Cablegate: Investment Climate Statement - Japan

DE RUEHKO #0108/01 0190800
R 190800Z JAN 10




E.O. 12958: N/A

REF: 09 STATE 124006

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


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.

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The 2009 Index of Economic Freedom compiled by the Heritage
Foundation ranked Japan number 19, with a score of 72.8 or mostly

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
-- 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
-- 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
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
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,

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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

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

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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

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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

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

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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.


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


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.


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

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

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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

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.


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


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


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

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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

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

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


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


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

TOKYO 00000108 010 OF 019

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

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

TOKYO 00000108 011 OF 019

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

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

TOKYO 00000108 012 OF 019

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

TOKYO 00000108 013 OF 019

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

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.


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

TOKYO 00000108 014 OF 019

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).


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.


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


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

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.

TOKYO 00000108 015 OF 019


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.


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.


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

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

102. Traditionally, Japanese workers were classified as either
"regular" or "other" employees. This system, to a considerable

TOKYO 00000108 016 OF 019

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.


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.


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.

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

--------------------------------------------- -
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.

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
--------------------------------------------- ----

--------------------------------------------- ----
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
--------------------------------------------- -----

Unit: million dollars
Net flow reporting basis for JFY2004
Balance of payment basis for CY 2005-08

- JFY2004 CY2005 CY2006 CY2007 CY2008
(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

/Pharma -- -1,168 1,538 -1,010 245
Metals 7 -- -- -- --
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 -- -- -- --
(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

--------------------------------------------- ---------

--------------------------------------------- ---------
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
--------------------------------------------- -------

--------------------------------------------- ---
Unit: million dollars
Net and flow; reporting basis for JFY2004
Balance of payment basis for CY 2005-08

- JFY2004 CY2005 CY2006 CY2007 CY2008

TOKYO 00000108 019 OF 019

(total) 13,750 26,146 34,513 39,515 45,268
/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 -- -- --
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
(total) 21,010 19,315 15,652 33,968 85,533
/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


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


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