1 Give an overview of the country’s economy, its structure and main characteristics, and prevailing government economic policy, particularly as regards foreign investment.
In recent years, due in part to the effect of the economic policies of the Japanese government, collectively known as ‘Abenomics’, as well as the qualitative and quantitative measures implemented by the Bank of Japan, there appear to be signs that the Japanese economy is recovering from the low economic growth and deflation seen in the past few decades. For example, real GDP improved from ¥516 trillion in 2015 to ¥534 trillion in 2018, and inward foreign direct investment (FDI) stock was ¥28.6 trillion in 2017, a 2.8 per cent increase compared with 2015.
In Japan, almost all industries are subject to some degree of governmental regulations, which is believed to be one of the obstacles faced by foreign companies investing and operating in Japan. Given these circumstances, and with an aim to increase the amount of FDI in Japan to ¥35 trillion by 2020, the Japanese government has been undertaking the necessary policy measures to simplify regulations and administrative procedures pertaining to foreign companies.
2 Describe the legal framework and legal culture in your jurisdiction as regards business and commerce.
Japan is a civil law jurisdiction and a unitary rather than a federal system of government. In accordance with the principle of ‘separation of powers’ under the Constitution of Japan, the activities of the national government are formally divided into three organs: (i) the National Diet as the legislative organ; (ii) the Cabinet as the executive organ; and (iii) the courts as the judicial organ.
The National Diet is the bicameral supreme legislative body of Japan, consisting of the House of Councillors (upper house) and House of Representatives (lower house). The Constitution provides that the National Diet is the sole law-making organ and, therefore, laws must be approved by the National Diet.
Enacted laws are enforced by administrative agencies presided over by the Cabinet. Administrative agencies have broad powers to regulate economic and commercial activities, and some are authorised to create and enforce their own regulations. As such, it is important for foreign companies to understand the laws and regulations applicable to their business operations in Japan.
The judicial organ consists of the Supreme Court and lower courts. Although Japan is a relatively less litigious society compared to other developed nations, it seems that the number of lawsuits relating to M&A, financing and other business activities here have been increasing recently.
3 What are the main sources of civil and administrative law applicable to companies?
The Japanese legal system is a civil law system. Civil law applicable to companies mainly consists of statutory laws such as the Civil Code, the Commercial Code and the Companies Act. In addition, although court precedents, except for Supreme Court decisions, do not have legally binding authority, case law plays a significant role in practice.
As for administrative law, statutory laws are important but government authorities also have strong discretionary administrative powers to issue ordinances, orders and guidelines that are also regarded as significant forms of administrative law.
4 How does the court system operate with regards to large commercial disputes?
The Japanese court system is quite efficient in resolving large commercial disputes.
First, a large commercial dispute is usually assigned to a panel of three professional judges at a district court (ie, the court of first instance), as there is no jury system for civil litigation in Japan.
Second, the judges take the lead in organising the arguments of the parties and identifying key issues during hearings, which are held every one or two months. Examinations of witnesses focus on the key issues and are conducted within a relatively short time, allotting, say, one hour per witness. Extensive discoveries are not allowed in Japan though, so document productions are limited to only the specific documents necessary to reach a decision regarding the key issues.
Third, special departments are set up for commercial disputes at large district courts in Japan, such as the Tokyo District Court, where judges in those special departments are more knowledgeable and experienced with commercial disputes than other judges. Such special departments are also set up for intellectual property disputes.
Furthermore, district court judges are obliged under Japanese law to make an effort to complete each of their court proceedings within two years. As a result, most large commercial disputes are decided or settled within two years.
5 What legal recourse do consumers typically have against businesses?
It is not very difficult for consumers to bring a lawsuit against companies because Japanese litigation is relatively inexpensive and, even if the plaintiffs lose, they are not required to bear the defendants’ attorneys’ fees. Japan did not have a system of collective action like that found in the United States until recently when Japan introduced a new system that enables consumers to file a class action in court. However, this new system is limited to the recovery of the following five types of monetary claims arising out of consumer contracts: (i) specific performance; (ii) return of unjust enrichment; (iii) compensation for losses arising from breach of contract; (iv) compensation for losses arising from defect liability; and (v) compensation for losses due to tort.
6 How significant is arbitration as a method of dispute resolution?
The use of arbitration, especially international arbitration, as a method of dispute resolution has gradually increased in Japan due to the increase in international transactions involving non-Japanese entities. While the number of international arbitrations held in Japan under the rules of the Japan Commercial Arbitration Association (JCAA) or the International Chamber of Commerce (ICC) had been increasing, in 2016, there were 16 arbitration cases newly brought before the JCAA, a 23.8 per cent decrease from the previous year. That being said, litigation still remains as the most common method of dispute resolution in Japan.
7 What other methods of dispute resolution are commonly used?
After the Act on Promotion of Use of Alternative Dispute Resolution was enacted as part of judicial system reforms in Japan, out-of-court dispute resolution proceedings, including arbitration and mediation, have become more common. Along with the arbitrations conducted in Japan (under JCAA or ICC rules), international arbitrations under the rules of other arbitration centres, including the Hong Kong International Arbitration Centre and the Singapore International Arbitration Centre, are also increasing. Mediation is another method also commonly used by courts and other organisations including bar associations.
8 How easy is it to have foreign court judgments and foreign arbitral awards recognised and enforced in your jurisdiction?
A final and binding judgment rendered by a foreign court can be recognised and enforced if it meets all of the following requirements:
- the jurisdiction of the foreign court is recognised under Japanese laws, regulations, conventions or treaties;
- the defendant received proper service of summons or appeared in court;
- the judgment and court proceedings are not contrary to public policy in Japan; and
- a reciprocity of enforcement of judgment exists between Japan and the foreign jurisdiction.
A foreign arbitral award has the same effect as a final and binding judgment and thus can be recognised and enforced unless it falls within the nine exceptional cases set forth in article 45 of the Arbitration Act. Those exceptions include cases where (i) the arbitral award is decided for matters beyond the scope of the arbitration agreement, (ii) the claims made during the arbitration relate to a dispute that cannot be the subject of an arbitration agreement under Japanese laws and regulations, and (iii) the arbitral award is contrary to public policy in Japan.
In practice, since Japanese courts rarely consider judgments or arbitral awards to be contrary to public policy, it is relatively easy to have foreign court judgments and foreign arbitral awards recognised and enforced in Japan as long as they meet the above requirements.
Foreign investment and trade
9 Outline any relevant treaty organisations, economic or monetary unions, or free trade agreements.
Japan has been a member of the World Trade Organization since 1 January 1995. As of February 2019, Japan has entered into 16 free trade agreements and more than 20 bilateral investment treaties. In addition, 11 countries including Japan and Canada signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on 8 March 2018. Initially, 12 countries including the US signed the Trans-Pacific Partnership (TPP) Agreement on 4 February 2016. However, the US withdrew from the TPP Agreement in January 2017. CPTPP became effective among several countries including Japan and Canada as of February 2019, and is scheduled to become effective among other countries.
10 Are foreign exchange or currency controls in place?
The Foreign Exchange and Foreign Trade Act (FEFTA) provides for regulations regarding payments between Japan and foreign countries and between residents and non-residents of Japan. Such payments are generally not prohibited; however, prior approval of the Minister of Finance or the Minister of Economy, Trade and Industry is required in certain circumstances, such as payments to persons subject to economic sanctions.
In addition, a post-facto report to the Minister of Finance regarding such payment is required under the FEFTA, if (the amount of such payment exceeds ¥30 million and such payment is not a direct result of the import or export of goods.
With respect to restrictions on foreign investment, please see question 11.
11 Are there restrictions on foreign investment?
In 2016, the total amount of new foreign investment in Japan was about ¥34.6 trillion. There are no restrictions prohibiting foreign investors from acquiring shares in Japanese companies, but there are mainly two types of regulations: a fixed maximum foreign shareholding ratio in specific industries and a reporting requirement. The following table indicates the fixed maximum foreign shareholding ratios for certain industries:
Fixed maximum foreign shareholding ratio
Less than one-third of a listed company, etc.
Broadcasting and radio
Less than 20% of a listed company, etc.
Less than one-third (whether a listed company, etc, or not)
Furthermore, there are government-affiliated corporations, such as Japan Post Holdings Co, Ltd Nippon Telegraph and Telephone Corporation, and Japan Tobacco, Inc. Under Japanese laws and regulations, the government is obliged to maintain a certain shareholding ratio in such corporations. With respect to Japan Post Holdings Co, Ltd and Japan Tobacco, Inc, the government is required to hold more than one-third of the issued shares of each company. Consequently, foreign investment in government-affiliated corporations is limited as such.
In addition, the FEFTA provides reporting requirements on certain foreign investments. Among others, an investment whereby a foreign investor acquires 10 per cent or more shares of a listed company shall be reported to the competent ministries via the Bank of Japan. In many cases, a foreign investor is simply required to file a post-transaction report after the acquisition of shares. However, foreign investments in specific industries, such as weaponry, aviation, nuclear energy and telecommunications, or investments from certain countries, are subject to a pre-transaction report requirement and screening by the government. In the case of a pre-transaction report, the Minister of Finance and other competent authorities may request the foreign investor to change the content of the investment or discontinue the investment altogether. Recently, the government of Japan has generally taken a stricter attitude towards foreign investments due to the changing international situation.
12 Are there grants, incentives or tax reliefs for foreign investors or businesses?
The Japanese government promotes foreign investment in Japan by awarding various incentives, such as the subsidies given by certain municipal governments for certain expenses (eg, rent, labour costs) of businesses from overseas. There are also other grants and incentive programs available to both domestic and foreign businesses.
13 What are the main taxes that apply to cross-border or foreign-owned business and investors?
If a foreign business sets up a subsidiary under Japanese law, the subsidiary will be subject to the general tax regime and pay business-related taxes, including corporate tax, enterprise tax and consumption tax (VAT). Japanese transfer pricing rules, thin-capitalisation rules and earnings-stripping rules may apply to transactions between the Japanese subsidiary and a foreign company in the same group. Dividends paid by the Japanese subsidiary to its foreign parent company may be subject to Japanese withholding tax, but many Japanese tax treaties provide reduced withholding tax rates or exemption, subject to certain conditions.
If a foreign business operates in Japan through a branch or dependent agent rather than a Japanese subsidiary, it will also be subject to the above-mentioned taxes with respect to income attributable to such branch or agent. There is no branch profit tax in Japan.
In other cases, typically where a foreign investor merely receives returns from a portfolio investment (eg, stocks or bonds issued by Japanese companies), Japanese withholding tax may apply but the investor may enjoy tax reduction or exemption under an applicable tax treaty. For example, under the tax treaty between Japan and the US, a portfolio investor may be entitled to a 5 per cent or 10 per cent reduced withholding tax rate (the general rate under the domestic tax law is 15.315 per cent for listed shares and 20.42 per cent for unlisted shares) on dividends from a Japanese company.
14 Which industry sectors are regulated or controlled by the government?
In Japan, almost all industries are subject to some degree of governmental regulations. The strictly regulated main industry sectors are: finance, including banking, insurance and securities; agriculture; medicine and pharmaceuticals; energy; transportation and construction; and broadcasting and telecommunications. Postal services, tobacco, telecommunications and railway businesses were operated by the Japanese government in the past, but most of them have been privatised and are now subject to competition under strict regulation.
15 Who are the key industry regulators, and what are their powers?
The Financial Services Agency (FSA) regulates the banking, insurance and securities industries, while either the FSA or the prefectural governor regulates non-banking businesses. Their powers include granting and revoking operating licences, ordering full or partial suspensions of business, requiring the submission of reports or information and conducting on-site inspections of financial and other records.
The Ministry of Agriculture, Forestry and Fisheries regulates agriculture, forestry and fisheries. Its powers include supervising these industries, and adjusting prices and supply and demand.
The Ministry of Health, Labour and Welfare regulates the medical and pharmaceutical industries and has jurisdiction over labour and employment matters. Its powers include granting and revoking licences to produce and sell pharmaceuticals.
The Ministry of Economy, Trade and Industry (METI) regulates the energy industries such as electricity and gas suppliers. Its powers include granting and revoking operating licences in these industries, and approving rates and other terms and conditions of services. METI also regulates manufacturers and importers of electrical appliances, and can require the submission of reports or information and conduct on-site inspections of financial and other records. Finally, METI is also a key industry regulator of credit businesses.
The Consumer Affairs Agency regulates manufacturers and importers of consumer products, and can publish data on product accidents, require the submission of reports or information and conduct on-site inspections of financial and other records.
The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) regulates the construction and the passenger and cargo transportation industries, while either MLIT or the prefectural governor regulates real estate businesses. Their powers include supervising these industries and granting and revoking operating licences.
The Ministry of Internal Affairs and Communications regulates the telecommunications and broadcasting sectors. Its powers include supervising these sectors, and approving licences, business registrations and service fees.
16 What are the other main enforcement authorities relevant to businesses?
The other main enforcement authorities (especially those beyond the bounds of industries but related to investment in businesses in Japan) are as follows:
The Japan Fair Trade Commission (JFTC), an independent administrative committee, has authority with respect to reviewing, investigating and imposing administrative disciplinary action for certain anticompetitive conduct under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Antimonopoly Act).
The National Tax Agency, an extra-ministerial bureau of the Ministry of Finance, is the primary governmental agency with respect to national taxes and compliance by verifying filed tax returns and conducting field examinations.
The Ministry of Finance and the Ministry that has jurisdiction over certain businesses (eg, METI, in the case of electrical equipment or automobile manufacturers) have authority over reviewing and prohibiting foreign investment in Japan related to national security, public infrastructure, public safety and domestic industry protection under the FEFTA.
The Public Prosecutor’s Office and the police departments of each prefecture enforce matters related to criminal law including fraud and corruption.
17 On which areas have regulators particularly focused their recent enforcement activities?
The Securities and Exchange Surveillance Commission (SESC), which is an organ of the FSA, investigates, collects and analyses market information and transaction data to detect possible misconduct, such as insider trading and market manipulation, and makes recommendations to the FSA regarding the imposition of administrative fines. During the year ended 31 March 2018, the SESC examined 1,099 cases, filed four criminal cases, and in 28 cases recommended that the FSA issue orders for administrative fines.
The JFTC, which enforces the Antimonopoly Act and related laws, supervises and strictly regulates market, economic and business activities to prevent or detect violations of the Antimonopoly Act, and actively takes measures against such violations. For the year ended 31 March 2018, the JFTC implemented legal measures in 13 cases, and issued surcharge payment orders totalling approximately ¥1.9 billion.
18 What are the principal bribery, corruption and money laundering concerns for businesses?
In Japan, bribery committed domestically and cross-border are both prohibited. The Penal Code prohibits bribery of Japanese government officials, while the Unfair Competition Prevention Act prohibits bribery of foreign public officials. The largest case in Japan involving foreign bribery occurred in 2014, concerning the railway consulting firm Japan Transportation Consultants, Inc (JTC) and three former executives who paid bribes totalling approximately ¥145 million to foreign public officials in several countries. The former executives were sentenced to imprisonment for two to three years plus suspended sentences of three to four years, and JTC was fined ¥90 million. On the other hand, private commercial bribery is not generally regulated other than by specific laws that regulate private commercial bribery in specific circumstances. For example, under the Companies Act, the provision of benefits to certain persons such as board members in connection with their duties is prohibited and may constitute criminal behaviour.
19 What are the main data protection and privacy risks for businesses?
The Act on the Protection of Personal Information (APPI) imposes certain obligations on private businesses that use personal information (PI) to, for instance: undertake necessary and appropriate measures to safeguard PI; not use PI except to the extent necessary for the purposes disclosed to the subject individuals; not disclose PI data to any third party (subject to certain exemptions); and conduct necessary and appropriate supervision over employees and contractors. The first significant amendment to the APPI was enacted to eliminate the ambiguity of the scope of PI and facilitate the proper use of anonymised data, and came into force on 30 May 2017.
Data breaches may result in huge compensatory and reputational risks and regulatory penalties. In addition to the administrative sanctions and criminal penalties set forth in the APPI, voluntary payments and statements of apology to affected individuals are also common. Furthermore, there have been cases where consumers filed tort claims to ask for higher compensation based on violations of privacy rights.
20 What are the main anti-fraud and financial statements duties?
Article 432 of the Companies Act requires a joint-stock company (kabushiki kaisha, or KK) to prepare accurate account books in a timely manner in accordance with Japanese GAAP, and to keep its account books and important materials regarding its business on a running 10-year basis. A KK must also prepare financial statements, which are subject to audit, and business reports at the end of every fiscal year. If a KK fails to prepare financial statements or business reports, or fails to record necessary items or produces false records, administrative fines may be imposed on the company’s officers including directors, company auditors and accounting auditors. The company’s officers may be liable to the company for damages arising from such omissions or false statements if the officers are found to have neglected their duties. In addition, they may be liable to third parties, including shareholders, for damages arising from such omissions or false statements if the officers are found to have had previous knowledge or were grossly negligent in performing their duties.
Under the Financial Instruments and Exchange Act (FIEA), listed and unlisted companies that meet a certain threshold regarding the number of shareholders are required to file an annual securities report and quarterly securities reports (semi-annual for certain companies) with the FSA. If these reports contain false material statements or omit material facts, the company may be subject to administrative or criminal fines, or both, and the company officers may be subject to imprisonment or criminal fines, or both. The SESC is the government body that carries out investigations and other enforcement actions with respect to such omissions or false statements in violation of the FIEA. The company and its officers may also be liable to shareholders for civil damages arising from such violations.
In addition, the Penal Code penalises any person who defrauds another of property with imprisonment of up to 10 years. Furthermore, the Unfair Competition Prevention Act makes illegal certain acts, such as acquiring trade secrets by theft, fraud, duress or other wrongful means, or creating confusion by using another person’s indication of goods or business.
21 What are the main competition rules companies must comply with?
The key rules of the Antimonopoly Act consist of the prohibition of unreasonable restraints of trade, private monopolisation, and unfair trade practices. In addition, there are merger control rules (see question 25).
- Cooperative conduct that causes substantial restraint of competition is prohibited as unreasonable restraint of trade. This category includes cartels and bid rigging.
- There are two types of private monopolisations: (i) exclusionary private monopolisation, where companies individually or jointly exclude competitors from the market by unfair conduct, such as unreasonable low-price sales or dealings on exclusive terms; and (ii) private monopolisation by control, where companies individually or jointly gain control of the market by restricting the business activities of other companies.
- ‘Unfair trade practices’ is an umbrella term for certain types of conduct that potentially restrain fair competition, such as refusal to trade, discriminatory pricing or unreasonable low-price sales.
Also, the Antimonopoly Act restrains abuse of dominant bargaining position, which is uncommon in other countries. It has frequently been applied to large-scale retailers who exploit suppliers or to powerful franchisors who exploit franchisees.
One of the main administrative sanctions enforced by the JFTC in connection with violations of the above rules is a surcharge payment order. The number of defendant companies to which the JFTC has imposed surcharge payment orders was 128 for fiscal year 2014, 31 for fiscal year 2015, 32 for fiscal year 2016 and 32 for fiscal year 2017. The total amount of administrative surcharges paid in each year was approximately ¥8.5 billion, ¥9.1 billion and ¥1.9 billion, respectively.
22 Outline the corporate governance regime.
The corporate governance regime is outlined in the Companies Act and, additionally, there are listing rules that are also applicable to companies listing their shares on Japanese stock exchanges. In view of the recent scandals of listed companies such as Takata, Toshiba and Olympus, there have been some amendments and changes to the corporate governance regime in Japan.
The Companies Act provides three types of systems for a KK, which are ‘a company with nominating committee, etc’, ‘a company with board of company auditors’, and ‘a company with audit and supervisory committee’. A company with nominating committee, etc, is equivalent to the committee system common in the US. A company with board of company auditors is the most commonly used in Japan, in which company auditors have no voting rights at board of directors’ meetings. A company with audit and supervisory committee system became applicable when the amended Companies Act came into effect on 1 May 2015, encouraging Japanese companies to adopt a committee system with independent directors instead of appointing statutory auditors.
Additionally, the Corporate Governance Code (CGC), which became a part of the listing rules as of 1 June 2015, requires listed companies to ‘comply or explain’ in accordance with CGC principles. One principle recommends listed companies to have at least two independent directors. As of 13 July 2018, 91.3 per cent of the 1st Section of the Tokyo Stock Exchange have appointed two or more independent directors (compared with 88 per cent in 2017 and 79.7 per cent in 2016) in response to the CGC. According to the ‘2018 Japan Board Index’ by Spencer Stuart, 31 per cent of TOPIX100 companies have appointed foreign directors. In this regard, for the purpose of further promoting the prevailing CGC as well as the Stewardship Code established in February 2014, the government established a council of experts to follow up on both codes in August 2017 and has been discussing further amendments to the corporate governance regime.
23 Can business entities incur criminal liability? What are the sanctions for businesses, related companies and their directors and officers for wrongdoing and compliance breaches?
Under Japanese law, as a general rule, a natural person can incur criminal liability. A business itself, which does not have a judicial personality, cannot incur criminal liability; however, there are situations where a juridical person (such as a corporation), which has a judicial personality and runs the business, can incur criminal liability under the concept of dual liability.
In certain situations, if a representative, agent, employee or any other worker of a juridical person violates certain laws, the offender and the juridical person itself will usually be subject to fines. For example, article 95 of the Antimonopoly Act stipulates, ‘If a representative of a juridical person, or an agent, an employee or any other worker of a juridical person or of an individual has, with regard to the business or property of the juridical person or individual, violated the provisions referred to in any of the following items, in addition to the offender being punished, the juridical person or individual is sentenced to the fine prescribed in each of those items’ (the ‘dual liability’). Dual liability clauses are commonly found in laws involving certain administrative aspects. In addition to the Antimonopoly Act, article 121 of the Labour Standards Act and article 22 of the Unfair Competition Prevention Act are considered to be the other major laws that impose dual liability. To reiterate, juridical persons may be subject to criminal liability under the concept of dual liability if explicitly stipulated in the applicable law.
On a separate note, the Companies Act, which is the basic law for business entities, stipulates that directors and officers shall be liable to their companies for damages caused by their neglect of duty. Violation of the fiduciary duty of loyalty, breach of trust, embezzlement and misstatement are examples of neglect of duty. As such, those directors and officers may be subject to civil liability (eg, compensation for damages) in addition to criminal liability (under the Penal Code, if applicable).
24 What types of business entity are most commonly used by foreign investors and why? What are the main requirements for their establishment and operation?
The business entity most commonly used by foreign investors is the KK.
There is no minimum or maximum share capital requirement for a KK; however, the monetary contribution is required to be paid to a Bank (as defined in article 2(1) of the Banking Act) or any other equivalent entity prescribed by the Ordinance of the Ministry of Justice. There are no restrictions on the nationality or residency of a director or other officer of a KK. The rights capacity and purpose of a KK are practically unlimited; therefore, a KK is also used as an entity for investment purposes. A KK shall have three or more directors if it has a board of directors.
A registration fee at a rate of 0.7 per cent of the paid-in capital (excluding capital reserves) will be required (with the minimum fee being ¥150,000). Several documents are necessary for registration, the most important being the articles of incorporation which must be certified by a Japanese public notary before the registration can be completed.
The limited liability company (GK) is also an option and tends to be selected for operating a business by a limited number of investors. Both KK and GK secure the limited liability of shareholders and members. Compared to a KK, though, a GK provides more flexibility in the internal governance structure; however, some government approvals and licences are only authorised for a KK.
25 Describe the M&A market and the merger control regime. How easy is it to complete deals in your jurisdiction?
The M&A market in Japan remains active. During 2018, M&A activity equalled ¥39,300 billion, which is the highest volume since 1980, through over 3,800 deals, which is also the highest number in 10 years. Of particular note are more high-profile outbound transactions such as Takeda Pharmaceutical’s ¥6,000-billion acquisition of Irish drugmaker Shire plc. However, small- and mid-sized transactions are also notably increasing.
Mergers and acquisitions meeting certain thresholds are subject to pre-merger review by the JFTC and waiting period requirements (Phase I: 30 days; and Phase II: the later of 120 days from the date of acceptance of the notification or 90 days from the date of submission of additional material after Phase I). The thresholds are determined based on the total amount of domestic sales in Japan. The standard for review by the JFTC of the competitive impact of a merger is whether the merger may substantially restrain competition. The JFTC has a tendency to make more careful reviews, which make the review period longer. Therefore, in practice, the parties to a difficult case will consult with the JFTC well in advance (ie, six months to a year) of the expected timing of the closing. However, the JFTC has never formally blocked a merger and it generally approves even difficult cases after the parties offer remedies. The types of remedies include disposal of shareholding, partial transfer of business facilities, abolition of interlocking directorship, technology licensing to a competitor, and supply of certain products to a competitor.
Concerning the recent topic of merger control in Japan, there are multiple merger reviews involving local banks. The business environment for local banks has been worsening, with certain of them intending to merge, but the difficulty lies in merger control review. The argument is being made that merger control review involving local banks should be given special treatment. As a notable case, on 24 August 2018, the JFTC approved the merger of two regional banks (the acquisition of shares of The Eighteenth Bank, Ltd by Fukuoka Financial Group, Inc) after an over two-year review, which is an exceptionally long period.
26 Outline the corporate insolvency regime. Is bankruptcy protection available for corporates?
There are two types of bankruptcy court proceedings for corporations under Japanese law. One is reorganisation, which aims to continue the business, and the other is liquidation, which closes the business.
With regard to reorganisation, corporations have two options: corporate reorganisation proceedings and civil rehabilitation proceedings, in which the latter is more flexible than the former. Civil rehabilitation proceedings allow the subject corporation’s management to maintain control over the operation of the business, while corporate reorganisation proceedings require court-appointed trustees to take control over the business. Recent court practice, however, has become more flexible, so it is possible for an executive officer of the distressed corporation to be appointed by the court as a trustee in corporate reorganisation proceedings. Corporate reorganisation proceedings are advantageous because they restrict secured creditors from independently enforcing security interests, which is an advantage not available in civil rehabilitation proceedings. According to the standard schedules provided by the Tokyo District Court, the periods between the filing and approval of a reorganisation or rehabilitation plan are 13 months for corporate reorganisation proceedings, and five months for civil rehabilitation proceedings. In 2017, there were 10 corporate reorganisation proceedings and 140 civil rehabilitation proceedings initiated.
There are also two options for court liquidation: bankruptcy proceedings and special liquidation proceedings, in which the latter is more flexible than the former. Special liquidation proceedings allow an officer of the corporation to be the liquidator to execute the liquidation, while bankruptcy proceedings require a court-appointed trustee to execute the liquidation. According to court statistics, more than 90 per cent of bankruptcy proceedings are completed within one year as it is rare to take more than two years to complete. No statistics are available for special liquidation proceedings but the period within which to complete them is generally similar to that of bankruptcy proceedings. In 2017, there were 76,015 bankruptcy proceedings (including those for individuals) and 335 special liquidation proceedings initiated.
All of these four proceedings may be initiated by either a creditor or the distressed company. However, in practice, only bankruptcy proceedings are actually commenced by creditors, and the other proceedings are commenced by distressed corporations only.
27 How easy is it to enter into and terminate employment contracts?
There are restrictions on discrimination towards job candidates based upon their age, gender or whether they are members of a labour union. However, employers generally have wide discretion in hiring employees.
On the other hand, it is extremely difficult for an employer to unilaterally terminate or dismiss an employee in Japan. An employer may only terminate or dismiss an employee on grounds that are objective, justifiable and reasonable, and termination or dismissal not on such grounds are invalid and deemed an abuse of the rights of the employer. Japanese courts strictly interpret what is ‘objective, justifiable and reasonable’, so it is generally difficult to convince the court that an employee’s performance was so poor as to merit termination or dismissal.
In cases of dismissal owing to business reasons of the employer, the following general requirements have been formulated by Japanese courts in determining the validity of the dismissal:
- necessity of labour reduction, such as financial deterioration of the employer;
- necessity to select dismissal over other available measures (for example, whether the employer can avoid dismissal by using means such as soliciting early retirement);
- appropriateness of the selection of the employee being dismissed; and
- appropriateness of the dismissal procedure (for example, whether the employer provided sufficient explanation and opportunities for consultation).
Furthermore, in order for the dismissal of an employee to be valid, all possible grounds for dismissal must be clearly stated in the work rules. If the dismissal is judged to lack ‘reasonable’ grounds and not be ‘socially acceptable’, the employer is obliged not only to pay wages lost during the dismissal period but also to reinstate the dismissed worker, making the dismissal null and void.
Fixed-term employment, in principle, expires when the contract term ends, and employers have the discretion to refuse to renew the employment agreement. However, in cases where the fixed-term employment agreement has been renewed repeatedly, or the employee has a reasonable expectation of renewal, the employer may not refuse the renewal of the employment agreement in certain situations according to the Labour Contract Act.
28 What are the key rights of local employees?
Employees’ rights include:
- overtime allowance;
- working hours (eight hours a day, 40 hours a week);
- holidays (statutory minimum of one day per week or four days per month; provided, however, there are working hour restrictions of 40 hours a week, so if an employee works eight hours a day, then two days per week shall be provided as holidays);
- annual paid leave (maximum of 20 days in accordance with the employee’s years of service);
- maternity, childcare and family care leave;
- industrial safety and health;
- restrictions on dismissals; and
29 What are the main restrictions on engaging foreign employees?
Foreigners intending to work in Japan must obtain work permits. Employers who employ foreign nationals must notify a Public Employment Security Office of the employment. In 2015, there were 81,295 work permits issued. It is relatively easier for foreigners with graduate degrees to obtain work permits than those without.
30 What are the other key employment law factors that foreign counsel, investors and businesses should be aware of?
Japan has been known for its practice of life-time employment with high degree of employment security. Various factors, such as restrictions on dismissal, social norms concerning employment security, and government employment policy centred on maintaining employment security, have made long-term employment the core feature of Japanese employment relations that cannot be modified easily.
Owing to such restrictions on dismissal (as per question 27), many companies utilise fixed-term employment practices. However, recently, the disparity between non-fixed-term and fixed-term employees has emerged as a social problem. The protection of fixed-term employees is actively discussed and companies must be wary of future governmental and judicial actions.
Further, because of the advancement of Japan’s aging society, employees at or past retirement age are also a social issue. Currently, the statutory minimum retirement age is 60, but employers will consider one of the following three retaining systems for their employees: (i) to raise the mandatory retirement age to 65; (ii) to introduce a re-employment system; or (iii) to abolish the mandatory retirement age outright (the Act on Stabilization of Employment of Elderly Persons).
31 Describe the intellectual property environment. How effective is enforcement and what are the key current issues?
Intellectual property (IP) rights are protected under various codified laws, including the Patent Act, the Trademark Act, the Copyright Act, the Design Act, and the Unfair Competition Prevention Act. Japan is also a party to major international treaties relating to IP rights. Civil and criminal proceedings, as well as border measures, are available for enforcing IP rights in Japan. The IP High Court, an appellate court established in 2005 to deal with IP matters only, is expected to apply consistent interpretations for both infringement litigation and invalidity trials. The IP High Court accepts about 100 appellate cases per year, including large-scale cases attracting considerable attention such as Apple v Samsung.
Since the Japanese government declared that it will promote IP as a national policy and enacted the Intellectual Property Basic Act in 2002, a series of reforms relating to the creation, protection and exploitation of IP have been made at an exceptionally fast pace. The current key issues, usually described in the Annual IP Strategic Program published by the government every year, include the introduction of a new evidence collection procedure in infringement litigation and the protection of works generated by artificial intelligence.
Legal reform and policy
32 What are the key issues in legal reform, government policy and the economy?
The Liberal Democratic Party, the ruling party and the president of which is the prime minister of Japan, Shinzo Abe, and another political party, the Komeito, are forming a coalition government and currently hold the majority in both the House of Councillors (upper house) and House of Representatives (lower house). Such circumstances may facilitate the approval of new laws by the National Diet.
For example, the Integrated Resorts Promotion Act was enacted by the National Diet on 15 December 2016. The law, commonly referred to as the ‘Casino Act’, establishes the government’s responsibility to develop so-called integrated resorts, which refers to leisure complexes that integrate facilities such as hotels, convention centres, theatres and casinos, to boost tourism and invigorate regional economies. Further, on 20 July 2018, the National Diet passed the Act to Implement Specified Integrated Resort Areas, which creates a framework for the operation of integrated resorts, such as by setting the number of integrated resort areas, the size of casino facilities and limitations on the number of visits. Detailed rules are expected to be determined by the ministry ordinance.
33 Are there any significant legal developments ongoing or pending? What are their effects on the business environment?
The Constitution of Japan enacted in 1946 has never been amended. However, amendment of the Constitution seems more realistic as of late. Since the governing coalition secured a majority in the upper house election in July 2016, amendment of the Constitution has been discussed among the political parties, especially amendment of article 9, which renounces war and prohibits Japan from maintaining war potential. However, resistance against amending the Constitution has been strong and the potential effects of such amendments on the business environment remain uncertain.
Further, the latest issue in Japan has been the strengthening of regulations on virtual currencies (cryptocurrencies). They were not well-known a few years ago but the virtual currency market has been rapidly growing and the number of registered virtual currency service providers has been increasing in Japan since 2017. However, regulations on virtual currencies are still in the embryonic stage despite the risk of them being used for money laundering or terrorism financing, or the target of hacking that causes significant losses. The National Diet approved a bill in 2016 to amend the Payment Services Act and the Act on Prevention of Transfer of Criminal Proceeds in order to regulate virtual currencies. Further, amendments to the FIEA and the Payment Services Act were approved by the Japanese Cabinet in March 2019 to strengthen virtual currency regulations. In the near future, the government is also expected to introduce further regulations regarding virtual currencies.
Resources and references
34 Please cite helpful references, for example, sources of law, websites of major regulators and government agencies.
* The authors would like to thank Suguru Miyata, Kenji Nishio, Masayuki Ishibashi, Kotaro Kajimoto, Rina Shimada and Kengo Ozaki for their assistance in writing this chapter.
Published May 2019