The government says that tax-free items will also include confectionary and health care products, and the new law will come into effect from October 1st this year.
Foreign tourists can have consumption tax refunded on purchases up to ¥5,000 ($48) at designated tax-free shops on the provision they provide their passports.
Move follows increase in consumption tax rate
The move comes after the Japanese government increased consumption tax rate from 5% to 8% in April of this year, which led to a big hike in consumption by Japanese consumers to beat the higher tax rate in the first quarter of the year.
Now the government wants to counterbalance the subsequent dip in sales by capitalising on the huge growth in tourist numbers, which has come about thanks to the lower exchange rate of the Japanese Yen against foreign currencies.
The Japan National Tourist Organization says 6.26 million tourists visited Japan during the first half of 2014, 26.4% ahead of figures for the same period last year – with 2013 already a record breaking year itself.
Korean and Chinese tourist come in search of bargains
The influx of tourists came from neighbouring South Korea and China (where disposable incomes are on the rise), tourist figures in Japan are soaring, and this is having a positive knock-on impact onto retail sales.
In 2013, tourists spent $14 billion in the country, and with the strong growth in visitor numbers already seen this year, that figure looks set to rise steeply for 2014.
Department stores – key retailers of cosmetics in Japan – have been profiting from the rise, with Japan's department stores association recently noting that duty-free spending at 46 stores across the country jumped 54% in April, compared with the previous year.
Cosmetics are high up on the shopping lists
A recent survey by the Japan Tourism Agency revealed that 38.5% of tourists who visited Japan bought cosmetics and pharmaceuticals, making them the third most commonly bought item after food and confectionery.
The Japanese economy has experienced years of shrinking as the government has sought to cut back on the country’s debt levels by ensuring the rate of inflation has remained extremely low.
That has resulted in lower income levels, which in turn has trickled down into consumer spending on a wide range of fast moving consumer products, and this has been particularly apparent in cosmetics and personal care.
The big cosmetics players, including Kao and Shiseido have all experienced sluggish domestic sales, and have invested in expanding their businesses overseas as a means of counteracting this effect.