Fresh Insights, Timely Updates
Navigating Japan’s Business Landscape
Japan’s economy has been performing well recently, thanks in part to increased tourism driven by the weaker Japanese Yen. Consequently, many companies, including publicly listed ones, are seeing strong results.
Challenges of an ageing population and workforce shortages
Despite these positive financial outcomes, many companies are facing challenges in finding enough workers. Some businesses, particularly in the hospitality sector, have lost valuable opportunities due to the labour shortages. Japan’s ageing population and shrinking workforce are significant concerns that will continue to affect the economy in the coming decades.
In Japan, 99.7% of Japanese companies are small and medium sized enterprises (SMEs), which employ almost 70% of the workforce. However, many of these SMEs are led by older managers, with a significant number over the age of 70. As these leaders retire, there’s a growing concern about who will take over.
Addressing business succession through M&A
One way to address this issue is through mergers and acquisitions (M&A), but many managers are hesitant to pursue this as M&A is not widely practised in Japan. Traditionally, businesses have been passed down within families. However, the Small and Medium Enterprise Agency (SMEA) is working to increase the understanding of M&A amongst business owners as a solution for business succession. They have also encouraged the promotion of younger management and addressed unethical practices in M&A advisory services by amending Japan's M&A guidelines to better protect business owners.
Doing business in Japan
Japanese corporate tax rates depend on the company size and type. If your company's share capital is JPY 100 million or less, the corporate tax rate ranges from 33% to 34%.
SMEs tend to face higher effective rax rates than larger companies. However, larger firms are also subject to additional size-based tax related to factors such as share capital and value-added. New businesses that might incur net operating losses instead of taxable income in the first few years can carry forward these losses for up to ten years, which is advantageous for SMEs.
Choosing the right corporate structure
Launching a business in Japan normally means choosing between two types of corporation: Kabushiki Kaisha (KK) and Godo Kaisha (GK).
Firstly, in terms of disclosure, KK companies are required to disclose their balance sheet annually, whereas GK companies are not. Secondly, regarding ownership and management, KK companies have separate owners (shareholders) and management. In contrast, in a GK company, ownership and management are the same. KK companies are generally considered more reliable than GK, but GK companies are often preferred by smaller businesses due to lower costs.
Audit requirements for Japanese companies
The Japanese Company Act requires private companies to be audited if their share capital is JPY 500 million or more, or if their liabilities are JPY 20,000 million or more. Therefore, most SMEs do not appoint an auditor and only engage with a tax accountant. However, subsidiaries owned by parent companies outside Japan are likely to be audited voluntarily to meet their parent company’s requirements for governance purposes and financial consolidation.
Professional support for businesses in Japan
When doing business in Japan, it is important to seek professional support and assistance from experienced and qualified advisors in areas such as company setup, taxation, succession planning and audits.
About the author
Yoshitaka Horiguchi
Sapporo, Japan
Yoshitaka is Senior Partner at Russell Bedford Hibiscus. His firm was established in 2005 in Sapporo on the northern island of Hokkaido. It opened its Tokyo office in 2007.
Yoshitaka and his colleagues regularly advise large and small companies across many industries. They cover the whole business lifecycle, so clients can count on them for their current needs as well as plans for future growth.