From October 1, Japan finally implements a much-delayed consumption tax hike, raising the rate from 8% to 10%, despite fears the move could cause a recession.

The worries have receded somewhat in recent months, and the government insists the increase is necessary to fund key policy priorities.

Here are some questions and answers on key aspects of the move:

What does the hike cover?

The increase covers almost all purchases, from electronics and alcohol to books and cars. The government has, however, made a few exceptions. Magazines and newspapers that publish more than twice a week will stay at 8%, along with food items purchased for consumption off-site.

That means groceries will stay at the old rate, along with food purchased for takeout. But it puts some food retailers, including bakeries and the country’s ubiquitous convenience stores, in a bind because customers can choose to eat their purchases in store or outside, requiring two different rates.

Why the delay?

Prime Minister Shinzo Abe’s government has twice delayed implementing the hike over fears it could hit the country’s fragile economic growth.

Growth in the second quarter was a revised 0.3%, compared with the previous quarter’s 0.5%, with exports hit by the global economic slowdown.

And historically tax hikes have hit Japan’s economy hard.

Both of the most recent increases – from 3% to 5% in 1997 and then to 8% in 2014 – have been followed by recessions.

“Japanese wages haven’t been going up for 20 years,” said Martin Schulz, an economist at the Fujitsu Research Institute. That means that the consumption tax hike directly induces a reduction of purchasing power.”

Japanese consumers already face sticker shock thanks to various additional indirect taxes, including tariffs on imported goods. Retailers display prices before tax, putting the full price only in smaller print below.

“It’s as if to say ‘It’s not us, it’s the mean government!'” Schulz said.

How will consumers react?

The hike has caused anxiety, with some consumers deciding to make big-ticket purchases before the increase comes into effect.

“The tax increase worries me because I’m going to retire at the end of the month and my pension isn’t very large,” said Mayumi Susami, 65, at a large electronics store in Tokyo.

But experts say there are signs that many consumers have simply resigned themselves to the increase and are unlikely to adjust their spending.

“Contrary to expectations, there are minimal signs of a significant increase in consumer spending ahead of the tax hike next month,” said Shahana Mukherjee, an economist at Moody’s Analytics.

“This situation lends further support to the notion that the tax hike is already priced into consumer expectations, and implies that spending is less likely to be dramatically altered post the increase.”

Why the hike?

VAT in Japan is among the lowest in the Organisation for Economic Cooperation and Development, where the average rate in 2018 was 19.3%.

But the country has the world’s highest national debt among developed nations, a whopping 226% of GDP, and is struggling with the ballooning costs associated with its aging population.

The government is taking measures to soften the blow for consumers and retailers, including a massive package to fund incentives for car and home purchases, and help low-income households and those with small children.

The measures mean it will be some time before the government sees much of an impact from the tax on its coffers. It eventually plans to use the increased revenue to improve the social security system as well as offer free preschool education from the age of three.

AFP