Challenges of doing business in Japan
The Japanese economy ranks third in the world in terms of gross domestic product (GDP), but ranks 51st in TMF Group’s Global Business Complexity Index 2022 – which ranks 77 jurisdictions according to the complexity of their business environments from the most to the least complex. Despite its domestic competence, having local help on board is essential for overseas ventures to work in the east Asian powerhouse.
Japan is a leading centre for innovation, boasting a highly attractive business and living environment within one of the world's largest economies. A survey by the Ministry of Economy, Trade and Industry (METI) found that Japan has a stellar reputation among Western and Asian companies, which are attracted by its R&D capabilities, personnel, and well-developed laws, such as intellectual property rights.
Many companies are also attracted to Japan’s shores because of its developed consumer base. The huge market is a trendsetter among regional economies and is utilised by many businesses as a test location. Some 49% of businesses say Japan is an attractive destination as a test market, and 40.5% say it offers a good environment for business expansion.
However, a large level of local or third-country competition, the number of regulatory hurdles and cultural factors can make Japan a difficult country to penetrate, which is why having local help can be a big asset when expanding into the country.
Procedure can be rather draining when starting a business in Japan, with several layers of bureaucracy to be navigated before a company can get off its feet. Organisations are required to communicate with the Ward office, the Legal Affairs Bureau of the Ministry of Justice, the District Tax Office, the local tax office, the Labor Standards Inspection Office, the Japan Pension Service, and the Public Employment Security Office before other procedures can be considered.
A trusting working relationship is vital in Japanese business culture. Due to the fact that there are few fluent English speakers makes building a relationship difficult. Add to this that all documentation is produced in Japanese, makes this an even tougher challenge.
The Japanese banking system is highly relationship oriented. A unique relationship between a company and its bank will often have been built over a long period of time, which poses challenges for new businesses. It is common for Japanese banks to be shareholders in companies that conduct banking business with them, further illustrating a relationship that is interconnected, likely developed over time and not easy to establish. The system also has limited English and overseas support and banks do not always guarantee that they can be used from overseas.
A new, mandatory consumption tax invoicing system will be introduced in Japan on 1 October 2023. It will be called the ‘tax qualified invoice method’ and will be required for Japanese Consumption taxpayers to preserve tax-qualified invoices issued by registered suppliers for tax credits. For more details, please see TMF Group’s report on the new system.
Japan has a complicated system for social insurance and labour insurance, which companies are legally obliged to take part in. This includes workers’ accident compensation insurance, employment insurance, health insurance and nursing care insurance, and employees’ pension insurance. A company must enter into these insurance systems when first incorporating or hiring staff. This is done by submitting the specific social insurance and labour insurance notification forms to the relevant authorities and submitting the necessary annual reports.
Surprising for a technologically advanced country, Japan still uses cash and old-tech, notably the fax machine which still plays a pivotal role in government and banking communications. Due to the problems that will likely arise with a total shift to new technology, doing business in Japan could remain a challenge, with companies needing to continue accommodating the use of old-tech in their business operations.
Japan ranks 43rd in the world for the time it takes to register a property, based on The World Bank Doing Business 2020 Report, taking 13 days, with six procedures to be followed. Registering property is a lengthy procedure, and requires a certificate of the seller’s seal impression, payment of stamp duty at a post office, application at the Legal Affairs Bureau and payment of real property acquisitions tax.
A modern finance system means obtaining credit is a relatively simple procedure in Japan, with favourable lending rates. The legal system also offers good protection to investors, although the process certainly is not as streamlined as in other nations.
The Japanese tax system is a victim of the country’s love of bureaucracy. The corporate tax system can soak up approximately 130 hours of management time, with 19 payments required annually (as of 2020 World Bank data). Corporate tax rates stand at 30%, with a line of other levies also requiring consideration.
Relationships drive business in Japan, and it is important to show the right level of respect and to be polite and diplomatic at all times. Patience is essential when handling business relations, and observing local etiquette in terms of gift buying is important.
We have the local knowledge to help you navigate these minefields. Whether you want to set up in Japan or just want to streamline your Japanese operations, talk to us.
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