Smoother Paths
Dealing with red tape and finding your way to success in Japan
Red tape and entrenched ways of operating are facts of business life in any country. Yet, Japan seems to have more head-scratching rules and regulations to confound the unwary than do most countries. Entrepreneurs who have navigated the minefields that make up Japanese business law each have a tale to tell of the experience—but all those with whom I spoke for this story expressed the firm belief that the country’s bureaucratic red tape is slowly being unwound.
“Setting up a company is like a lot of things in Japan—difficult and time-consuming,” said Timothy Langley, founder and chief executive officer of government affairs consultancy Langley Esquire. “You’re bound to make mistakes, particularly if you are doing it for the first time. You can attempt to do it by yourself, with a partner or friends who can help fulfill the requirements in Japanese, or you can pay someone to do it.
“Once you’ve set up a few companies and learn the ropes, you know what hoops you need to jump through. But the first couple of times, you’re going to ‘learn by mistaking,’ even if you pay someone to do it for you,” he told The ACCJ Journal.
Layers of Difficulty
The requirements for anyone setting up a company are clearly going to vary depending on the business sector. Anything in the healthcare industry is likely to face significant scrutiny before being permitted to operate, while companies in the legal, financial, real estate, or cryptocurrency spaces, for example, will all need the relevant licenses, said Langley, who serves as vice-chair of the American Chamber of Commerce in Japan (ACCJ) Secure Digital Infrastructure Committee.
“But if it’s plain vanilla and you have an innovative technology, product, or service you are trying to sell—and you simply want to set up an entity that has formal recognition and grants access to things like opening a bank account—there are several layers of difficulty that you hit at different stages of the company’s development,” he added.
The first layer is simply getting established, holding an incorporators’ meeting, the first shareholders’ meeting, and setting up a bank account. And while opening a bank account should be straightforward, the majority of people interviewed for this story expressed exasperation over the great pains to which new businesses are expected to go.
Banking can be a “game-stopper,” Langley admitted. “Sometimes you simply can’t.”
Thomas R. Shockley, CEO of travel business DocuMonde Inc. and co-chair of the ACCJ Independent Business Committee, is one of the founders who is of the opinion that innovations such as the ¥1 capital requirement (instead of the traditional ¥10 million) have made it easier to set up a company in Japan. But banking, he agrees, remains a source of frustration.
“Regulations are not the issue. The most challenging thing today is the same as it was 20 years ago: establishing a corporate bank account,” he said. “Banks choose their clients restrictively … and from the bank’s point of view, there is no business advantage—and it is quite possibly a disadvantage—in having a ¥1 company as one of its corporate accounts.”
Taxing Choices
Robert Roche, executive chairman and president of Oak Lawn Marketing, Inc., concurs that abolishing the ¥10 million capital requirement was a positive development, but also believes that elements of Japan’s tax system are unnecessarily draining entrepreneurial capacity.
“Although at the entrepreneurial level, I think that Japan is on a par with America and better than China, where everything has to be a wholly foreign-owned enterprise,” he said. “So, in general, Japan is ahead of the game in making many things easy.”
But that does not extend to one key element of tax laws here.
“If you live in Japan for more than five years, the Japanese tax your worldwide income,” he said. “My original success was in Nagoya. From there, not only did I establish several more companies, I also invested in even more startups in Japan. Naturally, I also invested in my home country and other countries. For many foreign entrepreneurs, over time, their non-Japanese investments become material.”
Roche said that his businesses are in several countries, each with separate teams; however, income generated from them would be taxed in Japan. Consequently, he did less entrepreneurial business in Japan simply because he was not proximate, not because he didn’t want to.
“I’m aware of quite a few people who no longer reside in Japan because of this tax,” he continued. “If they did live in Japan, they would be building and investing in more and more Japanese businesses. But the true loss is the mentoring of new entrepreneurs that doesn’t happen as a result of their absence.”
Piles of Paper
Catherine O’Connell, founder of Catherine O’Connell Law and co-chair of the ACCJ Legal Services and IP Committee, discovered that setting up a legal practice in Japan “does take a lot of time and paperwork,” although she emphasized that it is “absolutely correct” for the Ministry of Justice to regulate who can practice law in Japan so that consumers are protected and to ensure that lawyers behave ethically.
“That said, the procedure for being approved as a Registered Foreign Lawyer is an example of where the process could be a whole lot shorter and much more transparent,” she suggested. While the approval process is a “check-the-box” confirmation of paperwork that is submitted by the applicant, it can take eight months for approval to be granted.
“They need to remove the smokescreen and make this process transparent. I believe that crossing t’s and dotting i’s should really only take a month, maximum,” said O’Connell, who will be speaking on policy measures and regulatory practices for setting up a law firm in Japan at the APEC Study Center Japan event Promoting Trade in Services by SMEs and Women Entrepreneurs on October 1.
“I have an unsubstantiated personal belief that imposing lengthy processes is a way to test our dedication for doing business in Japan,” she added. “Anyone who is in Japan or has commercial relationships with businesses here knows that you are in this for the long game, building relationships over years.
“So, the process to set up is perhaps the very first trial of your tenacity and tolerance for what will be a long and successive line of tests of your gaman, your patience, in the journey that is doing business in Japan.”
Resistance to Change
Other arcane requirements of the Japanese bureaucracy—such as the need for hanko (personal seals) on all official documents and the domestic business world’s ongoing need for fax machines—were frequent bones of contention among business leaders.
O’Connell said she was glad she opted to use a signature when opening her law firm bank account instead of a hanko but is shocked at how many Japanese companies protested against government plans to abolish fax machines and introduce electronic alternatives to the hanko.
“Japan still has a long way to go on what other countries consider to be a given in business,” she said. “Japan is a modern country and a member of the G7, but they can’t move beyond the fax machine?
“The pandemic has shifted things a bit, thankfully, but these archaic remnants are anchoring Japan in the past and are a major deterrent for anyone considering doing business here.”
Smoother Paths
For all the hurdles in some sectors, however, others insist the process does not have to be too traumatic.
Over more than two decades as a partner at Deloitte Touche Tohmatsu LLC, Steve Iwamura set up a number of companies and says changes to the rules on representative directors, the attestation of the articles of incorporation, and the minimum paid-in capital have made the procedure much more straightforward.
“Although the incorporation process itself has been simplified, certain practical difficulties start to surface after the company is registered,” he said. “Even after the company is legally registered, most Japanese banks will not open corporate accounts when the directors of the company are not resident in Japan. Also, a personal address in Japan is required for many things, such as housing rental, personal bank accounts, auto purchases, domestic credit cards, and a cell phone.”
Obtaining residency status can be much more time-consuming than expected, resulting in frustrating delays in getting your business life started.
For Iwamura, it is “very important to hire a trusted bilingual judicial scrivener who will advise you about the total picture, rather than just providing the seemingly simplified incorporation services.”
Frank Packard, an advisor at Synnovate Capital Partners and chair of the ACCJ Alternative Investment Committee, said setting up a company is relatively simple but agrees that obtaining the necessary services, such as banking facilities, can be more of a challenge.
“The biggest problems lie within us,” he said. “Approaching regulations with a negative attitude and seeing it as necessary to ‘overcome’ regulations will almost surely lose every engagement. However, if you look to ‘meet’ or ‘satisfy’ regulations, then you will have a much better chance of success.”
Parker J. Allen, president and CEO of government relations and PR consulting firm Parthenon Japan Company Ltd., said that setting up a company is easier in the United States and other countries purely because much of the paperwork can be completed online. “However, having done the procedures on behalf of over a dozen companies in Japan, I don’t find them overwhelmingly difficult.
“For any issue that one may encounter in Japanese corporate affairs, the solution is always out there somewhere,” he added. “Having a strong network of specialists and legal professionals really makes a massive difference here. I am fortunate in that, no matter the situation, if I can’t solve it myself, I usually know who to ask.”
Room for Improvement
Yet Langley insists the hurdles to doing business in Japan—actual or perceived, large or surprisingly small—are still damaging to innovation and entrepreneurship here.
“This applies to entrepreneurs who are Japanese, foreigners who want to start a business in Japan, and those from overseas who want to innovate new processes or technologies and introduce them to the Japanese market,” he said.
“While there is promise of Tokyo’s growing attractiveness as a global financial hub, much work still needs to be done in this regard.”
