Effects of Tax Incentives on Sales of Eco-Friendly Vehicles:
Evidence from Japan
Ibrahim Alhulail
Graduate School of Economics, Kobe University
alhulail.ibrahim@gmail.com
andKenji Takeuchi
Graduate School of Economics, Kobe University
takeuchi@econ.kobe-u.ac.jp
March	  2014	
  Discussion	  Paper	
  No.1412	
  Graduate	
  School	
  of	
  Economics,	
  Kobe	  University

Abstract
This study examines the effects of economic incentives on the sales of ecofriendly vehicles in Japan. We focus on the Tonnage and Acquisition Tax
Cuts for Eco-Friendly Vehicles and the two waves of Eco-Car Subsidies
implemented in Japan. We use the monthly sales data of 10 vehicles from
April 2006 to March 2013. We find that the effects of the tax incentives
were more significant than the effect of gasoline price. This is in contrast to
results from the United States and Canada, where gasoline prices have had alarger effect on increasing the adoption levels of hybrid electric vehicles.
The difference is due to the structure of the tax cut. Japan’s policy of taxes
paid upon purchase was more effective compared to the policies in the
United States and Canada, where certain tax cuts were on income taxes.

JEL Code: L62, Q55, Q58
Keywords: Eco-Friendly Vehicle, Hybrid Electric Vehicle, Tax Cuts, Subsidy,
Gasoline Prices
	
  
	
  

1

	
  
1. Introduction
The Tonnage and Acquisition Tax Cuts for Eco-Friendly Vehicles and the EcoCar Subsidy were introduced in Japan in April 2009.1 The purpose of these policies is to
mitigate climate change by reducing greenhouse gas emissions. The government plansto achieve these goals by increasing the market share of eco-friendly vehicles anddecreasing that of combustion engine vehicles. These policies also aim to support
automobile industry sales, given that the Japanese automobile industry was hit by a drop
in demand from foreign markets due to the appreciation of the Japanese yen.
This study estimates the effect of these policies on the sales of eco-friendly
vehicles. Many other factors might affect the sales of eco-friendly vehicles. These
include changes in gasoline price, the price of vehicle models, and household incomes.
In particular, the gasoline price might play a significant role in vehicle purchasedecisions, since eco-friendly vehicles consume less fossil fuels. Thus, one of the goalsof this study is to compare the effects of the tax incentives and the change in thegasoline price on the sales of eco-friendly vehicles.
A growing number of studies have examined the impact of policy incentives on
the sales of eco-friendly vehicles. Gallagher and Muehlegger (2011) studied various
policies designed to increase the adoption rates of hybrid electric vehicles in the UnitedStates across federal, state, and local government levels. The types of policies theystudied included tax waivers, income tax credits, and non-tax incentives such as highoccupancy lane priority incentives. Sales tax waivers contributed to more than 10 times
the increase in hybrid electric vehicle sales compared to income tax credits. They also
found that the effect of rising gasoline price on the increase in adoption rates of hybrid
electric vehicles was higher than that of the tax incentives. Diamond (2009) analysed
the impact of government incentives on hybrid electric vehicles in the United States. He
found a strong relationship between gasoline price and hybrid electric vehicles adoption
rates, while a weaker relationship existed between adoption rates and tax incentives. He
also found that policies that provide direct incentives, such as upfront payments upon
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
1

An eco-friendly vehicle is a vehicle that emits fewer greenhouse gases than a conventional vehicle.
Thus, it is considered to be beneficial to the environment. The question of which particular vehicle may
be considered as eco-friendly or otherwise depends on the country and the context. The definition of an
eco-friendly vehicle, as per Japanese policy, is based on fuel economy and exhaust gas emissions.

2the purchase of a new vehicle, tend to be the most effective. Chandra et al. (2010)
examined the impact of a tax rebate policy for hybrid electric vehicle sales in Canadianprovinces. They estimated that 26% of the hybrid electric vehicles sold during theperiod of the tax rebate program could be attributed to the program itself. On the other
hand, they also noted that the program subsidised consumers who were planning to buy
a hybrid electric vehicle in any case. There was a decrease in the market share of
combustion engine models and an increase in the market share for hybrid electricvehicles. Beresteanu and Li (2011) studied hybrid electric vehicle demand and theeffects of the income tax credit incentives and gasoline price in the United States. They
estimated that in 2006, the government incentive program was responsible for 20% of
hybrid electric vehicle sales, while the increase in gasoline price from 1999 levels
contributed to a 37% increase in hybrid electric vehicle sales.
While most of the previous studies suggest that the effect of gasoline price isimportant, there is reason to believe that these effects would have less impact than a tax
cut policy. First, the change in gasoline price is uncertain. Even if consumers face risinggasoline prices, it might be a temporal phenomenon and could recede in the near future.
Second, most of the effects of gasoline prices occur in the future. Consumers maylargely discount the future cost savings of energy-efficient goods, so much so thatsometimes, the discount rate may be considerably higher than the market interest rate.
Third, cost savings through policy instruments are typically announced at the time ofpurchase of a new car, and consumers can easily recognize such an opportunity.
The main focus of this study is to compare the effect of tax incentives versus thatof gasoline price on eco-friendly vehicle sales. While previous studies found thatgasoline price had a larger effect than tax incentives on hybrid electric vehicle sales inboth the United States and Canada, this may not be the case for Japan because of thedifference in policy design. Our result suggests that while the gasoline price has aconsiderable effect on sales of eco-friendly vehicles in Japan, tax incentives have asignificantly larger effect.
The contribution of this study is twofold. First, this study includes not just hybrid
electric vehicles but all types of eco-friendly vehicles. The nature of Japan’s tax
incentives facilitated such a study, as the policy also includes vehicles (other thanhybrid electric vehicles) that emit fewer greenhouse gases. Second, many studies used3

data from the United States, where the tax cut is not offered directly at the point ofpurchase. The tax cut policy in Japan is more direct and easy to understand; it isessentially a reduction in the taxes consumers pay upon purchasing an eco-friendly
vehicle and upon paying taxes during the mandatory vehicle inspection. The benefits or
reductions in taxes are reaped quickly without complications. Conversely, the tax cut
policies in the United States are indirect and complicated. For example, the UnitedStates employs an income tax credit scheme to implement tax incentives for hybrid
electric vehicles. This scheme provides income credits to consumers who buy hybrid
electric vehicles, which can be used to reduce the income tax collected from them.
Therefore, the benefits are not directly related to the taxes paid upon purchase; instead,they are related to other taxes, such as income taxes, paid by the consumer. Thisdistinction is very important in terms of differing consumer reactions to tax policies inJapan compared to those in other countries.
Section 2 provides an overview of the Tonnage and Acquisition Tax Cuts for EcoFriendly Vehicles and the Eco-Car Subsidy, and changes in the demand trends for somevehicles in reaction to changes in gasoline price. In Section 3, we list the data sources
used in this study, explain our choice of this particular dataset, and detail the method
used in the analysis of the effects of the tax cut policy on eco-friendly vehicle sales.
Finally, in Section 4, we interpret the estimated results from the analysis and discuss
their implications.
2. Incentives for Purchasing Eco-Friendly Vehicles
The Japanese government introduced the Tonnage and Acquisition Tax Cuts for
Eco-Friendly Vehicles and the Eco-Car Subsidy in April 2009 as a part of the FY 2009
Tax Reform legislation,2 a document produced every fiscal year by the Tax Bureau of
the Ministry of Finance. The policy was originally proposed by the Japanese
Automobile Workers’ Union3 and later passed by the Ministry of Finance. The tax cut
was supposed to end by March 2012, but it was extended until April 2015. The decision
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
2

The FY 2009 Tax Reform document was retrieved fromhttp://www.mof.go.jp/english/tax_policy/tax_reform/fy2009/tax2009a.pdf.
3
The original request (in Japanese) for the policy can be found at
http://www.meti.go.jp/main/downloadfiles/zeisei24/youbou_165.pdf.

4

for the extension of this policy is documented in the FY 2012 Tax Reform legislation.4
A part of the reason for the extension was the appreciation of the yen, which negatively
affected global demand for Japanese automobiles. The program was extended in orderto support automakers and help them make up their losses in the global market byincreasing sales in the domestic market.
Table 1 details the Tonnage and Acquisition Tax Cuts for Eco-Friendly Vehicles.
Depending on its level of greenhouse gas emissions, a vehicle be considered ecofriendly and may enter the program. There are three levels of tax cuts: 50%, 75%, and100%. The more eco-friendly the vehicle, the higher the tax cut. Hybrid electricvehicles and electric vehicles are eligible for a 100% tax cut, which means that theacquisition tax at the time of purchase and the tonnage tax at the vehicle’s firstinspection are waived completely for these vehicles. For example, the Toyota Prius, ahybrid electric vehicle, avails a 100% tax cut, while the Honda Fit, which is not hybrid
but eco-friendly, avails a 50% tax cut. The tax cut is applicable to two taxes: theacquisition tax and the tonnage tax. Acquisition tax is the tax paid upon the purchase of
the vehicle, while tonnage tax is the tax paid during its first mandatory inspection,
which should take place within three years from the time of vehicle purchase and once
every two years thereafter.
Table 2 explains the Eco-Car Subsidy. The first wave of the subsidy was
implemented from April 2009 to September 2010, and the second wave, from
December 2011 to September 2012. The first wave of the program encouraged theretirement of old vehicles. If a consumer replaced a combustion engine vehicle ownedfor 13 years or more with an Eco-Car (an environmentally friendly vehicle), he/shewould either receive 250,000 yen for buying a hybrid vehicle or 125,000 yen for buying
a light motor vehicle. When a consumer chooses to buy an Eco-Car without the
aforementioned vehicle replacement, he/she is eligible to receive 100,000 yen whilebuying a hybrid vehicle or 50,000 yen while buying a light motor vehicle. The second
wave of the program did not encourage the retirement of old vehicles and simply
offered a consumer 100,000 yen for buying a hybrid vehicle or 70,000 yen for buying alight motor vehicle.
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
4

The FY 2012 Tax Reform document was retrieved fromhttp://www.mof.go.jp/english/tax_policy/tax_reform/fy2012/tax2012a.pdf.

5According to the data used in this study, there was a sizable increase in the salesof eco-friendly vehicles after the implementation of the tax incentives, especially forhybrid electric vehicles such as the Toyota Prius. Figure 1 shows the sales of the Toyota
Prius and the average price for regular gasoline in Japan from April 2006 to March
2013. We can see that after the implementation of the tax incentives, there was a sharp
rise in sales. The sharp decline in Prius sales in April and May 2011 can be attributed to
the 2011 East Japan Great Earthquake and Tsunami.
While Figure 1 suggests a relation between the tax incentives policy and the risein Toyota Prius sales, different vehicle models might have a different reaction to the tax
incentives and changes in gasoline prices. Figure 2 shows the sales data for the Toyota
Vitz and gasoline prices from April 2006 to March 2013. We can see that there is nosudden increase in Vitz sales after the introduction of the tax incentives, unlike the caseof the Prius. Therefore, we need to consider the different impact of the tax cuts on
different vehicle models.
3. Data and Method
3.1. Data
Our data set contains the monthly sales of 10 vehicles in Japan that fall under the
Tonnage and Acquisition Tax Cuts for Eco-Friendly Vehicles and the Eco-Car Subsidy.
The vehicles are Toyota Prius, Honda Fit, Toyota Vitz, Toyota Corolla, Nissan Serena,
Toyota Passo, Honda Step Wagon, Toyota Voxy, and Mazda Demio. All these vehicles
were among the top selling 30 vehicle models from April 2006 to March 2013.
Table 3 shows the 10 vehicles with the corresponding tax cut percentage andmanufacturer information. Data for monthly sales numbers from April 2006 to March2013 for each vehicle are sourced from the monthly sales statistics for new passenger
cars, released by the Japan Automobile Dealers Association.5

	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
5

The official title of the source is Shinsha Jouyousha Hanbai Daisu Rankingu (New Passenger Car Sales
Ranking). Source: http://www.jada.or.jp/contents/data/ranking/index.php.

6Vehicle prices in Japan are sourced from the Manufacturer’s Suggested Retail
Price (MSRP) list, which is typically posted on the manufacturer’s website.6 The data
set covers the MSRP prices for all 10 vehicles from April 2006 to March 2013.
Average monthly prices of regular gasoline in Japan are obtained from the websiteof the Institution of Energy Economics Japan, specifically from the Oil Information
Center. The website is updated on weekly and monthly bases for the prices of different
types of gasoline across Japan.7
We use the monthly average income per capita as a proxy for the household
budget constraint. The data are sourced from the Family Income and Expenditure
Survey, 8 which appears monthly on the websites of the Statistics Bureau and the
Director General for Policy Planning of Japan.
Table 4 shows a summary of the descriptive statistics for the datasets. Since thetax incentives were introduced in April 2009, we require data before and after the
implementation of the tax incentives to conduct our study and to compare the differencein sales numbers with and without the tax incentives. Thus, the time period of the dataspans from April 2006 to March 2013.
3.2. Method
We regress the sales numbers of eco-friendly vehicles on various explanatory
variables using the fixed effects model. We use the following equation:𝑙𝑛𝑉𝑒ℎ𝑖𝑐𝑙𝑒𝑆𝑎𝑙𝑒𝑠!" = 𝛼 + 𝛽! 𝑙𝑛𝑃𝑟𝑖𝑐𝑒!" + 𝛽! 𝑙𝑛𝐺𝑎𝑠𝑜𝑙𝑖𝑛𝑒! + 𝛽! 𝑙𝑛𝐼𝑛𝑐𝑜𝑚𝑒! +𝛽! 𝑇𝑎𝑥𝐶𝑢𝑡100!" + 𝛽! 𝑇𝑎𝑥𝐶𝑢𝑡75!" + 𝛽! 𝑇𝑎𝑥𝐶𝑢𝑡50!" + 𝛽! 𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑂𝑛𝑒! +𝛽! 𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑇𝑤𝑜! + 𝛽! 𝑙𝑛𝐸𝑎𝑟𝑡ℎ𝑞𝑢𝑎𝑘𝑒! + 𝛽! 𝑙𝑛𝐹𝑖𝑥𝑒𝑑𝐸𝑓𝑓𝑒𝑐𝑡𝑠! + 𝜀
The fixed effects model was chosen over the pooled ordinary least squares (OLS)
model on the basis of the F-test. The dependent variable 𝑙𝑛𝑉𝑒ℎ𝑖𝑐𝑙𝑒𝑆𝑎𝑙𝑒𝑠!" represents
the log of sales for month t and vehicle m. The independent variables contain economic
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
6

We took the average of MSRP for each model of each vehicle being sold at the same period. The data of
the past editions of the vehicles are obtained from the archived catalogues posted on the website.
7
The official title of the source is Kyuyusho Gasorin Keiyu Toyu Shujichosa (Weekly Survey on Prices of
Gasoline, Light Oil, Kerosene). The data are retrieved from http://oil-info.ieej.or.jp/price/price.html.
8
The data are retrieved from http://www.stat.go.jp/english/index.htm.

7

factors that may affect sales. The first variable is 𝑙𝑛𝑃𝑟𝑖𝑐𝑒!" , the logged MSRP for
vehicle model m in month t. The second variable is 𝑙𝑛𝐺𝑎𝑠𝑜𝑙𝑖𝑛𝑒! is the logged averageregular gasoline price in Japan in month t. The third variable is 𝑙𝑛𝐼𝑛𝑐𝑜𝑚𝑒! , the log of
average income per capita in Japan in month t.9 𝑇𝑎𝑥𝐶𝑢𝑡100!" is a dummy variable thatindicates whether the vehicle model is included in the 100% tax cut program for vehicle
model m in month t, where 1 indicates that it is part of the tax cut program and 0
indicates otherwise. The corresponding variables for vehicle models in the 75% and
50% tax cut program are 𝑇𝑎𝑥𝐶𝑢𝑡75!" and 𝑇𝑎𝑥𝐶𝑢𝑡50!" respectively. 𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑂𝑛𝑒!
and 𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑇𝑤𝑜! are dummy variables that indicate that the period of the first wave
and that of the second wave of the subsidy were in effect, respectively. 𝐸𝑎𝑟𝑡ℎ𝑞𝑢𝑎𝑘𝑒! isa dummy variable for April and May 2011 and is added to consider the impact of the2011 East Japan Great Earthquake and Tsunami. 𝐹𝑖𝑥𝑒𝑑𝐸𝑓𝑓𝑒𝑐𝑡𝑠! is a dummy variable
that allows capturing the time-invariant effects of each vehicle model. ε is the error
term.
4. Results and Implications
4.1. Results
The estimated results are shown in Table 5. All the estimated coefficients, except
for 𝑙𝑛𝑇𝑎𝑥𝐶𝑢𝑡50, are in line with the expected sign. Model 1 includes the earthquake
dummy, and Model 2 excludes it; however, the estimated results between the models
are not so different. Model 3 includes an additional variable, 𝑙𝑛𝑇𝑜𝑡𝑎𝑙𝑆𝑎𝑙𝑒𝑠!   which is
the log of the total number of sales for all vehicles for month t. Regarding Model 1,
𝑙𝑛𝑃𝑟𝑖𝑐𝑒 and 𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑇𝑤𝑜 are significant at the 5% level, 𝑇𝑎𝑥𝐶𝑢𝑡75 and 𝑇𝑎𝑥𝐶𝑢𝑡50
are significant at the 10% level, and the remaining coefficients are significant at the 1%
level.
The coefficient of 𝑇𝑎𝑥𝐶𝑢𝑡100 indicates the effect of the tax cut policy on ecofriendly vehicle sales with full tax exemption. The estimated coefficient is 0.872 and issignificant at the 1% level. The tax cuts at the 100% level contributed to 87.2% of the
	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  	
  
9

The average income level in Japan for a specific month is calculated by taking the average income data

for all prefectures for that specific month and averaging them.

8rise in eco-friendly vehicle sales. Note that the 100% category includes only hybrid
electric vehicles. The only hybrid electric vehicle in this study is the Toyota Prius.
The estimated coefficient of 𝑇𝑎𝑥𝐶𝑢𝑡75 is 0.086 and is significant at the 10%
level. Therefore, the tax cuts at the 75% level contributed to 8.6% of the rise in the salesof eco-friendly vehicles in the 75% category. On the other hand, the coefficient of
𝑇𝑎𝑥𝐶𝑢𝑡50 is estimated as −0.075 and is significant at the 10% level. Thus, the tax cutsat the 50% level contributed to a 7.5% decrease in the sales of eco-friendly vehicles in
the 50% category. The negative sign suggests that the tax cut caused an unfavourable
effect on vehicle sales in this category. This might be due to the shift in demand fromthis category of eco-cars to the other categories, namely those eligible for either the
100% or the 75% tax cut.
The coefficient of 𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑂𝑛𝑒 is positive and significant at the 1% level. The
estimated coefficient means that the subsidy contributed to 21.5% of the rise in ecofriendly vehicle sales. The coefficient of 𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑇𝑤𝑜 is also positive and significant at
the 5% level. The coefficient of the second wave of the subsidy is 0.107 and smaller
than that of the first wave. This is reasonable since, as explained in Section 2, thesecond wave of the subsidy was less generous than the first.
The coefficient on 𝑙𝑛𝐺𝑎𝑠𝑜𝑙𝑖𝑛𝑒  is 0.446 and is significant at the 1% level. Thus, a
1% rise in the price of gasoline would increase eco-friendly vehicle sales by 0.446%.
Because eco-friendly vehicles do not consume as much gasoline as combustion engine
vehicles, it is natural that people would buy vehicles that do not require a lot of gasoline
when gasoline prices are high. The rise in eco-friendly vehicle sales by 0.446%
indicates that Japanese consumers are fairly sensitive to the gasoline price.
The coefficient of 𝑙𝑛𝑃𝑟𝑖𝑐𝑒 is −0.488 and is significant at the 5% level. Thismeans that a 1% increase in the price of eco-friendly vehicles leads to a −0.488%
decrease in their sales numbers. The direction of the relation in 𝑙𝑛𝑃𝑟𝑖𝑐𝑒 fits the theory,
because demand falls when the price rises.
The coefficient of 𝑙𝑛𝐼𝑛𝑐𝑜𝑚𝑒  is −0.198 and is significant at the 1% level. Thismeans that as income rises, the demand for eco-friendly vehicles decreases slightly (a1% rise in demand decreases the sales of eco-cars by 0.198%). This is somewhat odd
but can be interpreted as follows: as people gain more income, they will be able to9

afford more gasoline, and they would not have to buy vehicles that have better fuelefficiency (namely, eco-friendly vehicles).
In model 3, we found that a 1% increase in 𝑙𝑛𝑇𝑜𝑡𝑎𝑙𝑆𝑎𝑙𝑒𝑠  increases sales byapproximately 1%. Also 𝑙𝑛𝐺𝑎𝑠𝑜𝑙𝑖𝑛𝑒 , 𝑙𝑛𝐼𝑛𝑐𝑜𝑚𝑒 , 𝑇𝑎𝑥𝐶𝑢𝑡50 and 𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑇𝑤𝑜
coefficients were not significant. Other than that the results in model 3 are not so
different from model 1.
Table 6 shows a different specification of the same models in Table 5 but with thetax cut dummy variables lumped together into one dummy variable. The significance ofthe variables and the sign are the same as those in the separated tax cut levels model,
but the benefit of this specification is that it is easier to compare the effects of the tax
cuts and gasoline price without concern about the different levels of tax cuts.
4.2. Implications
The estimated result suggests that the demand for eco-friendly vehicles is affectedby gasoline price positively. The coefficients on the gasoline price variable are 0.446: a
1% rise in the gasoline price would cause a rise of 0.446% in sales. This is sizable effectsince it is almost similar to the estimated effect of the decrease in vehicle prices(0.488%).
In our result, the Tonnage and Acquisition Tax Cut for Eco-Friendly Vehicles
affected sales positively and more than gasoline price. The coefficient on the tax cuts in
the 100%, 75%, and 50% categories suggest that because of the tax cuts, demand roseby 87.2% and 8.6% and fell by 7.5% respectively. We can see that the positive effect of
the tax cuts is clearly larger than their negative effect, mainly due to the tax exemptions
for hybrid electric vehicles. Comparing the coefficients clearly shows that the tax cuts
had a larger effect than gasoline price in increasing the adoption rate of eco-friendly
vehicles in Japan. In addition, using the results in Table 6, we can compare the lumped
tax cut dummy coefficients (0.159) with the logged gasoline price coefficients (0.395)
respectively. The interpretation here is that tax cuts increased sales by approximately
16%, and a 1% rise in the gasoline price increased sales by approximately 0.4%. In
other words, to have the same impact as tax cuts, gasoline price should be increased by
40%.

10

According to Gallagher and Muehlegger (2011), gasoline price affected the rise in
the demand for hybrid electric vehicles more than the tax incentives. Similar results
were found by Diamond (2009). The directness and simplicity of the Japanese tax cut
differentiates it from other tax cut policies being implemented with similar purposes in
the United States and Canada. The tax cut policy for hybrid electric vehicles in the
United States and Canada is not the biggest factor affecting the rise in hybrid electricvehicle sales, because the tax cuts were not immediate. The consumer does not obtainthe subsidy the moment he/she buys the car; instead, it is provided in the form of an
income tax credit or a tax rebate. Another reason for tax cut policies not playing a bigrole in the United States and Canada is that they are difficult for consumers tounderstand, which discourages people from attempting to apply for the tax cut
programs. These two characteristics are not relevant to the Tonnage and Acquisition
Tax Cuts for Eco-Friendly Vehicles in Japan, as it offers immediate benefits and is easy
to understand. Providing tax incentives on acquisition or consumption taxes is more
effective in increasing the demand for eco-friendly vehicles than implementing thosecuts on income tax.
The other tax incentive is the Eco-Car Subsidy. It was a large factor in increasing
sales; the first wave increased sales by 21.5%, and the second wave, by 10.7%. The
impact of the Eco-Car Subsidy was less than that of the 100% tax cut but more than thatof 75% and 50% tax cuts, and gasoline price. In the lumped tax model the subsidy had acomparable effect to that of the tax cut.
The purpose of these tax incentives is to increase the adoption rates of ecofriendly vehicles in order to reduce greenhouse gas emissions, which in turn would
improve Japan’s atmospheric environment. Another goal is to support Japan’s
automobile market, which was hit by a decreased in export demand because of theappreciation of the Japanese Yen. Our results imply that the policies were successful inincreasing the adoption rates of eco-friendly vehicles.
5. Conclusion
This study estimated the impacts of the Tonnage and Acquisition Tax Cut for
Eco-Friendly Vehicles and the Eco-Car Subsidy on the sales of eco-friendly vehicles in

11

Japan. In the United States, gasoline price played a larger role than tax incentives inincreasing the sales of hybrid electric vehicles. The effect of the tax incentives in Japanis unlike that in the United States, and in fact, the tax incentives play a larger role in theincrease of eco-friendly vehicle sales compared to gasoline price. This is because theJapanese tax incentives can be realised immediately and are easy to understand, while
those in the United States are indirect and complicated.
The results of this study have implications for the design of policies for promoting
eco-friendly vehicles. First, consumers react substantially to tax cuts and subsidies on
automobile purchases when the cuts come in the form of direct cuts in taxes paid uponpurchase. However, the budget used for the subsidy is huge so that the efficiency of thepolicy should be scrutinized. Second, consumers are not as sensitive as expected to thegasoline price, but it nevertheless is an important factor, with consumers preferring
vehicles with better fuel efficiency when gasoline price rise. Last, but not least, while
deciding on new vehicle purchases, the average Japanese consumer is more sensitive totax incentives than gasoline price. This indicates that tax incentives and subsidies canencourage buying eco-friendly vehicles. Conversely, the effect of the rise in gasoline
prices tends to be more uncertain; the opportunity of saving on gasoline use by buying
an eco-friendly vehicle is not easy to understand.
References
Beresteanu, A., Li, S., “Gasoline prices, government support, and the demand for hybrid
vehicles in the United States,” International Economic Review 52 (2011) 161182.
Chandra, A., Gulati, S., Kandlikar, M., “Green drivers of free riders? An analysis of tax
rebates for hybrid vehicles,” Journal of Environmental Economics andManagement 60 (2010) 78-93.
Diamond, D., “The impact of government incentives for hybrid-electric vehicles:
Evidence from US states,” Energy Policy 37 (2009) 972-983.
Gallagher, S., Muehlegger, E., “Giving green to green? Incentives and consumer
adoption of hybrid vehicle technology,” Journal of Environmental Economics andManagement 61 (2011) 1-15.

12

Japanese Automobile Dealers Association, “Japan’s measures to withstand impact of
global crisis on its automotive industry - JAMA shares at the 4th Indonesia
International Automotive Conference,” Tonnage and acquisition tax cuts for ecofriendly vehicles.” http://www.jama-english.jp/asia/news/2009/vol36/index.html.
Retrieved on 22/10/2012.
Japan Automobile Dealers Association, “Shinsha Jouyousha Hanbai Daisu Rankingu(Newpassenger

car

sales

ranking),”inJapanese.

http://www.jada.or.jp/contents/data/ranking/index.php. Retrieved on 22/10/2012.
The Institute of Energy Economics, Japan. “Kyuyusho Gasorin Keiyu Toyu Shujichosa(Weekly Survey on Prices of Gasoline, Light Oil, Kerosene),” in Japanese.
http://oil-info.ieej.or.jp/price/price.html. Retrieved on 22/10/2012.
Ministry of Internal Affairs and Communications, Statistics Bureau, Director-Generalfor Policy Planning (Statistical Standards) & Statistical Research and Training
Institute,“Family

IncomeandExpenditure

Survey.”http://www.stat.go.jp/english/data/kakei/index.htm. Retrieved on 22/10/2012.
Tax

Bureau,MinistryofFinance,

“FY

2009

Tax

Reform.”http://www.mof.go.jp/english/tax_policy/tax_reform/fy2009/tax2009a.pdf.
Retrieved on 22/10/2012.
	
  

	
  

13

	
  
Figure 1: Prius Sales and Gasoline Prices

	
  

	
  

14

Figure 2: Vitz Sales and Gasoline Prices

	
  

	
  

15

Table 1: Tonnage and Acquisition Tax Cut for Eco-Friendly Vehicles	
  Hybrid Electric
VehicleLow-Emission Passenger Vehicles

	
  

	
  

Exhaust emissions down by Exhaust emissions down by
75% from 2005 standards
75% from 2005 standards
Fuel efficiency 25% above
2010 standards

Fuel efficiency 15% above
2010 standards

Tonnage Tax Cut

100%

75%

50%

Acquisition Tax Cut

100%

75%

50%

Note:	
  The	
  effective	  period	
  of	
  the	
  Tonnage	  Tax	  Cut	  was	
  from	
  1	
  April	
  2009	  to	
  30	
  April	
  2012	
  and	
  that	  of	
  the	
  Acquisition	
  Tax	  Cut	  was	
  from	
  1	
  April	
  2009	  to	
  31	
  March	  2012.	
  After	  March	  2012,	
  the	
  fuel	  efficiency	
  standards	
  were	  revised	
  to	
  those	  for	  2015.	
  Source: Japanese Automotive Dealers Association
http://jama-english.jp/asia/news/2009/vol36/index.html.

	
  

16

	
  

Table	
  2:	
  First	
  and	
  Second	
  Waves	
  of	
  the	
  Eco-­‐Car	
  Subsidy	  PeriodConditions

Subsidy AmountFirst Subsidy Wave

Second Subsidy Wave

April 2009 to September 2010

December 2011 to September
2012

Replace a combustion
engine vehicle used
for over 13 years withan Eco-Friendly
VehicleBuy an Eco-Friendly
VehicleBuy an Eco-Friendly Vehicle

Passenger car:250,000 yen

Passenger car:
100,000 yen

Passenger car:
100,000 yen

Light-motor car:
125,000 yen

Light-motor car:50,000 yen

Light-motor car:70,000 yen

Budget580,000 million

Source: http://www5.cao.go.jp/keizai3/2012/1222nk/keizai2012-2013pdf.html.

	
  

	
  

17

270,000 million

Table 3: Levels of Tax Cuts

	
  

Maker

Model

Maximum Tax Cut

Toyota

Prius

100%

ToyotaCorolla75%

Toyota

Voxy

75%

Honda

Step Wagon

75%

NissanCube

75%

NissanSerena

75%

Mazda

Demio

75%

ToyotaPasso

50%

Toyota

Vitz

50%

Honda

Fit

50%

	
  

18

Table 4: Descriptive Statistics	  Variable

Mean

Std. Dev.

Max

Min

Observations

𝑙𝑛𝑉𝑒ℎ𝑖𝑐𝑙𝑒𝑆𝑎𝑙𝑒𝑠

8,146.643

6,102.125

45,496

1,357

840

𝑙𝑛𝑃𝑟𝑖𝑐𝑒

1,966,677

591120.2

3,200,000

1,060,000

840

𝑙𝑛𝐼𝑛𝑐𝑜𝑚𝑒

522,316.2

146990.5

968,846

413,50684

𝑙𝑛𝐺𝑎𝑠𝑜𝑙𝑖𝑛𝑒

145.226

13.861

196

117

84

𝑇𝑎𝑥𝐶𝑢𝑡100

0.071

0.258810840

𝑇𝑎𝑥𝐶𝑢𝑡75

0.127

0.334

1

0

840

𝑇𝑎𝑥𝐶𝑢𝑡50

0.211

0.408

1

0

840

𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑂𝑛𝑒

0.202

0.404

1

0

84

𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑇𝑤𝑜

0.119

0.326

1

0

84

	
  

19

Table 5: Estimation Results
Variable

Model 1Model 2Model 3Const

16.129***(3.349)14.192***(3.442)4.719*(2.760)𝑙𝑛𝑃𝑟𝑖𝑐𝑒−0.488**(0.218)−0.377*(0.224)−0.597***(0.176)𝑙𝑛𝐺𝑎𝑠𝑜𝑙𝑖𝑛𝑒

0.446***(0.152)0.406***(0.156)0.126(0.123)𝑙𝑛𝐼𝑛𝑐𝑜𝑚𝑒−0.198***(0.057)−0.158***(0.059)−0.054(0.047)

𝑇𝑎𝑥𝐶𝑢𝑡100

0.872***(0.072)0.848***(0.075)0.940***(0.059)𝑇𝑎𝑥𝐶𝑢𝑡75

0.086*(0.047)0.037(0.048)0.140***(0.038)𝑇𝑎𝑥𝐶𝑢𝑡50−0.075*(0.044)−0.132***(0.044)−0.002(0.035)

𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑂𝑛𝑒

0.215***(0.034)0.235***(0.035)0.177***(0.028)

𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑇𝑤𝑜

0.107**(0.047)0.157***(0.048)−0.030(0.039)𝐸𝑎𝑟𝑡ℎ𝑞𝑢𝑎𝑘𝑒−0.654***(0.090)-0.084(0.081)𝑙𝑛𝑇𝑜𝑡𝑎𝑙𝑆𝑎𝑙𝑒𝑠--

1.017***(0.049)Number of
Observations

840

840

840

Adjusted R-squared

0.601

0.575

0.739

*** Significant at 1%; ** Significant at 5%; * Significant at 10%.
Numbers in parenthesis are standard errors.

20

Table 6: Lumped Tax Cut Estimation Results
Variable

Model 1Model 2Model 3Const

28.971***(3.368)27.363***(3.467)17.435***(2.881)𝑙𝑛𝑃𝑟𝑖𝑐𝑒−1.362***(0.218)−1.275***(0.225)−1.463***(0.182)𝑙𝑛𝐺𝑎𝑠𝑜𝑙𝑖𝑛𝑒

0.395**(0.163)0.350**(0.168)0.075(0.137)𝑙𝑛𝐼𝑛𝑐𝑜𝑚𝑒−0.196***(0.061)−0.152**(0.063)−0.052(0.052)

𝑇𝑎𝑥𝐶𝑢𝑡0.159***(0.035)0.107***(0.035)0.225***(0.029)𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑂𝑛𝑒

0.252***(0.037)

0.276***(0.038)0.214***(0.031)

𝑆𝑢𝑏𝑠𝑖𝑑𝑦𝑇𝑤𝑜

0.118**(0.051)0.173***(0.052)−0.018(0.043)𝐸𝑎𝑟𝑡ℎ𝑞𝑢𝑎𝑘𝑒−0.708***(0.096)-0.031(0.090)𝑙𝑛𝑇𝑜𝑡𝑎𝑙𝑆𝑎𝑙𝑒𝑠--

1.018***(0.054)

Number of
Observations

840

840

840

Adjusted R-squared

0.540

0.511

0.679

*** Significant at 1%; ** Significant at 5%; * Significant at 10% level.
Numbers in parenthesis are standard errors.

21