Japan: Asia's Europe?

(MENAFN- ING) Past: a global innovation heavyweight

Japan used to be one of pharma's premier innovation markets – much like Europe. It combined a large, wealthy domestic market, strong local champions, deep scientific capability and a reimbursement system that historically rewarded high-quality medicines. The industry moved from post-war catch-up to genuine discovery strength, with Japanese companies producing many innovative new drugs from the mid-1980s onwards. At its peak, Japan accounted for more than 25% of the global pharmaceutical market (Tokyo Foundation), and by the mid-1990s, it still represented a major share of global pharma value creation.

So, both have gradually lost ground to the US – and now, increasingly, to China. Why? Because slower access pathways, weaker innovation incentives and relatively shallow capital markets have made them less attractive as launch and investment markets.

Japan's large and growing elderly population has also put fiscal pressure on the country's healthcare system, making it a less appealing destination to launch medicines. Despite efforts by both the government and industry to strengthen Japan's pharma ecosystem, the market remains constrained by an increasingly cost-conscious policy environment. This is reflected in the shrinking National Health Insurance (NHI) price list, which decreased by roughly 30% since 2019: regulators apply tougher standards on both clinical value and cost-effectiveness before adding or maintaining medicines.

Number of pharmaceuticals on NHI price list continues to decrease

Number of drugs included in NHI price list per year

Source: JPMA, BMI, ING

"> Present: still an innovation hub, but increasingly squeezed

Japan remains the fourth-largest global pharmaceutical market, behind the US, the EU and China, but growth is slower and more policy-constrained. The key problem is not lack of demand, because Japan's ageing population and chronic disease burden support medicine use. However, pricing is constrained, as the public health system keeps drug prices low. The result is visible in“drug lag”, where drugs arrive late, and“drug loss”, where drugs never get launched at all. In 2024, the Pharmaceuticals and Medical Devices Agency (PMDA) reported that 143 products approved in Europe and the US remained unavailable in Japan. Furthermore, 87% of new medicines launched globally since 2014 are available in the US, compared with only 50% through Japan's public NHI system (BMI), while Japanese patients wait an average of 15 months after global launch for reimbursement.

This problem is exacerbated by Trump's Most-Favoured Nation policies, where Japan is a key reference country. Historically, low Japanese prices mostly hurt Japan's own market attractiveness. Under MFN, low Japanese prices could also affect US pricing benchmarks. This could create upward pressure on Japanese drug prices, but also more launch risk. If Japan remains a low-price reference country, global pharma may delay launches to avoid contaminating US benchmarks. The US tariff framework adds another incentive for branded pharma companies to prioritise the US market, given that it accounts for roughly two-thirds of branded pharma profits.

That creates Japan's Europe-like dilemma: it wants innovation, but keeps squeezing the economics of innovation. Japan introduced pro-innovation pricing reforms in 2024 – including stronger Price Maintenance Premiums and upward revisions for low-margin essential medicines – but FY2025 and FY2026 reforms continued off-year price revisions and patented-drug price cuts. This risks undermining the government's innovation agenda and is evidenced by fewer clinical trials and relatively modest drug approval numbers in recent years.

Japan's drug approvals have been modest in recent years

Distribution of first global approvals of innovative drugs in absolute numbers, 2015-24

Future: reinvention is possible, but policy must stop pulling in opposite directions

Japan's future depends on whether it can become more than a mature, cost-controlled market. The government clearly understands the problem. Policy initiatives include a 10-year public fund for innovative drug development, the Pharmaceutical Industry Vision, and a roadmap to double private investment in drug-discovery startups by 2028.

Japan is also trying to reduce operational barriers. Reforms include 5-10% pricing premiums for accelerated launch of innovative drugs, efforts to build international-level clinical-trial systems, and the removal of mandatory domestic Phase I trials in some cases. These changes are intended to make Japan more attractive for global R&D and earlier launches.

But the risk is that Japan repeats Europe's mistake: announcing innovation strategies while using reimbursement systems to squeeze margins. Japan is therefore Asia's Europe: historically innovative, scientifically strong and still commercially important, but increasingly held back by pricing pressure, slow access, Trump's policies, relatively shallow capital markets and weaker launch incentives. The upside is that MFN may force Japan to rethink how low it can push prices without losing access to innovation. The downside is that if reform remains partial, Japan risks becoming a market that companies serve late; respected scientifically, but no longer central to the strategy of global pharma companies.

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