Entering the Japanese Market

Japanese Market

Japan is the world’s third largest economy and has thrived on being a world leader in innovation and high-tech built on a tradition of hard work. Japan has a Gross Domestic Product of 5.38 trillion US dollars, while the population of 126 million creates a massive consumer market.

Strategically, its location in East Asia and the northwestern Pacific Ocean puts it in a prime position among Pacific Rim nations, in comparatively proximity to China, South Korea and Thailand with sea routes south to Australia and eastwards to the west coast of the USA.

But Japan is a challenging market for foreign corporations, not least due to the lengthy and complex procedures for registering a legal entity and multi-layered tax regime.

All of this – and more – makes Japan a challenging target for foreign companies planning a global expansion by establishing a legal entity subsidiary. Attempting to recruit staff in-country from thousands of miles away is hazardous; migrating staff from the home country brings into play masses of red tape surrounding work permits and work visas. New arrivals will have to adjust to a unique culture and workplace attitudes.

Starting a business in Japan

Incoming companies typically choose to set up a limited liability company (LLC) known as a Godo Kaisha, GK, or a joint stock company (Kabushiki Kaisha, KK). After the initial step of registering a unique company name with the Ministry of Justice’s Legal Affairs Office there follows a daunting succession of registration procedures for onboarding and putting staff on the payroll.

• A Japanese resident, foreign or local, is appointed incorporator and must register a seal (Inkan) with the Trade Register for use on official company documents, attach his own seal and apply for the Representative Seal ID card.
• Articles of Incorporation are notarized in Japanese, which include full details of the company’s registered address any shareholders (in the case of a KK) or ‘members’ for a GK.
• The verified unique company name must be submitted to the Trade Register; it can be in English but must include the Japanese characters for Godo Kaisha or Kabushiki Kaisha.
• Paid-up capital is deposited in incorporator’s bank account.
• All certified documents are submitted to the Legal Affairs Office of the Ministry of Justice.
• The appointed incorporator transfers responsibilities to the company’s executive director or manager, who takes possession of the Certificate of Incorporation and Representative Seal from the Legal Affairs Office.

Once the company is cleared to operate, other procedures include:

• Remitting withheld taxes to the National Tax Agency (Kokuzei-cho, NTA).
• Remitting social insurance deductions to the relevant social insurance systems (Shakai Hoken).
• Filing returns for the tax year, which runs from January 1 till December 31.
• Withholding national income tax monthly. Provisional payments may be necessary in July and November if an individual’s previous year’s tax liability exceeded JPY 150,000 (US$1,360).
• If tax is not withheld, registered tax residents must pay instalments in June, August, October, and January of the following year.
• Providing employees with an annual certificate of deductions (Gensen) in December each year.
• Reconciling national and local taxes to assess for refunds or extra payments.

Expanding Business into Japan

Foreign companies expanding into Japan are entering one of the world’s powerhouse economies, but one where the unique business and social cultures creates other issues.

Japan is the world’s third largest economy with nominal Gross Domestic Product (GDP) of 5.38 trillion US dollars in 2021 and growth expected to accelerate during the latter stages of the year. Its geographic location in the northwestern Pacific Ocean makes it a major force among Pacific Rim nations, close to the markets of China, South Korea, and Taiwan, with sea routes to Australia and west coast USA.

The heavyweight contributors to Japan’s exports are motor vehicles, consumer electronics and computers, iron, and steel, with other key industries based on petrochemicals, pharmaceutics, shipbuilding, aerospace, banking and insurance, retail, and textiles.

This makes Japan a tempting target for foreign investment, but incoming companies must toe the line in terms of compliance with employment laws that provide unbreakable protections for the workforce. There are other questions too: where will you find distributors, manufacturers, and offices? Before you make your move – speak to Bradford Jacobs.

Japan Business Facts

• Capital city – Tokyo
• Population – 126 million
• States – Eight states. Hokkaido, Tohoku, Kanto, Chubu, Kinki/Kansai, Chugoku, Shikoku, Kyushu (incl. Okinawa), divided into 47 prefectures (subdivisions)
• Official Language – Japanese
• Economy and world ranking – World’s third largest economy; GDP US$5.38 trillion
• Leading sectors – Service industry, banking, retail, insurance, transportation, consumer goods, electronics, manufacturing, mining, IT, transport
• Main exports – Cars and vehicle parts, integrated circuits, precision machinery, cargo, and passenger ships
• Main imports – Crude petroleum and gas, coal briquettes, integrated circuits, and broadcasting equipment
• Main trading partners – USA, China, South Korea, Australia, Taiwan, Thailand
• Government – Constitutional monarchy and parliamentary government
• Currency – JPY Japanese Yen

Advantages and Challenges of the Japanese Market

Advantages of expanding into the Japanese economy include:

• Economy: Third largest in the world behind the US and China
• Consumerism: Population of 126 million and consumers with disposable income and a liking for premium products, especially Western goods
• Trading outlook: Keen to establish long-term international business partnerships
• International business: Japan External Trade Organization (JETRO) aims to promote international trade and partnerships
• Logistics:  Modern infrastructure of road and rail, fronted by 20 ports and five international airports for ease of exports and imports and potential for further expansion
• Workforce:  Highly educated, motivated, loyal workforce with strong work ethic
• Location:  Ideally placed for companies planning further expansion into the Pacific Rim region and Asia, with shipping routes to the US west coast and Australasia
• Ease of doing business: The World Bank ranked Japan 29^th out of 190 nations in 2020

Challenges of the Japanese market include:

• Red tape: Multi-layered bureaucracy involving government and other authorities to set up business and establish payroll, where successive steps must be followed in the correct order
• Demanding: Meeting high expectations of Japanese market
• Business culture: Integrating into a strictly hierarchical work culture where formality, respect and etiquette play major roles 
• Taxation: Complicated Corporate Tax, ranked 123^rd out of 190 nations by the World Bank
• Transportation: Moving goods in-country has to negotiate topography that includes nearly 7,000 islands
• Permits: Construction permits, up to six months, and registering properties are lengthy processes wrapped in red tape

Limited Company / Subsidiary or Branch in Japan?

International organizations planning expansion into Japan by setting up their own company, typically choose a limited liability company subsidiary, a Godo Kaisha (GK), with the other option being a branch office (Shiten).

Subsidiaries are a separate legal entity from foreign parent companies, which are generally free from responsibility for any debts or liabilities of the subsidiaries. Subsidiaries can have a totally different name from the parent company, pursue different business activities and form their own contracts. Subsidiaries are treated as resident for tax purposes but can benefit from double tax treaties. The parent company has the advantage of exploring the potential of the Japanese market without committing to major capital investment. There is also the potential to move further afield into the Pacific Rim and Far East markets.

Branch offices are an extension of the parent company and are generally of benefit only if the parent company needs an officially registered entity for opening bank accounts, for example. The branch will have to declare and pay corporation taxes.