Japan - U.S. Foreign Investment Issues

Increasing Japan Foreign Investment  
Japan and the United States are critical strategic partners in the world economy.  In order to improve that relationship, Japan’s economy needs to be robust and the Japanese government needs to complete various reforms to encourage growth and corporate restructuring.  It is essential for Japan to promote entrepreneurs and job creation in modern business sectors.

Japan’s economic recovery has been steady in large measure because legal reforms have made Japan a more open business environment.  In recent years, corporate earnings have improved in technology, manufacturing and service industries.  The liberalized rules for new businesses has made it easier for foreign businesses to penetrate the Japanese market.  Japan’s growth rate has increased in 2004.  Japanese capital investment and consumer consumption have increased.

The China Model For Growth          
The spectacular growth of China has been largely a result of the enormous foreign investment in its economy.  Japan certainly lags far behind China in inbound foreign investment.  Foreign investment in Japan represents only a tiny portion of its entire economy.

Foreign investment in Japan, both inbound and outbound, increased significantly from 2001 to 2002.  This increase occurred for several reasons, including an increase in joint ventures and alliances with foreign firms to achieve global competition, business reorganization and restructuring in Japan and reforms in government regulations that encouraged foreign investment.

In the past few years, cross investment between Japan and the U.S. has been promoted by the governments of both the U.S. and Japan.  It is essential for large-scale Japanese companies as well as for smaller businesses and individuals to increase investment in the U.S.

Inbound foreign investment in Japan increases options for consumers, promotes the introduction of American technology and management systems and creation of new jobs.  It is clear that foreign investment in the U.S. has increased employment opportunities and improved productivity in American states, including many disadvantaged areas in the U.S.     President Bush and Prime Minister Koizumi initiated the U.S.-Japanese Investment Initiative to increase business cross-fertilization between the countries.  Both countries recognize the inherent need to exchange leading edge technologies and new management practices and innovation.

In response to proposals from the Japanese Investment Initiative and requests from foreign companies in Japan, the Japanese government implemented the Industrial Revitalization Laws in 2003.  These regulations recognize triangular mergers and cash mergers in exchange for parent company shares and/or cash.  Foreign companies may purchase and reorganize Japanese companies using their own shares or cash in exchange.

The U.S. acknowledged these modernization efforts by Japan.  Since tax concerns are essential to American companies in their decisions to participate in mergers or acquisitions, the U.S. government has focused upon the availability to foreign investors of tax provisions similar to the U.S. such as deferral of capital gains taxes in stock swaps to promote M&A activity.  Liberalization of Japan’s Commercial Code will encourage M&A activity.

With regard to Japan’s Commercial Code, the government has proposed changes, including making triangular mergers using foreign shares and cash mergers.  The Japanese government has proposed other modern features to encourage corporate restructuring and foreign investment in Japan.

The Prime Minister targeted doubling of foreign investment between 2003 and 2007.  In 2003, the government passed a series of measures to promote foreign investment in Japan.  A Support Center was established in the Japan External Trade Organization (JETRO) to provide support to foreign companies desiring to enter the Japan market.  The Support Center offers consultative services to establish a business in Japan, and assists foreign companies with new start-ups in Japan.  This program has assisted a significant number of new foreign business operations in Japan.

Legislative Measures in Japan
Japan has taken several legislative measures to improve its investment climate for foreign businesses.  However, more reform is required, particularly to encourage Japanese business investment outside Japan, including in the U.S.  Increased inbound investment in the U.S. will offer mutual benefits for Japan and the U.S. for a variety of reasons.

Japan has encouraged outside investment for the past decade through financial reform and other governmental means.  In order to encourage foreign investment, Japan has adopted changes to business law and accounting principles which have motivated foreign investment in Japanese business.

In 2003, in order to reduce impediments to foreign combinations, triangular mergers and cash mergers were approved in order to encourage mergers in Japan by foreign parent companies.  Such cross-fertilization will reap substantial benefits for Japan and its trading partners.

Mergers & Acquisitions
The American economy benefited greatly from legislation that encouraged M&A activity commencing over 20 years ago.  The global leadership position of the U.S. derived in large measure from its liberal M&A regulations.

The United States and other western countries permit acquisitions through stock swaps.  The U.S. authorizes triangular mergers under which a target company is merged into a subsidiary formed by the buying company.  The buying company issues its own shares to the shareholders of the target firm in consideration for the purchase, with the result that the target company becomes a wholly-owned subsidiary of the buying company.

For American and other international businesses, the Japan market offers many attractive features.  Japan’s domestic market represents a significant portion of its worldwide GDP;  Japan offers a skilled, dedicated workforce and a high technology industrial environment and advantages as a focal point for the Asian market.  Japan’s well organized business infrastructure offers strong intellectual property protections.

M & A Transactions in Japan
 International mergers and acquisitions (M&A) remain a matter of increasing interest for both the U.S. and Japan.  The American government has worked with the Japanese government to expand the range of M&A techniques to include triangular mergers and cash mergers as tools for foreign companies seeking to invest in Japan.

Japan has created Special Zones in order to apply deregulation measures in various sectors to encourage foreign investment.  The forces of inertia have slowed the progress of implementation.

 There have been a number of high-profile American M & A transactions in Japan recently.  For example, Ripplewood restructured the Seagaia project in Kyushu; Colony Capital invested in the Daiei Fukuoka project in Fukuoka; Kodak invested in Nagano; Walmart joined Seiyu in Japan.  These restructuring transactions have created and saved Japanese jobs and revitalized local economies in Japan.

The U.S. Model
In order to achieve globalization and regain its potent position in the world marketplace, Japanese businesses needs to invest substantially in the U.S. through new business, mergers and acquisitions.  Many other European (UK, France, Netherlands) and other countries have continued to recognize the benefits of America’s open conomy, strong growth and high rate of return.  Foreign investment into the U.S. from these countries and others has increased dramatically since 2003.     
For many years, the U.S. has recognized that foreign investment is a significant contributor to the long-term growth of its economy.  Foreign investment in the U.S. accounts for a growing and significant share of its private sector GDP.  Japan’s U.S. contribution is largely affected by American employment by Japanese automakers such as Toyota and Honda.  Japanese businesses at all levels need to participate in this globalization effort.

Many American States have offices that promote foreign investment.  Many States offer incentives such as tax exemptions and provide investment in essential infrastructure.  Certain States have foreign offices which have attracted Japanese business.  Foreign investors in the U.S. benefit from its supportive institutions, its open economy, its productive employment pool and its welcoming attitude.

U.S. Opportunities for Japanese Businesses and Investors
The U.S. offers major business opportunities because of its wealth, market opportunities and transparency.  However, for various reasons, Japanese ompanies have been reluctant to invest in the U.S. after their experience in the 1980’s and early 90’s.  The U.S. has taken quick and appropriate actions to remedy problems in its corporate regulatory systems in order to regain buoyancy in the investment community.            

The American government model is rapidly adaptive since it continually seeks to restore and improve confidence in the U.S. economy and institutions to motivate trade and investment inflows.  The U.S. government quickly implements new methods to encourage new business opportunities and to improve the functioning of all U.S. businesses, whether domestic or international.
American business great vast experience in adopting the usage of information technology and other emerging technologies to constantly improve the flow of trade and business transparently.  It is well known that American business and government is very adaptive to the needs of private business and foreign governments to implement new measures and methods to solve problems and maximize business opportunities.
Japan has persuaded the U.S. to take several steps to encourage inbound Japan investment.  Practical measures have included improved visa procedures, easier driver license requirements in the U.S. and reduced surcharge tax requirements for foreign investment.     Other measures are necessary.  For example, the additional U.S. anti-terrorism inspections and other measures in the U.S. have caused cargo delays and difficulties for Japanese shippers and businesses.

Working Together to Make Improvements
The U.S. government has advised Japan that relatively few investment opportunities are available in Japan to American investors.  That quandary has hindered foreign investment in Japan.    The U.S. has discussed its concerns regarding the implications for the status of foreign university branches in Japan in terms of immigration status of students, taxes and related matters.  Additional flexibility is required in Japan.
The U.S. has requested that foreign university campuses in Japan be recognized as authorized schools in order to promote broader educational integration.  The U.S. has also requested provision of visas conferring immigration status covering the full term of studies for students at foreign university campuses not authorized as Japanese universities.  The Japanese government’s study group has made certain proposals, including allowing the foreign university branch being treated as a foreign university operating in Japan.    The Japanese Government explained that the current treatment of foreign university branches is related to Japan's educational system and immigration law and proferred additional study in the matter.
Japanese citizens required to move to the U.S. for business reasons have noted the difficulties of applying for visas to the U.S., including the lengthy backlogs.  It has been requested that the U.S. permit Japanese citizens who apply for Treaty Trader or Investor (E-1 and E-2) visas to be exempt from personal appearance requirements.  The U.S. consulates have added visa officers in Tokyo and Osaka and improved flexibility for applicants to reduce backlogs.
Japanese citizens have expressed concerns regarding issuance of state driver's licenses for Japanese citizens in non-work status i.e. those not holding Social Security Numbers.  All U.S. states have taken measures to facilitate this process for Japanese without social security numbers.
The Japan government has expressed concern about the Sarbanes-Oxley Act relative to Japanese firms and auditors.  The Securities and Exchange Commission (SEC) adopted an exemption for Japan businesses with boards of independent auditors authorized by home country requirements.  Firms using an audit committee must have an audit committee with 100% independent directors.  The Public Company Accounting Oversight Board and the SEC administer accountants who audit financial statements of public companies in U.S. markets.  Foreign firms must register, but informational requirements are somewhat reduced and confidential information in Japan may not be required to be disclosed.     Japanese businesses are very nervous about the escalating costs of legal expenses in the U.S.  Excessive legal costs and awards deter foreign businesses.  The question of excessive damage awards in the U.S. remains a concern to both U.S. and Japanese businesses.  The government and the courts have recognized these concerns and have made proposals to reduce inordinate court awards.
The Japanese government and Japanese businesses now recognize the inherent value to Japan of encouraging both inbound and outbound foreign investment.  The process of recognition needs to continue to trickle down to the lower levels of government, business and citizenry.

It is apparent that Japanese have accepted this business reality and are adopting essential measures to ensure increased foreign investment at all levels.  Japanese consumers have finally accepted the intrinsic value of American and other foreign goods.

As the Japanese economy continues its recovery and Japanese investors and businesses increase capital investment outside Japan, the movement toward globalization will accelerate.  Japan still needs to address basic structural issues and implement reforms to encourage foreign investment opportunities.    Both the Japanese and the U.S. governments are relentlessly receptive to the needs of international businesses in order to ensure that international trade and investment is enhanced.  A solid foundation has been laid for foreign investment to continue to accelerate for the mutual benefit of both Japan and the U.S.

Home | Our Mission | Newsletters | Resources | About Us | Contact Us

72 Allston Way, San Francisco, CA 94127 | (415) 571.8880
Copyright © 2014, Fukuda Law Firm     Disclaimer

Our newsletters do not provide legal advice or opinions. Legal questions may be complicated and experienced counsel
should be consulted in connection with particular cases.  Advice should be given relative to specific facts and conditions.