Japan 2015 (English & Chinese)

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.

Section 1: Key investment areas

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.

Section 2: Foreign investment restrictions

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.

Section 3: Corporate structure and investment method

Setting up a company

Unlike under the current regime of Chinese laws governing foreign investment (but similar to the proposed PRC Foreign Investment Law), the same single corporate law – the Companies Act – applies to foreign-invested companies incorporated in Japan and domestically-held companies. A company can be set up solely by registering with the local legal affairs bureau (法務局). No government approval is required.

Corporate governance

Chinese investors are often perplexed to learn that joint-stock corporations (株式会社，股份有限公司) are the common corporate structure for all listed and unlisted companies in Japan and that there are no longer limited liability companies (有限会社，有限公司). This does not mean that all companies in Japan are forced to adopt rigid regulations applicable to listed companies (as in the case of Chinese joint-stock corporations). Rather, the Companies Act allows for various types of corporate structures for joint-stock corporations, which are adopted by a majority of companies in Japan. For example, companies are not required to have a board of directors and the number of directors can be freely determined (but minimum of three if there is a board of directors). The term of directors and corporate auditors (which are optional) may be extended to 10 years in the case of closely-held corporations. One notable restriction different from China was that at least one
representative director (代表取缔役, which roughly corresponds to chairman（董事长）in China, but in Japan a company can have multiple representative directors) must have a Japanese address. This restriction was removed in March 2015.

Capital structure

Corporations in Japan, whether listed or unlisted, may issue class shares and options in accordance with respective rules. Especially in the case of investments in closely-held corporations, investors are able to devise and adopt the best capital structure suited to the capital needs of the company, each investor's risk preference and involvement with the management and other factors. For example, risk-averse investors may want to insist on getting preferred stock with some veto rights, while founders with smaller cash outlays may be granted common stock and stock options which will incentivise them to improve the company's performance. Issuance of these securities will involve amendments to the company's articles of incorporation, board/shareholders' resolutions and other steps in accordance with the Companies Act.

Chinese investors are advised to seek professional advice on Japanese corporate laws and determine an optimal structure upon close consultation with Japanese lawyers.

Section 4: Real estate

As discussed above, Chinese appetite for Japanese real estate property is rapidly increasing. While the purchase and sale of real estate property is generally free in Japan, investors should consider retaining professionals to ensure the property is free of any liens or restrictions and to avoid any unpredicted burdens.

No special government approval is required when Chinese companies (including companies incorporated in China or Japanese companies owned by Chinese companies) purchase real estate (land and buildings) in Japan. Of course, there are laws and regulations that are generally applicable to all real estate investors in Japan, such as the Building Standards Act (建筑基准法) and City Planning Act (都市計画法), which set out certain restrictions on the development and construction of property.

A key difference in Japan is that investors get to obtain full ownership of the land, as opposed to the land use rights that can be obtained and disposed of for Chinese property. Landowners are free to use and dispose of its land, unless otherwise restricted by the City Planning Act or other applicable regulations. Also, in Japan, land and building attached thereto are treated as separate real estate properties and may have different owners, which may lead to complicated legal consequences when investing in them.

All Japanese real estate property is registered in the national real estate registration system, with all details of the real estate and any subsequent collateral and other interests. Any party may obtain copies of the registration book to access these details. As the Japanese real estate registration system is old, some land (and, in some cases, buildings) may have a long history of chains of transfer of ownership and/or other interests between various parties. Effective due diligence is necessary to ensure the investment is free from any legal issues.

Protection of tenants

Japanese real estate laws provide a greater protection of tenants. As revenue from a purchased real estate property is, in most cases, realised by renting out to residents or business operators, investors should be aware of the applicable rules.

For the lease of lands, in principle, a lease term must be 30 years or more and landlords are substantially required to renew the term unless the tenant has failed to pay rent for an extended period of time. There are special types of land leases providing for a fixed term which may be executed between parties when satisfying certain formal and/or substantive requirements.

As for buildings, the lease term written in contact is much shorter (typically two years for residential), but landlords are substantially required to renew the lease unless due to reasons such as the tenant's failure to pay rent for a long period of time. Also, pursuant to court precedents, landlords may not terminate the lease agreement even when the tenant has breached the contract except under extremely limited circumstances. Investors may consider executing fixed term leases to protect their rights and interests and ensure predictability.

Section 5: Labour and employment

Chinese investors must be aware of various costs for operating businesses in Japan, and labour costs are one of the key factors to consider. There are many particularities of Japanese labour laws and practice that Chinese investors should keep abreast of.

Restricted termination

Some claim Japan is more socialistic than China with respect to the legal protection of employee rights, and there is some truth to this. Traditionally, Japanese employees are hired by a company with no fixed term immediately after college graduation, and they get to work for the same company until their retirement age (typically at 60 years old) (this practice is known as the Permanent Employment System). The Japanese labour laws, initially provided in court precedents but later codified into law, protect this traditional and prevalent labour practice. Most typically, even if an employer is contractually entitled to terminate a labour contract, a termination without “an objective and logical reason based upon social convention” will be considered “abuse of termination rights” and held invalid and void. Many fired employees in Japan file lawsuits on this ground. The judgments are made on a case-by-case basis but often ruled in favour of employees. To avoid uncertainties involved with disputes, many employers choose to make extra severance payments and mutually terminate labour contracts.

In principle, employers are required to pay a minimum of 25% of overtime if employees work for more than 40 hours in a week, excluding managers. 25% seems small, but due to the Japanese practice of working long hours, employers may incur substantial overtime costs. Work hours should therefore be properly managed and recorded. In order to allow businesses in Japan to operate more cost-competitively, the Abe administration is contemplating introducing the “white collar exemption” system where no overtime charge will be necessary for certain non-managers who satisfy certain requirements.