Bloomberg News

Japan Tobacco Gains as Minister Says Prices Should Rise 75%

September 20, 2011

(Updates with comments from trader in ninth paragraph.)

Sept. 20 (Bloomberg) -- Japan Tobacco Inc., the world’s third-biggest publicly traded cigarette maker, climbed to the highest in three years on speculation it can lift prices more than the tax increases proposed by the health minister.

Japan Tobacco rallied 5.4 percent to 368,000 yen, the highest since October 2008, at the 3 p.m. close of trading in Tokyo. It had the second-biggest advance today on the broader Topix index, which declined 1.7 percent.

Tobacco taxes in Japan should be raised until the average price of a pack of cigarettes is about 700 yen ($9.15), or 75 percent higher than the current level, to cut medical costs, Health Minister Yoko Komiyama said. Smoking in Japan was responsible for at least 4.3 trillion yen in medical costs and economic losses in 2005, according to the Institute for Health Economics and Policy.

“Tax increases will lead to Japan Tobacco’s profit growth,” said Mikihiko Yamato, a research partner at Japan Invest KK who recommends buying the stock. “If the price is over 500 yen, it will damage the sales of tobacco, but cigarette companies can still raise profit when their price increases reflect the higher costs.”

The ministry, which is participating in a tax panel session, will push for increasing tobacco levies by 100 yen annually for three years, Komiyama said in a Sept. 16 interview. Most panel members agreed with the idea last year, she said.

Underage Smokers

“At that level, we can expect people who want to quit smoking to stop, while maintaining the level of tax revenue,” said Komiyama, 63, who became minister on Sept. 2. “It’s also the best way to prevent underage smoking.”

Almost 10 percent of Japanese under 20 years old had smoked at least once, with 1.2 percent of them smoking every day, according to a study funded by the health ministry in 2007.

Efforts to raise duties have been complicated by government ownership of a controlling stake in Japan Tobacco and concerns that tax revenue may decline for a country facing the world’s largest public debt.

“When raising prices because of a tax increase, Japan Tobacco will offer prices that obviously exceed taxes they pay,” Yoshifumi Kikuchi, head of dealing at Nissan Century Securities Co., said today by phone. “If there’s a tax increase this time, though unrealistic, sales volumes will decline, but the amount of sales will grow.”

‘Easier’ for Business

The tax panel, led by Finance Minister Jun Azumi, proposes reducing the government’s stake in Japan Tobacco to a third from about half, he said Sept. 16. The maker of Mild Seven and Camel cigarettes has gained 22 percent this year in Tokyo trading, giving it a market value of 3.7 trillion yen, or $48 billion.

A sale of the government stake in Japan Tobacco “will make it easier for the company to do business,” Japan Invest KK’s Yamato said.

The average price of a pack of 20 cigarettes increased by 33 percent last October to 400 yen, or about $5.20. That compares with the average price of $10.80 in New York City, where taxes were raised in July 2010.

Japan Tobacco forecast an 11 percent increase in profit this fiscal year after raising prices in Russia and other overseas markets. Net income in the year ended March rose 4.7 percent to 145 billion yen, beating analysts’ estimates.

Japan Tobacco Executive Deputy President Masakazu Shimizu said the government should “think cautiously” before raising taxes. Tobacco consumption is declining by 4 percent to 5 percent annually, and this may accelerate to as much as 7 percent if taxes are raised, he said.

DPJ Manifesto

One of every four adults in Japan smoked in 2009, according to Japan Tobacco. That’s down from one in three in 2000. Cigarette sales volume fell after a tax increase in October pushed up prices, Japan Tobacco has said.

The proposal to increase taxes is in accordance with the manifesto of the ruling Democratic Party of Japan, Komiyama said. The manifesto calls for abolishing a law that the government own more than half of Japan Tobacco’s outstanding shares and says tobacco-related issues should be included in the “health agenda,” she said.

6 Million Deaths

The cigarette maker said Sept. 6 it wants the government to sell its shares and use the funds to finance reconstruction after a March 11 earthquake and tsunami left more than 20,000 people dead or missing. The Children’s Investment Fund Management UK LLP, the London hedge fund founded by Christopher Cooper-Hohn, has been lobbying for Japan Tobacco to buy back shares and raise dividends.

Central and regional governments raise about 2 trillion yen in tax revenue each year from tobacco, according to the finance ministry.

In the U.S., one of every five adults smokes cigarettes, according to the U.S. Centers for Disease Control and Prevention. Smoking was estimated to be responsible for $193 billion in annual health-related economic losses in the U.S. between 2000 and 2004, according to the CDC.

Tobacco-related illnesses comprise one of the biggest public-health threats and kill almost 6 million people a year, including 600,000 non-smokers, according to the World Health Organization.

Japan’s health ministry also will submit legislation at the session requiring businesses to ban smoking or provide separate smoking sections, Komiyama said. “I’m not stopping people from shortening their lives themselves,” she said. “But I don’t want to let them cause trouble for others.”

Komiyama, an anchorwoman for public broadcaster NHK for more than 20 years, began advocating anti-smoking measures when she became a lawmaker in 1998 and found other legislators smoked in the parliament buildings and at meetings.

“I walked around with a sign that said ‘no smoking at my table’ to every meeting I attended,” Komiyama said. “Then many lawmakers who didn’t enjoy the smoke began sitting near me. That’s how this started.”

--With assistance from Jason Gale in Singapore, Frank Longid in Hong Kong, Kana Nishizawa and Ritsuko Kameyama in Tokyo. Editor: Frank Longid, Subramaniam Sharma

To contact the reporters on this story: Kanoko Matsuyama in Tokyo at kmatsuyama2@bloomberg.net; Shunichi Ozasa in Tokyo at sozasa@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Jason Gale at j.gale@bloomberg.net


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