Japan

Risk assessment

All economic drivers set to slow in 2013

With the exception of foreign trade, all components of growth contributed positively to activity in 2012. Despite the new elected government’s fiscal stimulus targeted at households (but still to be voted by the Diet), private spending will stall in 2013. However, a hike in the consumption tax from 5% to 10% between 2014 and 2015, if actually implemented, could push Japanese consumers to spend more towards the end of 2013, to the detriment of their savings. This, in conjunction with the new 2 percent inflation target set by the Bank of Japan, would enable deflationary pressures to be contained, in a context of rising prices for imported energy to replace that provided by the 52 nuclear power plants, which were still shut in late 2012 and which had guaranteed 30% of the electricity supply. After adopting the budget allocations (4% of GDP over several years) for reconstruction of the regions devastated by the disasters of 2011, public investment is likely to slow. However, the funds allocated will continue to slowly permeate through to the economy and provide many companies with support, without, though, triggering a private investment boom. There are at least three reasons for this: pending radioactivity issue in the disaster region, insufficient manpower in the construction companies to respond to demand and resistance by local populations to economic and social redeployment. Moreover, the measures decided by Shinzo Abe’s government in order to boost domestic demand, are to be considered in a context of high level of fiscal deficit and public debt.

Considerable uncertainties over exports

All or some of the factors that put pressure on Japanese exports in 2012 are likely to last. Among those definitely set to remain are the recessions in the eurozone’s peripheral countries and subdued growth in its core countries – the European Union represents 12% of outlets. The yen should depreciate in 2013 thanks to the BoJ’s unconventional monetary easing but it is likely to experience some volatility. Among the uncertainties, those relating to the territorial conflict with China over the Senkaku-Diaoyu islands are worrying, as China accounts for nearly 20% of Japanese exports. Even if we can assume China will gradually lift the boycott on Japanese goods, exports of intermediary industrial products to China (20% of total sales) are likely to continue to suffer from the indirect impact of decelerating European demand for finished Chinese products which incorporate intermediate Japanese goods. Finally, the fiscal adjustment conducted by the United States, could more or less affect sales to the States (16%), depending on the scale of tax rises and spending cuts that will be agreed upon. Subject to an easing of geopolitical tensions with China, exports are expected to rise slightly, but not enough to enable external trade to contribute positively to growth, as imports will remain sustained by purchases of energy to replace the lost nuclear power.

Companies weakened by higher electricity tariffs and slower demand

The use of imported energy resources has increased production costs in the Archipelago, while the price of electricity was already high by international standards. The decision to authorise an average electricity price increase of 10% since July 2012 has been a weakening factor for businesses, but especially for large consumers like the electric steelmaking arc furnaces. Meanwhile, the slowdown in world demand is likely to continue to affect the mechanical engineering and semi-conductor sectors. Sales of household appliances were hit by the ending of subsidies and printing companies by very tough competition, which squeezed their margins. The losses announced by the largest manufacturers are expected to cascade down to their sub-contractors. This context is likely to impact on the activities of banks, whose profits are being eroded by low interest rates, while demand for credit remains subdued. So, in 2013 certain regional banks could undergo difficulties associated with deteriorating solvency among the SME’s, whose debt banks have already restructured. Nonetheless, for the moment, the number of company bankruptcies is stable. This is reflected by the Coface payment incident index, which still follows a favourable trend.

Payment incident index

Insolvency trends

MEANS OF PAYMENT AND COLLECTION METHODS

Japan has ratified the International Conventions of June 1930 on Bills of Exchange and Promissory Notes and of March 1931 on Cheques. As a result, the validity of these instruments in Japan is subject to the same rules as in Europe.

The bill of exchange (kawase tegata) and the much more widely used promissory note (yakusoku tegata), when unpaid, allow creditors to initiate debt recovery proceedings via a fast-track procedure, subject to certain conditions.

Although the fast-track procedure also applies to cheques (kogitte), their use is far less common for everyday transactions.

Clearing houses (tegata kokanjo) play an important role in the collective processing of the money supply arising from these instruments. The penalties for payment default act as a powerful deterrent.

A debtor failing twice in six months to honour a bill of exchange, promissory note, or cheque collectable in Japan, is barred for a period of two years from undertaking business-related banking transactions (current account, loans) with financial establishments attached to the clearing house. In other words, the debtor is reduced to a de facto state of insolvency.

These two measures normally result in the calling in of any bank loans granted to the debtor.

Bank transfers (furikomi), sometimes guaranteed by a standby letter of credit, have developed greatly throughout the economy in recent decades thanks to widespread use of electronic systems in Japanese banking circles.

Various highly automated interbank transfer systems are also available for local or international payments, like the Foreign Exchange Yen Clearing System (FXYCS, operated by the Tokyo Bankers Association) and the BOJ-NET Funds Transfer System (operated by Bank of Japan).

Payment made via the Internet site of the client’s bank is also increasingly common.

In principle, to avoid certain disreputable practices employed in the past by specialised companies, only lawyers (bengoshi) may undertake debt collection.

However, the law of 16 October 1998, which came into force on 1^st February 1999, established the profession of “servicer” to foster debt securitisation and facilitate collection of non-performing loans (NPL debts) held by financial institutions.

Servicers are debt collection companies licensed by the Ministry of Justice to provide collections services but only for certain types of debt: bank loans, loans by designated institutions, loans contracted under leasing arrangements, credit card repayments, and so on.

Out-of-court settlement is always preferable to avoid a lengthy and costly legal procedure and involves obtaining, where possible, a signature from the debtor on a notarised deed that includes a forced-execution clause, which, in the event of continued default, is directly enforceable without requiring a prior court judgement.

The standard practice is for the creditor to send debtor a recorded delivery letter with acknowledgement of receipt (naïyo shomeï), the content of which must be written in Japanese characters and certified by the post office.

The effect of this letter is to set back the statute of limitation by six months (which is five years for commercial debts).

If the debtor still fails to respond, the creditor must start legal action during that period to retain the benefit of interruption of the limitation period.

Summary proceedings intended to allow creditors to obtain a ruling on payment (tokusoku tetsuzuki), applies to uncontested monetary claims and effectively facilitates obtaining a court order to pay (shiharaï meireï) from the judge within about six months.

Court fees, payable by the claimant in duty stamps, vary according to the size of the claim.

If the debtor contests the order within two weeks of service of notice, the case is transferred to ordinary proceedings.

Ordinary proceedings are brought before the “summary court” (kan-i saibansho) for claims under 1,400,000 yen (JPY) and before the “district court” (chiho saibansho) for claims above this amount.

Those proceedings, partly written (with submission of arguments and exchanges of type of evidence) and partly oral (with respective hearings of the parties and their witnesses) can take from one to three years as a result of the succession of hearings and generate significant legal costs.

Court fees, payable in duty stamps, depend on the size of the claim.

With the 1^st January 1998 revision of the civil procedure code undertaken to reduce the duration of legal proceedings, the new amendment adopted on 1^st April 2004 is notably intended to speed up submission of evidence to both the adverse party and judge during the preliminary examination phase.

The distinctive feature of the Japanese legal system is the emphasis given to civil mediation (minji chôtei). Under court supervision, a panel of mediators, usually comprising a judge and two neutral assessors attempt to reach, by mutual concessions of the parties, a negotiation on civil and commercial disputes.

In practice, the litigants often settle the case at this stage of the procedure, before a judgment is delivered.

While avoiding lengthy and costly legal proceedings, any transaction obtained through such mediation becomes enforceable once approved by the court.

Similarly, disputes can be resolved via arbitration (chusai), an approach well appreciated locally and not involving excessive formalism.