This year’s research revealed the continuation of a trend towards outbound investment and acquisitions, in accordance with a desire among Japanese companies to expand their capabilities overseas. This has created opportunities for domestic and international firms alike to service clients on complex cross-border mandates. In the contentious space, the international arbitration market is undergoing a transformation in Japan and has been highlighted by practitioners as an area of development to watch closely over the next 12 months.
While the market is dominated by outbound work, inbound investment and activity has been aided by developments over the past few years. As sources noted, “The barriers to entry for foreign entities have been mitigated to some extent,” with the added observation that “foreign entities are getting a lot better at dealing with local and regional companies and regulators”. As a result, “the obstacles to doing business in Japan have relinquished a lot over the last couple of years”. Recently, M&A practitioners reported a greater interest in Japan than in previous years, and a higher volume of larger transactions. One practitioner notes, “This suggests that Japan is becoming more attractive as a market,” and cites Japan’s stability and low political risk as two contributing factors. The upcoming 2020 Olympic Games are also “shining greater interest on Japan and its potential” and have resulted in increased activity in real estate and tourism.
Nevertheless, Japan is a predominantly outbound market and “is all about overseas investment” – a marked “shift from a domestic market over the last few years”. According to sources, this is because “in Japan there is a limitation on growth” – in other words, the population is decreasing, and as a consequence “the Japanese market will become smaller and smaller”. This is creating a need for Japanese companies to look to markets outside Japan for investment opportunities. Practitioners report a keen interest in international expansion to regional markets in South East Asia, China and India, as well as further afield to well-established EU and US jurisdictions.
More Japanese companies are looking for opportunities to acquire foreign companies, and 2018 has heralded the announcement of “huge transactions involving Japanese companies”. One such example is Takeda Pharmaceutical Co’s $62 billion acquisition of Shire, a company headquartered in Ireland, which has been one of the largest in the market so this year. M&A activity for Japanese companies is predicted to increase, as companies are “keen to invest large sums into new areas” such as technology (an area in which “investment is booming”) and start-ups. The increase of global mega-mergers is also resulting in busy practices for competition lawyers, who have reported an uptick in merger filings and counsel work on worldwide merger controls.
Although Japanese courts are favoured for domestic disputes, arbitration is “definitely the preferred method for international dispute resolution in Japan”, reported one interviewee, as “Japanese courts are not too favourable for foreign disputes due to process and cultural differences”. As domestic M&A and investment activity decreases and Japanese companies shift their focus to overseas investments, the number of international arbitration clauses entering business contracts, and consequently the number of arbitrations involving Japanese clients, is increasing. This is creating a rising demand for legal advice and has led one lawyer to note, “Everybody is now focusing their attention on this aspect of the legal market.” Lawyers are becoming more involved and specialised in the area and international law firms are looking to set up and expand their dispute resolution practices in Tokyo.
Although “still in its early days”, arbitration “has grown phenomenally in the region” and there is “a lot of interest in Japan”. The Japanese government is committed to promoting arbitration in Japan and to providing the facilities to push the country as an arbitration centre. The Japan International Dispute Resolution Centre, the country’s first dedicated international arbitration and ADR facility, opened in Osaka on 1 May 2018, and practitioners “hope the number of arbitration cases will grow accordingly”. With the 2020 Olympics on the horizon, there is also a push towards opening a centre in Tokyo.
As well as government backing, Japanese arbitration practitioners are actively promoting the usefulness of arbitration to businesses. As such, parties are looking closely at arbitration clauses, and their increased use in agreements involving Japanese entities “will only increase the prominence of Tokyo as a seat”. Some practitioners voice concerns that, “Geography and language issues may preclude Japan from becoming a Singapore or a Hong Kong, as all supporting litigation would be done in Japanese and in Japanese courts.” One lawyer stated, “Singapore and Hong Kong have built on their success by growing lawyers with specialist arbitration experience, updating rules, establishing facilities and pro-arbitration courts, and having a government that is willing to support arbitration.” Japan is following suit in these regards, and as one source put it, “All of these factors make companies more likely to choose Japan as a seat for arbitration”.
Overall, “the market is still developing, and there is still scope for it to increase”. Practitioners report that “in this rapidly evolving space, arbitration is certainly seen as the default” method for international dispute resolution, and confidently predict that “international arbitration is definitely here to stay”.
Japan is a very competitive market, characterised by a distinction between domestic law firms and international outfits, who are not able to practice local law. The domestic market is dominated by four major Japanese firms – Anderson Mori & Tomotsune; Nishimura & Asahi; Nagashima Ohno & Tsunematsu; and Mori Hamada & Matsumoto. Competition is “fierce” between these major players. For foreign law firms, “the current market situation is very tough” and firms differentiate themselves from the competition by building strong cross-border or outbound investment practices. Leading international firms include Herbert Smith Freehills, Morrison & Foerster and White & Case.
Local firms “have made some great strides” to expand their regional networks and are keen to establish branches in other Asian countries to capture the business of Japanese clients operating there. Japanese firms have been focusing attention on accommodating clients on outbound activities, especially when it comes to cross-border transactions, which are driving the Japanese economy.
The Japanese market sees “some new players every now and again”; however, it is “a notoriously difficult space for newcomers to be successful in”. According to one practitioner, “Once established in the market, law firms are relatively safe.” Large firms are growing, and boutique firms are still very strong in their niches. However, medium-sized firms are feeling a squeeze and are “struggling to cope in the market”. This is likely to result in firms breaking up or merging, to “seek the merit of size and scale”.
In this small and sophisticated legal market, firms “must continually innovate to stay ahead in the legal services industry” and distinguish their practices from the competition and secure domestic and cross-border work from clients. M&A and related activities continue to be a major driving force in the market, a trend that is predicted to continue going forward. Japan’s position as an international arbitration centre remains to be decided; however, the arbitration community is taking great steps to ensure its bright future in the space.