Japan

Resilient domestic demand

Japan’s economic growth slowed in 2022 compared with 2021 as economic activity was affected by high commodity prices, supply-side constraints, and the impact of Covid-19. Private consumption (55% of GDP) and gross investment (25%) showed stronger recovery in the second half of 2022. Net exports however became an increasing drag on growth due to high import prices, a lack of tourism receipts linked to border restrictions and global trade slowdown. For 2022, Japan’s trade deficit (JPY 19.97 trillion) was the largest in over 40 years since 1979 as import value surged 74% y/y.

In the face of the global slowdown, Japan’s domestic demand will likely show resilience in 2023. Reopening momentum will continue to provide a boost to household consumption as voluntary cautiousness among consumers fades. The possibility of real wage growth turning positive on expected strong nominal increases following spring wage negotiations (shunt?), alongside a drawdown in excess household savings, estimated at 10% of GDP, will form additional tailwinds for consumer spending. The outcome of wage negotiations will also be a key factor behind monetary policy changes. Strong momentum in capital expenditure (capex) will also support the Japanese economy. Since mid-2022, corporate firms have started to raise capex significantly, with the September 2022 quarter seeing a 9.8% y/y rise. Data showed strong capex growth in both manufacturing and non-manufacturing sectors, such as production machinery, information and communication electrical equipment, construction, wholesale and retail trade, and services. Strong domestic demand for ongoing investment in sustainability, digital transformation, and solutions for alleviating manpower shortages, will underpin corporate capex in 2023.

Easing supply bottlenecks will support the recovery in industrial production, although the auto sector could continue to face some frictions in the supply of components, as highlighted by major car-makers, which will limit output. Waning external demand will be a major headwind to Japan’s GDP growth. A gradual normalisation of supply chains has aided Japan to grow its exports by 18% y/y in 2022, comparable to 22% rise in 2021.

Widening trade deficit

Weaker goods export performance, and resilient domestic demand, which should sustain strong import growth, could result in a wider trade deficit. However, current account balance should remain in surplus as the trade deficit will be more than offset by primary income surplus, reflecting strong income receipts coming from Japan’s overseas portfolio investment assets. Japan’s net international investment position (NIIP) has risen from 59.5% of GDP in 2017 to 70.7% by 2021, driven by outward FDI and portfolio outflows.

Combined budget requests for FY23 were at JPY 114.4 trillion (20% of GDP), up 6% from FY22’s JPY 107.6 trillion (19.1% of GDP), with debt-servicing at over one-fifth of the total, and social security spending at JPY 36.9 trillion (nearly one-third of total). Notably, Japan will hike its defence budget by over a quarter to JPY 6.8 trillion (1.2% of GDP) as part of a five-year programme to double defence spending to 2% of GDP by 2027 amid rising security challenges from North Korea and China. The final public spending tally is likely to be even higher since the government has routinely posted extra budgets each year since 2009, usually in the third or fourth quarter, which undermine fiscal consolidation efforts. In November 2022, the government announced a second supplementary budget worth JPY 29 trillion, where 80% would be financed through new bond issuances. This is expected to have taken total government bond issuances for FY22 to JPY 62.5 trillion. Continued government borrowings are projected to push the level of outstanding long-term debt to JPY 1,279 trillion (USD 10 trillion) or about 224% of Japan’s GDP. However, over 90% of long-term public debt is owned domestically, with the Bank of Japan holding just over half of outstanding debt after years of massive bond buying.

Moving towards policy normalisation

The Bank of Japan (BOJ)’s key inflation gauge, the core CPI (excluding fresh food), has kept above 2% since April 2022, and hit 4.1% in December 2022, the highest in over 41 years. This indicated a broadening of price pressures for a wider variety of goods and services. Furthermore, underlying inflation trend has been distorted by government policies such as the domestic travel subsidy programme and energy subsidies. Following the BOJ’s surprise move of a slight widening of the yield curve control (YCC) band to +/- 50bps in December, the central bank is likely to continue its gradual path of monetary policy normalisation, with more adjustments to the YCC, and negative interest rate policy (NIRP). There will also be a change of BOJ Governor in April. Although not our central scenario, a serious risk could emerge if Japan faces an unexpectedly rapid hike in inflation, prompting aggressive BOJ increases in short-term interest rates that could destabilise the domestic business environment that has long been used to very low borrowing rates, add to government’s debt payment pressures, and undermine financial stability.

Fading public support for the Kishida administration

The ruling coalition (Liberal Democratic Party and Komeito) controls 63% of the House of Representatives, and 58% of the House of Councillors, following the win in the upper house election soon after the assassination of former leader Shinzo Abe. However, support for Fumio Kishida’s government has plummeted to below 30% amid revelations about the longstanding ties between the LDP and the controversial Unification Church, and a series of forced ministerial departures due to scandal. Fading public support will make it more difficult for Kishida to keep the factious LDP in line, and navigate economic challenges, inflation and geopolitical tensions.

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.

As of 1 April 2020, statute of limitation period has changed.

For the debts accrued after 1 April , the statute of limitation period of the debts is 5 years from the date of the knowledge of the creditor of the collectability of the debts and 10 years from the date of the accrual of the debts in accordance with Article 166(1) of the Civil Code revised and informed as of 1 April 2020.

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.

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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.

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Last updated: April 2023