Doing business in Japan
Japan is a leading centre for innovation, featuring a highly attractive business and living environment within one of the world's largest economies. However, there are challenges to navigate – these include local language requirements, a complex regulatory environment and the country’s unique working culture.
Japan, or Nippon-koku in the local language, is a densely populated island country in northeast Asia. It is the world’s fourth largest economy by nominal GDP and the 12th largest country by population.
Manufacturing is a key part of the Japanese economy, with motor vehicles and electronics the major industries. The financial services sector has also developed into an important driver of economic growth. Japan is a member of the World Trade Organization (WTO), the Organisation for Economic Co-operation and Development (OECD) and the Asia-Pacific Economic Cooperation (APEC) forum.
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TMF Group’s Global Business Complexity Index (GBCI) shows that Japan is on an upward trend when it comes to the complexity of doing business. This can partly be attributed to local language requirements and a complicated banking system. It is crucial for companies expanding into Japan to first study its economic landscape and the rules and regulations that govern business activities.
Benefits of doing business in Japan
Japan has a stable political system and a thriving business environment, which features robust intellectual property rights and a reliable financial system. This provides a firm foundation for business operations.
The country is a significant player in the global computer and telecommunications market and a pacesetter in technology and innovation, specifically in electronics, robotics and manufacturing. Companies also have access to a highly skilled and educated workforce. Japan is also a leader in green technology and renewable energy, ranking as Asia’s highest country on the Green Growth Index.
The Japanese market is characterised by consumers with high levels of disposable income who are drawn to premium goods and services. Many companies are attracted to Japan because of this developed consumer base, which is used by businesses as a test location. Half (49%) of businesses say the country is an attractive destination as a test market, and 41% say it offers a good environment for business expansion.
Japan has a developed, modern infrastructure of roads, railroads, subways, airports, harbours and warehouses that support the distribution of all types of goods and services. It is also a regional gateway, offering access to the broader Asia-Pacific market.
Considerations for investing in Japan
Given the advantages on offer, Japan has become an increasingly popular destination for foreign investors.
A survey by the Ministry of Economy, Trade and Industry (METI) found Japan has a stellar reputation among both Western and Asian companies. They are attracted by its well-developed laws, such as intellectual property rights, and its R&D capabilities, which include the R&D Tax Credit, a dynamic scheme for supporting R&D investment in Japan.
The government actively promotes foreign direct investment (FDI). In 2024, it designated four areas as special zones to promote new entry and expansion of domestic and foreign financial and asset management businesses, and to therefore further attract foreign investment.
The government aims to develop these special zones into financial hubs with deregulation measures, such as allowing businesses to complete administrative procedures solely in English and introducing tax incentives. The four areas are Sapporo (Hokkaido), Tokyo, Osaka and Fukuoka.
American investment is particularly prevalent in Japan, with the US accounting for the highest share of FDI into Japan.
Tips for doing business in Japan
Japan’s unique business etiquette and cultural factors can make the market a difficult one to penetrate.
Politeness and sensitivity are at the heart of Japanese business culture, with the Japanese tending to be more formal than their Western counterparts. Business interactions are highly influenced by social structure, which has cultivated a very specific way of behaving during meetings and throughout deals.
A trusting working relationship is vital, and given there are relatively few fluent English speakers and the vast majority of documentation is produced in Japanese, it can be challenging to build such a relationship.
Japanese working culture: dos and don’ts
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Recognising Japanese body language, negotiation style and ethics is an asset when expanding into the country. It is therefore advisable to work with a partner that fully understands the local landscape.
Another aspect to carefully consider is the Japanese banking system. A unique relationship between a company and its bank will usually 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 and not easy to establish.
Compliance and the regulatory environment in Japan
Japan’s regulatory frameworks are often complex, with laws and compliance requirements that vary by industry, region and even the size of the business.
As highlighted earlier, as part of the push to attract FDI, the Japanese government has introduced special zones that will reduce some of the burden for foreign companies through a series of deregulation measures.
The government is also continuing to strengthen the legal framework for more effective enforcement of anti-money laundering (AML) measures. This includes amending the Criminal Proceeds Act to improve customer due diligence requirements. Japan’s Financial Services Agency (FSA), the country’s primary financial services regulator, has also made AML measures a top priority in its annual policy report.
The voluntary application of International Financial Reporting Standards (IFRS) for consolidated financial statements by companies that meet certain criteria is permitted. As well as IFRS, listed companies in Japan may use Japanese Generally Accepted Accounting Principles (GAAP) as issued by the Accounting Standards Board of Japan (ASBJ), Japan’s Modified International Standards (JMIS), or US GAAP. For tax returns, non-listed companies generally follow Japanese GAAP for their financial statements.
Navigating legal and compliance requirements in Japan requires careful planning, meticulous monitoring of regulatory changes and local expertise.
Tax considerations in Japan
The standard corporate income tax rate in Japan is 23.2% and this applies to ordinary corporations whose share capital exceeds JPY100 million.
Small and medium-sized corporations, whose capital is JPY100 million or less, are taxed at a rate of 15% up to JPY8 million in taxable income, and then at the rate of 23.2% for taxable income above this threshold.
Companies must also pay local corporate tax, enterprise tax, special corporate business tax and local inhabitant tax, with rates varying depending on a company’s size and location.
There is also a consumption tax rate of 10% to take into consideration and dividends, interest, royalties and technical service fees are subject to a 20% withholding tax.
Japan’s National Tax Agency shares information with the nations and regions that have signed taxation treaties based on the Common Reporting Standard (CRS). The information shared includes bank account details, interest, dividends and remuneration.
Hiring and managing talent in Japan
Japan’s Labour Standard Law applies to all employees in Japan and regulates the terms and conditions of employment contracts such as wages, hours of work, legal holidays and paid vacations, labour unions and severance compensation.
The minimum wage is determined by each prefecture and varies regionally, with Tokyo having the highest at JPY1,163 per hour (as of October 2024). Japan has a mandatory social insurance system that provides healthcare, retirement, unemployment and workplace injury benefits. Mandatory contributions to social security schemes are made by both employers and employees.
When it comes to the hiring process, contracts can be of either fixed or indefinite duration. Fixed-term contracts cannot be for a duration of more than three years. Companies operating in Japan should also be aware that employees can force an employer not to proceed with a certain action by asking a labour union to start a collective bargaining process.
The Japanese government maintains a policy of attracting skilled foreign professionals to enhance the status and improve the efficiency of the Japanese labour market. Foreign employees require valid work permits and work visas to live and work in Japan. Employers who hire foreign nationals must notify the Ministry of Health, Labour and Welfare of the details of the foreign national at the time of employment as well as at the time of termination of employment.
Starting a business in Japan
Foreign investors can choose from a number of different types of business representation when setting up in Japan.
These include a joint-stock corporation (kabushiki kaisha), which requires at least one shareholder and one representative director (who can be the same person) to be present at the time of incorporation, and a limited liability company (godo kaisha), through which the liability of members is limited to their capital contribution.
Understanding the options available for incorporating in Japan can help companies make a more informed decision on which approach is most suitable.
FAQs
1. What are the main challenges of doing business in Japan?
High levels of local or third-country competition, the number of regulatory hurdles and unique cultural factors can make Japan a difficult country to penetrate, which is why having local help can be a considerable asset when expanding into the country.
There are a number of challenges to navigate. These include a limited number of fluent English speakers, which can make building business relationships more difficult, and a complex banking system. It is crucial that companies first familiarise themselves with the main challenges of doing business in Japan so that they can develop appropriate strategies to overcome them.
2. Can foreigners start a business in Japan?
Yes, the Japanese government actively encourages FDI and has now also created special zones featuring a range of deregulation measures to help attract foreign companies. Foreign nationals will need a personal bank account in Japan or a director with such an account and an address for registration.
Foreign investors can choose from a number of different types of business representation when setting up in Japan.
3. Do foreigners need a visa to work in Japan?
Yes. The government is keen to attract skilled foreign professionals to help enhance the efficiency of the country’s economy. Foreign employees require valid work permits and work visas to live and work in Japan.
A foreign national is first required to apply for and obtain a certificate of eligibility from the Japanese immigration authority, either through the potential employer or by themselves.
The foreign national must then apply for and obtain a visa from the Japanese consulate or embassy in their country of residence. On arrival in Japan, after having secured the visa, the foreign national is required to produce their certificate of eligibility and receive a seal of landing permission on the visa, and their resident card.
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