Economic Studies
Japan

Japan

Population 126.5 million
GDP per capita 39,304 US$
A2
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A1
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 1.9 0.8 0.8 -3.0
Inflation (yearly average, %) 0.5 1.0 0.6 1.0
Budget balance (% GDP) -3.2 -3.1 -3.0 -2.8
Current account balance (% GDP) 4.2 3.5 3.3 3.2
Public debt (% GDP) 235.0 238.0 237.0 236.0

(e): Estimate. (f): Forecast. *Fiscal year from April 1st 2020 to 31st March 2021.

STRENGTHS

  • Privileged location in a dynamic region
  • Very high level of national savings rate (around 23% of GDP)
  • Public debt is 90% owned by local investors
  • Advanced technology products and diversified industrial sector
  • Trade agreement with the EU and Transpacific Partnership (December 2018)
  • Excellent corporate payment behaviour

WEAKNESSES

  • Difficulty of consolidating public finances and bringing an end to deflationary pressures
  • Reduction of the workforce and low emigration contribution; increasing share of precarious workers
  • Low growth potential, low productivity of SMEs
  • Still insufficient female labor participation, lack of child care
  • Aging population at risk of jeopardizing the social security system

Risk assessment

Growth to slow down in 2020

In 2020, the economy is likely to slow, largely due to the shackling effect of the sales tax hike (to 10% from 8% in October 2019) on private consumption (56% of GDP). In this context, consumer confidence should remain depressed despite ticking up in October and a low unemployment rate (2.4% in 2020), while the PMI fell into contractionary territory in October for the first time since mid-2016; both the sales tax hike and Typhoon Hagibis hit the reading. Nevertheless, the consumption tax rate was accompanied by measures to smooth demand volatility and mitigate the impact on the economy, including: a point-reward program for cashless payments in SME; a tax allowance for automobile and house purchases; infrastructure investment; and additional spending for childcare and tertiary education. On the other hand, clashes with South Korea and the US – China trade war will continue to constrain the external sector. Adverse external conditions will dampen export-driven private investment and manufacturing. However, non-manufacturing investment is expected to stay firm due to investment in labor-saving technologies. Furthermore, the government will apply new tax incentives in April 2020 for businesses to utilize their corporate cash stockpiles (84.3% of GDP) for productive use, and align the corporate tax code more closely with the digital economy for driving private investment and growth. Domestic demand is then likely to be a drag in 2020, which will in turn exacerbate deflationary pressures. Inflation should remain well below the Bank of Japan’s (BoJ) 2.0% target due to Japan’s deep-seated “deflationary mindset”. BoJ will likely keep its ultra-accommodative monetary policies in place throughout 2020, which will continue to sustain growth.

 

A heavy debt load

The current account is expected to remain in surplus, but this could again slightly narrow in 2020. The Yen is expected to weaken in 2020, worsening the terms of trade. Export (transport equipment, construction and manufacturing equipment, electronics, specialty chemicals, optics…) growth is set to decline due to slower global demand. Moreover, exports (14% of GDP) may be impacted by the US-China trade war, as Japan is exposed via supply-chain links. The consumer boycott of Japanese products by South Korea (clothes, cars) may also weigh on the current account as exports to South Korea make up about 7% of total Japanese exports. While the large yields on overseas investments will remain the mainstay of the income account surplus (3.6% of GDP), the current account will also benefit from inflows on the services front (3.5% of GDP), because of the rise of tourism notably, the Chinese one. The Tokyo 2020 Olympics should also increase the number of tourists this year.

The fiscal deficit is expected to narrow slightly in 2020, with the main factor driving this enhancement being the decline of infrastructure investments ahead of the Tokyo 2020 Olympic Games. Nevertheless, reconstruction works following the 2018’s disasters and typhoon Hagibis in October 2019 will still add to budgetary expenses. The social spending will continue to weigh significantly (33,7% of expenditures) on the state budget. In terms of revenues, increase in the sales tax will be insufficient to narrow the deficit substantially. Despite debt representing 236% of GDP, its service burden represents only 25% due to low interest rates at 0% on the 10-year government bond, as residents own 90% of it. Ttherefore, there is little space to implement further fiscal stimulus going forwards.

 

Difficult international context

Prince Naruhito became the 126th emperor of Japan in May 2019. Shinzo Abe, Prime minister and President of the ruling Liberal Democratic Party, reshuffled his Cabinet on September 2019, which has the priority to boost efforts to reform the nation’s social security systems. He enters the last two years of his final three-year term.

Internationally, the Abe government on October 2019 signed off on a bill that would ratify the new trade deal with the United States, enabling to protect Japanese manufacturers from the US’s customs reprisals. On the other hand, its relationship remains delicate with China and icy with North Korea and South Korea. With the latter, the dispute over compensation for forced Korean labor during Japan’s colonial rule is the issue at the heart of the diplomatic and economic disputes between the two countries. Nevertheless, South Korea announced that it will not leave the General Security of Military Information Agreement (GSOMIA), the strategic military information exchange agreement it shares with Japan. Sides have agreed to hold talks over Japan’s export dominance on three chemicals critical to the manufacture of semiconductors and displays by South Korea.

 

Last update : February 2020

Payment

Japan has ratified the International Conventions of June 1930 on Bills of Exchange and Promissory Notes, and of March 1931 on Cheques. As a result, the validity of these instruments in Japan is subject to the same rules as in Europe.

The bill of exchange (kawase tegata) and the much more widely used promissory note (yakusoku tegata), when unpaid, allow creditors to initiate debt recovery proceedings via a fast-track procedure, subject to certain conditions. Although the fast-track procedure also applies to cheques (kogitte), their use is far less common for everyday transactions.

Clearing houses (tegata kokanjo) play an important role in the collective processing of the money supply arising from these instruments. The penalties for payment default act as a powerful deterrent: a debtor who fails twice in a period of six months to honour a bill of exchange, promissory note, or cheque collectable in Japan is subsequently barred for a period of two years from undertaking business-related banking transactions (current account, loans) with financial establishments attached to the clearing house. In other words, the debtor is reduced to a de facto state of insolvency.

These two measures normally result in the calling in of any bank loans granted to the debtor.

Bank transfers (furikomi), sometimes guaranteed by a standby letter of credit, have become significantly more common throughout the economy over recent decades thanks to widespread use of electronic systems in Japanese banking circles. Various highly automated interbank transfer systems are also available for local or international payments, like the Foreign Exchange Yen Clearing System (FXYCS, operated by the Tokyo Bankers Association) and the BOJ-NET Funds Transfer System (operated by the Bank of Japan). Payment made via the Internet site of the client’s bank is also increasingly common.

Debt collection

In principle, to avoid certain disreputable practices employed in the past by specialised companies, only lawyers (bengoshi) may undertake debt collection. However, a 1998 law established the profession of “servicer” to foster debt securitisation and facilitate collection of non-performing loans (NPL debts) held by financial institutions. Servicers are debt collection companies licensed by the Ministry of Justice to provide collections services, but only for certain types of debt: bank loans, loans by designated institutions, loans contracted under leasing arrangements, credit card repayments, and so on.

 

Amicable phase

A settlement is always preferable, so as to avoid a lengthy and costly legal procedure. This involves obtaining, where possible, a signature from the debtor on a notarised deed that includes a forced-execution clause, which, in the event of continued default, is directly enforceable without requiring a prior court judgement.

The standard practice is for the creditor to send the debtor a recorded delivery letter with acknowledgement of receipt (naïyo shomeï), the content of which must be written in Japanese characters and certified by the post office.

The effect of this letter is to set back the statute of limitation by six months (which is five years for commercial debts). If the debtor still fails to respond, the creditor must start legal action during that period to retain the benefit of interruption of the limitation period.

 

Legal proceedings
Fast-track proceedings

Summary proceedings, intended to allow creditors to obtain a ruling on payment (tokusoku tetsuzuki), apply to uncontested monetary claims and effectively facilitate obtaining a court order to pay (shiharaï meireï) from the judge within approximately six months.

If the debtor contests the order within two weeks of service of notice, the case is transferred to ordinary proceedings.

 

Ordinary proceedings

Ordinary proceedings are brought before the Summary Court (kan-i saibansho) for claims under JPY 1,400, and before the District Court (chiho saibansho) for claims above this amount. Those proceedings, partly written (with submission of arguments and exchanges of type of evidence) and partly oral (with respective hearings of the parties and their witnesses) can take from one to three years as a result of the succession of hearings. These proceedings generate significant legal costs.

The distinctive feature of the Japanese legal system is the emphasis given to civil mediation (minji chôtei). Under court supervision, a panel of mediators – usually comprised of a judge and two neutral assessors – attempts to reach, by mutual concessions of the parties, an agreement on civil and commercial disputes.

In practice, litigants often settle the case at this stage of the procedure, before a judgment is delivered. While avoiding lengthy and costly legal proceedings, any transaction obtained through such mediation becomes enforceable once approved by the court.

 

Enforcement of a legal decision

A court judgment is enforceable if no appeal is lodged within two weeks. If the debtor does not comply with the decision, compulsory measures can be ordered through an execution against Real Property (an Examination Court issues a commencement order for a compulsory auction) or an execution against a claim (a compulsory execution is commenced through an order of seizure).

Japanese law provides for an exequatur procedure in order for foreign awards to be recognised and enforced. The court will verify several elements, such as whether the parties benefited from a due process of law, or if enforcement will be incompatible with Japanese public policy. Furthermore, if the issuing country does not have a reciprocal recognition and enforcement treaty with Japan, the decision will not be enforced by domestic courts.

 

Insolvency proceedings

Restructuring

There are two types of restructuring proceedings. The first of these is corporate reorganisation proceedings (kaisha kosei), which are typically used in complex insolvency cases involving stock companies. They come with the mandatory appointment of a reorganisation trustee by the court and with a stay against enforcement by both secured and unsecured creditors. The court typically appoints a third-party bengoshi with substantial experience in restructuring cases.

The second of these is civil rehabilitation proceedings (minji saisei), which are used to rehabilitate companies of almost any size and type. The debtor-in-possession (DIP) administers the rehabilitation under supervision of a court-appointed supervisor. Enforcement by secured creditors is not stayed in principle. The debtor must enter into settlement agreements with secured creditors in order to continue using the relevant collateral to conduct their business.

 

Winding up proceedings

There are two winding up proceedings. In bankruptcy proceedings (hasan), the court appoints a lawyer as trustee to administer the proceedings. Enforcement by secured creditors is not stayed; rather, they can freely exercise their claims outside of the bankruptcy proceedings. The trustee will usually attempt to sell secured collateral with the agreement of the secured creditors and contribute a percentage of the sales proceeds to the estate. The debtor’s estate is distributed to creditors in accordance with prescribed statutory priorities without any need for voting by the creditors.

The second, special liquidation (tokubetsu seisan), is used for stock companies. A liquidator is appointed by either a debtor’s shareholders or the court. Distributor of the debtor’s estate to creditors has to be approved by creditors with claims to two-thirds or more of the total debt or by way of settlement. This procedure is used when the debtor’s shareholders are confident that they will obtain creditors’ cooperation for the liquidation process, and wish to control the liquidation process without involvement of a trustee.

Insolvency trend Japan
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