Japan Implements Strategies to Lower Beer Prices, Promote Quality, and Boost Industry Growth

04 Oct, 2023

Japan Implements Strategies to Lower Beer Prices, Promote Quality, and Boost Industry Growth

In Japan, over 4,600 grocery items are slated to become more expensive this month, marking a response to the country's ongoing bout of once-in-a-generation inflation. However, there's an exception to this trend: beer. A 350-milliliter can of beer will now cost consumers about 7 yen (5 cents) less, all thanks to changes in the country's tax system. But this reduction in beer prices isn't merely a political ploy; it represents a long-overdue overhaul of Japan's complex liquor tax structure that has inadvertently incentivized brewers to prioritize lower-quality products.

While it may seem counterintuitive to lower alcohol taxes when many nations are imposing minimum prices or raising levies to curb excessive drinking, this change serves Japan's best interests. The reform aims to bolster government revenue and the quality of the nation's brews. Simultaneously, as taxes on "real" beer decrease, they are on the rise for cheaper, lower-quality substitutes that have dominated the market for the past three decades.

This transformation comes at a pivotal moment as Japan grapples with a deflationary mindset that threatens its global competitiveness. Prime Minister Fumio Kishida's recent call for a "historical shift from the long-standing cost-cutting economy of the past 30 years" highlights the urgency of this shift.

To understand the root of the issue, we must delve into the early 1990s when Japan's economic bubble burst. In response to consumers tightening their budgets, major brewers began producing beer alternatives with lower malt content to benefit from the tax system, which taxed beverages based on malt content. Anything with less than 67 percent malt was categorized as "happoshu," meaning "bubbly spirits," and subject to significantly lower taxes. These alternatives may not have been flavorful, but they were more affordable and rapidly gained market dominance.

The cost-cutting mentality deepened in the mid-2000s when the finance ministry increased taxes on happoshu. In response, alcohol producers turned to ingredients like peas or corn, which fit into an even lower-taxed bracket called "third beer." The price difference was substantial, with a 350-ml can of "real" beer costing more than a popular alternative like Hon Kirin.

This taxation system has drawn criticism from all sides. Major brewers dislike investing in inferior products and prefer reduced beer taxes. The finance ministry believes it has lost substantial tax revenue. Craft beer makers also disapprove, as their products often fall into the happoshu category, associated with subpar quality. Most consumers express a preference for "real" beer if it were more affordable.

The consequences have rippled through the industry. Lesser-quality beverages were unsuitable for export, hurting the international competitiveness of Japanese brewers. The focus on lowering prices conditioned consumers to expect lower price points, making price hikes challenging even when raw material costs increased.

In 2017, the government decided to address the issue. After beer revenue had declined by 30 percent from its 1994 peak, they initiated a plan to unify the tax rates for real beer, happoshu, and third beer by 2026. From a quality perspective, this was welcome news, as happoshu and third beers were seen as mediocre at best.

Now, as taxes on "real" beer decrease gradually, nearly a quarter of consumers surveyed last year anticipate drinking more of it. However, questions arise about whether most consumers can afford to spend more, especially in light of Japan's central bank's concerns about eroding spending power.

Japan stands at a turning point where companies are finally willing to pass on costs to consumers. Although inflation is receding, the future of salary increases remains uncertain, with potential external economic pressures looming. While pay rates saw an increase earlier this year, Japan must grapple with whether these changes are a lasting shift or a temporary adjustment. The rise of the "sober curious" youth, who drink less alcohol than previous generations, also complicates the situation.

In response, brewers are advocating for further decreases in beer taxes, highlighting the substantial disparities between countries like Germany and the US. However, the national discourse is currently focused on financing ambitious defense and child-rearing plans.

Ultimately, Japan must allocate its resources wisely and eliminate counterproductive incentives contributing to the happoshu phenomenon. If these changes can steer the government away from decades of cost-cutting and towards a more sustainable economic outlook, it would be a development worth raising a glass to.