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Home » Countries » Asia » Japan

Global expansion is a step to make for any business, regardless of what you wish to achieve. The opportunities that can come with an expansion can be both incredibly exciting as well as intimidating and confusing, especially when you consider all of the registration procedures that needs to be done and documentation required.

Expanding to countries such as Japan – which is characterized by a productive and international workforce, multifaceted employment and tax laws, a robust infrastructure network linking to the rest of Asia, and leading sectors in services, manufacturing, high technology, consumer products, life sciences, and agriculture – can bring both excitement to the possibilities, but also significant stress to ensuring the entity with the country’s rigorous legal structures and laws.

Ensuring compliance without the sufficient knowledge of the country’s laws also adds to the stress of getting your new entity off the ground and ready to test new markets. Going at it without the proper support can increase the costs, time and risks involved.

Each new markets bring new challenges, and these can be worked through more efficiently and cost-effectively with the support of an International Professional Employer Organization (PEO) such as Bradford Jacobs, especially through our Employer of Record (EOR) framework. This can be best utilized when businesses are just beginning their expansion process and require more information before committing to incorporating an entity and fully establishing themselves in that market.

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Japan – The Economy

The economy of Japan is a highly developed free-market economy. It is the third largest in the world by nominal GDP and the fourth largest by purchasing power parity (PPP). It is the world’s second-largest developed economy. Japan is also a member of both the G7 and G20.

According to the World Bank, the country’s per capita GDP (PPP) was at $40,193 (2020). Due to a volatile currency exchange rate, Japan’s GDP as measured in dollars fluctuates sharply. Accounting for these fluctuations through the use of the Atlas method, Japan is estimated to have a GDP per capita around $39,048.

The Japanese economy is forecast by the Quarterly Tankan survey of business sentiment conducted by the Bank of Japan. The Nikkei 225 presents the monthly report of top blue-chip equities on the Japan Exchange Group, which is the world’s fifth-largest stock exchange by market capitalization.

In 2018, Japan was the world’s fourth-largest importer and the fourth-largest exporter. It has the world’s second-largest foreign-exchange reserves, worth $1.4 trillion. It ranks 29th on Ease of doing business index, 5th on Global Competitiveness Report, and first in the world in the Economic Complexity Index. Japan is also the world’s fourth-largest consumer market.

Japan is the world’s second-largest automobile manufacturing country. It is often ranked among the world’s most innovative countries, leading several measures of global patent filings. Facing increasing competition from China and South Korea, manufacturing in Japan currently focuses primarily on high-tech and precision goods, such as integrated circuits, hybrid vehicles, and robotics. Besides the Kantō region, the Kansai region is one of the leading industrial clusters and manufacturing centers for the Japanese economy.

Japan is the world’s largest creditor nation. Japan generally runs an annual trade surplus and has a considerable net international investment surplus. Japan has the third-largest financial assets in the world, valued at $12 trillion, or 8.6% of the global GDP total as of 2020. As of 2017, 51 of the Fortune Global 500 companies are based in Japan, down from 62 in 2013. The country is the third largest in the world by total wealth. As of 2021, Japan has significantly higher levels of public debt than any other developed nation, standing at 266% of GDP, with 45% of this debt is held by the Bank of Japan. The Japanese economy faces considerable challenges posed by an aging and declining population, which peaked at 128 million in 2010 and has fallen to 125.5 million as of 2022. Projections show the population will continue to fall, potentially to below 100 million by the middle of the 21st century.

Small and Medium-Sized Companies

There are 3.8 million Japanese SMEs that account for 99.7% of total companies and employ 60% of all workers in the country. Their main sectors include manufacturing, trade, services, and retail.

No. of States/Provinces47 jurisdictions
Principal CitiesTokyo, Yokohama, Osaka, Nagoya, Sapporo, Kobe, Kyoto, Fukuoka, Kawasaki, Saitama, Hiroshima, & Sendai
Language(s)Standard Japanese
Local CurrencyJapanese yen (JPY)
Major ReligionShinto, Buddhism
Date Formatyear month day (weekday)
Time ZoneJapan Standard Time (GMT+9)
Country Dial Code+81
Population125.7 million
Border CountriesMaritime borders with PR China, North Korea, South Korea, the Philippines, Russia, Northern Mariana Islands (United States), and the Republic of China (Taiwan).
Tax Year1 January to 31 December (calendar year)
VAT %10.0%
Minimum WageMinimum wages are prefectural & range from ¥714 to ¥932 per hour for all workers
Taxpayer Identification NumbersIndividual Number (TIN & Social Security No.)
Corporate Number (Corporate TIN)
Registered Supplier ID Number (VAT Number)
Leading Sectorsmotor vehicles, electronics, machine tools, steel, nonferrous metals, ships, chemicals, textiles, processed foods
Main importscrude petroleum, petroleum gas, integrated circuits, broadcasting equipment, and computers
Main exportscars, integrated circuits, vehicle parts, machinery having individual functions, and photo lab equipment
Main trading partnersChina, United States, South Korea, Chinese Taipei, Hong Kong, Australia, and South Korea
Government TypeUnitary parliamentary constitutional monarchy
Current Prime MinisterNaruhito (Emperor), Fumio Kishida (Prime Minister)

The Main Sectors of the Japanese Economy

Japan focuses on the following key sectors, which all have a significant impact on the country’s economy:

  1. Services – The service industry plays one of the most significant roles in the economy and accounts for approximately three-quarters of the total output in the economy. The major players in the service industry include real estate, insurance, retailing, banking, telecommunication, and transport, and some of the major players in the industry include companies such as Mitsubishi Estate, Mitsui Sumitomo, Mizuho, NTT, Softbank Japan airlines, and Nomura among many others.

  2. Tourism – Japan’s inbound tourism market has shown remarkable growth, with the number of foreign visitors traveling to Japan in 2019 reaching a record high of 31.88 million (2.2% more than the previous year), marking the seventh consecutive year of record high (See Figure 1).

    In the same year, Japan earned about 46.1 billion USD in foreign tourist expenditure from visitors to Japan, moving the country to seventh place in the world, ahead of Germany and Australia. The travel and tourism sector contributed 359 billion USD to Japan’s GDP, making it the world’s third-largest market in this sector after the United States and China.

    As per the WEF’s (World Economic Forum) Travel and Tourism Competitiveness Report 2019, Japan’s overall ranking came to be fourth after Spain, France, and Germany.

  3. Agriculture – Agriculture in Japan plays a significant role and contributes approximately 1.4% of the national GDP and about 12% of the land in the country is appropriate for farming. The country lacks arable land, and therefore the terrace system is utilized in small areas.

    As a result of these, Japan has the highest level of crop output per unit area in the world and a total agricultural self-sufficiency ratio of approximately 50% on less than 14 million acres of cultivated land.

  4. Manufacturing – The manufacturing industry in Japan is the most diversified with various advanced industries which are exceedingly successful. Japan has managed to become a leader in technological development in a wide range of fields of manufacturing which include semiconductors, consumer electronics, optical fibers, automobile manufacturing, optoelectronics, copy machines, facsimile, and optical media among others.

    The country is also a leader in biochemistry and fermentation process in the food industry.

    Some of the motor vehicles companies in Japan include Toyota, Honda, Nissan, Suzuki, Mazda, Mitsubishi, Isuzu, and Subaru. There are also motorcycle companies like Kawasaki, Yamaha, Suzuki, and Honda.

Compliance Highlights

  • The National Tax Agency (国税庁, Kokuzei-chō, NTA) – the official tax collecting agency of Japan. National Tax Agency is responsible for fulfilling the responsibilities stipulated in Article 19 of the Law to Establish the Ministry of Finance, while paying due consideration to transparency and efficiency. To creating favorable environment for taxpayers:
    • NTA shall provide correct and easy-to-understand information on legal interpretation and administrative procedures for filing tax returns and paying taxes.
    • NTA shall quickly and accurately handle inquiries from taxpayers.
    • NTA shall endeavor to call on other ministries and citizens from all parts of society for their cooperation and participation in order to improve public understanding and support regarding the role of tax and tax administration.
  • Labor Standards Bureau (労働基準局, Rōdō Kijunkyoku)  – is a bureau of the Ministry of Health, Labor, and Welfare responsible for maintaining work standards in Japan.

    It is tasked with securing and improving working conditions, ensuring the safety and health of workers, and is also responsible for managing Workers’ Accident Compensation Insurance.

Labor Contracts Law

The employer-employee relationship is governed by the Labor Standards Law (LSL) and its Enforcement Ordinance, the Labor Standards Inspection Office (LSIO) with guidelines from the Ministry of Health, Labor, and Welfare (MHLW).

These laws add up to an extremely protective environment for employees and employers will have to avoid many pitfalls in the ‘hiring and firing’ process. In drawing up their agreement, parties cannot ‘opt out’ of statutory or mandatory requirements of the law and some specific requirements should be considered:

  • It is not a legal requirement for employees to have a formal written contract, but employers must provide a written agreement detailing essential factors of the working relationship.
  • The agreement must include salary and payment schedule, working hours and vacation entitlement, termination and disciplinary procedures, grounds for dismissal.
  • The contract does not have to be in Japanese, but in the case of translations only the Japanese version may be legally valid.
  • Employee contracts are usually Permanent / Regular (Sei-sha-in) or Fixed-Term / Contract (Keiyaku-sha-in).
  • Employees continuously employed by the same employer on fixed-term contracts for more than five years are able to switch to a permanent contract under the ‘conversion rule’.
  • Where a company employs more than 10, workplace rules must be filed with the LSIO.

With these conditions in mind, it is important to know about the main types of contracts in Japan:

  1. Permanent or Regular Employee Contracts (Sei-sha-in): These are preferred by employees, but harder to terminate for employers.

  2. Fixed-Term or Project-based Employee Contracts (Keiyaku-sha-in): Such contracts are for specific projects or periods, and easier for employers to terminate arrangements simply by not renewing. Employees are generally entitled to same benefits as permanent employees.

    A fixed-term contract should not exceed three years unless it is tied to completing a specific project. An exception includes where an employee possesses ‘highly specialized skills’ or is over 60 years old, in which case the contract can be for five years.

    Employees continuously employed by the same employer on fixed-term contracts for more than five years are able to switch to a permanent contract under the ‘conversion rule’.

  3. Probationary or Trial Periods: The trial period is usually between three and six months and cannot exceed one year. The trial can be put in place before the potential employee is officially engaged but must be used to assess suitability for intended role.

    Employers may find it hard to justify termination at the end of the trial period as the individual will be treated under the same laws for dismissal as a full-time employee under the Labor Standards Law.

  4. Temporary Staff Contracts or Agreements (Haken-shain): These apply to individuals hired out to companies by agencies and can apply to those having one or two jobs with different companies, or a person employed full-time with a company.

    In this case contracts are usually for three or six months and can be renewed by the company/agency up to a maximum of three years. After this the company must decide whether or not to offer their own contract to the employee.

  5. Youth Employment Agreements: The Labor Standards Law bans employment of under-15s unless involved in film, theatre, or artistic performances. Under-18s may work out of school hours only in light labor roles that do not involve hazardous surroundings or working underground.

  6. Collective and Trade Union Agreements:  The norm in Japan is for collective agreements to be negotiated at company level and not nationwide or across different sectors or industries.

    An exception is the ‘spring wage offensive’ (Shunto), which aims to secure national and industry minimum wage agreements. Labor unions liaise on their joint demands before negotiations begin with employers.

    The Labor Union Act bars employers from refusing to take part in collective negotiations, although the process is not formally regulated.

Payroll – Tax Contributions and Benefits

Income Tax:

Taxation in Japan depends on residency, with individuals considered tax residents if they have lived in Japan for more than one year. A non-permanent resident is a non-Japanese citizen who has lived and worked there between one and five years in a 10-year period. They pay tax on locally earned income and foreign-earned income remitted into Japan.

A permanent resident is a Japanese individual or someone who has lived and worked in Japan for more than five years in a 10-year period and they pay tax on their Japanese and worldwide earnings.

Income tax withheld by employers is remitted to the National Tax Agency (Kokuzei-cho, NTA).

Health and Social Insurance: All employees regardless of nationality must be members of the social insurance scheme which covers such as health insurance, medical care, pension and employment insurance and workers’ accident compensation. The employer’s statutory cost is 18.3% of the employee’s salary capped to a maximum JPY 620,000 (US$ 5,670) and JPY 1.5million (US$13,713) accounting for a standard rate bonus. Employees also contribute 18.3% from their salary. 

Sick Leave: Japan’s National Health Insurance Scheme provides for 66% of monthly salary from the fourth day of illness for up to 18 months. Foreign companies often offer sick leave as a benefit. It is illegal for anyone living in Japan for more than one year not to be registered in the schemes. Employees must have proof it is impossible to carry out the role due to the illness or injury.

Paid Vacations: Mandatory minimum paid vacations for full-time employees vary between 10 and 20 days depending on length of service. Employees are entitled to 10 days in their first year, provided they have worked at least six months and a minimum of 30 hours per week with at least 80% attendance.

There is no statutory paid leave for national holidays – around 16 in Japan – but this has no effect for full-time employees on monthly salaries.

Public Holidays: There are 16 annual national holidays when schools, public buildings and offices are closed, with most companies giving time off to their employees.

  • New Year’s Day – January 1
  • Coming of Age Day – Second Monday in January
  • National Foundation Day – February 11
  • Emperor’s Birthday – Feb 23
  • Vernal Equinox – Date in March varies
  • Showa Day – April 29
  • Constitution Memorial Day – May 3
  • Greenery Day – May 4
  • Children’s Day – May 5
  • Marine Day – Third Monday in July
  • Health and Sports Day – July 23
  • Mountain Day – August 9
  • Respect for the Aged Day – Third Monday in September
  • Autumnal Equinox – Date in September varies
  • Culture Day – November 3
  • Labor Thanksgiving Day – November 23

It is not required by law to provide the above-mentioned holidays as non-working days and the employer is not obligated to pay the employees for such national holidays.


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