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Japanese Yen Depreciation and Foreign Direct Investment in Japan

The yen is depreciating in the foreign exchange market. In the past, it was said that the yen should be bought in times of contingency or crisis, but it seems that the crisis in Ukraine has not generated interest in the yen. Since I am not an expert on economics or currency exchange, I will not comment on the causes of the current yen depreciation or future market developments. Still, there is a strong view that the current dollar/yen market trend will continue, and many pessimistic reports are floating around.

Japanese Yen Depreciation and Foreign Direct Investment in JapanPhoto by Marga Santoso on Unsplash

On the other hand, some believe that a mindset change is necessary to take a positive view of the yen’s prolonged depreciation. In their view, the yen’s depreciation could encourage manufacturers that had shifted their production bases overseas against the backdrop of the strong yen to return to Japan. Domestic employment in Japan and profits for export industries could increase by taking advantage of the yen’s depreciation.

In addition to the possibility of Japanese companies returning to Japan against the backdrop of ongoing yen depreciation, it is also possible that foreign companies and foreign entrepreneurs will increase their direct investment in Japan against this backdrop of depreciation. Currently, the Ministry of Economy, Trade, and Industry’s website promotes direct foreign investment in Japan.

Forms of business expansion

When an overseas corporation establishes a business presence in Japan, there are three possible forms the business can take: (1) establish a representative office, (2) establish a branch office, or (3) establish a Japanese corporation. In this issue, I write about some critical points to consider when deciding which form of a business base to choose when entering the Japanese market.

1. Establishment of a representative office
In principle, a representative office does not need to be registered and can be established freely. However, since there are no documents such as a certificate of registration to prove the office’s existence objectively, it is not recommended for those considering applying for a certificate of eligibility of Business Manager or Highly Skilled Business Manager.

2. Establishment of a branch office
“Establishment of a branch office” means setting up a foreign company’s business office in Japan. Since it has no corporate status in Japan, it is treated as a part of a foreign enterprise. Due to its lack of corporate status, claims and debts arising from the branch office activities will ultimately belong to the foreign company.

However, strangely, for tax purposes, if a branch office of a foreign company is recognized as a Permanent Establishment (PE) in Japan, it is generally treated as if it is a separate and independent entity from the head office of the foreign company. Therefore, the income attributable to the PE is required to file for corporate income tax, consumption tax, and other taxes.

In addition, only a person with an address in Japan can be appointed as the branch’s representative. The establishment of a Japanese branch by a non-resident alone is impossible.

I do not usually recommend our clients choose to establish a “branch office of a foreign company” because of the complications that can arise.

3. Incorporation of a Japanese corporation
Establishing a Japanese corporation can help to avoid the aforementioned complexities.

In the case of establishing a Japanese corporation, it is legally possible in principle for a non-resident to establish a company by themselves. In reality, however, it is difficult for a non-resident alone to establish a Japanese corporation without the assistance of someone with an address in Japan.

The requirement of the capital money injection into a Japanese bank account before establishing the company often becomes a concern because non-residents do not have an active bank account in Japan. Even after establishing the company, opening a bank account under the company’s name is very difficult (almost impossible) for non-resident representative directors due to the anti-money laundering policy and the strict screening process for opening a bank account.

In the case of a Japanese corporation established solely by a non-resident, the most problematic issue is whose account will be used for the capital injection before establishing a company. A bank account in the name of a founder or a director at the time of establishment is acceptable as the account for capital injection. If the director at the time of the establishment is the account holder of the bank passbook, a letter of attorney regarding the authority to receive the capital injection is required from the founder. (With some exceptions, inward direct investment by non-residents must also be reported to the Bank of Japan.)

As a notable exception, if none of the founders or directors at the time of the company’s establishment have an address in Japan, the payment may be received in an account in the name of a third party. (This is not limited to individuals, but corporations are also acceptable to be the “third-party.”)

A power of attorney to receive the capital injection from the founder is also required to authorize the third party to receive the capital injection in their bank account. The power of attorney does not have to be given by all or a majority of the founders, as a delegation from one of the founders is considered sufficient.

(For further details, please refer to the website of the Legal Affairs Bureau.)

Japanese Yen Depreciation and Foreign Direct Investment in JapanPhoto by Senad Palic on Unsplash

We here at Legal Associates Office Boston are grateful for the opportunity to work with our clients who have chosen Fukuoka as the location for establishing their Japanese corporations. Along with assisting clients with applications to acquire residence status of Business Manager or Highly Skilled Professional Business Manager, we provide additional customized assistance for clients to find the best legal solutions for their business needs. We hope that Fukuoka will continue to develop as a global start-up city for foreign entrepreneurs.

Disclaimer: While every effort has been made to ensure that the information on this article is accurate at the time of posting, it is not intended to provide legal advice as individual situations will differ. If you do require advice or wish to find out more about the information provided and related topics, please contact the author.

Text by: Masayo Boston (Certified Administrative Procedure Legal Specialist), May 2022
Legal Associates Office Boston (Fukuoka City)
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Fukuoka Prefecture
Published: May 10, 2022 / Last Updated: May 10, 2022

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