Japan: What happened in 2020 and significant events in 2021

Japanese Law: Year in Review 2020 summarises some key developments in Japan this year and Year to Come 2021 gives an overview of important changes that we anticipate in 2021. There are also links to further reading, where applicable.
Explore our overview of key developments below.

Key updates to

11

major legal developments in 2020 and 2021

Significant legal and regulatory events in 2020

The Year in Review 2020 summarises some key developments in Japan this year. There are also links to further reading, where applicable.

Corporate M&A

Foreign Direct Investment Restrictions Amendments (Overall): The amendment to the Foreign Exchange and Foreign Trade Act and the relevant regulations (the “FDI Amendments”) became effective on 8 May 2020, and with certain exceptions effective on 7 June 2020. The FDI Amendments, among others, lower the threshold of 10% to 1% for prior notification/clearance where a foreign investor wishes to buy shares in a Japanese listed company that operates in certain designated sectors (certain medicine and/or medical device manufacturing sectors have been newly added to such designated sectors since 15 July 2020). The FDI Amendments have also recently introduced certain exemptions to such prior notification/clearance requirements, which include certain asset management-related exemptions.

Further, the FDI Amendments expand the scope of actions subject to the notification requirements (i.e. prior notification/clearance or post notification), and business transfers (including those by way of a merger or corporate split) from a Japanese company to a foreign investor are now subject to the notification requirements.

Data Protection Law Amendments: The amendments to the Act on Protection of Personal Information have been enacted and were promulgated on 12 June 2020. They will become effective within two years from the promulgation date with certain exceptions. The amendments include, among others, expanding the rights of a data subject (e.g. it is now easier to request the suspension or deletion of personal data), a mandatory reporting obligation in the case of data leakage, more severe criminal sanctions, and tougher requirements for overseas data transfer. These amendments are in line with the general trend of approaches taken by foreign regulations, such as GDPR.

Investment Funds

Foreign Direct Investment Restrictions Amendments (Asset Management-Related Exemption): Whilst the threshold for prior notification/clearance in respect of a foreign investor buying Japanese listed shares in certain sectors has been lowered, the FDI Amendments (as defined above) have introduced an exemption where a foreign financial institution falling into any of the following categories is exempt from the requirement (as well as from similar requirements for prior notification/clearance in respect of some other types of foreign direct investments):

a) a certain securities firm registered under the Financial Instruments and Exchange Act of Japan (the “FIEA”) or its foreign equivalent;

b) a certain investment manager registered or notified under the FIEA or its foreign equivalent;

c) an investment corporation registered under the Act on Investment Trusts and Investment Corporations of Japan or its foreign equivalent;

d) a bank licensed under the Banking Act of Japan or its foreign equivalent;

e) an insurance company licensed under the Insurance Business Act of Japan or its foreign equivalent;

f) a certain company engaging in trust business under certain Japanese law or its foreign equivalent; or

g) a high-speed trader registered under the FIEA.

Change in Filing Process related to the Specially Permitted Businesses for Qualified Institutional Investors, etc.: As part of the Japanese government’s initiative to optimise the regulatory filing process by computerising the administrative procedures, and as part of the emergency measures against the Covid-19 crisis, the Kanto Local Finance Bureau and other Local Finance Offices (collectively, the “KLFB, etc.”) introduced a new method of submitting the notifications and exhibits in relation to the “Specially Permitted Businesses for Qualified Institutional Investors, etc. (the “SPBQII”)” under Article 63, paragraph 2 of the Financial Instruments and Exchange Act of Japan (the “FIEA”). The general partners that are or intend to be exempt from licence requirements under the FIEA by virtue of the application of SPBQII exemption are subject to various filing requirements under the FIEA, such as the initial filing of notification for commencement of SPBQII, the amendment filing and the regular filing of SPBQII business reports. Since the pandemic started globally, several Japanese and non-Japanese general partners have encountered difficulties in obtaining wet-ink signatures on various documents from the directors, officers and other individuals, especially in the regions on lockdown. In some cases, where original copies of documents with wet-ink signatures had to be submitted to the KLFB, etc. in relation to the commencement of SPBQII, the difficulties led to the delay in required filing and/or the fund launch.

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Financial Regulation

Newly introduced “Financial Services Intermediary Business (FSIB)”:
  1. On 5 June 2020, the Act on Sales, etc. of Financial Instruments (Act No. 101 of 2000) was amended and renamed as the “Act on the Provision of Financial Services” (the “APFS”) which created a new category of business named financial services intermediary business (“FSIB”).The FSIB covers the services of different financial sectors through a single registration as a Financial Services Intermediary Business Operator (“FSIBO”). The newly amended APFS is expected to create more user-friendly ‘one stop’ services after this amendment becomes effective. In particular, fintech companies may provide their customers with various intermediary services relating to bank loans, life insurance or investment products by using the saving and spending data or other information collected through their platform with a registration as an FSIBO.
  2. FSIB is defined as conducting intermediation of: (i) core banking business such as bank deposits contracts, money lending contracts or fund transfer contracts; (ii) insurance contracts; (iii) contracts for securities and derivatives transactions; and (iv) loan contracts between non-bank lenders and borrowers. In addition, an FSIBO may provide electronic payment services (i.e. account information and payment initiation services on behalf of bank account holders) without obtaining registration under the Banking Act, which are essential for online personal finance services.

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Energy & Infrastructure

Japan Offshore Wind Round 1 Auctions: Despite the Covid-19 pandemic, Japan has continued to push forward with its plans for developing a set of offshore windfarms.

The Japanese government ended 2019 with an announcement on 27 December designating an area off the coast of Goto City, Nagasaki (“Goto Promotion Area”) to be the first promotion area for a floating offshore wind project under the Act on Promotion of Use of Sea Areas to Develop Marine Renewable Energy Facilities (Act No. 89 of 2018, as amended). The auction process for the Goto Promotion Area launched on 24 June 2020, when the Ministry of Economy, Trade and Industry (“METI”) and the Ministry of Land, Infrastructure, Transport and Tourism (“MLIT”) jointly released the official public auction guidelines. This is the first public auction under the Marine Renewables Energy Act, and it is set to close on 24 December 2020.

On 17 July 2020, the first meeting of the public-private council for reinforcing competitiveness of the offshore wind industry was convened. In the opening remarks, Mr. Hiroshi Kajiyama, Minister of METI, commented that the forum should discuss longer-term targets to enhance investments in the offshore wind sector.

On 21 July 2020, METI and MLIT designated the remaining round 1 promotion areas: (i) a sea area off the coast of Choshi City, Chiba Prefecture; (ii) a sea area off the coast of Noshiro City, Mitane Cho and Oga City, Akita Prefecture; and (iii) a sea area off the coast of Yurihonjo (North and South), Akita Prefecture. The three promotion areas designated in July 2020 will be bottom-fixed offshore wind farms. On 18 September 2020, METI and MLIT jointly published draft guidelines for the public auctions to be held in relation to the three bottom-fixed offshore wind farms. By the end of November or early December 2020, METI and MLIT are expecting to launch the public auctions for the three bottom-fixed offshore wind farms.

Capital Markets

Outline of the benchmark reform initiative in Japan: In line with the global initiatives to tackle the permanent cessation of LIBOR (London Interbank Offered Rate) that could take place after the end of 2021, Japanese market participants and regulators continue to work on the smooth transition from LIBOR, and the incorporation of robust fallbacks into existing financial products/transactions referring to LIBOR. TONA (Tokyo Overnight Average Rate) published by the Bank of Japan has been designated as the risk-free rate for JPY. However, given that JPY takes multiple rate approaches (JPY TIBOR (Tokyo Interbank Offered Rate) and Euroyen TIBOR are also used), the market participants are required to establish appropriate fallbacks for loans and bonds, among others (for derivatives, the fallbacks set out in the ISDA IBORs Fallbacks Supplement would be the default choice). The Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks (the Bank of Japan serves as a secretariat, the “Committee”) is the centre of examination and discussion. In the second public consultation launched by the Committee, it is suggested that loans and bonds use the waterfall structure fallbacks where the term reference rate (which is not the compounded risk-free rate to be used for derivatives) is set as the first priority. QUICK Corp. has been selected as an administrator of the new term reference rate, TORF (Tokyo Term Risk Free Rate), and currently publishes the prototype rates. Based on the current roadmap (see page 17 of the second public consultation document – link again?), it is anticipated that the major transition and fallbacks incorporation work will take place in 2021 Q2-Q3. Therefore, market participants are required to make adequate preparations.

Significant legal and regulatory events in 2021

The Year to Come 2021 gives an overview of important changes that we anticipate over the coming year.

Corporate M&A

Amendment to the Companies Act: The Companies Act was amended in December 2019 and the amendment is expected to come into force in March 2021. Among others, the amended Companies Act will introduce a statutory share delivery (kabushiki koufu) as a new method for M&As. Under the current Companies Act, there are M&A methods that allow companies to use their own shares as consideration, such as a statutory share exchange (kabushiki koukan). However, a statutory share exchange (kabushiki koukan) is only available in the case of making the target company a wholly owned subsidiary, and under the current Companies Act it is practically difficult (although not impossible) to make the target company a subsidiary (but not a wholly owned subsidiary) by using shares as consideration.

In order to conduct a statutory share delivery (kabushiki koufu), the acquiring company must prepare a share delivery plan (kabushiki koufu keikaku), notify the contents of the share delivery plan to the shareholders of the target company and make a request for transferring the shares of the target company in exchange for the shares of the acquiring company. Further, depending on the size and nature of the parties, the acquiring company may need to have its shareholders approve the share delivery plan.

A statutory share delivery (kabushiki koufu) is only available for Japanese stock companies (kabushiki kaisha) and foreign companies cannot use this method. In addition, in the case of acquiring the shares of a listed company by a statutory share delivery (kabushiki koufu), the acquiring company must also go through the tender offer bid process under the Financial Instruments and Exchange Act.

Investment Funds

Emergency Registration Exemption for Foreign Financial Services Providers: On 22 July 2020, the Financial Services Agency of Japan (the “FSA”) amended the Cabinet Office Order on Definitions under Article 2 of the Financial Instruments and Exchange Act. The amendment introduced a new exemption from licence requirements applicable to non-Japanese financial services providers (including asset managers) under the FIEA. Pursuant to the new exemption, if a non-Japanese financial services provider has difficulty in continuing its business operations in its home jurisdiction due to disaster or other reasons, the non-Japanese financial services provider will be permitted to conduct their business operations in Japan by obtaining confirmation (instead of obtaining the relevant licences under the FIEA) from the FSA.

The FSA indicates in the public comments that the application for the confirmation will be accepted or rejected in around three business days from the submission of the completed application form.

The government expects the new exemption will provide a temporary relief to address overseas business disruptions due to disaster or otherwise, and expand Japan’s presence as a global financial centre.

Energy & Infrastructure

Japan Offshore Wind Round 2 Auctions: On 3 July 2020, METI and MLIT announced four areas had been designated as promising areas (potential promotion areas), and another three had begun the preliminary assessment process (bringing the total number to six). Round one auctions have been delayed but round two auctions in 2021 are expected to be on schedule.

In June 2020, the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities was amended. One of the key features is the replacement of feed-in-tariff regime with a market driven subsidy regime called “feed-in-premium” (“FIP”). Apart from the basic framework, the details of FIP are under discussion (including the type of technology / generation facilities transitioning to FIP, calculation of the FIP, curtailment and interface with battery storage). Further details of the FIP regime are expected to be released in 2021.

Capital Markets

Implementation of the new Netting Act: As we highlighted in “Year in Review 2019 and Year to Come 2020”, the amendment to the Act on Close-Out Netting of Specified Financial Transactions Conducted by Financial Institutions (the “Netting Act”) was made effective on 1 May 2020 (the “Netting Act Amendment”). Through the Netting Act Amendment, a certain type of security interest collateral arrangement has become eligible for statutory protection. If parties to the arrangement have duly incorporated certain provisions into the relevant agreement, a secured party may enforce its security interest in a timely manner (i.e. without subject to the stay) even when reorganisation proceedings (kousei tetsuzuki) with respect to a security provider has commenced. The implementation of the Netting Act Amendment allows the Japanese financial institutions (subject to the initial margin requirements for non-centrally cleared derivatives) to use the global standardised collateral management schemes (i.e. the security interest + third party custodian), and would also give market participants a chance to develop new structures for market transactions.

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