Hybrids break into the Japanese market (July 2015 update)

Japan’s 2013 passenger vehicle fuel economy guide is out (Japanese only), and for those interested in these matters it provides much food for thought. The most striking finding is that the fuel economy of new passenger vehicles in Japan improved an additional 7% between 2012 to 2013, from 21.1 to 22.5 km/L (10-15 mode) and 19.4 to 20.5 km/L (JC08 mode). Overall, fuel economy has improved by more than 80% since 1995, and has averaged 6% annual improvement over the past five years (see chart). In aggregate Japanese automakers exceeded the 2020 standards in 2013, calling into question the value of those targets in driving additional improvements.


Japanese New Vehicle Fuel Economy and Regulatory Targets, 1995 to 2020

A good share of the fuel economy improvement can be attributed to the rise of hybrid electric vehicles (HEVs) in Japan, which hands down has the highest penetration of HEVs worldwide. The second chart here shows HEVs market share for new passenger vehicles in Japan from fiscal year 2005 to 2014. As the chart shows, HEV market share jumped starting in 2009, when the Japanese government adopted aggressive new fiscal incentives for fuel efficient vehicles and the year that the third generation Prius was introduced. More than 40 HEV models are currently on sale today, with hybrids now accounting for 35% of conventional passenger vehicles and 21% of all passenger vehicles including minicars. Today, more than 60% of new cars in Japan are either HEVs or minicars, with the fuel economy implications shown above.


Japan HEV and EV market share by fiscal year, 2005 to 2014

This trend was driven in part by a suite of subsidies and tax breaks for advanced and low emitting vehicles. Subsidy programs covering HEVs were in effect between April 2009 and September 2010, and then again from April to September 2012 as a response to the 2011 Tohoku earthquake. Hybrid electric vehicles have also qualified for partial or complete exclusion from taxes and registration fees (the acquisition tax, tonnage tax, and automobile registration tax) on the basis of their superior fuel economy. As an example, by purchasing a new 2.5 million JPY (approx. $25,000 US) Toyota Prius in May 2010, consumers saved 188,700 JPY ($1,887 USD) due to tax breaks and received 100,000 JPY ($1000) from the subsidy program.

The effectiveness of these measures has taken almost everyone by surprise. When the Japanese government established its latest PV fuel economy targets in 2011, it assumed that HEV market share would be 18% in 2020 (as assessment we disagreed with, for the record), a level that was actually exceeded in 2012. Moreover, HEV market share has continued to increase despite the ending of the subsidy program in 2012, suggesting that Japan may has reached a tipping point after which sustainable growth can be expected. High HEV market share is helping Japan meet and even exceed its environmental and fuel security goals for the transportation sector. While not free, policymakers in other countries hoping to promote advanced and alternative fuel vehicles, including battery electric and fuel cell vehicles, would do well to take notice of Japan’s experience with incentive programs for hybrid vehicles.