IN A country whose main male role models seem to be flouncy-haired television “talent”, Shinya Yamanaka is an oddity. The 50-year-old scientist shared the 2012 Nobel prize for medicine for his work reprogramming mature cells into induced pluripotent stem (iPS) cells. But his career also includes bouts of failure—something rarely forgiven in Japan. He became a folk hero when he won the award.

To add to the surprise, his work has produced a whiff of enterprise in a country whose population and manufacturing industry are both ageing fast. Using iPS-cell patents, business-minded boffins are busy inventing new ways to rebuild retina tissue to prevent blindness among the elderly, for example. The government promises to back such ventures with 110 billion yen ($1.17 billion) of hard cash.

Dr Yamanaka’s success comes just as Japan is reaping the benefits of a transformation in the way it approves, pays for and administers drugs. The aim is to spur innovation and curb rising age-related health costs. The world’s biggest drugmakers are licking their lips.

“For foreign [drug] companies, it’s the best market in the world right now,” says Ira Wolf, Japan representative of the Pharmaceutical Research and Manufacturers of America, a lobby group. Sales growth for the top eight multinational drug firms in Japan in 2011 ranged from 12% to 31%, he says, which he calls “emerging-market” growth rates. The firms are now shipping some of their brightest researchers to Japan.

Deregulation has come in three areas. First, the government has speeded up its review of new drugs, eroding Japan’s so-called “drug lag” against approval processes in America and Europe. The vastly expanded Pharmaceuticals and Medical Devices Agency (PMDA), which conducts the approval process on behalf of the Health Ministry, has slashed review times since 2008 and increased the number of new drugs it has approved (see chart). Last year it created a Science Board of outside experts to improve its rulings on cutting-edge technologies such as Dr Yamanaka’s tissue engineering. “This is a matter of survival for Japanese industry,” says the PMDA’s Takao Yamori. Second, the pricing system is under review. Previously, the price of new drugs would be lowered every two years, which made it hard to cover the cost of innovation. Under a pilot scheme, which big drug firms hope will continue after next year, the price of new medicines will be maintained through the life of the patent, which would make them more profitable. Mr Wolf says this has already spurred an increase in research and development (R&D) in Japan. Third, the authorities have said that 30% of the volume of drugs sold should be generics, a goal it has almost attained. This has hit smaller Japanese drug firms, which rely on income from a long tail of old branded medicines, but it helps others. Meanwhile, Japan’s biggest drug companies are expanding internationally. In 2011 Takeda Pharmaceuticals bought Zurich-based Nycomed for almost $14 billion; it has since made half a dozen more acquisitions. Japanese companies feel they must diversify abroad because at home it is hard to compete with big pharma, whose R&D budgets alone are bigger than most firms’ total sales. “We have to get out,” says Isao Teshirogi, head of the Japan Pharmaceutical Manufacturers Association.

Japan’s health-care system is among the cheapest and best in the rich world. But as the population ages costs are bound to rise and hard choices will be faced. Taro Aso, the finance minister, recently said old people in costly terminal care should be allowed to “hurry up and die” to ease the burden on an over-indebted state. His remark caused outrage but it raised a serious point. Japanese health authorities are beginning to discuss what is known as “health-technology assessment” to weigh up the cost-effectiveness of treatments. The industry worries that this could be used to cap drug prices, which would dampen innovation. But it might also redirect spending in ways that could improve public health.

New products to help the elderly, such as eye-tissue regeneration, offer big growth opportunities, says William Hall, president of Ipsos Healthcare, a consultancy. But Japan, he reckons, still needs to develop venture-capital firms, an IPO market and closer links between universities and business for enterprise to flourish. “It’s not a success story yet.”