Japan Built a Machine to Cut Drug Prices. It Just Found Out There's No Reverse Gear.

On 19 June, Japan’s health minister, Kenichiro Ueno, told a Lower House committee that the country had to respond to the United States’ most-favoured-nation drug-pricing policy with what he called a considerable sense of crisis. It was a striking thing for a Japanese health minister to say out loud. It was also roughly two years late — and it named a problem his own ministry had spent the spring making worse.

This is not Japan reacting to a foreign threat. It is Japan discovering that the machine it built to solve one problem has quietly become the cause of another.

We wrote in April that the FY2026 reform — a roughly 4% cut to National Health Insurance drug prices, ¥105 billion taken out of the bill, accounting for around 70% of Japan’s entire healthcare reform target for the year — had landed without drama and turned Japan into the central exhibit in Washington’s case for most-favoured-nation pricing. The reform arrived quietly. The consequence is now arriving loudly. And the uncomfortable part, for Tokyo, is that the two are the same event seen from different ends.

To understand why Japan is now in a bind, look at what its pricing system is built to do. Since 2021, when it moved from a two-year cycle to an annual one, Japan has surveyed the gap between market transaction prices and official reimbursement prices every single year and corrected it downward. This year’s divergence rate was about 4.8%, and the correction followed. According to L.E.K., the ministry’s annual price survey alone shaves around 3% off prices in an average year — before any of the other mechanisms engage.

And there are many other mechanisms, all pointing the same way. Market-expansion repricing claws back price when uptake outpaces forecast. The special repricing rule for outperformers — the SPA-SSS mechanism — can cut a successful product’s price by up to 66.7%. The FY2026 reform applied the G1 price-cut rule to long-listed original biologics for the first time, with impact across as many as 13 brands. Even cost-effectiveness assessment, which is meant to adjust prices in both directions, has in practice functioned almost entirely as a tool of erosion; analysts note it has essentially never produced a price increase.

Every dial on the machine turns the same way. Down.

That was, for two decades, the entire point. Japan faces the most acute demographic cost pressure of any major health system, and a pricing apparatus engineered to push relentlessly downward was a fiscal necessity, not an oversight. The machine worked exactly as designed.

The problem is that the world has started referencing the direction.

The most-favoured-nation framework ties the price American payers pay to the lowest prices found across comparable developed countries. Japan’s prices are transparent, frequently below American levels, and now — through MFN — visible inputs to the United States’ own calculations. The logic Washington uses is blunt: if an American payer faces $150,000 a year for a molecule that costs $40,000 in Japan, the gap is an implicit subsidy flowing from American patients to the rest of the world. MFN is built to close that gap, by dragging foreign prices up or American prices down to meet them.

Which means a low Japanese price is no longer a domestic saving. It is a global liability — and, awkwardly, the saving and the liability are the same number.

This is not theoretical. EFPIA’s president, Stefan Oelrich, has flagged that at least four multinational drug makers already report MFN-related effects on their development or launch plans in Japan. PhRMA has warned that Japanese launches could erode companies’ global revenues, and that failure to act could make launching in Japan less commercially viable. L.E.K. puts the stakes plainly: Japan represents between 5% and 20% of global revenue for many top-selling drugs, its pricing is transparent, and its lifetime price trajectory runs in the opposite direction to American dynamics — the precise combination that makes it dangerous as a reference anchor.

And Japan is squeezed from both sides at once. The same FY2026 reform that cut domestic prices also tightened how German prices feed into Japan’s foreign-average-price adjustment, so a low European negotiated price now flows into Japan faster. Japan is referenced downward by the United States through MFN, and references Europe downward through its own foreign-price rules. It sits at the junction of two referencing systems, both pulling the same way.

Layer on the problem Japan already had — drug lag and drug loss, the delayed or absent arrival of innovative medicines that its own ministry has acknowledged for years — and MFN hands companies a fresh financial reason to put Japan later in the queue, or to skip it. The minister’s sense of crisis is, in that light, simply arithmetic catching up with policy.

So Japan is now trying to respond. Prime Minister Sanae Takaichi said in April that the government would monitor MFN developments and weigh appropriate measures. Industry and opposition have been more specific. In June, the Federation of Pharmaceutical Manufacturers’ Associations of Japan called for an emergency review of the foreign-average-price adjustment system used to set the price of newly listed medicines, arguing that Japanese prices can no longer be treated as a purely domestic matter. Opposition and industry proposals have pushed in the same direction: freeze the interim price revision, allow inflation-linked increases, scrap the rule that forbids a price from exceeding its pre-revision level, build a new methodology so that innovative drugs are not dragged below the levels of other advanced economies, hold prices stable through the patent period, and add industry voices to the Chuikyo pricing council.

Read that list carefully and the difficulty becomes obvious. Every proposal amounts to the same thing: installing an upward pricing capability into a system that two decades of policy were spent ensuring could only go down.

This is not a tweak. It is a reversal of direction.

And reversals are hard to engineer at speed. The FY2026 reform itself deferred the central question — how to evaluate and reward genuinely innovative new drugs — to a later cycle, pending further research. The cost-effectiveness mechanism that is nominally bidirectional has never delivered an increase. Tokyo is, in effect, trying to bolt a reverse gear onto a machine built only to move forward — mid-fiscal-year, with no demonstrated upward mechanism, against a budget where drug prices supply 70% of the savings the government is counting on.

You cannot bolt a reverse gear onto a machine built only to go forward. Not in one fiscal year. Not when the fuel is the same strained budget.

Because that is the bind beneath the bind: every yen Japan adds back to protect innovation and blunt its MFN exposure is a yen it must find elsewhere, in a health system already buckling under an ageing population. The downward machine was not a mistake to be corrected. It was a fiscal answer. MFN has simply made that answer collide with itself.

The Japanese episode is not a local curiosity. It is a working model of where most-favoured-nation pricing leads, and four things follow from it.

First, for global launch teams, Japan’s place in the sequence is now a live decision rather than a default. The old logic — launch in the US, Europe and Switzerland first, then Japan around year three or four — assumed Japan’s price was a contained, domestic event. It is not anymore. As we argued in April, and as L.E.K. and others now echo, a low Japanese price can compress American net revenue through MFN exposure; the foreign-price and SPA-SSS pathways have to be modelled explicitly before launch, not discovered after it.

Second, the upside Tokyo is now promising should be treated as intent, not instrument. Until the system demonstrates an actual upward move — a real price increase, not a deferred methodology or a sympathetic ministerial quote — the rational stance is to price Japan on what the machine has always done, not on what politicians say they would like it to do. Intent does not change a P&L.

Third, Japan now sits at the confluence of two reference systems pulling in the same direction — referenced downward by Washington, referencing Europe downward in turn. The fragmentation this publication keeps returning to has acquired a junction box, and it is in Tokyo.

Fourth, and least comfortably: Japan is a preview. Every transparent-price market that sits below the United States is now an MFN anchor, and therefore a candidate for delay or de-prioritisation. Japan is merely the first large one to say so in public, with a minister reaching for the word crisis. The others are running the same arithmetic more quietly — and reaching, so far, for the same absent lever.

Japan spent two decades teaching its pricing system to do one thing well. It learned the lesson completely. Now its own government needs it to do the opposite — and is finding out that a machine built for a single direction does not come with a reverse.

The sense of crisis is real. The reverse gear is not. Not yet, and not on this timetable.

Share

Beyond Approval publishes weekly strategic intelligence on market access, HTA, pricing, and regulatory shifts that reshape how medicines reach patients.