The New World of Foreign Direct Investment
1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?
Japan famously benefitted from the free-trade trend that the world saw after World War II. Although Japan protected many of its markets in the latter half of the 20th century, Japan’s markets are now mostly free from tariff-based trade barriers, with certain notable exceptions such as Japan’s rice market, which remains protected, as well as Japan’s leather and footwear markets.
With the recent trade friction between the US and China, and the trade sanctions against Russia in response to its invasion of Ukraine, the trend towards more restricted world trade appears to be with us for the foreseeable future. This will undoubtedly pose challenges for Japan. However, Japan’s political stability, combined with its increasing affordability (in part due to the weak yen), may create opportunities that did not seem possible just a few years ago. For example, Taiwan Semiconductor Manufacturing Company (TSMC) is building an advanced chipmaking factory in Kumamoto with some funding from Japan. TSMC expects to begin producing chips in 2024. As one publication noted, this effort is aimed at dealing with the “growing tensions between the United States and China over technology development.” Many companies are learning too late that a heavy reliance on China for their technology and manufacturing is untenable. Japan, with its technological and manufacturing prowess, may be an attractive alternative to China, especially for high-end products.
2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?
Not at all. Japan has liberalized most of its industries, which are now largely open to foreign investors except for certain specific areas, as discussed below. As a result, the Japanese government’s role in foreign direct investment is, for the most part, limited to monitoring transactions and investments for foreign exchange purposes through various post-transaction notification requirements under the Foreign Exchange and Foreign Trade Act (FEFT Act).
3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?
In a nutshell, yes. The FEFT Act requires foreign investors to submit written notification to the government prior to investing in industries that involve national security, the maintenance of public order, public safety, or industries that Japan has not yet liberalized. Under the FEFT Act, these industries include: (i) agriculture; (ii) forestry; (iii) fisheries; (iv) mining; (v) electricity, gas, heating, and water; (vi) information and communications; and (vii) transportation. The list also includes manufacturing in connection with aircraft, weapons, nuclear power, and space development. Moreover, due to the increasing importance of cybersecurity, Japan added industries such as integrated circuit manufacturing, personal computer manufacturing, and certain types of software development. In addition, the prior notification requirement applies to foreign direct investment from certain countries listed in the FEFT Act (such as North Korea and Iraq). The government has a maximum of five months to assess whether the contemplated transaction poses any risk in terms of national security, public order, or public safety. If necessary, the government can suspend the investment and/or take any steps required to eliminate the risk.
4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?
The collapse of the global supply chain has had serious adverse effects on the Japanese economy, especially on industries that rely heavily on parts and materials from other countries. Japan is attempting to alleviate the impact by encouraging investment in domestic manufacturing, specifically by offering subsidies to companies that establish facilities in Japan to manufacture products seriously affected by supply chain disruptions (such as semiconductors).
5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?
Apart from the restricted industries described above in Question 3, foreign and domestic investors face the same legal issues with M&A deals in Japan. For instance, prior to any M&A transaction, both foreign and domestic investors should check whether the deal will trigger a prior filing requirement with the Japan Fair Trade Commission (JFTC). Part of the JFTC’s job is to determine if a contemplated deal will have anti-competitive effects on the market. Naturally, there are also issues that foreign investors will discover only through their due diligence on a target company.
Under Japan’s Antimonopoly Act, a company that plans on acquiring or merging with another company is required to notify the JFTC prior to the contemplated deal when that company:
- has gross sales revenue in Japan of JPY 20 billion or more;
- acquires at least 20% of the shares in another company (that figure is 50% if the acquiring company already holds at least 20% of the shares in the company being acquired); and
- the company being acquired has revenue in Japan of at least JPY 5 billion.
If notification is required, the acquisition or merger cannot proceed until at least 30 days have passed from the date that the JFTC receives the notification. (However, the JFTC may shorten this period if it believes it is necessary or appropriate to do so.) During this 30-day period, the JFTC decides whether it needs to perform a more in-depth review of the deal and, if so, will obtain more information and documentation in order to evaluate whether the acquisition will have anticompetitive effects on the market. The JFTC must complete this evaluation no later than 120 days after it receives the notification, or 90 days after it receives all of the necessary information and documentation, whichever is later.
When the JFTC finds that a merger or acquisition will negatively affect competition, it will notify the company of its tentative decision. This decision will typically require the company to dispose of all or some of its shares, transfer a part of its business, or take other measures necessary to eliminate the negative effects on competition. The company has the opportunity to challenge this decision before the JFTC issues its final decision.
6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?
There are no legal restrictions on foreign investors acquiring Japanese real estate or other tangible property. With no citizenship requirements or obligations to establish a joint venture with a local partner, foreign investors can purchase real estate and other property as freely as Japanese citizens.
However, language and cultural issues often pose challenges. For this reason, there are real estate agents and brokers that specialize in assisting foreign investors. These services include serving as an intermediary between the foreign investor and Japanese speaking owners, performing title searches and on-site inspections, and providing advice on the relevant regulations. Because purchasing real estate and some types of tangible property can be high-risk, complex transactions, foreign investors should consider retaining legal counsel and tax advisors as early in the process as possible.
7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?
The Personal Information Protection Law regulates data exchange and privacy. This law imposes several obligations on “business operators handling personal information.” These obligations include:
- specifying the purpose of obtaining and storing the personal information;
- avoiding use of the personal information for purposes other than those specified unless the business operator has obtained consent;
- avoiding obtaining personal information in an inappropriate manner;
- immediately disclosing a person’s personal information to them when they request disclosure;
- deleting personal information when an individual points out that the information was obtained in an inappropriate manner; and
- taking steps to ensure that the business operator safely manages and stores the personal information.
In addition, “business operators handling personal information” assume several obligations regarding sensitive personal information such as race, religion, medical history, and criminal history. These obligations include:
- obtaining consent prior to collecting this type of information or providing it a third party;
- recording the date, recipient, and other information when providing this type of information to a third party; and
- when receiving sensitive personal information from a third-party provider, verifying certain details about that provider, such as the provider’s identity and how they came into possession of the information.
Some multinational companies use an office located outside of Japan as the HR department for their Japanese subsidiary (instead of having the Japan office itself be in charge of HR). Compliance may be more difficult for these companies, as they may wish to store the personal information of their Japanese employees at a subsidiary or a parent company located outside of Japan. The problem with this approach is that an overseas parent or subsidiary is legally considered a third party subject to additional requirements. As such, companies that store personal information outside of Japan should be especially careful to avoid violating the law. The maximum penalty for failing to comply with the requirements is two years’ imprisonment and a fine of JPY 1 million.
There are no unique aspects to intellectual property protection in Japan that foreign investors need to pay special attention to. One possible exception is the issue of moral rights, which are afforded greater protection in Japan than in certain jurisdictions like the United States (see discussion below).
Japan’s Patent Act, Utility Model Act, Design Act, Trademark Act, and Copyright Act together form a comprehensive intellectual property legal regime. As in many other jurisdictions, patents, utility models, designs, and trademarks need to be registered in order to receive protection, while copyright protection is provided without registration.
Japan protects an author’s moral rights, which include the right to make the work public, the right to determine how the author’s name appears on a work, and the right to maintain the integrity of the author’s works (moral rights are not assignable). The protection of moral rights in Japan is generally greater than that of countries such as the United States and the United Kingdom. Trade secrets may be protected if the information satisfies the requirements under the Unfair Competition Prevention Act. In addition, the layout of integrated semiconductor circuits is protected under the Act Concerning the Circuit Layout of a Semiconductor Integrated Circuit, and new plant varieties are protected under the Seeds and Seedlings Act.
Japan is a signatory to all major intellectual property treaties. Among these are the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs).
8 . Describe the most common legal structures used by foreign investors when doing business in your country.
Foreign investors in Japan typically use one of two limited liability entities - a kabushiki kaisha (KK) or a goudou kaisha (GK). With either a KK or a GK, the shareholders/equity holders are personally liable only for their investment in the company except in extraordinary circumstances where the corporate veil is pierced. Other legal structures exist under Japanese law but are not widely used because they do not offer limited liability.
Kabushiki kaisha or goudou kaisha?
KKs have historically been the de facto default, as GKs are relatively new. KKs are flexible enough to work for both start-ups and large companies. Moreover, the prevalence of KKs makes it easier to obtain credit and helps put business associates and customers in Japan at ease. The company’s owners may structure the KK in a number of ways to meet the needs of the company. Although a KK needs to have at least one director, it may instead have a board made up of at least three directors and a statutory auditor, who oversees the board and provides advice on various issues.
With every passing year, however, foreign investors are increasingly opting for GKs due to their lower costs and simplified incorporation procedures. In addition, GKs offer their owners more flexibility than KKs. Because the owner of a GK also manages the company, there are fewer corporate requirements to satisfy. This is different from a KK, which by law must hold shareholders meetings to make important corporate decisions and adequately maintain and operate the company. Because of these advantages, several high-profile multinational companies such as Amazon, Apple, and Google have chosen to incorporate as GKs.
Except for certain specific industries that are subject to foreign ownership restrictions (as discussed in Question 3), a foreign investor does not need to form a joint venture with a local investor in order to incorporate a new legal entity. In fact, a foreign investor may own 100% of the company, and the incorporation process usually takes only a couple of weeks. Except for prior notification that may be required for investors from certain restricted countries, a foreign investor will not need to take any other specific steps for incorporation besides registering with the legal affairs bureau.
Both a KK and a GK require initial capital of only JPY 1. Besides the initial capital, the cost to form a KK and a GK differs. On top of the required attorneys’ fees, the various fees and costs to incorporate a KK are approximately JPY 270,000, while those for a GK will total around JPY 80,000.
Unlike in the past, all directors may reside outside of Japan. In practice, however, most companies are in fact set up by at least one director who resides in Japan. This is due to the practical challenges in handling banking transactions. Notably, it is especially difficult for a newly incorporated company to open a bank account if the company has only non-resident directors.
9 . What are the most attractive opportunities for foreign investors in your country at this time?
Observers view Japanese properties, such as hotels and residential apartments, as undervalued. Compared to other countries, real estate in Japan can be a relatively inexpensive, stable source of income. With the current historically weak yen, investors from countries with strong currencies may find real estate investment opportunities in Japan to be doubly attractive.
Japan’s aging population, combined with its historically low birth rate, will likely result in a severe shortage of low-skilled workers, especially in the area of elder care.
The post-COVID-19 return of foreign tourists to Japan may create opportunities for foreign investors. Pre-pandemic, Japan’s tourism industry had made great strides to better accommodate foreign tourists. However, Japan can do a lot more to remove the various pain points for foreign tourists, allowing them to explore and enjoy all of Japan beyond well-known cities such as Tokyo and Kyoto. Foreign investors may be in a better position to satisfy the needs of foreign tourists and provide superior services that are better tailored to them.
10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?
Japan does not have any specific laws to protect foreign direct investors. However, Japan is a party to both bilateral and multi-national treaties that offer some protection to foreign direct investors. Among other things, these treaties allow foreign direct investors to file an arbitration claim against the government and seek damages resulting from a country’s treaty violations.