major macro economic indicators
|2017||2018||2019 (e)||2020 (f)|
|GDP growth (%)||1.9||0.8||0.8||-3.5|
|Inflation (yearly average, %)||0.5||1.0||0.6||0.3|
|Budget balance (% GDP)||-3.2||-3.1||-3.0||-10.0|
|Current account balance (% GDP)||4.2||3.5||3.3||1.8|
|Public debt (% GDP)||235.0||238.0||237.0||270.0|
(e): Estimate. (f): Forecast. *Fiscal year from April 1, 2020 to March 31, 2021.
- 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
- 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
- Ageing population at risk of jeopardizing the social security system
An inevitable contraction
The economy is expected to contract in 2020, as the COVID-19 outbreak hit domestic consumption (56% of GDP), further aggravated by a sharp drop in tourism (8% of GDP), while external demand remained muted (-15.4% YoY) in the first half of the year. Domestic consumption was already grappling with the shackling effect of the sales tax hike in October 2019 (from 8% to 10%). This will, in turn, exacerbate deflationary pressures. Restrictions on the movement of people and on activity weighed on the economic performance in April and May. Though measures have been gradually eased since May, both consumer and business confidence should remain depressed this year. The unemployment rate has been on an upward trend, reaching 2.9% in July, while manufacturing activity has been in contraction territory for the first half of the year. On the external front, exports (18% of GDP) have been under downward pressure due to the trade tensions between the U.S. and China, and further compounded by the COVID-19 outbreak. As a result, weak domestic and external demand are set to weigh on private investment (17% of GDP), as industries are looking to cut expenditures on plants and machinery (-11.3% YOY in Q2).
Debt load piling up
The current account is should remain in surplus, though it may slightly narrow in 2020. The Yen weakened and it should continue through the rest of the year due to worsening terms of trade. Export growth (transport equipment, construction and manufacturing equipment, electronics, specialty chemicals, optics…) is set to decline because of a muted global demand induced by the pandemic and the U.S.-China trade war, as Japan is exposed via supply-chains links. The ongoing trade disputes with South Korea (7% of total exports) since 2019 and exports curbs on semiconductor parts should also continue to weigh on the current account. The current account failed to capture inflows on the services front (3.5% of GDP) due to a collapse in tourism this year, as borders remain closed for international tourists and that the Tokyo 2020 Olympics have been postponed to 2021.
The fiscal deficit is expected to widen in 2020 due to fiscal responses aimed at offsetting the impact of the pandemic on the economy. So far, the government has unveiled two large packages according to the IMF, one in April - the Emergency Economic Package against COVID-19 (21.1% of GDP) - and the second supplementary budget (21.1% of GDP) passed in June, mostly to support employment, households and to ensure business continuity through subsidies and cash handouts. Furthermore, reconstruction works following the 2018 disasters and typhoon Hagibis in October 2019 will still add to budgetary expenses. In terms of revenues, the sales tax hike would hardly offset the increase in the fiscal deficit because of weaker economic activity, as restrictions dampened consumption and businesses. Therefore, these packages will be mainly financed through new debt issuance, and public debt is likely to exceed 250% of GDP this year.
Increased tensions in international relations
Prince Naruhito became the 126th emperor of Japan in May 2019. Shinzo Abe, Prime minister and President of the ruling Liberal Democratic Party, had boosted efforts to reform the nation’s social security systems. He had to end his final three-year term prematurely due to health reasons. Though his resignation is unlikely to prompt policy shifts, his successor will have to tackle COVID-19’s lingering effects on the economy before the elections in September 2021. Internationally, in October 2019, the government signed off a bill that ratifies the new trade deal with the United States, enabling the protection of Japanese manufacturers from U.S. customs reprisals. On the other hand, Japan’s 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 diplomatic and economic disputes between the two countries. Nevertheless, South Korea announced that it would not leave the General Security of Military Information Agreement (GSOMIA), the strategic military information exchange agreement it shares with Japan. Both sides have agreed to hold talks over Japan’s export dominance on three chemical products critical to the manufacturing of semiconductors and displays by South Korea.
Last updated: September 2020
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.
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.
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.
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 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.
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.