Policies Towards Foreign Direct Investment

Direct inward investment into Japan by foreign investors has been open and free since amendment of the Foreign Exchange and Foreign Trade Act (FEFTA) in 1998. In general, the only requirement for foreign investors making investments in Japan is to submit an ex post facto report to the relevant ministries. The Act was amended in 2019, updating Japan’s foreign investment review regime.  The legislation became effective in May 2020 and lowered the ownership threshold for pre-approval notification to the government for foreign investors from ten percent to one percent in industries that could pose risks to Japanese national security. There are waivers for certain categories of investors.

The Japanese Government explicitly promotes inward FDI and has established formal programs to attract it. In 2013, the government of Prime Minister Shinzo Abe announced its intention to double Japan’s inward FDI stock to JPY 35 trillion (USD 318 billion) by 2020 and reiterated that commitment in its revised Japan Revitalization Strategy issued in August 2016. At the end of 2019, Japan’s inward FDI stock was JPY 33.9 trillion (USD 310 billion), a 10.4 percent increase over the previous year. The Suga Administration’s interest in attracting FDI is one component of the government’s strategy to reform and revitalize the Japanese economy, which continues to face the long-term challenges of low growth, an aging population, and a shrinking workforce.

The government’s “FDI Promotion Council,” composed of government ministers and private sector advisors, releases recommendations on improving Japan’s FDI environment. In a May 2018 report ( http://www.invest-japan.go.jp/documents/pdf/support_program_en.pdf ), the council decided to launch the Support Program for Regional Foreign Direct Investment in Japan, recommending that local governments formulate a plan to attract foreign companies to their regions.

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 Tokyo location—with language assistance—where those seeking to establish a company in Japan can process the 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.

Foreign investors seeking a presence in the Japanese market or seeking to acquire a Japanese firm through corporate takeovers may face additional challenges, many of which relate more to prevailing business practices rather than to government regulations, although this varies by sector. These challenges include an insular and consensual business culture that has traditionally resisted unsolicited mergers and acquisitions (M&A), especially when initiated by non-Japanese entities; a lack of multiple independent directors on many company boards (even though board composition 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. Business leaders have communicated to the Embassy that regulatory and governmental barriers are more likely to exist in mature, heavily regulated sectors than in new industries.

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. 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 providers of broadcast infrastructure. 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.

The Foreign Exchange and Foreign Trade Act, as amended, governs investment in sectors deemed to have national security or economic stability implications. If a foreign investor wants to acquire over one percent of the shares of a listed company in the sectors set out below, it must provide prior notification and obtain approval from the Ministry of Finance and the ministry that regulates the specific industry. Designated sectors include weapons manufacturers, nuclear power, agriculture, aerospace, forestry, petroleum, electric/gas/water utilities, telecommunications, and leather manufacturing. There are waivers for certain categories of investors.

U.S. investors, relative to other foreign investors, are not disadvantaged or singled out by any ownership or control mechanisms, sector restrictions, or investment screening mechanisms.

Other Investment Policy Reviews

The World Trade Organization (WTO) conducted its most recent review of Japan’s trade policies in November 2020 (available at directdoc.aspx (wto.org) ).

The OECD released its biennial Japan economic survey results on April 15, 2019 (available at http://www.oecd.org/japan/economic-survey-japan.htm ).

Business Facilitation

The Japan External Trade Organization is Japan’s investment promotion and facilitation agency. JETRO operates six Invest Japan Business Support Centers (IBSCs) across Japan that provide consultation services on Japanese incorporation types, business registration, human resources, office establishment, and visa/residency issues. Through its website ( https://www.jetro.go.jp/en/invest/setting_up/ ), the organization provides English-language information on Japanese business registration, visas, taxes, recruiting, labor regulations, and trademark/design systems and procedures in Japan. While registration of corporate names and addresses can be completed online, 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 notary, although there are indications of change underway. When he took office in September 2020, Prime Minister Suga called for reforms to eliminate use of seals and paper-based process along with establishment of a new Digital Agency as part of his policy agenda of digitizing the provision of government services.

According to the 2020 World Bank “Doing Business” Report, it takes eleven days to establish a local limited liability company in Japan. JETRO reports that establishing a branch office of a foreign company requires one month, while setting up a subsidiary company takes two months. While requirements vary according to the type of incorporation, a typical business must register with the Legal Affairs Bureau (Ministry of Justice), the Labor Standards Inspection Office (Ministry of Health, Labor, and Welfare), the Japan Pension Service, the district Public Employment Security Office, and the district tax bureau. JETRO operates a one-stop business support center in Tokyo so that foreign companies can complete all necessary legal and administrative procedures in one location. In 2017, JETRO launched an online business registration system that allows businesses to register company documents but not immigration documentation.

No laws exist to explicitly prevent discrimination against women and minorities regarding registering and establishing a business. Neither special assistance nor mechanisms exist to aid women or underrepresented minorities.

Outward Investment

The Japan Bank for International Cooperation (JBIC) provides a variety of support for outward Japanese foreign direct investment. Most such support comes in the form of “overseas investment loans,” which can be provided to Japanese companies (investors), overseas Japanese affiliates (including joint ventures), and foreign governments in support of projects with Japanese content, typically infrastructure projects. JBIC often supports outward FDI projects to develop or secure overseas resources that are of strategic importance to Japan, for example, construction of liquefied natural gas (LNG) export terminals to facilitate sales to Japan and third countries in Asia. More information is available at https://www.jbic.go.jp/en/index.html .

Nippon Export and Investment Insurance (NEXI) supports outward investment by providing exporters and investors insurance that protects them against risks and uncertainty in foreign countries that is not covered by private-sector insurers. Together, JBIC and NEXI act as Japan’s export credit agency.

Japan also employs specialized agencies and public-private partnerships to target outward investment in specific sectors.  For example, the Fund Corporation for the Overseas Development of Japan’s Information and Communications Technology and Postal Services (JICT) supports overseas investment in global telecommunications, broadcasting, and postal businesses.

Similarly, the Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development (JOIN) is a government-funded corporation to invest and participate in transport and urban development projects that involve Japanese companies.  The fund specializes in overseas infrastructure investment projects such as high-speed rail, airports, and smart city projects with Japanese companies, banks, governments, and other institutions (e.g., JICA, JBIC, NEXI).

Finally, the Japan Oil, Gas and Metals National Corporation (JOGMEC) is a Japanese government entity administered by the Agency for Natural Resources and Energy under METI.  JOGMEC provides equity capital and liability guarantees to Japanese companies for oil and natural gas exploration and production projects.

Japan places no restrictions on outbound investment.

The 1953 U.S.-Japan Treaty of Friendship, Commerce, and Navigation gives national treatment and most favored nation treatment to U.S. investments in Japan.

On January 1, 2021, the Japan-UK Comprehensive Economic Partnership Agreement entered into force, which includes a chapter on investment liberalization. The text of the agreement is available online ( https://www.mofa.go.jp/files/100111408.pdf ). In November 2020, Japan signed the Regional Comprehensive Economic Partnership (RCEP) with the ten ASEAN nations, Australia, China, the Republic of Korea, and New Zealand. RCEP also includes a chapter on investment. The text of the agreement is available online (https://rcepsec.org/legal-text/).

As of February 2021, Japan had concluded 35 bilateral investment treaties (BITs) (Argentina, Armenia, Bangladesh, Cambodia, China, Colombia, Egypt, Georgia, Hong Kong SAR, Iran, Iraq, Israel, Jordan, Kazakhstan, the Republic of Korea, Kuwait, Laos, Mongolia, Morocco, Mozambique, Myanmar, Pakistan, Papua New Guinea, Peru, Russia, Saudi Arabia, Sri Lanka, Turkey, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vietnam, Oman, and Kenya). In addition, Japan has a trilateral investment agreement with China and the Republic of Korea. Japan also has 18 economic partnership agreements (EPA) that include investment chapters (with Singapore, ASEAN, Mexico, Malaysia, Philippines, Chile, Thailand, Brunei, Indonesia, Switzerland, Vietnam, India, Peru, Australia and Mongolia, the Comprehensive and Progressive Partnership for Trans-Pacific Partnership (CPTPP), UK and RCEP).

On February 1, 2019, the Japan – European Union Economic Partnership Agreement entered into force, which includes provisions related to investment. The text of the agreement is available online ( http://trade.ec.europa.eu/doclib/press/index.cfm?id=1684&title=EU-Japan-Economic-Partnership-Agreement-texts-of-the-agreement ). The Comprehensive and Progressive Agreement for Trans-Pacific Partnership went into effect on December 30, 2018. This agreement includes an investment chapter. The United States is not a signatory to this agreement. Japan is the current chair of the CPTPP commission, its second time since the agreement went into effect.

The United States and Japan have a double taxation treaty, which allows Japan to tax the business profits of a U.S. resident only to the extent that 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 corporate tax rate that nears 30 percent, serves to encourage foreign and investment funds to keep their trading and investment operations offshore.

In January 2013, the United States and Japan signed a revision to the bilateral income tax treaty, to bring it into closer conformity with the current tax treaty policies of the United States and Japan. The revision went into effect in August 2019 after ratification by the U.S Congress.

Japan has concluded 79 double taxation treaties that cover 142 countries and jurisdictions, as of February 1, 2021. More information is available from the Ministry of Finance: http://www.mof.go.jp/english/tax_policy/tax_conventions/international_182.htm .

Transparency of the Regulatory System

Japan operates a highly centralized regulatory system in which national-level ministries and government organs play a dominant role. Regulators are generally sophisticated and there is little evidence of explicit discrimination against foreign firms. Most draft regulations and impact assessments are released for public comment before implementation and are accessible through a unified portal ( http://www.e-gov.go.jp/ ). Law, regulations, and administrative procedures are generally available online in Japanese along with regular publication in an official gazette. The Japanese government also actively maintains a body of unofficial English translations of some Japanese laws ( http://www.japaneselawtranslation.go.jp/ ).

Some members of the foreign business community in Japan continue to express concern that Japanese regulators do not seek sufficient formal input from industry stakeholders, instead relying on formal and informal connections between regulators and domestic firms to arrive at regulatory decisions. This may have the effect of disadvantaging foreign firms that lack the benefit of deep relationships with local regulators. The United States has encouraged the Japanese government to improve public notice and comment procedures to ensure consistency and transparency in rule-making, and to give fair consideration to comments received. The National Trade Estimate Report on Foreign Trade Barriers (NTE), 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.

International Regulatory Considerations

The Japanese Industrial Standards Committee (JISC), administered by the Ministry of Economy, Trade, and Industry, plays a central role in maintaining Japan Industrial Standards (JIS). JISC aims to align JIS with international standards. According to JISC, as of March 31, 2020, 58 percent of Japan’s standards were harmonized with their international counterparts. Nonetheless, Japan maintains a large number of Japan-specific standards that can complicate efforts to introduce new products to the country. Japan is a member of the WTO and notifies the WTO Committee on Technical Barriers to Trade (TBT) of proposed regulations.

Legal System and Judicial Independence

Japan is primarily a civil law country based on codified law. The Constitution and the five major legal codes (Civil, Civil Procedure, Commercial, Criminal, and Criminal Procedure) form the legal basis of the system. Japan has a fully independent judiciary and a consistently applied body of commercial law. An Intellectual Property High Court was established in 2005 to expedite trial proceedings in IP cases. Foreign judgments are recognized and enforced by Japanese courts under certain conditions.

Laws and Regulations on Foreign Direct Investment

Major laws affecting foreign direct investment into Japan include the Foreign Exchange and Foreign Trade Act, the Companies Act, and the Financial Instruments and Exchange Act. The Japanese government actively encourages FDI into Japan and has sought over the past decades to ease legal and administrative burdens on foreign investors, including with major reforms to the Companies Act in 2005 and the Financial Instruments and Exchange Act in 2008. The Japanese government amended the Foreign Exchange and Foreign Trade Act in 2019.

Competition and Antitrust Laws

The Japan Fair Trade Commission (JFTC) holds sole responsibility for enforcing Japanese competition and anti-trust law, although public prosecutors may file criminal charges related to a JFTC finding. In fiscal year 2019, the JFTC investigated 99 suspected Antimonopoly Act (AMA) violations and completed 81 investigations. During this same time period, the JFTC issued 11 cease and desist orders and issued a total of 69.2 billion yen (USD 659 million) surcharge payment orders to 37 companies. In 2019, an amendment to the AMA passed the Diet that granted the JFTC discretion to incentivize cooperation with investigations and adjust surcharges according to the nature and extent of the violation.

The JFTC also reviews proposed “business combinations” (i.e., mergers, acquisitions, increased shareholdings, etc.) to ensure that transactions do not “substantially … restrain competition in any particular field of trade.” In December 2019, amended merger guidelines and policies were put into force to “deal with business combinations in the digital market.” Data is given consideration as a competitive asset under these new guidelines along with the network effects characteristic of digital businesses. The JFTC has expanded authority to review merger cases, including “Non-Notifiable Cases,” when the transaction value is more than JPY40 billion (USD 370 million) and the merger is expected to affect domestic consumers. Further, the amended policies suggest that parties consult with the JFTC voluntarily when the transaction value exceeds JPY40 billion and when one or more of the following factors is met: (i) When an acquired company has an office in Japan and/or conducts research and development in Japan;

(i) When an acquired company has an office in Japan and/or conducts research and development in Japan; (ii) When an acquired company conducts sales activities targeting domestic consumers, such as developing marketing materials (website, brochures, etc.) in the Japanese language; or

(ii) When an acquired company conducts sales activities targeting domestic consumers, such as developing marketing materials (website, brochures, etc.) in the Japanese language; or (iii) When the total domestic sales of an acquired company exceed JPY100 million (USD 920,000)

(iii) When the total domestic sales of an acquired company exceed JPY100 million (USD 920,000)

Expropriation and Compensation

Since 1945, the Japanese government has not expropriated any enterprise, and the expropriation or nationalization of foreign investments in Japan is highly unlikely.

Dispute Settlement

ICSID Convention and New York Convention

Japan has been a member of the International Centre for the Settlement of Investment Disputes (ICSID Convention) since 1967 and is also a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Enforcement of arbitral awards in Japan are provided for in Japan’s Arbitration Law. Enforcement in other contracting states is also possible. The Supreme Court of Japan has denied the enforceability of awards for punitive damages, however. The Arbitration Law provides that an arbitral award (irrespective of whether or not the seat of arbitration is in Japan) has the same effect as a final and binding judgment. The Arbitration Law does not distinguish awards rendered in contracting states of the New York Convention and in non-contracting states.

Investor-State Dispute Settlement

International Commercial Arbitration and Foreign Courts

The Japan Commercial Arbitration Association (JCAA) is the sole permanent commercial arbitral institution in Japan. Japan’s Arbitration Law is based on the United Nations Commission on International Trade Law “Model Law on International Commercial Arbitration” (UNCITRAL Model Law). Local courts recognize and enforce foreign arbitral awards.

A wide range of Alternate Dispute Resolution (ADR) organizations also exist in Japan. The Ministry of Justice (MOJ) has responsibility for regulating and accrediting ADR groups. A Japanese-language list of accredited organizations is available on the MOJ website: http://www.moj.go.jp/KANBOU/ADR/index.html .

Bankruptcy Regulations

The World Bank 2020 “Doing Business” Report ranked Japan third worldwide for resolving insolvency. 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. The Civil Rehabilitation 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.

Out-of-court settlements in Japan tend to save time and expense but can lack transparency. In practice, because 100 percent creditor consensus is required for out-of-court settlements and courts can sanction a reorganization plan with only a majority of creditors’ approval, the last stage of an out-of-court settlement is often a request for a judicial seal of approval.

There are three domestic credit reporting/ credit-monitoring agencies in Japan. They are not government-run.  They are: Japan Credit Information Reference Center Corp. (JICC, https://www.jicc.co.jp/english/index.html ‘, member companies deal in consumer loans, finance, and credit); Credit Information Center (CIC, https://www.cic.co.jp/en/index.html , member companies deal in credit cards and credit); and Japan Bankers Association (JBA, https://www.zenginkyo.or.jp/pcic/ , member companies deal in banking and bank-issued credit cards). Credit card companies, such as Japan Credit Bureau (JCB), and large banks, such as Mitsubishi UFJ Financial Group (MUFG), also maintain independent databases to monitor and assess credit.

Per Japan’s Banking Act, data and scores from credit reports and credit monitoring databases must be used solely by financial institutions for financial lending purposes.  This information is provided to credit card holders themselves through services provided by credit reporting/credit monitoring agencies.   Increasingly, however, to get around the law, real estate companies partner with a “credit guarantee association” and encourage or effectively require tenants to use its services. According to a 2017 report from the Japan Property Management Association (JPMA), roughly 80 percent of renters in Japan used such a service. While financial institutions can share data to the databases and receive credit reports by joining the membership of a credit monitoring agency, the agencies themselves, as well as credit card companies and large banks, generally do not necessarily share data with each other.  As such, consumer credit information is generally underutilized and vertically siloed.

A government-operated database, the Juminhyo or the “citizen documentation database,” is used for voter registration; confirmation of eligibility for national health insurance, national social security, and child allowances; and checks and registrations related to scholarships, welfare protection, stamp seals (signatures), and immunizations. The database is strictly confidential, government-controlled, and not shared with third parties or private companies.

For the credit rating of businesses, there are at least seven credit rating agencies (CRAs) in Japan, including Moody’s Japan, Standard & Poor’s Ratings Japan, Tokyo Shoko Research, and Teikoku Databank. See Section 9 for more information on business vetting in Japan.

Investment Incentives

The Japan External Trade Organization (JETRO) maintains an English-language list of national and local investment incentives available to foreign investors on their website: https://www.jetro.go.jp/en/invest/incentive_programs/ .

Foreign Trade Zones/Free Ports/Trade Facilitation

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.

The National Strategic Special Zones Advisory Council chaired by the Prime Minister has established a total of ten National Strategic Special Zones (NSSZ) to implement selected deregulation measures intended to attract new investment and boost regional growth. Under the NSSZ framework, designated regions request regulatory exceptions from the central government in support of specific strategic goals defined in each zone’s “master plan,” which focuses on a potential growth area such as labor, education, technology, agriculture, or healthcare. Foreign-owned businesses receive equal treatment in the NSSZs; some measures aim specifically to ease customs and immigration restrictions for foreign investors, such as the “Startup Visa” adopted by the Fukuoka NSSZ.

The Japanese government has also sought to encourage investment in the Tohoku (northeast) region, which was devastated by the earthquake, tsunami, and nuclear “triple disaster” of March 11, 2011. Areas affected by the disaster have been included in a “Special Zone for Reconstruction” that features eased regulatory burdens, tax incentives, and financial support to encourage heightened participation in the region’s economic recovery.

A revision to add “advanced data technologies” as one of targeted growth areas for NSSZs, was approved by the Diet in May 2020 and went into effect on September 1, 2020. The revision will allow regions to create “Super City National Strategic Zones,” on the condition that the zone will provide advanced services to its citizens through utilizing artificial intelligence (AI), big data or other data linkage platforms. The Cabinet Office website cited remote schooling/healthcare, cashless payment services, and one-stop administrative services as examples of such projects. The Japanese government is accepting applications for “Super City Strategic Zone Project ” as well as requests for related regulatory reforms until April 16, 2021.

Performance and Data Localization Requirements

Japan does not maintain performance requirements or requirements for local management participation or local control in joint ventures.

Japan has no general restrictions on data storage. On January 1, 2020, the U.S.-Japan Digital Trade Agreement went into effect and specifically prohibits data localization measures that restrict where data can be stored and processed. These rules are extended to financial service suppliers, in circumstances where a financial regulator has the access to data needed to fulfill its regulatory and supervisory mandate.

Real Property

Secured interests in real property are recognized and enforced. Mortgages are a standard lien on real property and must be recorded to be enforceable. Japan has a reliable recording system. Property can be rented or leased but no sub-lease is legal without the owner’s consent. In the World Bank 2020 “Doing Business” Report, Japan ranks 43 out of 190 economies in the category of Ease of Registering Property. There are bureaucratic steps and fees associated with purchasing improved real property in Japan, even when it is already registered and has a clear title. The required documentation for property purchases can be burdensome. Additionally, it is common practice in Japan for property appraisal values to be lower than the actual sale value, increasing the deposit required of the purchaser, as the bank will provide financing only up to the appraisal value.

The Japanese Government is unsure of the titleholders to 4.1 million hectares of land in Japan, roughly 20 percent of all land and an area equivalent in size to the island of Kyushu. According to a think tank expert on land use, 25 percent of all the land in Japan is registered to people who are no longer alive or otherwise unreachable. In 2015, the Ministry of Land, Infrastructure, Transportation and Tourism (MLIT) found that, of 400 randomly selected tracts of land, 46 percent was registered more than 30 years ago, and 20 percent was registered more than 50 years ago. A similar survey by the Ministry of Agriculture, Forestry and Fisheries (MAFF) found that 20 percent of farmland had a deceased owner and had not been re-registered. The government appointed a group of experts to study the matter, and the Unknown Land Owners Problem Study Group announced the results in a midterm report on June 26, 2017, and in a final report on December 13, 2017 ( http://www.kok.or.jp/project/fumei.html ). It estimated that by 2040 the amount of land without titleholders will increase to 7.2 million hectares. There are a number of reasons beyond the administrative difficulties of a title transfer as to why land lacks a clear title holder. They include: population decline, especially in rural areas; the difficulty of locating heirs, particularly if there are multiple heirs or if the deceased had no children; and the cost of reregistering land under a new name due to tax costs. Virtually all the large banks, as well as some other private companies, offer loans to purchase property in Japan.

Intellectual Property Rights

Japan maintains a comprehensive and sophisticated intellectual property (IP) regime recognized as among the strongest in the world. In 2020, Japan ranked sixth out of 53 countries evaluated by the U.S. Chamber of Commerce on the strength of IP environments. The government has operated a dedicated “Intellectual Property High Court” to adjudicate IP-related cases since 2005, providing judges with enhanced access to technical experts and the ability to specialize in intellectual property law. However, certain shortcomings remain, notably in the transparency and predictability of its system for pricing on-patent pharmaceuticals. The discriminatory effect of healthcare reimbursement pricing measures implemented by the Japanese government continues to raise serious concerns about the ability of U.S. pharmaceutical companies to have full and fair opportunity to use and profit from their IP in the Japanese market. More generally, the weak deterrent effect of Japan’s relatively modest penalties for IP infringement remains a cause for concern.

U.S. Embassy Tokyo is aware of isolated claims of U.S. IP misappropriation by Japanese state-owned or affiliated entities and presumes, given the vast volume of bilateral trade, that additional cases across public and private sectors may exist. That said, the Japanese government has taken several steps in recent years to improve protection of trade secrets. Revisions to the Unfair Competition Prevention Act (UCPA) went into effect July 2019, which classifies the improper acquisition, disclosure, and use of specified protected data as an act of unfair competition, offering civil and criminal remedies to stakeholders. The revisions also extend the scope of unfair competition to include attempts to circumvent technological restriction measures. Japan has taken a leading role in promoting the expansion of IP rights in recent regional trade agreements, including:

• RCEP: On November 15, 2020, Japan joined 10 ASEAN member states, plus Australia, China, New Zealand, and the Republic of Korea, in signing the Regional Comprehensive Economic Partnership. This regional trade agreement includes a comprehensive IP chapter, much of it repeating norms set out in TRIPS, but also offering unique protections for genetic resources, traditional knowledge, and folklore.
• Japan-UK CEPA: The Japan-UK Comprehensive Economic Partnership Agreement signed on October 23, 2020, and in force beginning January 1, 2021, contains an IP chapter including provisions on copyrights, trademarks, geographical indications, industrial designs, patents, regulatory test data exclusivity, new plant varieties, trade secrets, domain names, and enforcement.
• Japan-EU EPA: The Japan-EU Economic Partnership Agreement, which went into effect February 1, 2019, also includes a substantial IP chapter.
• CPTPP: As part of its 2018 accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Japan passed several substantive amendments to its copyright law, including measures that extended the term of copyright protection and strengthened technological protection rules.

Japan’s Customs and Tariff Bureau publishes a yearly report on goods seizures, available online in English ( http://www.customs.go.jp/mizugiwa/chiteki/pages/g_001_e.htm ). Japan seized an estimated $121.2 million worth of IP-infringing goods in 2019, a decrease of 5.2 percent over 2018. In June 2020, the Customs and Tariff Bureau of the Ministry of Finance announced the “SMART Customs Initiative 2020,” which aims to utilize cutting-edge technologies such as AI to improve the sophistication and efficiency of its operations. For additional information about national laws and points of contact at local IP offices, please see the World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Japan maintains no formal restrictions on inward portfolio investment except for certain provisions covering national security. Foreign capital plays an important role in Japan’s financial markets, with foreign investors accounting for the majority of trading shares in the country’s stock market. Historically, many company managers and directors have resisted 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, although there are signs of change. 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. All holdings of TSE-listed stocks are required to transfer paper stock certificates into electronic form.

The Japan Exchange Group (JPX) operates Japan’s two largest stock exchanges – in Tokyo and Osaka – with cash equity trading consolidated on the TSE since July 2013 and derivatives trading consolidated on the Osaka Exchange since March 2014.

In January 2014, the TSE and Nikkei launched the JPX Nikkei 400 Index. The index puts a premium on company performance, particularly return on equity (ROE). Companies included are determined by such factors as three-year average returns on equity, three-year accumulated operating profits and market capitalization, along with others such as the number of external board members. Inclusion in the index has become an unofficial “seal of approval” in corporate Japan, and many companies have taken steps, including undertaking share buybacks, to improve their ROE. The Bank of Japan has purchased JPX-Nikkei 400 exchange traded funds (ETFs) as part of its monetary operations, and Japan’s massive Government Pension Investment Fund (GPIF) has also invested in JPX-Nikkei 400 ETFs, putting an additional premium on membership in the index.

Japan does not restrict financial flows and accepts obligations under IMF Article VIII.

Credit is available via multiple instruments, both public and private, although access by foreigners often depends upon visa status and the type of investment.

Money and Banking System

Banking services are easily accessible throughout Japan; it is home to many of the world’s largest private commercial banks as well as an extensive network of regional and local banks. Most major international commercial banks are also present in Japan, and other quasi-governmental and non-governmental entities, such as the postal service and cooperative industry associations, also offer banking services. For example, the Japan Agriculture Union offers services through its bank (Norinchukin Bank) to members of the organization. Japan’s financial sector is generally acknowledged to be sound and resilient, with good capitalization and with a declining ratio of non-performing loans. While still healthy, most banks have experienced pressure on interest margins and profitability as a result of an extended period of low interest rates capped by the Bank of Japan’s introduction of a negative interest rate policy in 2016.

The country’s three largest private commercial banks, often collectively referred to as the “megabanks,” are Mitsubishi UFJ Financial, Mizuho Financial, and Sumitomo Mitsui Financial. Collectively, they hold assets approaching close to USD 8 trillion at 2020 year end. Japan’s third largest bank by assets – with more than USD 2 trillion – is Japan Post Bank, a financial subsidiary of the Japan Post Group that is still majority state-owned, 56.9 percent as of September 2020. Japan Post Bank offers services via 23,831 Japan Post office branches, at which Japan Post Bank services can be conducted, as well as Japan Post’s network of about 32,000 ATMs nationwide.

A large number of foreign banks operate in Japan offering both banking and other financial services. Like their domestic counterparts, foreign banks are regulated by the Japan Financial Services Agency (FSA). According to the IMF, there have been no observations of reduced or lost correspondent banking relationships in Japan. There are 518 correspondent financial institutions that have current accounts at the country’s central bank (including 123 main banks; 11 trust banks; 50 foreign banks; and 247 credit unions).

Foreigners wishing to establish bank accounts must show a passport, visa, and foreigner residence card; temporary visitors may not open bank accounts in Japan. Other requirements (e.g., evidence of utility registration and payment, Japanese-style signature seal, etc.) may vary according to institution. Language may be a barrier to obtaining services at some institutions; foreigners who do not speak Japanese should research in advance which banks are more likely to offer bilingual services.

Japanese regulators are encouraging “open banking” interactions between financial institutions and third-party developers of financial technology applications through application programming interfaces (“APIs”) when customers “opt-in” to share their information.  As a result of the government having set a target to have 80 banks adopt API standards by 2020, more than 100 subject banks reportedly have done so  Many of the largest banks are participating in various proofs of concept using blockchain technology.  While commercial banks have not yet formally adopted blockchain-powered systems for fund settlement, they are actively exploring options, and the largest banks have announced intentions to produce their own virtual currencies at some point.  The Bank of Japan is researching blockchain and its applications for national accounts and established a “Fintech Center” to lead this effort.  The main banking regulator, the Japan Financial Services Agency also encourages innovation with financial technologies, including sponsoring an annual conference on “fintech” in Japan.  In April 2017, amendments to the Act on Settlements of Funds went into effect, permitting the use of virtual currencies as a form of payment in Japan, but virtual currency is still not considered legal tender (e.g., commercial vendors may opt to accept virtual currencies for transactional payments, though virtual currency cannot be used as payment for taxes owed to the government).  The law also requires the registration of virtual currency exchange businesses.  There are currently 27-registered virtual currency exchanges in Japan. In 2017, Japan accounted for approximately half of the world’s trades of Bitcoin, the most prevalent blockchain currency (digital decentralized cryptographic currency).

Foreign Exchange and Remittances

Foreign Exchange

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 has a floating exchange rate and has not intervened in the foreign exchange markets since November 2011. It has joined statements of the G-7 and G-20 affirming that countries would not target exchange rates for competitive purposes.

Remittance Policies

Investment remittances are freely permitted.

Sovereign Wealth Funds

Japan does not operate a sovereign wealth fund.

Japan has privatized most former state-owned enterprises (SOEs). Under the Postal Privatization Law, privatization of Japan Post group started in October 2007 by turning the public corporation into stock companies. The stock sale of the Japan Post Holdings Co. and its two financial subsidiaries, Japan Post Insurance (JPI) and Japan Post Bank (JPB), began in November 2015 with an IPO that sold 11 percent of available shares in each of the three entities. The postal service subsidiary, Japan Post Co., remains a wholly owned subsidiary of JPH. The Japanese government conducted an additional public offering of stock in September 2017, reducing the government ownership in the holding company to approximately 57 percent. There were no additional offerings of the stock in the bank, but there was an offering in the insurance subsidiary in April 2019. JPH currently owns 88.99 percent of the banking subsidiary and 64.48 percent of the insurance subsidiary. 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 JPH to sell all shares of JPB and JPI, as soon as possible. The government planned to implement the third sale of its JPH share holdings in 2019 but did not do so due to sluggish share performance.

These offerings mark the final stage of Japan Post privatization begun under former Prime Minister Junichiro Koizumi more than a decade ago and respond to long-standing criticism from commercial banks and insurers—both foreign and Japanese—that their government-owned Japan Post rivals have an unfair advantage.

While there has been significant progress since 2013 with regard to private suppliers’ access to the postal insurance network, the U.S. government has continued to raise concerns about the preferential treatment given to Japan Post and some quasi-governmental entities compared to private sector competitors and the impact of these advantages on the ability of private companies to compete on a level playing field. A full description of U.S. government concerns with regard to the insurance sector and efforts to address these concerns is available in the annual United States Trade Representative’s National Trade Estimate on Foreign Trade Barriers report for Japan.

Privatization Program

In sectors previously dominated by state-owned enterprises but now privatized, such as transportation, telecommunications, and package delivery, U.S. businesses report that Japanese firms sometimes receive favorable treatment in the form of improved market access and government cooperation.

Deregulation of Japan’s power sector took a step forward in April 2016 with the full liberalization of the retail electricity sector. This change has led to increased competition from new entrants. While the generation and transmission of electricity remain mostly in the hands of the legacy power utilities, new electricity retailers reached a 20- percent market share of the total volume of electricity sold as of January 2021. Japan implemented the third phase of its power sector reforms in April 2020 by requiring vertically integrated regional monopolies to “legally unbundle” the electricity transmission and distribution portions of their businesses from the power generation and retailing portions. The transmission and distribution businesses retain ownership of, and operational control over, the power grid in their regional service territories. In addition, many of the former vertically integrated regional monopolies created electricity retailers to compete in the fully deregulated retail market.

American energy companies have reported increased opportunities in this sector, but also report that the regional power utilities have advantages over new entrants with regard to understanding the regulatory regime, securing sufficient low-cost generation in the wholesale market, and accessing infrastructure. For example, while a wholesale market allows new retailers to buy electricity for sale to customers, legacy utilities, which control most of the generation, sell very little power into that market. This limits the supply and increases the cost of electricity that new retailers can sell to consumers. While the liquidity of the wholesale electricity market has increased in recent years, new entrants — including American companies — report that they have few other options for cost-effectively securing the electricity they need to meet their supply obligations. These market dynamics were exacerbated in January 2021, when high electricity demand and constrained LNG supply during a cold spell led to record-high wholesale electricity prices over the course of several days. In addition, as the large power utilities still control transmission and distribution lines, new entrants in power generation are not able to compete due to limited access to power grids.

More information on the power sector from the Japanese Government can be obtained at: http://www.enecho.meti.go.jp/en/category/electricity_and_gas/electric/electricity_liberalization/what/ 

Progress has been made through efforts by the Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) to introduce non-binding reforms through changes to Japan’s Companies Act in 2014 and adoption of a Corporate Governance Code (CSR) in 2015. Together with the Stewardship Code for institutional investors launched by the FSA in 2014, these initiatives have encouraged companies to put cash stockpiles to better use by increasing investment, raising dividends, and taking on more risk to boost Japan’s growth. Positive results of these efforts are evidenced by rising shareholder returns, unwinding of cross-shareholdings, and increasing numbers of independent board members.  According to a TSE survey conducted in December 2018, 85.3 percent of companies had a compliance rate of 90 percent out of the 66 principles of the new code. As of May 2019,  93.6 percent of TSE listed firms  have at least one independent director, according to TSE’s most recent White Paper on Corporate Governance. In December 2019, the Diet approved a revision of the Companies Act, which will enable companies to provide documents for shareholders’ meetings electronically. Listed companies will be obligated to have at least one outside director. The bill went into effect on March 1, 2021.

Following Stewardship Code revision in March 2020, TSE and FSA plan to revise the Corporate Governance Code in spring of 2021 to reflect the realignment of the TSE segmentations, which will be implemented in 2022. The revised guidelines are expected to require companies, to be listed in the “Prime Section,” a top-tier TSE section, to have more than one-third external directors. The guidelines are also expected to urge listed companies to have more diversity in mid-level and managerial posts, by hiring and training female and foreign workers. Awareness of corporate social responsibility (CSR) among both producers and consumers in Japan is high, and foreign and local enterprises generally follow accepted CSR principles. Business organizations also actively promote CSR. Japan encourages adherence to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.

Additional Resources 

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

Japan’s penal code covers crimes of official corruption, and an individual convicted under these statutes is, depending on the nature of the crime, subject to prison sentences and possible fines. 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.

The direct exchange of cash for favors from government officials in Japan is extremely rare. However, the web of close relationships between Japanese companies, politicians, government organizations, and universities has been criticized for fostering an inwardly “cooperative”—or insular—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 seriously in Japan through the rigging of bids on government public works projects. However, instances of bid rigging appear to have decreased over the past decade. Alleged bid rigging between construction companies was discovered on the Tokyo-Nagoya-Osaka maglev high-speed rail project in 2017, and the case was prosecuted in March 2018.

Japan’s Act on Elimination and Prevention of Involvement in Bid-Rigging authorizes the Japan Fair Trade Commission to demand that 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. 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.

Japan has ratified the Organisation for Economic Co-Operation and Development (OECD) Anti-Bribery Convention, which bans bribing foreign government officials.

For vetting potential local investment partners, companies may review credit reports on foreign companies available from many private-sector sources, including, in the United States, Dun & Bradstreet and Graydon International.  Additionally, a company may inquire about the International Company Profile (ICP), which is a background report on a specific foreign company that is prepared by commercial officers of the U.S. Commercial Service at the U.S. Embassy, Tokyo.

Resources to Report Corruption

Businesses or individuals may contact the Japan Fair Trade Commission (JFTC), with contact details at: http://www.jftc.go.jp/en/about_jftc/contact_us.html .

Political violence is rare in Japan. Acts of political violence involving U.S. business interests are virtually unknown.

The Government of Japan has provided extensive and expanded employment subsidies to companies to encourage them to maintain employment during the COVID-19 pandemic. Despite the pandemic, worker shortages still remain in sectors such as construction, transportation, and nursing care. The unemployment rate as of December 2020 was 2.9 percent. The fact that Japan’s unemployment rate has risen so slowly during the pandemic is remarkable and likely due to the social contract between worker and employer in Japan, as well as the continued government subsidies. Traditionally, Japanese workers have been classified as either regular or non-regular employees. Companies recruit regular employees directly from schools or universities and provide an employment contract with no fixed duration, effectively guaranteeing them lifetime employment. Non-regular employees are hired for a fixed period. Companies have increasingly relied on such non-regular workers to fill short-term labor requirements and to reduce labor costs. The pandemic has particularly hurt non-regular workers whose employment was concentrated in hard-hit service sectors such as tourism, hospitality, restaurants, and entertainment.

Major employers and labor unions engage in collective bargaining in nearly every industry. Union members as of June 2020 made up 17.1 percent of employees (“koyo-sha”), up slightly compared to 2019 and an increase for the first time in 11 years, but still in decline from 25 percent of the workforce in 1990. The government provides benefits for workers laid off for economic reasons through a national employment insurance program. Some National Strategic Special Zones allow for special employment of foreign workers in certain fields, but those and all other foreign workers are still subject to the same national labor laws and standards as Japanese workers. Japan has comprehensive labor dispute resolution mechanisms, including labor tribunals, mediation, and civil lawsuits. A Labor Standards Bureau oversees the enforcement of labor standards through a national network of Labor Bureaus and Labor Standards Inspection Offices.

The number of foreign workers is rising, but at just over 1.72 million as of October 2020, they still represent a fraction of Japan’s 69-million-worker labor force. The Japanese government has made changes to labor and immigration laws to facilitate the entry of larger numbers of skilled foreign workers in selected sectors. A revision to the Immigration Control and Refugee Recognition Law in December 2018, implemented in April 2019, created the “Specified Skilled” worker program designed specifically for lower-skilled foreign workers. Prior to this change, Japan had never created a visa category for lower-skilled foreign workers and this law created two. Category 1 grants five-year residency to low-skilled workers who pass skills exams and meet Japanese language criteria and permits them to work in 14 designated industries identified by the Japanese government to be experiencing severe labor shortage. Category 2 is for skilled workers with more experience, granting them long-term residency and a path to long-term employment, but currently permitted only in a few designated industries.

The Japanese government also operates the Technical Intern Training Program (TITP). Originally intended as an international skills-transfer program for workers from developing countries, TITP is currently used to address immediate labor shortages in over 80 designated occupations , such as jobs in the construction, agriculture, fishery, and elderly nursing care industries. As noted previously, the 2018 Immigration Control Law revision enabled TITP beneficiaries with at least three years of experience to qualify to apply for the Category 1 status of the Specified Skilled worker program without any exams.

To address the labor shortage resulting from population decline and a rapidly aging society, Japan’s government has pursued measures to increase participation and retention of older workers and women in the labor force. A law that went into force in April 2013 requires companies to introduce employment systems allowing employees reaching retirement age (generally set at 60) to continue working until 65. The law was revised again in March 2020 and will enter into force in April 2021, asking companies to “make efforts” to secure employment for workers between 65 and 70. Since 2013, the government has committed to increasing women’s economic participation. The Women’s Empowerment Law passed in 2015 requires large companies to disclose statistics about the hiring and promotion of women and to adopt action plans to improve the numbers. The COVID-19 pandemic has, however, had a disproportionate effect on women in Japan. Women were more likely than men to occupy non-regular positions, work in industries hardest hit by the downturn, and face greater pressure to prioritize family over work. As a result, women have experienced reductions in working hours, departure from the labor force, or furloughs in greater numbers than men, erasing part of the rise in their workforce participation through 2019. The Government of Japan has acknowledged this impact on women’s economic participation and has convened a study group to consider solutions.

In May 2019, a package law that revised the Women’s Empowerment Law, expanded the reporting requirements to SMEs that employ at least 101 persons (starting in April 2022) and increasing the number of disclosure items for larger companies ( as of June 2020). The package law also included several labor law revisions requiring companies to take preventive measures for power and sexual harassment in the workplace.

In June 2018, the Diet passed the Workstyle Reform package.  The three key provisions are:  (1) the “white collar exemption,” which eliminates overtime for a small number of highly paid professionals; (2) a formal overtime cap of 100 hours/month or 720 hours/year, with imprisonment and/or fines for violators; and (3) new “equal-pay-for-equal-work” principles to reduce gaps between regular and non-regular employees.

Japan has ratified 49 International Labor Organization (ILO) Conventions (including six of the eight fundamental conventions). As part of its agreement in principle on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership Japan agreed to adopt the fundamental labor rights stated in the ILO Declaration including freedom of association and the recognition of the right to collective bargaining, the elimination of forced labor and employment discrimination, and the abolition of child labor. The CPTPP entered into force on December 30, 2018.

U.S. International Development Finance Corporation (DFC) insurance and finance programs are not available in Japan. However, U.S. companies seeking to invest in other foreign countries with Japanese partners may have access to DFC programs and benefit from cooperative memorandums that the DFC has signed with Japanese Government entities to fund projects in third countries.

Japan is a member of the Multilateral Investment Guarantee Agency (MIGA). Japan’s capital subscription to MIGA is the second largest, after the United States.

Other foreign governments have very limited involvement in Japan’s domestic infrastructure development, and most financing and insurance is managed domestically.

* Source for Host Country Data: *2019 Nominal GDP data from “Annual Report on National Accounts for 2019”, Economic and Social Research Institute, Cabinet Office, Japanese Government.  December, 2020. (Note: uses exchange rate of 109.01 Yen to 1 U.S. Dollar and Calendar Year Data)

The discrepancy between Japan’s accounting of U.S. FDI into Japan and U.S. accounting of that FDI can be attributed to methodological differences, specifically with regard to indirect investors, profits generated from reinvested earnings, and differing standards for which companies must report FDI. 

Jerome Ryan
Economic Section
U.S. Embassy Tokyo
1-10-5 Akasaka, Minato-ku,
Tokyo 107-8420
Japan
+81 03-3224-5485
ryanej@state.gov

Policies Towards Foreign Direct Investment

The ROK government welcomes foreign investment.  In a March 2019 meeting, President Moon Jae-in equated the foreign business community’s success with the Korean economy’s progress.  The ROK government offers incentives to foreign companies bringing in technology and investments contributing to the ROK’s manufacturing sector.  Hurdles for foreign investors in the ROK include regulatory opacity, inconsistent interpretation of regulations, unanticipated regulatory changes, underdeveloped corporate governance, rigid labor policies, Korea-specific consumer protection measures, and the political influence of large conglomerates, known as chaebol.

The 1998 Foreign Investment Promotion Act (FIPA) is the principal law pertaining to foreign investment in the ROK.  FIPA and related regulations categorize business activities as open, conditionally- or partly-restricted, or closed to foreign investment.  FIPA also includes:

• Simplified procedures to apply to invest in the ROK;
• Expanded tax incentives for high-technology investments;
• Reduced rental fees and lengthened lease durations for government land (including local government land);
• Increased central government support for local FDI incentives;
• Creation of “Invest KOREA,” a one-stop investment promotion center within the Korea Trade-Investment Promotion Agency (KOTRA) to assist foreign investors; and
• Establishment of a Foreign Investment Ombudsman to assist foreign investors.

The ROK National Assembly website provides a list of laws pertaining to foreigners, including FIPA, in English (http://korea.assembly.go.kr/res/low_03_list.jsp?boardid=1000000037).

The Korea Trade-Investment Promotion Agency (KOTRA) facilitates foreign investment through its Invest KOREA office (also on the web at http://investkorea.org).  For investments exceeding 100 million won (about USD 88,000), KOTRA helps investors establish domestically-incorporated foreign-invested companies.  KOTRA and the Ministry of Trade, Industry and Energy (MOTIE) organize a yearly Foreign Investment Week to attract investment to South Korea.  In February 2021, Trade Minister Yoo Myung-hee met with representatives of foreign-invested firms in the ROK and noted the critical role they play in the ROK economy and job creation.  The ROK’s key official responsible for FDI promotion and retention is the Foreign Investment Ombudsman.  The position is commissioned by the ROK President and heads a grievance resolution body that collects and analyzes concerns from foreign firms; coordinates reforms with relevant administrative agencies; and proposes new policies to promote foreign investment.  More information on the Ombudsman can be found at http://ombudsman.kotra.or.kr/eng/index.do.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in remunerative activity across many sectors of the economy.  However, under the Foreign Exchange Transaction Act (FETA), restrictions on foreign ownership remain for 30 industrial sectors, including three that are closed to foreign investment (see below).  Relevant ministries must approve investments in conditionally- or partially-restricted sectors.  Most applications are processed within five days; cases that require consultation with more than one ministry can take 25 days or longer.  The ROK’s procurement processes comply with the World Trade Organization (WTO) Government Procurement Agreement.

The following is a list of restricted sectors for foreign investment.  Figures in parentheses generally denote the Korean Industrial Classification Code, while those for air transport industries are based on the Civil Aeronautics Laws:

Completely Closed

•  Nuclear power generation (35111)
•  Radio broadcasting (60100)
•  Television broadcasting (60210)

Restricted Sectors (no more than 25 percent foreign equity)

•  News agency activities (63910)

Restricted Sectors (less than 30 percent foreign equity)

• Newspaper publication, daily (58121)  (Note: Other newspapers with the same industry code 58121 are restricted to less than 50 percent foreign equity.)

• Hydroelectric power generation (35112)
• Thermal power generation (35113)
• Solar power generation (35114)
• Other power generation (35119)

Restricted Sectors (no more than 49 percent foreign equity)

• Newspaper publication, non-daily (58121)  (Note: Daily newspapers with the same industry code 58121 are restricted to less than 30 percent foreign equity.)
• Television program/content distribution (60221)
• Cable networks (60222)
• Satellite and other broadcasting (60229)
• Wired telephone and other telecommunications (61210)
• Mobile telephone and other telecommunications (61220)
• Other telecommunications (61299)

Restricted Sectors (no more than 50 percent foreign equity)

• Farming of beef cattle (01212)
• Transmission/distribution of electricity (35120)
• Wholesale of meat (46313)
• Coastal water passenger transport (50121)
• Coastal water freight transport (50122)
• International air transport (51)
• Domestic air transport (51)
• Small air transport (51)
• Publishing of magazines and periodicals (58122)

Open but Separately Regulated under Relevant Laws

• Growing of cereal crops and other food crops, except rice and barley (01110)
• Other inorganic chemistry production, except fuel for nuclear power generation (20129)
• Other nonferrous metals refining, smelting, and alloying (24219)
• Domestic commercial banking, except special banking areas (64121)
• Radioactive waste collection, transportation, and disposal, except radioactive waste management (38240)

Other Investment Policy Reviews

The WTO conducted its seventh Trade Policy Review of the ROK in October 2016.  The Review does not contain any explicit policy recommendations.  It can be found at: https://www.wto.org/english/tratop_e/tpr_e/tp446_e.htm

The ROK has not undergone investment policy reviews from the OECD or United Nations Conference on Trade and Development (UNCTAD) within the past three years.

Business Facilitation

Registering a business remains a complex process that varies according to the type of business being established, and requires interaction with KOTRA, court registries, and tax offices.  Foreign corporations can enter the market by establishing a local corporation, local branch, or liaison office.  The establishment of local corporations by a foreign individual or corporation is regulated by FIPA and the Commercial Act; the latter recognizes five types of companies, of which stock companies with multiple shareholders are the most common.  Although registration can be filed online, there is no centralized online location to complete the process.  For small- and medium-sized enterprises (SMEs) and micro-enterprises, the online business registration process takes approximately three to four days and is completed through Korean language websites.  Registrations can be completed via the Smart Biz website, https://www.startbiz.go.kr/.  The UN’s Global Enterprise Registration (GER), which evaluates whether a country’s online registration process is clear and complete, awarded Smart Biz 2.5 of 10 possible points and suggested improvements in registering limited liability companies.  The Invest KOREA information portal received 2 of 10 points.  The Korea Commission for Corporate Partnership and the Ministry of Gender Equality and Family (http://www.mogef.go.kr/) are charged with improving the business environment for minorities and women.  Some local governments provide guaranteed bank loans for women and/or the disabled.

Outward Investment

The ROK does not have any restrictions on outward investment.  The ROK has several institutions to assist small business and middle-market firms with such investments.

• KOTRA has an Outbound Investment Support Office that provides counseling to ROK firms and holds regular investment information sessions.
• The ASEAN-Korea Centre, which is primarily funded by the ROK government, provides counseling and business introduction services to Korean SMEs considering investments in the Association of Southeast Asian Nations (ASEAN) region.
• The Defense Acquisition Program Administration opened an office in 2019 to advise Korean defense SMEs on exporting unrestricted defense articles.

As of March 2021, the ROK has 17 FTAs in force, encompassing trade with 57 countries including the United States, and 94 bilateral investment treaties.  The ROK has signed (but not ratified) additional FTAs in 2020 with 15 other countries, including 14 Asian countries under the Regional Comprehensive Economic Partnership (RCEP), and a bilateral FTA with Indonesia; negotiations for bilateral FTAs with Cambodia and Israel have concluded, but the agreements are not yet signed.  Ongoing FTA negotiations include an ROK-China-Japan trilateral FTA, and bilateral FTAs with Ecuador, Mercado Común del Sur (Mercosur), the Philippines, Russia, and Malaysia.  Negotiations are also in-progress to expand the ROK-China FTA services and investment chapter and to enhance existing FTAs with ASEAN, India, and Chile.  The ROK also agreed to begin FTA negotiations with Uzbekistan, the Eurasian Economic Union (Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan) and the Pacific Alliance (Mexico, Peru, Columbia, and Chile).  Separately, the ROK has entered into negotiations on a possible digital trade agreement with Singapore.  President Moon said in January 2021 his government will examine participation in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

As of March 2021, the ROK had signed bilateral tax agreements with 93 countries.  The ROK National Tax Service has a special unit dedicated to processing Advance Pricing Agreement and Mutual Agreement Procedure requests from North America, Europe, and Australia, as timely processing of these requests has historically been a frequent subject of disputes.  The U.S.-ROK bilateral income tax treaty entered into force in 1979.  A complete list of countries and economies with which South Korea has concluded bilateral investment protection agreements, such as BITs and FTAs with investment chapters, is available at http://www.mofa.go.kr/www/wpge/m_3834/contents.do and http://investmentpolicyhub.unctad.org/IIA.

Despite formal tax agreements and dispute resolution mechanisms, U.S. investors have raised concerns about discrimination and lack of transparency in tax investigations by ROK authorities.

Transparency of the Regulatory System

ROK regulatory transparency has improved, due in part to Korea’s membership in the WTO and negotiated FTAs.  However, the foreign business community continues to face numerous rules and regulations unique to the ROK.  National Assembly legislation on environmental protection or the promotion of SMEs has created new trade barriers that disadvantage foreign companies.  Also, some laws and regulations lack sufficient detail and are subject to differing interpretations by government regulatory officials.  In other cases, ministries issue non-legally binding guidelines on implementation of regulations, yet these become the bases for legal decisions in ROK courts.  Regulatory authorities also issue oral or internal guidelines or other legally-enforceable dictates that prove burdensome for foreign firms.  Intermittent ROK government deregulation plans to eliminate oral guidelines or impose the same level of regulatory review as written regulations have not led to concrete changes.  Despite KORUS FTA provisions designed to address transparency issues, they remain persistent and prominent.

The ROK constitution allows both the legislative and executive branches to introduce bills.  Ministries draft subordinate statutes (presidential decrees, ministerial decrees, and administrative rules), which largely govern the procedural matters addressed by the respective laws.  Administrative agencies shape policies and draft bills on matters within their respective jurisdictions.  Drafting ministries must clearly define policy goals and complete regulatory impact assessments (RIAs).  When a ministry drafts a regulation, it must consult with other relevant ministries before it releases the regulation for public comment.  The constitution also allows local governments to exercise self-rule legislative authority to draft ordinances and rules within the scope of federal acts and subordinate statutes.  The enactment of laws and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures in accordance with the Regulation on Legislative Process enacted by the Ministry of Government Legislation.  Since 2011, all publicly listed companies must follow International Financial Reporting Standards (IFRS, or K-IFRS in the ROK).  The Korea Accounting Standards Board facilitates ROK government endorsement and adoption of IFRS and sets accounting standards for companies not subject to IFRS.  According to the Administrative Procedures Act, authorities proposing laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation.  Regulations are sometimes promulgated after only the minimum required comment period and with minimal consultation with industry.

Regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods.  As a result, 80 percent of all new regulations are written and passed by the National Assembly without rigorous consideration of possible effects or solicitation of public comments.  The Official Gazette and the websites of relevant ministries and the National Assembly simultaneously post the Korean language text of draft acts and regulations, accompanied by executive summaries, for a 40-day comment period.  Comments are not made public, and firms may struggle to translate complex documentation, analyze, and respond adequately before the expiration of this period.  After the comment period, the Ministry of Government Legislation reviews the laws and regulations to ensure they conform to the constitution and monitors government adherence to the Regulation on Legislative Process.  While the Regulatory Reform Committee (RRC) reviews all laws and regulations to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness, the committee has been less active in recent years.

In January 2019, Korea introduced a “regulatory sandbox” program intended to reduce the regulatory burden on companies that seek to test innovative ideas, products, and services.  Depending on the business sector in which a particular proposal falls, either MOTIE, the Ministry of Science and ICT, or the Financial Services Commission manages the program.  The program is open to Korean companies and foreign companies with Korean branch offices.  Websites and applications are only available in Korean.  The business community has welcomed this effort by regulators to spur innovation.

The ROK government enforces regulations through penalties (either fines or criminal charges) in the case of violations of the law.  The government’s enforcement actions can be challenged through an appeal process or administrative litigation.  The CEOs of local branches can be held legally responsible for all actions of their company and at times have been arrested and charged for their companies’ infractions.  Foreign CEOs have cited this as a significant burden to their business operations in Korea.

The ROK’s public finances and debt obligations are generally transparent, with the exception of state-owned enterprise debt.

International Regulatory Considerations

The ROK has revised local regulations to implement commitments under international treaties and trade agreements.  Treaties duly concluded and promulgated in accordance with the constitution and the generally recognized rules of international law are accorded the same standing as domestic laws.  ROK officials consistently express intent to harmonize standards with global norms by benchmarking the United States and the EU.  The U.S., U.K., and Australian governments exchange regulatory reform best practices with the ROK government to encourage local regulators to employ more regulatory analytics, increase transparency, and improve compliance with international standards; however, unique local rules and regulations continue to pose difficulties for foreign companies operating in the ROK.  The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations.  The ROK is also a signatory of the Trade Facilitation Agreement (TFA).  The ROK amended the ministerial decree of the Customs Act in 2015, creating a committee charged with implementing the TFA.  The ROK is a global leader of modernized and streamlined procedures for transportation and customs clearance.  Industry sources report the Korea Customs Service enforces rules of origin issues largely in compliance with ROK obligations under its free trade agreements.

Legal System and Judicial Independence

The ROK legal system is based on civil law.  Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency.  The ROK has a written commercial law, and matters regarding contracts are covered by the Civil Act.  There are also three specialized courts in the ROK: patent, family, and administrative courts.  The ROK court system is independent and not subject to government interference in cases that may affect foreign investors.  Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK.  Rulings by district courts can be appealed to higher courts and to the Supreme Court.

Laws and Regulations on Foreign Direct Investment

The ROK has a transparent legal system with a strong rule-of-law tradition and an independent judiciary.  FIPA is the principal basic law pertaining to foreign investment in the ROK.  The Invest KOREA website (http://investkorea.org) provides information on relevant laws, rules, and procedures for foreign investment in the ROK.

Laws and regulations enacted within the past year include:

• On August 5, 2020, three new data protection laws took effect: the Personal Information Protection Act (PIPA), the Promotion of Information Communications Network Utilization and Information Protection Act (the “Network Act”), and the Use and Protection of Credit Information Act (the “Credit Information Act”).  These laws are intended to strengthen privacy rights by reducing unnecessary collection of personal information and prohibiting its unauthorized use or disclosure.
• On April 6, 2021, an amended Labor Standards Act (LSA) took effect. The amendments modify certain restrictions on allowable work hours for employees and add certain health and safety requirements for overtime labor.

Key pending/proposed laws and regulations as of April 2021 include:

• On September 28, 2020, the Ministry of Justice proposed bills expanding the scope of class action lawsuits and to provide for punitive damages.
• On December 9, 2020, the National Assembly passed amendments to the Trade Union and Labor Relations Adjustment Act (TULRAA). The revised TULRAA is intended to bring ROK law into compliance with International Labor Organization standards and is scheduled to take effect on July 6, 2021.
• On January 6, 2021, the Personal Information Protection Committee (PIPC) of the National Assembly proposed an amendment to the Personal Information Protection Act (PIPA) to define how businesses may use personal information and to strengthen protection of personal information.
• On January 8, 2021, the National Assembly passed the Serious Accident Penalty Act (SAPA), to take effect one year after promulgation. The SAPA establishes new health-and-safety obligations for businesses and executives and imposes stiff penalties on those that fail to comply.

Competition and Antitrust Laws

The Monopoly Regulation and Fair Trade Act (MRFTA) authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition and consumer safety matters.

KFTC has a broad mandate that includes promoting competition, strengthening consumers’ rights, and creating a suitable environment for SMEs.  In addition to investigating corporate and financial restructuring, the KFTC can levy sizeable administrative fines for violations of law and for failure to cooperate with investigators.  Decisions by KFTC are subject to appeal in Korean courts.  As part of KORUS implementation, KFTC instituted a “consent decree” process in 2014, whereby firms can settle disputes with KFTC without resorting to the court system.

Over the last several years, a number of U.S. firms have raised concerns that KFTC targets foreign companies with aggressive enforcement.  An amendment to the MRFTA in September 2020 improved the administrative decision-making process by the KFTC, including permitting access to confidential business information, limited to outside legal counsel, in order to protect possible trade secrets.

Expropriation and Compensation

The ROK follows generally-accepted principles of international law with respect to expropriation.  ROK law protects foreign-invested enterprise property from expropriation or requisition.  Private property can be expropriated for public purposes such as urban redevelopment, new industrial complexes, or constructing roads, and claimants are afforded due process and compensation.  Private property expropriation in the ROK for public use is generally conducted in a non-discriminatory manner, with claimants compensated at or above market value.  Embassy Seoul is aware of one case in which a U.S. investor filed an investor-state dispute lawsuit in 2018 against the ROK government, claiming that the government had violated the KORUS FTA in expropriating the investor’s land.  The case was dismissed in the ROK judicial system on jurisdictional grounds in September 2019.  The ROK government allotted USD 20 billion in its 2019 budget for land expropriation – a 38 percent increase from the previous year.

Dispute Settlement

ICSID Convention and New York Convention

The ROK acceded to the International Centre for Settlement of Investment Disputes (ICSID) in 1967 and the New York Arbitration Convention in 1973.  While there are no specific domestic laws on enforcement, South Korean courts have made rulings based on the ROK’s membership in the conventions.

Investor-State Dispute Settlement

The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency.  These bodies can call upon ROK courts to enforce an arbitrated settlement.  When drafting contracts, some firms choose arbitration by a third party such as the International Commercial Arbitration Association.  Companies have access to local expert legal counsel when drawing up contracts with a South Korean entity.  The KORUS FTA contains strong, enforceable investment provisions.  The United States also has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK with general provisions pertaining to business relations and investment.  Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK.  There is no history of extrajudicial action against foreign investors.  As noted above, one U.S. investor filed an investor-state dispute (ISD) lawsuit in 2018 against the ROK government, claiming that the government had violated the KORUS FTA in expropriating the investor’s land.  The case was dismissed on jurisdictional grounds in September 2019.  A U.S. activist fund submitted a notice of arbitration over an ISD pertaining to the KORUS FTA, also in 2018.  This firm claimed to have suffered serious financial losses due to the merger of two large conglomerates, stating the ROK government illicitly intervened by mobilizing the National Pension Service as a large shareholder in the process of approving the merger.  Another U.S. investor filed for arbitration seeking compensation for losses incurred from the same controversial merger.  Both cases are pending before a United Nations Commission on International Trade Law (UNCITRAL) tribunal.

International Commercial Arbitration and Foreign Courts

ROK civil courts can adjudicate commercial disputes, though foreign firms note the following impediments to litigation:

• Proceedings are conducted in Korean;
• ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in ROK courts;
• Civil procedures common in the United States such as pretrial discovery do not exist in the ROK; and
• During litigation of a dispute, courts may bar foreign citizens from leaving the country until the court reaches a decision.

Due to the expense and time required to obtain judgement, lawsuits are generally initiated only as a last resort, signaling the end of a business relationship.  ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency.

Firms may also bring commercial disputes before the Korean Commercial Arbitration Board (KCAB).  The Korean Arbitration Act and its implementing rules outline the following sequential steps in the arbitration process: 1) Parties may request the KCAB to act as an informal intermediary to a settlement; 2) if informal arbitration is unsuccessful, either or both parties may request formal arbitration, in which the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if formal arbitration is unsuccessful, the KCAB assigns an arbitration panel consisting of one-to-three arbitrators to decide the case.  If either party is not resident in the ROK, either may request an arbitrator from a neutral country.  If foreign arbitral awards or foreign court rulings meet the requirements of Civil Procedure Act Article 217, local courts can enforce their terms.  ROK authorities emphasize non-discriminatory arbitration of disputes, but statistics on outcomes are unavailable.  Embassy Seoul is not aware of statistics on court rulings on investment disputes with state-owned enterprises.

Bankruptcy Regulations

The Debtor Rehabilitation and Bankruptcy Act (DRBA) stipulates that bankruptcy is a court-managed liquidation procedure where both domestic and foreign entities are afforded equal treatment.  The procedure commences after a filing by a debtor, creditor, or a group of creditors, and determination by the court that a company is bankrupt.  The court designates a Custodial Committee to take an accounting of the debtor’s assets, claims, and contracts.  The Custodial Committee may grant voting rights among creditors.  Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms.  The World Bank ranked ROK policies and mechanisms to address insolvency 11th among 190 economies in its 2020 Doing Business report.  Debtors may be subject to arrest once a bankruptcy petition has been filed, even if the debtor has not been declared bankrupt.  Individuals found guilty of negligent or false bankruptcy are subject to criminal penalties.  The Seoul Bankruptcy Court (SBC) has nationwide jurisdiction to hear major bankruptcy or rehabilitation cases and to provide effective, specialized, and consistent guidance in bankruptcy proceedings.  Any Korean company with debt equal to or above KRW 50 billion (about USD 44 million) and/or 300 or more creditors may file for bankruptcy rehabilitation with the SBC.  Thirteen local district courts continue to oversee smaller bankruptcy cases in areas outside Seoul.

Investment Incentives

The ROK government provides the following general incentives for foreign investors:

• Cash incentives for qualified foreign investments in free trade zones, foreign investment zones, free economic zones, industrial complexes, and similar facilities;
• Tax and cash incentives for the creation and expansion of workplaces for high-tech businesses, factories, and research and development centers;
• Reduced rent for land and site preparation;
• Grants for establishment of community facilities for foreigners;
• Reduced rent for state or public property; and
• Preferential financial support for investing in major infrastructure projects.

Additionally, the ROK government provides incentives for investments that would increase ROK-based production of materials, parts, and equipment in six critical industrial sectors: semiconductors, displays, automobiles, electronics, machinery, and chemicals.  The Seoul Metropolitan government provides separate support for SMEs, high-technology businesses, and the biomedical industry.

Note that corporate tax exemption for foreign direct investment is limited to firms registered by the end of 2018.  The ROK government does not issue guarantees or jointly finance foreign direct investment projects.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Ministry of Economy and Finance (MOEF) administers tax and other incentives to stimulate advanced technology transfer and investment in high-technology services.  There are three types of special areas for foreign investment – Free Economic Zones, Free Investment Zones, and Tariff-Free Zones – where favorable tax incentives and other support for investors are available.  The ROK aims to attract more foreign investment by promoting its seven Free Economic Zones: Incheon (near Incheon airport); Busan/Jinhae (in South Gyeongsang Province); Gwangyang Bay (in South Gyeongsang Province); Gyeonggi (in Gyeonggi Province); Daegu/Gyeongbuk (in North Gyeongsang Province); East Coast (in Donghae and Gangneung); and Chungbuk (in North Chungcheong Province).  Additional information is available at http://www.fez.go.kr/global/en/index.do.  There are also 26 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors.  Special considerations for foreign investors vary among these zones.  In addition, there are four foreign-exclusive industrial complexes in Gyeonggi Province designed to provide inexpensive land, with the national and local governments providing assistance for leasing or selling in the sites at discounted rates.

Performance and Data Localization Requirements

There are no ROK requirements that firms hire local workers.  Foreigners planning to work during their stay in the ROK are required by law to apply for a visa.  Sponsoring employers file work permits and visa applications.  Hiring firms are required to confirm that prospective employees of foreign nationality have a valid work permit prior to making a job offer.  Once approved, the Ministry of Justice will issue a Certificate of Confirmation of Visa Issuance (CCVI) to the foreign worker.  The worker submits this certificate with the relevant visa application forms to the ROK embassy or consulate in the applicant’s country of residence.  Work visas are usually valid for one year, and issuance generally takes two to four weeks.  Changing a tourist visa to a work visa is not possible within the ROK; applicants for work visas must submit their applications to an ROK embassy or consulate.  The ROK has not imposed performance requirements on new foreign investment since 1992; there are no performance requirements regarding local content, local jobs, R&D activity, or domestic shares in the company’s capital.  Other conditions to invest in the ROK are elaborated in FIPA.

Recent ROK-specific security regulations on the use of cloud computing by public services (broadly defined) effectively deter U.S. firms from offering cloud services in the ROK.  In January 2016, the ROK government announced guidelines requiring Common Criteria Certification for cloud computing services for ROK government agencies or public institutions; the IT Security Certification Center may require disclosure of source code as part of Common Criteria Certification, which renders it difficult for U.S. cloud service providers to enter the Korean public cloud market.  Furthermore, restrictive ROK data privacy law governs any companies that collect, use, transfer, outsource, or process personal information.  The Personal Information Protection Act (PIPA) imposes strict conditions on transferring personal information out of the country, requiring data controllers to obtain each end-user’s consent to transfer personal information out of the ROK.  In the case of overseas transfer of personal information for the purpose of Information and Communications Technology (ICT) outsourcing, the data controller may forgo obtaining each individual’s consent if the data controller discloses in its privacy policy certain information about the overseas transfer, including the purpose and destination of the overseas transfer; similar requirements apply to transfer of personal information of end-users to a third party within the ROK.  In addition, regulations prohibit financial companies in the ROK from transferring customers’ personal information and related financial transaction data overseas.  As such, this financial transaction data cannot be outsourced to overseas ICT vendors, and financial companies in the ROK must store customers’ financial transaction data locally in the ROK.  The Financial Services Commission sets Korea’s financial policies and directs the Financial Supervisory Service in the enforcement of those policies.  The ROK government and legislature are considering further restrictions on the use of personal information.

Real Property

Property rights and interests are enforced under the Civil Act.  The Alien Land Acquisition Act (amended in 1998) extends to non-resident foreigners and foreign corporations the same rights as Koreans in land purchase and use.  The Real Estate Investment Trust (REIT) Act supports indirect investments in real estate and restructuring of corporations.  The REIT Act allows investors to invest funds through an asset management company and in real property such as office buildings, business parks, shopping malls, hotels, and serviced apartments.  Property rights are enforced, and there is a reliable system for registering mortgages and liens, managed by the courts.  Legally-purchased property cannot revert to other owners.  Squatters may have limited rights to cultivation of unoccupied land.

Intellectual Property Rights

Four ROK ministries share responsibility for protection and enforcement of intellectual property rights (IPR):  The Ministry of Culture, Sports and Tourism (MCST); the Korea Copyright Protection Agency (KCOPA); the Korean Intellectual Property Office (KIPO); and the Korea Customs Service (KCS).  Since being removed from USTR’s Special 301 Watch List in 2009, the ROK has become a regional leader of legal IPR frameworks  and enforcement of IPR.

The Ministry of Culture, Sports and Tourism announced in January 2021 a plan to fully revise the Copyright Act to reflect a move toward online platforms.  The amendments aim to implement a system of extended collective licensing, remuneration management, adoption of rights of publicity, updated concepts of digital transmission, and data mining for promotion of machine learning and big data analysis.

Industry sources have expressed overall satisfaction with the ROK legal framework, calling the ROK a model for IPR protection in Asia.  In July 2019, an amendment to the Unfair Competition Prevention and Trade Secret Protection Act entered into force with the following broad effects: Reduced requirements for secrecy by information owners, broadened scope of what constitutes “theft,” and increased statutory punishments for trade secret theft.  KIPO suspended 10,446 online transactions in 2020, up from 7,662 cases in 2019, and closed 394 illegal online shopping malls in 2020, up from 340 in 2019.  Since April 2019, KIPO rewards private citizens for reporting counterfeit goods for sale online, identifying 121,536 cases in 2019 and 126,542 in 2020.  KCS handled 176 border enforcement cases in 2020 for goods worth an estimated USD 237 million.  Trademark enforcement accounted for over 88 percent of cases, mostly for counterfeit watches, handbags, and apparel.  KCS focused its enforcement efforts on online overseas direct purchases, which rose 40 percent by volume and 20 percent by value year-on-year in 2020.  KCS also promoted IPR protection by posting public service announcements on public transportation and social media.

Some industry sources have expressed concern that the ROK’s low prosecution-to-indictment ratio in IPR violation cases, light sentencing standards, and low punitive damage assessments may not sufficiently deter infringement activity.  Stakeholders continue to express concern about Korea’s pharmaceutical reimbursement policy, specifically that it is not conducted in a fair and transparent manner that fully recognizes the value of innovation.

The ROK was not listed in the 2020 Special 301 Report, nor were any ROK-based physical or online markets included in the 2019 Notorious Markets List.  For additional information about national laws and points of contact at local intellectual property offices, please see the World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en/.

Capital Markets and Portfolio Investment

The ROK has an effective regulatory system that encourages portfolio investment.  The Korea Exchange (KRX) is comprised of a stock exchange, futures market, and stock market following the 2005 merger of the Korea Stock Exchange, Korea Futures Exchange, and Korean Securities Dealers Automated Quotations (KOSDAQ) stock markets.  It is tracked by the Korea Composite Stock Price Index (KOSPI).  There is sufficient liquidity in the market to enter and exit sizeable positions.  At the end of February 2021, over 2,400 companies were listed with a combined market capitalization of USD 2.2 trillion.  The ROK government uses various incentives, such as tax breaks, to facilitate the free flow of financial resources into the product and factor markets.   The ROK does not restrict payments and transfers for current international transactions, in accordance with the general obligations of member states under International Monetary Fund (IMF) Article VIII.  Credit is allocated on market terms.  The private sector has access to a variety of credit instruments.  While non-resident foreigners can issue bonds in South Korean won, they are otherwise unable to borrow money in local currency.  Foreign portfolio investors enjoy open access to the ROK stock market.  Aggregate foreign investment ceilings were abolished in 1998, and foreign investors owned 36.7 percent of benchmark KOSPI stocks and 9.9 percent of the KOSDAQ as of February 2021.  Foreign portfolio investment decreased slightly over the past year.  Foreign investors owned 31.7 percent of benchmark stocks and 7.7 percent of listed bonds, according to the Financial Services Commission in March 2021.  U.S. investors represent 41.4 percent of total foreign holdings, a gradual increase over the last three years.  The ROK Financial Services Commission in March 2020 banned the short-selling of stocks to stabilize stock price volatility during the COVID-19 pandemic.  The ban is currently set to expire in May 2021.

Money and Banking System

Financial sector reforms enacted to increase transparency and promote investor confidence are often cited as a reason for the ROK’s rapid rebound from the 2008 global financial crisis.  Since 1998, the ROK government has recapitalized its banks and non-bank financial institutions, closed or merged weak financial institutions, resolved many non-performing assets, introduced internationally-accepted risk assessment methods and accounting standards for banks, forced depositors and investors to assume appropriate levels of risk, and taken steps to help end the policy-directed lending of the past.  These reforms addressed the weak supervision and poor lending practices in the Korean banking system that helped cause and exacerbate the 1997-1998 Asian financial crisis.  The ROK banking sector is healthy overall, with a low non-performing loan ratio of 0.28 percent at the end of 2020, dropping 0.09 percentage points from the prior year.  Korean commercial banks held more than USD 3.3 trillion in total assets at the end of 2020.  Foreign commercial banks or branches can establish local operations, which would be subject to oversight by ROK financial regulators.  The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy.  There are no legal restrictions on a foreigner’s ability to establish a bank account in the ROK; however, commercial banks may refuse to accept foreign nationals as customers unless they show local residency or identification documents.  The Bank of Korea (BOK) is the central bank.

Foreign Exchange and Remittances

Foreign Exchange

All ROK banks, including branches of foreign banks, are permitted to deal in foreign exchange.   Applicants must notify foreign exchange banks in advance of applications for foreign investment.  In effect, these notifications are pro forma, and can be approved within hours.   Applications are denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns.  Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the shipping and distribution sector.  According to the Foreign Exchange Transaction Act (FETA, as noted), transactions that could harm international peace or public order require additional monitoring or screening for concerns such as money laundering or gambling.  Three specific types of transactions are restricted:

1. Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;
2. The Financial Services Commission will not permit foreign currency borrowing by “non-viable” domestic firms; and
3. The ROK government monitors and ensures that South Korean firms that have extended credit to foreign borrowers collect their debts. The ROK government has retained the authority to re-impose restrictions in the case of severe economic or financial emergency.

Funds associated with any form of investment can be freely converted into any world currency.  In 2020, 77 percent of spot transactions in the market were between the U.S. dollar and South Korean won, while daily transaction (spot and future) was equal to USD 52.84 billion, down 5.3 percent from the previous year.  Exchange rates are generally determined by the market.  The U.S. Department of the Treasury assessed that ROK authorities had historically intervened on both sides of the currency market, with a net impact that resisted won appreciation as demonstrated by a sustained rise in reserves and a net forward position.  In its January 2020 report to Congress, the Treasury Department assessed that in 2018 and the first half of 2019, ROK government authorities on balance intervened to support the won through small net sales of foreign exchange.  The BOK’s most recent intervention report, released in December 2020 and covering the third quarter of 2020, showed zero net intervention.

Remittance Policies

The right to remit profits is granted at the same time as the original investment approval.  Banks control the pro forma approval process for FETA-defined open sectors.  For conditionally- or partially-restricted investments (as defined by FETA), the relevant ministry must approve both the initial investment and eventual remittance.  When foreign investment royalties or other payments are included in a technology licensing agreement, either a bank or the MOEF must approve the agreement and the projected stream of royalties.  Approvals are quick and routine.  An investor wishing to send a remittance must present an audited financial statement to a bank to substantiate the payment.  The ROK routinely permits the repatriation of funds but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows skew the national balance of payments, cause excessive fluctuation in interest or exchange rates, or threaten the stability of domestic financial markets.  To repatriate funds, firms must also present a stock valuation report issued by a recognized securities company or the ROK appraisal board.  There are no time restrictions on remittances.

Sovereign Wealth Funds

The Korea Investment Corporation (KIC) is a wholly government-owned sovereign wealth fund established in July 2005 under the KIC Act.  KIC’s steering committee is comprised of its Chief Executive Officer, the Minister of Economy and Finance, the Bank of Korea Governor, and six private sector members appointed by the ROK President.  KIC is on the Public Institutions Management Act (PIMA) list.  The KIC Act mandates that KIC manage assets entrusted by the ROK government and central bank; the KIC generally adopts a passive role as a portfolio investor.  The corporation’s assets under management stood at USD 183.1 billion at the end of 2020.  KIC is required by law to publish an annual report, submit its books to the steering committee for review, and follow all domestic accounting standards and rules.  It follows the Santiago Principles and participates in the IMF-hosted International Working Group on Sovereign Wealth Funds.  The KIC does not invest in domestic assets, aside from a one-time USD 23 million investment into a domestic real estate fund in January 2015.

Many ROK state-owned enterprises (SOEs) continue to exert significant control over the economy.  There are 36 SOEs active in the energy, real estate, and infrastructure (i.e., railroad and highway construction) sectors.  The legal system has traditionally ensured a role for SOEs as sectoral leaders, but in recent years, the ROK has sought to attract more private participation in the real estate and construction sectors.  SOEs are currently subject to the same regulations and tax policies as private sector competitors and do not have preferential access to government contracts, resources, or financing.  The ROK is party to the WTO Government Procurement Agreement; a list of SOEs subject to WTO government procurement provisions is available in Annex 3 of Appendix I to the Government Procurement Agreement (GPA).  The state-owned Korea Land and Housing Corporation enjoys privileged status on state-owned real estate projects, notably housing.  The court system functions independently and gives equal treatment to SOEs and private enterprises.  The ROK government does not provide official market share data for SOEs.  It requires each entity to disclose financial information, number of employees, and average compensation figures.  The PIMA gives the Ministry of Economy and Finance oversight authority over many SOEs, mainly pertaining to administration and human resource management.  However, there is no singular government entity that exercises ownership rights over SOEs.  SOEs subject to PIMA must report to a cabinet minister.  Alternatively, the ROK President or relevant cabinet minister appoints a CEO or director, often from among senior government officials.  PIMA explicitly obligates SOEs to consult with government officials on budget, compensation, and key management decisions (e.g., pricing policy for energy and public utilities).  For other issues, government officials informally require either prior consultation or subsequent notification of SOE decisions.  Market analysts generally acknowledge the de facto independence of SOEs listed on local security markets, such as the Industrial Bank of Korea and Korea Electric Power Corporation; otherwise, SOEs are regarded either as fully-guaranteed by the government or as parts of the government.  The ROK adheres to the OECD Guidelines for Multinational Enterprises and reports significant changes in the regulatory framework for SOEs to the OECD.  A list of South Korean SOEs is available in Korean at: http://www.alio.go.kr/home.html.  The ROK government does not confer advantages on SOEs competing in the domestic market.  Although the state-owned Korea Development Bank may enjoy lower financing costs because of a governmental guarantee, this does not appear to have a major effect on U.S. retail banks operating in Korea.

Privatization Program

Privatization of government-owned assets has historically faced protests by labor unions and professional associations, and has sometimes suffered a lack of interested buyers.  No state-owned enterprises were privatized between 2002 and November 2016.  In December 2016, the ROK sold part of its stake in Woori Bank, recouping USD 2.1 billion, and plans to sell its remaining stake gradually by 2022.  As of March 2021, the government holds a 17.25 percent stake in Woori Bank.  Most analysts do not expect significant movement toward privatization in the near future.  Foreign investors may participate in privatization programs if they comply with ownership restrictions stipulated for the 30 industrial sectors indicated in the FETA (see Section 1: Openness To, and Restrictions Upon, Foreign Investment).  These programs have a public bidding process that is clear, non-discriminatory, and transparent.

Awareness of the economic and social value of responsible business conduct and corporate social responsibility (CSR) continues to grow in the ROK.  The Korea Corporate Governance Service, founded in 2002 by entities including the Korea Exchange and the Korea Listed Companies Association, encourages companies to voluntarily improve their corporate governance practices.  Since 2011, its annual assessments have included guidelines and CSR reviews, including of corporate environmental responsibility.  The United Nations Global Compact (UNGC) Network Korea, established in 2007, actively promotes corporate involvement in the UN Public Private Partnership for Sustainable Development Goals 2016-2030.  UNGC is focused on human rights, anti-corruption, labor standards, and the environment, with 231 ROK companies listed as UNGC members as of April 2020.  Government subsidies and tax reductions for social enterprises have contributed to an increase in the number of organizations tackling social issues related to unemployment, the environment, and low-income populations.  The ROK government promotes the OECD Guidelines for Multinational Enterprises online via seminars and by publishing and distributing promotional materials.  To enhance implementation, the ROK government established a National Action Plan overseen by the Ministry of Justice’s International Human Rights Division, designated a National Contact Point (NCP), and assigned the Korean Commercial Arbitration Board (KCAB) as the NCP Secretariat.  The KCAB handled 443 cases in 2019 with a total claim amount over USD 913 million.

The National Human Rights Commission, the Ministry of Employment and Labor (MOEL), the Korea Consumer Agency, and the Ministry of Environment impartially enforce ROK laws in the fields of human rights, labor, consumer protection, and the environment.  Shareholder rights are protected by the Act on External Audit of Stock Companies under the jurisdiction of the Financial Services Commission, the Act on Monopoly Regulation and Fair Trade under the jurisdiction of the KFTC, and the Commercial Act under the jurisdiction of the Ministry of Justice.  The Commercial Act was revised in December 2020 to better protect minority shareholders.  Other organizations involved in responsible business conduct include the ROK office of the Trade Union Advisory Committee to the OECD, the Korea Human Rights Foundation, and the Korean House for International Solidarity.  The Korea Sustainability Investing Forum (KOSIF) was established in 2007 to promote and expand socially responsible investment and CSR.  Through regular fora, seminars, and publications, KOSIF provides educational opportunities, conducts research to establish a culture of socially responsible investment in the ROK, and supports relevant legislative processes.

The ROK has no regulations to prevent conflict minerals from entering supply chains; however, MOTIE supports companies’ voluntary adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.  ROK companies are obligated to follow regulations on conflict minerals by export destination countries.  The Korea International Trade Association and private sector firms provide consulting services to companies seeking to comply with conflict-free regulations.  The ROK is not a member of the Extractive Industries Transparency Initiative.  It has participated in the Kimberly Process since 2012.  The ROK government is taking measures to guarantee transparency through the Mining Act, Overseas Resources Development Business Act, and other relevant laws on taxation, environment, labor, and bribery, as well as through the OECD Guidelines for Multinational Enterprises.  The ROK is not a signatory to international agreements on private military or security industries, and the ROK’s small security sector focuses primarily on commercial contracts.

Additional Resources

Department of State

• Country Reports on Human Rights Practices (https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/)
• Trafficking in Persons Report (https://www.state.gov/trafficking-in-persons-report/)
• Guidance on Implementing the UN Guiding Principles for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities (https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/)
• North Korea Sanctions & Enforcement Actions Advisory (https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf)

Department of Labor

• Findings on the Worst Forms of Child Labor Report (https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings )
• List of Goods Produced by Child Labor or Forced Labor (https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods)
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World (https://www.dol.gov/general/apps/ilab)
• Comply Chain (https://www.dol.gov/ilab/complychain/) 

In an effort to combat corruption, the ROK has introduced systematic measures to prevent the illegal accumulation of wealth by civil servants.  The 1983 Public Service Ethics Act requires high-ranking officials to disclose personal assets, financial transactions, and gifts received during their terms of office.  The Act on Anti-Corruption and the Establishment and Operation of the Anti-Corruption and Civil Rights Commission of 2008 (previously called the “Anti-Corruption Act”) concerns reporting of corruption allegations, protection of whistleblowers, and training and public awareness to prevent corruption; the act also establishes national anti-corruption initiatives through the Anti-Corruption and Civil Rights Commission (ACRC).  Implementation is behind schedule, according to Transparency International, which ranked the ROK 33 out of 180 countries and territories in its 2020 Corruption Perception Index with a score of 61 out of 100 (with 100 being the best score).  The Department of State’s 2019 ROK Human Rights Report highlighted allegations of corruption levied against former Minister of Justice Cho Kuk in October 2019.  Former ROK presidents Park Geun-hye and Lee Myung-bak were found guilty in separate corruption trials in 2018; the ROK Supreme Court upheld both verdicts in January 2021 and October 2020, respectively, and both remain imprisoned.  Political corruption at the highest levels of elected office has occurred despite more recent efforts by the ROK legislature to pass and enact anti-corruption laws such as the Act on Prohibition of Illegal Requests and Bribes, also known as the Kim Young-ran Act, in March 2015.  This law came into effect on September 28, 2016, and institutes strict limits on the value of gifts that can be given to public officials, lawmakers, reporters, and private school teachers.  It also extends to spouses of such persons.  The Act on the Protection of Public Interest Whistleblowers is designed to protect whistleblowers in the private sector and equally extends to reports on foreign bribery; the law also establishes an ACRC-operated reporting center.

A 2014 ferry disaster that resulted in the deaths of 304 passengers brought to public attention collusion between government regulators and regulated industries.  Investigators determined that companies associated with the vessel had used insider knowledge and government contacts to skirt legal requirements by hiring recently-retired government officials.  In response, the ROK government tightened regulations for hiring former government officials.  This reform expanded the number of sectors restricted from employing former government officials, extended the employment ban from two to three years, and increased scrutiny of retired officials employed in fields associated with their former duties.  The Public Service Ethics Commission, between May 2017 and February 2019, approved approximately 85 percent, or 1,335, of the requests made by former political appointees and government officials to accept government-affiliated or private sector positions, according to local press.  Most companies maintain an internal audit function to detect and prevent corruption.  The Board of Audit and Inspection, which monitors government expenditures, and the Public Service Ethics Committee, which monitors civil servants’ financial activities and disclosures are official agencies responsible for combating government corruption.  The ACRC focuses on preventing corruption by assessing the transparency of public institutions, protecting and rewarding whistleblowers, training public officials, raising public awareness, and improving policies and systems.  The Act on the Prevention of Corruption and the Establishment and Management of the Anti-Corruption and Civil Rights Commission, along with and the Protection of Public Interest Reporters Act, protects nongovernment organizations and civil society groups reporting cases of corruption to government authorities.  In April 2018, laws were updated to allow individuals filing allegations of corruption to report cases through attorneys without disclosing their identities to the courts.  Violations of these legal protections can result in fines or prison sentences.  U.S. firms have not identified corruption as an obstacle to FDI.  The ROK ratified the UN Convention against Corruption in 2008.  It is also a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and a member of the Asia-Pacific Economic Cooperation Anti-Corruption and Transparency Working Group.  The ROK Financial Intelligence Unit cooperates with U.S. and UN efforts to disrupt sources of terrorist financing.  Transparency International has maintained a national chapter in the ROK since 1999.

Resources to Report Corruption

Government agency responsible for combating corruption:

Anti-Corruption and Civil Rights Commission
Government Complex-Sejong (7-dong), 20, Doum 5-ro, Sejong-si 339-012
Tel: +82-44-200-7151 (International Relations Division)
Fax: +82-44-200-7916
Email: acrc@korea.kr

Anti-corruption non-government organization:

Transparency International Korea
#1006 Pierson Building, 42, Saemunan-ro, Jongno-gu, Seoul 110-761
Tel: +82-2-717-6211
Fax: +82-2-717-6210
Email: ti@ti.or.kr
http://www.transparency-korea.org/

Relations between the ROK and the Democratic People’s Republic of Korea (DPRK) are tense despite rapprochement efforts in 2018, and the two Koreas maintain one of the world’s most heavily-fortified borders.  The United States has had a security alliance with the ROK since 1953, with over 28,000 U.S. troops currently stationed in the ROK.  The presence of U.S. forces has ensured stability on the Korean Peninsula since 1953 and has enabled the ROK to grow into a modern, prosperous democracy boasting one of the world’s largest economies in 2020.  The two Koreas committed at an April 2018 inter-Korean summit to reduce military tensions on the border and to work toward a permanent peace regime on the Korean Peninsula.  Likewise, in the June 2018 Singapore Summit between former President Trump and Chairman Kim Jong Un, the United States and DPRK agreed to work toward the transformation of U.S.-DPRK relations, the construction of a lasting and stable peace regime on the Korean Peninsula, the complete denuclearization of the Korean Peninsula, and the recovery and repatriation of POW/MIA remains from the Korean War.  A subsequent summit in Hanoi in February 2019 and a meeting at the inter-Korean Joint Security Area in June 2019 did not result in further breakthroughs.

The ROK’s relations with Japan remained strained in 2021, primarily due to the ROK Supreme Court’s 2018 decisions directing Japanese companies to compensate South Koreans subjected to forced labor during World War II, including the court-directed seizure of defendant company assets, as well as Japan’s subsequent tightening of export controls against the ROK in 2019.   This prompted consumer boycotts in the ROK against Japanese goods, causing a significant drop in local sales for certain products, including beer and automobiles, as well as at certain Japanese retail chains.

Public health experts and economists gave the ROK government under President Moon Jae-in overall high marks on its management of the COVID-19 pandemic, as infections were kept to lower levels than many other OECD countries without the adoption of draconian restrictions.  In the first few years of the Moon administration the ruling Democratic Party (DP), with its near-super majority in the National Assembly, was able to unilaterally advance many of its policy priorities, particularly in the area of judicial reform.  By the start of 2021, steep rises in the price of housing and a string of scandals involving Moon’s senior officials and DP lawmakers, including a high-profile land speculation scandal that broke weeks before key by-elections in Seoul and Busan, damaged the standing of the ruling party and resulted in rising public support for the main opposition People Power Party.  Nevertheless, the Moon administration welcomed the arrival of the Biden-Harris administration and its renewed focus on strengthening strategic alliances, with both governments exploring renewed cooperation in topics such as climate change, public health, supply chain cooperation, and cyber issues.

The ROK does not have a history of political violence directed against foreign investors.  There have not been reports of politically-motivated threats of damage to foreign-invested projects or foreign-affiliated installations of any sort, nor of any incidents that might be interpreted as having targeted foreign investments.  Labor violence unrelated to the issue of foreign ownership, however, has occurred in foreign-owned facilities in the past.  There have also been protests in the past directed at U.S. economic, political, and military interests (e.g., beef imports in 2008 or deployment of Terminal High Altitude Area Defense in 2017 with protests continuing into 2021).  The ROK is a modern democracy with active public political participation, and well-organized political demonstrations are common.  For example, large-scale rallies were a regular occurrence throughout former President Park Geun-hye’s impeachment proceedings in 2016 and 2017.  The protests were peaceful and orderly.  The presidential by-election and transition that followed Park’s impeachment proceeded smoothly and without incident.

Upon taking office in May 2017, President Moon Jae-in declared himself the “Jobs President,” and his administration has introduced a number of employment-related reforms since then.  In an attempt to reduce the ROK’s notoriously long working hours, the Moon administration introduced a mandatory 52-hour workweek regulation in July 2018.  Domestic and foreign companies, however, expressed concern that the measure added further rigidity to the ROK’s already inflexible labor market.  According to Statistics Korea (http://kostat.go.kr/portal/eng/index.action), there were approximately 28 million economically active people in the ROK as of January 2021, with an employment rate (OECD standard) of approximately 57 percent.  The overall unemployment rate of 5.7 percent in January 2021 is much less than the 9.5 percent unemployment rate of youth aged 15-29.  The country has two major national labor federations.  As of December 2020, the Federation of Korean Trade Unions (FKTU) had 1,018,358 members, and the Korean Confederation of Trade Unions (KCTU) had 1,044,672 members.  FKTU and KCTU are affiliated with the International Trade Union Confederation.  Most of FKTU’s constituent unions maintain affiliations with international union federations.

The minimum wage is reviewed annually.  Labor and business set the minimum wage for 2021 at KRW 8,590,720 (approximately USD 8 per hour), a 21.5 percent increase from 2020.  According to Statistics Korea, non-regular workers received 62.8 percent of the wages of regular workers in 2020.  Non-regular workers on contracts stipulating monthly pay received KRW 1.73 million per month (about USD 1,575) while regular workers paid monthly received KRW 3.36 million (about USD 3,050).

For regular, full-time employees, the law provides for employment insurance, national medical insurance, industrial accident compensation insurance, and participation in the national pension system through employers or employer subsidies.  Non-regular workers, such as temporary and contracted employees, are not guaranteed the same benefits.  Regarding severance pay for regular workers, ROK law does not distinguish between firing versus laying off an employee for economic reasons.  Employers’ reliance on non-regular workers is partially explained by cost savings associated with dismissing regular full-time employees and re-hiring non-regular workers.  In 2004, the ROK implemented a “guest worker” program known as the Employment Permit System (EPS) to help protect the rights of foreign workers.  The EPS allows employers to legally employ a certain number of foreign workers from 16 countries, including the Philippines, Indonesia, and Vietnam, with which the ROK maintains bilateral labor agreements.  In 2020, the ROK increased its annual quota to 56,000 migrant workers.  At the end of 2020, approximately 181,073 foreigners were working under the EPS in the manufacturing, construction, agriculture, livestock, service, and fishing industries.

Legally, unions operate autonomously from the government and employers, although national labor federations comprised of various industry-specific unions receive annual government subsidies.  The ratio of organized labor to the entire population of wage earners at the end of 2019 was 12.5 percent.  ROK trade union participation is lower than the latest-available OECD average of 16 percent in 2016.  More information is available at http://stats.oecd.org/.  Labor organizations are free to organize in export processing zones (EPZs), but foreign companies operating in EPZs are exempt from some labor regulations.  Exemptions include provisions that mandate paid leave, require companies with more than 50 employees to recruit persons with disabilities for at least two percent of their workforce, and restrict large companies from participating in certain business categories.  Foreign companies operating in Free Economic Zones have greater flexibility to employ “non-regular” workers in a wider range of sectors for extended contractual periods.  ROK law affords workers the right of free association and allows public servants and private workers to organize unions.  The Trade Union and Labor Relations Adjustment Act provides for the right to collective bargaining and action, and allows workers to exercise these rights in practice.

The National Labor Relations Commission is the primary government body responsible for labor dispute resolution.  It offers arbitration and mediation services in response to dispute resolution requests submitted by employees, employers, or both parties together.  Labor inspectors from the Ministry of Employment and Labor also have certain legal authorities to participate in labor dispute settlement.  The Korea Workers’ Compensation and Welfare Service handles labor disputes resulting from industrial accidents or disasters.  In June 2018, the ROK President established the Economic, Social and Labor Council to serve as an advisory group on economic and labor issues.  The Act on the Protection of Fixed-Term and Part-Time Workers prohibits discrimination against non-regular workers and requires firms to convert non-regular workers employed longer than two years to permanent status.  The two-year rule went into effect for all businesses on July 1, 2009.  Both the labor and business sectors have complained that the two-year conversion law forced many businesses to limit the contract terms of non-regular workers to two years and incur additional costs with the entry of new contract employees every two years.  More information can be found in the Department of State’s Report on Human Rights Practices for 2020: https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/south-korea/.

*ROK Sources: GDP – http://ecos.bok.or.kr (as of March 2021); inbound FDI – http://www.motie.go.kr (as of March 2021); outbound FDI – http://www.koreaexim.go.kr (as of March 2021); portfolio investment – http://www.fss.or.kr (as of March 2021)

Note that ROK data differs significantly due to different calculation methods and data sources. 

Note that ROK data differs significantly due to different calculation methods and data sources.

Economic Officer, U.S. Embassy Seoul
188 Sejong-daero, Sejongno, Jongno-gu, Seoul, South Korea 110-710
Tel: +82 2-397-4114
SeoulECONContacts@state.gov