2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

Openness To, and Restrictions Upon, Foreign Investment

Japan is the world's third 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. The Japanese government's commitment to implement policies to improve the climate for foreign investment, however, has been uneven. Japan's stock of FDI, as a percentage of gross domestic product (GDP), stood at 3.7 percent at the end of 2010 and was expected to remain well under 4.0 percent through calendar 2011. While outbound investment surged during 2011 as Japanese firms embarked on a record-setting year of mergers and acquisitions (M&A) activity abroad, investment activity inside Japan continued at a low level, down significantly from that before the economic downturn that began in 2008. Final 2010 statistics for FDI in Japan show a net outflow of about $1.4 billion for the calendar year, and provisional figures for the nine months through September 2011 indicated an outflow of $1.2 billion and suggested that this trend may continue.

Beginning with the economic downturn of 2008-2009, Japan's broader economy and political world have witnessed significant upheaval. Following the economy's recovery and positive growth in 2010, as global demand expanded, in March 2011 Japanese growth ground to a halt as the nation experienced its worst crisis since 1945. On March 11, 2011, a 9.0 earthquake off of the coast of Northeastern Japan (Tohoku) unleashed a deadly tsunami that overwhelmed defenses and devastated many coastal areas in the region facing the Pacific Ocean. The resulting damage brought numerous Japanese business operations to a temporary halt and disrupted global supply chains. Moreover, a nuclear accident at the Fukushima Daiichi Nuclear Power Station, also resulting from the tsunami, led to shortages of electric power in the Tokyo area and forced both the government and businesses to implement emergency power-saving measures. In the aftermath of these disasters, the government made economic recovery and reconstruction its first priority. Imposition of new safety checks temporarily closing many other nuclear power plants and a reassessment of the nation's energy policy have also added a new dimension to national discussion of economic policy.

The economy featured prominently in both the lower house parliamentary election of August 2009 and the upper house election of July 2010. While the Democratic Party of Japan (DPJ) won the former, sending the long-ruling Liberal Democratic Party (LDP) into the opposition, the DPJ and its coalition partner failed to win the majority they sought in 2010. One consequence of this divided political outcome has been legislative gridlock. The DPJ’s outright majority in the lower house of the National Diet ensures that it can continue to lead the government, but the absence of a majority in the upper house complicates the task of policymaking for the governing coalition. The March 2011 disasters interrupted consideration of new policy initiatives such as Japan's New Growth Strategy, announced in 2010. A basic objective of the policy is to position Japan as base for international firms’ Asian operations and their research and development (R&D) functions. Following the resignation of Prime Minister Kan and the formation of a new DPJ-led government under Yoshihiko Noda in September 2011, the government pledged to reassess its growth strategy, among other policies, in light of the new conditions facing Japan.

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.

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.

Japan ranked 14 on Transparency International's Corruption Perceptions Index in 2011, with a score of 8.0 based on 12 surveys. The World Bank ranked Japan number 20 on its Ease of Doing Business 2012 report, covering the period June 2010 through May 2011. The 2011 Index of Economic Freedom compiled by the Heritage Foundation ranked Japan number 20, with a score of 72.8 or mostly free.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Perceptions Index

14

2011

Heritage Economic Freedom

20

2011

World Bank Doing Business

20

2012

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 practices comprising the business environment 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.

The U.S. and Japanese governments have discussed these issues bilaterally under several different initiatives, the most recent of which were announced on November 13, 2010 against the backdrop of Japan hosting the Asia-Pacific Economic Cooperation (APEC) forum in 2010 and the United States doing so in 2011. In 2011 there were three economic policy dialogues serving as the principal fora for discussing issues relating to the investment environment: the U.S.-Japan Economic Harmonization Initiative, the U.S.-Japan Dialogue to Promote Innovation, Entrepreneurship and Job Creation; and the U.S.-Japan Policy Cooperation Dialogue on the Internet Economy.

Future bilateral engagement will also occur in the context of a new initiative for the economic integration of the Asia-Pacific region in the form of the Trans-Pacific Partnership (TPP) free trade agreement currently being negotiated among the United States and eight other countries (Singapore, New Zealand, Brunei, Chile, Australia, Peru, Vietnam, and Malaysia). On November 12, 2011, leaders of these nine countries announced the outline of the TPP following a summit meeting hosted by the United States in Honolulu, Hawaii. Japan, Canada and Mexico also announced their interest in entering into consultations toward participating in the TPP negotiations. As of the end of 2011, the Office of the U.S. Trade Representative was receiving public comments pursuant to announcement in the Federal Register as part of its domestic stakeholder and Congressional consultation process to consider this interest.

Legal Reform Facilitates M&A Activity

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. 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.

The 2007 Financial Instruments and Exchange Law (amended in 2008) established a flexible regulatory system for financial markets. It 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.

The structural reforms, revisions to Japan's legal code, and pro-active Japanese government policies to welcome FDI and promote corporate restructuring of the past decade have increased foreign investment in Japan through merger and acquisition activity. The numbers have generally tracked the performance of the broader economy, coming down as Japan's economy has struggled since 2008. Whereas M&A transactions in Japan numbered approximately 800 in 1998, they stood at about 1,687 transactions in 2011, a 1.2 percent decline from the previous year, according to estimates by RECOF, a Tokyo-based M&A consultancy. The majority of these mergers were domestic transactions, but transactions involving foreign counterparts have also increased. The number of takeover bids (TOB) in Japan exceeded 100 for the first time in 2007. TOBs amounted to 51 between January and November 2011 according to RECOF. The total value of M&A deals involving Japanese companies in 2011 was 10.5 trillion yen, up 57.8 percent from the previous year. Japanese M&A directed at foreign companies amounted to 6.27 trillion yen during the same period, accounting for 59.7 percent of the total and up 71 percent from 2010, according to RECOF.

While inflows from the United States and Asia declined during 2010, inflows from Europe increased during the same period (Table 2). 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, FDI stock in Japan as of December 2010 was ¥17.5 trillion, (3.7 percent of GDP), according to Bank of Japan (BOJ) statistics.

Meanwhile, as the 2011 figures above indicate, a significant imbalance between inward and outward FDI persists. Japanese companies' large cash holdings combined with low global equity values and the strengthening of the yen supported increased outbound FDI activity. Notwithstanding this imbalance between inward and outward FDI, and the increase in outbound M&A activity, Japan's outward FDI as a percentage of GDP remains among the lowest of major OECD members.

Limited Sector-specific Investment Restrictions Remain

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 Law and Broadcasting Law also limit 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 bill was eventually removed from the docket. The Ministry of Land, Infrastructure, Transport and Tourism (MLIT) is expected to begin new discussions by March 2012 on the possibility of further privatization of Narita Airport. The GOJ will establish an "Action Plan of Airport Management Reform" by the summer of 2012, based on the proposals in the MLIT Airport Administration Study Group report completed in July 2011. According to press reports, the GOJ will submit a bill to the Diet in January 2012 that would allow private firms to manage 27 airports that are currently managed by the GOJ, including larger airports like Sendai and Hiroshima.

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 Minister for Finance and the minister having jurisdictions over the business through 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 Minister of Finance and the minister 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.

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 (article 6), shareholdings (articles 10, 11 and 14), interlocking corporate directorates (article 13), mergers (article 15), and acquisitions (article 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.

Amendments to the AMA, effective January 1, 2010, improved 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 rose to apply when the domestic sales amount of any one of the parties exceeds 20 billion yen and the domestic sales amount of another one of the parties exceeds 5 billion yen. The 20 billion yen threshold can be applied for either the acquirer or the target company, and likewise the 5 billion yen threshold. Also these can apply in the case where more than two companies are involved in the merger. The amendments also expanded the scope of exemptions from notification.

Limitations on Facility Development and Availability of Investment Real Estate

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. Japan's real estate sector experienced a painful contraction following the credit crunch of 2008 as prices declined. The real estate market, particularly for premium properties, rebounded in 2010, after the Bank of Japan (BOJ) announced its intention to buy real estate investment trust (REIT) shares. The small number of large real estate deals between unrelated parties, however, continues to impede recovery of the real estate market. Additionally, U.S. investors have reported that activities of criminal elements have interfered with real estate transactions in Japan, particularly those involving distressed assets.

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.

Japanese law permits marketing of REITs and mutual funds that invest in property rights. As of December 2011, there are 34 REITs listed on the Tokyo Stock Exchange (TSE). The Tokyo Stock Exchange's index tracking real estate investment trusts (REITs) dropped in 2011, falling below the lowest level for 2010 despite expenditure of about 66.5 billion yen by the Bank of Japan under an asset-purchasing program begun in October 2010, whose targets include REITs.

Corporate Tax Treatment

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.

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 currently high 40 percent corporate tax rate serves to encourage foreign and investment funds to keep their trading and investment operations off-shore.

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 implemented an exemption for foreign investors from paying taxes on interest income (previously 15 percent) on corporate bonds, fiscal loan and investment program bonds and those issued by the Japan Finance Organization for Municipalities in June 2010.

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

Since 2001, the Japanese Government has sought to revitalize the country's economy, in part by increasing inward FDI. Policies and programs to achieve this goal have changed over time. As of the end of 2011, the GOJ was reassessing to take into account the impact of the March 11, 2011 earthquake and related disasters, focusing especially on updating its New Growth Strategy, initially unveiled on June 18, 2010. On December 21, 2011, the Ministry of Economy, Trade and Industry (METI) announced that it would offer investment incentives to ten foreign companies (including three firms based in the United States) to establish high-value-added business operations in Japan. This program forms part of a larger program to promote Asian site location in Japan by firms with global operations.

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. (Detailed information is available at 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.

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 (www.jetro.org).

Post-Disaster Reconstruction Policy and Special Zone Legislation

The National Diet has allocated 15.1 trillion yen (about $193.5 billion) for reconstruction of the Tohoku region that was devastated by the March 11, 2011 earthquake and tsunami. This figure combines various supplementary budgets for reconstruction, and includes major portions for rebuilding infrastructure, and various grant programs -- some to be administered by local governments The reconstruction plan calls for local governments to create their own recovery plans. While the central government insists that Tohoku reconstruction will be open to the world, it currently has no plans to consolidate information on local projects or the business opportunities associated with them.

Similarly, while the National Diet passed legislation designating the Tohoku region an area for reconstruction, the decisive role of local governments in formulating reconstruction plans and the accompanying special zones for implementation of selected measures means there will be many different special zones rather than one single zone. The special economic zones legislation includes 222 municipalities in the 11 prefectures of the affected region. Local municipalities may choose from a given menu of regulatory, tax relief, and other measures from which to craft special economic zones specific to their needs. Another key aspect of the special measures is the possibility to rezone agricultural, residential, and industrial areas to fit local plans. Each locality has decided or will determine the aspects of its own special zone, so tax incentives and relaxed zoning may vary from locality to locality. Companies wishing to assist in Tohoku recovery should be aware that despite emergent circumstances, access to Japanese markets will not be automatically opened by central government fiat, and companies should still seek a Japanese partner to negotiate the various zones and search for opportunities through the diverse proposals presented by local governments.

The Reconstruction Agency to be established in February 2012 maintains a website with some information regarding reconstruction status at http://www.reconstruction.go.jp/english/

Conversion and Transfer Policies

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.

Japan is an active partner in combating 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 ¥100,000 (about $1,300) must do so through bank clerks, not ATMs, and must present photo identification. However, Japan is still working to rectify deficiencies noted in the 2008 FATF evaluation of Japan's anti-money-laundering and terrorist finance regime, particularly on customer due diligence, international cooperation, freezing terrorist assets, and criminalizing terrorist finance.

Expropriation and Compensation

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.

Similarly, public discussion since March 2011 of the possibility of nationalizing the Tokyo Electric Power Company (TEPCO) has occurred only against the highly unusual backdrop of the company being the operator of the Fukushima Daiichi Nuclear Power Station, which experienced a level 7 accident on the International Nuclear and Radiological Event Scale (INES), the most serious category on the scale. Expropriation or nationalization of foreign investments in Japan is extremely unlikely.

Dispute Settlement

There have been no major bilateral investment disputes since 1990. 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.

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. While the number did not reach the government's goal in 2010 (standing at about 2,000 in 2010 and 2011), it has increased substantially in comparison to prior years. Media sources have reported that some in the legal community have argued the increase has caused problems for the profession and have called for reducing the number who pass the Bar Examination.

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.

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.

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.

Performance Requirements/Incentives

Japan does not maintain performance requirements or requirements for local management participation or local control in joint ventures.

Right to Private Ownership and Establishment

Foreign and domestic private enterprises have the right to establish and own business enterprises and engage in all forms of remunerative activity.

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.

Protection of Property Rights

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.

Registering Patents, Trademarks, Utility Models and Designs: The IPR rights holder must register patents and trademarks in order 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.

While patent and trademark procedures in Japan have historically been costly and time-consuming, the GOJ has made strides to improve procedures in recent years. Specific complaints included the weaknesses of Japanese enforcement and legal redress, for example, judges are not adequately trained or that court procedures do not adequately protect business-confidential information required to file a case. In response, 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 an IPR court has been established. 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.

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.

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.

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.

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.

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.

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.

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. 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. In May 2011, the GOJ enacted a partial amendment to the Unfair Competition Prevention Law that protects trade secrets from being disclosed during court trials and makes it illegal to sell items designed to circumvent technological protection measures, even if the device has other legal uses. Both of these changes address specific issues of concern with the previous law. The partial amendment came into enforcement on December 1, 2011.

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.

Transparency of the Regulatory System

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.

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.

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.

In the financial sector, the Financial Services Agency (FSA) has made efforts to expand the body of published written interpretations of Japan’s financial laws, and has improved outreach to the private sector regarding these changes.

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 description of Japan’s regulatory regime as it affects foreign exporters and investors.

Efficient Capital Markets and Portfolio Investment

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 390 listed companies participate as of December 2011. All holdings of TSE-listed stocks are required to transfer paper stock certificates into electronic form.

The TSE has stepped up efforts to attract investors. Following receipt of a license from the FSA on May 29, 2009, the TSE launched Tokyo AIM, a new equity market for venture firms, in cooperation with the London Stock Exchange, however as of the end of 2011 it had only attracted one listing. Japan's stock exchanges face competitive pressures, however. 49 firms delisted from the TSE in 2010, according to the TSE. Other major stock exchanges in Asia -- including Taiwan, Hong Kong, Seoul, and Singapore – continue to seek stock listings by Japanese companies, and media reports indicate that some Japanese firms chose to conduct initial public offerings of shares offshore.

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.

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.

Since the Companies Act, which took effect in 2006, expanded the types of M&A structure available in the Japanese market, many companies adopted defensive measures against hostile takeovers. The most common of these are "advance warning systems" or "poison pill"-type rights distribution plans. In keeping with a trend evident since the economic downturn, the number of "poison pill" and related measures decreased slightly in 2011, down to about 523 from 542 in 2010, with 103 companies abandoning their measures in 2011, according to RECOF. While the financial crisis reduced the threat of hostile takeovers by reducing available capital, 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, uncertainty regarding tax treatment of certain M&A structures, 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.

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. 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 the time of exchange and transfer.

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.

Reflecting growing concern within Japan at the time that weaknesses in existing systems of corporate governance were a disincentive for foreign investors, METI and the FSA, studied the issue of introducing more independent voices on corporate boards and issued recommendations in 2009, as reported in detail in 2010 and 2011. Other non-governmental organizations also studied and reported on the matter at about the same time. While the government has not taken further measures to increase the level of independent monitoring and strategic oversight provided by the boards of listed companies, it has continued to study the matter. In 2010 the Ministry of Justice (MOJ) convened a Legislative Advisory Council having the authority to consider amendments to the Companies Act. The Company Act Sub-Committee did not specify a clear scope for its deliberations or signal a commitment to increasing the number of independent members on company boards at the outset, however. TEPCO's failure to take steps that would have prevented the March 2011 nuclear disaster as well as high-profile scandals at two Japanese firms with globally recognized names that resulted from lax corporate governance sparked renewed interest in corporate governance reform in 2011. In December the MOJ proposed requiring that listed firms have at least one outside director and was soliciting public comment on the proposal as of the end of 2011. Even this proposal, however drew immediate opposition from Keidanren, Japan's leading business lobby.

The TSE 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, 2009 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 of corporate governance. In March 2011, the TSE published the "TSE Listed Companies White Paper on Corporate Governance 2011." A TSE advisory group is still considering improvements of rules. The latest meeting was held on October 18, 2011, after a ten-month interval.

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.

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 a recent study by Nomura Securities, the cross-shareholding ratio (market value basis) in FY 2010 was a record-low 11.1 percent, a 0.4 percent decline from 2010.

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.

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.

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.

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 a final decision has been made on the mandatory introduction of IFRS. In June 2011, the FSA announced it would delaying its road map towards adoption of IFRS for publicly traded companies as a result of concerns over additional costs for Japanese companies struggling after the March 11 earthquake. The FSA's road map originally indicated it would be mandatory for Japanese companies to report under IFRS in 2015 or 2016. The FSA said instead there will be a transition period of five to seven years prior to mandatory adoption in order to allow companies sufficient time to prepare for the new reporting standard.

There has been greater disclosure of proxy voting during the past two years. The above-mentioned Financial System Council report issued in June 2009 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 institutional fund managers and other large-scale investors who invest on behalf of retail investors to disclose how they exercise their proxy votes.

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 2011 for capital gains of less than ¥5 million and for dividends on listed shares of less than ¥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 is due to expire at the end of December 2011, but the government has proposed an extension through December 2013. In addition, 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 ¥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 applies to shares sold by the founding shareholder within three years of listing.

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.

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.

Previously, most corporate bankruptcies in Japan were handled through out-of-court creditor agreements because court procedures were lengthy and costly. Since 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.

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.

Competition from State-Owned Enterprises (SOEs)

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. Since April 2010, a package of four bills intended to roll back the 2007 reforms that began the privatization of Japan Post has been pending in the Diet. The government has been unsuccessful in passing these bills and has begun to work with opposition parties to address their concerns and perhaps amend the current law rather than pass new legislation. The U.S. Government has continued to raise concerns about the preferential treatment that Japan Post entities receive compared to private sector competitors and the impact of these advantages on the ability of private companies to compete on a level playing field.

Japan does not have a sovereign wealth fund (SWF).

Corporate Social Responsibility (CSR)

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.

Political Violence

Political violence is rare in Japan. Acts of political violence involving U.S. business interests are virtually unknown.

Corruption

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 three years and possible fines up to ¥2.5 million (for the offering party), or prison sentences up to seven years and 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.

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.

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 ¥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.

Complicating efforts to combat bid rigging is the phenomenon known as amakudari whereby government officials retire into top positions in Japanese companies, frequently 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. The 2007 revised National Public Service Act 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. In view of strong DPJ opposition to amakudari when they were an opposition party, there were popular expectations that the DPJ-led government would move to eliminate amakudari. Since September 2009 when the DPJ first formed a government, however, the issue has not been a high government priority, and amakudari practices persist.

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.

Bilateral Investment Agreements

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

2010, Japan has concluded or signed bilateral investment treaties (BITs) with sixteen trading partners, including Egypt, Sri Lanka, China, Hong Kong SAR, Turkey, Pakistan, Bangladesh, Russia, Mongolia, Vietnam, the Republic of Korea, Cambodia, Laos, Uzbekistan, Peru, Columbia, and Papua New Guinea. The Japanese Government is currently negotiating bilateral BITs with the Kingdom of Saudi Arabia,, Kuwait, Kazakhstan, Angola and Iraq, as well as a trilateral agreement with China and the Republic of Korea. The government is also preparing to negotiate BITs with other countries possessing abundant natural resources, including Qatar, Algeria and the Ukraine.

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, Switzerland, and India, as well as a multilateral EPA with all ten members of the Association of Southeast Asian Nations (ASEAN). It has also signed an EPA with Peru; ratification by the Diet was still pending as of the end of 2011.

OPIC and Other Investment Insurance Programs

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.

Labor

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.

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, but mobility among firms of skilled and white-collar labor, at both the mid-level and executive level, remain low. Demographic pressures -- fewer young workers as a result of a long-term trend of a declining birth rate and a rapidly aging labor force and the subsequent structural changes in the Japanese economy -- are forcing many firms to sharply reduce 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. While estimated union membership increased slightly in 2009 to 18.5 percent, according to the FY 2011 Ministry of Health, Labor and Welfare (MHLW) "White Paper on Labor Economy", the estimated union membership as of June 30, 2010 did not change from the previous year. The number of "non-regular" workers who are union members has increased in recent years as a result of strengthened organizing efforts by some labor unions, although it is still substantially smaller than that of regular workers. With the formation of the DPJ-led government in September 2009, labor unions found the Japanese government more sympathetic than before to their concerns.

Investors should be aware of Japan's high wage structure. Growth in average wages has been slow however, 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. According to the MHLW White Paper, total cash salary, which began to increase in 2005 reflecting the economic recovery that began in 2002, fell again in 2007 and has been falling 3 years in a row. In 2009, the figure showed a record fall of 3.8 percent from the previous year, but increased slightly by 0.6 percent in 2010. While Japan has accepted highly skilled foreign labor, Japanese firms have depended overwhelmingly on the local labor market to supply workers. As of the end of 2010, the number of registered foreign nationals fell 2.4 percent from the prior year to 2.13 million persons (1.67 percent of Japan’s population of 128 million). The number of foreign nationals newly entering Japan for the purpose of employment also dropped in 2010 to 52,503, a decrease of 8 percent from the prior year, according to the Ministry of Justice "White Paper on Immigration Control 2011".

Traditionally, Japanese workers were classified as either "regular" or "other/non-regular" employees. This system, to a considerable 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 "non-regular" employees, mainly on fixed duration contracts. Since the mid-1990s, companies have increasingly used part-time workers, temporary contract workers and dispatch workers to fill short-term labor requirements and to save labor costs.

According to the FY2011 "White Paper on Children and Youths" by the Cabinet Office, 30.4 percent of employees aged 15-24, 25.9 percent of employees aged 25-34, and 27.4 percent of employees aged 35-44 were "non-regular" workers in FY2010. There remains deep concern among Japanese government policy makers that the number of younger workers in "non-regular" status remains stubbornly high and the ability of such workers to find permanent employment will decline as they get older. These "non-regular" employees have borne the brunt of corporate adjustment to the worldwide recession that began in September 2008. According to the MHLW “White Paper on Labor Economy”, the ratio of non-regular employees in 2009 fell slightly for the first time in 15 years to 33.4 percent, mainly due to the decrease in dispatch workers. The figure went up slightly to 33.7 percent, however, during the January-March 2010 quarter.

In response to social criticism after many manufacturers terminated contracts with staffing (dispatching) companies following the global financial crisis of 2008, the Bill to Partially Revise the Labor Dispatch Law was submitted to the Diet in early 2010. This bill would drastically limit dispatch work and prohibit dispatch to factories. Nevertheless, the bill did not pass in 2010 or 2011, due to the political opposition claiming that the law’s revision would have adverse effects to corporate earnings and domestic employment. The DPJ compromised with the opposition and accepted a major modification to the bill which would allow dispatch to factories, but the bill still did not pass in the final Diet session of 2011 and remains pending for 2012.

Companies have also narrowed down the recruitment of new graduates into the "regular work” force after 2008, which is adding to the youth employment problem.

Japan's legislature passed the Pension Security Enhancement Act in August 2011, which became effective January 1, 2012. Provisions of the act will allow employees to contribute to an employer-sponsored defined contribution (DC) plan for the first time. Previously, only employers could contribute to a DC plan on behalf of employees. Under the new rules, employee contributions cannot exceed employer contributions. The limit on combined employer and employee contributions (both receiving preferential tax treatment) to a DC plan will remain the same: JPY 51,000 (USD 659) per month if the employer sponsors only one occupational DC plan for employees, or JPY 25,000 (USD 323) if the employer also sponsors a defined benefit (DB) plan. The new act will also extend coverage to workers aged 65 or younger. Previously workers aged 60 or younger only could participate in a DC plan.

There are two types of DC plans in Japan: employer-sponsored plans for employees and individual plans available to the self-employed and to workers of employers who do not sponsor a pension plan. Contributions receive favorable tax treatment. In the case of employer-sponsored plans, contributions are recorded as an expense by the company and are not counted as income for the participant; for individual plans, the entire contribution is tax deductible for the participant up to the contribution limit, currently JPY 612,000 (USD 7,910) annually. Voluntary private pension plans in Japan (including DC and employer-sponsored defined-benefit (DB) plans) supplement the country's two-tiered public pension system, which comprises a flat-rate plan for all residents under the national pension program and an earnings-related plan under the employees' pension insurance program.

Foreign-Trade Zones/Free Ports

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.

Foreign Direct Investment Statistics

Between 1998 and December 2010, Japan's stock of FDI increased from 3.0 trillion yen to 17.5 trillion yen. In the same period investment inflows were generally strong. All data in the tables below are current as of November 2011. Negative figures indicate net outflow.

Table 1a: Net FDI Inflows (Unit: billion dollars; balance-of-payment basis)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

JFY 2001

JFY 2002

JFY 2003

JFY 2004

JFY 2005

6.19

9.09

6.24

7.81

3.22

CY 2006

CY 2007

CY 2008

CY2009

CY2010

-6.78

22.18

24.55

11.84

-1.36

Table 1b: Ratio of Inward to Outward FDI (balance-of-payment basis)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.
If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

JFY 2001

JFY 2002

JFY 2003

JFY 2004

JFY 2005

1 : 6.2

1 : 3.5

1 : 4.6

1 : 4.0

1 : 14.1

JFY 2006

JFY 2007

JFY 2008

JFY2009

JFY2010

n/a

1 : 3.3

1 : 5.3

1 : 6.3

n/a

1. Figures were first calculated in nominal Japanese yen and converted into U.S. dollars using Bank of Japan average annual exchange rates.

Source: http://www.jetro.go.jp/world/japan/stats/fdi/data/country2_cy10.xls

http://www.jetro.go.jp/world/japan/stats/fdi/data/country1_cy10.xls

Table 2: Foreign Direct Investment in Japan, by country (Unit: million dollars; net and flow; balance-of-payment basis)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

CY2006

CY2007

CY2008

CY2009

CY2010

North America

-2,666

12,709

12,005

1,712

3,014

U.S.A.

105

13,270

11,792

1,831

2,961

Canada

-2,771

-561

213

-119

53

Asia

-852

1,605

3,381

1,093

3,123

China

12

15

37

-137

314

Hong Kong

-2,136

47

257

-81

698

Taiwan

110

36

66

57

21

Korea

108

221

279

255

274

Singapore

1,062

1,282

2,716

756

1,575

Thailand

1

1

6

24

9

India

-1

3

1

14

4

W. Europe

-3,938

4,785

4,861

8,210

198

Germany

-542

-813

1,185

389

2,205

U.K.

1,807

540

-1,289

5,629

4,817

France

274

504

177

371

1,128

Netherlands

-7,583

-390

2,692

2,584

-7,733

Belgium

884

148

-2,040

14

-479

Luxembourg

-12

484

477

543

381

Switzerland

317

1,162

1,873

-990

51

E. Europe, Russia

-4

1

5

1

6

L. America

566

2,831

4,020

690

-7,724

Mexico

0

0

0

0

-7,321

Brazil

0

0

0

-8

2

Cayman Is.

-82

1,480

3,592

965

616

Oceania

36

215

258

50

-17

Middle East

-1

3

-2

23

0

Africa

63

33

21

61

36

TOTAL

-6,789

22,181

24,550

11,839

-1,359

Source: http://www.jetro.go.jp/world/japan/stats/fdi/data/country2_cy10.xls

Table 3: Japan’s FDI inward stock by country/region (Unit: million dollars)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

End of 2006

end of 2007

end of 2008

end of 2009

CY2010

North America

44,273

45,947

75,680

76,184

73,900

U.S.

41,989

44,795

74,344

75,003

72,497

Canada

2,284

1,152

1,336

1,181

1,403

Asia

8,247

9,390

16,769

17,336

23,279

China

100

125

225

197

399

Hong Kong

1,928

2,301

3,203

1,444

4,044

Taiwan

1,475

1,534

1,892

2,656

2,255

Korea

423

694

1,235

1,999

1,933

Singapore

4,205

4,620

10,047

10,632

13,901

Thailand

42

44

61

79

100

India

9

13

18

32

40

Europe

42,367

62,341

86,915

83,883

92,126

Germany

4,582

3,811

6,592

7,166

10,009

U.K.

4,983

5,962

6,750

7,318

9,386

France

11,549

12,776

16,233

15,208

19,193

Netherlands

12,175

26,025

36,510

36,034

36,890

Belgium

1,901

1,947

1,362

934

94

Luxembourg

1,635

2,267

4,000

4,262

4,842

Switzerland

3,536

3,942

7,150

4,913

5,271

E. Europe, Russia

47

46

63

63

77

L. America

12,123

15,227

23,576

20,990

23,593

Mexico

4

5

6

6

261

Brazil

30

32

40

32

38

Cayman Is.

8,400

10,469

17,363

16,965

18,784

Oceania

492

779

1,075

1,095

1,245

Middle East

14

20

29

51

59

Africa

63

99

275

342

387

TOTAL

107,663

133,888

204,433

199,991

214,722

Source: http://www.jetro.go.jp/world/japan/stats/fdi/data/10fdistockjp02.xls

Table 4: FDI in Japan, by industry (Unit: million dollars) (balance of payment basis)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

CY2006

CY2007

CY2008

CY2009

CY2010

Manufacturing (total)

254

1,381

2,261

3,420

1,766

General machinery

-24

-22

721

115

1,089

Electric machinery

32

-391

642

1,705

-281

Trans. equipment

-1,408

331

-55

469

3,359

Precision machines

598

20

113

94

291

Chemicals and pharmaceuticals

1,538

-1,010

245

307

-2,859

Iron, non-ferrous metals

60

230

124

287

233

Rubber & leather

35

35

4

6

5

Petroleum

37

935

300

-19

-144

Textiles

58

109

-3

-8

-95

Food

-717

365

-86

421

220

Glass & ceramics

193

663

212

-90

-138

Non-manuf. (total)

-7,043

20,800

22,289

8,349

-3,125

Farming & forestry

11

41

1

-5

9

Fish/ marine products.

-39

-33

-

1

0

Mining

1

0

0

-1

64

Finance/ Insurance

2,265

17,661

19,823

5,205

-1,503

Wholesale & retail

-387

1,660

1,160

1,057

-229

Services

122

295

473

1,343

875

Real estate

72

1,413

581

-71

216

Communication

-9,715

-633

-1,028

619

-3,244

Transportation

28

-288

43

-90

197

Construction

37

19

-60

16

-1

TOTAL

-6,789

22,181

24,550

11,839

-1,359

Source: http://www.jetro.go.jp/world/japan/stats/fdi/data/industry2_1011.xls

Table 5: Japanese Direct Investment Overseas, by country (Unit: million dollars; net and flow; balance-of-payment basis)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

CY2006

CY2007

CY2008

CY2009

CY2010

North America

10,188

17,385

46,046

10,889

9,016

U.S.A.

9,297

15,672

44,674

10,660

9,193

Canada

892

1,713

1,372

229

-177

Asia

17,167

19,388

23,348

20,636

22,131

China

6,169

6,218

6,496

6,899

7,252

Hong Kong

1,509

1,131

1,301

1,610

2,085

Taiwan

491

1,373

1,082

339

-113

R. Korea

1,517

1,302

2,369

1,077

1,085

Singapore

375

2,233

1,089

2,881

3,845

Thailand

1,984

2,608

2,016

1,632

2,248

Indonesia

744

1,030

731

483

490

Malaysia

2,941

325

591

616

7,058

Philippines

369

1,045

705

809

514

India

512

1,506

5,551

3,664

2,864

Western Europe

18,029

20,456

22,418

17,073

14,450

Germany

1,128

880

3,905

2,089

-321

U.K.

7,271

3,026

6,744

2,126

4,624

France

842

479

1,703

1,161

551

Netherlands.

8,497

12,440

6,514

6,698

3,288

Sweden

416

254

570

160

-623

Spain

136

10

210

162

38

Latin America

2,547

9,482

29,623

17,393

5,346

Mexico

-2,603

501

315

211

688

Brazil

1,423

1,244

5,371

3,753

4,316

Cayman Isles

2,814

5,838

22,550

12,903

-1,848

Oceania

723

4,204

6,060

7,629

6,407

Australia

466

4,140

5,232

7,136

6,371

Middle East

242

958

1,138

575

-348

UAE

-56

60

194

139

-498

Saudi Arabia

254

746

892

378

117

Africa

899

1,101

1,518

-301

-372

South Africa

466

82

648

143

104

TOTAL

50,165

73,483

130,801

74,650

57,223

Source: http://www.jetro.go.jp/world/japan/stats/fdi/data/country1_cy10.xls

Table 6: Japanese Direct Investment Overseas, by industry (Unit: million dollars, net and flow; balance of payment basis)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

CY2006

CY2007

CY2008

CY2009

CY2010

Manufacturing (total)

34,513

39,515

45,268

32,934

17,803

Chemicals and Pharmaceuticals

4,413

3,744

11,647

7,407

7,902

Food

1,025

12,776

3,601

8,954

2,017

Iron, non-ferrous & metals

1,795

2,202

3,152

3,738

3,873

General Mach.

1,663

2,642

3,726

4,411

4,385

Electric machinery

7,041

4,691

5,675

2,505

1,361

Transportation equipment

8,597

8,671

10,924

566

-3,582

Precision machinery

1,420

1,293

953

609

51

Rubber and leather

1,107

835

771

445

634

Lumber & pulp

420

745

734

1,207

1,068

Textiles

180

371

716

477

377

Petroleum

2,921

-280

652

-51

-837

Glass & ceramics

2,759

837

1,417

2,042

377

Non-manuf. (total)

15,652

33,968

85,533

41,717

39,420

Finance/Insurance

5,562

19,458

52,243

15,463

11,397

Wholesale & retail

5,483

4,792

13,319

8,418

1,946

Real estate

-811

162

162

463

765

Services

188

1,406

2,721

1,263

1,596

Transportation

1,507

2,133

2,283

2,894

2,294

Mining

1,577

4,053

10,518

6,482

9,061

Construction

-64

490

389

499

302

Farming/ forestry

42

93

59

10

145

Fisheries

28

64

119

36

47

Communications

-3,368

-331

1,675

3,870

9,899

TOTAL

50,165

73,483

130,801

74,650

57,223

Source: http://www.jetro.go.jp/world/japan/stats/fdi/data/industry1_1011.xls

Table 7: FDI Inflow Relative to GDP (balance-of-payment basis)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

CY2006

CY2007

CY2008

CY2009

CY2010

(a) GDP/Nom

(trillion yen)

506.7

513.0

501.2

471.1

481.1

(b) FDI Inflow

(trillion yen)

-0.76

2.65

2.52

1.12

-0.11

b/a (pct)

n/a

0.52

0.50

0.24

n/a

Sources:

http://www.esri.cao.go.jp/jp/sna/kakuhou/kekka/h22_kaku/22fcm1n_jp.xls

http://www.mof.go.jp/international_policy/reference/balance_of_payments/bpfdi.htm

[This is a mobile copy of Japan]