Call it the silent arrow of Abenomics, the series of economic plans proposed by Japanese Prime Minister Shinzo Abe’s administration. Inspired by an ancient tax code from the 19th century, Japanese beer is an absolute enigma from a legal perspective. Rather than impose a fairly simple excise tax on alcoholic beverages, Japanese beer has a gradation policy. This has prevented many of the nation’s beer stocks from truly reaching their potential.
Breweries in Japan are regulated by malt content — the greater the malt, the more taxes you pay.
If you thought that was weird, hold on — it gets worse! Real Japanese beer is labeled at the grocery markets as such: beer. But for those that want to avoid the onerous taxation of standard malt beverages, breweries can produce beer knockoffs, or derisively known as “happoshu.” These beverages integrate peas, corn, or soybeans, essentially anything undesirable to drop the malt content.
In fact, the “Big Four” of Japanese beer stocks — Asahi Group Holdings Ltd (OTCMKTS:ASBRF), Kirin Holdings Co Ltd (ADR) (OTCMKTS:KNBWY), Suntory Beverage & Food Ltd (OTCMKTS:STBFY) and Sapporo Holdings NPV (OTCMKTS:SOOBF) — have an unwritten policy of flooding the market with happoshu. This way, they can still sell their alcoholic beverages while getting underneath the taxation threshold.
Japanese Beer Stocks Versus the Government
The current iteration of Japanese beer laws dates back to 1953, according to Japan Inc. Since then, two revisions were introduced — one in 1962, and one in 1989. The latter year was the most burdensome for the country’s beer stocks, ironic because it was the pinnacle of the Nikkei 225 index.
At that time, several goods saw their tax liabilities reduced. Unfortunately for Japanese beer stocks, their brew was not affected. Deciding not to take the disparity lightly, STBFY was the first among the beer stocks to introduce happoshu in 1994. Shortly thereafter, ASBRF, KNBWY and SOOBF followed suit with their own variants of cheap beer.
What was a creative, but literally distasteful way, of getting around Japan’s archaic alcohol laws was a short-lived victory. The suits in Tokyo caught on to the scheme, and began adjusting their malt threshold lower. In response, Japanese beer stocks became creative in their concoctions. The back and forth provided jobs for research and development teams, but was a nightmare for anyone who enjoys a cold one.
Inarguably, though, Japan’s craft brewery industry absorbed the most pain. Because craft beer contains exotic ingredients, the government often classifies them as happoshu. That wouldn’t be a problem except for one thing — craft beer is expensive to make. But since they’re labeled as happoshu, domestic powerhouse STBFY overwhelms them. After all, why pay more for cheap beer?
For independent Japanese beer companies, the choices are limited. Domestically, the term happoshu has a negative connotation. Internationally, they would get clobbered by the mainstay beer stocks ASBRF, KNBWY, and SOOBF.
Beer Stocks Critical for Abenomics
Fortunately, change is on the horizon. According to Bloomberg, 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.”
With smaller beer stocks able to compete in a more transparent environment, Japan can boost its regional economies.
This falls right into the core principle of Abenomics — revitalize Japan through removing its shackles. In recent years, this translated into a national dialogue of women in the workplace and attracting immigration. Of course, as a country steeped in tradition, some of the arrows of Abenomics are more palatable than others.
The best part about Japanese beer stocks is that no one is going to turn down a cold one. Even the worst ideas sound great after alcohol consumption. But in all seriousness, the revamped tax codes make so much sense. Bloomberg further notes that domestic “shipments of all beer have declined for 12 straight years, according to the Brewers Association of Japan”; giving craft breweries a reason to exist is an important and necessary step.
New Policy a Welcome Change
The policy shift isn’t just favorable for independent beer stocks. The majors are welcoming this transition with open arms. KNBWY CEO Yoshinori Isozaki bluntly stated that “Too much attention has been given to winning market share through price wars, and we have left behind what is most important — the customer.”
ASBRF and SOOBF have issued similar complaints for years. The average tax on Japanese beer is 800% higher than American beer, and 1,800% more expensive than its German counterpart. Antiquated laws were killing Japanese beer stocks from the inside out. But with the changing political tide, major brewers like STBFY are reinvesting in premium beverages.
So far, this dynamic has occurred relatively quietly, and understandably so. Japan of today isn’t the Japan of the 1980s. Nevertheless, the new Japanese beer policy is one of the most dramatic changes in the nation’s retail distribution. As a result, don’t be surprised to find that Japanese beer stocks will remain silent no longer!
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.