Economic, Political and Legal Environment of Japan

Economic, Political and Legal Environment of Japan

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INTRODUCTION

Japan„s nickname, the Land of the Rising Sun„, comes from its location on the edge of the

Eastern hemisphere and is an appropriate analogy for its economy. At several times throughout

its history, Japan has risen to the level of a major economic world power. Due to its dramatic

post World War II growth, Japan„s industrialized free market economy is the third largest in the

world; however, Japan has suffered due to recent global economic conditions (CIA-The World

Factbook, 2009). When worldwide demand for its exports decreased dramatically in 2008, Japan

entered its first recession in six years. Real GDP growth, as reported by the Bank of Japan, was -

1.8% in 2008 and -5.2% in 2009. Forecasts for 2010 call for minimal growth (U.S. Department

of State, 2009).

Japanese business culture is wrongly perceived as the biggest obstacle to starting business in

Japan for many foreign companies thinking of entering the Japanese market. Many foreign

companies never do start business in Japan (or only enter the Japanese market through a

distributor) simply because of the misconception, fueled by those infamous myths of doing

business in Japan, that dealing with Japanese business culture is somehow too risky. Fortunately,

Japanese business culture is not an impenetrable barrier to successful business in Japan, as

proven by the very substantial Japanese market share enjoyed by Yahoo!, BMW, Mercedes-

Benz, Chanel, Louis Vuitton, Tiffany & Co. and many others. Inevitably Japanese business

culture is different to that of the US or Europe, but the differences do not make it any more risky

to do business in Japan than elsewhere in the world. In fact, certain aspects of Japan's business

culture, especially the very stable long-term relationships resulting from the conservative

Japanese sense of loyalty to trusted partners, can be very beneficial for those foreign companies

that understand how to swim with the cultural tide as opposed to vainly struggling against it.

The economy of Japan is the third largest in the world by the Gross Domestic Product (GDP) in

Japan was worth 4601.46 billion US dollars in 2014, the fourth largest by purchasing power

parity that is $4.70 trillion (2013 est.) and is the world's second largest developed economy.

According to the International Monetary Fund, the country's per capita GDP (PPP) was at

$36,899, the 22nd-highest in 2014. Japan is a member of the G7. The Japanese economy is

forecasted by the Quarterly Tankan survey of business sentiment conducted by the Bank of

Japan. Nikkei 225 presents the monthly report of top Blue chip (stock market) equities on Japan

Exchange Group. Due to a volatile currency exchange rate, Japan's GDP as measured in dollars

fluctuates widely. Accounting for these fluctuations through use of the Atlas method, Japan is

estimated to have a GDP per capita of around $38,490.


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ECONOMIC ENVIRONMENT

The Japanese government has initiated an economic policy known as “Abenomics”, through the

“three arrows” of monetary easing, a flexible fiscal policy and structural reform. “Abenomics”

has arguably stabilized the yen exchange rate, fattened the stock market, and helped business

confidence boosted, resulting in recovering corporate investment. Steps have already been made,

including negotiations with the US and others on the Trans-Pacific Partnership (TPP) and with

the EU on the Economic Partnership Agreement (EPA) to address the third arrow of structural

reform, as well as some agricultural, energy sector and corporate governance reforms.

Challenges still lie ahead and it remains to be seen if bolder structural reform can be achieved.

The fall in the value of the Yen has not increased Japan‟s exports as much as some had expected.

Analysts suggest this is due to the off-shoring in recent years of Japanese manufacturing

operations and the weakening competitiveness of Japanese firms in some sectors.

Japan‟s public sector debt, the world‟s largest, currently stands at over 245% of GDP. Japan

increased its rate of consumption tax (VAT) from 5% to 8% in April 2014. A second proposed

rise in VAT (to 10%) has been postponed until April 2017. In December 2014, the Government

also announced a $29 billion stimulus package to boost the Japanese economy.

A second proposed rise in VAT (to 10%) has been postponed until April 2017. In December

2014, the Government also announced a $29 billion stimulus package to boost the Japanese

economy. As a country with limited natural resources, Japan is dependent on imports, especially

Oil and Gas, food and raw materials for industrial production. This issue has increased in the

aftermath of the 2011 Tsunami that resulted in the closure of all nuclear reactors in Japan causing

a massive increase in energy imports.

1. Gross Domestic Product

The Gross Domestic Product (GDP) in Japan was worth 4601.46 billion US dollars in 2014. The

GDP value of Japan represents 7.42 percent of the world economy. GDP in Japan averaged

2520.98 USD Billion from 1960 until 2014, reaching an all time high of 5954.48 USD Billion in

2012 and a record low of 44.30 USD Billion in 1960. GDP in Japan is reported by the World

Bank Group.

The gross domestic product (GDP) measures of national income and output for a given country's

economy. The gross domestic product (GDP) is equal to the total expenditures for all final goods

and services produced within the country in a stipulated period of time.


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Figure: Japan GDP

2. Gross National Income

Gross National Product in Japan increased to 537319.60 JPY Billion in the second quarter of

2015 from 534692.50 JPY Billion in the first quarter of 2015. Gross National Product in Japan

averaged 447942.56 JPY Billion from 1980 until 2015, reaching an all time high of 537319.60

JPY Billion in the second quarter of 2015 and a record low of 263297.50 JPY Billion in the

second quarter of 1980. Gross National Product in Japan is reported by the Cabinet Office,

Japan.

Figure: Japan Gross National Income


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3. Foreign Direct Investment

Foreign Direct Investment in Japan decreased to 14340 JPY Hundreds Million in August from

15690 JPY Hundreds Million in July of 2015. Foreign Direct Investment in Japan averaged

4983.62 JPY Hundreds Million from 1996 until 2015, reaching an all time high of 37754 JPY

Hundreds Million in July of 2013 and a record low of -3825 JPY Hundreds Million in January of

2010. Foreign Direct Investment in Japan is reported by the Ministry of Finance, Japan.

Figure: Japan Foreign Direct Investment

The main asset of Japan is its position as a leader in matters of high technology, research and

development. The potential hindrances to investment are linguistic in nature and involve its

business culture. The disaster that hit Japan on March 11, 2011 (the earthquake and the

devastating tsunami that followed), as well as environmental and health concerns about the

situation of the Fukushima Daiichi Nuclear Plant, could slow down foreign investment for a

short period. However, Japan remains a key market for investors. In addition, the Japanese

economy should be able to finance the reconstruction of the country without too much difficulty

thanks to a surplus in savings accumulated over recent years. The growth strategy of Prime

Minister Shinzo Abe aims to double the value of the 2012 FDI stock by 2020.

4. Foreign Exchange Reserves

Foreign Exchange Reserves in Japan increased to 1248936 USD Million in September from

1244150 USD Million in August of 2015. Foreign Exchange Reserves in Japan averaged

274169.72 USD Million from 1957 until 2015, reaching an all time high of 1306668 USD

Million in January of 2012 and a record low of 455 USD Million in September of 1957. Foreign

Exchange Reserves in Japan is reported by the Ministry of Finance, Japan.


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In Japan, Foreign Exchange Reserves are the foreign assets held or controlled by the country

central bank. The reserves are made of gold or a specific currency. They can also be special

drawing rights and marketable securities denominated in foreign currencies like treasury bills,

government bonds, corporate bonds and equities and foreign currency loans.

Figure: Japan Foreign Exchange Reserves

5. Inflation Rates

Consumer prices in Japan increased by 0.2 percent year-on-year in August of 2015, the same

pace as in the previous month and beating market expectations of a 0.1 percent drop. While

prices of food, furniture, clothing and leisure activities rose at a faster pace; cost of energy and

communication fell further. Excluding fresh food prices, the index declined by 0.1 percent; while

excluding food and energy prices it rose by 0.8 percent. Meanwhile, September consumer prices

in Tokyo fell by 0.1 percent year-on-year. Inflation Rate in Japan averaged 3.13 percent from

1958 until 2015, reaching an all time high of 25 percent in February of 1974 and a record low of

-2.52 percent in October of 2009. Inflation Rate in Japan is reported by the Ministry of Internal

Affairs & Communications.

In Japan, the most important categories in the consumer price index are Food (25 percent of total

weight) and Housing (21 percent). Transportation and communications accounts for 14 percent;

Culture and recreation for 11.5 percent; Fuel, light and water charges for 7 percent; Medical care

for 4.3 percent; Clothes and footwear for 4 percent. Furniture and household utensils, Education

and Miscellaneous goods and services account for the remaining.


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Figure: Japan Inflation Rates

6. Balance of Trade

Japan reported a trade deficit of ¥114.48 billion in September of 2015, much lower than a

¥961.98 billion gap a year earlier but missing market consensus of a surplus, as exports grew less

than expected while imports fell. Balance of Trade in Japan averaged 372.48 JPY Billion from

1963 until 2015, reaching an all time high of 1608.67 JPY Billion in September of 2007 and a

record low of -2795.04 JPY Billion in January of 2014. Balance of Trade in Japan is reported by

the Ministry of Finance Japan.

Between 1980 and 2010 Japan recorded a trade surplus every year. But since the Fukushima

nuclear disaster in March 2011, imports have surged due to the weakening of the Japanese yen

and increased purchases of fossil fuels and gas. As a result in 2014 trade deficit was the worst on

record. In 2014, the biggest trade surpluses were recorded with: United States, Hong Kong,

South Korea, Taiwan and Singapore. The biggest trade deficits were recorded with: China, Saudi

Arabia, Australia, United Arab Emirates, Russia and Malaysia.


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Figure: Japan Balance of Trade

7. Exports

Exports in Japan increased to 6417.36 JPY Billion in September from 5881.48 JPY Billion in

August of 2015. Exports in Japan averaged 3158.45 JPY Billion from 1963 until 2015, reaching

an all time high of 7681.69 JPY Billion in March of 2008 and a record low of 105.08 JPY Billion

in January of 1963. Exports in Japan is reported by the Ministry of Finance Japan.

Figure: Japan Exports


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8. Export Prices

Export Prices in Japan decreased to 112.50 Index Points in August from 114 Index Points in July

of 2015. Export Prices in Japan averaged 139.51 Index Points from 1960 until 2015, reaching an

all time high of 207.30 Index Points in October of 1982 and a record low of 94 Index Points in

January of 2012. Export Prices in Japan is reported by the Bank of Japan.

In Japan, Export Prices correspond to the rate of change in the prices of goods and services sold

by residents of that country to foreign buyers. Export Prices are heavily affected by exchange

rates.

Figure: Export Prices

9. Imports

Imports in Japan increased to 6531.83 JPY Billion in September from 6451.14 JPY Billion in

August of 2015. Imports in Japan averaged 2785.96 JPY Billion from 1963 until 2015, reaching

an all time high of 8047.03 JPY Billion in January of 2014 and a record low of 162.06 JPY

Billion in January of 1963. Imports in Japan is reported by the Ministry of Finance Japan.

Japan main imports are: mineral fuels (34 percent of total imports) with petroleum accounting for

18 percent, machinery (21 percent), food (8 percent), manufactured goods (8 percent), chemicals

(8 percent) and raw materials (7 percent). From March of 2011, Japan‟s imports of fuels has

surged due to the closure of the nuclear plants. Japan's main import partners are China (22

percent), the United States (8 percent), Saudi Arabia (6 percent), United Arab Emirates (5

percent) and Qatar (4.5 percent).


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Figure: Japan Imports

10. Import Prices

Import Prices in Japan decreased to 114.50 Index Points in August from 116.90 Index Points in

July of 2015. Import Prices in Japan averaged 91.83 Index Points from 1960 until 2015, reaching

an all time high of 190.40 Index Points in October of 1982 and a record low of 45.90 Index

Points in September of 1962. Import Prices in Japan is reported by the Bank of Japan.

In Japan, Import Prices correspond to the rate of change in the prices of goods and services

purchased by residents of that country from, and supplied by, foreign sellers. Import Prices are

heavily affected by exchange rates.

Figure: Japan Import Prices


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11. Ease of Doing Business

Ease of Doing Business in Japan deteriorated to 29 in 2014 from 27 in 2013. Ease of Doing

Business in Japan averaged 21 from 2008 until 2014, reaching an all time high of 29 in 2014 and

a record low of 13 in 2008. Ease of Doing Business in Japan is reported by the World Bank.

The Ease of doing business index ranks countries against each other based on how the regulatory

environment is conducive to business operationstronger protections of property rights.

Economies with a high rank (1 to 20) have simpler and more friendly regulations for businesses.

Figure: Ease of doing Business

12. Corporate Tax Rates

The Corporate Tax Rate in Japan stands at 33.06 percent. Corporate Tax Rate in Japan averaged

43.42 percent from 1993 until 2015, reaching an all time high of 52.40 percent in 1994 and a

record low of 33.06 percent in 2015. Corporate Tax Rate in Japan is reported by the National

Tax Agency Japan.

In Japan, the Corporate Income tax rate refers to the highest corporate tax rate for companies

with taxable income above 8 million JPY a year based in Tokyo. Revenues from the Corporate

Tax Rate are an important source of income for the government of Japan.


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Figure: Japan Corporate Tax Rate

13. Sales Tax Rate

The Sales Tax Rate in Japan stands at 8 percent. Sales Tax Rate in Japan averaged 5.60 percent

from 2006 until 2015, reaching an all time high of 8 percent in 2014 and a record low of 5

percent in 2007. Sales Tax Rate in Japan is reported by the National Tax Agency Japan.

In Japan, the sales tax rate is a tax charged to consumers based on the purchase price of certain

goods and services. The benchmark we use for the sales tax rate refers to the highest rate.

Revenues from the Sales Tax Rate are an important source of income for the government of

Japan.

Figure: Japan Sales Tax Rate


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POLITICAL AND LEGAL ENVIRONMENT

The Japanese political and legal system presents a complex picture. On the one hand, Japan is a

democratic state, with strong civic and legal institutions. On the other hand, the country has

characteristics of nondemocratic systems. It is a democracy yet just one party, the Liberal

Democratic Party (LDP), has run the country almost continuously since the end of World War II.

Japan is highly bureaucratic as well. Decisions affecting national policy are often made by

ministries with substantial power and influence and ties to business and industrial groups. As a

result, it is often said that Japan lacks the pragmatic approach to change that is common in

Western democracies, and this is seen as contributing to Japan‟s extended economic malaise.

To most foreigners, Japanese politics may appear somewhat puzzling. Policy does not seem to

change regardless of whom is leading the country, and, in fact, that‟s the argument the person in

the street gives when asked about his or her lack of interest in politics. “Why bother, nothing

changes.” Actually, most legislation isn't produced by the members of the Diet but by ministers

and bureaucrats.

The policy-making process in Japan is more similar to the parliamentary systems of Europe and

contrasts with the American system, in which presidential appointees attempt to exercise control

over branches of the bureaucracy on behalf of the president. It's not uncommon in Japan for the

influence and power of a Japanese ministry or agency to outlive the reign of a prime minister, as

evident in the powerful Ministry of International Trade and Industry, better known as MITI.

Not surprisingly given the culture, the Japanese political system also has a tradition of group

rather than personalized leadership. Elderly statesmen and party chiefs, not individual prime

ministers, often make political decisions. Cabinet members are usually appointed to head

ministries or agencies for very brief periods of time and at most establish only general policy

control. Recently, commentators have begun to question this lack of action.

Japan‟s legal system is very different from what most Westerners are used to. For example, only

since 1986 have foreign legal consultants (Gaigokuho-Jimu-Bengoshi) been allowed to provide

legal services. The requirements were modified in 1994 with the signing of the Amendments to

the Foreign Attorney Law. In certain types of practices, licensed legal consultants from other

countries can now practice together with Japanese attorneys.

Anyone planning on doing business in Japan should bear in mind that prefectures and

municipalities may create laws and regulations independently of each other, so long as they do

not contradict national laws. In other words, there are local laws and regulations in addition to

laws that are consistent and uniform throughout the country. Each of the 47 prefectures may have

a slightly different requirement concerning paperwork, for example.


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The Japanese are not very litigious; they generally prefer arbitration and compromise to

instituting lawsuits. Lawyers encourage settlement out of court for all disputes, and the amount

of money awarded as compensation is a fraction of the amounts awarded in America, for

example.

One of the most significant differences between Japanese law and the law in many other

countries has to do with the power of contracts. Japanese contracts are not necessarily meant to

be binding. Rather, founded on trust (shinyô), they're often more short statements of mutual

intent. The assumption is that if a change occurs in the circumstances of the contract, the terms

will be renegotiated.

1. System of Government

There are 2 main levels of government in Japan: National and Prefectural. Under the Japanese

Constitution, national legislative power is vested in the Diet. The prefectural assemblies of the 47

administrative prefectures have the power to govern and enact laws within the prefecture. At the more

local level is a system of city, town and village municipal assemblies.

2. Sources of Law

Japan is a civil law country, governed by laws passed by Parliament and interpreted by the courts. At the

beginning of the Meiji era (1868-1912), the German and French legal systems were the model for the

Japanese court and legal system. After the Second World War, a major reform of the legal system took

place in Japan with many of the revised laws being modeled on American law. Today, the Japanese legal

system remains a hybrid of the continental European system and the Anglo-American system.

3. Forms of business organization

There are a number of different business entities and structures available to foreign corporations intending

to operate a business in Japan. The main business entities or structures available are:

(1) Corporation (“KK Company” kabushiki kaisha): A KK Company must be incorporated with a

minimum capital of ¥10 million (approximately US$90,000). Payment of this initial capital of ¥10 million

is usually made by cash.

(2) Limited Liability Company (“YK Company” yugen kaisha): The limited liability company offers

certain advantages to a foreign investor particularly in terms of a lower minimum initial capitalization, as

only ¥3 million (approximately US$26,500) is required, and the fact that financial results are not required

to be filed. Foreign tax regulations (e.g., US “check the box” regulations) or other similar considerations

may operate to make the establishment of a limited liability company a more desirable entity for a

subsidiary than a KK company.

(3) Registration of the foreign corporation as a branch: The procedures for registering a foreign

corporation are relatively simple. The foreign corporation must appoint an individual representative who

is resident in Japan. The foreign corporation must notify the individual of the appointment by sending a

notice. Within 3 weeks of receiving such notice, the representative in Japan is required to register the


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foreign corporation with the Legal Affairs Bureau by submitting an application together with certain

required attachments. One of these attachments is an affidavit, which must be notarized by a notary public

in the country of the foreign corporation, stating the existence of the foreign corporation, the authority of

the representative in Japan and the legal nature of the foreign corporation.

(4) Representative office: A foreign corporation proposing to enter the Japanese market may initially wish

to enter the market in a very limited capacity to investigate the opportunities and possibilities. If the

extent of such activities in Japan is limited to “non-commercial” liaison activities, then the appropriate

structure from which to operate could be a representative office. The activities of a representative office

must be limited to those activities which are conducted on behalf of the head office of the foreign

corporation “not in the direct pursuit of profit”. Examples of activities in which a representative office

may be engaged include: information gathering, market research, advertising, and other pre-sales and

post-sales activities. The establishment of a representative office in Japan is procedurally simple with no

formal registration or reporting requirements being required. There are no annual or other meeting

requirements.

(5) General and silent partnerships: The Japanese Civil Code provides for the concept of a general or

“voluntary” partnership (nin-i kumiai) which is similar to a US style general partnership. In a general

partnership, the partners conduct the partnership business jointly and share in the profits and losses pro

rata to his or her respective contribution unless otherwise agreed among the partners. Each of the partners

will have unlimited liability for the obligations of the partnership pro rata to his or her respective

contribution unless otherwise agreed among the partners and will each own a portion of the partnership

assets. The voluntary partnership has no distinct legal personality and is transparent for tax purposes.

There are no filing or registration requirements.

Another form of partnership, referred to as a silent partnership (tokumei kumiai), is provided for in the

Commercial Code of Japan. A silent partnership is not an “entity” as such but is a specialized business

structure. In a silent partnership, one or more silent partners enter into an investment agreement with a

person, referred to as an “entrepreneur”, under which the silent partners provide funds to the entrepreneur

in exchange for the entrepreneur‟s promise to distribute to the silent partners a specified share of the

profits and losses, if there is no contrary provision in the silent partnership contract, arising from the

partnership business.

4. Foreign investment laws

Foreign investment in Japanese companies and businesses is regulated under the Foreign Exchange and

Foreign Trade Law. Certain reporting or approval requirements may apply to “direct inward investments”

depending on:

(1) The jurisdiction in which the investor is located (i.e., whether it is an approved country or not);

(2) The industry in which the target company or business operates (i.e., whether the industry in question

is a regulated industry or non-regulated industry); or

(3) In the case of asset acquisitions, the nature of the particular asset involved.


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5. Intellectual property

In Japan, intellectual property law is mostly all legislated. For example, the registration and protection of

patents is governed by the Patent Law, utility models by the Utility Model Law, designs by the Design

Law and trademarks by the Trademark Law. The Unfair Competition Prevention Law provides trade

secret protection for technical or business information, as well as protection for well-known and famous

names, trademarks or other “indications” even if not registered. The law protecting copyrights is the

Copyright Law. Japan provides protection to semiconductor chip designs under the Law Concerning the

Circuit Layout of a Semiconductor Integrated Circuit. Japan has also acceded to international treaties and

conventions, the most important of which are the Paris Convention for the Protection of Industrial

Property, the Berne Convention for the Protection of Literary and Artistic Works, the Patent Cooperation

Treaty, the Protocol Relating to the Madrid Agreement Concerning the International Registration of

Marks, the Convention Establishing the World Intellectual Property Organization and the Treaty on the

Trade Related Aspects of Intellectual Property (“TRIPS”).

6. National Taxes

Corporations Tax

In Japan, the national Corporations Tax is generally computed at a rate of 30% on all earnings. However,

for small corporations capitalized at ¥100 million or less, the first ¥8 million of income is subject to tax at

a rate of 22%. However, when local taxes are also taken into account with the national corporate income

tax, the average effective corporate tax rate reflecting the tax deductibility of the local enterprise tax (see

below) when paid, is around 41% to 42%. Different effective tax rates are applied if a company is subject

to the “factor-based enterprise tax” which is based not only on income but also other value-added factors.

Our Tax Department can provide more detail on the calculation of these rates, if required.7.2.1

Corporations Tax In Japan, the national Corporations Tax is generally computed at a rate of 30% on all

earnings. However, for small corporations capitalized at ¥100 million or less, the first ¥8 million of

income is subject to tax at a rate of 22%. However, when local taxes are also taken into account with the

national corporate income tax, the average effective corporate tax rate reflecting the tax deductibility of

the local enterprise tax (see below) when paid, is around 41% to 42%. Different effective tax rates are

applied if a company is subject to the “factor-based enterprise tax” which is based not only on income but

also other value-added factors. Our Tax Department can provide more detail on the calculation of these

rates, if required.

Both companies and branches are taxed on their net income (i.e., after the deduction of expenses incurred

in the development of their activities) but the scope of their taxable income is different. Companies are

subject to corporate taxation on their worldwide income (and foreign tax credit is available if certain

conditions are met), while branches are generally subject to tax only on their Japanese source income.

Personal Income Tax

Individual resident taxpayers must generally pay income tax on the total income earned during the

calendar year concerned. Generally, income tax rates are progressive, ranging from 10% to 37%. A local

inhabitants tax is also imposed, of which rates are also progressive, ranging from 5% to 13%. However

certain income, such as retirement income, designated interest income, dividend income and capital gains


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on listed shares, is taxed separately. An individual who has a residence of one year or more in Japan

(“resident”) must pay income tax on all of his or her income from both within and outside Japan.

An individual who has had residence in Japan for less than one year (“non-resident”) must pay income tax

on income derived from sources within Japan. Most of the income earned by non-residents is normally

subject to a flat withholding tax (e.g., 20%), but the rate may be reduced by virtue of the operation of any

applicable tax treaty.

Consumption Tax

Consumption tax is an indirect tax similar to the value-added tax (i.e., VAT) in EU countries.

Consumption tax is imposed on the transfer/lease of assets in Japan and services in Japan offered by

enterprises. In general, consumption tax is ultimately borne by consumers. The overall total current

consumption tax rate is a flat 5% (which includes a 1% Local Consumption Tax,). There are a number of

transactions which are exempt from consumption tax, for example: sales and leasing of land; sales of

securities such as national government bonds, corporate bonds and stocks; money lending and other

financial transactions; and housing rent.

6. Labor law

The main law governing individual employment and labor relations in Japan (i.e., the law which deals

with the conclusion, continuation and termination of labor contracts between workers and employees) is

the Labor Standards Law. Individual employment relations in Japan are also governed by:

(1) The rules of employment or work rules established by each employer;

(2) The individual employment contracts entered into between the employer and the employee;

(3) Company custom and practice; and

(4) Relevant case law and precedent.

The basic standards for working conditions are set out in the Labor Standards Law. These standards are

intended to establish minimum working conditions only, and employers are expected to establish and

maintain working environments which exceed those standards. Any working conditions which fall below

such minimum standards are invalid.

Employers who employ ten or more workers on a continuous basis at a particular workplace must draw

up rules of employment, often called “work rules”, which are applicable to all of their employees. The

Labor Standards Law specifies the items which must be included in the work rules. These rules must then

be submitted to the Labor Standards Inspection Office. If an employer employs less than ten workers, it

need not adopt work rules.

Trade unions

Collective labor relations which concern primarily the formation and operation of worker organizations

representing workers in seeking better employment conditions are mainly covered by the Labor Union

Law. In Japan, since employees traditionally tend to have strong ties with their respective companies due


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to the practice of “lifetime employment”, approximately 90% of Japanese trade unions consist of

“enterprise unions”. Enterprise unions are formed within a specific enterprise, company, establishment, or

factory. Although most of these enterprise unions are affiliated with an industrial union in their industry,

industrial unions rarely play a significant role in negotiations with companies; rather, enterprise unions

take a major part in union activities. Enterprise unions are often established in large-sized companies, but

typically not in smaller-sized companies.

Dismissal of an employee

The dismissal of an employee in Japan can be a difficult due to the expectation of “life-time employment”

for Japanese employees. Certain procedural, contractual and substantive requirements must be met when

terminating an employee‟s employment in Japan. Further and more comprehensive information relating to

labor law issues in Japan and, in particular, the dismissal of employees in Japan is available upon request.


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Conclusion

Japan is the 3rd largest economy in the world. It is the UK‟s 2nd largest export market after

Europe and the US, and one of the leading inward investors in the UK. With a GDP 1.5 times the

size of the UK and GDP per person about 6 times that of China, Japan remains the high-tech

powerhouse economy of Asia - with the 2nd highest spend worldwide on R&D, a hunger for IP

and new trends, and an increasingly globalised outlook. Japan‟s households hold financial assets

of 1645 trillion yen (more than 300% of GDP). Japan‟s major growth driver is exports despite

external demand accounting for 16% of its total GDP. Average annual economic growth since

2012 has been around 1%. The OECD expects the economy to grow by 0.7% in 2015 and 1.4%

in 2016.

Strengths

According to the 2009 World Competitiveness Rankings issued by the World Economic Forum,

Japan is the 8th most competitive country in the world. Japan enjoys a comparative advantage

due in part to its world-class business sophistication and innovation. Its business sophistication is

a product of Japan„s value chain breadth, control of international distribution, and product

process sophistication, each of which are considered the best in the world. Japan„s capacity for

innovation comes from its reservoir of scientists and engineers as well as high company spending

on research and development. Japan is ranked second in the world in each of these categories,

trailing Finland in availability of scientists and engineers and Switzerland in spending on

research and development. The strength of Japan„s workforce is not limited to its scientists and

engineers. The group orientation of the Japanese people lends itself to employees that are loyal

and dependable. There is an especially high cultural fit with manufacturing which is evident in

Japan„s 18.3% share of the manufactures imported into the U.S. Japan was among the top twenty

countries for the areas of getting credit, protecting investors, and trading across borders. Japan

was ranked first for ease of closing a business, with an average recovery rate of 92.5 cents on the

dollar.

Weaknesses

Japan„s overall competitive performance is adversely affected by its macroeconomic

weaknesses. Its consistent annual budget deficits have built up into one of the largest public debt

levels in the world. In 2008, Japan„s public debt was 196.29% of GDP, or $8.63 trillion. The

soundness of Japanese banks is also an issue, as economists estimate as much as one trillion

dollars in bad debts on the banks‟ books. The banks are reluctant to call in these bad loans, and

the government is reluctant to force the issue.

Another weakness of the Japanese economy is inefficient government bureaucracy. Nearly 17%

of companies who responded to the World Economic Forum„s survey noted inefficiencies of

government as the most problematic factor of doing business in Japan. The strong association


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between the government and business leads to policy instability that increases the cost of doing

business in Japan.

Another factor increasing the cost of business is the high corporate tax rate of 55.7% of profits.

Only one third of the countries in the 2010 Ease of Doing Business Report had more problems

regarding tax regulation than Japan. Japan has a real need to increase the number of engineers in

technology by 10 percent by the end of 2020. The New York Times has reported that Japan is

running out of engineers.

Last, due to its geographical location, Japan has heavy dependence on imports of raw materials

and food products. Less than 15% of the land in Japan is arable, so it is the largest market for

U.S. agricultural exports. Because Japan has few of the raw materials required in its competitive

manufacturing industry, it must import them first from China or the European Union. About 36%

of its imports are fuels from Saudi Arabia and the United Arab Emirates; however, Japan has

utilized its innovation to become one of the most energy-efficient developed countries in the

world. Japan has reduced its dependence on petroleum by using coal, liquefied natural gas,

nuclear power, and hydropower.

Risks

In the most recent risk assessment by the global trade organization Coface, Japan received an

A1, the rating representing the lowest risk. Coface reported that Japan„s political and economic

situation is strong, its quality business environment has a positive influence on corporate

payment behavior, and corporate default probability is very low on average. The A1 rating

means that corporate financial information is available and reliable, the legal system provides

fair and efficient creditor protection, and the country„s institutional framework is good for

companies. Other countries with an A1 rating included the U.S., Germany, and the U.K. China„s

risk assessment was B, the third riskiest rank on a seven-level scale.

Investment in the Japanese market holds risk associated with the country„s sensitivity to the

global economy. In 2008, the economic slowdowns in the U.S., Japan„s main trading partner,

caused Japanese exports to decline, sending it into a recession. The country„s exports were hurt

further by economic downturns in Europe and Asia and the appreciation of the yen. The

automotive, mechanical, and electronics sectors are most affected by foreign demand, which may

decline further in 2010. Also expected to drop in 2010 is household spending, which will hurt

sectors that focus on the domestic market as well.

Another future uncertainty for the Japanese economy is the role of the Democratic Party of Japan

(DPJ). On August 30, it ousted the Liberal Democratic Party after 50 years of almost

uninterrupted power. Because the state has an active role in the Japanese economy, the change in

politics could mean change in business. The new Prime Minister, Yukio Hatoyama, has railed

against ―unrestrained market fundamentalism and financial capitalism. The DPJ has pledged to

cut back on big government construction projects, increase social spending, and raise the


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minimum wage from ¥629 to ¥1,000 per hour. Businesses fear that the new government might

tax them to pay for these measures. Exporters are worried as financial experts expect the yen to

appreciate under the DPJ.

With a new political party in power, continuing global economic uncertainty, and a decreasing

population, can Japan rise out of this recession as a major economic power? Japan must utilize

its innovation and business sophistication in order to increase its exports. It needs to respond to

certain human rights issues and focus on retaining its strong base of knowledge workers. Japan

can lower its corporate tax rates and bureaucratic policies in an effort to attract new MNCs and

FDI. Japan should harness the innovation evident in its manufacturing sector, and integrate it into

other areas of its economy. Without a strategy to increase its business competitiveness, the Land

of the Rising Sun will be left in China„s economic shadow.