Japan: eastern eye

Tokyo hosted the International Bar Association (IBA) conference last month. The opening ceremony was presided over by Emperor Akihito and Empress Michiko, and Shinzo Abe, the prime minister of Japan.

Tokyo launched its candidacy to host the world’s premier legal event in autumn 2008 and, through the Japanese Federation of Bar Associations (JFBA), campaigned hard against another strong contender, Sydney. In February 2009, the IBA decided in favour of the Japanese capital.

Writing in the JFBA journal in June 2009, the then vice-president of the IBA, Akira Kawamura, commented on the significance of this victory: ‘It is the first IBA Annual Conference in Asia east of Singapore and the first to be held in any non-common law, non-English-speaking Asian country. This helps to prove that Japan is recognised as one of the bastions of the “rule of law” by lawyers around the world.’

In his opening speech to the IBA, Abe took up this theme when he told 6,000 delegates from 130 countries that Japan and its legal community had a leading role to play in establishing and strengthening the rule of law around the world.

Despite growing international recognition of Japan’s legal system, foreign law firms have found the Japanese market difficult to navigate. Conspiring against them are a different business culture, market protectionism and increasingly expansionist domestic law firms. A number of firms have struggled to make a success of their Japanese ventures, retreating from the country or downsizing their activities.

But recently there have been indications of renewed enthusiasm among UK and US lawyers, who together represent the biggest contingent of foreign lawyers in Japan. Helping drive this are the reforms of Abe, who was re-elected in December 2012 and has since set out to revive the country’s sluggish economy with a radical growth programme – dubbed ‘Abenomics’ – of fiscal stimulus, monetary relaxation and structural reforms to boost Japan’s competitiveness.

This has led to a significant depreciation of the yen, which makes Japan a cheaper place to do business. There has also been an expansion in outbound merger and acquisition activity by Japanese companies. Coupled with an ongoing quest for overseas investment, particularly in energy and natural resource projects, the result is ‘an increasingly strong demand’ for international legal services, according to a new guide on doing legal business in Japan launched at the IBA by the Law Society’s International Division.

Furthermore, the 2020 Olympic and Paralympic Games in Tokyo are expected to bring new business opportunities in infrastructure and real estate development in the domestic market. The Abe administration aims to double foreign direct investment in Japan to ¥35tn by that date.

There are also encouraging signs of further liberalisation of the legal sector.

Lingering protectionism

The Japanese legal market has gradually opened up over the past 25 years. In 1987, legislation was introduced to permit registered foreign lawyers (known as ‘gaikokuho-jimu-bengoshi’ or simply ‘gaiben’) to open offices in Japan to provide advice on the law of their home jurisdiction.

Then in 1995, gaiben were allowed to enter arm’s-length associations with Japanese attorneys (bengoshi), but these arrangements proved unsatisfactory because they did not allow the associated firms to share profits, among other restrictions. Very few international law firms made use of this system, most notably Simmons & Simmons, which in 2001 opened an office in Tokyo with Japan’s TMI Associates.

The next phase came in 2005, when bengoshi and gaiben were permitted to merge and share profits, and gaiben could hire Japanese attorneys, subject to notification to the JFBA. This led to a number of international law firms entering the market, including Linklaters, which merged with Japanese firm Mitsui Yasuda Wani & Maeda in 2005.

Despite these reforms, international lawyers say barriers remain.

The main problem is the gaiben regime. To be licensed to practise law in Japan, a foreign lawyer must have practised for at least three years, two of which must have been in their home jurisdiction.

Jason Daniel, managing partner of Simmons & Simmons in Tokyo, says this is disruptive and costly: ‘The Japanese government is currently forcing those people to go outside Japan for a couple of years before they can legally practise. It’s a pain for them and it’s a pain for the law firms.’ Foreign lawyers may have family connections and a developing career in Japan, and the firm obviously loses members of its Japanese team. Daniel says there should be ‘a level playing field’ between gaiben and Japanese attorneys, who are not subject to the same requirements.

Adding time and cost is the lengthy application process that requires approval from the Ministry of Justice (MoJ) and committees at the JFBA. James Lawden, partner at Freshfields Bruckhaus Deringer, says: ‘Getting someone registered [as gaiben] in under three months is practically impossible. It takes between three and six months.’

Lawden is also chair of the Legal Services Committee of the European Business Council (EBC –the European Chamber of Commerce in Japan), which has been working with the Law Society on removing the remaining restrictions affecting foreign firms.

In its 2014 white paper on the Japanese business environment, a draft of which has been seen by the Gazette , the EBC will make the following recommendations: the rule requiring a specific number of post-qualification years of experience should be abolished or, at the very least, experience in home jurisdiction law should be recognised regardless of where it has been practised; the application procedure for the registration of gaiben should be accelerated; and only firms – not individuals – should be required to register.

Reforms to the gaiben system have been touted before, but there are hopes this time that there will be real change. Lawden points to the regulatory plan of the Abe cabinet, approved on 24 June , which proposed the establishment in the current fiscal year of a ‘study group’ under the responsibility of the MoJ to discuss the gaiben system, including the three-year requirement. It also envisages discussions – starting by the end of the year – between the MoJ and the FJBA on the transparency of the registration and qualification approval system, and ways of making the process simpler and faster.

The JFBA is playing down expectations. International policy advisor Yuichi Kawamoto told the Gazette : ‘There will be further discussions in the near future based on the plan. We are yet to see where the discussion will lead.’

But Lawden, who has been in Japan for more than 16 years, says: ‘The JFBA is spectacularly good at not moving forward at all, so it is quite possible that this will not lead anywhere, but it is the first movement  for a long time on the issue that’s been troubling us.’

In what seems to be an interim measure to appease foreign lawyers, legislation was passed in April to permit gaiben to open more than one branch in Japan by establishing their own legal professional corporations (LPC).

However, few seem happy with the change, due to come into force in March 2016. Lawden says: ‘The ability to operate through a corporation is only open to foreign law firms consisting entirely of foreign lawyers.’ But many UK and US firms based in Tokyo also employ Japanese attorneys because of their knowledge of local law and native language skills.

Twenty of Freshfields’ 38 fee-earners in Tokyo are bengoshi; Hogan Lovells has seven out of 32; while at Baker & McKenzie, one of the oldest and largest foreign firms in Japan, there are 99 bengoshi.

The EBC is lobbying for the legislation to be amended to permit gaiben and bengoshi to establish LPCs together, or abolish the restrictions on branches.

Culture clash

Lingering protectionism is not the only challenge for foreign lawyers. Japanese business culture creates significant barriers too.

First, it is a lot more relationship-based than in Europe. Second, Daniel points out: ‘The company has a social role to play by providing people with an income, and the employer is a sort of benevolent figure who will almost deliberately have excess people, and who doesn’t hone things down to the barest minimum to extract the maximum profit.’ This approach may create ‘tension’ between Japanese and western businesses, including law firms, which may be perceived as too open about pursuing profits.

Mark Goodrich, a London-based White & Case partner who worked in Japan for almost 10 years, describes Japan’s business culture as ‘conservative’. Clients nevertheless want value for money, he points out. About 40% of Goodrich’s practice focuses on Japan.

With Japanese law firms globalising their operations to offer cross-border legal support to big corporations, clients have become even more price-conscious. Furthermore, an oversupply of lawyers is adding to competitive pressures.

 

‘Our domestic competitors are driving down prices by hiring cheaper lawyers,’ says Rina Sproat, chief of strategy implementation at Baker & McKenzie in Tokyo, referring to a ‘plethora’ of young bengoshi coming into the workforce. ‘Pricing is very competitive, while we feel that the quality of work is being driven down.’

Fifteen years ago Japan’s legal system faced a crisis with a huge shortfall in lawyers at a time when the largest domestic law firms had fewer than 50 attorneys. This prompted changes to the legal education system, with the number of bengoshi doubling to about 35,000 between 2000 and 2014. ‘Big four’ firm Anderson Mori & Tomotsune, which last year opened offices in Shanghai, Singapore and Nagoya, adding to its offices in Tokyo and Beijing, currently has a team of about 300 lawyers.

‘Japanese firms have quite a lot of lawyers, and are not afraid to discount, so you basically have to bring something else to the party,’ Lawden says, adding that this does not mean Japanese clients do not value quality as well. Freshfields has advised Japan’s casualty insurer Sompo on a number of overseas investments, including last year’s purchase of British insurer Canopius for about £600m. ‘They are fine with the way we charge now they understand the way we operate,’ Lawden says.

Despite their efforts to internationalise, Japanese firms cannot rival UK- and US-based international law firms for their global networks. ‘Japanese firms don’t have hundreds of lawyers overseas who are qualified in English or New York law, and who really know their subject and can produce very high-quality documentation,’ Daniel says.

One of the main challenges we face is the lack of bilingual foreign partners who are truly engrained in the local culture and language

Rina Sproat, Baker & McKenzie

With English law the most commonly used law for international transactions, this advantage is key, Goodrich explains. ‘There is clearly a need [among Japanese corporates] for English law expertise,’ he says, pointing to the increased focus on sub-Saharan Africa. White & Case is currently advising Japanese clients on infrastructure projects in oil, gas and mining in the region.

Japanese lawyers appear to be arguing that the way forward for international firms is co-operation rather than competition.

Masaakira Kitazawa, a senior partner at Anderson Mori & Tomotsune, says that in the past five to 10 years international law firms have not significantly grown their operations in Japan, but this is changing.

‘Their clients seem to have a renewed interest in Japan,’ Kitazawa says. ‘One challenge those firms may face if they attempt to build out their practices in response to such developments is that the size and the range of legal practice undertaken by international firms in Japan would necessarily be more limited than full-service local firms.’

Kitazawa notes that international law firms have strengths in outbound M&A and other overseas activities undertaken by Japanese companies, and points to a convergence of interests.

‘By the appropriate co-operative relationship between local firms and international firms, both of them would benefit by utilising each party’s stronger point,’ says Kitazawa.

Hogan Lovells, which celebrates 25 years in Tokyo next year and regularly works with the top Japanese law firms, agrees that co-operation is valuable. Tokyo managing partner Rika Beppu says: ‘We respect the depth of services that these large Japanese law firms have. Our strategy is not to compete head-on with the top Japanese law firms, but to ensure that we deliver the high level of international legal services which the client companies expect.’

Under-lawyered

If the market is becoming crowded, particularly at the more junior level, there remains a shortage of senior talent.

‘One of the main challenges we face is the lack of bilingual foreign partners, who are truly engrained in the local culture and language,’ Sproat says. ‘There is an inevitable demand for foreign law capability, but Japanese corporates still would like to communicate in the local language.

‘Many of our longstanding partners who have lived and worked in Japan for more than 20 years are the prime advisers, but we do not see the “next generation” of practitioners moving into this space.’ One factor is Japan’s recent natural disasters, including the tsunami and earthquake in 2011, provoking highly radioactive leaks at Fukushima nuclear plant. This may have dissuaded younger families from moving to the country.

The other side of the coin is the challenge of finding native Japanese-speaking attorneys with good English. English proficiency is on average fairly low in Japan. ‘Japanese people learn English at school and they learn it pretty well, but they learn it off the written page,’ Daniel says. ‘Their spoken English is sometimes not so great, nor is their English listening.’

So what is keeping foreign law firms busy in Tokyo? There has been a significant expansion in the M&A market, both inbound and, to a much greater extent, outbound.

‘Deal flow of outbound M&A activities continues to be steady despite the recent correction of the excessively strong yen,’ Kiyoshi Endo, partner in the corporate and M&A group at Baker & McKenzie, says. Endo explains that Japanese corporations remain ‘cash rich, and can easily find the funds to invest abroad. Commercially, the shrinking economy, as well as the ageing and decreasing workforce, has left no other choice but to expand abroad.’

Japanese corporations are investing overseas in a wide variety of sectors, from manufacturing to services, to energy and finance. There has been a shift of investment to fast-growing south-east Asian economies, away from China, as a result of the tensions between the two countries. For example, Freshfields recently acted for Japanese life insurer Meiji Yasuda Life on its investment in Thailand’s Life Insurance.

But, as Jiro Toyokawa, partner in the corporate and M&A group at Baker & McKenzie, points out: ‘An important recent trend in the Japanese outbound M&A is a notable shift from mid-sized deals in Asia to larger transactions in the US and Europe.’

This year, Baker & McKenzie in Japan advised Dai-ichi Life Insurance Company on its acquisition of Protective Life Corporation, a US life insurance group listed on the New York Stock Exchange, in a transaction worth $5.7bn. ‘Following some successful mid-size acquisitions in the Asian market, more Japanese companies are willing to go further to acquire bigger targets in developed regions like the US and Europe,’ Toyokawa says.

M&A – both inbound and outbound – appears to be the focus of the toughest competition from domestic players. Anderson Mori & Tomotsune has seen significant growth in this area. In 2013, the firm advised global reinsurance giant Swiss Re Ltd on acquiring a stake in Japan’s Lifenet Insurance, while earlier this year it represented Japan’s Panasonic Corp in the purchase of Turkey-based electronics Viko Elektrik ve Elektronik Endustrisi Sanayi ve Ticaret Anonim Sirketi.

Battling for business is less challenging in project development and finance, particularly in natural resources, energy and renewables, because of historical and cultural links with the regions that are subject to investment. Japan relies on imports for about 84% of its energy requirements, and has faced shortages, particularly since Fukushima.

‘We have seen a lot of work in the Middle East and Africa,’ says Daniel. Simmons & Simmons is currently advising a large Japanese trading company on its bid to build an integrated water and power plant in Qatar, worth billions of dollars.

Cross-border transactional work is generating demand for international arbitration among Japanese investors. To meet increasing client demand, international firms are either expanding or starting arbitration teams in their Tokyo offices. That includes Simmons & Simmons, which created a dispute resolution team staffed by two lawyers earlier this year.

Japan is not a litigious society like the US, or even the UK. ‘There is still a preference among major Japanese corporates to see if they can sort problems by discussions and negotiations,’ Goodrich, who advises Japanese clients in contentious matters arising out of energy and infrastructure projects, notes.

‘But Japanese companies, the same as anybody else, will end up in disputes from time to time,’ he says. When this happens, they prefer neutral jurisdictions such as Hong Kong, Singapore or London to those of their opponents. Goodrich, who also advises on the construction and development of projects, notes that arbitration clauses are appearing in most of the bigger commercial contracts and transactions involving Japanese companies overseas.

But international law firms – through their bengoshi – are also representing clients in domestic litigation. ‘Our Japanese law team continues to be involved in litigation in IP and commercial litigation, and have had a run of wins in the Japanese courts on behalf of international clients,’ Beppu says.

Freshfields’ litigation team in Tokyo has carved a niche in employment litigation, winning landmark decisions in domestic courts, including a ruling on overtime compensation for white-collar employees.

There are also increasing opportunities in the domestic market, including in infrastructure as the Japanese government seeks more private funding. In one of its most high-profile mandates yet, Freshfields is representing the Japanese government in the privatisation of New Kansai International Airport Company, which manages the two airports serving Japan’s second largest city, Osaka.  

Real estate is also booming. Investment has risen to ¥3.5tr from the start of the year to September, the highest level since 2007, driven by the cheap yen, pro-growth policies and the 2020 Olympics. Japanese Real Estate Investment Trusts (J-REITs) are increasingly popular among retail and institutional investors. Kitazawa says Anderson Mori & Tomotsune has seen ‘significant growth’ in this area, having recently worked on J-REITs sponsored by Tokyu Real Estate, Japan’s construction group Daiwa House, Global Logistic Properties and Nomura Real Estate.

Alex Jampel, partner and co-head of the real estate group at Baker & McKenzie, says: ‘On the back of the positive macro-economic effects of Abenomics, the 2020 Tokyo Olympic and Paralympic Games provide a welcome boost to real estate and infrastructure investments in Japan.

‘There has been a surge in real estate activity, in both transactions and developments,’ he adds

The Olympic plans envisage the building or modification of as many as 33 venues for the events, 28 of which will be located within five miles of the proposed Olympic village along the waterfront in central Tokyo. The Tokyo Metropolitan Government has already accepted initial bids for some projects but the majority remain open, Jampel says. ‘With “green” as a major theme, this presents real opportunities for foreign companies with the right expertise,’ he concludes.

Despite the latest growth figures casting doubt on the health of the Japanese economy, in the medium- to long-term there appear to be plenty of reasons for international firms to be sanguine about the prospects in Japan.

Marialuisa Taddia is a freelance journalist

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