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Japan’s sales tax hike: What you need to know

Pedestrians carry shopping bags while crossing an intersection in the Ginza district of Tokyo, Japan.
Yuriko Nakao | Bloomberg| Getty Images
Pedestrians carry shopping bags while crossing an intersection in the Ginza district of Tokyo, Japan.

It's no April Fools' Day joke this year for Japanese consumers, who face a rise in the country's sales tax for this first time since 1997.

The consumption tax is scheduled to rise to 8 percent from 5 percent on April 1. It was given the go ahead late last year after a heated debate within the government.

(Read more: Japan braces for first sales tax hike in 17 years)

We help explain why the increase is such a big deal for the world's number three economy.

Why is Japan raising its consumption tax?

Basically Japan has a hefty debt pile, in fact one of the highest among the world's industrialized countries. The government says the tax hike is essential to bring down the debt burden.

(Read more: Japan's debt time bomb is ticking: Kyle Bass)

That sounds fair, so why is the tax hike so controversial?

Well, critics argue that raising the tax could derail Japan's economic recovery. Why saddle consumers with a tax increase that will hit spending just as the economy is getting back on its feet after years of deflation, they argue. Japan's economy grew a real 1.6 percent last year in the second straight year of expansion.

What happened the last time Japan hiked the sales tax?

In 1997, Japan lifted the sales tax to 5 percent from 3 percent and the economy fell into recession not too long afterwards. That, say some analysts, is a reason why raising the sales tax is a bad idea.

Could Japan's economy fall back into recession?

The economy should take a short-term hit but a recession is unlikely, economists say. They point out that in 1997 Japan was also hurt by the Asian financial crisis so the recession at that time needs to be put into context. Also, the government has ramped up fiscal stimulus to help the economy weather the impact, while the Bank of Japan is expected to provide additional monetary stimulus.

(Read more: 5 reasons the BOJ will unleash fresh stimulus)

Should the tax hike have been delayed?

This is one option Prime Minister Shinzo Abe is believed to have considered last year. Analysts say the timing of the increase is certainly a tricky one, especially given the comparison with 1997 and recent signs that Japan may finally be putting deflation in the past.

"There has been a debate about the timing of the sales tax hike given the recovery and emerging from deflation," says Izumi Devalier, Japan economist at HSBC. "It is a very difficult choice but I do think it is the right move."

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