Japan 2015 (English & Chinese)

Yu Wakae

Nagashima Ohno & Tsunematsu

The economic tie between Japan and China is very strong but, until recently, it has been rather one-sided in terms of cross-border investments. After the start of the “open and reform” policy and the resumption of bilateral diplomatic relations in the late 1970s, a large number of Japanese companies invested in various industries in China, which greatly contributed to China's industrial and commercial growth in the subsequent decades leading up to the present. Currently, more than 20,000 Japanese companies invest and operate in China, and directly or indirectly generate tens of millions of employment in China. As compared with a long list of Japan-to-China investments, admittedly, the list is disproportionately shorter for the investments by Chinese companies into Japan.

Now, we are seeing a surge in Chinese investments globally, traditionally in emerging economies such as Africa and Latin America, but recently also into developed economies, including the US, Europe and Japan. This trend reflects the huge Chinese capital accumulated through its domestic economic growth and the greater appetite for growth and profit potentials in overseas markets. Chinese laws and policies have accommodated this demand by permitting overseas investment under a simpler and less burdensome set of procedures.

Chinese investors are also starting to make, or contemplate making, investments into Japan. But given the potentials of the two of the three largest economies of the world and the investment sectors in Japan that are attractive to and suitable for various types of Chinese investors (briefly discussed below), more should be on their way.

Some argue that acquisitions by Chinese investors should face great difficulties in Japan, suggesting that they may not be welcomed by Japanese targets due to cultural and political concerns. While such claims should not be outright ignored, there is another recent phenomenon – a skyrocketing number of Chinese tourists coming to Japan, visiting various places and buying lots of Japanese goods to bring back into their country. With their first-hand experiences of contemporary Japan and its goods, we can expect an increased awareness among Chinese decision makers of Japan as not only as great travel destination, but as a great investment target. On the other hand, Japanese businesses, together with various municipalities across Japan, are welcoming the Chinese tourists and devising ways of attracting visits and consumption. The depreciated yen, the investment appetite of Chinese investors, the demand for capital and growth opportunities on the part of Japanese companies and the Abe administration's pro-business policies and measures enticing inbound investment (e.g. the ongoing reductions of corporate tax rates which are to be implemented gradually) may lead the China-Japan investment environment to follow the same pattern. Japan's well-established legal systems and minimal restrictions on foreign investments will also positively affect future Chinese investments.

Below are some key areas in Japan that may interest Chinese investors. Respective Chinese investors should look for suitable targets in Japan and make judgments based on their needs and expertise.

Real estate: Many Chinese investors believe real estate prices in China are overpriced and look overseas. After the burst of the bubble economy in the 1990s, Japanese real estate prices are already on the low side and are very stable. Many are optimistic for future growth, especially before the 2020 Tokyo Olympics.

Quality products and services: Japan has one of the most mature consumer markets in the world, which has enabled many Japanese businesses to improve and sophisticate their products and services to satisfy consumer needs for high quality products and services. As China's consumer market becomes more mature, acquiring Japanese companies in consumer-oriented industries may be helpful for Chinese enterprises.

For the elderly: As China rapidly becomes an aged society, prospects in the life sciences field (most prominently pharmaceuticals and medical devices) and caregiving industries will be promising. Japan became an aged society several decades ago and, as a result, there are many Japanese companies providing great products and services in these areas.

Environment: China is finally prioritising environmental protection. Japan faced serious environmental problems in 1970s – since then, many Japanese companies worked hard to create and improve technologies to solve these problems cost-effectively, which may be also useful for China.

Accustomed to the rigorous regulations for foreign investors in the mainland, many Chinese investors are surprised to learn the limited set of restrictions and procedures they will be subject to when investing in Japan. At the same time, there are some unique regulations in Japan affecting investors. First, the Japanese regulations of foreign investment follow the “negative list” model which has been also adopted in the Shanghai Free Trade Zone (and will be adopted in the newly-proposed PRC Foreign Investment Law). Second, corporate laws are simple and allow investors to make a range of choices as to how they invest. Third, real estate and labour laws in Japan are very different to those in China.

Restrictions pursuant to specific legislations

Japanese laws generally do not prohibit or restrict investments by foreign investors (including Chinese investors), except for very limited types of industries such as broadcasting or aviation, where shareholding by foreign investors is restricted by specific legislations and must remain below certain specified thresholds (e.g. 20% for broadcasting, one-third for aviation).

Forex controls and reporting obligations

In most industries, Chinese companies need only abide by after-the-fact reporting obligations under the foreign exchange regulations. When Chinese investors set up a new corporation in Japan or purchase shares in a Japanese corporation, the transaction will generally constitute an inbound direct investment under the regulations stipulated by the Japanese Foreign Exchange and Foreign Trade Act and it must be reported by submitting a form to the government authorities within 15 days from the date of the transaction.

However, inbound direct investments in certain specified industries trigger before-the-fact notification obligations where investors need to notify the government of the proposed deal and wait for 30 days before implementing the transaction. During the waiting period, which may be extended up to four months, the transaction is reviewed by the relevant authorities on a case-by-case basis and may be rejected if found inappropriate for national security or other concerns. On the other hand, the waiting period may be shortened to, typically, two weeks (or five business days in some cases) if the government finds no substantive review is necessary.

The list of industries requiring prior notification include:

(a) national security-related (which also include manufacturing of goods that would be diverted to military use);

(b) public order-related (e.g. electricity, gas, heat, telecommunications, water and railway);

(c) public safety-related (e.g. production of vaccines and security guard business); and

(d) other regulated industries (e.g. agriculture and fishery, oil, leather production, aviation and marine transport).

Merger filing

As a separate matter, a Chinese investment in a Japanese business may trigger the merger filing requirements under the Japanese competition laws. In principle, the merger may not be implemented during the 30-day waiting period, if applicable.