Japan

KEY COUNTRY FACTS
System of government:	constitutional monarchy with a parliamentary government
Population:	127.1 million
Currency:	Yen (JPY)
FX regime:	free float
GDP:	US$5.01 trillion (2013)
IGTA member:	yes
FATF member:	yes
Treasury association:	Japan Association for CFOs (JACFO)
Other professional financial/banking associations:	Japanese Bankers' Association

Financial regulatory framework

Bank supervision

The Financial Services Agency (FSA) supervises financial institutions and markets.

Exchange controls

The official currency of Japan is the Japanese yen (JPY) whose value is determined by a free-floating exchange rate. Japan has relaxed almost all its foreign exchange controls under the terms of the 1998 Foreign Exchange and Foreign Trade Law. Residual foreign exchange controls are administered by the Ministry of Finance, the Ministry of Economy, Trade and Industry (METI) and the Bank of Japan. The import and export of cash (including cheques, promissory notes and securities) with a value in excess of JPY1m must be notified to the Ministry of Finance by the customs authorities. Any import or export of gold weighing more than 1 kg must be similarly notified. Insurance companies are only permitted to engage in transactions that do not cause their foreign currency denominated assets to be worth more than 30% of their total overall assets. Direct investment is also subject to some controls.

Taxation framework

Corporate taxation

The effective statutory tax rate of 35.64% comprises national corporation tax (25.5%), and two local corporation taxes – inhabitants' tax and enterprise tax. Inhabitants' tax varies depending on the size and location of the company, with the rates ranging between 17.3% and 20.7% of the national corporation tax liability. Inhabitants' tax includes a per capita levy (which is based on capital and number of employees) in addition to the income levy. Enterprise tax has three components: 4.3% of taxable profits for fiscal years starting on or after 1 October 2014, 0.48% of a “value-added” factor and 0.2% of share capital and capital reserves. (Rates quoted are the standard rates, but actual rates may differ depending on the local tax jurisdiction and the taxable income of the company.)

Capital gains

Capital gains of a resident Japanese company are not subject to separate or preferential taxation. Instead, all such gains must be reported when realised, and are taxed with other ordinary corporate income.

Taxation of dividends

In general, dividends of unlisted shares paid to resident companies are taxed at 20%. Dividends from listed shares received by companies are subject to withholding tax at 7%.

Transfer pricing

Under self-assessment, companies are required to prepare their corporation tax returns on a basis that is consistent with arm's length principles. Where such principles were not initially applied to transactions with related parties, appropriate adjustments to profits must be made when completing the return. In determining what an arm's length price is, OECD transfer pricing guidelines should be applied as they are generally consistent with Japanese transfer pricing rules. Companies are also advised to maintain sufficient documentation to support the prices used and any adjustments made. Failure to provide adequate documentation in an audit upon request can lead the auditors to make a presumptive assessment, along with penalties being charged. The tax authority requires taxpayers to disclose their cross-border related-party transactions by type and counterparty on schedule 17(4) of the corporate tax return. Information requested includes the name, location and financial data of the counterparty, the amount and type of transaction, and the transfer pricing methodologies used. Advance pricing agreements on the reasonableness of the taxpayer’s methodology and results may be obtained from the tax authorities.

Thin capitalisation

Japanese thin capitalisation rules apply where the ratio of total average debt to total average equity exceeds 3:1 (safe harbour ratio). The rules prevent a Japanese company from deducting interest expenses to the extent that such expenses are attributable to foreign interest-bearing debt exceeding three times the average balance of equity owned by foreign controlling shareholders (direct or indirect ownership of 50% or more of the stock of the Japanese company).

Indirect taxes

Japanese Consumption Tax (JCT) is levied on all taxable goods and services and on all taxable goods imported into Japan. The standard rate is 8%; there is also a zero rate for certain categories of goods and services. Exports are exempt.

Tax information provided by Deloitte Touche Tohmatsu and Deloitte Highlight 2015 (www.deloitte.com).

Accounting framework

Key principles

Accounting standards in Japan (Japanese GAAP) are overseen and set by the Accounting Standards Board of Japan, the Japanese Institute of Certified Public Accountants (JIPCA) and the Business Accounting Council (BAC). Japanese GAAP includes both specific rules and procedures relating to particular circumstances and also broad principles and conventions of general application. It follows the accruals basis of accounting. Japanese GAAP is in the process of convergence with International Financial Reporting Standards (IFRS). The process has nearly been completed, with only a few remaining elements left to be brought into line.

Accounting for financial instruments

Derivatives are generally marked to market. Trading securities and available-for-sale securities are marked to market. Changes in fair value of available-for-sale securities are displayed in shareholders' equity. Such treatments are similar to US GAAP but there are some minor differences:

deferral hedge accounting or mark-to-market hedge accounting is allowed for fair value hedges; and
plain-vanilla interest rate swaps are allowed to be accrued if they are entered into for hedging purposes.

Banking service provision

The Japanese banking system includes four city banks, 16 bank holding companies, 16 trust banks, 64 regional banks (collectively known as commercial banks) and 54 foreign banks. There are also 15 “other” banks which include long-term credit banks and internet banks. The city banks (the Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp, Resona Bank, and Mizuho Bank) are amongst the largest and most powerful private financial institutions in Japan. They primarily serve the country's larger corporations, but provide a wide range of services, including consumer credit, cash management and leasing services. Regional (commercial) banks are divided into first-tier and second-tier institutions. The first-tier regional banks usually limit their operations to one geographic area. Their client base includes mostly small and medium-sized businesses, as well as any major corporations headquartered in their areas. The second-tier regional banks tend to be smaller than first tier banks, but from a regulatory standpoint there is no difference between them. Recent developments in the financial sector include the rise of internet-only banks such as Rakuten Bank, Sony Bank, Seven Bank and Japan Net Bank. Foreign banks are largely present in the market via strategic relationships but there have been some acquisitions of weak Japanese banks by foreign banks seeking to strengthen their presence. Language and cultural differences lead most foreign-owned multinational companies to prefer to deal with foreign banks wherever possible, however such banks may not have access to the full range of Japanese banking products.

Clearing and payment systems

Clearing systems

Japan possesses a fairly complex clearing system structure with four main systems:

BOJ-NET – the BOJ-NET system is Japan's real-time gross settlement (RTGS) system. It processes large-value and urgent interbank payments denominated in JPY. Since 14 November 2011, all high-value payments (above JPY100m) processed by Zengin are also settled in real time in BOJ-NET. There are 514 participants in the system, which is operated by the Bank of Japan. Users access the system via dedicated terminals. A new infrastructure for BOJ-NET is in development, which will result in an extended operating day.
Foreign Exchange Yen Clearing System (FXYCS) – FXYCS processes JPY-denominated transactions involving non-residents, those arising from cross-border transactions, including import and export settlement payments, and those arising from JPY-denominated FX transactions. FXYCS is a real-time gross settlement system. There are 203 participants in the system, which is operated by the Tokyo Bankers' Association.
Zengin System – the Zengin system is Japan's main retail payments system. It processes retail payments as well as single and bulk electronic credits denominated in JPY between resident bank accounts. (Transactions involving non-residents must be processed through FXYCS.) A sixth Generation Zengin System commenced operations in November 2011 with enhanced functions, such as real-time gross settlement (RTGS) for high-value payments (above JPY100m) and XML format payment messages. There are 142 direct and 1,210 indirect participants in the system, which is operated by the Tokyo Bankers' Association.
Bill and Cheques Clearing Systems (BCCS) – BCCS is Japan's paper-based clearing system. It processes cheques, promissory notes and other paper-based instruments through a network of regional clearing houses. There are 318 clearing houses nationwide, operated by the local regional bankers' association. The Tokyo Clearing House is the country's most important component of BCCS, processing approximately 33% by volume and 70% by value of all paper-based instruments processed in Japan.

Payments

Credit transfer is the most important cashless payment method in Japan in terms of value. It is the dominant form of payment used by companies, whether to make supplier, tax or salary payments or for treasury operations. Direct debits are commonly used for making regular payments, such as utility and mortgage payments. Cheques are primarily used by companies and the Japanese government. They are not a common payment method among individuals. Despite the decline in paper-based instruments, promissory notes remain a popular method of payment between companies. There is an active discount note market, allowing recipients of promissory notes access to working capital finance.

Credit transfers – the credit transfer is the most important cashless payment method in Japan in terms of value. It is the dominant form of payment used by companies in Japan, whether to make supplier, tax or salary payments or for treasury operations.
Direct debits – direct debits are commonly used for making regular payments, such as utility and mortgage payments. However, there is, at present, no standardised direct debit scheme in Japan. Each direct debit relationship has to be established individually.
Payment cards – payment cards continue to increase in popularity in Japan. At the end of 2013, there were 418 million debit cards in circulation. There were 323.5 million credit cards in circulation at the end of 2012.
Electronic money – electronic money schemes are becoming more popular. Eight major brands (Edy, Suica, ICOCA, PASMO, nanaco, WAON, SUGOCA and Kitaca) have issued over 175 million cards (including mobile phones). There are also approximately 1.1 million e-money terminals for transactions.

E-money schemes in Japan are either chip-based plastic cards and mobile phones or server-based schemes that do not require a physical device. Chip-based schemes have been the most prominent in the recent expansion of Japan's e-money schemes. Electronic money is mostly used for low-value payments

Cheques – cheques are primarily used by companies and the Japanese government. They are not a common payment method amongst individuals.
Promissory notes – despite the decline in paper-based instruments, promissory notes remain a popular method of payments between companies. There is an active discount note market, allowing recipients of promissory notes access to working capital finance.
Cross-border – there is currently no distinction between high-value or low-value cross-border payments. Some cross-border transactions are settled via FXYCS with the remainder settled via correspondent bank networks. All the major banks have direct SWIFT connections. Supporting documentation is required in most instances.

Cash and bank account management

Interest bearing accounts

Interest is not paid on current account surpluses. However, it is usually possible to sweep surpluses balances into an interest-bearing overnight account.

Account opening requirements

Residents can open and maintain foreign currency accounts domestically and abroad. Domestic currency (JPY) denominated accounts are convertible into foreign currency. Non-residents are also able to open and maintain foreign currency accounts domestically and abroad. Domestic currency (JPY) denominated accounts are convertible into foreign currency. Interest cannot be offered on domestic currency current accounts, whether they are held by residents or non-residents. Short-term and demand deposit accounts, denominated in both domestic and foreign currency are available to both residents and non-residents. Companies can arrange overnight sweeps from current accounts into demand deposit accounts.

Money laundering

Japan has implemented anti-money laundering legislation (the Law Concerning Punishment of Organised Crime, Control of Criminal Proceeds and Other Matters 1999; the Law on Customer Identification and Retention of Records on Transactions with Customers by Financial Institutions 2002; the Act on Punishment of Financing of Offences of Public Intimidation 2002; the Financial Instruments and Exchange Law of 2006 and the Law for the Prevention of Transfer of Criminal Proceeds 2007, as amended 2011). A Financial Action Task Force (FATF) member, Japan observes most of the FATF-49 standards. Japan is also a member of the Asia-Pacific Group on Money Laundering (APG) and has observer-jurisdiction status on the Council of Europe's MONEYVAL Committee. Japan has a financial intelligence unit (FIU), the Japan Financial Intelligence Office (JAFIO), which is a member of the Egmont Group.

Information supplied by BCL Burton Copeland (www.bcl.com). Data as at January 2015.

Cash concentration

Cash concentration is a liquidity management capability whereby account balances are physically transferred to/from a single account (known as a master, header or concentration account) for liquidity management purposes. Cash concentration can take these forms:

Zero balancing (ZBA) – sometimes referred to as sweeping, zero balancing is a cash concentration capability whereby the total of all account balances is physically transferred into a nominated account.
Target balancing – also known as sweeping, target balancing is a cash concentration capability similar to ZBA, whereby all account balances are physically transferred into a nominated account leaving a predetermined amount in the sub-accounts.
Threshold balancing – a cash concentration capability similar to ZBA, whereby the balances of the sub-accounts are physically transferred in their totality into a nominated account each time the sub-account balances reach a predetermined threshold.

Cash concentration, and zero balancing in particular, is offered by a number of cash management banks in Japan. Zero balancing is the more popular cash concentration technique employed in Japan. Target balancing is also available. Non-resident accounts can participate in a cash concentration structure.

Cross-border issues

Resident companies are increasingly establishing cross-border cash management structures. These practices have been made easier as a result of a relaxation of Japanese foreign exchange tax laws. Resident companies can locate cash concentration structures in a number of locations, both within and outside Japan. Non-resident companies can participate in cross-border cash management structures. Companies need to be aware of the Japanese thin capitalisation rules when establishing any cross-border cash concentration structure.

Notional pooling

Although notional pooling is available, the tax treatment is unclear, so few companies use it.

Electronic and internet banking

Electronic banking is widely used in Japan, with most banks offering electronic banking services, known locally as firm banking, to their corporate clients. There is no bank-independent standard. The main difficulty for international companies is translating data presented in Japanese into a format readable by internationally developed ERP systems and vice versa. Similarly, Japanese banks may have difficulty in translating messages between their internal systems and SWIFT. The language difficulties can also mean some multinational companies operate separate electronic banking and ERP systems for their Japanese operations. Internet banking is widespread both within companies and among retail consumers. Broadband internet access is common, with over 99% of Japanese having DSL coverage. Consumers can make payments over the internet using credit cards and also via the Edy system. Mobile phones are also increasingly being used by consumers to make payments.

Liquidity management

Short-term investments

Short-term investments include:

Treasury bills – the Japanese government issues T-bills via a public auction. The bills are usually issued with maturities of three months (financing bills), six months and the maximum maturity of one year. There is an active secondary market.
Repurchase agreements (repos) – repurchase agreements are available and are used by companies as short-term investment instruments.
Term deposits – term deposit accounts in local and foreign currency time deposits are available with a range of maturities. Foreign currency deposits have become popular as domestic interest rates have remained low.
Certificates of deposit (CDs) – CDs are available. Banks issue CDs for a range of maturities from overnight to over a year. Three months is the most common maturity. There is an active secondary market.
Commercial paper (CP) – CP is a popular investment instrument in Japan with companies issuing commercial paper at a discount for maturities up to one year. The most popular maturity is three months.

Short-term borrowing Borrowing instruments include:

Overdrafts – Yen and foreign currency overdrafts are commonly used by good credit quality companies and through persistent use become quasi medium-term funding. Interest charged for overdrafts is higher than for discounted bills.
Bank lines of credit and loans – short-term advances of up to six months are a very common method of corporate funding. These typically require security in various forms such as accounts receivables, securities, inventory, real estate and through bill discounting. Foreign currency advances are available.
Commercial paper – CP is issued for terms from two weeks to one year. Issues are usually supported by back-up credit lines for at least half of the CP outstanding. In addition, issuers need either to attain a credit rating of A3 or be guaranteed by a financial institution. Japanese companies are only permitted to issue JPY-denominated CP. This can be issued through dealers or placed privately. Domestic investors tend to hold CP to maturity. Foreign companies are permitted to issue Euro-yen and JPY-denominated (Samurai) CP in Japan.