Japan Legal’s future growth depends on its ability to embrace the future, which is evident, and develop its in-house legal market, which is lagging, writes John Church
Japan Legal is to a great extent cornered by demographics and crippled by tradition. The demographics are dictating where growth needs to evolve, but the tradition in terms of legal roles has to a large degree shackled the legal development of the country, in particular with regard to the evolution of in-house counsel.
How the nation moves forward now will be critical to its future success. If it succeeds in harnessing technology, as it is doing in areas like fintech and even space exploration, opportunities will present themselves. And if it can break free from the shackles of tradition surrounding the roles of its in-house lawyers, as much wanted and better-late-than-never developments are indicating, the business sector will be finally equipped to compete with the fast changing demands of international commerce.
Developments in fintech and other tech industries are paramount, as with new sectors like the space industry and gaming, along with crucial reform in areas like intellectual property and labour law.
The product of demographics is having a great bearing on current legal trends, notes Masakazu Iwakura, a senior partner with TMI Associates and professor of law at Hitotsubashi University. “The Japanese population is decreasing and ageing, and therefore the Japanese market continues to shrink, as a result of which listed companies are obliged to enter into foreign markets in order to achieve objectives of continuing growth,” Iwakura explains.
“Many Japanese companies have considered and conducted outbound M&A transactions in various foreign markets. In the 2000s, they went into [China] but most of them failed. Currently, most Japanese companies are executing M&A in Southeast Asian countries, North American countries, and European countries.”
Yoshiaki Muto, a partner at Baker McKenzie, says the US and Western Europe continue to be the most active regions for Japanese outbound M&A, especially in the tech sector. “Within Asia-Pacific, Australia, Indonesia and Vietnam appear to be popular destinations for Japanese outbound deals,” says Muto. “We are also interested in seeing whether the change in the Malaysian administration results in a resurgence in interest in Malaysia among Japanese investors.”
But as Rika Beppu, a partner at Squire Patton Boggs and chairperson of Women in Law Japan, points out, outbound investment is not so much an add-on to portfolios as a necessity.
“The reason for the trend is that it is absolutely imperative for Japanese companies to seek markets outside of Japan, and to think and act globally, or face a gradual decline of their business, in any sector,” says Beppu. “The globalization of their business is no longer a “nice to have”, but an absolute must in the fight for survival. Although there are still many companies in Japan that have yet to go ahead with a cross-border M&A deal, it is definitely on management’s radar.
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“It has almost become an ‘attack or die’ situation. The other threat, or opportunity, is that the companies that are not successful in globalizing will be M&A targets themselves, like it or not. I would expect the trend to continue for the decades to come.”
To add to this, Hiromasa Ogawa, partner at Kojima Law Offices, observes that outbound M&A by mid-sized Japanese companies is not performing well.
“The Japanese government and other professionals (including the Japan Federation of Bar Associations) have been trying to promote investments overseas by mid-sized (and small-sized) Japanese companies, in view of the fact that the domestic market is saturated,” he says. “JETRO [the Japan External Trade Organization] has been assisting Japanese companies going overseas, and performs well in assisting Japanese SMEs in selling their products overseas.
“However, outbound M&A is completely different from export business, and requires ongoing support after the closing, which JETRO or other advisers may not be fully capable of. For outbound M&A, SMEs do not have sufficient human resources or experience. Many of the projects do not have suitable post-merger integration plans.”
When SMEs acquire overseas enterprises, lack of human resources and experience is an obstacle to success. In particular, proper management of a target company and post-merger integration plans are often inadequate.
Ogawa says Japanese SMEs planning to acquire foreign companies should fully recognize their own weaknesses and utilize external experts to cover for insufficiencies. “It may be worth considering acquisition in collaboration with other companies, rather than acquiring the target independently,” he says. “In order to succeed in acquiring foreign companies, it is also important as to how much extra funds can be prepared in addition to the acquisition costs. Various risks can be prevented by retaining outside experts during the acquisition, or afterwards, or by having close communication with local staff.”
Both corporate governance and M&A implicate significant legal issues that company management teams must understand and consider when making decisions, says Ogawa. “However, Japanese companies traditionally do not rely heavily on their legal departments for guidance in these areas; they instead limit their legal departments to traditional roles of reviewing contracts and responding to lawsuits.”
Ogawa points to a December survey of about 960 companies conducted by the Association of Corporate Legal Departments (ACLD), where more than 50% of companies’ legal departments responded that they “do not participate in making important decisions” or that management only listened to their views, but did not incorporate them into any final decisions. Only 6.4% of legal departments in Japanese companies responded that “management almost always reflects or incorporates their advice/opinions in their decisions.”
The findings are disturbing, but are only scratching the surface when it comes to the evolution of in-house counsel in Japan. Surprisingly, up until a decade or so ago, in-house counsel were a rare species and in many cases unqualified for the position in the modern sense. Tradition in Japan is of towering importance and traditionally legal departments have almost been afterthoughts.
Read more: Japan in-house counsel: A chronology of development – A timeline of development of Japanese in-house counsel and its associations
“Many Japanese companies established legal departments only in the past 20 years or so,” says Ogawa. “Before that, Japanese companies assigned other departments to handle legal matters, but those departments also handled administrative matters and general corporate documents. They did not specialize in legal matters.
“As recently as 11 years ago (in 2007), Japan had only 188 lawyers serving as in-house counsel, in part because at that time Japan was producing so few lawyers.”
The discrepancy between careers with law firms and as in-house counsel was magnified over the years by a deliberate initiative at a grass roots educational level to institute an extremely low quota on students passing the Japanese bar exam. This deliberate manipulation has resulted in the stunted development of Japan’s legal community.
“In the past, many law graduates from the prominent universities did not seek to pass the Japanese bar exam, which is considered one of the most difficult public exams in Japan, and one that had deliberately kept the pass rate low for many years – hence the very low number of qualified lawyers in Japan compared to other developed nations,” says Beppu.
“Therefore, with their first degree in law, many of them joined a large Japanese company’s established in-house legal department and tended to stay in the legal department for their entire career. Therefore, they are not qualified Japanese lawyers as such, but are career professionals as in-house counsel. Some of them who are sent overseas by their companies on an LLM course would tend to study for, and pass, the New York bar, for example.”
The founder of the Japan In-house Lawyers Association (JILA), Yasuhiro Umeda, says that in August 2001 there were only 66 in-house counsel in Japan, and more than half of them were working as general counsel or similar positions for foreign companies, especially investment banks.
“Until the early 2000s, anyone who wanted to become in-house counsel needed to pass the bar exam, which then passed less than 1,000 people each year, and to get permission from the bar association, which was usually reluctant to admit,” says Umeda. “On 19 March 2002, the cabinet approved the policy of judicial reform, which included increasing the number of successful candidates up to 3,000 and abolishing the permission system for in-house counsel. On 1 April 2004, the revised Attorney Act was enforced and, in 2007, the number of successful candidates had increased to 2,000.”
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As of June 2017, Japan had a total of 39,800 registered lawyers, of which 1,931 worked as in-house counsel (about 5% of the total) – still, a number that represents about a 10-fold increase in just a decade.
“Prior to the introduction of the Japanese law school system, most of the people working in the legal departments of Japanese companies were college graduates who majored in law but were not qualified lawyers,” says Ogawa. “Perhaps surprisingly, the situation today is not so different, with the vast majority of people managing in-house legal departments being non-lawyers. According to the ACLD survey, as of September 2015, lawyers made up only 6.8% of the total staff of Japanese companies’ legal departments.”
Beppu says that, since 2004, the number of lawyers passing the bar has increased significantly. “However, not all newly qualified lawyers have found employment with law firms, so some go straight into in-house company jobs from day one,” she says. “Therefore, the number of qualified lawyers who are in-house has increased, but there is a concern amongst some that they are not necessarily trained to be lawyers, as they have no experience in law firms.
“This is a marked difference to other countries like the US and the UK, where most law graduates would spend time in a law firm, then transition to an in-house lawyer position as a qualified lawyer.”
Ogawa adds that, traditionally, legal departments in Japan had two main roles: (1) reviewing and revising agreements; and (2) consulting outside counsel to respond to disputes and lawsuits. “Needless to say, without qualified lawyers, legal departments needed to retain outside counsel to handle litigation. Even when reviewing contracts, legal departments have typically relied on outside counsel to review and negotiate agreements that were of particular importance to the companies.”
Given these facts, one may legitimately wonder how Japanese legal departments can get by with so few (or no) qualified lawyers. “The answer is that, compared to in-house legal departments in some other countries, legal departments in Japanese companies serve a significantly narrower role,” says Ogawa. “In this way, one should view legal departments in Japanese companies less as providers of legal services and more as ‘users’ of legal services that outside counsel provide.
“In that sense, even with comparatively few qualified lawyers, they are able to handle the matters assigned to them. Their actual value to the company lies more in serving as the company’s ‘window’ to outside counsel, as well as ensuring that outside counsel provide the company with high-quality legal services. These functions will not disappear.”
Fortunately, he adds a caveat. “The number of in-house counsel in Japanese companies is growing at an increasingly rapid pace. In addition, the recent trend is for experienced attorneys in law firms (whether large or mid-sized) to move in-house. These two developments could significantly increase the number of qualified in-house lawyers in 5 to 10 years, thereby finally allowing Japanese in-house counsel to serve their proper role in the decision-making process and strategy planning.”
Beppu agrees. “I think that the in-house counsel role is ever-evolving in Japan, as the growing numbers evidence,” she says. “The senior in-house counsel are moving into new companies and new roles, which is very encouraging to see. If the companies become more aware of the need to have serious legal departments in-house, the role of in-house counsel will grow even more.”
Catherine O’Connell, a registered foreign lawyer who worked in Japan as an in-house counsel before starting her own business, says rapid globalization and the digital economy will continue to push companies to build and/or strengthen their legal departments to be recognized as valuable to the business.
“Japan regulations continue to bind the IHC legal market, which is looking for innovative ways to meet their legal resourcing needs through flexible legal services (contract lawyers) and allowing IHCs to truly work flexibly, not just as lip service,” says O’Connell. “Japan may see a steady increase in smaller firms and solo practitioners who can provide these services.
Read more: Foreign, female and business focused – New Zealand lawyer Catherine O’Connell on her launching a law firm in Japan, a traditional, male-dominated nation
“A challenge for IHC is to continue to build their niche as a specialist and be recognized as valuable, persuasive and influential to the business. In Japan, bengoshi (qualified lawyers) continue to move in-house when they didn’t before, resulting in competition for roles, so you had better be an IHC who carves out an area where you can be an expert.”
While Japanese in-house counsel have faced an uphill battle in terms of qualification and role recognition, the same could arguably be said for foreign lawyers hoping for their piece of Japan’s pie.
“International law firms have been campaigning for decades for a relaxation of the laws and rules restricting the ability of foreign qualified lawyers to practise foreign law in Tokyo,” says Masaki Hosaka, managing partner at Nishimura & Asahi. “A recent, albeit brief report in the Japanese press indicates that Japanese authorities are considering revision of the laws applying to foreign qualified lawyers.
“The details of the proposals are yet to be released, but it appears that the reforms are motivated, at least in part, by a wish to increase the flow of international arbitration work taking place within Japan; in recent years the JCAA [Japan Commercial Arbitration Association] has handled about 20 cases annually compared to Singapore, where the Singapore International Arbitration Centre administered 421 of the 452 cases filed in 2017.”
Hosaka says the details of the deregulation appear to centre around:
- Reducing the number of years a lawyer must practise the law of their home jurisdiction before being allowed to register in Japan (currently three years is required, with at least two of those years being overseas); and
- Allowing foreign-registered lawyers to establish joint corporations with local lawyers (currently foreign registered lawyers are not permitted to do so).
“With regard to increasing the use of international arbitration in Japan, concerns have been raised by foreign lawyers that the Japanese Foreign Lawyers Law can be used to prevent foreign-registered lawyers from acting on arbitrations conducted in Japan between wholly-owned Japanese subsidiaries of foreign corporations,” says Hosaka, adding that, “it is not clear whether or not this deregulation process will deal with this issue.”
Even after completing the above required period of overseas practice, a foreign lawyer must complete the initial registration and approval process, another area criticized by Japan’s foreign lawyer community. “After submission of extensive hard copy documentation … the registration process takes, at its quickest, five months, and involves in-person visits to the Ministry of Justice and the bar association,” says Hosaka. He adds that this is the case even where it is a renewal of a registration that was held previously – for example, where a registered lawyer moves overseas for a few years and then returns to Japan – which is not unusual in international law firms.
“This can be contrasted with the equivalent registration process in Singapore, in which registration is conducted by an online application with scanned documentation attached and the process from completion of application to approval of the registration is usually completed within two to three weeks,” he says.
“Any regulatory changes that allow the greater participation of qualified foreign legal expertise in the Japanese legal services market are to be welcomed, as such moves can only help Japanese corporations as they increase their outbound and overseas activities, and the Japanese economy as it further internationalizes and becomes ever more integrated with global markets.”
Perhaps not surprisingly, evolutions in the tech space that are currently reverberating around the globe are firmly on the agenda in Japan, which prides itself on its cutting edge tech advancements.
Muto, at Baker McKenzie, predicts tech-oriented legal issues such as legal structuring of high-tech products and services, regulatory compliance and disputes related to fintech, medtech, autotech, industrytech, internet of things (IoT), and other data-related businesses and services generally will be areas of keen interest in the next 12 months.
“The cryptocurrency space is booming in Japan,” adds Koichiro Ohashi, a partner at Greenberg Traurig Tokyo Law Offices. “Japanese investors are getting used to trading virtual currencies, and it is said that more than half of all Bitcoins are currently traded in Japan,” he says. “Corresponding to this situation, Japanese regulators have been keen to regulate the virtual currencies. As a result, Japan is one of a very few countries in the world that have enacted full regulation regarding the trade of virtual currencies.”
The virtual currency regulations are built into the Fund Settlement Act of Japan. Currently, less than 15 virtual currency (VC) exchange registrations have been issued to virtual currency traders.
Because of the large volume of trades of virtual currencies in Japan, Ohashi says many other participants have intended to apply for the VC exchange registration. However, after hackers stole more than half a billion dollars in cryptocurrencies from Japanese exchange Coincheck in January this year, “the Japanese regulators have since been seriously concerned and are nervous to allow more VC exchange registrations to other applicants. So, currently all of the regulators’ review on the VC exchange registration application process are frozen.”
Nonetheless, he says many traders around the world are aiming to trade cryptocurrencies in Japan, especially global proprietary traders eager to trade bulk amount cryptocurrencies knowing that there are robust demands of cryptocurrency supply in Japan.
Initial Coin Offerings (ICOs) are also actively planned in Japan. “Certain tokens are not falling under the definition of virtual currencies under the Fund Settlement Act, and tokens are not generally treated as financial products under the Financial Instruments & Exchange Act [FIEA],” says Ohashi. “Therefore, in theory, certain token offerings can be made without any distribution licence or product registration in Japan. However, a certain category of tokens called security tokens, which are treated as a security under US regulations, seem to be viewed as paragraph 2 securities under the FIEA and thus require a Type II licence in an offering to Japanese investors, unless falling under exemptions from distribution licence requirements, such as the article 63 exemption.
“The JFSA [Japan Financial Services Agency] also requires all token offerings/ICO issuers to consult with it before the offering to confirm that the tokens are not falling under a virtual currency under the Fund Settlement Act. As the JFSA is so busy in dealing with various crypto-related matters, ICO issuers need to budget a good deal of time until they receive comments from the agency.”
As for fintech, Fumihide Sugimoto, the managing partner at Nagashima Ohno & Tsunematsu, says Japan’s Banking Act has been amended twice so that the banks may adopt more fintech and co-operate with fintech companies. “For example, under the amended Banking Act, the banks may hold stakes in fintech companies, and the banks should make efforts to open their API [application programming interface] to fintech companies,” he says.
“The Japanese government deems that fintech is one of their most important economic policies, and especially the Ministry of Economy Trade and Industry (METI) and the JFSA wish to support fintech businesses.”
Ohashi says the ePayment space is growing due to the expansion of online markets such as Amazon.com and Rakuten. “As far as I know, most ePayment service providers are acting as collection agents for merchants because certain collection agency services are exempted from the Japanese license requirements, as opposed to money sending services, which require a money transfer licence under the Fund Settlement Act of Japan,” he says.
“I know that there is a discussion within the government that an industry cross-settlement act is expected, whether you are a bank or money transfer agent, and if it becomes a law the current exempted collection agency businesses may be regulated by this industry-cross settlement act. The discussion has just started, and it will take some time if it becomes a law, but it is a topic that we have to keep an eye on.”
He says eWallet services (general settlement services including, without limitation, sending and receiving funds in an account set in a provider) are also coming to Japan, which may require the combination of a money transfer licence, prepaid card licence, online banking agent registration, and/or credit card issuer registration. “This will require multi-attention to multiple sets of laws in Japan, and is thus complex. But the service is coming to Japan, as you see in China and other places in the region.”
Ohashi notes that Japan has finally followed the US and EU in enacting the regulation of high speed trading (HST) with an amendment to the FIEA, and implementing the act from April this year. “Market makers and proprietary traders who trade stocks and certain financial products listed in a Japanese exchange using algorithms that are stored in a virtual server in a collocation area of the exchange should obtain HST registration under the FIEA at latest by the end of September,” he says.
“It is a revolutionary change of regulators’ stance toward the market participants that the JFSA, for the first time in Japanese regulatory history, accepts all application documents for the HST registration in English. In the past, it was a great burden for foreign participants wanting financial licences in Japan to translate all relevant documents including internal policies, etc., into Japanese.”
Ohashi says Japanese regulators have changed their stance to welcome more foreign players in the Japanese market, mainly to keep Japan’s position as one of the global financial centres, adding the HST regulations are less onerous that those of the EU or US.
The space race
On 15 November last year, Japan’s Cabinet Office started taking applications launching and managing an artificial satellite under the Act on Launching and Managing Artificial Satellites. Standards and guidelines under the act were publicized. The act, along with the Act on Securing Proper Handling of Satellite Remote Sensing Records, serve to regulate utlilization of outer space, and the applications are expected to enhance Japanese activities in space.
Hosaka, at Nishimura & Asahi, says the firm has about 15 lawyers involved in this key and futuristic area. “Due to the rapid expansion of the market size and the variety of industry players becoming involved in the business of space, we believe we can expect more related demand for complex and specialist legal services,” he says.
“In addition, with the growing trend of interaction between space businesses and other industries – for example AI and remote sensing, robotics and space exploration, agriculture tech and the International Space Station – to keep up and deliver excellent services to companies in other industries, especially when it comes to new businesses, knowledge and expertise concerning space and the laws relating to the business of space, will be increasingly valuable to our clients.
“We expect that both domestic and international laws will develop, increasingly, to accommodate complex and multinational value chains and business partners based in various countries who seek to maximize the business opportunities that are arising from the utilization of space resources.”
Hosaka says of the many projects his firm is involved in is ispace, a Tokyo-based startup that is aiming to enter the business of space-resource mining and utilization, which raised close to US$100 million in its series A financing. “This is the largest Japanese startup series A financing to date, and globally the largest series A finance to date, for a startup in the space domain,” he says.
The venture round was led by Innovation Network Corporation of Japan (INCJ), while KDDI, Suzuki, Shimizu Corporation and other companies and funds joined the round. “We supported ispace in the deal structuring, negotiation and execution of the transaction,” says Hosaka. “We also supported the company in the area of research and analysis for future global/domestic rule-making, as well as providing strategies and structure for the company’s business alliances with companies in other business domains, which helped ensure the success of the fundraising.
“Our think-tank arm, Nishimura Institute of Advanced Legal Studies (NIALS), together with Leiden University, University of Luxembourg and Secure World Foundation, was appointed as a consortium member of the Hague International Space Resource Governance Working Group, which is convened regularly in the Hague, the Netherlands, and the working group was recognized and referred to in the formal discussion at the United Nations Committee on the Peaceful Uses of Outer Space (COPUOS).”
Casinos and gaming
The Integrated Resort Promotion Law, soon to be implemented, is a radical departure from previous form for Japan. The law refers to integrated resorts (IR), which refer to tourism facilities that establish casinos. Keep in mind that, up until now, gaming has been prohibited in Japan, with exceptions like horse racing.
Iwakura, from TMI, says so far any and all gaming business in Japan has been operated solely by national and local governments. “The new IR Law will, for the first time, permit private enterprises and foreign companies to operate and engage in gaming business,” he says. “In some sense, a sort of privatization will be achieved in the area.
“The basic IR Law was enacted last year, and its implementation is being discussed and considered at the current Diet (parliament). The ruling coalition (LDP and Komeito Party) wanted to enact by late June, but the opposition party resisted and [a date] has not yet been clarified.
“If implementation of the IR Law is enacted, the impacts and implications will be gigantic, not only to private enterprises, which plan to engage in the business, but also to law firms, which aim to provide various advice on the related laws and regulations to those clients.”
Japan’s congress in June this year enacted amendments to the Patent Law. Aki Ryuka, director and president of Ryuka IP Law Firm, says the grace periods for patents, designs and utility models have been extended from six to 12 months. “If the Japanese application is filed within 12 months from the loss of novelty, the invention/design can still be protected,” says Ryuka. “The proof that the inventor/creator or its assignee disclosed the invention/design must be submitted within 30 days from the Japanese filing date.”
Ryuka says that while US law requires that priority applications be filed within one year from the loss of novelty, Japanese law requires that the Japanese application be filed within one year. “If the Japanese application is filed close to the end of the priority period, then the grace period likely does not apply,” he says. “Therefore, if the loss of novelty is claimed in a foreign country, then the due date for filing in Japan should be docketed as one year from the loss in the foreign country.”
Article 105.2 of the Patent Law has also been amended to more easily allow in-camera procedures. Ryuka says the court can order the parties to submit documents for in-camera procedures where limited persons review the documents and determine whether the documents are necessary for proving the infringement or damages (articles 105.3 and 105.4). If they are found necessary, the court will order the submission of the documents to the court.
“The patent law provides that a reasonable royalty is deemed as damage of the infringement (article 102.3),” he says. “For calculating a reasonable royalty, the patentee must prove the amount of infringing products being sold. Because this is difficult, damages had been very low in Japan. The amendment intends to help prove the damages and thereby reinforce Japanese patents.”
Yoshitaka Sonoda, co-founder and managing partner at Sonoda & Kobayashi, sees standards essential patents (SEPs) as a red-button issue for IP firms. “Various efforts being made mainly by METI, aiming at the prevention and resolution of potential disputes regarding SEPs are important movements in Japan,” says Sonoda.
The measures include:
- Publication of a Guide for Licence Negotiation for Standard Essential Patents (Draft);
- Modification of Hantei (advisory opinion) system so that the Japan Patent Office’s (JPO) opinion on essentiality can be requested; and
- Amendments of Unfair Competition Prohibition Law and Patent Law (published on 30 May) to enhance the effectiveness of adversarial proceedings including Hantei.
“We must watch carefully how the above-mentioned guide and also the Hantei system for essentiality judgements will be appreciated by industries,” says Sonoda. “The final guide [currently only the draft is released], is yet to be published and we are not aware of Hantei requested for essentiality judgment.
“It is important to note that the Hantei system has been in place for a number of years to determine the possibility of infringement of the subject article concerning the scope of rights, and the number of requests annually have been low. It will be interesting to see whether the Hantei for essentiality judgment will be used more.”
Another red-button issue in the next 12 months is changes to Japan’s labour and employment law. Hosaka, from Nishimura, says the Abe administration and his Liberal Democratic Party (LDP) are working on major labour and employment reform to include new and amended employment-related laws, ordinances, guidelines and enforcement, in order to tackle the rapid decrease in Japan’s working-age population, as well as increasing demand for more flexible and diverse working styles.
“The reforms include changes to achieve objectives such as shorter working hours, equal employment terms and conditions for non-permanent workers, growth in labour productivity, flexible working through the use of telework and home offices, greater use of women and of foreign workers, and participation by the elderly in the labour market,” says Hosaka.
The reform is considered to be Japan’s biggest since the establishment of the Labor Standards Act in 1947, and is expected to bring major changes to employers’ HR departments and to employees’ working styles.
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Wanted: Women lawyers in Japan – The founding of Women in Law Japan, and their aim towards gender equity
Foreign, female and business focused – New Zealand lawyer Catherine O’Connell on her launching a law firm in Japan, a traditional, male-dominated nation