Japan: Market Profile

1. Overview

Japan is the world’s third largest economy, and its service sector contributes about 70% of the country’s GDP, with wholesale and retail trade, real estate services, and professional, scientific and technical activities as the major service pillars. Transport equipment, food and beverages are the major manufacturing industries of Japan. Since 2012, Japan’s government has adopted a “three arrows” strategy to reinvigorate the economy. The so-called “Abenomics” comprises expansionary monetary policy, flexible fiscal policy and structural reform. The 2020 Tokyo Olympics is considered the “fourth arrow” of Abenomics.

Source: Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

June 2017
Parliament passed a landmark bill allowing Emperor Akihito to abdicate.

October 2017
Japan's ruling LDP-Komeito coalition retained its two-thirds majority in the lower house elections held on October 22.

Source: BBC Country Profile – Timeline, Fitch Solutions

3. Major Economic Indicators

e = estimate, f = forecast
Source: International Monetary Fund, World Bank, Fitch Solutions
Date last reviewed: August 21, 2018

4. External Trade

4.1 Merchandise Trade

Source: WTO
Date last reviewed: August 21, 2018

Source: Trade Map, Fitch Solutions
Date last reviewed: August 29, 2018

4.2 Trade in Services

e = estimate
Source: WTO
Date last reviewed: August 21, 2018

5. Trade Policies

• Japan has been a WTO member since January 1, 1995 and a member of the General Agreement on Tariffs and Trade (GATT) since September 10, 1955. Japan's tariff schedule has five columns of applicable rates: General, WTO, Generalised System of Preferences (GSP), LDC and Temporary. Goods originating from Hong Kong are charged at WTO rates unless a lesser "Temporary" rate exists. Japan's GSP grants lower or duty-free rates to products imported from developing countries. However, Hong Kong fully graduated from Japan's GSP in February 2000.


• Most goods can be freely imported without import licences, except certain items covered by the Import Restriction System (e.g. chemical products and weapons). Most of Hong Kong’s exports to Japan, such as garments, toys, jewellery, housewares, watches, clocks and the majority of electronic items are not subject to import restrictions.

• In October 2015, the Trans-Pacific Partnership (TPP) agreement was concluded, with Japan among the 12 signatory countries. The deal covered some 40% of the global economy. However, the US notified its intent to not ratify the TPP in January 2017. Following the withdrawal of the US, the remaining eleven countries reached a broad agreement on the core elements of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in November 2017, and a deal was signed in March 2018.


• As of March 2018, Japan had a total of 16 Economic Partnership Agreements (EPAs) in force or signed with the following countries/region: Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, Brunei, ASEAN, the Philippines, Switzerland, Vietnam, India, Peru, Australia, Mongolia, while the EPA with the the European Union (EU) has been concluded. Besides, agreements under negotiations are the EPAs with Canada, Colombia, Korea and the Gulf Cooperation Council (GCC), Regional Comprehensive Economic Partnership (RCEP), and a trilateral Free Trade Agreement among Japan, China and Korea.


• The overall orientation of Japan's trade policies has remained broadly unchanged since its previous WTO  review in 2015. Japan has several systems in place to expedite the release and clearance of goods, including an Authorized Economic Operator (AEO) programme; it has mutual recognition arrangements (MRAs) on AEO programmes with some of its trading partners.


• Japan makes relatively little use of trade contingency measures, although the number of anti-dumping measures implemented by Japan has increased (from 2 in 2014 to 6 in 2016). It applied neither countervailing nor safeguard measures during the review period. On 30 September, 2016, Japan initiated an anti-dumping investigation on highly polymerized polyethylene terephthalate from China.


• The Japan Bank for International Cooperation (JBIC) and the Nippon Export and Investment Insurance (NEXI) remain the official export credit agencies of Japan. Most of JBIC's lending activities are for overseas investment loans, which represents more than three quarters of the total operations in value. NEXI provides trade and investment insurance, including insurance products covering different aspects of trade risks as well as investment insurance for Japanese companies.


• With regards to Japan's intellectual property rights framework, the main changes during the 2017 review period included: the implementation of stand-alone legislation on geographical indications for foods, beverages, and agricultural and marine products; the strengthening of the protection of trade secrets; and various amendments to the Patent Act, the Trademarks Act, the Design Act, and the Act on International Applications under the Patent Cooperation Treaty (PCT).


• Access to the medical profession in Japan is regulated through qualification and language requirements; there are a few bilateral agreements allowing easier access conditions. Nurse and care-worker examinations are accessible to foreigners; this regime is covered in some regional trade agreements.


• The services sector, a key component in Japan's economy, is broadly open to competition, except in selected areas, such as certain broadcasting and medical services. The main changes during the review period in the regulatory framework for financial services included several amendments to the Banking Act. These amendments have partially relaxed requirements in respect to agency services and intermediary services for foreign banks, and, on the other hand, introduced a series of new and stricter rules regarding licensing standards, information obligations, maintenance of assets in Japan, and supervisory powers in case of bankruptcy or reorganisation proceedings, essentially for prudential reasons.

Source: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreements

6.1 Multinational Trade Agreements

Active

1. Japan-India: A Comprehensive Economic Partnership Agreement between Japan and the Republic of India was signed on February 16, 2011.


2. The Association of Southeast Asian Nations (ASEAN)-Japan: The ASEAN is a regional intergovernmental organisation comprising ten Southeast Asian countries, which promotes intergovernmental cooperation and facilitates economic, political, security, military, educational and socio-cultural integration amongst its members and other Asian countries, as well as globally. Since its formation on August 8, 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand, the organisation's membership has expanded to include Brunei, Cambodia, Laos, Myanmar and Vietnam. The ASEAN-Japan Comprehensive Economic Partnership (AJCEP) came into effect on December 1, 2008 and enhances trade between the two areas.


3. The Japan-Thailand Economic Partnership Agreement (JTEPA): JTEA is a free-trade agreement between Thailand and Japan. The agreement was a deal that would eliminate tariffs on more than 9%  of bilateral trade within 10 years. It was signed on April 3, 2007 in Tokyo, Japan by the Prime Minister of Japan Shinzō Abe and the visiting Prime Minister of Thailand, Surayud Chulanont.


4. Japan-Australia: The Japan-Australia Economic Partnership Agreement was concluded between Australia and Japan in November 2014 and took effect on January 15, 2015. A number of concessions were secured for Australian agricultural exporters, while Australian tariffs on electronics, whitegoods and cars were to be lowered.

Ratification Pending

1. EU-Japan Trade Agreement: In July 2018, the EU and Japan signed a trade deal that promises to eliminate 99% of tariffs that cost businesses in the EU and Japan nearly EUR1 billion annually. According to the European Commission, the EU-Japan EPA will create a trade zone covering 600 million people and nearly a third of global GDP. The result of four years of negotiation, the EPA was finalised in late 2017 and is expected to come into force by the end of the current mandate of the European Commission in 2019. The total trade volume of goods and services between the EU and Japan is EUR86 billion. The key parts of the agreement will cut duties on a wide range of agricultural products and it seeks to open up services markets, in particular financial services, e-commerce, telecommunications and transport. As of August 2018, the agreement is awaiting ratification by the European Parliament and the Japanese Diet, following which it could enter into force in 2019. At the same time, negotiations with Japan continue on investment protection standards and investment protection dispute resolution.


2. Japan is party to the CPTPP agreement. Following the withdrawal of the US from the original agreement, the remaining eleven countries reached a broad agreement on the core elements of the CPTPP in November 2017. The CPTPP, also known as TPP11 is a signed, but not-yet ratified, trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. These countries represent 13.4% of the global GDP, making this the third-largest trade agreement after the North American Free Trade Agreement and the EU.

Under Negotiation

1. Japan-Australia: The Japan-Australia EPA was concluded between Australia and Japan in November 2014 and took effect on January 15, 2015. A number of concessions were secured for Australian agricultural exporters, while Australian tariffs on electronics, whitegoods and cars were to be lowered.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Source: UNCTAD
Date last reviewed: August 21, 2018

7.2 Foreign Direct Investment Policy

1. The Japanese government actively welcomes and solicits foreign investment, and has set ambitious goals for increasing inbound FDI. Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, inbound FDI stocks as a share of GDP are the lowest in the OECD. Future changes in Japan’s investment climate are largely contingent on the success of structural reforms to the Japanese economy. Recent changes that aim to strengthen corporate governance and increase female labour force participation have the potential to improve Japan’s economic condition, but further reforms likely remain necessary to secure a return to robust economic growth.


2. The Bank of Japan is at the forefront of the country's efforts to boost private consumption, through quantitative and qualitative monetary easing with a negative interest rate. On the fiscal front, a number of economic plans have been adopted with a view, inter alia, to improving the country's public finances including its debt position, and boosting the competitiveness of the economy through large-scale investments. Structural reforms including those aimed at encouraging labour force participation and improving Japan's corporate governance framework are also under way. In April 2014, the government established a new “FDI Promotion Council” comprised of government ministers and private sector advisors. On the fiscal policy front, the Japanese government announced in June 2016 to postpone the planned consumption tax increase from April 2017 to October 2019. During 2016-2017, a series of supplementary budgets were approved to provide various fiscal supports to the private sector, including grants for R&D schemes, aids for disaster recovery projects and accelerate infrastructure developments. To further develop inbound tourism and tap the potential of the 2020 Tokyo Olympics, the parliament passed the bill to legalise casino gambling in Japan in December 2016.


3. Japan’s legal and regulatory climate is highly supportive of investors in many respects. Courts are independent, sophisticated, and ostensibly provide equal treatment to foreign investors. The country’s regulatory system has improved its level of transparency and looks to develop new regulations in line with international norms. Capital markets are deep and broadly available to foreign investors. Japan maintains strong protections for intellectual property rights with generally robust enforcement. The country is home to world class corporations, research facilities and technologies. Nearly all foreign exchange transactions, including transfers of profits, dividends, royalties, repatriation of capital, and repayment of principal, are freely permitted.


4. The Government of Japan explicitly promotes inward FDI and has established formal programs to attract it. Soon after taking office, the government of Prime Minister Shinzo Abe announced its intention to double Japan’s inward FDI stock to JPY35 trillion by 2020 and reiterated that commitment in its revised Japan Revitalization Strategy issued in August 2016. The Abe administration’s interest in attracting FDI is one component of the government’s strategy to reform and revitalize the Japanese economy, which continues to face the long-term challenges of low growth, an aging population, and a shrinking workforce.


5. The Ministry of Economy, Trade and Industry (METI) and the Japan External Trade Organization (JETRO) are the lead agencies responsible for assisting foreign firms wishing to invest in Japan. METI and JETRO have together created a “one-stop shop” for foreign investors, providing a single Tokyo location - with language assistance - where those seeking to establish a company in Japan can process the necessary paperwork. JETRO operates six Invest Japan Business Support Centers (IBSCs) across Japan that provide consultation services on Japanese incorporation types, business registration, human resources, office establishment, and visa/residency issues.


6. The Japanese Government established an “Investment Advisor Assignment System” in April 2016 in which a State Minister acts as an advisor to select foreign companies with “important” investments in Japan. The system aims to facilitate consultation between the Japanese Government and foreign firms. Of the nine companies selected to date, six are from the United States.


7. While requirements vary according to the type of incorporation, a typical business must register with the Legal Affairs Bureau (Ministry of Justice), the Labour Standards Inspection Office (Ministry of Health, Labour, and Welfare), the Japan Pension Service, the district Public Employment Security Office, and the district tax bureau. JETRO has announced its intent to develop a full online business registration system, but it was not operational as of March 2017.


8. In the post-war period since 1945, the Japanese government has not expropriated any enterprises and the expropriation or nationalisation of foreign investments in Japan is highly unlikely.


9. As of March 2017, Japan had concluded bilateral investment treaties (BITs) with 29 countries: Bangladesh, Cambodia, China, Colombia, Egypt, Hong Kong SAR, Iran, Iraq, Israel, Kazakhstan, South Korea, Kuwait, Laos, Mongolia, Mozambique, Myanmar, Pakistan, Papua New Guinea, Peru, Russia, Saudi Arabia, Sri Lanka, Turkey, Ukraine, Uruguay, Uzbekistan, Vietnam, Oman, and Kenya. In addition, Japan has a trilateral investment agreement with China and South Korea. Japan also has 16 EPAs that include investment chapters (Singapore, ASEAN, Mexico, Malaysia, Philippines, Chile, Thailand, Brunei, Indonesia, Philippines, Switzerland, Vietnam, India, Peru, Australia and Mongolia) and has recently negotiated an EPA with the EU that includes provisions related to investment. In 2016, Japan’s parliament ratified the Trans-Pacific Partnership, an agreement among 11 countries that includes an investment chapter, and in March 2018 signed its successor deal, which no longer includes the US.


10. Foreign and domestic private enterprises have the right to establish and own business enterprises and engage in all forms of remunerative activity. Japan has gradually eliminated most formal restrictions governing FDI. One remaining restriction limits foreign ownership in Japan's former land-line monopoly telephone operator, Nippon Telegraph and Telephone (NTT), to 33%. Japan's Radio Law and separate Broadcasting Law also limit foreign investment in broadcasters to 20%, or 33% for broadcasters categorised 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.


11. Japan has no general restrictions on data storage. In September 2015, the Japanese Diet passed an amendment to the Personal Information Protection Act, seeking to “enhance the use of personal data for business purposes while protecting privacy”. The amendment created new rules for the protection of personal data including the transfer of personal data over the Internet, and established a third party authority similar to the EU’s Privacy Commissioner as regulator. On January 1, 2016, the Personal Information Protection Commission was established. The Commission issued its guidelines for businesses on the protection of personal data on November 30, 2016. The 2015 amendment to the Personal Information Protection Act will be fully enforced starting May 30, 2017.


12. The Foreign Exchange and Foreign Trade Act governs investment in sectors deemed to have national security or economic stability implications. If a foreign investor wants to acquire over 10% of the shares of a listed company in certain designated sectors, it must provide prior notification and obtain approval from 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.

Sources: WTO – Trade Policy Review, the International Trade Administration (ITA), U.S. Department of Commerce

7.3 Free Trade Zones and Investment Incentives

8. Taxation – 2018

• Value added tax: 8%
• Corporate income tax: 23.2%

Source: PwC Tax Summaries 2018

8.1 Important Updates to Taxation Information

• As of 1 April 2018, corporate taxpayers are obligated to file and pay the national local corporate tax at a fixed rate of 10.3% of their corporate tax liabilities. Previously, the national local corporate tax rate was 4.4%. Furthermore the corporation tax rates are set to change as of April 2018, from 23.4% to 23.2% for firms with paid-in capital of over JPY100 million. Branch profits are taxed in the same manner as corporate profits.


• Due to a tax amendment, the consumption tax increase that was originally scheduled to rise to 10% on April 1, 2017 was delayed to October 1, 2019; however, concessions have been introduced with lower rates for selected goods to lessen the burden for the lower income tax brackets. To cope with the multiple consumption tax rates, an invoicing method will be introduced, although not until April 1, 2023, with transitional measures in place for the three-year and six months interim.


• On March 28, 2018, the 2018 Tax Reform Act was approved by the Diet, and, on March 31, 2018, the 2018 Tax Reform Act, the Enforcement Orders, and Regulations were promulgated, which are effective for corporate tax years ending on or after April 1, 2018, in principle. The 2018 Tax Reform Act provides for tax measures to help improve corporate productivity by ‘Internet of Things’ (IoT) investment and increase salary income to revitalise the economy.

8.2 Business Taxes

Source: PwC Tax Summaries 2018
Date last reviewed: August 29, 2018

9. Foreign Worker Requirements

9.1 Entry Requirements

Japan has entered into reciprocal visa exemption agreements with various jurisdictions, including regional peers. Before entering Japan, foreign nationals must obtain a visa corresponding to the purpose of their visit from a Japanese embassy or consulate abroad. Foreign nationals from countries that have entered into reciprocal visa exemption agreements are not required to obtain visas if they intend to stay in Japan for not more than a specified time period for the purpose of limited activities.

9.2 Work visas and self-employment

Foreign nationals accepting employment in Japan must obtain a work permit (visa) at a Japanese embassy or consulate. To obtain a work permit, foreign nationals must first apply for a Certificate of Eligibility (CoE) from the Japanese Immigration Authority. The CoE is issued by the Ministry of Justice in Japan. The CoE certifies that the holder has met the criteria established for a certain status of residence in Japan. It is possible for expatriates to be self-employed in Japan; however, it is very difficult. The expatriate must also obtain a CoE.

9.3 Skilled Workers

Highly Skilled Foreign Professionals may receive preferential immigration treatment based on a points-based system. Foreign nationals with a valid passport and residence card may now leave and return to Japan without holding a re-entry permit if the period of absence from Japan is less than one year. The period of stay for those with residential statuses is for a maximum of five years. The Japanese government has made additional changes to labour and immigration law to facilitate the entry of larger numbers of skilled foreign workers in selected sectors. For example, the Immigration Control and Refugee Recognition Law was revised in 2014 to improve the “Points System” for highly skilled foreign professionals, easing the requirements for residency.

9.4 Permanent Residence

The Minister of Justice may grant permanent residence only if a foreign national fulfills all of the following conditions, which are generally difficult to meet:

• The applicant has adequate moral standing.
• The applicant has sufficient assets or skills to be able to make an independent living.
• The applicant’s permanent residence is in accordance with the interests of Japan.

With regard to the third condition generally, the applicant is required to reside in Japan for 10 years or longer, with a few limited exceptions. In April 2017, new exceptions to the 10-year rule were enacted. According to the guidelines concerning permanent residence, if the applicant’s points calculated in accordance with a points-based system for Highly Skilled Foreign Professionals are 70 points or more, residing in Japan for three years suffices. In addition, if the applicant’s points are 80 points or more, residing in Japan for one year suffices. The points relate to various items, such as academic background, professional career, annual salary and research achievement.

Source: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings

Source: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators

Source: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices

Source: Fitch Solutions
Date last reviewed: August 29, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Japan’s economic expansion will continue over the course of 2018, as the combination of accommodative monetary and fiscal policy will likely boost investment in the near-term at a time when corporate profits are at a high. Nonetheless, the long-term growth outlook remains dampened by the demographic challenges. The major risk to the Japanese economy comes from a rise in global bond yields, which could trigger a rapid sell off in the yen. This has the potential to lead to a sharp rise in domestic inflation, which we believe would undermine the Bank of Japan's ability to keep borrowing costs low.

OPERATIONAL RISK
Even though the working-age population in Japan is projected to shrink at a slower pace over the next 10 years (an average of 0.7% per year) relative to the last decade (0.9%), the major demographic drag will still come from the ageing population and the impact that this will have on the country's savings rate. Japan's active population ratio will decline to 58.0% by 2027, from 60.6% at present and 69.7% in 1990. This is by far the lowest ratio in the developed world, and with such a high share of people consuming more than they are producing in retirement, the national savings rate will face considerable downward pressure, undermining investment.

Source: Fitch Solutions

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: August 21, 2018

10.5 Fitch Solutions Operational Risk Index

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: August 21, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Japan

Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Source: Hong Kong Census and Statistics Department, Fitch Solutions

Source of visitor number: Hong Kong Tourism Board
Source of resident number: United Nations Department of Economic and Social Affairs - Population Division

Source of visitor number: Hong Kong Tourism Board, Fitch Solutions
Source of resident number: United Nations Department of Economic and Social Affairs - Population Division
Date last reviewed: August 21, 2018

11.2 Commercial Presence in Hong Kong

11.3 Treaties and Agreements between Hong Kong and Japan

• A taxpayer may elect to deduct foreign tax from taxable income under certain conditions. If a nonresident is resident in a country with which Japan has entered into a tax treaty, income may be either exempt from tax or subject to a lower tax rate. Japan has entered into double tax treaties with both China and Hong Kong SAR. These treaties reduce the tax rates on Japanese-source interest, dividends, royalties and similar income, and also provide relief from double taxation through tax credits.


• Japan has Bilateral Investment Treaties with both Hong Kong (entered into force on June 18, 1997) and mainland China (entered into force on May 14, 1989).

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

The Hong Kong Japanese Chamber of Commerce and Industry
Address: Unit 902, 9/F, Tower 535, 535 Jaffe Road, Causeway Bay, Hong Kong
Tel: (852) 2577 6129

Source: The Hong Kong Japanese Chamber of Commerce and Industry

Japanese Consulate in Hong Kong
Address: 46-47/F, One Exchange Square, Central, Hong Kong
Tel: (852) 2868 0156

Source: Consulate-General of Japan in Hong Kong

11.5 Visa Requirements for Hong Kong Residents

Holders of a valid HKSAR passport enjoy visa-free access to enter Japan for the purpose of short-term visits of up to 90 days. This exemption does not apply when the visit is for purposes other than a short term visit, such as seeking employment or exercising a profession or other occupation. However, visa fees for these kinds of visits where a visa is required will be waived.

Source: Visa on Demand