The Journal The Authority on Global Business in Japan

Grant Thornton cooperates with, and provides extensive and distinguished services to, US companies pursuing merger and acquisition (M&A) transactions with Japanese companies or who are starting up in Japan. Here are some insights from our experience that may help you:

Recently, public Japanese companies have been appointing external intellectuals as board members. However, the number of outside board members is still limited because there are circumstances in which internally promoted directors who operate the companies—similar to officers in the US—keep their seats on the board. Generally, the boards of public US companies are meant to be kept more independent from management teams compared with Japanese companies, which are typically controlled by operating directors. In addition, internal decisions are basically well supported by staff, therefore advanced negotiations with the staff of Japanese targets make projects go swiftly.

Although some Japanese manufacturers were investigated by US officials—resulting in anti-trust measures gaining popularity in Japan—US companies have worked within these regulations longer than Japanese companies. When it comes to anti-corruption measures, Japanese companies generally have insufficient knowledge of the regulations. Accordingly, due diligence should be carefully considered, if needed.

Traditionally, large Japanese companies have developed computer software for internal use from scratch while small and middle-sized companies have used external software packages made in Japan. This externally produced software is normally used with limited customization, if any. Recently, large and middle-sized companies have begun implementing branded enterprise resource planning (ERP) packages, but small companies still use the local packages, which are generally reputable and reliable. For security, many Japanese companies obtained ISO 27001 certification, sometimes for development of internal control system required for compliance with J-SOX—Japan’s version of the US Sarbanes-Oxley Act. Protection of personal information is also attracting significant attention from Japanese companies due to public awareness rather than regulation.

Japanese generally accepted accounting principles (GAAP) have recently converged with international standards, however there are still differences. Except for a famous rule of goodwill amortization, an accounting method for employees’ retirement benefits is unique and warrants attention. Employees who work for Japanese companies generally join plans with defined benefits rather than defined contributions, as is common in the United States, on the condition that they will be continuously employed until a certain age of retirement, typically 55–65. In addition, most Japanese companies establish external funds for the employees’ retirement benefits by themselves or with other companies in the same industry. For this kind of fund, as well as all retirement benefit plans, prospect obligations arising from future payments to employees—or contributions to the funds—must be booked on balance sheets even under Japanese GAAP. However, Japanese GAAP provides a simplified accounting method for such obligations for small companies with less than 300 employees. Japanese M&A practice normally considers that companies with fewer than 300 employees possibly undervalue liabilities on their balance sheets, and treats the difference as a typical debt-like item.

The relationship with banking corporations is sometimes different in Japan than in the US. These companies are required to make many efforts to enter into new loan agreements with Japanese banking corporations, even if they have existing accounts. Therefore, Japanese companies intend to keep certain loan balances by renewing existing loan agreements, even if a company has sufficient cash to no longer need loans. Fully repaying loan balances can make it difficult to borrow funds for future cash needs. And, when loaning, Japanese banking corporations do not require borrowers to assign independent auditors for financial statements. But they certainly do require pledging sufficient value of collateral for loans, except in the cases of substantial blue-chip companies.

For more information, please contact your Grant Thornton representative at +81 (0)3 5770 8829 or email us at

Toru Shirai is a senior manager at the Tokyo office of Grant Thornton Japan, where he provides assurance services to multinational companies. When he was seconded to Grant Thornton’s Chicago office for three years (2012–2015), he also supported cross-border business expansion. Shirai has 15 years of experience in public accounting and specializes in ICT and manufacturing.
Japanese companies intend to keep certain loan balances by renewing existing loan agreements, even if a company has sufficient cash to no longer need loans.