Japan’s Biofuels Pivot: Key Policy Shifts, Declining Fuel Demand, and Rapid Growth in SAF

Japan’s biofuels market is undergoing a significant transformation. Although the country still meets its long-standing ethanol mandate primarily through ETBE blending, several new policies are reshaping incentives across the liquid fuels sector. As a result, refiners, traders, and producers are preparing for substantial changes in fuel economics, SAF demand, and long-term blending strategy.

A Market Facing Structural Decline in Gasoline Demand

Japan’s fuel consumption has stabilized following the post-pandemic recovery; however, the long-term trend still points downward. Demographics, efficiency improvements, and changing mobility habits continue to erode gasoline demand. Consequently, METI projects a 2–2.5% annual decline in gasoline use through 2029. Diesel is expected to fall more gradually, although it is also on a long-term downward trajectory.

The chart below highlights this persistent shift. Moreover, it illustrates how the gasoline-to-diesel ratio has tightened, influencing refinery optimization and blending patterns across the sector.

Despite these declines, Japan continues to meet its 824 million-liter ethanol mandate. The mandate is fulfilled almost entirely through ETBE, which maintains a nationwide effective blend rate of 1.9%. Nevertheless, METI plans to gradually shift toward direct E10 blending, beginning regional trials in Okinawa in FY 2028. Therefore, ethanol’s role may expand meaningfully over the next decade.

A Major Tax Reform That Reduces Ethanol’s Competitive Advantage

One of the most impactful policy developments is the government’s decision to abolish the 25.1 yen per liter provisional gasoline tax at the end of 2025. This levy has been a core component of Japan’s fuel tax structure since the 1970s. More importantly, it has helped enlarge the price advantage ethanol enjoys due to exemptions from several gasoline-related taxes.

After the tax is removed, ethanol’s price advantage will shrink from 56.6 yen/L to approximately 31.5 yen/L. Consequently, voluntary E10 blending becomes less attractive unless refiners receive new incentives or consumers benefit from lower pump prices. This shift may slow adoption of direct ethanol blending, even though the country remains committed to introducing E10 nationwide by FY 2030.

Furthermore, refiners may continue to rely heavily on ETBE unless future revisions to METI’s Sophisticated Act create additional economic motivation for higher ethanol volumes.

SAF Expansion Becomes Japan’s Primary Growth Driver

Although ethanol policy is moving incrementally, the SAF sector is expanding rapidly. The launch of Cosmo Oil’s HEFA-based SAF plant in April 2025 marks Japan’s first commercial facility, producing 30 million liters annually from used cooking oil (UCO). This milestone is essential, especially because Japan aims to replace 10% of jet fuel with SAF by 2030.

Additional SAF projects totaling more than one billion liters are planned for 2028–2030. However, several have been delayed due to elevated construction costs, labor shortages, and feedstock constraints. Consequently, Japan’s ability to meet its 2030 SAF target will depend heavily on project execution and imported feedstock availability.

Japan’s SAF Project Pipeline

If completed, these projects could lift Japan’s SAF output to nearly 1.2 billion liters annually by 2030. The chart below illustrates how production capacity is expected to scale, showing a clear acceleration after 2028.

Strategic Implications for Market Participants

Japan’s evolving policy landscape presents both opportunities and challenges. On one hand, stable ethanol mandates and expanding SAF incentives create long-term demand for biofuel inputs. On the other hand, the removal of the provisional tax may temporarily weaken the economics of E10 adoption. Consequently, market participants should closely monitor policy adjustments, feedstock availability, and refinery blending strategies.

Paradigm Futures will continue to track these developments, offering clients guidance as Japan’s energy transition accelerates. As incentives shift and SAF capacity builds out, traders and producers who position early may benefit from evolving price relationships and new demand channels.