As the Japan Times reported last year, Japanese Prime Minister Shinzo Abe’s administration developed an updated growth strategy calling for a doubling of the “outstanding amount of foreign direct investment in Japan to ¥35 trillion by 2020, with the government taking necessary policy steps and the prime minister and other top leaders using their overseas visits as opportunities to persuade foreign businesses to invest [in Japan].” At the same time, the Japanese government has been actively seeking to facilitate the expansion of Japanese companies overseas.
This raises an interesting question about how Japanese lawyers active in the facilitation of this foreign investment are seeing these changes play out in their day-to-day practices. For some answers to this and other related questions, I turned to Hiroaki Tsuda, a partner in Tokyo-based Kumagai Tanaka & Tsuda. Here’s what he told me during an interview in his office last week:
What overall trends do you see in foreign investment into Japan?
Nowadays, more foreign companies are trying to invest in Japan because the exchange rate has changed. The Yen is currently lower. Especially, an increasing number of Chinese and other Asian companies are trying to invest in Japan in context of their economic growth. Investors are coming to Japan to invest in property and manufacturing, for example. We’ve seen many cases of foreign companies seeking to invest in existing Japanese companies, or to incorporate a new company in Japan. Aside from the business sector, we’ve seen many tourists come to Japan as well. For many other lawyers in Japan, this is expected to increase their work relating to such “inbound” cases.
What countries are the prime sources of foreign investment you’re seeing?
US, UK, but also China and Hong Kong (Hong Kong investment coming of course from a variety of origins)
What Japanese sectors are foreign investors most interested in?
Aside from finance and insurance sectors, manufacturing would be the sector which foreign investors have most interest in. Many SMEs in Japan have their own competitive techniques and skills in manufacturing products. But some of the ownership is aging, so they’re trying to transfer their shares to new investors or successors. Their technology and capabilities have much value for investors, but in fact it’s not easy for them to find new investors.
What about Japanese real estate? Is it undervalued and is their growing interest?
Yes, the trend would possibly continue at least until the Tokyo Olympics in 2020. It is said that until then the price of real estate would possibly increase. Right now the Japanese real estate market is very hot. But after that, it would be quite difficult to know how the real estate market will go in Japan.
What makes Japan so attractive for foreign investment? And when investors expand or enter the market – what concerns – legal, regulatory or others – might you counsel them on?
Basically there is no legal restriction for foreign investors to invest in Japan except for some specific areas. Investments from foreign countries need only be reported to the government after investment.
However, before this March, 2015, there had been a legal hurdle for foreign investors to establish a company in Japan. According to the former company registry’s rule, one of the representative directors of Japanese companies should have been required to have an address in Japan. Without it – they couldn’t be registered as a representative director and in case there was no director who has an address in Japan, they can’t register a company in Japan. But from this March, this regulation was lifted and has changed to permit foreign investors to establish a corporation in Japan without the need for any representative director having an address in Japan. So restrictions have been lowered but there are still some practical difficulties, One example is to open a bank account to receive capital from overseas. When anyone is going to establish a new company, an incorporator shall need to open his or her own account for receiving the capital. However, opening a bank account in Japan requires a local address in Japan. Therefore, foreign investors need to appoint anyone who has an address in Japan as an incorporator and let him/her open a bank account.
Are there capital requirements?
There is no minimum requirement for an amount of capital according to the corporate code of Japan. However, in order to obtain an investment visa for Japan, investors are practically required to invest 5 Million Japanese Yen as a minimum requirement of capital.
The Japanese government is actively encouraging Japanese companies to expand overseas. What are you seeing here?
Yes, the Japanese government is encouraging Japanese medium sized companies to expand into overseas markets. They’ve supported Japanese SMEs via arranging professional advisors including tax lawyers, accountants, and consultants with experience in foreign countries. The government also has a fund to promote overseas investment.
Is there growth in the Japanese SME sector and more interest in overseas investment?
Yes, a variety of sectors including manufacturing, services, and the food sector – due to shrinkage of the domestic market, are in search of new overseas markets. Several years ago a main target was the Chinese market. But now in addition to China, other Asian countries, Thailand, Malaysia, Vietnam and others have also become attractive to Japanese companies. For manufacturers, lower labor costs are very important factors in decisions about where they should establish and operate their factories. Previously, many Japanese manufacturers had gone to invest in China for their factories due to lower labor costs there. But during these last several years, labor costs in China have risen rapidly every year. So many factories invested in by Japanese companies have moved to some countries in Southeast Asia where labor costs remain lower.
Are most Japanese SME’s looking regionally versus at the EU, the US or elsewhere?
It depends on each company. But Asian countries are still more popular destinations. Simply speaking, markets in some Asian countries are still in growth, and the distance is closer and the cost is lower.
What’s the impact of Japan’s recent announcement that it will be investing $110 Billion USD in Asian infrastructure?
The Japanese government is seeking to sell Japanese infrastructure and energy company services overseas. Japanese companies have expertise in transportation, construction, and power industries that can help improve infrastructure overseas.
How do Japanese law firms work on transactions for Japanese companies going overseas?
Some Japanese law firms have opened branches in some Asian countries to assist the needs of their clients going abroad. Japanese lawyers provide legal services for clients to form partnerships or joint ventures, do due diligence, draft documents related to internal regulation – by keeping close relationships and cooperation with foreign local lawyers.
Our first job is to create a good relationship with local lawyers. When Japanese companies do business overseas, they need to comply with local regulation of the country where they are going to invest. We, Japanese lawyers, provide information about local regulation related to the client’s business and determine a scheme under which the client invests in such country. During that process, we do need help from local lawyers in obtaining information about local regulations and advice on how to solve legal problems, if any. Our important task is to find more local lawyers with high quality, cost-effective services. Each local lawyer has each specialized in a legal area. We can provide better legal services to our Japanese clients if we can appoint the best local lawyer in a specific legal area which the client’s business will be involved in.
What is governing law in Japanese corporate overseas expansions?
Firstly, when Japanese companies do business in any foreign county, they shall be governed by the local regulations applied in such country.
On the other hand, when Japanese companies do transactions or enter into any agreement, such as international sales agreements, with foreign companies, basically they can choose the governing law of that transaction. In such cases, governing law tends to be determined based on the power balance between the two parties.
Tell me about your firm and how you help foreign investors
We help foreign investors to do business in Japan. For example, we explain about the legal framework and local regulations in Japan when they are planning to invest in Japan. And if they are going to purchase any Japanese company, then we help them to do due diligence from legal aspects and advise them what kind of legal scheme they can adopt in their case. And draft necessary agreements to be entered into with Japanese companies. If they are going to register subsidiaries then we take necessary procedures and deal with various legal issues for expanding their business in Japan.
What advice would you give law students who are interested in a career on matters related to cross-border investment in and out of Japan?
Gain experience working overseas. Aside from learning foreign languages and studying foreign legal systems, living overseas itself should be very important. I have worked at the local firms in Hong Kong and China,- and I have become able to provide advice from my personal experience in these areas. However, although it will be important for young lawyers to have experiences overseas, I think Japanese lawyers must study Japanese law and legal practices in Japan first. After learning them, we can provide legal services more effectively to our Japanese clients by comparing foreign regulations and Japanese regulations and our advices would become more reliable for our clients. Therefore, in my opinion, first thing they should do is to work in Japan and learn Japanese practice – and then study abroad to help them provide advice on overseas transactions.