngs of tourists jamming its department stores and souvenir shops.
Lawmakers in the political center of Nagatacho have stepped up their efforts to maximize profits from foreign visitors — by setting their sights on the country's tax-free shopping system.
Last Thursday, a handful of Liberal Democratic Party lawmakers gathered for the second meeting of a study group to discuss abolishing the tax-free system.
'Widespread fraudulent use of the tax-free system undermines the credibility and fairness of the consumption tax. We can't allow this to continue,' Lower House lawmaker Kazunori Tanaka, the group's chairman, said in his opening remarks.
The group has put together a preliminary proposal to submit to the party's powerful tax committee, which will then hold discussions that are expected to set the agenda for the fiscal 2026 budget.
Seated next to Tanaka at the meeting was Lower House lawmaker Kenji Nakanishi — a former executive at the Tokyo branch of JP Morgan who has long been one of the most passionate advocates for abolishing the tax-free system.
The weak yen, compounded by decades of deflation and stable prices, has made Japan such a popular destination for tourists that, even if they didn't enjoy tax-free shopping, they would come anyway, Nakanishi said.
'The tax-free system has led to some results in the past,' he said. 'But I think that now, its role has come to an end.'
Japan introduced tax-free shopping over 70 years ago when it was still well outside the radar of international travelers.
Since then, its scope has progressively expanded, as the government invested heavily to enhance Japan's appeal as a tourist destination.
The current system exempts foreign visitors from paying the nation's 10% consumption tax on purchases exceeding ¥5,000 ($35) — on the premise that the goods are taken out of the country. For purchases of consumable items such as cosmetics or food products, a ceiling of ¥500,000 per day applies.
Savvy inbound travelers often make a beeline to Don Quijote to enjoy tax-free shopping. |
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The drastic increase in international tourist numbers in recent years has led to a surge in revenues derived from the tax-free system. Government data shows that of the over ¥8.1 trillion international tourists spent in 2024, roughly one third — or ¥2.4 trillion — was spent on shopping.
With consumption tax exempted on that amount, fiscal revenues amounting to ¥200 billion to ¥240 billion went uncollected.
'We shouldn't make low prices our key selling point,' Nakanishi said. 'I want foreign tourists to understand the true value of Japan, I don't want them to come just because it's cheap.'
A majority of OECD countries offer tax-free shopping to foreign visitor. Notable exceptions are the United States and the United Kingdom. The latter discontinued the perk in 2021.
Mixed feelings
Since Japan's full reopening to tourism in the spring of 2023, department stores have greatly benefited from the influx of foreign tourists and the country's tax-free system.
On a May afternoon in Tokyo's busy Shibuya neighborhood, crowds of travelers lined up for over half an hour on the seventh floor of a Don Quijote store to get a tax discount on their shopping. A sizable portion of the floor was set up to welcome the crowds, while the remainder showcased souvenirs such as chopsticks and cuddly toys.
'I think people would come and buy anyway even if there was no tax-free system,' a 27-year-old female tourist from New York City said. 'I see it as a bonus.'
Not everyone sees it that way, though.
'Everything is so cheap compared to where we live,' said a 21-year-old Polish man, who lives in the U.K., on his last day in Japan. 'I understand where people who want to abolish this system come from, but we also want them to understand how we feel.'
Liberal Democratic Party lawmaker Kazunori Tanaka speaks at a party panel discussing the country's tax-free shopping system on Thursday. |
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'We queued for a long time, but the 10% discount makes it very cheap to shop,' said a woman in her 50s from Hong Kong who was with her son and who travels to Japan roughly three times a year. 'I don't want the system to change.'
Tourists from Japan's immediate neighbors — mainland China, Hong Kong, Taiwan and South Korea — are outspending their American and European counterparts on shopping.
Last year, department stores recorded a staggering 86% increase in revenues from the tax-free system compared with 2023, totaling over ¥640 billion — roughly 11% of their overall revenues. Spending by foreign tourists made up the lion's share of department stores' revenues even as domestic consumption stagnated.
Shopping tourism has become such an integral part of the Japanese economy that abolishing the tax-free system would only benefit the state's coffers, said Masahiro Ohmoto, the vice-chairman of the Japan Tax-Free Shop Association, an organization that protects the interests of retailers adopting the tax-free system.
'Even if we abolish the exemption system here and secure some financial resources, those resources will just be spent elsewhere,' Ohmoto said, adding he's been actively lobbying politicians from both ruling and opposition parties to preserve tax-free shopping in Japan. 'People who won't shop in Japan will just shop in South Korea.'
Loopholes and abuse
Since its introduction in 1952, Japan's tax-free shopping system has gone through many changes.
In 2014, in an effort to boost the country's attractiveness in the eyes of international tourists, the government expanded the scope of the system and simplified its procedures.
Today the exemption from the consumption tax happens at the point of purchase. Retailers verify travelers' visa statuses and input their details as well as information related to their purchases into a digital database introduced in 2021 that is accessible by Japan Customs. When leaving the country, travelers must present their passports to customs agents, who may require them to then present the tax-free items.
LDP lawmaker Kenji Nakanishi believes Japan's tax-free shopping system no longer plays the role it used to. |
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However, cases of abuse of the system — often involving the resale of the tax-free items in the domestic market with a markup — appear to have skyrocketed in recent years.
From March 2022 to April 2024, roughly 90% of 690 individuals who spent over ¥100 million on tax-free shopping left the country with no further checks or penalty — even if they didn't have their purchases with them when they departed. Additionally, the Board of Audit of Japan discovered that a total of ¥340 million in taxes tied to the purchases of just nine individuals in 2022 had gone uncollected.
Abusers have resorted to ever more ingenious methods, some even involving elements of organized crime, to evade the consumption tax, especially when purchasing high-priced luxury goods. Some stores have systems in place that alert them when visitors make several big purchases within a short span of time to flag suspicious activities, Ohmoto said.
Stores that fail to collect the consumption tax as needed are charged the shortfall amount as a penalty. Last August, department store Takashimaya made headlines when it was fined ¥570 million for selling goods without meeting the requirements of the tax-free system.
As a result of the rampant abuse of the system, a legal amendment was made earlier this year to change the rules from November 2026. After the change, visitors to Japan will pay full price when shopping, then have the consumption tax refunded after their purchases are verified by customs at their point of departure. Similar systems are in place in other countries such as Italy and France.
But this solution is not without its own set of issues. Concerns have emerged over how it would lead to long lines at the country's major airports and create an additional burden on the customs agency.
Masahiro Ohmoto, the vice-chairman of the Japan Tax-Free Shop Association, says that in the absence of a tax-free system in the country, tourists will take their business elsewhere. |
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'The tax-free system is essentially a transfer of income from Japanese people to foreigners,' said Shumpei Goto, a researcher at the Japan Research Institute. 'There's a trade-off — whether to prioritize fairness of the consumption tax and put a strain on airport capacity or sacrifice fairness and keep business as usual.'
The larger question
The government aims to welcome 60 million tourists by 2030 — a goal that would propel Japan to the top five most-traveled destinations worldwide.
With the depreciation of the yen showing no signs of abating and Japan affirming itself as a popular destination for international travelers, the debate over the country's tax-free system is only expected to intensify in the years to come.
Proponents argue that, with the upcoming adjustments, the system will continue to provide a significant boost to Japan's economy, particularly in rural regions still relatively unaffected by the recent waves of foreign tourists.
However, Ohmoto said the sudden surge in tourist numbers at certain popular destinations has caused a degree of discomfort among locals struggling with rising prices and the diminishing power of the yen.
'At a time when Japanese people are struggling with the rising cost of living and what they perceive as heavy taxation, some might be frustrated to see foreigners buying cheaply and receiving favorable treatment,' he said.
Others argue that the tax-free system benefits the urban retailers of foreign luxury goods much more than the local economy, saying the public might not have a complete understanding of it.
'It's hard to say this system is contributing to regional revitalization or creating employment opportunities,' the LDP group's proposal stated.
In this context, the debate fits into a larger, more pressing discussion over the need to redesign Japan's tourism strategy to strike a balance between the economic interests of certain sectors and the well-being of local residents.
'It's about what we're aiming for when we say we want to become a tourist hub,' Nakanishi said.