(Bloomberg Businessweek) -- In Japan, a nation of epicures, the local beers aren’t always palate pleasers. Connoisseurs blame the taxman. The Finance Ministry imposes higher taxes on drinks with greater malt content. So the biggest breweries, including Asahi Group Holdings Ltd. and Kirin Holdings Co., sell knockoffs, called happoshu (meaning bubbly spirits), or third beer, that may use peas, corn, or soybeans to reduce the amount of flavorful malt. “A lot of time, energy, and money has been wasted coming up with some really bad drinks—and it’s because of the tax system,” says Tatsuo Aoki, owner of the Tokyo bar Popeye.
Craft brewers, which account for about 2 percent of beer sales in Japan, say the tax incentives have given bigger companies an advantage and allowed the substitutes to dominate the market, because they cost a lot less. Meanwhile, some expensive-to-make special brews with exotic ingredients must be advertised as the cheap stuff because their recipes don’t meet official definitions of beer—which regulations define, in part, as having at least 67 percent malt content. “I view the entire beer-tax regime in Japan as a colossal bad joke,” says Bryan Baird, a co-founder of Baird Brewing Co., one of 265 craft brewers in Japan.
The Finance Ministry, in an effort to boost the competitiveness of Japanese beers in the international market, will change the tax rates for beer and the substitutes starting in 2020, continuing through 2026. In 2018 it will expand the list of ingredients allowed inside the can. Leveling the taxes and removing the happoshu stigma could mean fast growth for the nation’s craft brewers.
Changing the code to encourage more craft brewing could also help revitalize regional economies, according to the ministry’s tax bureau, something Prime Minister Shinzo Abe promotes as a key part of his development program. Domestic shipments of all beer have declined for 12 straight years, according to the Brewers Association of Japan. Revenue is projected to continue falling through 2021, according to Tokyo-based market researcher Fuji Keizai Co.
The current tax regime is a relic of the 19th century, when beer was a luxury imbibed primarily by foreigners. It was seen as a way to raise money without putting a tax burden on Japanese consumers.
Japan’s five big brewers—Asahi, Kirin, Suntory Holdings Ltd., Sapporo Holdings, and Orion Breweries—have long argued the taxes are too high and make beer too expensive for average drinkers. The tax on a can of beer equals 77 yen (68¢), which is 9 times greater than that in the U.S. and 19 times greater than Germany’s, according to a 2016 report by a lobby group representing the brewers. If the malt content is lowered enough, the tax could fall to 28 yen. “Too much attention has been given to winning market share through price wars, and we have left behind what is most important—the customer,” says Yoshinori Isozaki, Kirin’s chief executive officer.
Beer startups are also hindered by a regulation that prohibits malt beverages containing fruit extracts, spices, and other ingredients from being sold as real beer. As such, some craft beers have been lumped in with the cheaper, low-malt brews, lessening their appeal.
Executives at Japan’s largest craft beer maker, Yo-Ho Brewing Co., are toasting the government’s changes. Yo-Ho, which is one-third owned by Kirin, makes a wheat beer with coriander and orange peel, accordingly labeled happoshu.
“Customers have been under the mistaken impression that just because the label says ‘happoshu,’ it doesn’t taste good,” says Yo-Ho CEO Naoyuki Ide. “We definitely see things going in a positive direction for craft beer.” —With Maiko Takahashi
The bottom line: Japan’s new tax laws may bring about a beer boom that could boost the production of craft brews.
To contact the authors of this story: Grace Huang in Tokyo at xhuang66@bloomberg.net, Gearoid Reidy in Tokyo at greidy1@bloomberg.net, Jason Clenfield in Tokyo at jclenfield@bloomberg.net.
To contact the editor responsible for this story: Dimitra Kessenides at dkessenides1@bloomberg.net.
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