Some 4,600 grocery items are becoming more expensive this month in Japan as the country’s food and beverage makers continue to pass on costs amid a once-in-a-generation inflation surge. Beer, however, is the notable exception.
A 350-milliliter can of brew costs drinkers about 7 yen (5 cents) less from October, thanks to changes in the country’s tax system. But cheaper suds aren’t a ploy for political support. Instead, it’s a long-overdue overhaul to Japan’s convoluted liquor tax, which for decades has incentivised brewers to prioritise low-quality products.
It might seem odd to reduce taxes on alcohol while many countries are imposing minimum prices or lifting levies, something the World Health Organization says could save thousands of lives a year. But for Japan, this is actually a beneficial change, meant to improve government coffers and the quality of the country’s brews. At the same time as the tax on “real” beer is being lowered, the rate is rising for cheaper, lower-quality substitutes that have come to dominate the market over the past three decades.
Coincidentally, this also comes at a crucial time in the country’s battle with a deflationary mindset that has sapped its global competitiveness. The government emerged from Covid-19 realising that it’s in danger of slipping into a middle-income economy. That was likely on Prime Minister Fumio Kishida’s mind when he last week called for “a historical shift from the long-standing cost-cutting economy of the past 30 years.”
The beer industry exemplifies that penny-pinching attitude and its dangers better than any other. To understand what’s happening, we need to go back to the early 1990s after Japan’s economic bubble burst. As customers tightened their purse strings, the country’s major brewers began to develop beer alternatives using less malt, taking advantage of how the system taxes the beverage based on the malt content. Anything with less than 67 percent malt fell into a category called happoshu, meaning “bubbly spirits,” and was taxed at a far lower rate. These derivatives might not have tasted great, but they were much cheaper, and they rapidly began to take over the market.
The cost-cutting attitude was further entrenched in the mid-2000s when, after the finance ministry lifted the rate on happoshu, alcohol producers returned to the lab and made brews using the likes of peas or corn instead of malt, which fit into a even lower-taxed bracket called “third beer.” The price difference is substantial: A 350-ml can of Asahi Super Dry (a “real” beer) costs 207 yen or so on Kakuyasu Group Co.’s online store, while Hon Kirin, a best-selling alternative, is just 160 yen.
This levy structure has managed the enviable task of irritating everyone. The big brewers say they don’t want to spend time and money doing research and development for inferior products — they simply favor reduced beer taxes. The finance ministry believes it has been cheated out of billions in tax revenue. Craft beer makers hate the arrangement too; drinks made with more exotic ingredients such as fruit peel quickly fall into the category of happoshu, which consumers associate with subpar quality. And for the most part, drinkers say they would much prefer to imbibe real beer in the first place, if only it were cheaper.
It’s also had knock-on effects. The lesser-quality beverages weren’t suitable for the export market, denting the international competitiveness of Japanese brewers who were spending vast sums on merchandise that would never be consumed elsewhere and having to advertise multiple brands at once. Meanwhile, the emphasis on reducing expenses above all else got customers used to lower price points, making hikes difficult even when raw materials rose.
In 2017, the government decided it had enough. After revenue from beer had fallen 30 percent from a 1994 peak, it decided to unite the tax bands of real beer, happoshu and third beer into one, a three-stage process that will be complete in 2026.
From a quality perspective, this is cause for cheer: Happoshu and third beers are varying degrees of average to awful. You might have encountered them during a night out at karaoke (the sore head is a giveaway) or just been unlucky enough to choose one from a convenience store shelf. When money was tight, I switched to Clear Asahi, a “third type” alternative made with fermented barley. After a while, you tell yourself you hardly notice the difference.
After a raise at my old workplace, I was lucky enough to be able to afford to switch back to real beer. Now, even that can of Clear Asahi will cost about 10 yen more this month. Nearly a quarter of those surveyed last year by an organisation of brewers say they expect to drink more real beer after the changes come into effect. But do most customers have the luxury of spending more? Although the tax on real beer will come down to nearly 55 yen by 2026 from 77 yen before 2020, it’s still twice the 28 yen levied on a can of third beer before the changes — further contributing to an erosion in spending power that is worrying the central bank.
Booze is far from the only segment of society that has fallen prey to expense-slashing and investing in the wrong things over the past three decades. But Japan is now at an inflection point: Companies have finally accepted the idea of passing on costs, and despite the backlash to former Bank of Japan Governor Haruhiko Kuroda’s comments last year, customers seem to be getting used to paying more. Pay rates saw a significant rise earlier this year, while another welcome change in October was the lifting of the minimum wage to an average of 1,000 yen, the biggest hike since records began.
Yet it’s far from clear whether this is a lasting change or a one-time adjustment. Inflation is already coming down, which may dull the need for further salary increases next spring. The looming prospect of a recession in the US will be giving even cash-rich companies pause. For now, with the rise of the “sober curious” youth who drink less alcohol than previous generations, pay might be less relevant than pensions.
That’s why the brewers are calling for further decreases in the beer tax, arguing the prevailing rate is 14 times that of Germany and seven times that of the US. That seems unlikely to carry too much weight in a nation where the debate currently revolves around how to finance ambitious defense and child-rearing plans.
Japan needs to put its money to work in the right areas — and discard the type of bad incentives that led to happoshu. If these changes can help shock the government out of its multi-decade economising mood, that would be something to raise a glass to.
Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
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