An Introduction to the Japanese Legal Marketplace

Last year the Japanese economy unexpectedly fell into recession two years into the Abe administration’s reformist economic model, commonly referred to as “Abenomics”. The country’s prime minister hopes that a mixture of fiscal stimuli, monetary easing and structural reforms will incentivise the market. However, a lack of confidence has curtailed investment from Japan’s corporate sector and inhibited growth. The country’s performance in 2015 is widely seen as a critical year for the government and for the long-term economic future of the country.

The first quarter did see a much-needed improvement, with the economy growing by 3.9 per cent on an annualised basis. Crucially, business investment saw particularly strong growth, which accounted for 1.5 percentage points to GDP. On the surface it would seem that confidence is returning to the market, but economists are pessimistic about the results of the second quarter, given the poor industrial output and consumer spending. There remain a number of key obstacles that stand in the way of long-term economic prosperity. The OECD economic forecast pointed to a number of priorities that focus on the need to push for the reinvestment of large cash holdings held by corporations. Indeed, statistics indicate that Japanese companies are currently holding around US$730 billion in cash.

Japan’s corporations are currently buoyed by massive export growth, due to a weaker yen, low commodity prices and a worldwide pickup in trade. Ensuring that corporate profits are reinvested into the economy is a crucial aim of the Abe administration. Consequently, much policymaking is directly targeting Japan’s corporate governance, which is having a tangible impact on the legal marketplace in Japan.

A significant remodelling of the corporate environment can be put down to the new Companies Act, which came into effect in May of this year. The amendment to the original 2006 Companies Act is targeting the homogeny in Japanese boardrooms, promoting the appointment of outside directors. The new rules are already having a practical effect on governance structures, as more and more companies are hiring outside directors. Corporate lawyers have confirmed that they are advising some of Japan’s largest listed companies on the adoption of new governance models.

Another key reform has focused on the country’s corporate tax system. The plan includes steadily taking the rate of tax down by 3.29 percentage points from its previous position of 34.6 per cent, the second highest in the industrialised world. The plan is also seeking to expand the tax base, which has fallen to 30 per cent of businesses after years of declining profits; as a result, from 2017, companies will only be able to apply up to half of losses to reported income, rather than the current 80 per cent of reported income.

Ultimately it is hoped that these amendments will strengthen the profit margins of Japan’s businesses so that they will in turn reinvest in the domestic workforce, which should promote consumer spending and end two decades of deflation. However, the most immediate impact of these reforms has seen corporations directing most of their growing cash reserves away from the domestic market.

Outbound M&A has been particularly vibrant as Japanese companies look to invest overseas with corporate lawyers reporting a lot of work in this space. According to Dealogic, by May of this year Japanese companies had spent $39 billion on overseas deals, double the total from the same period last year. Topping the deal spree so far this year has been Itochu Corp’s 20 per cent stake in CITIC for $10.4 billion and a recent headline deal is the purchase of the Financial Times by Nikkei Inc for $1.3 billion. Respondents note that Japanese companies are increasingly looking to the developed market in the US and Europe. This is in tandem with growing Japanese investment in India and, particularly, South East Asia. Japanese companies are also paying premiums in an effort to outbid their international peers, such is the determination to expand portfolios abroad.

While inbound M&A remains slow with no signs of improving and the domestic market remains relatively deflated, a number of law firms, both domestic and international, are refocusing their efforts on outbound M&A as the sole area of significant growth. In particular, Japan’s larger law firms are focused on gaining a stronger market share of South East Asia in an attempt to fend off competition from international firms. Anderson Mori & Tomotsune, Nagashima Ohno & Tsunematsu, Mori Hamada & Matsumoto and Nishimura & Asahi have all opened offices outside of Japan in recent years.

After three years of Abenomics, the government has succeeded in pushing up corporate profit margins. The record annual ¥80 trillion asset-buying scheme, which the Bank of Japan recently voted to continue, has pushed down the yen’s value, benefited exporters and boosted stock prices. However, the unrelenting desire of corporations to invest in the international market reveals a lack of confidence in domestic growth. Japan’s economy is forecast to grow by only 0.8 per cent in 2015 and by 1 per cent in 2016. Moreover, the rate of inflation remains around zero, below the desired rate of 2 per cent. Until there is sustainable long-term economic growth, experts will continue to call for labour market, corporate governance and financial sector reform.


This is a transitional period for Japan’s corporations and business law firms, as the country’s unique and traditional corporate landscape is forced to change by sweeping reforms. Corporate and finance legal departments are at full tilt as both advisory and transactional practices aid Japan’s businesses through this evolutionary period. The resulting effect has seen corporations behaving in a more shareholder-responsive manner: strengthening governance, releasing capital and paying dividends.

At its core, Abenomics is a reformist rather than a long-term economic model, which is attempting to repair the damage of Japan’s lost decades. As one source noted, during this time “it is essential that businesses prepare for ongoing economic fluctuation and legislative reform by seeking good counsel”. The law firms in the pages that follow thus stand to be an important part of Japan’s future growth.

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