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Shipping in Japan

An interview with Makoto Hiratsuka and Yuji Miyazaki

Hiratsuka & Co

Makoto (Mak) Hiratsuka is the senior partner of Hiratsuka & Co.

After obtaining a diploma in shipping law from University College London, at Ince & Co (Donald O’May’s office), Thomas Miller (Terence Coglin’s office) and Tindal Riley (Mike William’s office), Mak started his own firm in 1976.

Mak and his partners deal with full range of marine casualties: collisions, groundings, fires, salvage incidents and personal injuries. He and his team also have extensive experience of shipping disputes (charterparty problems and cargo claims), together with insurance, reinsurance and insolvency matters, and have dealt with, and are presently dealing with, serious litigation cases for non-Japanese clients.

He and his partners are known to be very prompt in answering any questions about Japanese law and Japanese court and arbitration proceedings clearly and accurately.

Mak is a member of the arbitration committee at the Japan Shipping Exchange Inc and the Private International Law Association of Japan. He is also a member of the Maritime Law Association of Japan where he serves on its board of directors, and one of the few Japanese fellows of the International Academy of Trial Lawyers.

Yuji Miyazaki has been a partner at Hiratsuka & Co since 2014.

He specialises in litigation, arbitration and negotiation of all maritime matters including charterparties, contract of affreightment, shipbuilding contracts and disputes, sale and purchase of ships, collisions, fire, grounding, pollution, arrest and release of ships, cargo claims and personal injury defence. He also undertakes international insolvency, product liability, insurance and reinsurance and general corporate matters.

Prior to joining Hiratsuka & Co in 2011, he worked as a general civil and criminal litigator in Tokyo.

His education is: Faculty of Letters, Tokyo University (BA, aesthetics); Waseda Law School (JD); University of Southampton (maritime law short course, 2013).

Prior to entering university, he spent 12-and-a-half years in New York.

Yuji is a member of the Tokyo Bar Association, and plays piano and guitar in his spare time.

GTDT: What is the current state of the shipping industry in your country?

Makoto Hiratsuka and Yuji Miyazaki: The Japanese shipping industry has a relatively high reliance on the dry bulk market, and its gradual recovery in 2017 has had a positive effect on the industry as a whole. Although the recovery is not yet full-scale, the devaluation of the yen since 2013 has allowed shipping companies to undergo multi-year structural reforms to counter the market conditions. Such reforms seem to have begun to pay off, with the ‘big three’ Japanese operators reporting improved numbers in fiscal year 2017, where:

  • NYK reported a net profit of about US$184 million (from a net loss of about US$2.4 billion the previous year);
  • “K” Line reported a net profit of about US$95 million (from a net loss of about US$1.25 billion the previous year); and
  • MOL reported losses of about US$431 million but with improved revenue, operating profit and ordinary profit (the net loss being mostly due to a one-off loss of about US$670 million for costs relating to the establishment of Ocean Network Express Pte Ltd (ONE)).

The establishment of ONE on 1 April 2018 was one of the largest restructuring projects within the Japanese shipping industry in recent years. Formed as a joint venture between the container ship businesses of NYK, MOL and “K” Line, ONE commenced operations with a fleet size of 1.4 million 20-foot equivalent units, making it the sixth largest container shipping line in the world. NYK has a 38 per cent share, while MOL and “K” Line have 31 per cent each. Although the holding company is located in Japan, the operating company was incorporated in Singapore, with regional headquarters in Hong Kong, Singapore, the United Kingdom, the United States and Brazil. Although their container line businesses have been consolidated, NYK, MOL and “K” Line continue to operate their other businesses independently.

One sector that has been affected by the formation of ONE is non-vessel operating common carriers (NVOCCs). Major domestic cargo interests that had previously spread their contracts between the three domestic container carriers are said to have begun contracting with NVOCCs, in addition to ONE. The ‘big three’ are also aiming to expand their NVOCC businesses, and MOL plans to establish a new company in Hong Kong this year to consolidate the businesses of MOL Logistics (Japan) Ltd and MOL Consolidation Service Ltd.

In the shipbuilding sector, Japanese shipyards received orders for 195 new builds (9.45 million gross tonnage (GT)) in 2017. Although this was a two-and-a-half-fold increase from the previous year on a GT basis, the figures are still low compared to 22.22 million GT ordered as recently as 2015. Of the 195 orders, 156 were bulk carriers and 27 were tankers. The total order book for Japanese shipyards at the end of December 2017 was 516 ships (12.89 million compensated gross tonnage), which translates to about two-and-a-half years of work according to building capacity.

GTDT: What are the prevailing shipping market trends affecting your country?

MH & YM: As mentioned at the outset, the bulker market has shown gradual improvement. The number of newly built ships entering the market are expected to stay low due to uncertainties regarding environmental regulations, while the supply of cargo is expected to remain steady. As such, the Japanese shipping industry is hopeful that 2018 will see continued improvement in the bulk shipping market.

Meanwhile, for oil tankers, VLCCs saw a decline in the spot market in 2017 and 2018 is not expected to be profitable either. The market for chemical tankers on the other hand are expected to benefit from new chemical plants being built in Saudi Arabia and the US gulf coast, and there is hope that the market will improve despite the ongoing delivery of upcoming new builds.

With regard to container ships, the yearly synergy produced by the formation of ONE is expected to be over US$1 billion, expected to be fully realised by fiscal year 2020. ONE has projected net profits of 110 million for fiscal year 2018, 313 million for 2019 and 648 million for 2020, on the basis of bunker prices at US$383 per metric tonne and an exchange rate of ¥107 to the dollar. However, a continued rise in bunker prices or fluctuations in the exchange rate could cause decreased profits.

In the shipbuilding industry, Japanese shipbuilders opened 2018 with a flurry of changes, with Mitsubishi Heavy Industries and Mitsui Engineering & Shipbuilding splitting off their shipbuilding divisions as separate companies, while Imabari Shipbuilding took control of Minaminippon Shipbuilding Co from Mitsui Engineering & Shipbuilding and MOL. Such changes were made in consideration of the slow market and ongoing competition from Chinese and Korean yards, and more could be coming.

GTDT: Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?

MH & YM: Following the inauguration of the new US president, the value of the Japanese yen has seen wide fluctuation. As the profitability of the Japanese shipping industry is strongly dependent on the value of the yen, sharp variations may have a critical effect on their earnings regardless of other developments in the market.

The new US tariffs on steel and aluminium, developments in negotiations with North Korea, the effective withdrawal of the US from the Iran nuclear deal etc, are some of the recent political developments that may have an impact on Japan’s shipping market.

In regard to legislative developments, on 18 May 2018, the Japanese diet enacted a bill amending the sections of the Japanese Commercial Code concerning shipping, etc, which had gone unchanged from its initial promulgation in 1899. International conventions and specialised laws have more or less superseded the general provisions within the Commercial Code in many aspects of international shipping, but this will be a significant change for lawyers, if not so much for the market. One of the notable amendments is the newly instated obligation of the shipper to notify the carrier with regard to certain information when contracting for the carriage of dangerous goods.

GTDT: What are the key regulatory and compliance issues for your country’s shipping market?

MH & YM: Environmental regulations, such as the International Maritime Organization Ballast Water Management Convention entering force in September 2017, and MARPOL requirements, such as the NOx Emission Tier III standard, which took effect from 1 January 2016 and the SOx requirement to be implemented in January 2020, continue to be the key regulatory issues, which will all affect compliance costs for owners and shipbuilders by the millions of dollars, but are also hoped to accelerate the pace of scrapping and fleet renewal. Japanese shipping companies are expected to begin negotiate increased freight rates to absorb compliance costs within this fiscal year.

GTDT: What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?

MH & YM: Bank loans have traditionally been the Japanese shipping industry’s primary source of finance. Japanese megabanks, regional banks, and credit unions offer ship finance, while public financial institutions such as the Development Bank of Japan and Japan Bank for International Cooperation also provide export loans to overseas importers to help finance the export of ships built by Japanese yards.

With the exception of export loans, Japanese banks have traditionally provided finance to Japanese owners, with the megabanks focusing on the reliability and profitability of the charterers and operators while the local banks focused on relations with local owners and shipyards. However, there has been a recent trend of overseas shipping companies seeking finance from Japanese banks, caused by the decrease in lending by European banks. An increasing number of Japanese banks have reportedly decided to answer this demand, due in part to the lack of financing opportunities in the domestic market.

The advantage for overseas owners to finance a vessel through Japanese banks in the Japanese market would be the general availability of loans.

As an alternative to direct bank loans, Japanese trading houses are starting to act as intermediaries for domestic bank loans to foreign owners, whereby the trading houses obtain loans from banks, and pass on the loan to the end borrowers with a surcharge. There have also been reports of Japanese trading houses acting as guarantors for overseas borrowers for Japanese bank loans. The difficulties of a stringent credit check by Japanese banks may be alleviated through these methods, but in return the borrower will have to pay a commission to the trading houses.

One further development in Japanese ship financing is the rise of shipping funds. In 2007, Mizuho Securities and Dai-ichi Life Insurance established Anchor Ship Investment Co, Ltd, which managed Japan’s first domestic ship investment fund with an investment of ¥130 billion. A second fund managed by Anchor Ship Partners Co, Ltd was put together with an investment of not less than ¥200 billion in 2011, and a third was put together in 2014, concentrating on larger scale projects. Unlike some speculative funds who have entered and left the market during the early 2010s, the Anchor Ship group has focused on gaining stable long-term returns for its investments, and has become increasingly visible in the Japanese shipping market.

“The Japanese shipping industry has been undergoing various internal reforms in recent years to reduce exposure and improve efficiency.”

GTDT: Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?

MH & YM: In very general terms, there are few Japanese court decisions and arbitration awards on shipping matters rendered in a given year, in part due to the tendency towards amicable settlement.

That said, the Tokyo District Court judgment of 15 June 2015 and the subsequent Tokyo Court of Appeal Decision (Japanese Westlaw 2015WLJPCA06158003), which was a case where we succeeded in having the court admit a time charterer’s claim for loss of earnings in a collision, may be of interest to shipowners, charterers and insurers. This was the first judgment in Japan that specifically admitted a time charterer’s claim for loss of earnings, which in our understanding would not have been admissible under English law.

Another recent decision that may be of interest is the Tokyo Court of Appeal decision of 30 June 2017 (Japanese Westlaw 2017WLJPCA06306013), which concerned a ship collision in Japanese waters, where an owner exercised a statutory lien over the opposing owner’s right to claim insurance payment in order to secure its damage claim, and the opposing owner filed an objection. Although the first instance decision determined that a statutory lien is governed solely by lex fori and dismissed the objection on the basis that the lien would be admitted under Japanese law, the Court of Appeal:

  • ruled that a statutory lien should be governed by the cumulative application of the law of the secured claim and the law of the place where the subject matter of the lien is situated (and in the case the subject matter is a claim, then the governing law of that claim);
  • that the secured claim (collision claim for damage) was governed by both Korean and Japanese law (the flag states of the colliding vessels), while the subject matter of the lien (the insurance claim) was governed by English law; and
  • accepted the objection on the basis that the statutory lien, while admissible under Japanese law, was not admissible under English and Korean law.

Because maritime liens also fall under statutory liens, this Tokyo Court of Appeal decision is expected to affect Japanese ship arrest practice.

GTDT: What is the outlook for your country’s shipping market?

MH & YM: The Japanese shipping industry has been undergoing various internal reforms in recent years to reduce exposure and improve efficiency. Such efforts continue, as NYK announced a new five-year plan beginning in fiscal year 2018 with emphasis on reorganising its dry bulk fleet and “K” Line shifted the focus of its dry bulk fleet reform to panamax and smaller vessels, while MOL has begun to renew its mid-small bulker fleet with new orders, having completed its structural reform by the end of fiscal year 2016. Such reforms have proved beneficial, and the major Japanese operators appear to be in a stable financial condition.

The consolidation of the container ship businesses of the ‘big three’ into ONE is another development affecting the future of the Japanese shipping market. Having just commenced operations in April 2018, it remains to be seen whether its expectations will be met. However, initial signs seem to be positive, with early booking volumes in Japan matching or exceeding the previous totals of the ‘big three’ combined.

The Japanese shipbuilding industry in the meanwhile has also long recognised the need for reorganisation, and the separation of the shipbuilding divisions of Mitsubishi Heavy Industries and Mitsui Engineering & Shipbuilding are further developments in this shifting sector. Previous business associations are also being cemented as business alliance agreements, with the Mitsubishi entities concluding agreements with Imabari Shipbuilding, Namura Shipbuilding and Oshima Shipbuilding and the Mitsui entity concluding an agreement with Tsuneishi Shipbuilding. M&As of smaller yards are also active, with mid-tier yard Fukuoka Shipbuilding recently purchasing Watanabe Shipbuilding and Imabari Shipbuilding taking over Minaminippon Shipbuilding already this year. If the slow market continues, we may see further restructuring of the Japanese shipbuilding market in the near future.

The Inside Track

What are the particular skills that clients are looking for in an effective shipping lawyer?

Expertise in the local law (especially regarding jurisdiction and conflict of laws) being a given, the most sought after skills in a Japanese shipping lawyer are command of the English language, commercial awareness, multi-jurisdictional connections and experience.

English is a must because most, if not all, shipping documents are written in the language, and because maritime law continues to revolve around English law. Commercial awareness is also important to give proper advice in a business context. Multi-jurisdictional connections are essential too because international shipping disputes often branch across numerous jurisdictions, in which case a foreign lawyer’s opinion is necessary to assess the client’s position. Experience, while always helpful, is of particular importance for a shipping lawyer, who is often required to give advice in a short time frame.

What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?

There are various considerations in arranging shipping finance, such as the type and structure of financing, the financing entity, assessment and management of risks, security, insurance, and plans for the future operation of the vessel.

From a lawyer’s standpoint, however, the most crucial issue is how such considerations are reflected in the contractual documents. Content-wise, the most important part of the contract would be the jurisdiction and governing law clause, because these are the bases upon which the contract will be interpreted. Clients should also be aware that finance documents require a certain amount of time to properly review, and that lawyers should always be provided ample time to go over them. Although some clients may prefer providing their lawyers with documentation at the last minute, perhaps to save time and costs, it should be kept in mind that preventive law is always less expensive than litigation.

What are the most interesting and challenging cases you have dealt with in the past year?

Claims for damage to fixed or floating objects is a type of claim that has not decreased in volume amidst the slow market. During the past year, we have seen claims regarding damage to berth fenders, gantry cranes, fishing nets, underwater cables, etc. Although they pop up routinely, the cases often involve obscure local regulations and may be deceptively complex. Further, the claim amounts may be very high, especially if claimants attempt to claim loss of use. The authorities, including the coastguard, becomes involved in many instances too. Because these claims give rise to maritime liens under which a ship could be arrested, it would be advisable for these cases to be referred to Japanese lawyers as soon as possible.

Makoto Hiratsuka and Yuji Miyazaki
Hiratsuka & Co

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