In 2002, the country held 11.7 per cent of the world's pharmaceutical sales to the tune of $398bn, however, although that figure had risen to $608bn in 2006, Japan's market share had slipped to only 9.3 per cent, with other countries such as Spain and Italy edging forward.
Japan, whose pharmaceutical industry has reminaed largely a homogenous marketplace, is now only realising the need to take innovative steps to maintain its number two spot.
As is the scenario in many parts of the world, drugs in the fields of oncology, central nervous system (CNS) and diabetes are the strongest growth performers in terms of disease indication, and as such are areas being focused on by pharma firms.
However, it is Japan's generics industry - which has barely taken off - that currently presents the biggest opportunity for growth.
According to a presentation in November by Alan Thomas, IMS Japan's global account director, compared with the rest of the world, Japan has an extremely high proportion of brands that have come off patent - 41 per cent - but an extremely low generic penetration on the market - at only 3.4 per cent.
Robert Kamphuis, a spokesperson for Japanese contract manufacturer Bushu Pharmaceuticals, told Outsourcing-Pharma.com that the reason behind this is the fact that despite patents finishing, Japanese consumers still prefer to buy branded drugs, as in addition to perceived safety fears over non-branded products, generics are not really promoted in the country so people are largely without information and unaware of the possibility for brand substitution with a cheaper product.
Now, Japan's generics industry is expanding at an annual rate of 8.9 per cent which is small compared to the rest of the world but makes it the largest growth area in Japan, a scenario that is predicted to continue.
The industry has been largely spurred on by the fact that the country's regulators have just started to pave the way for increased foreign activity in Japan, and the allowance of a cheaper way of enabling domestic manufacturers to produce generic drugs via increased outsourcing and sourcing arrangements with foreign firms - in 2005 the Pharmaceutical Affairs Law was changed to allow license holders to outsource 100 per cent of the manufacturing of drugs.
Meanwhile, Japan's drug lag is still a major issue - of the 142 new chemical entities (NCEs) launched between 2002 and 2006 only 22 per cent have been launched in Japan.
Following recent initiatives by the drug regulators, Thomas did note that the country was starting to see an improvement in this area, but there is still a long way to go.
The Japanese market is expected to grow between three and five per cent between now and 2014 although " several initiatives " are currently being debated amongst the powers that be that could positively impact this, he added.