Discussion Papers In Economics
And Business

Cigarette Tax Revenues andTobacco Control in Japan
Junmin Wan
Discussion Paper 04-11-Rev.

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANCigarette Tax Revenues andTobacco Control in Japan
Junmin Wan
Discussion Paper 04-11-Rev.

February 2006
この研究は「大学院経済学研究科・経済学部記念事業」
基金より援助を受けた、記して感謝する。
Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANCigarette Tax Revenues andTobacco Control in Japan∗
Junmin Wan†
Osaka University

Abstract
The hypotheses of non-addiction, myopia and rational addiction are
tested using annual, quarterly and monthly data. Changes in the prices ofJapanese cigarettes can be viewed as exogenous from the point of view ofconsumer behavior, because the Japanese government controls cigaretteprices. The empirical results of this paper support the addiction hypothesis. The short-run and long-run price elasticities range from -0.338 to-0.421, and from -0.679 to -0.686, respectively; thus, increases in tax revenues in the long-run are likely to be smaller than those in the short-run.
As a result, tax increases would be an eﬀective means of curbing smoking and reducing its social cost. Furthermore, the debt compensation
programs for the Japan Railway and the National Forestry will not go
according to plan, unless revenues are increased in the future.

JEL classiﬁcation: D12, E21, H29
Keywords: smoking, rational addiction, tax revenues∗ This was a revised version on 29 October, 2004

† I wish to thank Kazuo Ogawa for the guidance and advice that he provided while I was
writing this paper, as well as Charles Yuji Horioka, Shinsuke Ikeda, Fumio Ohtake, Wataru
Suzuki for their valuable advice and comments. In addition, I wish to thank Dariusz Stanko,
Midori Wakabayashi, and seminar participants at Osaka University for their helpful comments. Any remaining errors are my responsibility. Correspondence: Junmin Wan, OSIPP,
Machikaneyama 1-31, Toyonaka, Osaka 560-0043, Japan. tel/fax: +81(6)68505839; E-mail:wan@osipp.osaka-u.ac.jp1

1

Introduction

Because smoking is harmful to human health, many countries have instituted
various anti-smoking policies. For example, the 192 members of the World
Health Organization (WHO) unanimously adopted the Framework Convention
on Tobacco Control (FCTC), aimed at curbing tobacco-related deaths and disease, on May 21, 2003. This was the ﬁrst international treaty negotiated under
the auspices of the WHO. In Japan, smoking has also become a hot topic in themass media and the Diet. The Health Enhancement Act (HEA; in Japanese,
Ken Kou Zou Shin Ho) was implemented on May 1, 2003, and consisted, primarily, of anti-smoking legislation. Many policies and tools were mentioned in
the FCTC and HEA, and an increase in cigarette taxes was clearly an importantand common goal of the two acts. Thus, a clariﬁcation of the eﬀect that tax
increases are likely to have on cigarette consumption is important.
Cigarette consumption and the prevalence of smoking in Japan have beenmuch higher than comparable rates in other developed countries. The WHO haspointed out that the provisions of the Japanese anti-smoking policy have beenvery lax, as compared to those of other developed countries. This observation
raises the question of whether Japanese anti-smoking policies, and especially
tax increases, will actually reduce cigarette consumption.
In order to eliminate some of the enormous debts of the Japan Railway and
the National Forestry, the Japanese Government raised the cigarette tax rate
after 1998 by introducing the ’Tobacco Special Tax’; this tax is an earmarked
tax. The increase in tax revenues accruing to the Japanese government from the’Tobacco Special Tax’ is anticipated to be 260 to 280 trillion yen (about 2.413
to 2.598 trillion dollars in 2000 dollars) during the period 2000-2059. However,
it is not clear that these revenues will be realized according to plan, or what theeﬀects of this tax will be on overall tax revenues from cigarette taxation and on
the social cost of smoking.
In addition, a new tobacco tax, called the ’Tobacco Health Tax,’ was intro-

2

duced on July 1, 2003. Based on the HEA, this tax was intended to decreasecigarette consumption and to increase tax revenue, thereby decreasing the deﬁcitof the annual budget, a budget that had been reduced, due to gloomy economy
prospects. However, the amount of revenue that the tax will actually generate,
as well as the eﬀects that the new tax1 will have on smoking behavior, remain
unclear.
Since the social cost of smoking is very high, tobacco control is necessary;thus, an important issue in this respect is the question of which tobacco control
policy will be most eﬀective for Japan.
Chaloupka (1991), Becker, Grossman and Murphy (BGM, 1994), Bardsley
and Olekalns (1999), Escario and Molina (2001), and many other authors2 haveprovided empirical results in support of the rational addiction model. The eﬀect
of anti-smoking policies, e.g., a workplace smoking ban, has been analyzed by
Evans et al (1999) and by Bardsley and Olekalns (1999); their results support
the view that workplace smoking bans reduce smoking. It is not yet clear,
however, which hypothesis best characterizes the behavior of Japanese cigarette
consumers. Speciﬁcally, is their behavior non-addictive, myopic, or rationally
addictive?
This paper analyzes cigarette consumption in Japan during the period 19552003 from the point of view of addictive behavior3 . Models of non-addiction,
myopia, and rational addiction are tested respectively. The results support
the rational addiction model, but reject the non-addiction and mypic addiction
model. The long-run price elasticity is larger than that in the short-run. Thus,
1 According to Merriman (2001) and Goel (2004), higher tobacco tax rate may cause
cigarette smuggling. The cigarette smuggling in Japan is not analyzed here.
2 Bask and Melkersson (2004) analyze two addictive goods, alcohol and cigarette. Here,
only one addictive goods, cigarette smoking is analyzed.
3 The price elasticity of demand for Japanese cigarettes was estimated by Saito (1991). In
the book, National Accounts, Saito estimated the price elasticity of demand for cigarettes to be−0.46, using data from the Japanese Household Consumption Expenditure survey. However,some aspects of his analysis left room for improvement, such as parts of the model and thesample, among other things. First, the analytic model used was static, because cigarettes wereconsidered to be non-addictive goods. If smoking addiction were to be considered, the analytic
model would have to be dynamic. Second, the sample included only worker households, not
all households. Furthermore, the time-series data were for the period from 1954 to 1984; thus,
cigarette consumption after 1985 was not analyzed.

3increases in tax revenues in the long-run are likely to be smaller than those in
the short-run.
The models employed in this paper do not address the eﬀects of advertising,public knowledge about the health hazards of smoking4 , demography, and otherissues, because data on these variables are not currently available.
This paper is organized as follows. Smoking in Japan is described in Section
2. Rational, myopic, and non-addiction models are outlined in Section 3. The
data and estimation techniques are presented in Section 4, and the empiricalresults are reported in Section 5. Japanese tobacco policy is analyzed in Section
6. Section 7 concludes the study.

2

Tobacco in Japan

2.1

Aggregate and per capita consumption

We have the cigarette consumption data in Japan from 1955 to 2002. Aggregate
consumption (in packs) grew continuously, with growth accelerating until 1977
and decelerating after 1978. While cigarette consumption per capita increased
greatly until 1977, it was relatively static, experiencing only a slight decrease,
after 1978.

2.2

Smoking prevalence

There are data on the prevalence of smoking among Japanese adults from 1958
to 2000. There was a downward trend in smoking for males, but a stable trend
for females. Figure illustrates the prevalence of smoking among Japanese adultmales by generation. All generations exhibited downward trends. Figure 2
illustrates the smoking prevalence for all generations of Japanese adult females.
The younger generations exhibited an upward trend, while the older generations
exhibited downward trends.

4 For example, Hsieh (1998) analyzes this point.

4

2.3

Cigarette industry and imports

The Japan Tobacco and Salt Corporation was started in 1949 and run by theJapanese government. It was then reorganized into Japan Tobacco Inc. in 1985,
in accordance with Japan’s Tobacco Industry Law (in place from 1985). The
Ministry of Finance owned all Japan Tobacco Inc. stock until 1994, at whichtime one-third of the stock was sold to various private companies. At present,
the Ministry of Finance continues to own two-thirds of the stock. It is indicatingthat the Japanese government has maintained a monopoly over the Japanesecigarette industry.
The ratio of imported cigarettes to total cigarettes consumed continued torise, and increased remarkably in 1987, due to the removal of the import tax.

2.4

Tobacco taxes and pricing

The tobacco tax was set by the ’Tobacco Tax Law’ and the ’Local Tax Law.’ In
May of 1999, the national tobacco tax rate was 2,716 yen per 1,000 cigarettes. In
addition, the rate of the ’Tobacco Special Tax’ was 820 yen per 1,000 cigarettes,
and the rate of the ’District Tobacco Tax’ was 3,536 yen per 1,000 cigarettes, ofwhich 868 yen was to be distributed to prefectures, and 2,668 yen of that sum
was to go to cities, towns and villages.
Nominal cigarette prices rose seven times as a consequence of successive
cigarette excise tax increases during the period 1955-2003. The real price ofcigarettes greatly declined during the period 1955-1974 because of an increasing
consumer price index (CPI). After 1974, real prices experienced a slight increase
due to a surge in nominal prices (Figure 3).

2.5

Tax revenues

Each year, when the annual budget is formulated in the Diet, the Japanese
government decides the target ﬁgure for tobacco tax revenues for the following year. The total revenue from tobacco taxes in the 1999 ﬁscal year was

5

2,322,100 million yen (about 21,547 million dollars in 2000 dollars), whereas
revenue from the national tobacco tax was 905 billion yen (about 8.398 billion
dollars in 2000 dollars). The ’Tobacco Special Tax’ was 273,600 million yen(about 2,538.799 million dollars in 2000 dollars), of which the tobacco tax toprefectures was 276,400 million yen (about 2.564.781 million dollars in 2000 dollars), and the tobacco tax to cities, towns and villages was 867,100 million yen(about 8,046.026 million dollars in 2000 dollars) from that sum.
Figure 4 illustrates the real cigarette tax revenues collected and real cigaretteprices from 1955 to 2002. Real tax revenues exhibited an upward trend from1955 until the end of the 1970s, while they exhibited a downward trend from1980 to 2002. Conversely, real prices of cigarettes declined from 1955 to theend of the 1970s, while they increased slightly from 1980 to 2002. Thus, realcigarette tax revenues moved in a direction opposite to that of real cigaretteprices.

2.6

Social costAccording to ’Tobacco control measures in the 21st century,’ a report issued
by the Ministry of Health and Welfare in Japan, the extra medical expenses
incurred as a result of smoking were 1.2 trillion yen (about 11.13 billion dollars
in 1993 dollars) in 1993, which was just equal to the national tax revenue fromcigarettes.
As indicated by Goto (1996), the total social cost to the Japanese of having
a cigarette industry was 5.6 trillion yen (about 39.64 billion dollars in 1993
dollars), while the total economic beneﬁt was 2.8 trillion yen (about 19.82 billion
dollars in 1990 dollars) in 1990. Thus, the total social loss due to smoking was
2.8 trillion yen (about 19.82 billion dollars in 1990 dollars).
Therefore, from the economic point of view, tobacco control is necessary.

6

2.7

Tobacco control

The Statistics of Tobacco Control Country Proﬁles (WHO Reports 2001) reported that the national tobacco control provisions in Japan were much lessrestrictive than those in other industrialized countries. For example, provisions
in the following four areas were voluntary and not nationally legislated or regulated:(1) Advertising and Sponsorship: advertising bans (cinema, internet, radio
and television) and sponsorship restrictions; (2) Health Promotion and Education: institution of health education curricula or programs and public information initiatives; (3) Sales and Distribution Restrictions: the prohibition of freeproducts or samples, the restriction of tobacco sales to certain locations, andthe prohibition of the sale of smokeless tobacco; (4) Smoke-Free Indoor Air Restrictions: prohibition in air crafts, educational facilities, government worksites,
health care facilities, workplaces, etc.
The prevalence of smoking among Japanese adults and youth has also beenvery high. Japan has been regarded as a ’smokers’ heaven,’ largely as a resultof the lack of tobacco controls and the high prevalence of smoking.

3

Analytical Models

3.1

Rational addiction

The theoretical model employed here follows BGM (1994). Consumers are assumed to be inﬁnitely-lived and to maximize their lifetime utility, which is
discounted at the rate r. The consumer’s problem can be stated as

max

∞


β t−1 U (Ct , Ct−1 , Yt , et ).

t=1
∞


s.t.

β t−1 (Yt + Pt Ct ) = A0

t=1

β = 1/(1 + r)

7(1)

Here, Ct , Ct−1 are the quantities of cigarettes consumed in periods t and t-1,
respectively. Yt is the consumption of the composite commodity in period t,
and et reﬂects the impact of unmeasured life-cycle variables on utility. The
composite commodity, Y , is taken as the numeraire, so the price of cigarettes inperiod t is denoted by Pt . The rate of interest is assumed to equal the rate oftime preference. β is the time discount factor. A0 is the present value of wealth.
The associated ﬁrst-order conditions are

Uy (Ct , Ct−1 , Yt , et ) =U1 (Ct , Ct−1 , Yt , et ) + βU2 (Ct+1 , Ct , Yt+1 , et+1 ) =

λ,

(2)

λPt .

(3)

The utility function considered is quadratic in Yt , Ct , and et . By solving theﬁrst-order condition for Yt and Ct , a linear diﬀerence equation can be derived,

Ct = α + θCt−1 + βθCt+1 + θ1 Pt + θ2 et + θ3 et+1 ,(4)

where 5α =−λ(uy1 + βuy2 )−(u12 uyy − u1y u2y )(u11 uyy − u21y ) + β(u22 uyy − u22y )uyy λ2(u11 uyy − u1y ) + β(u22 uyy − u22y )

θ

=

θ1

=

θ2

=

−(uyy u1e − u1y uey )(u11 uyy − u21y ) + β(u22 uyy − u22y )θ3=−β(uyy u2e − u2y uey ).
(u11 uyy − u21y ) + β(u22 uyy − u22y )A good is addictive if θ > 0 and the degree of addiction increases with θ.
The roots of the diﬀerence equation (4) are

φ1 =1 − (1 − 4θ 2 β)1/2
1 + (1 − 4θ 2 β)1/2, φ2 =
,
2θ
2θ

(5)

5 There seems to be a misprint in BGM (1994). According to my calculations, the last
multiplicative term in the numerator of the formula for θ3 should be u2y uey instead of u2y u2e .

8and the stability conditions are4θ 2 β < 1, φ1 < 1, φ2 > 1.

(6)

Given these roots, the temporary current, past, and future price eﬀects are
dCt
dPt
dCt
dPt−1
dCt
dPt+1

=
=
=

θ1
θφ2
θ1
θ(φ2 )2
θ1 φ1
.
θφ2

(7)
(8)
(9)

All roots are negative, since θ1 is negative.
The short-run price eﬀect is
θ1
dCt
=
∗
dP
θ(1 − φ1 )φ2(10)

and is deﬁned as the impact of a reduction in current and all future prices oncurrent consumption, with past consumption held constant.
The long-run price eﬀect is
θ1
dC∞
=
dP
θ(1 − φ1 )(φ2 − 1)(11)

and is deﬁned as the eﬀect of a permanent reduction in prices in all periods.6

3.2

Myopic addiction

Following BGM (1994), the myopic consumer is assumed to fail to consider the
impact of current consumption on future utility and future consumption. Future
price and consumption changes have no impact on the current consumption ofa myopic addict. Under the scenario detailed in Fenn et al. (2001), the myopic

6 See BGM (1994) for details.

9consumer faces a one-period problem:

max U (Ct , Ct−1 , Yt , et ).

(12)s.t. Yt + Pt Ct = At ,where At is period t income. The solution is

Ct = η + γCt−1 + γ1 Pt + γ2 et ,

(13)

where

η

= −λuy1

γ

=

γ1

=

γ2

=

−(u12 uyy − u1y u2y )(u11 uyy − u21y )uyy λ(u11 uyy − u21y )−(uyy u1e − u1y uey ).
(u11 uyy − u21y )The demand equation of a myopic addict is entirely backward-looking, andcurrent consumption depends only on current price, lagged consumption, theconsumer’s marginal utility of wealth, and current events. Current consumption
is independent of both future consumption, Ct+1 , and future events, et+1 .

3.3

Non-addiction model

The ’non-addiction’ model addresses the case in which γ equals 0 in equation(13). Here, current consumption depends only on current prices. This is avery common model of consumption demand and can be found in a standard
textbook.

10

4

Data and Estimation Techniques

4.1

Data

The data consist of yearly, quarterly and monthly time-series for the period
from January 1955 to September 2003, where the yearly data are based on theJapanese ﬁscal year. The quarterly and monthly data are adjusted by X-12
ARIMA.
Ct denotes cigarette consumption in packs per capita. These data are takenfrom the ’Japan Tobacco Association’ and ’Public Finance Statistics’; the dataconsist of total sales data of cigarettes, and are divided into three subsets,according to the age of smokers: the smoking population aged ten and over, thesmoking population aged ﬁfteen and over, and the total population of smokers.
Pt denotes the average real retail cigarette price per pack, which is equal to
the Tobacco Price Index divided by the CPI. These data come from the ’Annual
Report on the Consumer Price Index’ and the ’Monthly Report on the Retail
Price Survey.’
Yt corresponds to real household disposable income per capita and is equal
to total disposable income divided by the total population and the CPI. These
yearly and quarterly data come from the ’Report on National Accounts.’ Similarly, the monthly data come from the ’worker household disposable income’section of the ’Annual Report of Family Income and Expenditure’ and, likewise,
represent total disposable income per family divided by the total population.
∆Yt is the ﬁrst diﬀerence of Yt .
T axt denotes real cigarette tax revenue per capita in a given ﬁscal year, andis equal to total national tobacco tax revenue divided by the CPI and the total
population. These data come from the ’Public Finance Statistics.’
Table 1 presents the means, standard deviations, and other indicators forthe primary variables in the data set.

11

4.2

Unit root tests

If any of the variables were revealed to be nonstationary, then some problems
would arise in the statistical inference using Ordinary least-squares (OLS) andtwo-stage least-squares (2SLS). Therefore, I test whether each variable is stationary. The ADF test and Phillips-Perron test (1988) are used for this purpose,and the results are presented in Table 2.
The hypotheses of unit roots for Ct , Pt and ∆Yt are rejected at the 10%
signiﬁcance level, so these variables are considered to be either stationary ortime-trend stationary. Since the unit root hypotheses for the quarterly andmonthly Yt cannot be rejected at any conventional signiﬁcance level, I conclude
that Yt is not stationary. If Yt were used in OLS and 2SLS, a bias might arise;
therefore, I use ∆Yt .

4.3

Estimation techniques

OLS and 2SLS are used to obtain parameter estimates. The OLS estimates may
not be consistent because of the endogeneity of past and future consumption,
and also because of the possibility of serial correlation of the residuals. Therefore, to insure that consistent estimates are obtained, I also use 2SLS methods.
The 2SLS estimates are consistent under the instrumental variables approach7 .
The cigarette price is totally controlled by the Japanese government. There wasa special law for every increase of cigarette tax. The seven times of cigarette
tax increase were done by Japanese government not because of the situation ofcigarette demand but because of the heavy deﬁcit of public ﬁnance8 . Thus thetax (or changes in cigarette prices) is an exogenous variable for the cigarette
consumer. Furthermore, price is strongly correlated with cigarette consumption; thus, it is thought to be a good instrument for cigarette consumption.
Price lags are used as the instrumental variables for past cigarette consump7 Auld and Grootendorst (2004) point that aggregate data tend to yield spurious evidence infavor of the rational addiction hypothesis. But it is also pointed in the 9th page of their paperthat instrumental variable estimates of the coeﬃcients on the lag and lead of consumption are
consistent if prices are exogenous.
8 See ’The History of Japanese Tobacco Monopoly’ (in Japanese, Nihon Tabako Senbaishi).

12

tion, while price leads are used as the instrumental variables for future cigarette
consumption. Finally, the Wu test is used to determine whether OLS estimates
are consistent.

5

Empirical results

5.1

Non-addiction and myopic addiction

The estimated values for the myopic and non-addiction models are reported inTable 3 9 (Ct is divided by the population aged 15 and over). The ’non-addiction’column presents the parameter estimates for the non-addiction model. The ’basic’ column presents the parameter estimates for the basic myopic addiction
model. All coeﬃcients from the OLS and 2SLS regressions are signiﬁcant at
the 1% level. In the Wu test, the hypothesis that the OLS estimates are consistent cannot be rejected at the 5% level; therefore, the OLS estimates can beconsidered eﬃcient when compared to those from the 2SLS procedure.
The ’non-addiction’ model corresponds to the case in which γ = 0 in equation(13). The OLS coeﬃcient of Ct−1 in the ’basic’ model is signiﬁcant at the 1%
level. Thus, the ’non-addiction’ model is not supported.
The ’expanded’ column presents the parameter estimates for the expanded
myopic addiction model. When the one-period lead price is added to the basic
myopic addiction model, its OLS coeﬃcient is signiﬁcant at the 5% level, andits 2SLS coeﬃcient is signiﬁcant at the 1% level. These results suggest thatcurrent consumption depends on future prices. Thus it rejects myopic addiction
model but is consistent with a rational addiction hypothesis. In a rational
addiction model, a reduction in future prices brings about higher expected future
consumption, which, in turn, raises current consumption. Hence, these results
challenge the validity of the myopic addiction model. The hypothesis in the Wu
test, that the OLS estimates are consistent, cannot be rejected at the 5% level.
9 The results based on yearly data are reported here. Other results, which are based onquarterly and monthly data, are very similar to those derived from the yearly data and arethus not reported here. The omitted results are available upon request from the author.

13

5.2

Rational addiction

5.2.1

Ct divided by the smoking population aged 15 and overThe estimated parameter values for the rational addiction model are reported
in Table 4 (Ct is divided by the smoking population aged 15 and over). The’yearly,’ ’quarterly,’ and ’monthly’ columns present the estimates for the rational
addiction model using yearly data, quarterly data,10 and monthly data11 . The
three results are very similar.
The hypothesis in the Wu test that the OLS estimates are consistent cannot
be rejected at the 5% level. Thus, the OLS estimates are considered consistent and eﬃcient. The OLS and 2SLS coeﬃcients on Ct−1 , Ct+1 and Pt are
signiﬁcant, and these results provide sound support for the rational addiction
model.
The OLS and 2SLS coeﬃcients on Yt in the ’yearly’ column are positive
but are not signiﬁcant at any conventional level. These results suggest thatcurrent consumption does not depend on real disposable household income.
The coeﬃcient on ∆Yt in the ’quarterly’ column is also not signiﬁcant. The
coeﬃcient on ∆Yt in the ’monthly’ OLS column is signiﬁcantly negative.
The estimated values satisfy the stability conditions given in equation (6).
The rational addiction hypothesis is strongly supported by all three results.
Using these coeﬃcients and the sample means from Table 1, I estimate theshort-run and long-run price elasticities, which are shown in the rows labeled’short-run ’ and ’long-run .’ The long-run price elasticity is about two times
as large as that for the short-run.
According to the results derived from the yearly data, a 10-percent permanent increase in the price of cigarettes should reduce current consumption by
3.38 percent in the short-run, and by 6.59 percent in the long-run.
10 Following another paper of the author’s, the rates of tax increase are used as proxies forinventory in the estimated equation. The estimates of the coeﬃcients on the proxies are notreported here, though there is a large inventory eﬀect. The omitted results are available uponrequest from the author.
11 Following another paper of the author’s, dummies are used as proxies for inventory in theestimated equation. The coeﬃcient estimates for the proxies are not reported here but areavailable upon request. The inventory eﬀect is large.

14

5.2.2

Ct divided by the total population of smokers

In this case, the coeﬃcient on price is not signiﬁcant, and the stability condition
is not satisﬁed. The rational addiction model is not supported, while the myopic
addiction model is supported, possibly because consumers are not given the
choice to quit smoking in the latter model. This result is not contradictory to
the sense of the rational addiction model, because, in that model, the consumer
has the option to quit.

5.2.3

Comparison with the U.S.

According to BGM (1994), the short-run price elasticity (taken from annual
U.S. data) ranged from −0.355 to −0.407, and the long-run price elasticity
ranged from −0.734 to −0.788. The short-run and long-run price elasticities inJapan were −0.338 and −0.659. Thus, the absolute values of the short-run andlong-run price elasticities in Japan are near to those in the U.S.

6

Policy analysis

6.1

Debt compensation and the reduction of pure social
cost

Because of the Japanese government’s monopoly of the tobacco industry, cigaretteprices are entirely controlled via adjustments in cigarette tax rates. High tax
rates increase cigarette prices for consumers.
The cigarette tax rate was raised in 1998. According to the ’Tobacco Special
Tax,’ an extra tax of 820 yen per thousand cigarettes was imposed.
A new tax called the ’Tobacco Health Tax’ was introduced on July 1, 2003.
The total increase in tax revenues resulting from the ’Tobacco Health Tax’ isanticipated to be about 240 trillion yen.
The increase in tax revenues accruing to the Japanese government as a resultof the ’Tobacco Special Tax’ is anticipated at 260 to 280 trillion yen. Because15the long-run price elasticity is about two times as large as the short-run priceelasticity, the long-run increase in tax revenues will be much smaller than thatin the short-run. According to my calculations (Table 5), the increase in tax
revenues will be less than 260 billion yen after 2003, because of the ’Tobacco
Health Tax’. Therefore, the debt compensation programs will not go according
to plan.
According to Goto (1996), the pure social cost of smoking was 173.913 yen
per pack in 1990. The reduction of pure social cost resulting from the ’Tobacco
Special Tax’ and from the ’Tobacco Health Tax’ is estimated in Table 5, in
which I also assume that all other conditions are unchanged. The reduction of
the pure social cost of smoking should become greater with time and should bemuch greater than the reduction that accrues in the increased tax revenue.

6.2

Better policy for tax revenue

The smoking rate for Japanese males has declined. One can infer from the trendof smoking rate (or the minus coeﬃcient of time in the Table 4) that consumers
will probably reduce cigarette consumption gradually in the future, becauseof a greater awareness of health hazards, among other reasons. Thus, total
cigarette consumption should decrease in the long-run. Although the current
policy for total tax revenue maximization in the long-run is a lower tax rate
in an unchanged smoking environment, a better policy for raising tax revenue
would be to increase the current tax rate, if the government expects consumers
to reduce their cigarette consumption in the future. Therefore, increases in
the ’Tobacco Special Tax’ and the ’Tobacco Health Tax’ should be considered
as better policies for raising tax revenue. In addition, the absolute value ofthe long-run price elasticity is smaller than one, and thus tax increases should
increase total tax revenues.

16

6.3

Tobacco control

Due to the enormous social cost of smoking, the WHO and many other groups
have proposed tobacco control policies. The Japanese government has also introduced many tobacco control provisions, most of which have been voluntary.
Because price increases tend to have a negative eﬀect on consumption, an increase in the cigarette tax would be an eﬀective means of further tobacco control.
Furthermore, such increases would be most eﬀective in the long-term, since consumers are more sensitive to events taking place in the long-run than they areto those that occur in the short-run.

7

Conclusion

Japanese cigarette consumption has been analyzed in this study using nonaddiction, myopic and rational addiction models. This analysis obtains someevidences that are not consistent with the non-addiction and myopic addiction
hypotheses but consistent with the rational addiction hypothesis. The realcigarette price has a negative eﬀect on consumption, while the eﬀect of realhousehold disposable income on consumption is not signiﬁcant. The long-run
price elasticity is about two times as large as the short-run elasticity. Thus,
any long-run increase in tax revenues resulting from higher tax rates is likely to
be much smaller than that in the short-run. The debt compensation programsof the Japan Railway and the National Forestry will not proceed according toplan, as the ’Tobacco Health Tax’ was imposed on July 1, 2003. On the other
hand, these price increases should reduce the total social cost resulting fromsmoking and should constitute a good anti-smoking policy, bearing in mind thecurrent state of regulations that are otherwise lax in Japan.
In this paper, the models do not treat the eﬀects of advertising, publicknowledge about the health hazards of smoking, education, and demography,
etc. In fact, data for these variables are not currently available. However, it ishoped that these issues will be addressed in the future.

17

Appendix: Data
Consumer Price Index, Statistics Bureau, Ministry of Public Management, Home Aﬀairs, Posts and Telecommunications, Japan. Annual Report on
the Consumer Price Index, 1955-2003.
Consumer Price Index of Cigarettes, Statistics Bureau, Ministry of
Public Management, Home Aﬀairs, Posts and Telecommunications, Japan. ”Subgroup Index for Japan.” Annual Report on the Consumer Price Index, 19552003.
Nominal Household Disposable Income, Economic Planning Agency,
Government of Japan. Report on National Accounts, 1953-2003.
Nominal Retail Cigarette Prices, Statistics Bureau, Ministry of Public
Management, Home Aﬀairs, Posts and Telecommunications, Japan. ”Nationwide Uniform Prices or Charges” Monthly Report on the Retail Price Survey,
2000.
Nominal Tax Revenues, Ministry of Finance, Government of Japan. Public Finance Statistics, 1955-2003.
Nominal Cigarette Prices, Nominal Retail Cigarette Prices (2000) times
the consumer price index of cigarettes divided by the index (2000).
Per Capita Cigarette Consumption, Total cigarette consumption divided by the Japanese population.
Population, Statistics Bureau and Statistics Center, Government of Japan.
Population estimates series, 1955-2003.
Real Household Disposable Income, Nominal Household Disposable
Income divided by the consumer price index.
Smoking Prevalence, Report on Smoking and Health, Ministry of Healthand Welfare, Japan, 1958-2000.
Total Cigarette Consumption, Japan Tobacco Association, 1955-2003.

18

References
Auld, M. C. and Grootendorst, P. (2004) An empirical analysis of milk addiction,
Journal of Health Economics, forthcoming.
Bardsley, P. and Olekalns, N. (1999) Cigarette and Tobacco Consumption: Have
Anti-smoking Policies Made a Diﬀerence? Economic Record, 75, 225-240.
Bask, Mikael and Melkersson, Maria (2004) Rationally Addicted to Drinking
and Smoking? Applied Economics, 36(4), 373-381.
Becker, G. S. and Murphy, K. M. (1988) A Theory of Rational Addiction, Journal of Political Economy, 96, 675-700.
Becker, G. S., Grossman, M. and Murphy, K. M. (1994) An Empirical Analysis
of Cigarette Addiction, American Economic Review, 84, 396-418.
Chaloupka, F. J. (1991) Rational Addictive Behaviour and Cigarette Smoking,
Journal of Political Economy, 99, 722-42.
Chaloupka, F. J. and Warner, K. E. (1999) Economics of Smoking, NBER Working Paper, No.7047.
Economic Planning Agency, Government of Japan. Report on National Accounts, 1955-2003.
Escario, J. J. and Molina, J. A. (2001) Testing for the Rational Addiction Hypothesis in Spanish Tobacco Consumption, Applied Economics Letters, 8,211-215.
Evans, W. N., Farrelly, M. C. and Montgomery, E. (1999) Do Workplace Smoking Bans Reduce Smoking? American Economic Review, 89, 728-47.
Fenn, A.J., Frances Antonovitz and John R. Schroeter (2001) Cigarettes andaddiction information: new evidence in support of the rational addiction
model, Economics Letters, 72, 39-45.

19Goel, Rajeev K. (2004) Cigarette Demand in Canada and the US-Canadian
Cigarette Smuggling, Applied Economics Letters, 11(9), 537-540.
Goto, K. (1996) Tobacco no Keizai Bunseki (in English, Economic Analysis of
Tobacco), The Journal of the Japan Medical Association, 116(4), 370-371.
Hausman, J. A. (1978) Speciﬁcation Tests in Econometrics, Econometrica, 46,
1251-71.
Hsieh, Chee-Ruey (1998) Health Risk and the Decision to Quit Smoking, Applied
Economics, 30(6), 795-804.
Japan Tobacco and Salt Corporation, Nihon Tabako Senbaishi (in English, The
History of Japanese Tobacco Monopoly).
Merriman, David (2002) Cigarette Smuggling Does Not Reduce the Public
Health Beneﬁts of Cigarette Taxes, Applied Economics Letters, 9(8), 493496.
Ministry of Health and Welfare, Japan. Report on Smoking and Health, 1987.
Ministry of Health and Welfare, Japan. Tobacco and Health, www.healthnet.or.jp/kenkonet/tobacco/menu02.html.
Saito, M. (1991) National Accounts (in Japanese, Kokumi keizai Keisan), 1st
Ed. Sobunsya Corporation.
Statistics Bureau and Statistics Center, Government of Japan. Consumer Price
Index, 1955-2003.
World Health Organization. Tobacco Free Initiative, Statistics, Tobacco Control
Country Profiles, Western Pacific Region, Japan, 394-395.
Wu, D. M. (1973) Alternative Tests of Independence Between Stochastic Regressors and Disturbances, Econometrica, 41, 733-50.

20Figure 1: Smoking prevalence of Japanese male adults 1958-2000
100

90

70

60
aged 20-29
aged 30-39
aged 40-49
aged 50-59
aged 60 and overaverage

50

40

30

20

10

Source: Japan Tobacco Association

21

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

1967

1964

1961

0
1958

male adults smoking prevalence (percent)80

Figure 2: Smoking prevalence of Japanese female adults 1958-2000
30

20

aged 20-29
aged 30-39
aged 40-49
aged 50-59
aged 60 and overaverage15

10

5Source: Japan Tobacco Association

22

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

1967

1964

1961

0
1958

female adults smoking prevalence (percent)

25

600

300

500

250

400

200

Real tobacco
price (CPI 1995
base year, yen
per pack)

150
Nominal price300

Source: Annual Report on the Consumer Price Index,
Monthly Report on the Retail Price Survey

23

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

0
1970

0
1967

50

1964

100

1961

100

1958

200

1955

Real price, CPI index

Figure 3: Real and nominal cigarette price 1955-2002

CPI (1995=100)

Nominal tobacco
price (yen per
pack)Figure 4: Real cigarette tax revenue and real cigarette price 1955-2002
140

600

120
500

100

300

60

200
40

100
20

Source: Public Finance Statistics

24

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

1967

1964

1961

0
1958

0
1955

Real tax revenue

80

Real cigarette price

400

Real tax
revene (10billion yen,baseyear=1995)
Real cigaretteprice (yen per
pack, baseyear=1995)

Figure 5: Real cigarette consumption and real cigarette price 1955-2002

600

Real cigarette price (yen per pack)

500

400

Real cigarette
price

300

200

100

0
0

50

100

150

Real cigarette consumption per capita (packs per
year, divided by all generations)
Source: author’s calculation based on the processed data25

Table 1. Summary statistics: 1955-2003
PeriodVariable

Mean

Std.Dev.

Max.

Min.

Ct

142.900

29.079174.850

80.000Pt

29.6778.902

50.03520.406Yt

16.7776.817

24.4484.092

Ct

35.672

7.183

49.71919.407

QuarterlyPt

28.7268.642

49.11417.192(1955.01-2003.03)

Yt

3.179

2.278

6.280

0.154

ΔYt

0.028

0.065

0.344

-0.183Ct

11.8962.552

23.4305.902MonthlyPt

28.7348.626

49.59117.153(1955.01-2003.09)

Yt

0.712

0.497

1.448

0.050

ΔYt

0.002

0.022

0.099

-0.136

Yearly(1955-2002)

Note: Max means maximum value; Min means minimum value; Ct is divided by the
population of aged 15 and over.

26

Table 2. Tests of unit roots (ADF test and Phillips-Perron test): 1955-2003
ADF test

Variableconstant

YearlyQuarterlyMonthly

time lags

Phillips-Perron test

test statistics

constant

time lags test statistics

Ct

yes

no

2

-2.823*

yes

no

1

-2.667*

Pt

yes

no

2

-2.856*

yes

no

2

-2.797*

Yt

yes

no

2

-2.764*

yes

no

2

-2.909*

Ct

yes

no

5

-2.670*

yes

no

1

-2.506

Pt

yes

no

4

-2.711*

yes

no

2

-2.584*

Yt

yes

yes

2

0.878

yes

yes

2

1.179

ΔYt

yes

yes

2

-4.940***

yes

yes

2

-15.381***

Ct

yes

yes

2

-3.278***

yes

yes

2

-8.922***

Pt

yes

no

2

-2.610*nono2-2.276**

Yt

yes

yes

2

-0.068

yes

yes

2

-0.889

ΔYt

yes

yes

2

-20.081***

yes

yes

2

-52.633***

Note: *** means significant at the 1% level; ** means significant at the 5% level; * means
significant at the 10% level.

27

Table 3. Estimates of Myopic and Non-addiction Models, Dependent Variable=Ct, yearly data
OLS

Independent
variable
Constant

2SLS

non-addiction

basic

expanded

basic

expanded237.759***

63.983***79.976***130.608**

139.943***(77.364)(2.864)(3.797)(2.696)(3.440)

***

***

**

0.419**

0.721

Ct-1

Pt

0.445

(7.847)(7.721)(2.241)(2.508)-3.196***-0.782**-0.010-1.707**-0.724(-32.197)(-2.452)(-0.024)(-2.469)(-1.182)

Pt+1

2

0.665

-1.057***-1.191***(-2.844)(-2.883)

0.956

0.980

0.984

0.973

0.982

Wu ratio

-

-

-

3.295

2.971

Observations

48

47

46

46

45

Adjusted R

Note: *** means significant at the 1% level; ** means significant at the 5% level; * means
significant at the 10% level; The instruments of `basic' 2SLS column: the second lag of priceand other exogenous variables. The critical 5% value for Chi-Square distribution with 3
degrees of freedom is 7.815; The instruments of `expanded' 2SLS column: the first lag andthe first lead of price and other exogenous variables; The critical 5% value for Chi-Square
distribution with 4 degrees of freedom is 9.488.

28

Table 4. Estimates of Rational Addiction Models, Dependent Variable=Ct, yearly, quarterly and monthly
data
YearlyIndependent
variable
Constant

Ct-1

Ct+1

Pt

Yt

OLS

Quarterly
2SLS

48.1926**43.712

OLS
*

2SLS

***

20.312

OLS*

10.5952SLS***

7.588*(2.469)(1.656)(5.489)(1.777)(15.487)(1.929)0.394***

0.441***

0.388***

0.376**

0.364***

0.342***(4.681)(3.103)(5.098)(2.549)(13.301)(4.065)0.392***

0.366**

0.184**

0.290**

0.114***

0.277*(4.001)(2.12)(2.603)(2.272)(4.826)(1.675)

***

*

***

-0.104*-0.679**-0.609*(-2.540)(-1.740)

0.523

0.49

(0.844)(0.62)

ΔYt

Time

26.642Monthly-0.364-0.281-0.147(-5.211)(-1.731)(-14.440)(-1.854)

1.485

1.455

-2.230**-2.480**(0.807)(0.793)(-2.316)(-2.356)***-0.000-0.256-0.253-0.005-0.004-0.001(-1.062)(-0.781)(-1.415)(-0.930)(-2.876)(-0.767)4θ2β<1(-2.486)(-1.491)(-7.455)(-2.340)(-24.516)(-2.528)φ1<1(-3.497)(-2.068)(-9.786)(-3.957)(-34.015)(-3.280)φ2>1(2.005)(1.264)(2.904)(1.255)(8.025)(2.121)

short-run ε-0.338***-0.293**-0.397***-0.387***-0.421***-0.406***(-3.439)(-1.999)(-6.255)(-2.717)(-18.124)(-4.679)-0.659***-0.655***-0.686***-0.680***-0.679***-0.658***(-4.064)(-3.023)(-16.265)(-11.871)(-36.825)(-15.526)

0.991

0.990

0.956

0.973

0.962

0.955

Wu ratio

-

0.219

-

2.398

-

1.076

Observations

46

45

193

187

583

576

long-run εAdjusted R2

Note: *** means significant at the 1% level; ** means significant at the 5% level; * means
significant at the 10% level; The instruments of `yearly’ 2SLS column: the second and thefirst lag of price, the lead of price, the lag of Yt, tax rate and other exogenous variables. The
critical 5% value for Chi-Square distribution with 6 degrees of freedom is 12.592; The
instruments of `quarterly’ 2SLS column: three lags and two leads of price, the lag of ΔYt,
five leads and two lags of tax rate and other exogenous variables. The critical 5% value for
Chi-Square distribution with 8 degrees of freedom is 15.507; The instruments of `monthly’29

2SLS column: three lags and the lead of price, seven lags of ΔYt, and other exogenous
variables, where twenty dummies for inventory are included in the exogenous variables. The
critical 5% value for Chi-Square distribution with 26 degrees of freedom is 38.885.

30

Table 5. Estimates of tax revenue and reduction of pure social cost (unit: billion yen per fiscal year)
year

1999

2000

2001

2002

2003

2004

…

estimates

26.65126.32326.19926.14625.19624.844…

realized

27.36

26.44

26.59

26.02125.19624.844…

reduction

100.769

135.461148.683

154.314255.083292.398…

Note: estimates: estimated tax revenue from the `Tobacco Special Tax'; realized: realized tax
revenue from the `Tobacco Special Tax'; reduction: estimated reduction of pure social costfrom the `Tobacco Special Tax' and `Tobacco Health Tax'.

31