Despite the perceived difficulty of entering and finding success in the Japanese market, there is no reason why companies with a competitive product, solution or service, excellent customer support, and a carefully planned strategy, cannot profit from Japanese expansion.
As long as you are able to diligently control your Japan Market Entry costs, pathways, and logistics, you could establish a strong brand presence here faster than you think. However, before any of this happens, you will need to decide what your ‘entry strategy’ actually looks like as operating in Japan can take many forms for international businesses.
In this article, we have pulled together some of the most important considerations for incorporating a business in Japan and how it plays a part in your Japan market entry strategy.
Key Drivers of Growth in Japan
- Retail – Japan has the world’s third-largest global economy and the third-largest e-commerce market globally, which is known for its influence and trendsetting position within Asia.
- Automotive sector – Japan is the world’s biggest producer of cars and the largest market for automotive parts, technology, and expertise.
- Biotechnology and healthcare – Supported by its dominance in the technology sector, Japan has placed continued importance on healthcare and related technologies in recent years.
- Information Technology – Japan has enjoyed the continued development of its IT sector, including digital media.
- Corporate Governance – New governance codes have been implemented, offering guidance and a clearer framework urging companies to focus on financial management and improving returns to shareholders to further attract foreign investment in Japan.
- Growing Entrepreneurship – Japan’s total early-stage entrepreneurial activity (TEA) has grown consistently in recent years, rising to 5.35% in 2019, up from 5.34 % the previous year, according to the Global Entrepreneurship Monitor.
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Potential Japan Market Entry Methods
There are several ways to enter Japan as a new business. Many companies first setting up in Japan opt for partnership or distributorship style arrangements with local partners in the earlier stages of their Japan market entry strategy. This has the main benefits of giving you quick access to the end-user while avoiding the difficulties of language barriers, setting up a new distribution network, and managing the business and legal requirements you might otherwise face when incorporating in Japan.
One of the most common ‘transitional’ steps of Japan market entry, distributorship allows foreign companies to deliver their products and services through an already established Japanese company. In this situation, you will retain control over the production and development of your services and product, while letting another entity handle logistics on the ground.
The obvious benefits here are that distributorship requires a lower investment to get started and can let you test the market for your product offerings without overly committing resources. The flipside of this is that you will lose a significant amount of the profits you could have made as well as the ability to develop a more permanent presence.
If you choose this method, it’s important to clearly outline from the start the nature of the relationship with your distribution partner; if, and for how long, will your distribution partner have exclusive rights to your product; and your potential plans to enhance your local presence beyond this entry model.
One of the most common ‘transitional’ steps of Japan market entry, distributorship allows foreign companies to deliver their products and services through an already established Japanese company.
License arrangements also let foreign companies easily access the Japanese market with minimal investment requirements. This model allows a Japanese company to acquire the rights of your products or services and deliver it to the Japanese market. It often includes the right to customize the product as well to suit the local requirements.
While companies can benefit from this kind of low-stress expansion to a new market, with additional revenue from a growing consumer base, there is little chance to learn about the Japanese market here and use your experiences and findings to develop a more permanent presence through incorporating in Japan.
Many businesses shy away from Joint Ventures due to the relative complexity of the process. However, when done right, they can be one of the most rewarding methods for Japan market entry. Essentially, it involves collaborating closely with a Japanese company to share resources, knowledge, and expertise as you both try to bring success to your product or services. Depending on your partner company, you could benefit from priceless resources and support including an existing distribution network, or a matured understanding of the market. The downside is that finding the perfect partner and creating the perfect structure can take a great deal of time, patience, and negotiation.
What is Company Incorporation?
The next move to consider for companies who are already operating in Japan in some capacity, or businesses who want to commit to expansion here from the outset, is officially incorporating in Japan as a separate entity. While this is a major commitment for some businesses, it can often make the difference between short and long-term success in this exciting market. Doing it alone comes with the inherent burden of establishing a distribution network, and fronting the cost of building a presence in Japan, however, it also comes with greater reward and the ability to establish a stronger presence locally, while constantly learning firsthand about your market.
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Common Ways of Incorporating in Japan
There are a few ways that foreign companies engaging in long-term business activities in Japan can register themselves officially.
Establishing a Japanese Representative Office
The appointment of a representative office creates a location for carrying out limited business operations within Japan. You won’t be able to launch a full-scale operation in your new market, or even open a bank account in your company’s name, but you will be able to conduct initial preparatory tasks that can help you build the foundation for future activities. These representative offices allow foreign businesses to start building a domestic presence through advertising and marketing initiatives and collect essential information through market research. You can also supply information to distributors, identify sales opportunities, and negotiate future prices and terms of sale, however, you will not be able to engage in any form of direct sales activity.
These representative offices allow foreign businesses to start building domestic presence through advertising and marketing initiatives and collect essential information through market research.
Registration of a Representative Office
The establishment of a representative office does not require any registration and one cannot ordinarily open bank accounts or lease real estate in its own name, so agreements for such purposes must instead be signed by the head office of a foreign company, or the individual representative at the representative office in an individual capacity. You won’t be subject to tax and audits and there are no legal requirements to retain financial records in Japan, or report inward investment to the Japanese government.
Establishing a Japanese Branch Office
A branch office is encompassed within the corporate status of a foreign company, rather than having its own legal corporate status. As such, it does not typically engage in large scale business activities independently of its parent company, and all financial transactions are the responsibility of the parent company. Many consider this as the easiest way of incorporating in Japan. A Japanese branch office can open bank accounts and lease real estate in its name, so as soon as an office location is established and the required documentation processed, your branch office can start conducting operations, which includes sales activities.
The Japanese government considers your company’s branch-office as a ‘semi-foreign company’ which must adhere to all Japanese laws, including taxation laws, labor laws, and product liability laws. However, you will have no local paid-in capital, equity, or directors, other than its representative.
Registration of a Branch Office
A branch office must register its establishment with the Japanese Legal Affairs Bureau. Your company’s Board of Directors must formally consent to register a branch-office of your company in Japan. Your company must also appoint a Japanese or foreigner resident in Japan as the authorized representative of its Japanese branch office. This individual must create the Representative’s Affidavit in Japanese and get it notarized it at the embassy of the home country of the parent company.
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Establishing a Wholly Owned Subsidiary
In contrast to a branch office, a subsidiary company is actually a separate corporation from the foreign company and will be liable to local laws and regulations independently of its parent company. Under this method, there are a few types of potential subsidiary classifications to choose from, most popular being a joint-stock corporation (Kabushiki-Kaisha or K.K.) which consists of shareholders whose liabilities to creditors of the company are limited to the amount of stock purchased in the company.
Each one of these entity structure types will give you a more permanent status in Japan, but also comes with their own unique set of implications for your business. Depending on the nature of your Japan market entry plans, it is worth carefully mapping your long-term goals with the type of company set up you choose. Japanese advisors and consultants are a good place to start if you are not sure which options suit your enterprise best.
Depending on the nature of your Japan market entry plans, it is worth carefully mapping your long-term goals with the type of company set up you choose.
Registration of Establishment of a Wholly Owned Subsidiary
Subsidiary companies also require registration with the Legal Affairs Bureau. Certain documents will need to be prepared in the home country of the parent entity, such as the company profile and legal status of the company’s representative in Japan. Other required documentation for Japan incorporation through a subsidiary include an establishment certificate, affidavit, and registration certificate. You may also need to submit documents certifying that a foreign company has decided to establish a subsidiary in Japan and documents related to capital custody.
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Taxes in Japan
Regardless of your choice of company structure when incorporating in Japan, you will be subject to a number of tax regulations in accordance with Japanese law. The first among these is Japanese corporate income tax, but you will also need to pay withholding tax, and Japanese consumption tax (sales tax).
Japanese Corporate Income Tax (Business Tax)
Your corporate income tax in Japan will total around 30-35% depending on how much paid-in capital your company has. Individual tax requirements include the following:
- National Income Tax
- Local Income Tax
- Standard Enterprise Tax and Local Corporate Special Tax (paid-in capital of JPY100,000,000 or less)
- Size-based Enterprise Tax and Local Corporate Special Tax (paid-in capital greater than JPY100,000,000)
- Inhabitant’s Tax
Japanese Withholding Taxes
Companies that are subject to withholding tax are required to pay the tax office with tax withheld at source. What this means is you’ll need to deduct the relevant tax from employee payments and royalties to foreign parent companies, and pay this to the government directly. Whether the payment is designated for an individual or corporation, you will need to calculate the type of income and its tax rate based on the recipient of that income. Looking for assistance navigating Japan’s complex tax system? The HLS Tax Services team specialize in helping foreign companies operating in Japan for all their requirements related to Tax Compliances. Visit our Tax Services page to learn more.
Japanese Consumption Tax
Japanese companies with paid-in capital of JPY10,000,000 or more are required to pay consumption tax of 10% on invoices issued to all its domestic consumers. This is commonly known as VAT in other countries.
The US-Japan Tax Treaty
Some of Japan’s tax-treaties reduce tax liabilities for companies from certain nations who have established themselves here. The biggest tax treaty is between the US and Japan, where there is a reduction in withholding tax to 0% for payments to US licensors. This includes:
- No withholding tax on royalties
- Reduced or eliminated withholding tax on dividends
- No withholding tax on interest payments
This and other agreements between the two nations have made it potentially much more profitable for companies to find success in each other’s markets.
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Japan’s Labor Laws
As part of your process of incorporating in Japan and your overall Japan market entry strategy, you will need to factor in the relevant laws pertaining to HR & Labor Compliances and the conduct of your business in relation to the protection of worker rights. Many of these may resemble the laws in your own country, but others will have to be addressed with more specific attention to Japan’s Labor Standards Act, Labor Contracts Act, Labor Dispatch Act, Health Act, and Minimum Wage Act.
These laws apply to all enterprises in Japan, regardless of your corporate structure. Additionally, they will also apply to any foreign workforce currently employed in Japan. Typically, companies that have over 10 employees in Japan will need to develop a document outlining Work Rules, which should be submitted to the Labor Standards Office, subsequently informing its employees of these rules. Important aspects to consider as part of your compliance with Japan’s Labor Laws include:
- Working Hours
- Overtime Work
- Annual Paid Leave
- Maternity Leave
- Childcare Leave
- Family Care Leave
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How to Build a Japan Market Entry Strategic Advantage
Find Strong Local Partners
Choosing a strong Japanese partner to help you in your market entry strategy can be one of the most beneficial things you do here. When considering partner companies within a Joint Venture Agreement, or Distributorship, for example, this requires a careful balancing of several factors. Things to look for in a partner include:
- Knowledge and experience with the local market
- Existing network of sales channels
- Reputation in market
- Financial resources and backing
- Willingness to support your Japan market entry process
- Potential of them becoming a future competitor
Even if you’re operating without a partner, you could benefit from working with a Japan market entry advisor who can help with everything from business development, market research, operational support, and localization.These entities can also help you with many of the important tax and incorporation aspects identified above, such as helping you choose the most optimal company structure for your purposes or extending your market exposure and brand awareness through their existing knowledge of the local landscape and competitors.
At HLS, we have helped several businesses gain a better handle on their Japan market strategy through tailored support and advice. Whether helping a publicly listed U.S. company to conduct a comprehensive study of the technology market, or offering marketing and sales support for a startup in the semiconductor manufacturing sector, we have a number of success stories that have proven local support is critical for making effective operational decisions.
Even if you are operating without a partner, you could benefit from working with a Japan market entry advisor who can help with everything from business development, market research, operational support, and content localization.
Product and Content Localization
Localization is a crucial aspect of any successful Japan market entry strategy. Not only is Japanese a unique language that does not directly translate from English, but consumer trends and behavior can vary widely here compared to other markets around the world.
Whether you are localizing your actual products and services, or just your content output and marketing activities, you will need to build a robust plan for refining your approach to this new culture. Ultimately, this will help your brand to build credibility and integrity in the market, and make sure that you are not tripping over any local etiquette rules.
When dealing with important legal documentation or processes, you will also need to ensure that language effectively conveys the intended meaning for both audiences, whether its translating tax forms or company structure documentation. Japanese is a complex language for English speakers to learn and it’s common for companies to employ local support resources to help make sure their operations are 100% aligned with their new markets so that compliance is efficiently factored in at all stages.
The importance of language support services in both Japanese and English should not be underestimated. Many companies that overlook this, or offer only limited budget to bilingual language solutions, have failed to succeed long-term in Japan. The fact of the matter is, you need native speakers on the ground who can help with important Japanese accounting and tax support, as well as business development and logistics processes, with sufficient translation and localization capabilities to bridge the gap between your foreign workforce, local teams and local partners in Japan.
There are a number of ways to access talent in Japan, including many private recruitment firms specializing in talent acquisition. If you are planning on hiring locally, consider researching the capabilities and success rate of your potential recruitment partners in helping foreign clients hire employees that work well with foreign owned organizations. Some agencies will have an extensive database of registered candidates, while others will offer more executive, headhunter-style recruitment support. During this process, a certified Labor and Social Insurance Attorney, or ‘Sharoushi’, is indispensable when it comes to thoroughly understanding and implementing Japanese labor laws for your organization.
Understand Market Competition
Many companies avoid Japan due to a perceived difficulty in market competition. While this is understandable, it’s also underplayed how a unique and competitive product or service can perform incredibly well when backed by a solid market entry strategy. Regardless, understanding market competition is a critical part of finding success in Japan as part of your expansion plans here.
It is especially important that you time your entry right if you are in a fast-moving market, as there is perhaps no place like Japan where first-mover status is crucial for long-term success. This is partly due to Japan’s conservative business culture where consumers and corporations are typically loyal to current brands and suppliers.
This tendency is something that can really boost your businesses’ long-term growth if you are able to secure that loyalty with excellent service, quality, and reliability — distancing yourself from competitors and strengthening your market position.
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Where to Target Your Japan Market Entry Activities
Location can have a big impact on the potential success of your company’s Japan market entry strategy. It is important to evaluate the options wisely and carefully choose the best location for your market entry activities in Japan.
The Greater Tokyo Metropolitan Area
Tokyo is an obvious choice for many foreign companies looking to establish a long-term presence in Japan. A number of global companies already have their national headquarters or major branches located here, and the capital has an existing familiarity with foreign products in various sectors.
Many of the nation’s consumer trends also originate from Tokyo, making it an advantageous position for staying ahead of market changes and offering unique products and services before the competition. Additionally, despite the high cost of residential and office space, the city also comes with a larger ratio of high-income consumers, proximity to the powerful central government regulatory agencies, and location at the hub of Japan‘s highly centralized transportation networks.
Many of the nation’s consumer trends also originate from Tokyo, making it an advantageous position for staying ahead of market changes and offering unique products and services before the competition.
Kansai (Osaka, Kyoto, Kobe, etc.)
The Kansai region, anchored by the vast metropolitan area of Osaka, includes the major port city of Kobe as well as Kyoto, an important political and cultural hub. Kansai’s economic base is diverse, catering to businesses in several sectors, including food, textiles, and electronics. It also has a healthy SME scene and many globally successful enterprises operating in the energy, manufacturing, and automotive sectors are present in the region.
Incorporating in Japan Process Checklist
- Choose your type of market entry strategy and company incorporation structure in Japan
- Understand the procedures necessary for registration/establishment
- Understand entry procedures and visa-related requirements
- Learn how to manage the Japanese Corporate Tax System
- Familiarize yourself with Japan’s Labor Laws and regulations
- Build your strategic advantage in the market
- Choose the most appropriate region/location for your Japan market expansion
Implementing Your Japan Market Entry Strategy
Incorporating in Japan and executing your own market entry strategy can take many forms, but underpinning each method is a requirement to take the process seriously. Whether it’s correctly evaluating your market and your place within it; delivering on the promise of quality products and services; or working to optimize and adapt your content and product offerings for the Japanese market, success in Japan requires a careful juggling of your priorities.
This general attitude, and the support of local advisors or partners, is arguably much more important than how much capital you have to throw at this venture.
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