On June 2, 2020 Focus Economics reported that the Japanese economy entered its 3rd quarter of recession and will shrink this year, as the Covid-19 crisis disrupts business activity, weighs on consumption and investment appetite, and reduces overseas demand for Japanese exports.  In addition the Tokyo Olympic Games have been postponed until next year.  A massive and coordinated fiscal and monetary policy stimulus should support economic activity.  Focus Economics experts see the economy contracting -4.7% in 2020, which is down 0.8 percentage points from the previous forecast, before growing 2.6% in 2021.

• At real prices, private final consumption rose by 0.1% in 2019 and it is forecast to fall by 5.9% in 2020.  Consumer spending will be limited by COVID-19 and the increase in consumption tax from 8% to 10%.
• Unemployment was 2.4% in 2019 and it will increase to 2.9% in 2020.  Many businesses are struggling to weather the pandemic.  In response to an accelerating decline in the working-age population, Tokyo has launched a new approach to immigration that will allow up to 500,000 guest workers into the country to ease labor shortages.

Population aging poses other problems.  The rate of household savings is falling because retirees spend more of the wealth accumulated in the past.  That trend will boost domestic consumption (long thought to be too low) but also make it difficult to sustain aggregate investment.  Japan’s workforce is presently contracting by almost 1% per year.  Deaths now outnumber births at an average rate of 1,000 a day.

Population began to fall around 2009 and in 2018 stood at 125.5 million (CIA World Factbook Est.) – about 1.3 million less than in 2000.  The median age is 48.6 years – significantly higher than for other large economies in the region and 2nd highest in the world after Monaco.  The steady aging of Japanese society is a significant drag on economic performance.  In 2020, the number of those over 65 years amounted to 36.5 million (CIA World Factbook Est.).  The government forecasts that 40% of the population will be of retirement age by 2050.

In 2019 U.S. exports of consumer-ready foods totaled US$6.2 billion, a decrease of 5% over the same period in 2018.  Japan is the 3rd largest market for U.S. consumer food products after Canada and Mexico.  Japan is also the 3rd largest U.S. export market for processed foods, totaling US$2.7 billion in 2019, down 4% from the previous year.  Top processed foods exported to Japan in 2019 included:

• Processed Vegetables & Pulses
• Prepared/Preserved Seafood
• Food Preparations
• Non-Alcoholic Beverages
• Processed/Prepared Dairy Products
• Prepared/Preserved Meats
• Processed Fruit
• Distilled Spirits & Other Alcoholic Beverages
• Dog & Cat Food

The USA, China, and the EU-28 are Japan’s major trading partners.  Together, exports to these three markets accounted for 50.5% of the total in 2019.  Machinery and electrical equipment made up 34.4% of Japan’s total exports in 2019 followed by transport goods (24.2%).

Japan and Australia have a trade deal that lowers tariffs on imports of key products. Japan also has a pact with India and has on-going free-trade talks with Canada.  Japan is also negotiating an agreement with China and South Korea and a Free Trade Agreement with the U.S. has recently been ratified which protects Japan from U.S. trade tariffs.  Tokyo and the European Union (EU) have concluded a free trade agreement that took effect early in 2019.  The EU has agreed to a gradual phase-out of all tariffs on cars imported from Japan.  In turn, Europe’s farmers face far lower tariffs when exporting to Japan.  Japan is a member of the new 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was formally created in March 2018.  The decision could provide an especially important boost to non-U.S. food exporters.

The USDA Agricultural Trade Office or ATO in Osaka hereinafter referred to as “Post” reports that Japan is the fourth largest market for U.S. exporters of all food and agricultural products. The total Japanese food and beverage market was valued at an estimated US$779 billion in 2018, with the retail sector accounting for US$479 billion, and the foodservice sector accounting for US$300 billion.  There are tremendous opportunities for U.S. exporters willing and able to follow the strict Japanese product regulations and keep up with the latest trends in this market. Under the U.S. – Japan Free Trade Agreement (“USJTA” effective January 1, 2020) nearly 90% of U.S. food and agricultural imports into Japan are either duty-free or receive preferential tariff access.

Advantages and Challenges for U.S. Food Exporters in Japan

The Japanese market offers a number of benefits to U.S. exporters, but it is not without difficulties.

Advantages

• Under the U.S.-Japan Trade Agreement nearly 90% of U.S. agricultural products are either duty free or receive preferential tariff access
• U.S. food cost/quality competitiveness
• The wide variety of U.S. food products
• Reliable supply of U.S. food products
• Advanced U.S. food processing technology
• Relatively low U.S. shipping costs
• Science-based U.S. food safety procedures
• Growing Japanese emulation of U.S. food trends
• Japanese food processing industry seeking new ingredients
• Changes in the Japanese distribution system, becoming similar to that of the U.S.
• Japan’s dependence on foreign food supply

Challenges

• Competition with other exporting countries, some with a limited number of products with lower comparative duties under free trade agreements with Japan
• Increasing safety concerns on food products among Japanese consumers, and frequent distrust of imports
• Long-distance from Japan
• Perceived consumer antipathy for biotech, genome-edited foods, and food additives
• High expectations for quality and appearance
• Consumers preference for domestic products
• High cost of marketing in Japan
• High import duties on many products
• Competition with other exporting countries, some with lower duties due to free trade agreements with Japan
• Importers expectation of long-term involvement and commitment

Retail Sector

According to Euromonitor, retail sales in the packaged food market in Japan had been estimated at US$182.1 billion in 2019.  That represents a growth of 3.3% and US$5.7 billion since 2015.  Japan is the 3rd largest package food market in the world after the U.S. and China.  By the year 2024, the retail sales in the packaged food market in Japan are expected to reach US$201.1 billion, a growth of 7.9% or US$14.7 billion.  High growth categories in the forecast include:

• Sweet biscuits, snack bars, and fruit snacks
• Breakfast cereals
• Ice cream and frozen desserts
• Soups
• Ready meals
• Dairy products
• Baked goods

Post reports that in 2019, the total value of all retail food and beverage (F&B) sales in Japan fell 1.3% to US$483.2 billion.  The top category is supermarkets (70% of total sales) followed by convenience stores (14%).  Drug stores and department stores hold a small, but growing, the share of F&B sales.  Preferential tariff access now exists for many U.S. retail products following the entry into force of the U.S.-Japan Trade Agreement (USJTA) on January 1, 2020.  Following requests for people to stay home during the COVID-19 pandemic, retail sales at supermarkets have surged, up 20% to 30% for major chains.

Since 2000, the number of convenience stores has increased from 35,461 to 56,502 stores, resulting in significant growth in F&B sales.  However, this year sales dropped 5.1% as the sector relinquished market share to drug stores and department stores. Drugstores are increasing F&B offerings, especially in rural areas where no supermarkets are located.  Department stores generally carry premium food items and sales of ready-to-eat meals (REM) or take-home food items represent a very strong area of growth.  GMS offers products such as apparel, shoes, sporting goods, bedding, kitchenware, etc., in addition to F&B products. 

In recent years, internet F&B sales have experienced double-digit annual growth, however official 2019 sales totals are not currently available as research and publication of statistics has been disrupted during the COVID-19 pandemic.  The Nomura Research Institute (NRI) estimates that the total retail eCommerce market (including non-F&B) will grow more than 50% between 2018 and 2025.  Japanese consumers often look for convenience, quality, and single-serving sizes.  An estimated 13.5 million people commute via a combination of train and foot in Tokyo every day.  Therefore, convenience and accessibility are highly valued by consumers who drive less than their counterparts from other developed countries.

REM offerings have been increasing in every retail area, including delicatessens in supermarkets, department stores, and convenience stores, and are a key marketing strategy element to increase customer traffic and revenue.  Frozen foods have also gained a large presence in this market.  For instance, thaw-and-serve bentos (lunches that are bought frozen in the thawed and ready to eat by lunchtime) have gained popularity.  The rise of working, single-person households directly affects the rise in sales of ready-made, frozen, take-out, delivery, and restaurant prepared meals, as many career-focused young adults, want to avoid the hassle of cooking at home.

Approximately 27% of household expenditures go toward food, according to the Japanese Statistic Bureau.  The two main consumer groups are seniors (60 and older) and young adults in their 20s and 30s.  Seniors often demand healthy foods, but many have limited mobility.  The retail response has come in the form of delivery services, mobile operations, expanded internet shopping, smartphone market integration, promotions, and products developed with this cohort in mind.

Euromonitor reports that in order to target consumer demand for shopping options that are embedded in their fast-paced everyday lives and to counter competition from rival formats such as convenience stores and drugstores, some supermarket players are opening so-called mini-supermarkets.  These stores are usually positioned between conventional supermarkets and convenience stores, and seen as urban-style supermarkets. Typically, mini-supermarkets are opened in residential areas and are smaller than conventional supermarkets but with similar product coverage.  The key differences between mini-supermarkets and convenience stores can be seen in the fresh grocery offer, with mini-supermarkets tending to offer a significantly broader range of fresh meat and vegetables than convenience stores.  Examples of mini-supermarkets include My Basket by AEON, and mini PIAGO by Pan Pacific International Holdings.  In addition, Tokyu introduced its new style of supermarket, Tokyu Store Food Station mini, at the end of the review period, planning to expand its network of such stores after the opening of an outlet in a train station in November 2019.

Best Product Prospects

Post reports that U.S. products with high potential for continued success include beef and beef products, pork and pork products, processed vegetables, frozen potatoes, wheat and what products, fresh and processed fruit, tree nuts and peanuts, whisky wine and beer and cheeses of all types.

Food Service Sector

In Pre-Covid 19 Post reported that following seven consecutive years of growth, Japan’s hotel, restaurant, and institutional (HRI) foodservice industry achieved record sales of US$300 billion in 2018.  The continuing surge in inbound tourism and the recovery of sales in the quick-service segment has contributed to the industry’s success.  Evolution and innovation in home-meal replacements (HMR) and food service for the aging population are also driving growth, while sales at drinking establishments and hotels are relatively lackluster. U.S. suppliers are well-positioned to compete in many product categories, provided they are willing to adjust to market demands.

The number of foreign visitors to Japan hit a record high of 31.2 million in 2018.  With the government of Japan promoting tourism, in 2018 their spending was US$41.5 billion, up 8.7% from 2017.  Out of that total, 20.7 % was spent on meals.  Japan aims to boost foreign visitors to 40 million during the 2021 Tokyo Olympics and Paralympic Games along with nearly doubling foreign tourists’ spending. Japan is in process of developing three integrated resorts (IR) with large capacity hotels, conference/exhibition halls, and casinos. The plan is to have one of three IR locations be slated to open in March 2025; just before the opening of the Osaka World Expo.  Many hotels and restaurants are trying to attract this growing number of tourists and accommodate their diversified diet needs and preferences into their menu offerings.

HRI sales increased in 2018 for the seventh consecutive year. This trend is attributable to a variety of factors, including:

• A continued surge in inbound tourism, Evolution and growth in home-meal replacement (HMR), driven by young single professionals and the elderly
• Recovery in sales of the quick-service segment including hamburger shops, casual sushi restaurants, beef bowl, and ramen shop chains, and
• The development of a new market targeted at the increasing aging population and their evolving dietary needs

The variety of restaurants and menu items available continues to expand as Japanese consumers show interest in trying new cuisines.  Foods from Europe, Asia, North Africa, and the Americas are becoming increasingly popular, partly due to a large number of Japanese traveling abroad every year (18.9 million in 2018, up 6% from the previous year).  Additionally, the number of inbound tourists has skyrocketed since 2012; rising from 8.4 million to 31.2 million, mostly due to increasing traffic from nearby Asian countries.  With the coming Tokyo Olympic Games in 2021 (they were postponed), inbound tourism is expected to further increase.

Euromonitor reports that already facing the considerable challenges posed by a shrinking and aging population, a severe labor shortage, and a consumer trend towards eating at home, the Japanese consumer foodservice market ended 2019 responding to an increase in the rate of a Value Added Tax, (VAT), government efforts to promote cashless payment and the outbreak of a novel coronavirus.  The lack of available labor, contraction of the consumer base, intense competition, and cannibalization within brands were already leading major players to reconsider their strategies, particularly the convenience store operators that dominate the top of the rankings in consumer foodservice.

The shrinking of the consumer base and the recognition that ongoing network expansion is unsustainable are forcing players to work to raise spending per consumer visit.  Efforts in this direction include the development of higher-value menu options targeting prevailing demand trends and work to encourage consumers to spend more time in outlets by enhancing the overall consumer experience. In addition, consumer foodservice players are seeking to generate sales beyond outlets and tap into the growing demand for eating at home amongst busy and elderly consumers by expanding their takeaway and delivery options, either by partnering with third-party platforms or developing their own services.

Chained convenience stores/limited-service restaurants are the largest consumer foodservice category by value in Japan.   The top three consumer foodservice players, 7-Eleven, FamilyMart and Lawson, are all active in the category.  Having pursued strategies of expansion through the aggressive opening of new outlets, these companies are reconsidering their approaches in light of a contracting consumer base, the labor shortage, cannibalization within brands, and intense competition with other players. Consequently, convenience store operators are closing unprofitable stores and being more selective about the opening of new outlets.

Japan begins the forecast period (2020-2024) under the shadow of an emergent coronavirus pandemic, which is likely to have major implications for the immediate development of the consumer foodservice market.  Voluntary and imposed restrictions on international travel in the Asia Pacific will have a significant impact on a consumer foodservice industry placing considerable hope in government plans to raise inbound tourist numbers as they look to counter the impact of a shrinking and aging domestic population.  The two main sources of inbound tourists in Japan are China, where the virus originated and the area of the most severe outbreak, and South Korea, a site of early and rapid spread.  Moreover, plans to diversify the profile of inbound tourism are likely to be affected by a reluctance to visit the region from further afield and official restrictions on international travel.  Furthermore, there is even speculation that the 2020 Tokyo Olympics and Paralympics, key pillars in the plans to raise Japan’s international profile and promote inbound tourism, will be canceled if the outbreak is not controlled.

Food-Processing Sector

Post reports that in 2019, Japan’s food processing industry manufactured US$219.7 billion of food and beverage products, up from US$216.8 billion in 2018.  Health-oriented products are rapidly increasing in popularity and frozen food consumption has significantly increased over the past decade.  Additionally, there is a growing demand for convenient, ready-to-eat food options, as consumers generally cook fewer meals at home. The United States is the top agricultural supplier to Japan and has a reputation for being a reliable supplier of safe and high-quality foods.

The food processing industry produces a wide variety of foods: traditional Japanese, Western, and health-oriented foods for infants and the elderly.   Food processors focus on maintaining market share among traditional product lines while developing creative and innovative food products to attract consumers.  The largest food processing companies developed from traditional breweries that expanded their portfolios to include foods, distilled spirits, beverages, etc.

Processed foods that are increasing in popularity include yogurt, meat, soups, and ramen. Popular beverages include tea, vegetable juice, distilled spirits, and energy drinks.  Frozen food consumption continues to grow due to convenience and improvements in product quality and safety.  As consumers are cooking fewer meals at home, convenience and packaging—especially single serving sizes—are critical factors in product development.  According to Fuji Keizai, the top growing domestic processed foods are salad chicken (ready-to-eat chicken breast), freeze-dried products, Chuhai (kind of canned cocktail), carbonated water, cheese, and pre-packaged rice.  Notable trends in convenience-oriented foods include:

• Health-oriented foods or products that augment nutrients such as vitamins and minerals are increasingly popular. In 2015, Japan’s Consumer Affairs Agency (CAA) established a new food labeling and health claims category called Food with Function Claims (FFC). With the relative ease and affordability of the FFC registration process compared to the Food for Specialized Health Uses (FOSHU) registration process, the volume of companies and products that are marketing health food products has risen substantially.
• Small-sized packages: Demand for individual or small-sized packaging is strong due to limited kitchen and refrigerator storage, growing elderly population, and a large number of single-member households.
• Ready-to-eat or easy-to-prepare meals: Increased participation of women in the labor force and busy urban lifestyles contribute to a higher demand for convenience foods.
• Premixes: The term “premix” is an abbreviation for “prepared mix.” According to the Shurui Shokuhin Tokei Geppo, the production of prepared mixes was 300,000 tons in 2019, up 2.4% from 2018. Popular items for ‘premix’ are pancakes, tempura (batter for frying seafood and vegetables), and okonomiyaki (savory, stuffed pancakes). Premixes are increasingly popular among restaurants and supermarkets.

Best Product Prospects

Post reports that Japanese food manufacturers seek quality ingredients and conveniently prepared semi-processed foods that can reduce costs.   Specifically, indications are that there is good potential in the market for beef and products, tree nuts, fish products and processed vegetables.