Global Trade Alert

Under the 2009 tax reform bill Japan passed by the Diet on March 27, 2009 and made official in the gazette March 31, 2009, a temporary lower taxation burden is placed on automobiles that meet higher environmental standards. Japan will temporarily waive an automobile weight tax for people buying hybrid cars and electric vehicles. The tax measure is also part of the more general Innovation for Green Economy and Society plan which, among others, foresees acceleration of development and deployment of photovoltaic power and next generation vehicles.
Under the existing system purchase of new cars was subject to the automobile acquisition tax, equivalent to ca. 5% of the car's price and three years' worth of the weight tax. In case of a hybrid or electric car, these taxes are waived entirely. Other types of environmentally friendly cars are also subject to 50-75% tax reductions depending on their emissions level.
From the beginning the new measure was expected to boost Japanese auto industry sales - the industry counted on 310,000 additional vehicles in sales in the financial year to March 2010.
In fact, according to information from Nissan Motor Co., orders for eco-friendly cars are up 30 percent in Japan so far in May as compared with the same period last year. Toyota Motor Corp, a market leader, reported overall domestic vehicle orders growth in April of 20 percent (mostly due to pre-sale orders for the new Prius hybrid, the first monthly rise in orders in two years). There is little doubt these sales increases are due to the government tax measures to encourage green investment and purchase of green products.
There are some concerns about the discriminatory nature of this measure. Reuters reported on June 10, 2009 that 'a green tax incentive introduced in April left all foreign car brands neatly outside the fence.'Sales of foreign-branded passenger cars are down by 30% in the year to date (as of June 10, 2009). According to Reuters 'strict mileage rules for a separate scheme that rewards consumers up to 250,000 yen ($2,500) to replace vehicles older than 13 years mean fewer than 40 percent of foreign cars are eligible, versus nearly 90 percent of domestic cars. The policies rankle foreign carmakers because Japan's fuel economy standards are based on an arcane testing method that critics say hardly resembles real-life driving.' 
Foreign producers could adjust their cars to meet the new standards, achieving this is expected to take at least a couple of months and incur significant costs.
Any discriminatory impact of the measure is exacerbated by the fact that Japanese consumers are said to be particularly sensitive to lowering taxes on automobiles and likely to buy a car allowing them to make use of tax waivers on the nine different taxes on Japanese car owners at purchase and during ownership. This complex system makes expensive cars even costlier. Reuters reports that 'automobile-specific taxes run as high as 38 times those of Western countries, according to the Japan Automobile Importers Association.'