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Diplomacy in Action

2013 Investment Climate Statement - Japan


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
March 2013
Report
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Openness To, and Restrictions Upon, Foreign Investment

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. The Japanese government's commitment to implement policies to improve the climate for foreign investment, however, has been uneven. Japan's stock of FDI, as a percentage of gross domestic product (GDP), stood at 3.9% at the end of 2011, compared with 28.7% on average for all Organization for Economic Cooperation and Development (OECD) member countries. While the FDI stock has risen substantially since the 1990’s, Japan still has the lowest ratio of FDI as a proportion of GDP of any OECD member.

In terms of trends, outbound investment continued moving upwards during 2012 as Japanese companies' large cash holdings combined with low global equity values and the strong yen supported their active merger and acquisition (M&A) activity abroad. Meanwhile, investment activity inside Japan showed a modest increase in numbers of M&A transactions during 2012, ending a five-year downward trend. Final 2011 statistics for FDI in Japan show a net outflow of about $1.7 billion for the year, and provisional figures for the nine months through September 2012 indicated an outflow of $0.4 billion. Notwithstanding the imbalance between inward and outward FDI, and the increase in M&A activity by Japanese firms overseas, Japan's outward FDI as a percentage of GDP also remains among the lowest of major OECD members.

Japan has largely recovered from the economic shocks caused by the March 2011 Tohoku earthquake and tsunami, and gross domestic product has returned to its pre-quake levels. Japan continues to face challenges of low growth, deflation, and an aging population and shrinking workforce. While the strong yen posed challenges for Japan’s export sector in 2012, some exports – particularly automobiles – still performed well. At the same time, the strong yen cushioned the cost of increased fuel imports resulting from reduced reliance on nuclear power generation in the wake of the March 2011 disasters. Japan’s unemployment rate of 4.6% is low compared to many other developed economies, but is relatively high by domestic standards as the rate has historically ranged between 3.0% and 3.5%. As of 2012, the International Monetary Fund estimates Japan’s public debt at about 235% of GDP – the highest percentage among advanced economies. The national Diet voted in 2012 to raise the consumption tax from 5% to 10% in stages by 2015 to help reduce the fiscal imbalance.

Economic issues featured prominently in the Diet Lower House election of December 2012, in which the Liberal Democratic Party (LDP) returned to power after three years of government led by the Democratic Party of Japan (DPJ). The LDP claimed 294 of the 480 Lower House seats. LDP President Shinzo Abe became Prime Minister on December 26; Abe had previously served as Prime Minister from 2006-2007. The new Abe Government has set economic recovery and revitalization as key goals and has proposed a large supplementary budget, with half earmarked for public works projects, to stimulate the economy. The Government is also expected to prod the Bank of Japan to ease monetary policy in order to tackle deflation, and will aim to stimulate growth through science and technology research and innovation.

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 17th on Transparency International's Corruption Perceptions Index in 2012, with a score of 74. The World Bank ranked Japan number 24 on its Ease of Doing Business 2013 report, covering the period June 2011 through May 2012. The 2012 Index of Economic Freedom compiled by the Heritage Foundation ranked Japan number 22, with a score of 71.6, or “mostly free.” In each instance, Japan’s ranking was slightly lower than the previous year.

Measure

Index/Ranking

Year

TI Corruption Perceptions Index

17

2012

Heritage Economic Freedom

22

2012

World Bank Doing Business

24

2013

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 challenges, many of which relate more to prevailing practices comprising the business environment rather than to government regulations. The most notable are:

  • An 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 tend to inhibit labor mobility.

The U.S. and Japanese governments have discussed these issues bilaterally under several different initiatives. In recent years, economic policy dialogues serving as the principal fora for discussing issues relating to the investment environment were 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.

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 Act 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.

The 2007 Financial Instruments and Exchange Act (amended in 2008) established a flexible regulatory system for financial markets and applied 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.

The structural reforms, revisions to Japan's legal code, and pro-active Japanese government policies to welcome FDI and promote corporate restructuring of the past decade have increased foreign investment in Japan through M&A activity. The numbers have generally tracked the performance of the broader economy, declining as Japan's economy struggled after 2008 but rebounding somewhat between January and November 2012, with the 1,652 transactions in that period representing a 10.5% increase over the corresponding period of 2011, according to estimates by RECOF, a Tokyo-based M&A consultancy. The majority of these mergers were domestic transactions, but transactions involving foreign counterparts have also increased. The number of takeover bids (TOB) in Japan exceeded 100 for the first time in 2007 but has since dropped to more modest levels, amounting to 42 between January and October 2012 according to RECOF. The total value of M&A deals involving Japanese companies between January and November 2012 was 10.4 trillion yen, up 5.5% from the previous year. Japanese M&A directed at overseas companies amounted to 6.86 trillion yen during this period, accounting for 66% of total M&A and up 16.8% from 2011, according to RECOF.

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%. Japan's Radio Law and separate Broadcasting Law also limit foreign investment in broadcasters to 20%, or 33% 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.

Though the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) was expected to begin new discussions in 2012 on the possibility of further privatization of Tokyo’s Narita International Airport, the discussions have not progressed. The GOJ had also planned to establish an "Action Plan of Airport Management Reform" by the summer of 2012, based on the proposals in the MLIT Airport Administration Study Group report completed in July 2011, but none was made. The GOJ submitted a bill to the Diet in March 2012 that would allow private firms to manage 27 airports that are currently managed by the GOJ, including larger airports like Sendai and Hiroshima, but the bill was not acted on and did not carry over to the new Diet session in January 2013.

Laws and Regulations Governing Investment

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 Ministry of Finance, and to the ministry having jurisdiction over that business sector, through the Bank of Japan within 15 days of acquiring more than 10% 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% 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 (article 6), shareholdings (articles 10, 11 and 14), interlocking corporate directorates (article 13), mergers (article 15), and acquisitions (article 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 to apply when the domestic sales amount of any one of the parties exceeds 20 billion yen and the domestic sales amount of another one of the parties exceeds five billion yen. The 20 billion yen threshold can be applied for either the acquirer or the target company, and likewise the five billion yen threshold. Also these can apply in the case where more than two companies are involved in the merger. The amendments 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's real estate sector experienced a painful contraction following the credit crunch of 2008 as prices declined. The real estate market, particularly for premium properties, has rebounded after the Bank of Japan (BOJ) began buying real estate investment trust (REIT) shares in 2010. As of December 2012, BOJ has 110 billion yen of REIT shares on its books, a very small portion of BOJ’s total assets but up substantially from just 2.2 billion yen in 2010. The small number of large real estate deals between unrelated parties, however, continues to impede recovery of the real estate market. Additionally, U.S. investors have reported isolated instances of criminal elements interfering with real estate transactions in Japan, particularly those involving distressed 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 property available 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 REITs and mutual funds that invest in property rights, although the REIT market in Japan remains relatively small. As of December 2012, there are 40 REITs listed on the Tokyo Stock Exchange (TSE). The TSE's REIT Office Index has rebounded from the all-time low it reached in December 2011, and as of December 2012 was at its highest point since January 2011.

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 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 in Japan are not subject to Japanese 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.

In June 2011, the U.S. Department of the Treasury announced that it planned to begin formal negotiation of amendments to the existing bilateral income tax treaty with Japan in order to bring the existing tax treaty into closer conformity with the current tax treaty policies of the United States and Japan.

Investment Promotion and Incentives

Since 2001, the Japanese Government has made increased inward FDI an explicit policy goal, but policies and programs to achieve this goal have changed over time. Most recently, in November 2011 the GOJ established a “Conference on Promoting Japan as an Asian Industrial Center and Direct Investment into Japan,” a task force chaired by the Parliamentary Secretary of the Cabinet Office and composed of officials from relevant government ministries. It subsequently released a “Program for Promoting Japan as an Asian Business Center and Direct Investment into Japan” with the aim of boosting investment profitability, utilizing a special zone system, and improving support structures for investment. The Conference set a target in June 2012 to double Japan's FDI stock up to 35 trillion yen by 2020, and this target was incorporated into the Comprehensive Strategy for the Rebirth of Japan, which was endorsed by the Cabinet on July 31, 2012.

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. (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 (www.jetro.org).

Post-Disaster Reconstruction Policy and Special Zone Legislation

The Diet has allocated 18.9 trillion yen to date for reconstruction of the Tohoku region that was devastated by the March 11, 2011 earthquake and tsunami. The appropriations cover the five years from FY2011 to FY2015 (designated as the “concentrated reconstruction period”). The total combines funds allocated in the three supplementary budgets passed in FY2011 and the FY2012 budget, and includes major portions for rebuilding infrastructure along with various grant programs, some to be administered by local governments. As of December 6, 2012, approximately 420 billion yen in grants had been made to 26 towns and villages to promote collective housing relocation, and approximately 396 billion yen to 53 towns and villages for public housing developments. There are calls for additional reconstruction money in the FY2013 budget.

Under GOJ guidelines, participation in Tohoku reconstruction should be open to foreign contractors and investors. Japan’s new Reconstruction Agency, established in February 2012, has hosted numerous briefings in conjunction with other agencies for foreign private companies and the diplomatic corps in Japan to promote private foreign direct investment and explain investment incentive measures in the disaster-hit areas. The Reconstruction Agency maintains a website on the reconstruction status at http://www.reconstruction.go.jp/english/, and is available at invest.tohoku@cas.go.jp to answer questions and consult with the private sector, including foreign companies, interested in investing in the disaster-hit regions.

Local governments in the Tohoku region play a central role in formulating reconstruction plans and implementing nationally-approved measures. The special economic zones legislation of 2011 includes 222 municipalities in the 11 prefectures of the affected region. Local municipalities may choose from a given menu of regulatory, tax relief, and other measures from which to craft special economic zones specific to their needs. As of December 14, 2012, 30 reconstruction promotion plans that feature special zones have been approved. The list of approved plans, and details on each, are available on the Reconstruction Agency website. While local governments are responsible for creating their own recovery plans, central government officials are providing technical assistance in drafting plans, exchanging information, and coordinating joint projects. On April 1, 2012, Corporate Coordination Promotion Offices were set up in the Reconstruction Agency’s headquarters as well as in the Tohoku Bureaus.

Another key aspect of the special measures is the possibility to rezone agricultural, residential, and industrial areas to fit local plans. Each locality has decided or will determine the aspects of its own special zone, so tax incentives and relaxed zoning may vary from locality to locality. Companies wishing to participate in Tohoku reconstruction should be aware of these circumstances, and may wish to seek a Japanese partner to negotiate the various zones and search for opportunities through the diverse proposals presented by local governments.

While Tohoku reconstruction efforts present significant potential opportunities for investors, challenges remain. According to a report submitted to the Diet by the Reconstruction Agency in November 2011, public infrastructure recovery has largely progressed according to the project plan and time schedule. However, shortages of skilled labor and construction materials have hindered progress in housing relocation and reconstruction. As a result, many local municipalities have been unable to begin housing projects and their allocated budgets have not been used. The GOJ is working with local governments to address these problems.

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 Act.

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 yen 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 Financial Action Task Force (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 any enterprises and the expropriation or nationalization of foreign investments in Japan is extremely unlikely. Historically, nationalizations of enterprises have been rare and have all involved Japanese firms: 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, and the 2010 nationalization of Japan Airlines as a part of a two-year corporate reorganization plan. The airline has since been re-privatized.

Most recently, in the wake of the March 2011 nuclear accident at the Fukushima Daiichi Nuclear Power Station, the Tokyo Electric Power Company (TEPCO) was placed under “temporary public control” when the government injected $12.5 billion through the Nuclear Damage Liability Facilitation Fund to procure a 50.1% stake in the company in May 2012. Total government support for TEPCO and its compensation payments to victims and evacuees of the nuclear accident reached $37 billion in December 2012. The utility is scheduled to pay back the funds over time, but the plan is contingent on the uncertain restart of TEPCO’s large nuclear plant on Japan’s west coast.

Dispute Settlement

There have been no major bilateral investment disputes since 1990. 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.

Legal Services

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. In March 2012, the Cabinet endorsed the draft revisions of the Act on Special Measures concerning the Handling of Legal Services by Foreign Lawyers to allow gaiben to form professional corporations and branch offices, and the amendment bill was submitted to the Diet. However, it was dropped when the Diet was dissolved in late 2012 and it is unclear whether it will be taken up again in the new session.

Courts and Arbitration

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 Japan to revoke Article 821 or more formally clarify its meaning. The Japanese Government has said it will 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.

While patent and trademark procedures in Japan have historically been costly and time-consuming, the GOJ has made strides to improve procedures in recent years. Specific complaints included the weaknesses of Japanese enforcement and legal redress; for example, judges are not adequately trained or that court procedures do not adequately protect business-confidential information required to file a case. In response, 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 an IPR court has been established. 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 all 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. In place since January 2008, 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. In May 2011, the GOJ enacted a partial amendment to the Unfair Competition Prevention Law that protects trade secrets from being disclosed during court trials and makes it illegal to sell items designed to circumvent technological protection measures, even if the device has other legal uses. Both of these changes address specific issues of concern with the previous law. The partial amendment came into enforcement on December 1, 2011.

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, and has 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 undertake 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

Stock Exchanges

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 400 listed companies participate as of December 2012. 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. However, in March 2012 AIM was integrated into TSE and rebranded as “Tokyo PRO Market.” As of December 2012, only three companies were listed on the Tokyo PRO Market, out of 2,303 total listed on TSE.

Japan's stock exchanges face competitive pressures. In 2012, 56 firms delisted from the TSE. Other major stock exchanges in Asia -- including Taiwan, Hong Kong, Seoul, and Singapore – continue to seek stock listings by Japanese companies, and media reports indicate that some Japanese firms chose to conduct initial public offerings of shares offshore. In part to improve their competitiveness internationally, Japan’s two biggest stock exchanges, Tokyo and Osaka, completed a merger on January 1, 2013. Cash equity trading will be consolidated on the Tokyo Exchange in July 2013, while derivatives trading is slated to be consolidated on the Osaka Exchange in January 2014.

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 to 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 receiving an investment from or being acquired by a domestic firm with which they have a pre-existing business relationship.

After the Companies Act took full effect in 2007, expanding the types of M&A structure available in the Japanese market, many companies adopted defensive measures against hostile takeovers, though the prevalence of such measures has since declined. The most common of these are "advance warning systems" or "poison pill"-type rights distribution plans. While the financial crisis starting in 2008 reduced the threat of hostile takeovers by reducing available capital, the 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 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 fully entered into force in May 2007 as the Companies Act, 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 allowed 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.

Changes in Corporate Governance

Under the 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 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 Companies Act makes these options available to all listed companies. Unfortunately, very few listed Japanese companies have adopted the board committee system. Companies can also 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 were a disincentive for foreign investors, the Japanese Government in the last few years has taken an increasingly strong stance towards corporate misconduct. In March 2012, the Financial Services Agency (FSA) implemented an amendment to corporate disclosure rules to require disclosure of information on the degree of independence of outside directors and outside company auditors, such as the relationship between the company and the current or previous employer of those outside directors/auditors. In addition, FSA launched a review of existing regulation and government supervision of Japan's asset management sector. The FSA has recently published draft amendments aimed at reducing the likelihood of cases like the AIJ Investment Advisors scandal, which involved fraudulent handling of pension fund assets by an investment management firm.

Broadly, the FSA's proposed amendments are aimed at introducing systems to help domestic trust banks and pension funds verify financial information provided by discretionary investment management companies, as well as increasing the volume of information which discretionary investment management companies are required to provide. In addition, the FSA proposes implementing heavier penalties for false statements made by discretionary investment management companies and introducing a more rigorous system of regulatory supervision and inspection. Following the proposals, the FSA has also imposed administrative punishments (including suspension of certain business operations) on three investment advisors who managed investments for the fund which AIJ is suspected of defrauding.

In 2010 the Ministry of Justice (MOJ) convened a Legislative Advisory Council having the authority to consider amendments to the Companies Act of 2005. The 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 at the outset. However, TEPCO's failure to take steps that would have prevented the March 2011 nuclear disaster, as well as high-profile Olympus and AIJ scandals that resulted from lax corporate governance, sparked renewed interest in corporate governance reform in 2011. In August 2012, MOJ published and submitted to the Justice Minister draft amendments to the Companies Act with an accompanying resolution that "there is the need to establish discipline in the rules and regulations of financial instruments exchanges to the effect that listed companies shall strive to secure at least one independent board member that is an outside director." Although MOJ did not recommend a change in the law to require listed company boards to have at least one outside director – due at least in part to opposition by Japanese business groups – the amendments would require those companies which do not have an outside director to disclose why it considers the appointment of an outside director as inappropriate. The amendments also create an alternative structure where companies may institute an audit and supervisory committee (kansa kantoku iinkai setchi geisha) whose members do not serve as directors. It is expected that the amendment bill will be submitted to the Diet in early 2013. While viewed as a positive step, the international business community has expressed concern that the amendments do not go far enough to strengthen corporate governance.

In 2009, the TSE implemented new restrictions on private placements to protect the interests of shareholders and published its Listing System Improvement Action Plan. The plan sets out steps to enhance corporate governance, improve disclosure, and improve the governance of group companies. At the end of 2009 the TSE released its revised Principles of Corporate Governance for Listed Companies, the first revision since their formulation in 2004, adding points to enhance corporate governance not only of the parent company, but of the corporate group as a whole; strengthen statutory auditors' functions; and identify suitable governance models. The TSE published a "TSE Listed Companies White Paper on Corporate Governance,” and revised its requirements to handle earnings forecast disclosure in a “practical manner” in 2011. In March 2012, TSE relaxed rules for listed firms’ earnings forecasts. Firms now have more flexibility to choose items to include, how to present items, and which periods to cover. The changes are intended to steer firms preparing disclosure in the direction of dialogue with investors, rather than “perfunctory conformation with rules,” and came into effect with TSE financial statement filings for the fiscal year ending March 2012. In response to the MOJ Subcommittee's recommendations on corporate governance, TSE has requested that its listed companies make efforts to secure an independent outside director.

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 1990’s as Japan's banking system came close to collapse.

Within a 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 a March 2011 study by Nomura Holdings Inc., the cross-shareholding ratio (market value basis) in FY ended March 2011 was a record-low 11.1%, a 0.4% decline from the previous year.

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.

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 a final decision has not been made on the mandatory introduction of International Financial Reporting Standards (IFRS). In June 2011, the FSA announced it would delay its road map towards adoption of IFRS for publicly traded companies due to concerns over additional costs for Japanese companies struggling after the March 11 earthquake. The FSA's road map originally indicated it would be mandatory for Japanese companies to report under IFRS in 2015 or 2016. The FSA said instead there will be a transition period of five to seven years prior to mandatory adoption in order to allow companies sufficient time to prepare for the new reporting standard.

There has been greater disclosure of proxy voting during the past few 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 individual capital gains is 20%. However, under special policy measures intended to stimulate capital markets, Japan applied a special 10% capital gains tax rate on the proceeds of sales of listed stocks through 2011, and was subsequently extended to December 2013 for capital gains of less than 5 million yen and for dividends on listed shares of less than 1 million yen. Starting January 1, 2014, earned income from new investments of up to 1 million yen will be exempt from capital gains and dividend tax for up to 10 years. The program will be in effect until December 31, 2016, during which time taxpayers can make an investment of up to 1 million yen in stocks and stock funds each year, aggregating to a maximum of 3 million yen in total.

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 10% capital gains tax rate will apply if the sale is made prior to public listing in an M&A transaction and, from 2008, a 10% 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. Since bankruptcy trustees had limited powers to oversee restructuring, most judicial bankruptcies ended in liquidation, often at distressed prices. 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. In April 2012, the Diet passed legislation to amend the Postal Privatization Laws that were first enacted under Prime Minister Koizumi in 2005. Among other things the revised legislation (1) changes the group’s organizational structure from a five company structure to a four company structure by requiring the mail delivery company and the postal network company to merge; (2) removes the deadline to fully privatize Japan Post Insurance and Japan Post Bank; (3) mandates that Japan Post group provide insurance and banking services universally in an integrated manner, which will raise costs to the Japan Post system and discourage the selling of private sector products through the Japan Post’s post office network; and (4) substantially eases new product expansion, particularly after 50 percent of the postal financial entity’s shares are sold.

Also, the Japan Post Company, which was established on October 1, 2012 through merger of the postal operating entities, should provide private companies access to its network comparable to that given to Japan Post entities, and select and distribute financial products of private providers through its network transparently and without discrimination. In addition, Japan should implement measures to prevent cross-subsidization among the Japan Post businesses and related entities, such as ensuring the Japan Post companies’ strict compliance with the Insurance Business Law’s “arm’s length” rule and requiring adequate financial disclosures to demonstrate that cross-subsidization is in fact not occurring.

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.

In addition, U.S. private equity firms can still face challenges when seeking to make significant investment in “strategic industries” deemed important to Japan’s national interests. Private equity buyout deals in Japan during 2012 totaled only USD 3.5 billion, which is 4% of the value in the United States.

Japan does not have a 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 yen (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, 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 yen. 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, frequently 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 popular expectations that the DPJ-led government would move to eliminate amakudari after assuming power in 2009. However, successive DPJ governments did not make the issue a 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 2012, 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, Colombia, Papua New Guinea, Kuwait, and Iraq, as well as a trilateral agreement with China and the Republic of Korea. The Japanese Government is currently negotiating bilateral BITs with the Kingdom of Saudi Arabia, Kazakhstan, Angola, and Uruguay. The government is also preparing to negotiate BITs with other countries possessing abundant natural resources, including Qatar, Algeria and the Ukraine.

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, India and Peru, as well as a multilateral EPA with all ten members of the Association of Southeast Asian Nations (ASEAN). It is negotiating bilateral EPAs with Australia, the Gulf Cooperation Council states, the Republic of Korea, Colombia and Mongolia, and has agreed to open official negotiations on an FTA with the European Union and a trilateral EPA with China and the Republic of Korea.

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. Throughout most of the post-war period, these 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, but mobility among firms of skilled and white-collar labor, at both the mid-level and executive level, remains low. Demographic pressures – fewer young workers due to the long-term trends of a declining birth rate 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.

Labor Unions

Although labor unions play a role in the annual determination of wage scales throughout the economy, that role has been shrinking. The FY2012 Ministry of Health, Labor and Welfare (MHLW) "White Paper on Labor Economy" estimated that union membership as of June 30, 2011 had fallen by 93,000 from the previous year to 9.96 million people. This figure has been in constant decline since it peaked at 12.70 million in 1994. 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 LDP regaining power in December 2012, labor unions have expressed some concerns over the prospect of more conservative labor policies, as DPJ-led governments had been seen as more sympathetic to union issues than previous LDP administrations.

Employment Patterns and Labor Force Composition

While investors should be aware of Japan's high wage structure, growth in average wages in recent years has been slow, a situation that largely reflects the state of the economy and the increased use of "non-regular" employees. According to the MHLW White Paper, total cash salary, after rising in 2005-2006, fell steadily from 2007-2009, increased by 0.6% in 2010, and fell again by 0.2% in 2011. While Japan has accepted highly skilled foreign labor, Japanese firms have depended overwhelmingly on the local labor market to supply workers. As of the end of 2010, the number of registered foreign nationals fell 2.4% from the prior year to 2.13 million persons (or 1.67% of Japan’s population of 128 million). The number of foreign nationals newly entering Japan for the purpose of employment also dropped in 2010 to 52,503, a decrease of 8% from the prior year, according to the Ministry of Justice "White Paper on Immigration Control 2011."

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. In recent years, re-hiring of employees on non-regular status after retirement is on the rise.

According to the FY2012 "White Paper on Children and Youths" by the Cabinet Office, 32.3% of employees aged 15-24, 26.8% of employees aged 25-29, 25.6% of employees aged 30-34 and 28.1% of employees aged 35-44 were "non-regular" workers in FY2011. There remains deep concern among Japanese government policy makers that the number of younger workers in "non-regular" status remains stubbornly high and that the ability of such workers to find permanent employment will decline as they get older. These "non-regular" employees bore the brunt of corporate adjustment to the worldwide recession that began in September 2008, with companies reducing their recruitment of new college graduates into the work force. According to the MHLW “White Paper on Labor Economy,” the ratio of non-regular employees in 2011 increased slightly from the previous year to 35.1%. The White Paper points out that although there are many who choose to work as “non-regular workers” to suit their own purposes, such as flexible working hours, statistics show that in 2010, approximately 22.5% of all non-regular workers were in such status because they were unable to land “regular” jobs. These trends coincide with a persistent decline in labor force participation by young people (age 15 to 34). According to MHLW, the number of Japanese aged 15-34 participating in the labor force fell to 17.43 million in 2011, and has accounted for less than 30% of the total labor force since 2008.

Government Measures to Increase Workforce Participation

In the face of population decline and a rapidly aging society, the Japanese Government has pursued measures to increase participation and retention of older workers in the labor force. A revision to the “Employment Stability Law for the Elderly” passed the Diet in August 2012, and requires companies to introduce employment systems allowing employees reaching retirement age (generally set at 60) to continue working until 65, if they desire. The revised law will enter into force in April 2013. The Government is also pursuing work-life-balance measures for families, such as by increasing the number of day care facilities and encouraging companies to make it easier for their employees to take childcare leave, in order to boost women’s participation in the workforce. The long-term effectiveness of these measures remains to be seen.

Dispatch Work

In response to public criticism after many manufacturers terminated contracts with staffing (dispatching) companies following the global financial crisis of 2008, the Bill to Partially Revise the Labor Dispatch Law was submitted to the Diet in early 2010. This bill was intended to drastically limit dispatch work and prohibit dispatch to factories. Nevertheless, the bill did not pass in 2010 or 2011, due to the political opposition claiming that the law’s revision would have adverse effects on corporate earnings and domestic employment. The DPJ compromised with the opposition and accepted a major modification to the bill which would allow dispatch to factories, and this modified version finally passed the Diet in April 2012. The new law, which bans dispatch contracts of 30 days or less except in certain narrow circumstances, went into force on October 1, 2012.

Pensions

Japan's legislature passed the Pension Security Enhancement Act in August 2011, which became effective January 1, 2012. Provisions of the Act will allow employees to contribute to an employer-sponsored defined contribution (DC) plan for the first time. Previously, only employers could contribute to a DC plan on behalf of employees. Under the new rules, employee contributions cannot exceed employer contributions. The limit on combined employer and employee contributions to a DC plan will remain the same: 51,000 yen per month if the employer sponsors only one occupational DC plan for employees or 25,500 yen if the employer also sponsors a defined benefit (DB) plan. Both employer and employee contributions receive preferential tax treatment. The Act also extends DC coverage to workers from age 60 or younger to age 65 and below.

There are two types of DC plans in Japan: employer-sponsored plans for employees, and individual plans available to the self-employed and to workers of employers who do not sponsor a pension plan. Contributions receive favorable tax treatment. In the case of employer-sponsored plans, contributions are recorded as an expense by the company and are 100% tax deductible for the participant; for individual plans, the entire contribution is tax deductible for the participant up to the contribution limit, currently 816,000 yen annually. Voluntary private pension plans in Japan (including DC and employer-sponsored defined-benefit (DB) plans) supplement the country's two-tiered public pension system, which comprises a flat-rate plan for all residents under the national pension program and an earnings-related plan under the employees' pension insurance program.

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 and Foreign Portfolio Investment Statistics

Between 1998 and December 2011, Japan's stock of FDI increased from 3.0 trillion yen to 17.5 trillion yen. In the same period investment inflows were generally strong, although net outflow has been observed for the last two years. All data in the tables below are current as of December 2012. Negative figures indicate net outflow.

Table 1a: Net FDI Inflows (Unit: billion dollars; balance-of-payment basis)

JFY 2002

JFY 2003

JFY 2004

JFY 2005

CY 2006

9.09

6.24

7.81

3.22

-6.78

         

CY 2007

CY 2008

CY2009

CY2010

CY2011

22.18

24.55

11.84

-1.36

-1.70

 

Table 1b: Ratio of Inward to Outward FDI (balance-of-payment basis)

JFY 2002

JFY 2003

JFY 2004

JFY 2005

CY 2006

1 : 3.5

1 : 4.6

1 : 4.0

1 : 14.1

n/a

         

CY 2007

CY 2008

CY2009

CY2010

CY2011

1 : 3.3

1 : 5.3

1 : 6.3

n/a

n/a

         

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/country2_e_cy11.xls

http://www.jetro.go.jp/en/reports/statistics/data/country1_e_cy11.xls

Table 2: Foreign Direct Investment in Japan, by country (Unit: million dollars; net and flow; balance-of-payment basis)

 

CY2007

CY2008

CY2009

CY2010

CY2011

North America

12,709

12,005

1,712

3,014

-3,120

 

U.S.A.

13,270

11,792

1,831

2,961

-3,197

Canada

-561

213

-119

53

76

Asia

1,605

3,381

1,093

3,123

1,384

 

China

15

37

-137

314

109

Hong Kong

47

257

-81

698

125

Taiwan

36

66

57

21

111

Korea

221

279

255

274

197

Singapore

1,282

2,716

756

1,575

782

Thailand

1

6

24

9

-1

India

3

1

14

4

9

W. Europe

4,785

4,861

8,210

198

1,203

 

Germany

-813

1,185

389

2,205

18

U.K.

540

-1,289

5,629

4,817

1,792

France

504

177

371

1,128

3,438

Netherlands

-390

2,692

2,584

-7,733

3

Belgium

148

-2,040

14

-479

-556

Luxembourg

484

477

543

381

-406

Switzerland

1,162

1,873

-990

51

69

E. Europe, Russia

1

5

1

6

0

L. America

2,831

4,020

690

-7,724

-1,388

 

Mexico

0

0

0

-7,321

-248

Brazil

0

0

-8

2

1

Cayman Is.

1,480

3,592

965

616

-1,294

Oceania

215

258

50

-17

90

Middle East

3

-2

23

0

142

Africa

33

21

61

36

-13

TOTAL

22,181

24,550

11,839

-1,359

-1,702

Source: http://www.jetro.go.jp/en/reports/statistics/data/country2_e_cy11.xls

Table 3: Japan’s FDI inward stock by country/region (Unit: million dollars)

 

end of 2007

end of 2008

end of 2009

end of 2010

end of 2011

North America

45,947

75,680

76,184

73,900

72,863

 

U.S.

44,795

74,344

75,003

72,497

70,908

Canada

1,152

1,336

1,181

1,403

1,955

Asia

9,390

16,769

17,336

23,279

26,671

 

China

125

225

197

399

560

Hong Kong

2,301

3,203

1,444

4,044

2,225

Taiwan

1,534

1,892

2,656

2,255

4,584

Korea

694

1,235

1,999

1,933

2,402

Singapore

4,620

10,047

10,632

13,901

16,031

Thailand

44

61

79

100

111

India

13

18

32

40

52

W. Europe

62,341

86,915

83,883

92,126

101,841

 

Germany

3,811

6,592

7,166

10,009

9,651

U.K.

5,962

6,750

7,318

9,386

15,894

France

12,776

16,233

15,208

19,193

20,505

Netherlands

26,025

36,510

36,034

36,890

39,936

Belgium

1,947

1,362

934

94

165

Luxembourg

2,267

4,000

4,262

4,842

4,228

Switzerland

3,942

7,150

4,913

5,271

6,171

E. Europe, Russia

46

63

63

77

104

L. America

15,227

23,576

20,990

23,593

22,699

 

Mexico

5

6

6

261

20

Brazil

32

40

32

38

41

Cayman Is.

10,469

17,363

16,965

18,784

18,463

Oceania

779

1,075

1,095

1,245

1,406

Middle East

20

29

51

59

208

Africa

99

275

342

387

376

TOTAL

133,888

204,433

199,991

214,722

226,224

Source: http://www.jetro.go.jp/en/reports/statistics/data/11fdistocken02.xls

Table 4: FDI in Japan, by industry (Unit: million dollars) (balance of payment basis)

 

CY2007

CY2008

CY2009

CY2010

CY2011

Manufacturing (total)

1,381

2,261

3,420

1,766

2,406

 

General machinery

-22

721

115

1,089

70

Electric machinery

-391

642

1,705

-281

1,132

Trans. equipment

331

-55

469

3,359

252

Precision machines

20

113

94

291

-251

Chemicals and pharmaceuticals

-1,010

245

307

-2,859

774

Iron, non-ferrous metals

230

124

287

233

521

Rubber & leather

35

4

6

5

6

Petroleum

935

300

-19

-144

-83

Textiles

109

-3

-8

-95

124

Food

365

-86

421

220

282

Glass & ceramics

663

212

-90

-138

-66

Non-manuf. (total)

20,800

22,289

8,349

-3,125

-4,108

 

Farming & forestry

41

1

-5

9

-5

Fish/ marine products.

-33

-

1

0

-1

Mining

0

0

-1

64

1

Finance/ Insurance

17,661

19,823

5,205

-1,503

-3,702

Wholesale & retail

1,660

1,160

1,057

-229

1,588

Services

295

473

1,343

875

794

Real estate

1,413

581

-71

216

-239

Communication

-633

-1,028

619

-3,244

-2,748

Transportation

-288

43

-90

197

-259

Construction

19

-60

16

-1

-67

TOTAL

22,181

24,550

11,839

-1,359

-1,702

Source: http://www.jetro.go.jp/en/reports/statistics/data/industry2_e_1009.xls

Table 5: Japanese Direct Investment Overseas, by country (Unit: million dollars; net and flow; balance-of-payment basis)

 

CY2007

CY2008

CY2009

CY2010

CY2011

North America

17,385

46,046

10,889

9,016

15,166

 

U.S.A.

15,672

44,674

10,660

9,193

14,730

Canada

1,713

1,372

229

-177

436

Asia

19,388

23,348

20,636

22,131

39,492

 

China

6,218

6,496

6,899

7,252

12,649

Hong Kong

1,131

1,301

1,610

2,085

1,509

Taiwan

1,373

1,082

339

-113

862

R. Korea

1,302

2,369

1,077

1,085

2,439

Singapore

2,233

1,089

2,881

3,845

4,492

Thailand

2,608

2,016

1,632

2,248

7,133

Indonesia

1,030

731

483

490

3,611

Malaysia

325

591

616

7,058

1,411

Philippines

1,045

705

809

514

1,019

India

1,506

5,551

3,664

2,864

2,326

Western Europe

20,456

22,418

17,073

14,450

39,213

 

Germany

880

3,905

2,089

-321

2,165

U.K.

3,026

6,744

2,126

4,624

14,125

France

479

1,703

1,161

551

116

Netherlands.

12,440

6,514

6,698

3,288

5,346

Sweden

254

570

160

-623

-95

Spain

10

210

162

38

124

Latin America

9,482

29,623

17,393

5,346

11,287

 

Mexico

501

315

211

688

264

Brazil

1,244

5,371

3,753

4,316

8,290

Cayman Isles

5,838

22,550

12,903

-1,848

223

Oceania

4,204

6,060

7,629

6,407

8,767

 

Australia

4,140

5,232

7,136

6,371

8,149

Middle East

958

1,138

575

-348

716

 

UAE

60

194

139

-498

207

Saudi Arabia

746

892

378

117

104

Africa

1,101

1,518

-301

-372

464

 

South Africa

82

648

143

104

459

TOTAL

73,483

130,801

74,650

57,223

115,732

Source: http://www.jetro.go.jp/en/reports/statistics/data/country1_e_cy11.xls

Table 6: Japanese Direct Investment Overseas, by industry (Unit: million dollars, net and flow; balance of payment basis)

 

CY2007

CY2008

CY2009

CY2010

CY2011

Manufacturing (total)

39,515

45,268

32,934

17,803

57,952

 

Chemicals and Pharmaceuticals

3,744

11,647

7,407

7,902

19,618

Food

12,776

3,601

8,954

2,017

8,149

Iron, non-ferrous & metals

2,202

3,152

3,738

3,873

5,017

General Mach.

2,642

3,726

4,411

4,385

5,655

Electric machinery

4,691

5,675

2,505

1,361

7,334

Transportation equipment

8,671

10,924

566

-3,582

4,132

Precision machinery

1,293

953

609

51

2,791

Rubber and leather

835

771

445

634

715

Lumber & pulp

745

734

1,207

1,068

1,268

Textiles

371

716

477

377

672

Petroleum

-280

652

-51

-837

216

Glass & ceramics

837

1,417

2,042

377

1,325

Non-manuf. (total)

33,968

85,533

41,717

39,420

577,780

 

Finance/Insurance

19,458

52,243

15,463

11,397

19,111

Wholesale & retail

4,792

13,319

8,418

1,946

12,407

Real estate

162

162

463

765

2,447

Services

1,406

2,721

1,263

1,596

4,022

Transportation

2,133

2,283

2,894

2,294

1,606

Mining

4,053

10,518

6,482

9,061

16,477

Construction

490

389

499

302

436

Farming/ forestry

93

59

10

145

250

Fisheries

64

119

36

47

-7

Communications

-331

1,675

3,870

9,899

-1,799

TOTAL

73,483

130,801

74,650

57,223

115,732

Source: http://www.jetro.go.jp/en/reports/statistics/data/industry1_e_1009.xls

Table 7: FDI Inflow Relative to GDP (balance-of-payment basis)

 

CY2007

CY2008

CY2009

CY2010

CY2011

(a) GDP/Nom

(trillion yen)

513.0

501.2

471.1

481.1

468.2

(b) FDI Inflow

(trillion yen)

2.65

2.52

1.12

-0.11

-0.14

b/a (pct)

0.52

0.50

0.24

n/a

n/a

Sources:

http://www.esri.cao.go.jp/jp/sna/data/data_list/sokuhou/files/2012/qe123/__icsFiles/afieldfile/2012/11/09/gaku-mcy1231.csv

http://www.mof.go.jp/english/international_policy/reference/balance_of_payments/ebpfdi.htm



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