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In recent years, Japanese businesses have been less inclined to expand into China, while the opposite is true for investments in Japan by Chinese firms, driven by factors such as the weakening yen. Following the surge in acquisitions of Japanese enterprises and real estate by Chinese corporations and individual investors, however, emerging complexities present themselves as cultural differences, local policy uncertainties, and disputes arising from a lack of understanding of local laws and regulations.

This article outlines the challenges and legal risks confronting Chinese companies investing in Japan and gives advice on how to navigate these complexities.

Q: What are the challenges for Chinese companies investing in Japan?

A: In summary, there are challenges in three aspects.

High costs of operational compliance and fierce competition. The overall cost of doing business in Japan is high, involving office rents, labour costs and legal compliance expenses. This poses a significant challenge for Chinese companies featuring low-cost advantages. Moreover, the maturity of the Japanese market entails intense competition, particularly in consumer goods and high-tech sectors. Chinese investors have to compete for market share not only with local firms but also with Western companies, potentially facing substantial pressure on cost control and profit margins.

Strict market regulations and compliance standards. The Japanese market is governed by stringent legal frameworks, particularly in areas of employment, environmental protection, anti-monopoly, intellectual property rights and consumer rights protection. Without a comprehensive understanding of local market rules and legal systems, Chinese companies venturing into Japan may be confronted with compliance issues and legal risks.

Differences in cultures and languages. Despite the rich history of cultural exchange between China and Japan, significant differences in business culture persist. The Japanese market has high standards in customer service, brand image and business etiquette, which pose cultural challenges for Chinese firms. The language makes for another major obstacle. While English is widely used in international markets, business activities in Japan are generally conducted in Japanese. If Chinese companies are not equipped with Japanese-speaking professionals or cultural consultants, their communication efficiency and progress of business negotiations will be impeded.

Q: What risks should Chinese companies consider when investing in Japan?

A: Chinese companies are advised to focus on three key areas: employment regulations, tax policies, and intellectual property rights protection.

Employment regulations. The Japanese workforce is known for its reluctance to work for foreign companies, which can make recruitment difficult. Meanwhile, Japan has no visa-free policy for Chinese nationals, and the process of granting a long-term work visa is notoriously stringent and time-consuming, with a lack of transparency. Such rigorous control over foreign workers in Japan hinders Chinese companies from maintaining a stable workforce, further impacting business growth.

In terms of labour dispatch, the Japanese law mandates that, after a dispatch period of three years, the actual employer shall directly hire the dispatched worker, or the labour dispatch agency shall establish an open-ended labour contract with the worker.

Tax policies. Japanese tax regulations are intricate and encompass a diverse range of tax rates, some of which are relatively high. The financial outcomes for businesses, including investment returns and profit distribution, are significantly influenced by these policies. Misunderstanding of the tax code could lead to excessive tax burdens. When Chinese companies are contemplating investments, it is imperative to accurately assess the tax implications to ensure the economic viability of their ventures.

Intellectual property rights protection. Japan has stringent legal frameworks and is known for its robust defence of intellectual property rights. In the case that investment involves technology acquisition or innovative development, Chinese companies must place a high priority on intellectual property laws. Failure to do so could result in lawsuits for infringement and substantial claims for damages, affecting the cost and profitability of the investment.

Q: Any advice for Chinese companies investing in Japan?

A: Chinese companies investing in China are suggested to make thorough preparations in the following aspects.

Prior consultation with professionals. To mitigate risks, Chinese companies should engage experts well-versed in Japanese law and tax regulations to conduct due diligence on potential investments. This ensures a well-informed decision-making process considering the risks, returns and compliance requirements of the project.

Employment practices compatible with Japanese culture. As Chinese companies grow, fostering a sense of belonging among Japanese employees becomes crucial. Notably the Japanese employment regulations are anchored in the principles of lifetime employment, seniority-based wages and enterprise-based labour unions.

Considering the Japanese workplace attachment, Chinese firms should adapt their employment systems and corporate culture to align with these values, while nurturing local talent to build a stable core team. Additionally, during the initial stages of establishing a Japanese entity, Chinese companies might use Japan¡¯s labour dispatch services to mitigate the risks associated with direct employment.

Networking with local governments, trade promotion agencies and business associations. It is beneficial for Chinese firms operating in Japan to establish close ties with local government authorities and business associations so as to provide regular updates on business developments, voice any issues encountered and to seek additional support.

Key business associations in Japan include the Japan External Trade Organisation, Japan-China Economic Association, China Enterprises Association (Japan), and Japan-China Economic Relations and Trade Centre, among others.

Ryan Pan is a senior partner and April Li is an associate at Ronly & Tenwen Partners