Overview of Foreign Investment Climate
Japan is the world's third largest economy, the United States' fourth largest trading partner, and an important destination for U.S. foreign direct investment (FDI). The Government of Japan explicitly promotes inward FDI and has established formal programs to attract it. Since 2001, Japan's stock of FDI, as a percentage of gross domestic product (GDP), grew from less than one percent to more than 3.8 percent at the end of 2010. Japan continued to attract positive FDI inflows in 2010, albeit at a slower pace than before the economic downturn that began in 2008 and caused Japan’s economy to contract at a double-digit rate in early 2009. The recovery that began in 2009 continued, with Japan’s economy registering positive rates of growth and unemployment easing in 2010 as global demand expanded during the year.
The economy featured prominently in the upper house election held in July 2010, in which the Democratic Party of Japan (DPJ) and its coalition partner, in power since September 2009, failed to win the majority they sought. While the DPJ’s outright majority in the lower house of the National Diet ensures that it can continue to lead the government, the absence of a majority in the upper house complicates the task of policymaking for the governing coalition. Of the government’s policy initiatives advanced in 2010, one of the most significant for foreign firms considering investing in Japan is the New Growth Strategy, which, seeks to position Japan as base for international firms’ Asian operations and their research and development (R&D) functions. Specific policies were still being formulated as of the end of 2010; initial descriptions highlighted areas such as environment, health care, and tourism as focus sectors. While the New Growth Strategy aims to attract investment from abroad, it does not list specific numerical targets, such as amount of FDI as a percentage of GDP, in the manner as the government did before September 2009, when the Liberal Democratic Party (LDP) held power.
The Ministry of Economy Trade and Industry (METI) and the quasi-governmental Japan External Trade Organization (JETRO) are the lead agencies responsible for assisting foreign firms wishing to invest in Japan. Many prefectural and city governments also have active programs to attract foreign investors, but they lack many of the financial tools U.S. states use to attract investment.
Risks associated with investment in many other countries, such as expropriation and nationalization, are not of concern in Japan. The Japanese Government does not impose export balancing requirements or other trade-related FDI measures on firms seeking to invest in Japan.
Japan ranked 17 on Transparency International's Corruption Perceptions Index in 2009, with a score of 7.8 based on eight surveys. The World Bank ranked Japan number 18 on its Ease of Doing Business 2011 report, covering the period to June 2010. The 2010 Index of Economic Freedom compiled by the Heritage Foundation ranked Japan number 19, with a score of 72.9 or mostly free.
|
Measure |
Year |
Index/Ranking |
|
TI Corruption Index |
17 |
2009 |
|
Heritage Economic Freedom |
19 |
2010 |
|
World Bank Doing Business |
18 |
2011 |
In addition to business considerations relevant to investing in a mature economy with an aging population, foreign investors seeking a presence in the Japanese market, or to acquire a Japanese firm through corporate takeover, face a number of unique challenges, many of which relate more to prevailing practices comprising the business environment rather than government regulations. The most notable are:
· A highly insular and consensual business culture that is resistant to hostile mergers and acquisitions (M&A) and prefers to do business, especially M&A transactions, with familiar corporate partners;
· A lack of independent directors on most company boards;
· Cross-shareholding networks among listed corporations in which shares are held for non-economic reasons resulting in a minimal float of available common stock relative to total capital;
· Exclusive supplier networks and alliances between business groups that can restrict competition from foreign firms and domestic newcomers,
· Cultural and linguistic challenges; and
· Labor practices that inhibit labor mobility, suppress productivity, and negatively affect skill development.
Until 2009, the U.S. and Japanese governments had discussed all these issues in working groups under the Regulatory Reform and Competition Policy Initiative, and the Investment Initiative, as part of the U.S.-Japan Economic Partnership for Growth. While recognizing the progress made in some areas under this structure, the two governments decided in 2010 to recalibrate bilateral economic engagement to best address these issues and take into account new needs arising from the macroeconomic environment and bilateral cooperation in addressing global issues such as climate change, against the backdrop of Japan hosting the Asia-Pacific Economic Cooperation (APEC) forum in 2010 and the United States doing so in 2011. On November 13, 2010, the two governments announced several new bilateral initiatives. Of these, three economic policy dialogues are expected to serve as the principal fora for discussing issues relating to the investment environment: the U.S.-Japan Economic Harmonization Initiative, the U.S.-Japan Dialogue to Promote Innovation, Entrepreneurship and Job Creation; and the U.S.-Japan Policy Cooperation Dialogue on the Internet Economy.
Future bilateral engagement will occur against a changed political environment in Japan. Whereas the LDP was closely affiliated with the Japanese business community, the DPJ and its coalition partner – the People's New Party – draw support from other constituencies, including trade unions. While investment issues were not at the center of policy debates within Japan in 2010, the transfer of power from the LDP to the DPJ-led coalition has brought changes to the policy-making process. DPJ leaders have pledged to exercise greater political leadership over policy and reduce the influence of the bureaucracy in policy-making. Moreover, Prime Minister Naoto Kan, who took office in June 2010 following the resignation of Yukio Hatoyama, stepped up attention to economic policy. Following a reshuffle of the Cabinet in September 2010, the government announced economic partnership agreements with India and Peru. Japan and the United States also signed an Open Skies Agreement in October 2010. As Japan prepared to host the APEC Leaders Meeting in Yokohama, the Prime Minister also announced that Japan should consider joining the Trans-Pacific Partnership (TPP) free trade agreement and carry out the reform of the agricultural sector necessary to do so. As of the end of December 2010, the Kan Administration had not decided to seek to participate in the negotiations with the United States and eight other countries (Singapore, New Zealand, Brunei, Chile, Australia, Peru, Vietnam, and Malaysia) on this new multilateral free trade agreement.
Structural reforms, revisions to Japan's legal code, and pro-active Japanese government policies to promote FDI and corporate restructuring led to a boom in merger and acquisition (M&A) activity after 2001. The annual number of M&A transactions in Japan increased dramatically during the following years, from approximately 800 in 1998 to almost 2,700 in 2007, according to RECOF, a Tokyo-based M&A consultancy. Although down from the peak reached during the 2006-2007 period, M&A activity continued through 2010, numbering about 1,543 transactions between January and November, a 12.5 percent decline from the same period the previous year, according to RECOF estimates. The majority of these mergers were domestic transactions, but transactions involving foreign counterparts also increased. The number of takeover bids (TOB) in Japan exceeded 100 for the first time in 2007. TOBs amounted to 51 between January and November 2010 according to RECOF. The total value of M&A deals involving Japanese companies in January-November 2010 was ¥6.16 trillion, down 13.3 percent from the same period the previous year. Japanese M&A directed at foreign companies amounted to 3.43 trillion yen during the same period, accounting for 55.7 percent of the total and up 39 percent from the same period in 2009, according to RECOF. Although change is slow, many Japanese corporate leaders now appreciate the contribution M&A can make to increasing corporate value.
While inflows from the United States and Asia declined during 2009, inflows from Europe increased during the same period (Table 2). Despite the increase in FDI since the mid-1990s, Japan continues to have the lowest foreign direct investment as a proportion of GDP ratio of any major OECD member. On a yen basis, FDI stock in Japan as of December 2009 was ¥18.43 trillion, (3.9 percent of GDP), according to Bank of Japan (BOJ) statistics.
Meanwhile, Japan continues to run a significant imbalance between inward and outward FDI (see Table 1b). Japanese companies' large cash holdings combined with low global equity values and the strengthening of the yen supported increased outbound FDI activity. Notwithstanding this imbalance between inward and outward FDI, and the increase in outbound M&A activity, outward FDI as a percentage of GDP remains lower for Japan than for other major OECD members.
Legal Reform Facilitates M&A Activity
In recent years, reforms in the financial, communications, and distribution sectors have encouraged foreign investment in these industries. The 2005 Companies Act, an amended bankruptcy law, and the 2007 Financial Instruments and Exchange Law helped increase the attractiveness of Japan as a destination for FDI.
The most significant legislative change was the substantial revision of Japan’s corporate-related law. The changes enacted in 2005 significantly expanded the types of corporate structures available in Japan as well as the variety of M&A transactions available for corporate consolidation and restructuring. A foreign firm, for the first time, may now use its stock as consideration in a cross-border M&A transaction by means of a procedure known as a triangular merger, as long as the foreign acquirer has an existing Japanese subsidiary with which to merge the target company.
Unfortunately, the tax regulations that govern triangular mergers contain strict conditions regarding business viability and business relevance between the acquiring subsidiary and the target Japanese firm for the transaction to be granted tax deferral of capital gains. As a result, the procedure has not attracted significant new investment flows. As of December 2010, only one major foreign investor has used the triangular merger provisions of the Companies Act to complete the purchase of a Japanese firm and, in that case, the foreign acquirer already had a significant existing Japanese operation into which it could merge its new Japanese acquisition. The Japanese Government has acknowledged the issue requires further study and resolution.
The 2007 Financial Instruments and Exchange Law (amended in 2008) established a flexible regulatory system for financial markets and applies a uniform set of rules for similar financial instruments. At the same time, the law allows brokers and financial advisors to treat investors differently, depending on whether they are deemed "professional" investors (assumed to be capable of more sophisticated investment strategies and requiring less protection and disclosure) or "general", i.e., retail investors. Brokerage firms must provide the latter with detailed disclosure of risks related to different types of financial products at the time of offering.
Limited Sector-specific Investment Restrictions Remain
Japan has gradually eliminated most formal restrictions governing FDI. One important restriction remaining in law limits foreign ownership in Japan's former land-line monopoly telephone operator, Nippon Telegraph and Telephone (NTT), to 33 percent. Japan's Radio and Broadcasting Law also limits foreign investment in broadcasters to 20 percent, or 33 percent for broadcasters categorized as facility-supplying. Foreign ownership of Japanese companies invested in terrestrial broadcasters will be counted against these limits. These limits do not apply to communication satellite facility owners, program suppliers or cable television operators. In 2009, the Experts Advisory Council on Airport Infrastructure proposed a bill that would limit non-governmental investment at Narita International Airport to 20 percent, but the bill was eventually removed from the docket. The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) is expected to begin new discussions in 2011 on the possibility of further privatization of Narita Airport. In 2011, the newly created MLIT Airport Administration Study Group may discuss whether to privatize airports that are currently government-owned.
The Foreign Exchange and Foreign Trade Act governs investment in sectors deemed to have national sovereignty or national security implications. In most cases, foreign investors need only report transactions to the Bank of Japan within 15 days of acquiring more than 10 percent of the shares in a publicly listed company or any shares of a closely held company. However, if a foreign investor wants to acquire over 10 percent of the shares of a listed company in certain designated sectors, it must provide prior notification (and thus obtain specific approval) of the intended transaction to the Ministry of Finance and the ministry that regulates the specific industry. Designated sectors include agriculture, aerospace, forestry, petroleum, electric/gas/water utilities, telecommunications, and leather manufacturing. Amendments to the prior notification and reporting requirements under the law, effective in 2009, reduced the administrative burden on foreign investors so as to facilitate inward investment.
Several sections of the Japanese Anti-Monopoly Act (AMA) are relevant to FDI. Chapter Four of the AMA includes extensive anti-trust provisions pertaining to international contract notification (section 6), shareholdings (sections 10 and 14), interlocking corporate directorates (section 13), mergers (section 15), and acquisitions (section 16). The stated purpose of these provisions is to restrict shareholding, management, joint venture, and M&A activities that may constitute unreasonable restraints on competition or involve unfair trade practices. The Japanese Government has emphasized these provisions are not intended to discriminate against foreign companies or discourage FDI.
Amendments to the AMA, effective January 1, 2010, improved the climate for M&A by clarifying the pre-merger review process and significantly raising the thresholds for pre-merger reporting to antitrust authorities. The amendments make share acquisitions subject to the same pre-merger notification rules as mergers and asset acquisitions. The thresholds for notification rose from ¥10 billion to ¥20 billion for the acquiring corporation and from ¥1 billion to ¥5 billion for the acquired corporation. They also expanded the scope of exemptions from notification.
Limitations on Facility Development and Availability of Investment Real Estate
Aiming to increase the liquidity of Japanese real estate markets, the government in recent years has progressively lowered capital gains, registration, and license taxes on real estate. It also reduced inheritance and gift taxes to promote intergenerational transfer of land and other real assets.
Japan continues restricting development of retail and commercial facilities in some areas to prevent excessive concentration of development in the environs of Tokyo, Osaka, and Nagoya, and to preserve agricultural land. Conversely, many prefectural governments outside the largest urban areas make available property for development in public industrial parks. Japan's zoning laws give local officials and residents considerable discretion to screen almost all aspects of a proposed building. In some areas, these factors have hindered real estate development projects and led to construction delays and higher building costs in particular, in cases where proposed new retail development would affect existing businesses.
Japanese law permits marketing of real estate investment trusts (REITs) and mutual funds that invest in property rights. As of November 2010, there are 35 REITs listed on the Tokyo Stock Exchange (TSE), two fewer than a year earlier.
Japan's real estate sector experienced painful contraction as a result of the credit crunch beginning in 2008 and the deterioration of the economy overall in the first half of 2009. Several developers went bankrupt and others were forced into emergency restructuring as regular short-term financing evaporated. As of December 2010, the sector continued to face adverse market trends. The office real estate market in Tokyo remained in a slump, with rents falling for more than two years straight by the end of 2010. The Tokyo Stock Exchange's index tracking real estate investment trusts (REITs) surged 27 percent in 2010, however. Demand for REITs rose sharply after the Bank of Japan's October 2010 announcement of an asset-purchasing program whose targets include REITs.
Corporate Tax Treatment
Local branches of foreign firms are generally taxed only on corporate income derived within Japan, whereas domestic Japanese corporations are taxed on their worldwide income. Calculations of taxable income and allowable deductions, and payments of the consumption tax (sales tax) for foreign investors are otherwise the same as those for domestic companies. Corporate tax rules classify corporations as either foreign or domestic depending on the location of their "registered office," which may be the same as -- or a proxy for -- the place of incorporation. The ruling Democratic Party of Japan proposed lowering Japan's effective corporate tax rate by 5 percentage points to 35 percent, but Diet approval was still pending at the end of 2010.
The current U.S.-Japan bilateral tax treaty allows Japan to tax the business profits of a U.S. resident only to the extent those profits are attributable to a "permanent establishment" in Japan. It also provides measures to mitigate double taxation. This "permanent establishment" provision combined with Japan's currently high 40 percent corporate tax rate serves to encourage foreign and investment funds to keep their trading and investment operations off-shore.
Cross-border dividends on listed stock are not subject to source country withholding tax if the parent company owns 50 percent or more of the foreign subsidiary. Interest on financial transactions payable to a nonresident and royalties paid to a foreign licensor are no longer subject to source country withholding tax. A special tax measure allows designated inward investors to carry over certain losses for tax purposes for ten years rather than for the normal five years. The government implemented an exemption for foreign investors from paying taxes on interest income (previously 15 percent) on corporate bonds, fiscal loan and investment program bonds and those issued by the Japan Finance Organization for Municipalities in June 2010.
The option of consolidated taxation is available to corporations. The purpose of these rules is to facilitate investment and corporate restructuring, because losses usually expected from a new venture or recently acquired subsidiary can be charged against the profits of the parent firm or holding company.
Investment Incentives
Since 2001, the Japanese Government has sought to revitalize the country's economy, in part, by increasing inward FDI. Recognizing the benefits for Japan of increased foreign investment, the LDP-led government sought to double Japan’s stock of FDI, which it did by 2006. In June that year, the government accepted the Japan Investment Council recommendation to establish a national goal of increasing Japan's stock of FDI to the equivalent of five percent of the country’s GDP by FY2010 (March 2011.) While the economic downturn that began in 2008 also slowed investment activity, and the DPJ-led government has not continued this policy of setting FDI targets, the Government of Japan continues to seek increased inward foreign direct investment. In December 2009 the government released a preliminary outline of its New Growth Strategy, and on June 18, 2010, the Cabinet approved a longer document setting forth wide-ranging policy recommendations to revitalize the economy. As of December 2010, decisions on implementation of investment-related provisions were still pending.
JETRO operates six Invest Japan Business Support Centers in major urban areas to provide investment-related information and "one-stop" support services to foreign companies interested in investing in Japan. (More detailed information is available at http://www.jetro.go.jp/en/invest.) Most national level ministries also have information desks to help guide potential investors in navigating Japanese Government administrative procedures.
Many city or regional governments work to attract foreign capital through outreach to prospective foreign investors, business start-up support services, and limited financial incentives. JETRO supports local government investment promotion efforts. Detailed information on local and regional FDI promotion programs is available in English on the JETRO website.
Conversion and Transfer Policies
Generally, all foreign exchange transactions to and from Japan -- including transfers of profits and dividends, interest, royalties and fees, repatriation of capital, and repayment of principal -- are freely permitted. Japan maintains an ex-post facto notification system for foreign exchange transactions that prohibits specified transactions, including certain foreign direct investments (e.g., from countries under international sanctions) or others that are listed in the appendix of the Foreign Exchange and Foreign Trade Control Law.
Japan is an active partner in combating terrorist financing. In coordination with other OECD members, Japan has strengthened due-diligence requirements for financial institutions, and has had a "Know Your Customer" law since 2002. Customers wishing to make cash transfers exceeding ¥100,000 ($1,100) must do so through bank clerks, not ATMs, and must present photo identification. However, Japan is still working to rectify deficiencies noted in the 2008 FATF evaluation of Japan's anti-money-laundering and terrorist finance regime, particularly on customer due diligence, international cooperation, freezing terrorist assets, and criminalizing terrorist finance.
Expropriation and Compensation
In the post-war period, the Japanese Government has not expropriated or nationalized any enterprises, with the exception of the 1998 nationalization of two large Japanese capital-deficient banks and the 2002 nationalization of two failed Japanese regional banks as part of the government's efforts to clean up the banking system after its near collapse in 1998. Expropriation or nationalization of foreign investments is extremely unlikely.
Dispute Settlement
There have been no major bilateral investment disputes since 1990. Nor are there any outstanding expropriation or nationalization cases in Japan. There have been no cases of international binding arbitration of investment disputes between foreign investors and Japan's Government since 1952. Japan is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards. Nevertheless, Japan is considered an inhospitable forum for international commercial arbitration.
There are no legal restrictions on foreign investors' access to Japanese lawyers and reforms in the legal services sector and the judicial system have increased the ability of foreign investors to obtain international legal advice related to their investments in Japan. Japan does, however, retain certain restrictions on the ability of foreign lawyers to provide international legal services in Japan in an efficient manner. Only individuals who have passed the Japanese Bar Examination and qualified as Japanese lawyers (bengoshi) may practice Japanese law. However, under Japan's Foreign Legal Practitioner system foreign qualified lawyers may establish Japanese/foreign joint legal enterprises (gaikokuho kyodo jigyo) and provide legal advice and integrated legal services on matters within the competence of its members. Foreign lawyers qualified under Japanese law (gaiben), may provide advice on international legal matters. Gaiben and bengoshi in joint enterprises can adopt a single law firm name of their choice and may determine the profit allocation among them freely and without restriction. However, foreign lawyers are unable to form professional corporations in the same manner as Japanese lawyers and are prohibited from opening branch offices in Japan. Gaiben may hire Japanese lawyers to work directly with them or in a joint legal enterprise or in a Foreign Japanese Joint Legal Office (gaikokuho-jimu-bengoshi jimusho) composed of multiple gaiben. The Japanese government has adopted a long term goal of increasing the number of legal professionals who pass the Bar Examination to 3,000 per year by 2010. The Ministry of Justice Foreign Lawyers Study Group considered possible amendments to the law and released its final report in December 2009.
Japan’s civil courts enforce property and contractual rights and do not discriminate against foreign investors. Japanese courts, like those in other countries, operate rather slowly and experience has shown them sometimes ill-suited for litigation of investment and business disputes. Japanese courts lack powers to compel witnesses to testify or a party to comply with an injunction. Timely temporary restraining orders and preliminary injunctions are difficult to obtain. Filing fees are based on the amount of the claim, rather than a flat fee. Lawyers usually require large up-front payments from their clients before filing a lawsuit, with a modest contingency fee, if any, at the conclusion of litigation. Contingency fees familiar in the U.S. are relatively uncommon. A losing party can delay execution of a judgment by appealing. In appeals to higher level courts, additional witnesses and other evidence may be allowed.
Japan's Alternative Dispute Resolution (ADR) law provides a legal framework for arbitration, including international commercial arbitration. Foreign lawyers qualified under Japanese law can represent parties in ADR proceedings taking place in Japan in which one of the parties is foreign or foreign law is applicable, at least to the extent such representation is not inconsistent with Japanese law. The United States continues to urge Japan to promote alternative dispute resolution mechanisms by ensuring that gaiben and non-lawyer experts can act as neutrals in international arbitration or other international ADR proceedings in Japan, in whole or in part, regardless of the governing law or matter in dispute.
Courts have the power to encourage mediated settlements and there is a supervised mediation system. However, this process is often time-consuming and judges transfer frequently, so continuity is often lost. As a result, it is common for companies to settle cases out of court.
Performance Requirements and Incentives
Japan does not maintain performance requirements or requirements for local management participation or local control in joint ventures.
Right to Private Ownership and Establishment
Foreign and domestic private enterprises have the right to establish and own business enterprises and engage in all forms of remunerative activity.
However, the 2005 Companies Act includes a provision -- Article 821 -- which creates uncertainty among foreign corporations that conduct their primary business in the Japanese market through a branch company. As written, Article 821 appears to prohibit branches of foreign corporations from engaging in transactions in Japan "on a continuous basis." The Japanese Diet subsequently issued a clarification of the legislative intent of Article 821 that makes clear the provision should not apply to the activities of legitimate entities. However, some legal uncertainty remains, particularly with respect to possible private litigation against directors and officers of affected firms. The U.S. Government has urged that Japan revoke Article 821 or more formally clarify its meaning. The Japanese government has undertaken to ensure Article 821 will not adversely affect the operations of foreign companies duly registered in Japan and conducting business in a lawful manner.
Protection of Property Rights
In general, Japan maintains a strong intellectual property rights (IPR) regime, but there are costs and procedures of which prospective investors should be aware. Companies doing business in Japan are encouraged to be clear about all rights and obligations with respect to IPR in any trading or licensing agreements. Explicit arrangements and clear understanding between parties will help to avert problems resulting from differences in culture, markets conditions, legal procedures, or business practices.
Registering Patents, Trademarks, Utility Models and Designs: The IPR rights holder must register patents and trademarks in order to ensure protection in Japan. Filing the necessary applications requires hiring a Japanese lawyer or patent practitioner (benrishi) registered in Japan to pursue the patent or trademark application. A U.S. patent or trademark attorney may provide informal advice, but is not able to perform some required functions.
Patent and trademark procedures in Japan have historically been costly and time-consuming. There have also been complaints about the weaknesses of Japanese enforcement and legal redress, for example, that judges are not adequately trained or that court procedures do not adequately protect business-confidential information required to file a case. Japan's government has revised the law and continues to take steps to address these concerns and it is becoming easier and cheaper to obtain patent and trademark protection. Procedures have been simplified, fees cut, and judges are receiving more training and are being assigned to specialized IPR courts. Courts have strengthened rules to protect sensitive information and the government has established criminal penalties for inappropriate use of sensitive information used in court or administrative proceedings.
Prompt filing of patent applications is very important. Printed publication of a description of the invention anywhere in the world, or knowledge or use of the invention in Japan, prior to the filing date of the Japanese application, could preclude the granting of a patent. Japan grants patents on a first-to-file basis. It accepts initial filings in English (to be followed by a Japanese translation), but companies should be careful as translation errors can have significant negative consequences. Unlike the United States, where examination of an application is automatic, in Japan an applicant must request examination of a patent application within three years of filing.
The Japanese Patent Office (JPO) publishes patent applications 18 months after filing, and if it finds no impediment to granting a patent, publishes the revised application a second time before the patent is granted. The patent is valid for 20 years from the date of filing. Currently, the law allows parties to contest the terms of a patent after issuance (for up to six months), rather than prior to registration as was the previous practice.
Patent Prosecution Highway: The Patent Prosecution Highway (PPH) is a noteworthy development for U.S. firms seeking patent protection in Japan. Becoming operational January 4, 2008, after an 18-month pilot program, the PPH allows filing of streamlined applications for inventions determined to be patentable in other participating countries and is expected to reduce the average processing time. The program, which is based on information sharing between national patent offices and standardized application and examination procedures, should reduce costs and encourage greater utilization of the patent system.
Trademarks, Utility Models, and Designs: Japan's Trademark Law protects trademarks and service marks and, like patent protection, requires registration by means of an application filed by a resident agent (lawyer or patent agent). As the process takes time, firms planning on doing business in Japan should file for trademark registration as early as practicable. Japan is a signatory of the Madrid Protocol. Trademarks registered at the WIPO Secretariat are protected among all member countries.
Japan's Utility Model Law allows registration of utility models (a form of minor patent) and provides a 10-year term of protection. Under a separate design law, effective April 2007, protection is available for designs for a 20-year term from the date of registration.
Semiconductor chip design layouts are protected for 10 years under a special law, if registered with the Japanese "Industrial Property Cooperation Center" -- a government-established public corporation.
Unfair Competition and Trade Secrets: The Unfair Competition Prevention Law provides for protecting trademarks prior to registration. The owner of the mark must demonstrate that the mark is well known in Japan and that consumers will be confused by the use of an identical or similar mark by an unauthorized user. The law also provides some protection for trade secrets, such as know-how, customer lists, sales manuals, and experimental data. Recent amendments to the law provide for injunctions against wrongful use, acquisition or disclosure of a trade secret by any person who knew, or should have known, the information in question was misappropriated. Criminal penalties were also strengthened. However, Japanese judicial processes make it difficult to file claims without losing the trade secrets.
Copyrights: In conformity with international agreement, Japan maintains a non-formality principle for copyright registration -- i.e., registration is not a pre-condition to the establishment of copyright protection. However, the Cultural Affairs Agency maintains a registry for such matters as date of first publication, date of creation of program works, and assignment of copyright. United States copyrights are recognized in Japan by international treaty.
Transparency of the Regulatory System
The Japanese economy continues to suffer from over-regulation, which can restrain potential economic growth, raise the cost of doing business, restrict competition, and impede investment. It also increases the costs for Japanese businesses and consumers. Over-regulation underlies many market access and competitive problems faced by U.S. companies in Japan.
The United States has for several years called on Japan to make improvements in its regulatory system to support domestic reform efforts and ensure universal access to government information and the policymaking process.
The Japanese government has taken steps to improve its public comment procedures, but these improvements are not uniform throughout the government. The United States continues to urge Japan to apply consistently high transparency standards, including by issuing new rules to ensure transparency and access for stakeholders in the rulemaking process; by allowing effective public input into the regulatory process; and by giving due consideration to comments received. The United States also has asked Japan to lengthen its public comment period and to require ministries and agencies to issue all new regulations or statements of policy in writing or provide applicable interpretations to interested stakeholders in plain language.
In the financial sector, the Financial Services Agency (FSA) has made efforts to expand the body of published written interpretations of Japan’s financial laws, including improvements to the "no-action letter" system, and improved outreach to the private sector regarding these changes.
The United States has engaged in bilateral working-level discussions since 2002 in an effort to encourage the Japanese Government to promote deregulation, improve competition policy, and administrative reforms that could contribute to sustainable economic growth, increase imports and foreign direct investment into Japan. The National Trade Estimate Report on Foreign Trade Barriers, issued by the Office of the U.S. Trade Representative (USTR), contains a description of Japan’s regulatory regime as it affects foreign exporters and investors.
Efficient Capital Markets and Portfolio Investment
Japan maintains no formal restrictions on inward portfolio investment and foreign capital plays an important role in Japan's financial markets. However, many company managers and directors resist the actions of activist shareholders, especially foreign private equity funds, potentially limiting the attractiveness of Japan's equity market to large-scale foreign portfolio investment. Nevertheless, some firms have taken steps to facilitate the exercise of shareholder rights by foreign investors, including the use of electronic proxy voting. The Tokyo Stock Exchange (TSE) maintains an Electronic Voting Platform for Foreign and Institutional Investors in which more than 372 listed companies participate as of December 2010. All holdings of TSE-listed stocks are required to transfer paper stock certificates into electronic form.
The TSE has stepped up efforts to attract investors. Following receipt of a license from the FSA on May 29, 2009, the TSE launched Tokyo AIM, a new equity market for venture firms, in cooperation with the London Stock Exchange. It also prepared to introduce a faster trading system in January 2010. Japan's stock exchanges face competitive pressures, however. 68 firms delisted from the TSE in 2010, according to the TSE. Other major stock exchanges in Asia -- including Taiwan, Hong Kong, Seoul, and Singapore -- are stepping up efforts to attract stock listings by Japanese companies, and media reports indicate that some Japanese firms chose to conduct initial public offerings of shares offshore.
Environment for Mergers and Acquisitions: Japan’s aversion to M&A is receding gradually, accelerated by the unwinding of previously extensive corporate cross-shareholding networks between banks and corporations in the same business family, improved accounting standards, and government mandates that began in the late 1990s that require banks divest cross-holdings above a set threshold. The majority of M&A over the past decade has been driven by the need to consolidate and restructure mature industries or in response to severe financial difficulties.
Friendly transfer of wholly-owned or majority-owned subsidiaries remains by far the more common form of M&A in Japan. Similarly, unlisted owner-operated firms -- which traditionally would only sell out as a last resort before bankruptcy -- are becoming more amenable to acquisition, including by foreign investors. Nevertheless, there remains a strong preference among Japanese managers and directors for M&A that preserves the independence of the target company. If companies are forced to seek an acquirer, they are often most comfortable merging with a firm with which they have a pre-existing business relationship.
Since the Companies Act, which took effect in 2006, expanded the types of M&A structure available in the Japanese market, many companies have adopted defensive measures against hostile takeovers. The most common of these are "advance warning systems" or "poison pill"-type rights distribution plans. In response to the rapid adoption of such plans and the concerns of many foreign investors, including investment funds, that companies were using takeover defenses to entrench existing management, METI in early 2008 convened the Corporate Value Study Group (CVSG) to clarify the purpose of takeover defense measures and principles governing their use. The CVSG's final report issued July 2008 explicitly recognizes the "positive effects" of hostile takeovers and emphasizes defensive measures should not be used to protect managements' own interests at the expense of shareholders, nor should they deprive shareholders of the right to make their own determination whether to accept a takeover bid.
The number of "poison pill" and related measures slightly decreased in 2010, down to about 540 from 560 in 2009, with 76 companies abandoned their measures in 2010, according to RECOF. While the financial crisis reduced the threat of hostile takeovers by reducing capital available, this decline also flowed from intensified criticism of such measures from investors and growing recognition by management that takeover defense plans are not in the interests of either the firm or its shareholders. Nevertheless, a number of technical factors continue to limit greater entry into the Japanese market through M&A. These factors include tax policy, a lack of independent directors, uncertainty regarding tax treatment of certain M&A structures, weak disclosure practices, and a relative shortage of M&A infrastructure in the form of specialists skilled in making matches and structuring M&A deals.
Company Law Revisions: The extensive revision of Japan's Company Law (Commercial Code) in 2005-06 significantly expanded the flexibility of corporate capital structures and increased the types of governance structures available to Japanese firms. The new law, which came fully into force in May 2007, revised and combined Part II of the previous Commercial Code with existing laws governing limited liability companies (yugen gaisha) and audits. The law also introduced changes to facilitate start-ups and make corporate structures more flexible, including elimination of minimum capital requirements for joint-stock companies (kabushiki kaisha). It merged a number of different corporate structures and created a new structure (godo kaisha) modeled on the U.S.-style limited liability company.
The Companies Act also permits formation of corporate holding companies in Japan for the first time since World War II. This step has facilitated use of domestic stock swaps in corporate restructuring, through which one party becomes a wholly-owned subsidiary of the other. Japan's tax law now provides special tax treatment and deferral of taxes on such stock-swap transactions at the time of exchange and transfer. As of May 2007, foreign equities can be used as consideration in triangular merger transactions targeting Japanese firms. However, to take advantage of the new rules, the foreign acquirer must legally establish a Japanese subsidiary firm to act as the counterpart to the stock exchange/transfer.
Changes in Corporate Governance: Under the new Companies Act and the Industrial Revitalization Law, publicly traded companies have the option of adopting a U.S.-style corporate governance system instead of the traditional Japanese statutory auditor (kansayaku) system of corporate governance. This new system requires the appointment of executive officers and the establishment of a board committee system in which at least the audit, nomination, and compensation committees are composed of a majority of outside directors. Initially available only under the Industrial Revitalization Law and effectively limited to distressed companies, the new Companies Act makes these options available to all listed companies. Companies also can use the Internet or other electronic means to provide notices of annual general meetings or similar communication with shareholders. Where available, shareholders may exercise voting rights electronically and companies are permitted to make required disclosures of balance sheet and other financial information in an electronic format.
Reflecting growing concern within Japan that weaknesses in existing systems of corporate governance are a disincentive for foreign investors, several government agencies and non-government organizations have studied the matter and issued recommendations. METI inaugurated a Corporate Governance Study Group (CGSG), with business-community representation, which issued "The Corporate Governance Study Group Report" on June 17, 2009. Significantly, the CGSG was the first government-linked body to set out a formal definition of "independent" director or statutory auditors. Japan's Companies Act only requires boards to have "outside" directors, defined as an individual who is not an executive or employee of the company itself, or of the company's subsidiaries. The FSA also convened the Financial System Council's Study Group, which issued its report, "Toward Stronger Corporate Governance of Publicly Listed Companies," the same month.
On the central question of appointing independent members on corporate boards, the CGSG convened by METI stopped short of calling for changing the existing "outsider" requirements of board composition with "independence" requirements. The CGSG confirmed the need for some independent board representation but also noted that non-independent board members can still make valuable contributions to a firm. Positing a potential tradeoff between increased independence and the efficacy of management, the report recommended that each firm should be allowed to adopt the most effective structure in terms of its business. It urged the stock exchange to make rules calling for firms to name one independent director or statutory auditor on each board. It also put forward a model of governance where the firm would appoint at least one "outside" director and disclose its corporate governance system or explain how its model of corporate governance will be effective where no outside director is appointed.
Highlighting the critical role of shareholders in ensuring effective corporate governance, the Financial System Council's report echoed the CGSG recommendations on independent directors. It urged the government to consider ways to require listed companies to disclose the details of any existing relationship between individual directors and the company, and to provide the company's views on the level of independence of individual directors. It also called for efforts to strengthen the functions of statutory auditors within companies, and to provide better training and resources so that auditors can more effectively carry out their oversight functions. The government did not take further measures to increase the level of independent monitoring and strategic oversight provided by the boards of listed companies. While the Ministry of Justice convened a Legislative Advisory Council having the authority to consider amendments to the Companies Act in 2010, its Company Act Sub-Committee did not specify a clear scope for its deliberations or signal a commitment to increasing the number of independent members on company boards.
The TSE implemented new restrictions on private placements to protect the interests of shareholders on August 24, 2009, and published its Listing System Improvement Action Plan on September 29, 2009. The plan sets out steps to enhance corporate governance, improve disclosure, and improve the governance of group companies. On December 24, 2009 the TSE released its revised Principles of Corporate Governance for Listed Companies, the first revision since their formulation in 2004. Points newly added address issues of enhancing corporate governance through enterprise groups, strengthening of statutory auditors' functions, and suitable models of corporate governance. As of December 2010, the Advisory Group on Improvements to TSE Listing System was continuing to consider rules regarding corporate governance.
Cross-shareholdings and M&A: Potential foreign investors in Japan frequently point out that cross-shareholding between Japanese listed companies greatly complicates market-based M&A activity and reduces the potential impact of shareholder-based corporate governance. Such cross-shareholding practices allow senior management to put a priority on internal loyalties over shareholder returns and can lead to premature rejection of M&A bids. Traditionally, a company maintained a close relationship with a large-scale commercial bank, known as a "main bank", usually part of the same loose corporate grouping. In return for holding a bloc of the company's shares, the bank provided both regular financing and emergency support if the company ran into financial difficulties. This "main bank" system largely dissolved in the late 1990s as Japan's banking system came close to collapse.
With the recovery of the Japanese economy at mid-decade, however, some company boards began rebuilding cross-shareholding networks, this time with suppliers or nominal competitors rather than a commercial bank. While many boards saw such linkages as an effective means of defense against hostile takeovers, the sharp decline in Japanese stock prices in the autumn of 2008 highlighted the risks of this strategy. According to Daiwa Institute of Research, the proportion of stocks owned in cross-shareholding deals among Japanese firms continued to fall in 2009, dropping to 4.9 percent of shares for the fiscal year ending March 2010. Subsequent declines will be necessary to conclude that this change represents a trend, and it remains unclear whether the introduction of International Financial Reporting Standards (IFRS) will lead to further declines in cross-shareholdings.
Accounting and Disclosure: Implementation of so-called "Big Bang" reforms since 1998 has significantly improved Japan’s accounting standards. Consolidated accounting has been mandatory since 1999 and "effective control and influence" standards have been introduced in place of conventional holding standards, expanding the range of subsidiary and affiliated companies included for the settlement of accounts. Consolidated disclosure of contingent liabilities, such as guarantees, is also mandatory. All marketable financial assets held for trading purposes, including cross-shareholdings and other long-term securities holdings, are recorded at market value.
Companies are required to disclose unfunded pension liabilities by valuing pension assets and liabilities at fair value. Fixed asset impairment accounting, in effect since 2005, requires firms to record losses if the recoverable value of property, plant, or equipment is significantly less than book value.
The greater focus on consolidated results and mark-to-market accounting had a significant effect in encouraging the unwinding of cross-shareholdings and the "main bank" system. Corporate restructuring has taken place, in many cases with companies reducing pension under-funding and banks disposal of many low-yield assets.
The Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) began discussions on the convergence of Japanese both accounting standards and IFRS practices in March 2005 and, in March 2006, further agreed to accelerate the process of convergence. The ASBJ embarked on similar discussions with the U.S. Financial Accounting Standards Board in May 2006. In December 2009, the FSA issued an order allowing companies to submit their financial statements based on international accounting standards. This order prepares the legal groundwork for a complete switch to IFRS in the future, but no decision has been made on the mandatory introduction of IFRS. Previously, the FSA accepted only Japanese or U.S. standards for consolidated accounting.
There has been greater disclosure of proxy voting during the past two years. The above-mentioned Financial System Council report issued in June 2009 urged the government to consider introducing legislation similar to the American ERISA law that would spell out the fiduciary duties of pension fund managers to exercise their proxy voting rights on behalf of pension beneficiaries. The report called upon the investment industry to establish rules or other means to require institutional fund managers and other large-scale investors who invest on behalf of retail investors to disclose how they exercise their proxy votes.
Taxation and M&A: Japan's standard tax rate for capital gains is 20 percent. However, under special policy measures intended to stimulate capital markets, Japan applies a special 10 percent capital gains tax rate on the proceeds of sales of listed stocks through 2011 for capital gains of less than ¥5 million and for dividends on listed shares of less than ¥1 million. The temporary cut in the tax rate from 20 percent to 10 percent on capital gains from listed share sales and dividend income is due to expire at the end of December 2011, but the government has proposed an extension through December 2013. In addition, a new tax-free program has been proposed to encourage individual investors to invest in stocks. Under the new program, to be effective from January 2012, combined annual capital gains and annual dividend income of up to ¥1 million will be exempted from income tax during a three-year period (2012-2014). Under a series of special measures Japan adopted to promote venture businesses, if the founding shareholder of a qualified company sells shares in the company a ten percent capital gains tax rate will apply if the sale is made prior to public listing in an M&A transaction and, from 2008, a ten percent rate applies to shares sold by the founding shareholder within three years of listing.
Bankruptcy Laws: An insolvent company in Japan can face liquidation under the Bankruptcy Act or take one of four roads to reorganization: the Civil Rehabilitation Law; the Corporate Reorganization Law; corporate reorganization under the Commercial Code; or an out-of-court creditor agreement.
Japan overhauled its bankruptcy law governing small and medium size firm bankruptcies by enacting the Civil Rehabilitation Law in 2000. The law focuses on corporate restructuring in contrast to liquidation, provides stronger protection of debtor assets prior to the start of restructuring procedures, eases requirements for initiating restructuring procedures, simplifies and rationalizes procedures for the examination and determination of liabilities, and improves procedures for approval of rehabilitation plans. Japan’s Corporate Reorganization Law, generally used by large companies, was similarly revised in 2003. Amendments made corporate reorganization for large companies more cost-efficient, speedy, flexible and available at an earlier stage. By removing many institutional barriers to the restructuring process, the new bankruptcy regime accelerated the corporate restructuring process in Japan.
Previously, most corporate bankruptcies in Japan were handled through out-of-court creditor agreements because court procedures were lengthy and costly. The fact that bankruptcy trustees had limited powers to oversee restructuring meant most judicial bankruptcies ended in liquidation, often at distress prices. Beginning in 2001, a group of Japanese bankruptcy experts published a set of private rehabilitation guidelines, modeled after the UK-based INSOL guidelines, for out-of-court corporate rehabilitation in Japan. Out-of-court settlements in Japan tend to save time and expense, but can sometimes lack transparency and fairness. In practice, because 100 percent creditor consensus is required for out-of-court settlements and the court can sanction a reorganization plan with only a majority of creditors’ approval, the last stage of an out-of-court workout is often a request for a judicial seal of approval.
Credit Markets: Domestic and foreign investors have free access to a variety of credit instruments at market rates. Most foreign firms obtain short-term credit from Japanese commercial banks or one of the many foreign banks operating in Japan. Medium-term loans are available from commercial banks or from trust banks and life insurance companies. Large foreign firms tend to use foreign sources for long-term financial needs.
Competition from State-Owned Enterprises (SOEs)
Japan has privatized most former state-owned enterprises. The privatization of the financial companies of the Japan Post group, including Japan Post Bank and Japan Post Insurance, however, remains incomplete. After assuming power in September 2009, the DPJ-led government decided to delay indefinitely the stock sale of these companies. The U.S. Government has continued to raise concerns about the preferential treatment that Japan Post entities receive compared to private sector competitors and the impact of these advantages on the ability of private companies to compete on a level playing field.
Japan does not have any sovereign wealth fund (SWF).
Corporate Social Responsibility (CSR)
Awareness of corporate social responsibility among both producers and consumers in Japan is high and growing, and foreign and local enterprises generally follow accepted CSR principles. Business organizations also actively promote CSR.
Political Violence
Political violence is rare in Japan. Acts of political violence involving U.S. business interests are virtually unknown.
Corruption
Japan's penal code covers crimes of official corruption. An individual convicted under these statutes is, depending on the nature of the crime, subject to prison sentences up to three years and possible fines up to ¥2.5 million (for the offering party), or prison sentences up to seven years and mandatory confiscation of the monetary equivalent of the bribe (for the recipient). With respect to corporate officers who accept bribes, Japanese law also provides for company directors to be subject to fines and/or imprisonment, and some judgments have been rendered against company directors.
Although the direct exchange of cash for favors from government officials in Japan is extremely rare, some have described the situation in Japan as "institutionalized corruption." The web of close relationships between Japanese companies, politicians, government organizations, and universities has been said to foster an inwardly-cooperative business climate that is conducive to the awarding of contracts, positions, etc. within a tight circle of local players. This phenomenon manifests itself most frequently and most seriously in Japan through the rigging of bids on government public works projects.
Japanese authorities have acknowledged the problem of bid-rigging and have taken steps to address it. Building on the longstanding laws on bribery of public officials and misuse of public funds, the 2006 amendments to the 2003 Bid-Rigging Prevention Act, now called the Act on Elimination and Prevention of Involvement in Bid-Rigging, aimed specifically to eliminate official collusion in bid rigging. The law authorizes the Japan Fair Trade Commission (JFTC) to demand central and local government commissioning agencies take corrective measures to prevent continued complicity of officials in bid-rigging activities, and to report such measures to the JFTC. The Act also contains provisions concerning disciplinary action against officials participating in bid rigging and compensation for overcharges when the officials caused damage to the government due to willful or grave negligence. The act prescribes possible penalties of imprisonment for up to five years and fines of up to ¥2.5 million. Nevertheless, questions remain as to whether the Act's disciplinary provisions are strong enough to ensure officials involved in illegal bid-rigging are held accountable.
Complicating efforts to combat bid rigging is the phenomenon known as amakudari whereby government officials retire into top positions in Japanese companies, usually in industries that they once regulated. Amakudari employees are particularly common in the financial, construction, transportation, and pharmaceutical industries, among Japan's most heavily regulated industries. The 2007 revised National Public Service Act aimed at limiting involvement of individual ministries in finding post-retirement employment for its officials and more transparent administrative procedures may somewhat ameliorate the situation. In view of strong DPJ opposition to amakudari when they were an opposition party, there were great expectations that the DPJ-led government would move to eliminate amakudari. In 2010, however, the issue was not a high government priority, and amakudari practices persist.
Japan has ratified the OECD Anti-Bribery Convention, which bans bribing foreign government officials. The OECD has identified deficiencies in Japan's implementing legislation, some of which the Japanese Government has taken steps to rectify. In 2004, Japan amended its Unfair Competition Prevention Law to extend national jurisdiction to cover the crime of bribery and in 2006 made changes to the Corporation Tax Law and the Income Tax Law expressly to deny the tax deductibility of bribes to foreign public officials.
Bilateral Investment Agreements
The 1952 U.S.-Japan Treaty of Friendship, Commerce, and Navigation gives national treatment and most favored nation treatment to U.S. investments in Japan. As of December
2010, Japan has concluded or signed bilateral investment treaties (BITs) with sixteen trading partners, including Egypt, Sri Lanka, China, Hong Kong SAR, Turkey, Pakistan, Bangladesh, Russia, Mongolia, Vietnam, the Republic of Korea, Cambodia, Laos, Uzbekistan, Peru, and Columbia. The Japanese Government is currently negotiating bilateral BITs with the Kingdom of Saudi Arabia,, Kuwait, Kazakhstan, Papua New Guinea, and Angola, as well as a trilateral agreement with China and the Republic of Korea. The government is also preparing to negotiate BITs with other countries abundant in natural resources, particularly Qatar and Algeria.
Japan has economic partnership agreements (an EPA is analogous to a free trade agreement) containing investment chapters in force with Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, Brunei, the Philippines, Vietnam, Switzerland, as well as a multilateral EPA with all ten members of the Association of Southeast Asian Nations (ASEAN). It has also announced EPAs with India and Peru; resolution of final details was still pending as of the end of 2010.
U.S.-Japan Dialogue on Investment: Under the Economic Partnership for Growth, established by President Bush and Prime Minister Koizumi in June 2001, semi-annual discussions in the U.S.-Japan Investment Initiative Working Group addressed U.S. Government concerns about barriers to foreign investment in Japan. In 2010, as part of the recalibration of bilateral economic engagement, the two governments convened the U.S.-Japan Dialogue to Promote Innovation, Entrepreneurship and Job Creation, which met initially in May and was formally launched by both governments on November 13. The Investment Initiative’s work included vigorous public outreach to increase receptivity to FDI, and both governments have continued to sponsor investment promotion seminars. In 2010, such events were held in San Francisco and in Makuhari, Chiba Prefecture, alongside the Green Device 2010 trade show.
OPIC and Other Investment Insurance Programs
U.S. OPIC insurance and finance programs are not available in Japan. Japan is a member of the Multilateral Investment Guarantee Agency (MIGA). Japan's capital subscription to the organization is the second largest, after the United States.
Labor
Changing demographic patterns, macroeconomic trends, and regulatory reforms are gradually affecting traditional Japanese employment practices. Foreign investors seeking to hire highly qualified workers in Japan should benefit from many of these changes.
Throughout most of the post-war period, Japanese employment practices -- most notably in the nation's large, internationally competitive firms -- rested on three pillars: lifetime employment, seniority-based wages, and enterprise unions. Today, all three are undergoing rapid transformation. Demographic pressures -- fewer young workers and a rapidly aging labor force and the subsequent structural changes in the Japanese economy -- are forcing many firms to sharply reduce lifetime employment guarantees and seniority-based wages in favor of merit-based pay scales and limited-term contracts. Although labor unions play a role in the annual determination of wage scales throughout the economy, that role has been shrinking. However, according to the FY 2010 Ministry of Health, Labor and Welfare (MHLW) "White Paper on Labor Economy", the estimated union membership as of June 30, 2009 marked a slight increase for the first time in 34 years and is now 18.5 percent. The number of "non-regular" workers who are union members has increased in recent years as a result of strengthened organizing efforts by some labor unions, although it is still substantially smaller than that of regular workers. With the formation of the DPJ-led government in September 2009, labor unions found the Japanese government more sympathetic than before to their concerns.
Investors should be aware of Japan's high wage structure. Growth in average wages has been slow however, a situation that largely reflects the shift to increased use of "non-regular" employees and the hiring of younger workers to replace older, higher-wage workers who have begun to retire. According to the MHLW White Paper, total cash salary, which began to increase in 2005 reflecting the economic recovery that began in 2002, fell again in 2007 and has been falling 3 years in a row. In 2009, the figure showed a record fall of 3.8 percent from the previous year. While Japan has accepted highly skilled foreign labor, Japanese firms have depended overwhelmingly on the local labor market to supply workers. In 2009, the number of registered foreign nationals fell 1.4 percent from the prior year to 2.19 million persons (1.71 percent of Japan’s population of 127.5 million). The number of foreign nationals newly entering Japan for the purpose of employment also dropped in 2009 to 57,093, a decrease of 20.9 percent from the prior year, according to Ministry of Justice statistics.
Traditionally, Japanese workers were classified as either "regular" or "other/non-regular" employees. This system, to a considerable degree, remains in place. Companies recruit "regular" employees directly from schools or universities and provide an employment contract with no fixed duration. In contrast, firms hire "non-regular" employees, mainly on fixed duration contracts. Since the mid-1990s, companies have increasingly used part-time workers, temporary contract workers and dispatch workers to fill short-term labor requirements and to save labor costs. According to an MHLW survey on youth employment, 38.4 percent of employees aged 15-19 and 36.1% of employees aged 20-24 were "non-regular" workers in FY2009. There remains deep concern among Japanese government policy makers that the number of "non-regular" employees aged 25-34 remains stubbornly high and the ability of such workers to find permanent employment will decline as they get older. These "non-regular" employees have borne the brunt of corporate adjustment to the worldwide recession that began in September 2008. According to the MHLW White Paper on Labor Economy, the ratio of non-regular employees in 2009 fell slightly for the first time in 15 years to 33.4 percent, mainly due to the decrease in dispatch workers.
Defined contribution pension plans have been available in Japan since 2001. Such plans should promote greater labor mobility in the future, as workers are able to carry pension savings with them to new jobs. However, only about three percent of Japanese workers are currently covered by such plans. Although in January 2010 the government increased the tax deductible employer contribution limits from ¥46,000 ($505) to ¥51,000 ($560) per month, the second increase since 2001, this ceiling on contributions is too low to realize the full potential of the program. In 2008, 2009, and 2010, the government submitted legislation to allow employees to make individual contributions to their pension plans, but the bills were not enacted by the Diet.
Foreign-Trade Zones/Free Ports
Japan no longer has free-trade zones or free ports. Customs authorities allow the bonding of warehousing and processing facilities adjacent to ports on a case-by-case basis.
Foreign Direct Investment Statistics
Between 1998 and December 2009, Japan's stock of FDI increased from ¥3.0 trillion to ¥18.2 trillion. In the same period investment inflows were generally strong. All data in the tables below are current as of December 2010. Negative figures indicate net outflow.
Table 1a: Net FDI Inflows (Unit: billion dollars; balance-of-payment basis)
|
JFY 2000 |
JFY 2001 |
JFY 2002 |
JFY 2003 |
JFY 2004 |
|
8.23 |
6.19 |
9.09 |
6.24 |
7.81 |
|
JFY 2005 |
JFY 2006 |
JFY 2007 |
JFY 2008 |
JFY2009 |
|
3.22 |
-6.78 |
22.18 |
24.55 |
11.84 |
|
1. Figures were first calculated in nominal Japanese yen and converted into U.S. dollars using Bank of Japan average annual exchange rates.
Source: http://www.jetro.go.jp/en/reports/statistics/data/bpfdi01_e_1004.xls
http://www.jetro.go.jp/en/reports/statistics/data/bpfdi02_e_1004.xls
Table 2: Foreign Direct Investment in Japan, by country (Unit: million dollars; net and flow; balance-of-payment basis)
|
CY2005 |
CY2006 |
CY2007 |
CY2008 |
CY2009 |
||
|
North America |
-636 |
-2,666 |
12,709 |
12,005 |
1,712 |
|
|
U.S.A. |
308 |
105 |
13,270 |
11,792 |
1,831 |
|
|
Canada |
-944 |
-2,771 |
-561 |
213 |
-119 |
|
|
Asia |
1,565 |
-852 |
1,605 |
3,381 |
1,093 |
|
|
China |
11 |
12 |
15 |
37 |
-137 |
|
|
Hong Kong |
960 |
-2,136 |
47 |
257 |
-81 |
|
|
Taiwan |
-26 |
110 |
36 |
66 |
57 |
|
|
Korea |
31 |
108 |
221 |
279 |
255 |
|
|
Singapore |
598 |
1,062 |
1,282 |
2,716 |
756 |
|
|
Thailand |
-6 |
1 |
1 |
6 |
24 |
|
|
India |
1 |
-1 |
3 |
1 |
14 |
|
|
W. Europe |
1,123 |
-3,938 |
4,785 |
4,861 |
8,210 |
|
|
Germany |
237 |
-542 |
-813 |
1,185 |
389 |
|
|
U.K. |
132 |
1,807 |
540 |
-1,289 |
5,629 |
|
|
France |
-78 |
274 |
504 |
177 |
371 |
|
|
Netherlands |
2,541 |
-7,583 |
-390 |
2,692 |
2,584 |
|
|
Belgium |
-1,188 |
884 |
148 |
-2,040 |
14 |
|
|
Luxembourg |
363 |
-12 |
484 |
477 |
543 |
|
|
Switzerland |
-748 |
317 |
1,162 |
1,873 |
-990 |
|
|
E. Europe, Russia |
0 |
-4 |
1 |
5 |
1 |
|
|
L. America |
1,278 |
566 |
2,831 |
4,020 |
690 |
|
|
Mexico |
0 |
0 |
0 |
0 |
0 |
|
|
Brazil |
1 |
0 |
0 |
0 |
-8 |
|
|
Cayman Is. |
1,069 |
-82 |
1,480 |
3,592 |
965 |
|
|
Oceania |
-114 |
36 |
215 |
258 |
50 |
|
|
Middle East |
9 |
-1 |
3 |
-2 |
23 |
|
|
Africa |
1 |
63 |
33 |
21 |
61 |
|
|
TOTAL |
3,223 |
-6,789 |
22,181 |
24,550 |
11,839 |
|
Source: http://www.jetro.go.jp/en/reports/statistics/data/bpfdi02_e_1004.xls
Table 3: Japan’s FDI inward stock by country/region (Unit: million dollars)
|
end of 2005 |
End of 2006 |
end of 2007 |
end of 2008 |
end of 2009 |
||
|
North America |
47,729 |
44,273 |
45,947 |
75,680 |
76,184 |
|
|
U.S. |
43,888 |
41,989 |
44,795 |
74,344 |
75,003 |
|
|
Canada |
3,841 |
2,284 |
1,152 |
1,336 |
1,181 |
|
|
Asia |
6,702 |
8,247 |
9,390 |
16,769 |
17,336 |
|
|
China |
102 |
100 |
125 |
225 |
197 |
|
|
Hong Kong |
2,612 |
1,928 |
2,301 |
3,203 |
1,444 |
|
|
Taiwan |
1,391 |
1,475 |
1,534 |
1,892 |
2,656 |
|
|
Korea |
313 |
423 |
694 |
1,235 |
1,999 |
|
|
Singapore |
2,159 |
4,205 |
4,620 |
10,047 |
10,632 |
|
|
Thailand |
42 |
42 |
44 |
61 |
79 |
|
|
India |
10 |
9 |
13 |
18 |
32 |
|
|
Europe |
38,101 |
42,367 |
62,341 |
86,915 |
83,883 |
|
|
Germany |
5,904 |
4,582 |
3,811 |
6,592 |
7,166 |
|
|
U.K. |
3,033 |
4,983 |
5,962 |
6,750 |
7,318 |
|
|
France |
10,777 |
11,549 |
12,776 |
16,233 |
15,208 |
|
|
Netherlands |
11,654 |
12,175 |
26,025 |
36,510 |
36,034 |
|
|
Belgium |
474 |
1,901 |
1,947 |
1,362 |
934 |
|
|
Luxembourg |
1,632 |
1,635 |
2,267 |
4,000 |
4,262 |
|
|
Switzerland |
2,106 |
3,536 |
3,942 |
7,150 |
4,913 |
|
|
E. Europe, Russia |
47 |
47 |
46 |
63 |
63 |
|
|
L. America |
8,218 |
12,123 |
15,227 |
23,576 |
20,990 |
|
|
Mexico |
4 |
4 |
5 |
6 |
6 |
|
|
Brazil |
31 |
30 |
32 |
40 |
32 |
|
|
Cayman Is. |
5,599 |
8,400 |
10,469 |
17,363 |
16,965 |
|
|
Oceania |
478 |
492 |
779 |
1,075 |
1,095 |
|
|
Middle East |
14 |
14 |
20 |
29 |
51 |
|
|
Africa |
1 |
63 |
99 |
275 |
342 |
|
|
TOTAL |
101,322 |
107,663 |
133,888 |
204,433 |
199,991 |
|
Source: http://www.jetro.go.jp/en/reports/statistics/data/09fdistocken02.xls
Table 4: FDI in Japan, by industry (Unit: million dollars) (balance of payment basis)
|
CY2005 |
CY2006 |
CY2007 |
CY2008 |
CY2009 |
||
|
Manufacturing (total) |
-2,191 |
254 |
1,381 |
2,261 |
3,420 |
|
|
General machinery |
164 |
-24 |
-22 |
721 |
115 |
|
|
Electric machinery |
-1,195 |
32 |
-391 |
642 |
1,705 |
|
|
Trans. equipment |
32 |
-1,408 |
331 |
-55 |
469 |
|
|
Precision machines |
-59 |
598 |
20 |
113 |
94 |
|
|
Chemicals and pharmaceuticals |
-1,168 |
1,538 |
-1,010 |
245 |
307 |
|
|
Iron, non-ferrous metals |
-34 |
60 |
230 |
124 |
287 |
|
|
Rubber & leather |
1 |
35 |
35 |
4 |
6 |
|
|
Petroleum |
-44 |
37 |
935 |
300 |
-19 |
|
|
Textiles |
188 |
58 |
109 |
-3 |
-8 |
|
|
Food |
-211 |
-717 |
365 |
-86 |
421 |
|
|
Glass & ceramics |
103 |
193 |
663 |
212 |
-90 |
|
|
Non-manuf. (total) |
5,414 |
-7,043 |
20,800 |
22,289 |
8,349 |
|
|
Farming & forestry |
-1 |
11 |
41 |
1 |
-5 |
|
|
Fish/ marine products. |
0 |
-39 |
-33 |
- |
1 |
|
|
Mining |
0 |
1 |
0 |
0 |
-1 |
|
|
Finance/ Insurance |
645 |
2,265 |
17,661 |
19,823 |
5,205 |
|
|
Wholesale & retail |
1,157 |
-387 |
1,660 |
1,160 |
1,057 |
|
|
Services |
178 |
122 |
295 |
473 |
1,343 |
|
|
Real estate |
15 |
72 |
1,413 |
581 |
-71 |
|
|
Communication |
912 |
-9,715 |
-633 |
-1,028 |
619 |
|
|
Transportation |
2,108 |
28 |
-288 |
43 |
-90 |
|
|
Construction |
41 |
37 |
19 |
-60 |
16 |
|
|
TOTAL |
3,223 |
-6,789 |
22,181 |
24,550 |
11,839 |
|
Source: http://www.jetro.go.jp/en/reports/statistics/bpfdi08_e_1010.xls
Table 5: Japanese Direct Investment Overseas, by country (Unit: million dollars; net and flow; balance-of-payment basis)
|
CY2005 |
CY2006 |
CY2007 |
CY2008 |
CY2009 |
||
|
North America |
13,169 |
10,188 |
17,385 |
46,046 |
10,889 |
|
|
U.S.A. |
12,126 |
9,297 |
15,672 |
44,674 |
10,660 |
|
|
Canada |
1,042 |
892 |
1,713 |
1,372 |
229 |
|
|
Asia |
16,188 |
17,167 |
19,388 |
23,348 |
20,636 |
|
|
China |
6,575 |
6,169 |
6,218 |
6,496 |
6,899 |
|
|
Hong Kong |
1,782 |
1,509 |
1,131 |
1,301 |
1,610 |
|
|
Taiwan |
828 |
491 |
1,373 |
1,082 |
339 |
|
|
R. Korea |
1,736 |
1,517 |
1,302 |
2,369 |
1,077 |
|
|
Singapore |
557 |
375 |
2,233 |
1,089 |
2,881 |
|
|
Thailand |
2,125 |
1,984 |
2,608 |
2,016 |
1,632 |
|
|
Indonesia |
1,185 |
744 |
1,030 |
731 |
483 |
|
|
Malaysia |
524 |
2,941 |
325 |
591 |
616 |
|
|
Philippines |
442 |
369 |
1,045 |
705 |
809 |
|
|
India |
266 |
512 |
1,506 |
5,551 |
3,664 |
|
|
Western Europe |
7,509 |
18,029 |
20,456 |
22,418 |
17,073 |
|
|
Germany |
270 |
1,128 |
880 |
3,905 |
2,089 |
|
|
U.K. |
2,903 |
7,271 |
3,026 |
6,744 |
2,126 |
|
|
France |
541 |
842 |
479 |
1,703 |
1,161 |
|
|
Netherlands. |
3,315 |
8,497 |
12,440 |
6,514 |
6,698 |
|
|
Sweden |
82 |
416 |
254 |
570 |
160 |
|
|
Spain |
363 |
136 |
10 |
210 |
162 |
|
|
Latin America |
6,402 |
2,547 |
9,482 |
29,623 |
17,393 |
|
|
Mexico |
629 |
-2,603 |
501 |
315 |
211 |
|
|
Brazil |
953 |
1,423 |
1,244 |
5,371 |
3,753 |
|
|
Cayman Isles |
3,915 |
2,814 |
5,838 |
22,550 |
12,903 |
|
|
Oceania |
943 |
723 |
4,204 |
6,060 |
7,629 |
|
|
Australia |
640 |
466 |
4,140 |
5,232 |
7,136 |
|
|
Middle East |
542 |
242 |
958 |
1,138 |
575 |
|
|
UAE |
19 |
-56 |
60 |
194 |
139 |
|
|
Saudi Arabia |
494 |
254 |
746 |
892 |
378 |
|
|
Africa |
25 |
899 |
1,101 |
1,518 |
-301 |
|
|
South Africa |
-17 |
466 |
82 |
648 |
143 |
|
|
TOTAL |
45,461 |
50,165 |
73,483 |
130,801 |
74,650 |
|
Source: http://www.jetro.go.jp/en/reports/statistics/data/bpfdi01_e_1004.xls
Table 6: Japanese Direct Investment Overseas, by industry (Unit: million dollars, net and flow; balance of payment basis)
|
CY2005 |
CY2006 |
CY2007 |
CY2008 |
CY2009 |
||
|
Manufacturing (total) |
26,146 |
34,513 |
39,515 |
45,268 |
32,934 |
|
|
Chemicals and Pharmaceuticals |
3,363 |
4,413 |
3,744 |
11,647 |
7,407 |
|
|
Food |
1,685 |
1,025 |
12,776 |
3,601 |
8,954 |
|
|
Iron, non-ferrous & metals |
1,331 |
1,795 |
2,202 |
3,152 |
3,738 |
|
|
General Mach. |
1,296 |
1,663 |
2,642 |
3,726 |
4,411 |
|
|
Electric machinery |
4,377 |
7,041 |
4,691 |
5,675 |
2,505 |
|
|
Transportation equipment |
8,611 |
8,597 |
8,671 |
10,924 |
566 |
|
|
Precision machinery |
1,419 |
1,420 |
1,293 |
953 |
609 |
|
|
Rubber and leather |
831 |
1,107 |
835 |
771 |
445 |
|
|
Lumber & pulp |
826 |
420 |
745 |
734 |
1,207 |
|
|
Textiles |
416 |
180 |
371 |
716 |
477 |
|
|
Petroleum |
531 |
2,921 |
-280 |
652 |
-51 |
|
|
Glass & ceramics |
258 |
2,759 |
837 |
1,417 |
2,042 |
|
|
Non-manuf. (total) |
19,315 |
15,652 |
33,968 |
85,533 |
41,717 |
|
|
Finance/Insurance |
9,227 |
5,562 |
19,458 |
52,243 |
15,463 |
|
|
Wholesale & retail |
4,623 |
5,483 |
4,792 |
13,319 |
8,418 |
|
|
Real estate |
-851 |
-811 |
162 |
162 |
463 |
|
|
Services |
1,086 |
188 |
1,406 |
2,721 |
1,263 |
|
|
Transportation |
824 |
1,507 |
2,133 |
2,283 |
2,894 |
|
|
Mining |
1,372 |
1,577 |
4,053 |
10,518 |
6,482 |
|
|
Construction |
148 |
-64 |
490 |
389 |
499 |
|
|
Farming/ forestry |
23 |
42 |
93 |
59 |
10 |
|
|
Fisheries |
-44 |
28 |
64 |
119 |
36 |
|
|
Communications |
1,712 |
-3,368 |
-331 |
1,675 |
3,870 |
|
|
TOTAL |
45,461 |
50,165 |
73,483 |
130,801 |
74,650 |
|
Source: http://www.jetro.go.jp/en/reports/statistics/data/bpfdi07_en_1010.xls
Table 7: FDI Inflow Relative to GDP (balance-of-payment basis)
|
CY2005 |
CY2006 |
CY2007 |
CY2008 |
CY2009 |
|
|
(a) GDP/Nom (trillion yen) |
501.7 |
507.3 |
515.5 |
505.1 |
474.2 |
|
(b) FDI Inflow (trillion yen) |
0.31 |
-0.76 |
2.65 |
2.52 |
1.17 |
|
b/a (pct) |
0.06 |
-0.15 |
0.51 |
0.49 |
0.25 |
Sources (2005-2007): http://www.mof.go.jp/bpoffice/bpdata/fdi/fdi2bop.htm
(2008-2009):
