Japanese food processors have been faced with internal and external squeezes in recent years. Internally, the industry is faced with an overall demand ceiling due to Engel's law and a rapidly changing demand structure due to the "westernisation" of the Japanese consumers' taste. Externally, the industry is faced with increased import competition as a result of the liberalisation of the Japanese import market for agricultural and processed food products. Under these pressures, performance of the Japanese food processors in terms of productivity and profitability, is found to be below average, compared with Japanese manufacturing as a whole. Associated with the deteriorating productivity and profitability performance, Japanese food processors have stepped up their foreign direct investment (FDI) activities in the Asia-Pacific region. This development provides both challenge and opportunities for Australian producers and food processors. As most of the Japanese FDIs are either domestic market or export oriented, they are likely to pose serious competition for Australian firms. At the same time, through joint ventures with Japanese firms, the Australian food processors may acquire the inside knowledge of the Asian market which would enable them to capitalise on the enormous opportunities in the Asian food market.