Growing Japan’s Market

Industry insiders say organic food will unlikely reach the same level of market penetration in Japan as it has in Western countries.

A survey by Fusion Consulting in 2008 among major Japanese food manufacturers of confectionary, dairy, bakery products and cooking sauces reveals that many global companies regard Japan as a key market for organic products after Europe and the US.

However, Japan’s domestic organic food industry is still underdeveloped. This is partly due to the high level of pesticide that is traditionally used in an average fruit or vegetable farm, compared with North America or most of Western Europe, in order to address issues concerning insect infestations caused by a relatively hot and humid climate.

The term ‘organic’ has low public recognition in Japan due to cultural differences from other mature consumer markets. Products such as fresh milk and noodles would be better marketed with words such as ‘chemical free’ or ‘pesticide-free’ on their labels, as opposed to ‘organic’.

Japanese consumers also have difficulty accepting that locally grown organic food is available seasonally, when imported food and nonorganic food (grown with pesticide) are available all year round.

Industry insiders say organic food will unlikely reach the same level of market penetration in Japan as it has in Western countries. It will likely top out at around 2% of the total food market, which is estimated to be worth $1 trillion. However, the Japanese Trade Commission says this is still significant when compared to the current market share of less than 0.5%. And below are some key factors that will drive the organics industry in the country.

• Impact of food scandals in Japan

There were two major food scandals in Japan last year. One involved pesticide-tainted Chinese dumplings, which caused food poisoning in at least 10 consumers. The other involved contaminated rice that was intended for industrial use such as the manufacture of glue. It was sold to thousands of consumers, including schoolchildren and nursing home patients. This second scandal even resulted in the resignation of Japan's agriculture minister.

Different border regulations in global supply chains make the tracking of ingredients challenging. Consumers are increasingly aware of unethical practices through the mass media, and are paying attention to food safety, ingredient quality and labeling. Consumer concerns on food scandals is perhaps the most important driver of both legislation and consumer sentiment towards organic food.

• Market potential

Food manufacturers have much to gain from tapping into a large aging population with relatively high-income levels. Japan is expected to see a dramatic rise in the ratio of elderly dependents (age 65 years and above) to the adult population. The sharp decline in Japan’s fertility rate is also expected to generate a rapid growth in Japan’s aging population than in any other major industrial countries (Chart 3).

Organic food, functional food and nutraceuticals that can boost the quality of life and help prevent age-related disease are expected to boom in the market. The Japanese government for example has changed the status of ingredients such as Glucosamine from drug to food. Since its entrance on the food market, Glucosamine has tripled in sales to $58 million. CoQ10 and L-carnitine, both approved last year, had sales of around $50 million and $20 million respectively in 2008. Industry leaders say the government currently reviews about 10 new food products a year, thereby opening more opportunities for organic ingredients.

• Law enactment on organic farming

Strengthening the wider supply chain, beginning with agricultural producers, will inadvertently drive the growth of the organic food industry in Japan. Recent official changes, namely the Law on Promotion of Organic Agriculture and guidelines from Ministry of Agriculture, Forestry and Fisheries (MAFF), now focus on promoting local organic products with quantitative targets. They set out to:

1. Help traditional farmers switch to organic farming.

2. Facilitate the production, distribution, and sale of organic farm products.

3. Improve consumer access to organic farm products.

4. Connect organic farmers, consumers and other stakeholders.

• New food labeling laws New food labeling laws were tightened due to food scandals and food labeling misrepresentations by Japanese food manufacturers. They are expected to streamline and expand coverage of existing laws and for consumers to know ‘what goes into their manufactured or processed food’.

Outlook

Consumer data from the European Union and the UK in the past months seem to indicate a severe decline in organic sales due to the global recession.

The challenge for Japanese organic food manufacturers is exacerbated by other market restraints unique to the country, such as limited space to grow food domestically, consumer obsession with product packaging and appeal, and the significant price difference between conventional and organic food. The import market share is likely to be a significant portion of the market growth.

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