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RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #0108/01 0190800
ZNR UUUUU ZZH
R 190800Z JAN 10
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8779
INFO RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHFK/AMCONSUL FUKUOKA 8372
RUEHNAG/AMCONSUL NAGOYA 5460
RUEHNH/AMCONSUL NAHA 0713
RUEHOK/AMCONSUL OSAKA KOBE 2188
RUEHKSO/AMCONSUL SAPPORO 8868

UNCLAS SECTION 01 OF 19 TOKYO 000108 
 
SIPDIS 
 
DEPT FOR EEB/IFD/OIA 
DEPT FOR EAP/J 
TREASURY FOR DO/WFOSTER 
UDSOC FOR ITA 
DEPT PASS USTR FOR WCUTLER, MBEEMAN 
 
E.O. 12958: N/A 
TAGS: EINV ECON ELAB OPIC KTDB USTR JA
SUBJECT: INVESTMENT CLIMATE STATEMENT - JAPAN 
 
REF: 09 STATE 124006 
 
¶1.  TABLE OF CONTENTS 
A.1. Overview of Foreign Investment Climate, para. 2-33 
A.2. Conversion and Transfer Policies, para. 34-35 
A.3. Expropriation and Compensation, para. 36 
A.4. Dispute Settlement, para.37-41 
A.5. Performance Requirements and incentives, para. 42 
A.6. Right to Private Ownership and Establishment, 
-    para. 43-44 
A.7. Protection of Property Rights, para. 45-55 
A.8. Transparency of the Regulatory System, para. 56-60 
A.9. Efficient Capital Markets and Portfolio Investment, 
-    para. 61-85 
A.10. Competition from State-Owned Enterprises, 
-    para. 86-87 
A.11. Corporate Social Responsibility, para. 88 
A.12. Political Violence, para. 89 
A.13. Corruption, para. 90-94 
A.14. Bilateral Investment Agreements, para. 95-97 
A.15. OPIC and Other Investment Insurance programs, 
-     para. 98 
A.16. Labor, para. 99-103 
A.17. Foreign Trade Zones/Free Ports, para. 104 
A.18. Foreign Direct Investment Statistics, 
-     para. 105-113 
 
A.1. OVERVIEW OF FOREIGN INVESTMENT CLIMATE 
 
¶2.  Japan is the world's second largest economy, the United States' 
fourth largest trading partner, and an important destination for 
U.S. foreign direct investment (FDI).  The Government of Japan 
explicitly promotes inward FDI and has established formal programs 
to attract it.   Since 2001, Japan's stock of FDI, as a percentage 
of gross domestic product (GDP), grew from less than one percent to 
more than 3.5 percent at the end of 2009.  Despite experiencing one 
of the worst recessions since the Second World War and the first 
transfer of power to the political opposition in over fifty years, 
Japan continued to attract positive FDI inflows in 2009, albeit at a 
slower pace than before the downturn. 
 
¶3.  In the third quarter of CY 2008, Japan's economy entered 
recession for the first time since 2002.  The global economy's 
contraction in the wake of the financial turmoil of 2008 adversely 
impacted Japan's economy, hitting Japan's export-oriented industries 
such as automobiles and consumer electronics, with particular force. 
 In early CY 2009, Japanese GDP contracted at a double-digit rate. 
While conditions ameliorated as global demand rebounded later in the 
year, the government's economic forecast for FY 2009 (April 2009 to 
March 2010) projects nominal GDP will be negative 4.3 percent, which 
amounts to a negative growth rate of 2.6 percent in real terms, and 
an unemployment rate of 5.4 percent. 
 
¶4.  The economy featured prominently in the general elections held 
August 30, 2009, in which the opposition Democratic Party of Japan 
(DPJ) won a majority in the lower house of the National Diet, thus 
ending over 50 years of nearly uninterrupted Liberal Democratic 
Party (LDP) rule.  While the DPJ-led government that assumed power 
in September had not reversed any measure to encourage inward FDI, 
as of December 2009 it had not publicly reaffirmed the previous 
governments' commitment to welcoming FDI either. 
 
¶5.  The Ministry of Economy Trade and Industry (METI) and the 
quasi-governmental Japan External Trade Organization (JETRO) are the 
lead agencies responsible for assisting foreign firms wishing to 
invest in Japan.  Many prefectural and city governments also have 
active programs to attract foreign investors, but they lack many of 
the financial tools U.S. states use to attract investment. 
 
¶6.  Risks associated with investment in many other countries, such 
as expropriation and nationalization, are not of concern in Japan. 
The Japanese Government does not impose export balancing 
requirements or other trade-related FDI measures on firms seeking to 
invest in Japan. 
 
¶7.  Japan ranked 17 on Transparency International's Corruption 
Perceptions Index in 2009, with a score of 7.7 based on six surveys. 
 The World Bank ranked Japan number 15 on its Ease of Doing Business 
2010 report, covering the period from June 2008 through May 2009. 
 
TOKYO 00000108  002 OF 019 
 
 
The 2009 Index of Economic Freedom compiled by the Heritage 
Foundation ranked Japan number 19, with a score of 72.8 or mostly 
free. 
 
¶8.  In addition to business considerations relevant to investing in 
a mature economy with an aging population, foreign investors seeking 
a presence in the Japanese market, or to acquire a Japanese firm 
through corporate takeover, face a number of unique challenges, many 
of which relate more to prevailing business practices rather than 
government regulations. The most notable are: 
-- A highly insular and consensual business culture that is 
resistant to hostile mergers and acquisitions (M&A) and prefers to 
do business, especially M&A transactions, with familiar corporate 
partners; 
-- A lack of independent directors on most company boards; 
Cross-shareholding networks among listed corporations in which 
shares are held for non-economic reasons resulting in a minimal 
float of available common stock relative to total capital; 
-- Exclusive supplier networks and alliances between business groups 
that can restrict competition from foreign firms and domestic 
newcomers, 
-- Cultural and linguistic challenges; and 
-- Labor practices that inhibit labor mobility, suppress 
productivity, and negatively affect skill development. 
 
¶9.  Since 2001, the U.S. and Japanese governments have discussed all 
these issues in working groups under the Regulatory Reform and 
Competition Policy Initiative, and the Investment Initiative, as 
part of the U.S.-Japan Economic Partnership for Growth.  While 
recognizing the progress made in some areas under this structure, as 
of December 2009 both the U.S. and Japanese governments were 
considering how to recalibrate a U.S.-Japan bilateral economic 
dialogue to best address these issues and take into account new 
needs arising from continuing economic turmoil, bilateral 
cooperation in addressing global issues such as climate change, and 
hosting the Asia-Pacific Economic Cooperation (APEC) forum in 2010 
(Japan) and 2011 (the United States). 
 
¶10.  Future bilateral engagement will occur against a changed 
political environment in Japan.  Whereas the LDP was closely 
affiliated with the Japanese business community, the DPJ and its 
coalition partners - the Social Democratic Party of Japan and the 
People's New Party - draw support from other constituencies as well, 
including trade unions.  While investment issues did not figure 
directly in the 2009 elections, the DPJ's August 2009 campaign 
platform criticized structural reforms championed by former Prime 
Minister Koizumi and pledged to reduce the influence of the 
bureaucracy in policy-making.  It also promised to shift government 
spending away from public works projects toward programs benefitting 
consumers. 
¶11.  Structural reforms, revisions to Japan's legal code, and 
pro-active Japanese government policies to promote FDI and corporate 
restructuring led to a boom in merger and acquisition (M&A) activity 
after 2001.  The annual number of M&A transactions in Japan 
increased dramatically during the ensuing decade, from approximately 
800 in 1998 to almost 2,700 in 2007, according to RECOF, a 
Tokyo-based M&A consultancy.  Although down from the peak reached 
during the 2006-2007 period, M&A activity continued through 2009, 
numbering about 1,954 transactions, a 19 percent decline from the 
previous year, according to RECOF estimates.  Measured by value, M&A 
activity declined 43 percent in 2009, to about 7 trillion yen.  The 
majority of these mergers were domestic transactions, but 
transactions involving foreign counterparts also increased.  The 
number of takeover bids (TOB) in Japan exceeded 100 for the first 
time in 2007.  TOBs numbered 76 in 2008 and 78 in 2009, according to 
RECOF.  The total value of M&A deals involving Japanese companies in 
CY 2009 was JPY 7.24 trillion, down 42.2 percent from CY 2008.  At 
the same time, Japanese M&A directed at foreign companies in CY 2009 
amounted to JPY 2.79 trillion, accounting for 38.6 percent of the 
total and down 62.4 percent from CY 2008, according to RECOF. 
Although change is slow, many Japanese corporate leaders now 
appreciate the contribution M&A can make to increasing corporate 
value. 
¶12.  While inflows from the developed nations in Europe and the 
United States held steady or declined during 2008, inflows from Asia 
and Central and South America increased during the same period 
(Tables 2-3).  Despite the increase in FDI since the mid-1990s, 
Japan continues to have the lowest foreign direct investment as a 
proportion of GDP ratio of any major OECD member.  On a yen basis, 
 
TOKYO 00000108  003 OF 019 
 
 
FDI stock in Japan as of December 2008 was JPY 18.46 trillion, (3.6 
percent of GDP), according to Ministry of Finance (MOF) statistics. 
 
 
¶13.  Meanwhile, Japan continues to run a significant imbalance 
between inward and outward FDI (see Table 1b).  Japan's outward 
foreign direct investment rose from USD 50.1 billion in 2006 to USD 
73.4 billion in 2007 and USD 130.8 billion in 2008 (see Table 5). 
Japanese companies' large cash holdings combined with low global 
equity values and the strengthening of the yen supported increased 
outbound FDI activity.  Notwithstanding the imbalance between inward 
and outward FDI, outward FDI as a percentage of GDP remains lower 
for Japan than for other major OECD members. 
 
Legal Reform Facilitates M&A Activity 
------------------------------------- 
¶14.  In recent years, reforms in the financial, communications, and 
distribution sectors have encouraged foreign investment in these 
industries.  The 2005 Companies Act, an amended bankruptcy law, and 
the 2007 Financial Instruments and Exchange Law helped increase the 
attractiveness of Japan as a destination for FDI. 
 
¶15.  The most significant legislative change was the substantial 
revision of Japan's corporate-related law.  The changes enacted in 
2005 significantly expanded the types of corporate structures 
available in Japan as well as the variety of M&A transactions 
available for corporate consolidation and restructuring.  A foreign 
firm, for the first time, may now use its stock as consideration in 
a cross-border M&A transaction by means of a procedure known as a 
triangular merger, as long as the foreign acquirer has an existing 
Japanese subsidiary with which to merge the target company. 
 
¶16.  Unfortunately, the tax regulations that govern triangular 
mergers contain strict conditions regarding business viability and 
business relevance between the acquiring subsidiary and the target 
Japanese firm for the transaction to be granted tax deferral of 
capital gains.  As a result, the procedure has not attracted 
significant new investment flows.  As of December 2009, only one 
major foreign investor has used the triangular merger provisions of 
the Companies Act to complete the purchase of a Japanese firm and, 
in that case, the foreign acquirer already had a significant 
existing Japanese operation into which it could merge its new 
Japanese acquisition.  The U.S. government has repeatedly raised the 
issue of effective tax deferral for M&A transactions in bilateral 
discussions, and the Japanese Government itself has acknowledged the 
issue as something requiring further study and resolution. 
 
¶17.  The 2007 Financial Instruments and Exchange Law establishes a 
flexible regulatory system for financial markets and applies a 
uniform set of rules for similar financial instruments.  At the same 
time, the law allows brokers and financial advisors to treat 
investors differently, depending on whether they are deemed 
"professional" investors (assumed to be capable of more 
sophisticated investment strategies and requiring less protection 
and disclosure) or "general", i.e., retail investors. Brokerage 
firms must provide the latter with detailed disclosure of risks 
related to different types of financial products at the time of 
offering. 
 
Limited Sector-specific Investment Restrictions Remain 
--------------------------------------------- --------- 
 
¶18.  Japan has gradually eliminated most formal restrictions 
governing FDI.  One important restriction remaining in law limits 
foreign ownership in Japan's former land-line monopoly telephone 
operator, Nippon Telegraph and Telephone (NTT), to 33 percent. 
Japan's Radio and Broadcasting Law also limits foreign investment in 
broadcasters to 20 percent, or 33 percent for broadcasters 
categorized as facility-supplying.  Foreign ownership of Japanese 
companies invested in terrestrial broadcasters will be counted 
against these limits.  These limits do not apply to communication 
satellite facility owners, program suppliers or cable television 
operators.  In 2009, the Experts Advisory Council on Airport 
Infrastructure proposed a bill that would limit non-governmental 
investment at Narita International Airport to 20 percent, but the 
National Diet did not vote on the bill.  The Ministry of Land, 
Infrastructure, Transport and Tourism (MLIT) is expected to begin 
new discussions in 2010 about whether any investment limitation is 
appropriate at Narita.  Regarding Haneda Airport, the government has 
 
TOKYO 00000108  004 OF 019 
 
 
decided not to discuss any proposed investment limitation for the 
time being. 
 
¶19.  The Foreign Exchange and Foreign Trade Act governs investment 
in sectors deemed to have national sovereignty or national security 
implications.  In most cases, foreign investors need only report 
transactions to the Bank of Japan within 15 days of acquiring more 
than 10 percent of the shares in a publicly listed company or any 
shares of a closely held company.  However, if a foreign investor 
wants to acquire over 10 percent of the shares of a listed company 
in certain designated sectors, it must provide prior notification 
(and thus obtain specific approval) of the intended transaction to 
the Ministry of Finance and the ministry that regulates the specific 
industry.  Designated sectors include agriculture, aerospace, 
forestry, petroleum, electric/gas/water utilities, 
telecommunications, and leather manufacturing. Amendments to the 
prior notification and reporting requirements under the law, 
effective in 2009, reduced the administrative burden on foreign 
investors so as to facilitate inward investment. 
 
¶20.  Several sections of the Japanese Anti-Monopoly Act (AMA) are 
relevant to FDI.  Chapter Four of the AMA includes extensive 
anti-trust provisions pertaining to international contract 
notification (section 6), shareholdings (sections 10 and 14), 
interlocking corporate directorates (section 13), mergers (section 
15), and acquisitions (section 16).  The stated purpose of these 
provisions is to restrict shareholding, management, joint venture, 
and M&A activities that may constitute unreasonable restraints on 
competition or involve unfair trade practices.  The Japanese 
Government has emphasized these provisions are not intended to 
discriminate against foreign companies or discourage FDI. 
 
¶21.  Amendments to the AMA, effective January 1, 2010, improve the 
climate for M&A by clarifying the pre-merger review process and 
significantly raising the thresholds for pre-merger reporting to 
antitrust authorities. The amendments make share acquisitions 
subject to the same pre-merger notification rules as mergers and 
asset acquisitions.  The thresholds for notification will rise from 
JPY 10 billion to JPY 20 billion for the acquiring corporation and 
from JPY 1 billion to JPY 5 billion for the acquired corporation. 
They also expand the scope of exemptions from notification. 
 
Limitations on Facility Development and Availability of Investment 
Real Estate 
---------------------- 
 
¶22.  Aiming to increase the liquidity of Japanese real estate 
markets, the government in recent years has progressively lowered 
capital gains, registration, and license taxes on real estate.  It 
also reduced inheritance and gift taxes to promote intergenerational 
transfer of land and other real assets.  More changes in tax policy 
and accounting standards could increase real estate liquidity, but 
the market remains hampered by a shortage of legal and accounting 
professionals and by a relative lack of information on prices and 
income flows. 
 
¶23.  Japan continues restricting development of retail and 
commercial facilities in some areas to prevent excessive 
concentration of development in the environs of Tokyo, Osaka, and 
Nagoya, and to preserve agricultural land.  Conversely, many 
prefectural governments outside the largest urban areas make 
available property for development in public industrial parks. 
Japan's zoning laws give local officials and residents considerable 
discretion to screen almost all aspects of a proposed building.  In 
some areas, these factors have hindered real estate development 
projects and led to construction delays and higher building costs in 
particular, in cases where proposed new retail development would 
affect existing businesses. 
 
¶24.  Japanese law permits marketing of real estate investment trusts 
(REITs) and mutual funds that invest in property rights.  As of 
December 2009, there are 37 REITs listed on the Tokyo Stock Exchange 
(TSE), three fewer than a year earlier. 
 
¶25.  Japan's real estate sector experienced painful contraction as a 
result of the credit crunch beginning in 2008 and the deterioration 
of the economy overall in the first half of 2009.  Several 
developers went bankrupt and others were forced into emergency 
restructuring as regular short-term financing evaporated.  As of 
 
TOKYO 00000108  005 OF 019 
 
 
December 2009, the sector continued to face adverse market trends. 
 
Corporate Tax Treatment 
----------------------- 
 
¶26.  Local branches of foreign firms are generally taxed only on 
corporate income derived within Japan, whereas domestic Japanese 
corporations are taxed on their worldwide income.  Calculations of 
taxable income and allowable deductions, and payments of the 
consumption tax (sales tax) for foreign investors are otherwise the 
same as those for domestic companies. Corporate tax rules classify 
corporations as either foreign or domestic depending on the location 
of their "registered office," which may be the same as -- or a proxy 
for -- the place of incorporation. 
 
¶27.  The current U.S.-Japan bilateral tax treaty allows Japan to tax 
the business profits of a U.S. resident only to the extent those 
profits are attributable to a "permanent establishment" in Japan. 
It also provides measures to mitigate double taxation.  This 
"permanent establishment" provision combined with Japan's high 40 
percent corporate tax rate serves to encourage foreign and 
investment funds to keep their trading and investment operations 
off-shore. 
 
¶28.  Cross-border dividends on listed stock are not subject to 
source country withholding tax if the parent company owns 50 percent 
or more of the foreign subsidiary.  Interest on financial 
transactions payable to a nonresident and royalties paid to a 
foreign licensor are no longer subject to source country withholding 
tax.  A special tax measure allows designated inward investors to 
carry over certain losses for tax purposes for ten years rather than 
for the normal five years.  The government has also announced plans 
to exempt foreign investors from paying taxes on interest income 
(currently 15 percent) on corporate bonds, fiscal loan and 
investment program bonds, and those issued by the Japan Finance 
Organization for Municipalities, starting in June 2010. 
 
¶29.  The option of consolidated taxation is available to 
corporations.  The purpose of these rules is to facilitate 
investment and corporate restructuring, because losses usually 
expected from a new venture or recently acquired subsidiary can be 
charged against the profits of the parent firm or holding company. 
 
Investment Incentives 
--------------------- 
 
¶30.  Since 2001, the Japanese Government has sought to revitalize 
the country's economy, in part, by increasing inward FDI. 
Recognizing the benefits for Japan of increased foreign investment, 
the government sought to double Japan's stock of FDI, which it did 
by 2006. 
In June that year, the government accepted the Japan Investment 
Council recommendation to establish a national goal of increasing 
Japan's stock of FDI to the equivalent of five percent of the 
country's GDP by FY2010 (March 2011.) 
 
¶31.  Following several controversial foreign investment cases, the 
Cabinet Office appointed an ad-hoc Experts Committee on FDI 
Promotion in January 2008.  In May that year, the Experts Committee 
recommended that the government:  (1) review and improve Japan's 
rules for M&A; (2) undertake a comprehensive examination of national 
security-related FDI regulations; (3) establish priority sectors for 
FDI that that will have a positive impact on the Japanese economy 
and quality of life; (4) reduce business costs, including by 
lowering corporate tax rates, and improve regulatory transparency; 
and (5) develop a strategic plan to spur regional economies' 
revitalization through the use and attraction of foreign capital. 
These five recommendations served as the basis for the government's 
"Revised Program for Acceleration of Foreign Direct Investment in 
Japan" of December 2008.  The DPJ-led government released a 
preliminary outline of its economic growth strategy in December 
¶2009. While the outline summary did not feature increasing FDI, as 
the time of its release the government had just begun to draft 
substantive policy recommendations (due in May 2010). 
 
¶32.  JETRO operates six Invest Japan Business Support Centers in 
major urban areas to provide investment-related information and 
"one-stop" support services to foreign companies interested in 
investing in Japan.  (More detailed information is available at 
 
TOKYO 00000108  006 OF 019 
 
 
http://www.jetro.go.jp/en/invest.)  Most national level ministries 
also have information desks to help guide potential investors in 
navigating Japanese Government administrative procedures. 
 
¶33.  Many city or regional governments work to attract foreign 
capital through outreach to prospective foreign investors, business 
start-up support services, and limited financial incentives.  JETRO 
supports local government investment promotion efforts.  Detailed 
information on local and regional FDI promotion programs is 
available in English on the JETRO website. 
 
A.2. CONVERSION AND TRANSFER POLICIES 
 
¶34.  Generally, all foreign exchange transactions to and from Japan 
-- including transfers of profits and dividends, interest, royalties 
and fees, repatriation of capital, and repayment of principal -- are 
freely permitted.  Japan maintains an ex-post facto notification 
system for foreign exchange transactions that prohibits specified 
transactions, including certain foreign direct investments (e.g., 
from countries under international sanctions) or others that are 
listed in the appendix of the Foreign Exchange and Foreign Trade 
Control Law. 
¶35.  Japan is an active partner in the struggle against terrorist 
financing.  In coordination with other OECD members, Japan has 
strengthened due-diligence requirements for financial institutions, 
and has had a "Know Your Customer" law since 2002.  Customers 
wishing to make cash transfers exceeding JPY 100,000 (USD 1,100) 
must do so through bank clerks, not ATMs, and must present photo 
identification. 
 
A.3. EXPROPRIATION AND COMPENSATION 
 
¶36.  In the post-war period, the Japanese Government has not 
expropriated or nationalized any enterprises, with the exception of 
the 1998 nationalization of two large Japanese capital-deficient 
banks and the 2002 nationalization of two failed Japanese regional 
banks as part of the government's efforts to clean up the banking 
system after its near collapse in 1998.  Expropriation or 
nationalization of foreign investments is extremely unlikely. 
 
A.4. DISPUTE SETTLEMENT 
 
¶37.  There have been no major bilateral investment disputes since 
¶1990.  Nor are there any outstanding expropriation or 
nationalization cases in Japan.  There have been no cases of 
international binding arbitration of investment disputes between 
foreign investors and Japan's Government since 1952.  Japan is a 
member of the 1958 New York Convention on the Recognition and 
Enforcement of Foreign Arbitration Awards.  Nevertheless, Japan is 
considered an inhospitable forum for international commercial 
arbitration. 
 
¶38.  There are no legal restrictions on foreign investors' access to 
Japanese lawyers and reforms in the legal services sector and the 
judicial system have increased the ability of foreign investors to 
obtain international legal advice related to their investments in 
Japan.  Japan does, however, retain certain restrictions on the 
ability of foreign lawyers to provide international legal services 
in Japan in an efficient manner.  Only individuals who have passed 
the Japanese Bar Examination and qualified as Japanese lawyers 
(bengoshi) may practice Japanese law.  However, under Japan's 
Foreign Legal Practitioner system foreign qualified lawyers may 
establish Japanese/foreign joint legal enterprises (gaikokuho kyodo 
jigyo) and provide legal advice and integrated legal services on 
matters within the competence of its members.  Foreign lawyers 
qualified under Japanese law (gaiben), may provide advice on 
international legal matters.  Gaiben and bengoshi in joint 
enterprises can adopt a single law firm name of their choice and may 
determine the profit allocation among them freely and without 
restriction.  However, foreign lawyers are unable to form 
professional corporations in the same manner as Japanese lawyers and 
are prohibited from opening branch offices in Japan.  Gaiben may 
hire Japanese lawyers to work directly with them or in a joint legal 
enterprise or in a Foreign Japanese Joint Legal Office 
(gaikokuho-jimu-bengoshi jimusho) composed of multiple gaiben.  The 
Japanese government has adopted a long term goal of increasing the 
number of legal professionals who pass the Bar Examination to 3,000 
per year by 2010.  The Ministry of Justice Foreign Lawyers Study 
Group considered possible amendments to the law in 2009; release of 
 
TOKYO 00000108  007 OF 019 
 
 
its final report is expected in 2010. 
 
¶39.  Japan's civil courts enforce property and contractual rights 
and do not discriminate against foreign investors.  Japanese courts, 
like those in other countries, operate rather slowly and experience 
has shown them sometimes ill-suited for litigation of investment and 
business disputes.  Japanese courts lack powers to compel witnesses 
to testify or a party to comply with an injunction.  Timely 
temporary restraining orders and preliminary injunctions are 
difficult to obtain.  Filing fees are based on the amount of the 
claim, rather than a flat fee. Lawyers usually require large 
up-front payments from their clients before filing a lawsuit, with a 
modest contingency fee, if any, at the conclusion of litigation. 
Contingency fees familiar in the U.S. are relatively uncommon.  A 
losing party can delay execution of a judgment by appealing.  In 
appeals to higher level courts, additional witnesses and other 
evidence may be allowed. 
 
¶40.  Japan's Alternative Dispute Resolution (ADR) law provides a 
legal framework for arbitration, including international commercial 
arbitration.  Foreign lawyers qualified under Japanese law can 
represent parties in ADR proceedings taking place in Japan in which 
one of the parties is foreign or foreign law is applicable, at least 
to the extent such representation is not inconsistent with Japanese 
law.  The United States continues to urge Japan to promote 
alternative dispute resolution mechanisms by ensuring that gaiben 
and non-lawyer experts can act as neutrals in international 
arbitration or other international ADR proceedings in Japan, in 
whole or in part, regardless of the governing law or matter in 
dispute. 
 
¶41.  Courts have the power to encourage mediated settlements and 
there is a supervised mediation system.  However, this process is 
often time-consuming and judges transfer frequently, so continuity 
is often lost.  As a result, it is common for companies to settle 
cases out of court. 
 
A.5. PERFORMANCE REQUIREMENTS AND INCENTIVES 
 
¶42.  Japan does not maintain performance requirements or 
requirements for local management participation or local control in 
joint ventures. 
 
A.6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
 
¶43.  Foreign and domestic private enterprises have the right to 
establish and own business enterprises and engage in all forms of 
remunerative activity. 
 
¶44.  However, the 2005 Companies Act includes a provision -- Article 
821 -- which creates uncertainty among foreign corporations that 
conduct their primary business in the Japanese market through a 
branch company.  As written, Article 821 appears to prohibit 
branches of foreign corporations from engaging in transactions in 
Japan "on a continuous basis."  The Japanese Diet subsequently 
issued a clarification of the legislative intent of Article 821 that 
makes clear the provision should not apply to the activities of 
legitimate entities.  However, some legal uncertainty remains, 
particularly with respect to possible private litigation against 
directors and officers of affected firms.  The U.S. Government has 
urged that Japan revoke Article 821 or more formally clarify its 
meaning.  The Japanese government has undertaken to ensure Article 
821 will not adversely affect the operations of foreign companies 
duly registered in Japan and conducting business in a lawful 
manner. 
 
A.7. PROTECTION OF PROPERTY RIGHTS 
 
¶45.  In general, Japan maintains a strong intellectual property 
rights (IPR) regime, but there are costs and procedures of which 
prospective investors should be aware.  Companies doing business in 
Japan are encouraged to be clear about all rights and obligations 
with respect to IPR in any trading or licensing agreements. 
Explicit arrangements and clear understanding between parties will 
help to avert problems resulting from differences in culture, 
markets conditions, legal procedures, or business practices. 
 
¶46.  Registering Patents, Trademarks, Utility Models and Designs: 
The IPR rights holder must register patents and trademarks in order 
 
TOKYO 00000108  008 OF 019 
 
 
to ensure protection in Japan.  Filing the necessary applications 
requires hiring a Japanese lawyer or patent practitioner (benrishi) 
registered in Japan to pursue the patent or trademark application. 
A U.S. patent or trademark attorney may provide informal advice, but 
is not able to perform some required functions. 
 
¶47.  Patent and trademark procedures in Japan have historically been 
costly and time-consuming.  There have also been complaints about 
the weaknesses of Japanese enforcement and legal redress, for 
example, that judges are not adequately trained or that court 
procedures do not adequately protect business-confidential 
information required to file a case.  Japan's government has revised 
the law and continues to take steps to address these concerns and it 
is becoming easier and cheaper to obtain patent and trademark 
protection.  Procedures have been simplified, fees cut, and judges 
are receiving more training and are being assigned to specialized 
IPR courts.  Courts have strengthened rules to protect sensitive 
information and the government has established criminal penalties 
for inappropriate use of sensitive information used in court or 
administrative proceedings. 
 
¶48.  Prompt filing of patent applications is very important. 
Printed publication of a description of the invention anywhere in 
the world, or knowledge or use of the invention in Japan, prior to 
the filing date of the Japanese application, could preclude the 
granting of a patent.  Japan grants patents on a first-to-file 
basis. It accepts initial filings in English (to be followed by a 
Japanese translation), but companies should be careful as 
translation errors can have significant negative consequences. 
Unlike the United States, where examination of an application is 
automatic, in Japan an applicant must request examination of a 
patent application within three years of filing. 
 
¶49.  The Japanese Patent Office (JPO) publishes patent applications 
18 months after filing, and if it finds no impediment to granting a 
patent, publishes the revised application a second time before the 
patent is granted.  The patent is valid for 20 years from the date 
of filing.  Currently, the law allows parties to contest the terms 
of a patent after issuance (for up to six months), rather than prior 
to registration as was the previous practice. 
 
¶50.  Patent Prosecution Highway: The Patent Prosecution Highway 
(PPH) is a noteworthy development for U.S. firms seeking patent 
protection in Japan.  Becoming operational January 4, 2008, after an 
18-month pilot program, the PPH allows filing of streamlined 
applications for inventions determined to be patentable in other 
participating countries and is expected to reduce the average 
processing time.  The program, which is based on information sharing 
between national patent offices and standardized application and 
examination procedures, should reduce costs and encourage greater 
utilization of the patent system. 
 
¶51.  Trademarks, Utility Models, and Designs: Japan's Trademark Law 
protects trademarks and service marks and, like patent protection, 
requires registration by means of an application filed by a resident 
agent (lawyer or patent agent).  As the process takes time, firms 
planning on doing business in Japan should file for trademark 
registration as early as practicable.  Japan is a signatory of the 
Madrid Protocol. Trademarks registered at the WIPO Secretariat are 
protected among all member countries. 
 
¶52.  Japan's Utility Model Law allows registration of utility models 
(a form of minor patent) and provides a 10-year term of protection. 
Under a separate design law, effective April 2007, protection is 
available for designs for a 20-year term from the date of 
registration. 
 
¶53.  Semiconductor chip design layouts are protected for 10 years 
under a special law, if registered with the Japanese "Industrial 
Property Cooperation Center" -- a government-established public 
corporation. 
 
¶54.  Unfair Competition and Trade Secrets: The Unfair Competition 
Prevention Law provides for protecting trademarks prior to 
registration.  The owner of the mark must demonstrate that the mark 
is well known in Japan and that consumers will be confused by the 
use of an identical or similar mark by an unauthorized user.  The 
law also provides some protection for trade secrets, such as 
know-how, customer lists, sales manuals, and experimental data. 
 
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Recent amendments to the law provide for injunctions against 
wrongful use, acquisition or disclosure of a trade secret by any 
person who knew, or should have known, the information in question 
was misappropriated.  Criminal penalties were also strengthened. 
However, Japanese judicial processes make it difficult to file 
claims without losing the trade secrets. 
 
¶55.  Copyrights: In conformity with international agreement, Japan 
maintains a non-formality principle for copyright registration -- 
i.e., registration is not a pre-condition to the establishment of 
copyright protection.  However, the Cultural Affairs Agency 
maintains a registry for such matters as date of first publication, 
date of creation of program works, and assignment of copyright. 
United States copyrights are recognized in Japan by international 
treaty. 
 
A.8. TRANSPARENCY OF THE REGULATORY SYSTEM 
 
¶56.  The Japanese economy continues to suffer from over-regulation, 
which can restrain potential economic growth, raise the cost of 
doing business, restrict competition, and impede investment.  It 
also increases the costs for Japanese businesses and consumers. 
Over-regulation underlies many market access and competitive 
problems faced by U.S. companies in Japan. 
 
¶57.  The United States has for several years called on Japan to make 
improvements in its regulatory system to support domestic reform 
efforts and ensure universal access to government information and 
the policymaking process. 
 
¶58.  The Japanese government has taken steps to improve its public 
comment procedures, but these improvements are not uniform 
throughout the government.  The United States continues to urge 
Japan to apply consistently high transparency standards, including 
by issuing new rules to ensure transparency and access for 
stakeholders in the rulemaking process; by allowing effective public 
input into the regulatory process; and by giving due consideration 
to comments received.  The United States also has asked Japan to 
lengthen its public comment period and to require ministries and 
agencies to issue all new regulations or statements of policy in 
writing or provide applicable interpretations to interested 
stakeholders in plain language. 
 
¶59.  In the financial sector, the Financial Services Agency has made 
efforts to expand the body of published written interpretations of 
Japan's financial laws, including improvements to the "no-action 
letter" system, and improved outreach to the private sector 
regarding these changes. 
 
¶60.  The United States has engaged in bilateral working-level 
discussions since 2002 in an effort to encourage the Japanese 
Government to promote deregulation, improve competition policy, and 
administrative reforms that could contribute to sustainable economic 
growth, increase imports and foreign direct investment into Japan. 
The National Trade Estimate Report on Foreign Trade Barriers, issued 
by the Office of the U.S. Trade Representative (USTR), contains a 
detailed description of Japan's regulatory regime as it affects 
foreign exporters and investors 
 
A.9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
 
¶61.  Japan maintains no formal restrictions on inward portfolio 
investment and foreign capital plays an important role in Japan's 
financial markets.  However, many company managers and directors 
resist the actions of activist shareholders, especially foreign 
private equity funds, potentially limiting the attractiveness of 
Japan's equity market to large-scale foreign portfolio investment. 
Nevertheless, some firms have taken steps to facilitate the exercise 
of shareholder rights by foreign investors, including the use of 
electronic proxy voting.  The Tokyo Stock Exchange (TSE) maintains 
an Electronic Voting Platform for Foreign and Institutional 
Investors in which more than 347 listed companies participate as of 
December 2009.  All holdings of TSE-listed stocks are required to 
transfer paper stock certificates into electronic form. 
¶62.  The Tokyo Stock Exchange has stepped up efforts to attract 
investors. Following receipt of a license from the Financial 
Services Agency (FSA) on May 29, 2009, the TSE launched Tokyo AIM, a 
new equity market for venture firms, in cooperation with the London 
Stock Exchange.  It also prepared to introduce a faster trading 
 
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system in January 2010.  Japan's stock exchanges face competitive 
pressures, however.  A record 163 firms delisted from the TSE in 
2009, according to Teikoku Databank.  Other major stock exchanges in 
Asia -- including Taiwan, Hong Kong, Seoul, and Singapore -- are 
stepping up efforts to attract stock listings by Japanese companies. 
 
 
¶63.  Environment for Mergers and Acquisitions: Japan's aversion to 
M&A is receding gradually, accelerated by the unwinding of 
previously extensive corporate cross-shareholding networks between 
banks and corporations in the same business family, improved 
accounting standards, and government mandates that began in the late 
1990s that require banks divest cross-holdings above a set 
threshold.  The majority of M&A over the past decade has been driven 
by the need to consolidate and restructure mature industries or in 
response to severe financial difficulties. 
 
¶64.  Friendly transfer of wholly-owned or majority-owned 
subsidiaries remains by far the more common form of M&A in Japan. 
Similarly, unlisted owner-operated firms -- which traditionally 
would only sell out as a last resort before bankruptcy -- are 
becoming more amenable to acquisition, including by foreign 
investors.  Nevertheless, there remains a strong preference among 
Japanese managers and directors for M&A that preserves the 
independence of the target company.  If companies are forced to seek 
an acquirer, they are often most comfortable merging with a firm 
with which they have a pre-existing business relationship. 
 
¶65.  Since the Companies Act, which took effect in 2006, expanded 
the types of M&A structure available in the Japanese market, many 
companies have adopted defensive measures against hostile takeovers. 
 The most common of these are "advance warning systems" or "poison 
pill"-type rights distribution plans.  In response to the rapid 
adoption of such plans and the concerns of many foreign investors, 
including investment funds, that companies were using takeover 
defenses to entrench existing management, METI in early 2008 
convened the Corporate Value Study Group (CVSG) to clarify the 
purpose of takeover defense measures and principles governing their 
use.  The CVSG's final report issued July 2008 explicitly recognizes 
the "positive effects" of hostile takeovers and emphasizes defensive 
measures should not be used to protect managements' own interests at 
the expense of shareholders, nor should they deprive shareholders of 
the right to make their own determination whether to accept a 
takeover bid. 
 
¶66.  The number of "poison pill" and related proposals decreased 
markedly in 2009, down to about 100 from more than 200 in 2008, 
according to the consultancy Glass Lewis.  While the financial 
crisis reduced the threat of hostile takeovers by reducing capital 
available, this decline also flowed from intensified criticism of 
such measures from investors and growing recognition by management 
that takeover defense plans are not in the interests of either the 
firm or its shareholders.  Nevertheless, a number of technical 
factors continue to limit greater entry into the Japanese market 
through M&A.  These factors include tax policy, a lack of 
independent directors, weak disclosure practices, and a relative 
shortage of M&A infrastructure in the form of specialists skilled in 
making matches and structuring M&A deals. 
 
¶67.  Company Law Revisions: The extensive revision of Japan's 
Company Law (Commercial Code) in 2005-06 significantly expanded the 
flexibility of corporate capital structures and increased the types 
of governance structures available to Japanese firms.  The new law, 
which came fully into force in May 2007, revised and combined Part 
II of the previous Commercial Code with existing laws governing 
limited liability companies (yugen gaisha) and audits.  The law also 
introduced changes to facilitate start-ups and make corporate 
structures more flexible, including elimination of minimum capital 
requirements for joint-stock companies (kabushiki kaisha).  It 
merged a number of different corporate structures and created a new 
structure (godo kaisha) modeled on the U.S.-style limited liability 
company. 
 
¶68.  The Companies Act also permits formation of corporate holding 
companies in Japan for the first time since World War II.  This step 
has facilitated use of domestic stock swaps in corporate 
restructuring, through which one party becomes a wholly-owned 
subsidiary of the other. Japan's tax law now provides special tax 
treatment and deferral of taxes on such stock-swap transactions at 
 
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the time of exchange and transfer.  As of May 2007, foreign equities 
can be used as consideration in triangular merger transactions 
targeting Japanese firms.  However, to take advantage of the new 
rules, the foreign acquirer must legally establish a Japanese 
subsidiary firm to act as the counterpart to the stock 
exchange/transfer. 
 
¶69.  Changes in Corporate Governance: Under the new Companies Act 
and the Industrial Revitalization Law, publicly traded companies 
have the option of adopting a U.S.-style corporate governance system 
instead of the traditional Japanese statutory auditor (kansayaku) 
system of corporate governance.  This new system requires the 
appointment of executive officers and the establishment of a board 
committee system in which at least the audit, nomination, and 
compensation committees are composed of a majority of outside 
directors. Initially available only under the Industrial 
Revitalization Law and effectively limited to distressed companies, 
the new Companies Act makes these options available to all listed 
companies.  Companies also can use the Internet or other electronic 
means to provide notices of annual general meetings or similar 
communication with shareholders.  Where available, shareholders may 
exercise voting rights electronically and companies are permitted to 
make required disclosures of balance sheet and other financial 
information in an electronic format. 
 
¶70.  Reflecting growing concern within Japan that weaknesses in 
existing systems of corporate governance are a disincentive for 
foreign investors, several government agencies and non-government 
organizations have studied the matter and issued recommendations. 
METI inaugurated a Corporate Governance Study Group (CGSG), with 
business-community representation, which issued "The Corporate 
Governance Study Group Report" on June 17, 2009.  Significantly, the 
CGSG was the first government-linked body to set out a formal 
definition of "independent" director or statutory auditors.  Japan's 
Companies Act only requires boards to have "outside" directors, 
defined as an individual who is not an executive or employee of the 
company itself, or of the company's subsidiaries.  The Financial 
Services Agency also convened the Financial System Council (FSC) 
Study Group, which issued its report, "Toward Stronger Corporate 
Governance of Publicly Listed Companies," the same month. 
 
¶71.  On the central question of appointing independent members on 
corporate boards, the Corporate Governance Study Group convened by 
METI stopped short of calling for changing the existing "outsider" 
requirements of board composition with "independence" requirements. 
The CGSG confirmed the need for some independent board 
representation but also noted that non-independent board members can 
still make valuable contributions to a firm.  Positing a potential 
tradeoff between increased independence and the efficacy of 
management, the report recommended that each firm should be allowed 
to adopt the most effective structure in terms of its business.  It 
urged the stock exchange to make rules calling for firms to name one 
independent director or statutory auditor on each board.  It also 
put forward a model of governance where the firm would appoint at 
least one "outside" director and disclose its corporate governance 
system or explain how its model of corporate governance will be 
effective where no outside director is appointed. 
 
¶72.  Highlighting the critical role of shareholders in ensuring 
effective corporate governance, the FSC report echoed the CGSG 
recommendations on independent directors.  It urged the government 
to consider ways to require listed companies to disclose the details 
of any existing relationship between individual directors and the 
company, and to provide the company's views on the level of 
independence of individual directors.  It also called for efforts to 
strengthen the functions of statutory auditors within companies, and 
to provide better training and resources so that auditors can more 
effectively carry out their oversight functions. 
 
¶73.  The Tokyo Stock exchange implemented new restrictions on 
private placements to protect the interests of shareholders on 
August 24, 2009, and published its Listing System Improvement Action 
Plan on September 29, 2009.  The plan sets out steps to enhance 
corporate governance, improve disclosure, and improve the governance 
of group companies.  On December 24 the TSE released its revised 
Principles of Corporate Governance for Listed Companies, the first 
revision since their formulation in 2004. Points newly added address 
issues of enhancing corporate governance through enterprise groups, 
strengthening of statutory auditors' functions, and suitable models 
 
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of corporate governance.  As of December 2009, the TSE was still 
considering rules regarding the independence of directors. 
 
¶74.  Cross-shareholdings and M&A: Potential foreign investors in 
Japan frequently point out that cross-shareholding between Japanese 
listed companies greatly complicates market-based M&A activity and 
reduces the potential impact of shareholder-based corporate 
governance. Such cross-shareholding practices allow senior 
management to put a priority on internal loyalties over shareholder 
returns and can lead to premature rejection of M&A bids. 
Traditionally, a company maintained a close relationship with a 
large-scale commercial bank, known as a "main bank", usually part of 
the same loose corporate grouping.  In return for holding a bloc of 
the company's shares, the bank provided both regular financing and 
emergency support if the company ran into financial difficulties. 
This "main bank" system largely dissolved in the late 1990s as 
Japan's banking system came close to collapse. 
 
¶75.  With the recovery of the Japanese economy at mid-decade, 
however, some company boards began rebuilding cross-shareholding 
networks, this time with suppliers or nominal competitors rather 
than a commercial bank.  While many boards saw such linkages as an 
effective means of defense against hostile takeovers, the sharp 
decline in Japanese stock prices in the autumn of 2008 highlighted 
the risks of this strategy.  According to Daiwa Institute of 
Research, the proportion of stocks owned in cross-shareholding deals 
among Japanese firms fell slightly in FY 2008 to 8.2 percent. 
Subsequent declines will be necessary to conclude that this change 
represents a trend, and it remains unclear whether the introduction 
of International Financial Reporting Standards (IFRS) will lead to 
further declines in cross-shareholdings. 
 
¶76.  Accounting and Disclosure: Implementation of so-called "Big 
Bang" reforms since 1998 has significantly improved Japan's 
accounting standards.  Consolidated accounting has been mandatory 
since 1999 and "effective control and influence" standards have been 
introduced in place of conventional holding standards, expanding the 
range of subsidiary and affiliated companies included for the 
settlement of accounts.  Consolidated disclosure of contingent 
liabilities, such as guarantees, is also mandatory.  All marketable 
financial assets held for trading purposes, including 
cross-shareholdings and other long-term securities holdings, are 
recorded at market value. 
 
¶77.  Companies are required to disclose unfunded pension liabilities 
by valuing pension assets and liabilities at fair value.  Fixed 
asset impairment accounting, in effect since 2005, requires firms to 
record losses if the recoverable value of property, plant, or 
equipment is significantly less than book value. 
 
¶78.  The greater focus on consolidated results and mark-to-market 
accounting had a significant effect in encouraging the unwinding of 
cross-shareholdings and the "main bank" system. Corporate 
restructuring has taken place, in many cases with companies reducing 
pension under-funding and banks disposal of many low-yield assets. 
Recent changes to accounting standards and growth in M&A activity 
have exacerbated the shortage of accounting professionals. 
 
¶79.  The Accounting Standards Board of Japan (ASBJ) and the 
International Accounting Standards Board (IASB) began discussions on 
the convergence of Japanese both accounting standards and IFRS 
practices in March 2005 and, in March 2006, further agreed to 
accelerate the process of convergence.  The ASBJ embarked on similar 
discussions with the U.S. Financial Accounting Standards Board in 
May 2006.  In December 2009, the FSA issued an order allowing 
companies to submit their financial statements based on 
international accounting standards. This order prepares the legal 
groundwork for a complete switch to IFRS in the future, but no 
decision has been made on the mandatory introduction of IFRS. 
Previously, the FSA accepted only Japanese or U.S. standards for 
consolidated accounting. 
 
¶80.  2009 saw calls for greater disclosure of proxy voting.  The 
above-mentioned Financial System Council report issued in June urged 
the government to consider introducing legislation similar to the 
American ERISA law that would spell out the fiduciary duties of 
pension fund managers to exercise their proxy voting rights on 
behalf of pension beneficiaries.  The report called upon the 
investment industry to establish rules or other means to require 
 
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institutional fund managers and other large-scale investors who 
invest on behalf of retail investors to disclose how they exercise 
their proxy votes. 
 
¶81.  Taxation and M&A: Japan's standard tax rate for capital gains 
is 20 percent.  However, under special policy measures intended to 
stimulate capital markets, Japan applies a special 10 percent 
capital gains tax rate on the proceeds of sales of listed stocks 
through 2010 for capital gains of less than JPY 5 million and for 
dividends on listed shares of less than JPY 1 million.  The 
temporary cut in the tax rate from 20 percent to 10 percent on 
capital gains from listed share sales and dividend income expires at 
the end of December 2011; however, a new tax-free program has been 
proposed to encourage individual investors to invest in stocks. 
Under the new program, to be effective from January 2012, combined 
annual capital gains and annual dividend income of up to JPY 1 
million will be exempted from income tax during a three-year period 
(2012-2014).  Under a series of special measures Japan adopted to 
promote venture businesses, if the founding shareholder of a 
qualified company sells shares in the company a ten percent capital 
gains tax rate will apply if the sale is made prior to public 
listing in an M&A transaction and, from 2008, a ten percent rate 
will apply to shares sold by the founding shareholder within three 
years of listing. 
 
¶82.  Bankruptcy Laws: An insolvent company in Japan can face 
liquidation under the Bankruptcy Act or take one of four roads to 
reorganization: the Civil Rehabilitation Law; the Corporate 
Reorganization Law; corporate reorganization under the Commercial 
Code; or an out-of-court creditor agreement. 
 
¶83.  Japan overhauled its bankruptcy law governing small and medium 
size firm bankruptcies by enacting the Civil Rehabilitation Law in 
¶2000.  The law focuses on corporate restructuring in contrast to 
liquidation, provides stronger protection of debtor assets prior to 
the start of restructuring procedures, eases requirements for 
initiating restructuring procedures, simplifies and rationalizes 
procedures for the examination and determination of liabilities, and 
improves procedures for approval of rehabilitation plans.  Japan's 
Corporate Reorganization Law, generally used by large companies, was 
similarly revised in 2003.  Amendments made corporate reorganization 
for large companies more cost-efficient, speedy, flexible and 
available at an earlier stage.  By removing many institutional 
barriers to the restructuring process, the new bankruptcy regime 
accelerated the corporate restructuring process in Japan. 
 
¶84.  Previously, most corporate bankruptcies in Japan were handled 
through out-of-court creditor agreements because court procedures 
were lengthy and costly.  The fact that bankruptcy trustees had 
limited powers to oversee restructuring meant most judicial 
bankruptcies ended in liquidation, often at distress prices. 
Beginning in 2001, a group of Japanese bankruptcy experts published 
a set of private rehabilitation guidelines, modeled after the 
UK-based INSOL guidelines, for out-of-court corporate rehabilitation 
in Japan.  Out-of-court settlements in Japan tend to save time and 
expense, but can sometimes lack transparency and fairness.  In 
practice, because 100 percent creditor consensus is required for 
out-of-court settlements and the court can sanction a reorganization 
plan with only a majority of creditors' approval, the last stage of 
an out-of-court workout is often a request for a judicial seal of 
approval. 
 
¶85.  Credit Markets: Domestic and foreign investors have free access 
to a variety of credit instruments at market rates.  Most foreign 
firms obtain short-term credit from Japanese commercial banks or one 
of the many foreign banks operating in Japan.  Medium-term loans are 
available from commercial banks or from trust banks and life 
insurance companies.  Large foreign firms tend to use foreign 
sources for long-term financial needs. 
 
A.10. COMPETITION FROM STATE-OWNED ENTERPRISES (SOEs) 
 
¶86.  Japan has privatized most former state-owned enterprises. The 
privatization of the financial companies of the Japan Post group, 
including Japan Post Bank and Japan Post Insurance, however, remains 
incomplete.  After assuming power in September 2009, the DPJ-led 
government decided to delay indefinitely the stock sale of these 
companies.  The U.S. Government has continued to raise concerns 
about the preferential treatment that Japan Post entities receive 
 
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compared to private sector competitors and the impact of these 
advantages on the ability of private companies to compete on a level 
playing field. 
 
¶87.  Japan does not have any sovereign wealth fund (SWF). 
 
A.11. CORPORATE SOCIAL RESPONSIBILITY (CSR) 
 
¶88.  Awareness of corporate social responsibility among both 
producers and consumers in Japan is high and growing, and foreign 
and local enterprises generally follow accepted CSR principles. 
Business organizations also actively promote CSR. 
 
A.12. POLITICAL VIOLENCE 
 
¶89.  Political violence is rare in Japan.  Acts of political 
violence involving U.S. business interests are virtually unknown. 
 
A.13. CORRUPTION 
 
¶90.  Japan's penal code covers crimes of official corruption.  An 
individual convicted under these statutes is, depending on the 
nature of the crime, subject to prison sentences up to seven years 
and possible fines up to JPY 2.5 million (for the offering party) or 
mandatory confiscation of the monetary equivalent of the bribe (for 
the recipient).  With respect to corporate officers who accept 
bribes, Japanese law also provides for company directors to be 
subject to fines and/or imprisonment, and some judgments have been 
rendered against company directors. 
 
¶91.  Although the direct exchange of cash for favors from government 
officials in Japan is extremely rare, some have described the 
situation in Japan as "institutionalized corruption." The web of 
close relationships between Japanese companies, politicians, 
government organizations, and universities has been said to foster 
an inwardly-cooperative business climate that is conducive to the 
awarding of contracts, positions, etc. within a tight circle of 
local players.  This phenomenon manifests itself most frequently and 
most seriously in Japan through the rigging of bids on government 
public works projects. 
 
¶92.  Japanese authorities have acknowledged the problem of 
bid-rigging and have taken steps to address it.  Building on the 
longstanding laws on bribery of public officials and misuse of 
public funds, the 2006 amendments to the 2003 Bid-Rigging Prevention 
Act, now called the Act on Elimination and Prevention of Involvement 
in Bid-Rigging, aimed specifically to eliminate official collusion 
in bid rigging.  The law authorizes the Japan Fair Trade Commission 
(JFTC) to demand central and local government commissioning agencies 
take corrective measures to prevent continued complicity of 
officials in bid-rigging activities, and to report such measures to 
the JFTC.  The Act also contains provisions concerning disciplinary 
action against officials participating in bid rigging and 
compensation for overcharges when the officials caused damage to the 
government due to willful or grave negligence.  The act prescribes 
possible penalties of imprisonment for up to five years and fines of 
up to JPY 2.5 million.  Nevertheless, questions remain as to whether 
the Act's disciplinary provisions are strong enough to ensure 
officials involved in illegal bid-rigging are held accountable. 
 
¶93.  Complicating efforts to combat bid rigging is the phenomenon 
known as amakudari whereby government officials retire into top 
positions in Japanese companies, usually in industries that they 
once regulated. Amakudari employees are particularly common in the 
financial, construction, transportation, and pharmaceutical 
industries, among Japan's most heavily regulated industries.  A 2007 
law aimed at limiting involvement of individual ministries in 
finding post-retirement employment for its officials and more 
transparent administrative procedures may somewhat ameliorate the 
situation. 
 
¶94.  Japan has ratified the OECD Anti-Bribery Convention, which bans 
bribing foreign government officials.  The OECD has identified 
deficiencies in Japan's implementing legislation, some of which the 
Japanese Government has taken steps to rectify.  In 2004, Japan 
amended its Unfair Competition Prevention Law to extend national 
jurisdiction to cover the crime of bribery and in 2006 made changes 
to the Corporation Tax Law and the Income Tax Law expressly to deny 
the tax deductibility of bribes to foreign public officials. 
 
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A.14. BILATERAL INVESTMENT AGREEMENTS 
 
¶95.  The 1952 U.S.-Japan Treaty of Friendship, Commerce, and 
Navigation gives national treatment and most favored nation 
treatment to U.S. investments in Japan.  As of December 2009, Japan 
has concluded or signed bilateral investment treaties (BITs) with 
fifteen trading partners, including Egypt, Sri Lanka, China, Hong 
Kong SAR, Turkey, Pakistan, Bangladesh, Russia, Mongolia, Vietnam, 
the Republic of Korea, Cambodia, Laos, Uzbekistan, and Peru.  The 
Japanese Government is currently negotiating bilateral BITs with the 
Kingdom of Saudi Arabia and Colombia, as well as a trilateral 
agreement with China and the Republic of Korea.  The government is 
also preparing to negotiate BITs with other countries abundant in 
natural resources, particularly Qatar and Kazakhstan. 
 
¶96.  Japan has economic partnership agreements (an EPA is analogous 
to a free trade agreement) containing investment chapters in force 
with Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, 
Brunei, the Philippines, Vietnam, and Switzerland, as well as a 
multilateral EPA with all ten members of the Association of 
Southeast Asian Nations (ASEAN). 
 
¶97.  U.S.-Japan Investment Initiative: Discussions as part of the 
U.S.-Japan Investment Initiative under the Economic Partnership for 
Growth, established by President Bush and Prime Minister Koizumi in 
June 2001, have addressed U.S. Government concerns about barriers to 
foreign investment in Japan.  The Initiative's Investment Working 
Group has held semi-annual sessions to discuss policy measures that 
could improve the investment climate in both countries.  The group's 
work has also included vigorous public outreach to increase 
receptivity to FDI.  In 2009, its annual investment promotion 
seminar was held in Yokohama, alongside the Green Device 2009 trade 
show; it focused particularly on the role of venture capital in 
fostering economic growth and the development of new industries. 
 
A.15. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
 
¶98.  U.S. OPIC insurance and finance programs are not available in 
Japan.  Japan is a member of the Multilateral Investment Guarantee 
Agency (MIGA).  Japan's capital subscription to the organization is 
the second largest, after the United States. 
 
A.16. LABOR 
 
¶99.  Changing demographic patterns, macroeconomic trends, and 
regulatory reforms are gradually affecting traditional Japanese 
employment practices.  Foreign investors seeking to hire highly 
qualified workers in Japan should benefit from many of these 
changes. 
 
¶100.  Throughout most of the post-war period, Japanese employment 
practices -- most notably in the nation's large, internationally 
competitive firms -- rested on three pillars: lifetime employment, 
seniority-based wages, and enterprise unions.  Today, all three are 
undergoing rapid transformation.  Demographic pressures -- fewer 
young workers and a rapidly aging labor force and the subsequent 
structural changes in the Japanese economy -- are forcing many firms 
to reduce sharply lifetime employment guarantees and seniority-based 
wages in favor of merit-based pay scales and limited-term contracts. 
 Although labor unions play a role in the annual determination of 
wage scales throughout the economy, that role has been shrinking. 
As in the United States, trade union membership as a portion of the 
labor force has been declining for decades, but the number of 
part-time workers who are union members has increased in recent 
years as a result of strengthened organizing efforts by some labor 
unions.  With the formation of the DPJ-led government in September 
2009, labor unions found the Japanese government more sympathetic 
than before to their concerns. 
 
¶101.  Investors should be aware of Japan's high wage structure. 
Growth in average wages has been slow, even in the midst of a return 
to economic growth, a situation that largely reflects the shift to 
increased use of non-regular employees and the hiring of younger 
workers to replace older, higher-wage workers who have begun to 
retire. 
 
¶102.  Traditionally, Japanese workers were classified as either 
"regular" or "other" employees.  This system, to a considerable 
 
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degree, remains in place.  Companies recruit "regular" employees 
directly from schools or universities and provide an employment 
contract with no fixed duration.  In contrast, firms hire "other" 
employees on fixed duration contracts, which generally cannot exceed 
one year but may be renewed several times.  Since the mid-1990s, 
companies have increasingly used part-time workers, interns, and 
temporary workers to fill short-term labor requirements.  According 
to a 2007 MHLW survey, non-regular workers accounted for 71.8 
percent of all employees aged 15-19 years and 43.2 percent of all 
employees age 20-24.  There remains deep concern among Japanese 
government policy makers that the number of non-regular employees 
aged 25-34 remains stubbornly high and the ability of such workers 
to find permanent employment will decline as they get older.  These 
non-regular employees and temporary workers have borne the brunt of 
corporate adjustment to the worldwide recession since September 
¶2008.  In 2009 employment of such non-regular workers generally 
continued on a downward trend, with the largest drop being 380,000 
in the quarter ended September 2009, according to the Ministry of 
Internal Affairs and Communications (MIC). 
 
¶103.  Defined contribution pension plans have been available in 
Japan since 2001.  Such plans should promote greater labor mobility 
in the future, as workers are able to carry pension savings with 
them to new jobs.  However, only about three percent of workers are 
currently covered by such plans and the ceiling on contributions is 
too low to realize the full potential of the program.  In December 
2008, the government submitted legislation to allow employees to 
make individual contributions to their pension plans, but the bill 
was not enacted by the Diet.  In July 2009, the government announced 
it would increase tax deductible employer contribution limits, 
effective January 2010, the second increase since 2001. 
 
A.17. FOREIGN-TRADE ZONES/FREE PORTS 
 
¶104.  Japan no longer has free-trade zones or free ports.  Customs 
authorities allow the bonding of warehousing and processing 
facilities adjacent to ports on a case-by-case basis. 
 
A.18. FOREIGN DIRECT INVESTMENT STATISTICS 
 
¶105.  Between 1998 and December 2008, Japan's stock of FDI increased 
from JPY 3.0 trillion to JPY 18.5 trillion.  In the same period 
investment inflows were generally strong.  All data in the tables 
below are current as of December 2008.  Negative figures indicate 
net outflow. 
 
¶106.  TABLE 1A: NET FDI INFLOWS 
------------------------------ 
Unit: billion dollars; balance-of-payment basis 
 
JFY1999  JFY2000  JFY2001  JFY2002  JFY2003 
12.31    8.23      6.19     9.09     6.24 
 
JFY2004  JFY2005  JFY2006  JFY2007  JFY2008 
7.81     3.22     -6.78     22.18    24.55 
 
¶107.  TABLE 1B:  RATIO OF INWARD TO OUTWARD FDI 
--------------------------------------------- - 
balance-of-payment basis 
 
1999   2000   2001    2002    2003 
1:1.8  1:3.8  1:6.2   1:3.5   1:4.6 
 
2004   2005   2006    2007    2008 
1:4   1:14.1  1:9.4   1:3.3   1:5.3 
--------------------------------------------- 
Note: Figures were first calculated in nominal Japanese yen and 
converted into U.S. dollars using Bank of Japan average annual 
exchange rates. 
 
¶108.  TABLE 2: FDI IN JAPAN, BY COUNTRY 
-------------------------------------- 
Unit: million dollars 
Net and flow; balance-of-payment basis 
 
- Year end   2004    2005    2006    2007    2008 
¶N. America  2,294    -636  -2,666  12,706  12,005 
 U.S.       1,407     308     105  13,270  11,792 
 Canada       890    -944  -2,771    -561     213 
 
TOKYO 00000108  017 OF 019 
 
 
Asia          994   1,565    -852   1,605   3,381 
 China         -9      11      12      15      37 
 Hong Kong    295     960   2,136      47     257 
 Taiwan        74     -26     110      36      66 
 Korea        251      31     108     221     279 
 Singapore    389     598   1,062   1,282   2,716 
 Thailand      -1      -6       1       1       6 
 India          0       1      -1       3       1 
¶W. Europe   5,623   1,123  -3,938   4,785   4,861 
 Germany    1,170     237    -542    -813   1,185 
 U.K.        -310     132   1,807     540  -1,289 
 France     1,049     -78     274     504     177 
 Nethlnds.  3,611   2,541  -7,583    -390   2,692 
 Belgium     -417  -1,188     884     148  -2,040 
 Luxembourg   260     363     -12     484     477 
 Switz.       108    -748     317   1,162   1,873 
¶E. Europe 
 Russia        -1       0      -4       1       5 
¶L. Amer.   -1,114   1,278     566   2,831   4,020 
 Mexico         0       0       0       0       0 
 Brazil        20       1       0       0       0 
 Cayman       752   1,069     -82   1,480   3,592 
Oceania        -4    -114      36     215     258 
Middle East     3       9      -1       3      -2 
Africa        -13       1      63      33      21 
TOTAL       7,808   3,223  -6,789  22,181  24,550 
--------------------------------------------- ---- 
 
¶109.  TABLE 3: FDI INWARD STOCK BY COUNTRY/REGION 
--------------------------------------------- ---- 
Unit: million dollars 
 
- Year end   2004    2005    2006    2007    2008 
¶N. America 45,919  47,729  44,273  45,947  75,680 
 U.S.      40,872  43,888  41,989  44,795  74,344 
 Canada     5,049   3,841   2,284   1,152   1,336 
Asia        5,889   6,702   8,247   9,390  16,769 
 China         90     102     100     125     225 
 Hong Kong  2,136   2,612   1,928   2,301   3,203 
 Taiwan     1,605   1,391   1,475   1,534   1,892 
 Korea        537     313     423     694   1,235 
 Singapore  1,380   2,159   4,205   4,620  10,047 
 Thailand      48      42      42      44      61 
 India         10      10       9      13      18 
¶W. Europe  41,779  38,101  42,367  62,341  86,915 
 Germany    3,915   5,904   4,582   3,811   6,592 
 U.K.       2,310   3,033   4,983   5,962   6,750 
 France    13,693  10,777  11,549  12,776  16,233 
 Nethlnds. 14,210  11,654  12,175  26,025  36,510 
 Belgium      613     474   1,901   1,947   1,362 
 Luxembourg 1,650   1,632   1,635   2,267   4,000 
 Switz.     3,172   2,106   3,536   3,942   7,150 
¶E. Europe 
 Russia        52      47      47      46      63 
¶L. Amer.    3,004   8,218  12,123  15,227  23,576 
 Mexico         5       4       4       5       6 
 Brazil        33      31      30      32      40 
 Cayman Is. 2,666   5,599   8,400  10,469  17,363 
Oceania       637     478     492     779   1,075 
Middle East     9      14      14      20      29 
Africa        -12       1      63      99     275 
TOTAL      97,305 101,322 107,663 133,888 204,433 
--------------------------------------------- ----- 
 
¶110.  TABLE 4: FDI IN JAPAN, BY INDUSTRY 
--------------------------------------- 
Unit: million dollars 
Net flow reporting basis for JFY2004 
Balance of payment basis for CY 2005-08 
 
-         JFY2004  CY2005  CY2006  CY2007  CY2008 
Manufacturing 
(total)       952  -2,191     254   1,381   2.261 
 Machinery    402      --      --      --      -- 
 General mach. --     164     -24     -22     721 
 Electric      --  -1,195      32    -391     642 
 Trans. Equip. --      32  -1,408     331     -55 
 Precision mach.--    -59     598      20     113 
 Chemicals    199      --      --      --      -- 
 
TOKYO 00000108  018 OF 019 
 
 
 Chemicals 
 /Pharma       --  -1,168   1,538  -1,010     245 
 Metals         7      --      --      --      -- 
 Iron, 
  non-ferrous  --     -34      60     230     124 
 Rubber leather--       1      35      35       4 
 Petroleum    166     -44      37     935     300 
 Textiles      83     188      58     109      -3 
 Food          32    -211    -717     365     -86 
 Glass & ceramics--   103     193     663     212 
Others         63      --      --      --      -- 
Non-manufacturing 
(total)    36,507   5,414  -7,043  20,800  22,289 
 Farming/forestry --   -1      11      41       1 
 Fish/marine prod.--    0     -39     -33      -- 
 Mining       --        0       1       0       0 
 Finance/Insur. 27,693 645  2,265  17,661  19,823 
 Trading      999     --      --       --      -- 
 Wholesale/retail -- 1,157   -387   1,660   1,160 
 Services   1,263      178    122     295     473 
 Real estate  213       15     72   1,413     581 
 Telecom    4,338       --     --      --      -- 
 Communication  --     912 -9,715    -633  -1,028 
 Transport  1,947    2,108     28    -288      43 
 Construction  31      41      37      19     -60 
 Others        24      --      --      --      -- 
TOTAL      36,507   3,223  -6,789  22,181  24,550 
 
--------------------------------------------- --------- 
 
¶111.  TABLE 5: JAPANESE FDI OVERSEAS, BY COUNTRY/REGION 
--------------------------------------------- --------- 
Unit: million dollars 
Net and flow; balance-of-payment basis 
 
- Year end   2004    2005    2006    2007    2008 
¶N. America  7,601  13,169  10,188  17,385  46,046 
 U.S.       7,559  12,126   9,297  15,672  44,674 
 Canada        42   1,042     892   1,713   1,372 
Asia       10,531  16,188  17,167  19,388  23,348 
 China      5,863   6,575   6,169   6,218   6,496 
 Hong Kong    491   1,782   1,509   1,131   1,301 
 Taiwan       473     828     491   1,373   1,082 
 ROK          771   1,736   1,517   1,302   2,369 
 Singapore    138     557     375   2,233   1,089 
 Thailand   1,867   2,125   1,984   2,608   2,016 
 Indonesia    498   1,185     744   1,030     731 
 Malaysia     163     524   2,941     325     591 
 Philippines    6     442     369   1,045     705 
 India        139     266     512   1,506   5,551 
Europe      7,097   7,509  18,029  20,456  22,418 
 Germany      645     270   1,128     880   3,905 
 U.K.       1,649   2,903   7,271   3,026   6,744 
 France        25     541     842     479   1,703 
 Nethlnds.  3,337   3,315   8,497  12,440   6,514 
 Sweden       -70      82     416     254     570 
 Spain        183     363     136      10     210 
¶L. America  3,120   6,402   2,547   9,482  29,623 
 Mexico       191     629  -2,603     501     315 
 Brazil       -65     953   1,423   1,244   5,371 
 Cayman Is. 2,726   3,915   2,814   5,838  22,550 
Oceania     1,856     943     723   4,204   6,060 
 Australia  1,651     640     466   4,140   5,232 
Middle East   -63     542     242     958   1,138 
 UAE          -19      19     -56      60     194 
 Saudi Arabia -38     494     254     746     892 
Africa        378      25     899   1,101   1,518 
 South Africa 124     -17     466      82     648 
TOTAL      30,962  45,461  50,165  73,483 130,801 
--------------------------------------------- ------- 
 
¶112.  TABLE 6: JAPANESE FDI OVERSEAS, BY INDUSTRY 
--------------------------------------------- --- 
Unit: million dollars 
Net and flow; reporting basis for JFY2004 
Balance of payment basis for CY 2005-08 
 
-         JFY2004  CY2005  CY2006  CY2007  CY2008 
Manufacturing 
 
TOKYO 00000108  019 OF 019 
 
 
 (total)   13,750  26,146  34,513  39,515  45,268 
 Chemicals 
 /Pharma    3,530   3,363   4,413   3,744  11,647 
 Trans. Equip. 3,601   --      --      --      -- 
 Food         428   1,088   1,685   1,025  12,776 
 Metal      1,078   1,391      --      --      -- 
 Iron, 
 non-ferr.     --    1,331  1,795   2,202   3,152 
 General mach. 1,108 1,296  1,663   2,642      -- 
 Electric mach.--   4,377   7,041   4,691   5,675 
 Transport equip.-- 8,611   8,597   8,671  10,924 
 Precision mach.--  1,419   1,420   1,293     953 
 Rubber/leather --    831   1,107     835     771 
 Lumber & pulp 119    826     420     745     734 
 Textiles      172    416     180     371     716 
 Petroleum     --     531   2,921    -280     652 
 Glass/ceramics --    258   2,759     837   1,417 
Non-manufacturing 
 (total)   21,010  19,315  15,652  33,968  85,533 
 Finance 
 /Insurance 11,613  9,227   5,562  19,458  52,243 
 Trade      1,884      --      --      --      -- 
 Wholesl/retail --  4,623   5,483   4,792  13,319 
 Real estate  370    -851    -811     162     162 
 Services   2,360   1,086     188   1,406   2 721 
 Transport  1,286     824   1,507   2,133   2,283 
 Mining     2,054   1,372   1,577   4,053  10,518 
 Construction 280     148     -64     490     389 
 Farm/forest   38      23      42      93      59 
 Fisheries     24     -44      28      64     118 
 Communications --  1,712  -3,368    -331   1,675 
TOTAL      34,548  45,461  50,165  73,483 130,801 
 
--------------------------------------------- 
 
¶113.  TABLE 7:  FDI INFLOW RELATIVE TO GDP 
------------------------------------------ 
Balance-of-payment basis 
 
(a) GDP/Nom (trillion yen) 
 
2004    2005    2006    2007    2008 
------------------------------------- 
498.3   501.7   508.9   515.7   494.2 
 
(b) FDI Inflow (trillion yen) 
 
2004    2005   2006    2007    2008 
------------------------------------- 
0.85    0.31   -0.76    2.65    2.52 
 
(b/a) (percent) 
 
2004    2005   2006    2007    2008 
------------------------------------- 
0.17    0.06   -0.15    0.51    0.51 
--------------------------------------- 
 
ZUMWALT