Attitude toward Foreign Direct Investment
The Government of Japan explicitly promotes inward FDI and has established formal programs to attract it. Soon after taking office, the government of Prime Minister Shinzo Abe announced its intention to double Japan’s inward FDI stock to JPY 35 trillion by 2020, and reiterated that commitment in its revised economic growth strategy in June 2015. At the end of 2014, the inward FDI stock was JPY 23.34 trillion, exceeding JPY 20 trillion for the first time. For the third consecutive year, the inflow of direct investment in Japan in 2014 exceeded the outflow. In April 2014, the government constituted a new “FDI Promotion Council” comprised of government ministers and private sector advisors. An advisory committee to the Council released a report with recommendations on how Japan can improve its investment climate (available at: http://www.invest-japan.go.jp/promotion/0425/sankou_02.pdf). On March 18, 2015, the Council proposed a new five-point action plan to encourage inbound FDI and help foreigners conduct business in Japan (available at http://www.invest-japan.go.jp/promotion/promise_en.pdf). The proposals include minimizing wait times for immigration procedures; introducing free Wi-Fi for foreign visitors; and providing multi-language displays in stores, roads, railways and hospitals by March 2020, prior to the Summer Olympic/Paralympic Games in Tokyo.
Japan's stock of FDI, as a percentage of gross domestic product (GDP), stood at 4 percent at the end of 2014, compared with 34 percent on average for all Organization for Economic Cooperation and Development (OECD) member countries. While the FDI stock has risen substantially since the 1990s, Japan still has the lowest ratio of FDI as a proportion of GDP of any OECD member. The Ministry of Economy, Trade and Industry (METI) and the Japan External Trade Organization (JETRO) are the lead agencies responsible for assisting foreign firms wishing to invest in Japan. METI and JETRO have together created a “one-stop shop” for foreign investors, providing a single location—with language assistance—where those seeking to establish a company in Japan can process necessary paperwork. (Details are available at http://www.jetro.go.jp/en/invest/ibsc/). Prefectural and city governments also have active programs to attract foreign investors, but they lack many of the financial tools U.S. states and municipalities use to attract investment.
The renewed interest of the Abe administration in attracting FDI is one component of the government’s drive to revitalize the Japanese economy. Japan has largely recovered from the economic shocks caused by the March 2011 Great East Japan earthquake and tsunami, but Japan continues to face the long-term challenges of low growth, an aging population, and a shrinking workforce. The government seeks to restore Japan to a path of sustainable growth through its economic program combining aggressive monetary easing, flexible fiscal policy, and regulatory and structural reform, collectively dubbed “Abenomics.” Fiscal and monetary policies are credited with reigniting economic growth in 2013 and early 2014, but the economy stumbled following an April 2014 consumption tax hike and has struggled since to post consistent positive growth. Abe relaunched “Abenomics” in September 2015 with new goals to expand nominal GDP by 20 percent by 2020; raise the fertility rate to stabilize the population; and increase social support to allow workers with elderly relatives or children to keep working.
However, the reform component of “Abenomics,” considered essential for long-term growth and competitiveness, remains a work in progress. Additional impetus for reform should come from Japan’s participation in the Trans-Pacific Partnership (TPP), an ambitious, high-standard free trade agreement on which the United States, Japan, and ten other countries reached agreement in October 2015.
Over time, Japan must also transition toward fiscal sustainability. According to the International Monetary Fund’s World Economic Outlook, as of October 2015 Japan’s gross public debt was estimated at about 245.9 percent of GDP – the highest percentage among advanced economies. The national Diet voted in 2012 to raise the consumption tax from 5 percent to 10 percent in two stages by 2015 to help reduce the fiscal imbalance; the first stage, from 5 percent to 8 percent, was implemented on April 1, 2014. The resulting drop in domestic consumption, however, compelled PM Abe in late 2014 to postpone by 18 months—from October 2015 to April 2017—the second stage of the tax hike (from 8 percent to 10 percent). The Diet in March 2015 ratified this postponement by amending the 2012 law, but removed the clause that would allow for additional postponements beyond 2017.
In addition to business considerations relevant to investing in a mature economy, foreign investors seeking a presence in the Japanese market or to acquire a Japanese firm through corporate takeover may face additional challenges, many of which relate more to prevailing business practices rather than to government regulations. These include an insular and consensual business culture that has traditionally been resistant to unsolicited M&A, especially when initiated by non-Japanese entities; a traditional lack of independent directors on many company boards (though this is changing); 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 United States has discussed these and other issues relating to the investment environment with Japan in several different fora, including the U.S.-Japan Economic Harmonization Initiative; the U.S.-Japan Dialogue to Promote Innovation, Entrepreneurship and Job Creation; the U.S.-Japan Policy Cooperation Dialogue on the Internet Economy; and bilateral negotiations on non-tariff measures (NTMs) in connection with the TPP.
Other Investment Policy Reviews
The World Trade Organization (WTO) conducted its most recent review of Japan’s trade policies in March 2015 (available at https://www.wto.org/english/tratop_e/tpr_e/tp410_e.htm).
The OECD released its biennial Japan economic survey results on April 15, 2015 (http://www.oecd.org/japan/economic-survey-japan.htm).
UNCTAD has not conducted any recent investment policy reviews of Japan.
Laws/Regulations on Foreign Direct Investment
Major laws affecting FDI into Japan include the Foreign Exchange and Foreign Trade Act, the Companies Act, and the Financial Instruments and Exchange Act. Japan has an independent judiciary, and Japan’s civil courts enforce property and contractual rights and do not discriminate against foreign investors.
A series of revisions to Japan's legal code over the past decade has served to encourage inbound FDI through M&A activity, even as overall levels remain low by OECD standards. Measures include 2005 revisions to the Companies Act, which 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; and the 2007 Financial Instruments and Exchange Act (last amended in 2008), which established a flexible regulatory system for financial markets and applied a uniform set of rules for similar financial instruments. After peaking at 309 in 2007, the number of annual inbound M&A transactions declined to 112 in 2012, but rebounded to 205 in 2015.
JETRO serves as the investment promotion agency within the Japanese government to facilitate foreign investment in Japan. JETRO’s website on “Laws and Regulations on Setting Up Business in Japan” provides information on business registration, visas, taxes, recruiting, labor regulations, and trademark/design systems and procedures in Japan. The website is available at: https://www.jetro.go.jp/en/invest/setting_up/laws.html in English, French, German, Chinese and Korean. While registration of corporate names and addresses can be completed through the internet, most business registration procedures must be completed in person. In addition, corporate seals and articles of incorporation of newly established companies must be verified by a Japanese notary. In April 2015, JETRO opened a one-stop business support center in Tokyo so that foreign companies can complete all necessary legal and administrative procedures in one location.
The Basic Law on Small and Medium Sized Companies in Japan has multiple standards to define SMEs in different sectors. The Japanese government defines a SME in the manufacturing, construction, and transportation industries as either having less than JPY 300 million in capital or 300 or fewer employees. In the service sector, the government defines an SME as either having less than JPY 50 million in capital or 100 or fewer employees. In 2014, the Small and Medium Sized Enterprises Agency announced a three-year tax incentive package to promote SME investment in new technologies or devices that can help improve productivity. Foreign SMEs with operations in Japan are also eligible to apply for this tax incentive package. However, the firm is not eligible for this program if the parent company of a foreign SME exceeds the SME threshold as defined above, and if more than 50 percent of its capital comes from the parent company or its overseas headquarters.
Industrial Promotion/National Strategic Special Zones
The National Strategic Special Zones Advisory Council chaired by the Prime Minister has designated a total of eleven National Strategic Special Zones (NSSZ) to implement selected deregulation measures intended to attract new investment and boost regional growth. Each zone has focused reform efforts in areas such as labor, education, technology, agriculture, or healthcare. The zones include Niigata City; Tokyo Metropolitan Area; Kansai region (Osaka, Hyogo, and Kyoto); Yabu City (in Hyogo Prefecture); Okinawa; Fukuoka City; Senboku City (Akita Prefecture); Sendai City (Miyagi Prefecture); Aichi Prefecture; Hiroshima Prefecture and Imabari City; and Kitakyushu City (Fukuoka Prefecture). Further details on the initiative are available at http://www.kantei.go.jp/jp/singi/keizaisaisei/pdf/dai2-3en.pdf.
In an effort to promote tourism-related investment, the Abe administration in 2014 introduced legislation in the Diet that would provide the legal framework for allowing privately-operated casinos as part of integrated resorts, although no action has been taken on the bill as of early 2016. Opposition to the bill among some elements of the ruling coalition, and the absence of strong public support, make prospects for passage of the legislation unclear.
The property tax system for real estate acquisition or transfer includes registration and license taxes, acquisition tax, capital gains tax (which differs depending on the duration property was held), and official document taxes. In general, the government has been increasing taxes in a number of areas to discourage asset holding and encourage investment in the real economy. In January 2015, the government increased its inheritance and gift taxes, although it does provide some temporary exemption thresholds for property, aimed at promoting intergenerational transfer of land and other real assets. Japan's real estate sector experienced a painful contraction following the credit crunch of 2008, but rebounded after the Bank of Japan (BOJ) began buying real estate investment trust (REIT) shares in 2010. In April 2013 the BOJ increased its purchases of riskier assets as part of its aggressive monetary easing policy, and as of December 2015, the BOJ had JPY 270 billion of REIT shares on its books—a very small portion of BOJ’s total assets of JPY 383 trillion, but up substantially from just JPY 2.2 billion at the end of 2010. The BOJ’s adoption of a negative interest rate in February 2016 has spurred a decline in mortgage rates at many banks. Additionally, U.S. investors in the past have reported isolated instances of criminal elements interfering with real estate transactions in Japan, particularly those involving distressed assets.
Limits on Foreign Control and 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, Article 821 of the 2005 Companies Act appears to prohibit branches of foreign corporations from engaging in transactions in Japan on a continuous basis. This wording has created uncertainty among foreign corporations that conduct their primary business in the Japanese market through a branch company. 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, and 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.
Japan has gradually eliminated most formal restrictions governing FDI. One remaining restriction limits foreign ownership in Japan's former land-line monopoly telephone operator, Nippon Telegraph and Telephone (NTT), to 33 percent. Japan's Radio Law and separate Broadcasting Law also limit 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.
While not a limit on foreign control per se, Japan does restrict development of retail and commercial facilities 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.
Japan has privatized many state-owned enterprises over the last two decades. In other instances, it has reorganized government-run businesses as separate companies, although the government remains the sole or primary shareholder of the reorganized entity.
A bill was enacted in June 2013 to allow the sale of airport management rights for 28 airports owned and operated by the central government, including large regional airports like Sendai and Hiroshima, as well as 65 airports owned and operated by local governments. Under the program, airport operators must initiate the privatization request, which must be approved by the central government after a stakeholder review process. If approved, private firms would be able to bid on operation rights at these airports while the central or local governments would maintain ownership of the land and buildings. As of early 2016, Kansai, Takamatsu, Sendai, New Chitose, and Fukuoka airports have initiated requests for privatization. In July, Sendai Airport will be handed-off to a joint venture which seeks to invest in significant airport improvements over a 30-year period.
The Government of Japan sold shares in Japan Post Holdings (JPH), the parent company of the Japan Post Group, and two financial subsidiaries – Japan Post Bank (JPB) and Japan Post Insurance (JPI) – in an initial public offering (IPO) on November 4, 2015. The IPO sold 11 percent of available shares in three of four Japan Post entities. The final entity, the postal service subsidiary Japan Post Co., will remain a wholly owned subsidiary of JP Holdings. Follow on sales of shares in the three companies will take place over time, as the Postal Privatization Law requires the government to sell a majority share (up to two-thirds of all shares) in JPH, and all shares of JPB and JPI, as soon as possible. Timing for additional sales has not yet been determined.
Screening of FDI
The Foreign Exchange and Foreign Trade Act governs investment in sectors deemed to have national sovereignty or national security implications. 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 obtain approval from 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, effective in 2009, reduced the administrative burden on foreign investors so as to facilitate inward investment. However, U.S. private equity firms can still face challenges when seeking to make significant investments in strategic industries deemed important to Japan’s national interests.
Several sections of Japan’s Anti-Monopoly Act (AMA) are relevant to FDI. 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 that these provisions are not intended to discriminate against foreign companies or discourage FDI. Amendments to the AMA enacted in December 2013 include the abolition of the Japan Fair Trade Commission (JFTC) hearing (Shinpan) system and transferred the authority to hear appeals of JFTC rulings to the Tokyo Municipal Court. The revised bill took effect April 1, 2015. On March 8, 2016 the Japanese government submitted a bill to the Diet to partially revise the Anti-Monopoly Law (AML), as part of an omnibus bill on TPP, which calls for revision of a total of 11 bills to make them consistent with the TPP agreement. The revised bill calls for a creation of a system under which the Japan Fair Trade Commission (JFTC) and business operator(s) can resolve alleged AML violation cases through a mutual agreement. The Japanese government expects the change to increase the chances of JFTC and business operator(s) reaching an amicable solution in a timely manner.