Recent events, including the trade conflict between the US and China, the COVID-19 pandemic and the Russian invasion of Ukraine, have heightened global interest in international trade and national/economic security.

In Japan, (i) the enactment of the Economic Security Promotion Act; (ii) the publication of the Guidelines for Respect for Human Rights in Responsible Supply Chains; (iii) the sanctions imposed in relation to the situation in Ukraine; (iv) competition policy issues in relation to activities to achieve Carbon Neutrality; and (v) the application of a new deemed export control regime, are all key developments in this field as explained below. In addition, a new foreign direct investment regime, under which investments in Japanese companies engaged in cybersecurity related and other regulated business are more frequently subject to review by authorities, has been applied since 2020.

Economic Security Promotion Act

The Economic Security Promotion Act (the “Act”) was enacted during the ordinary session of the Diet on 11 May 2022. The Act consists of the following four “pillars”.

Strengthening of the supply chains of important items and raw materials

In order to mitigate the increasingly serious impact that a potential supply disruption of semiconductors and pharmaceuticals may cause due to the reliance of industrial infrastructures and medical services on digitalisation, and in order to counter a relative decline in Japan’s ability to secure critical supplies in times of supply disruptions of essential items due to the growth of emerging countries and the deepening of global value chains, the following measures will be implemented in accordance with a basic policy that will be formulated in greater detail by the national government:

• designation of specified items and materials that are to be the subject of the measures;
• public support for private sector companies that contribute to the stable supply of specified items and materials in exchange for submitting a plan to the relevant authorities by such companies outlining the manner in which they hope to contribute to the stabilisation of the supply of such specified items and materials; and

• government measures to secure the stable supply of such specified items and materials.

Securing the safety and reliability of key infrastructures

In order to mitigate the risk of cyber-attacks due to the large-scale digitalisation of critical facilities of key infrastructures, a prior assessment system will be applied to the introduction of critical facilities for key infrastructures and the commission of maintenance and management of critical facilities. Businesses/business operators that will be particularly affected include: (i) companies that operate a key infrastructure; (ii) companies that supply specified critical facilities, or that supply parts to the key infrastructures classified under the preceding item (i); and (iii) companies that are commissioned to manage and maintain the specified key infrastructures classified under the preceding item (i). Foreign companies may find it difficult to pass the prior assessment regarding the supply of the specified critical facilities and management and maintenance of the specified key infrastructures. 

Implementing systems to develop and support key technologies by both public and private sectors

For advanced technologies critical for the stability of people’s daily lives and economic activities, a framework of government support and co-operation between the public and private sectors will be implemented. According to the written opinions issued by an expert advisory panel on economic security legislation during the preparation of the bill before its enactment into law, specified key technologies that will be targeted for support include those that fall within the areas of space engineering, marine engineering, quantum technology, artificial intelligence and biotechnology.

Prevention of leakage of sensitive data relating to inventions by non-disclosure of relevant patent information

In order to reinforce measures for the prevention of leakage of sensitive information through patent application procedures pertaining to inventions of which the disclosure may be likely to harm the security of Japanese citizens, the Act introduces: (i) a system of withholding the publication of such patent applications; and (ii) measures to protect the information relating to such patent applications. Businesses/business operators that will likely be affected by these measures are: (a) companies that engage in the research of nuclear technology or technologies related to the development of military weapons; and (b) companies that receive information from companies classified under item (a) above, or are licensed by the latter. Inventions that fall within specified technological areas and that originate in Japan are prohibited from being the subject of patent applications in other countries in principle, and penalties may be imposed for the violation of this rule.

Publication of the Guidelines for Respect for Human Rights in Responsible Supply Chains

Background

The discussion of business and human rights in Japan has evolved with the unanimous endorsement of the “Guiding Principles on Business and Human Rights” (the “UN Guiding Principles”) by the United Nations Human Rights Council in 2011 and with the recent growing attention being paid to the Sustainable Development Goals (SDGs). One milestone was the formulation of a “National Action Plan on Business and Human Rights (2020–2025)”  published in October 2020 (the “NAP”), the first time the Japanese government demonstrated its expectation that corporations doing business in Japan must respect human rights.

Although the NAP was a step forward in discussing business and human rights in Japan, there remained significant calls for formulating guidelines from companies, as NAP was unclear as to how to proceed with implementing specific measures. On 13 September 2022, the Japanese government published the “Guidelines for Respect for Human Rights in Responsible Supply Chains” (the “Guidelines”)  to more clearly explain and promote the efforts to respect human rights required in the UN Guiding Principles and to promote other international standards from companies.

The Guidelines are the first guidelines regarding business and human rights prepared by the Japanese government. Note that the Guidelines are not legally binding nor intended to serve as mandatory standards that must be followed and instead are to be understood as “soft law” in the sense that companies doing business in Japan are expected to fulfill their responsibilities for respecting human rights.

Overview of the Guidelines

As with Section II of the UN Guiding Principles, the Guidelines mainly consist of three sections: (i) the establishment of human rights policy, (ii) the implementation of a human rights due diligence (“HRDD”), and (iii) remedies.

Regarding (i) the establishment of human rights policy, companies are encouraged to express, both internally and externally, their commitment to fulfill their responsibility to respect human rights by establishing a human rights policy. The Guidelines also recommend engaging and holding discussions with their internal departments as well as with external stakeholders and others concerned.

With respect to (ii) the implementation of an HRDD, companies are encouraged to take four steps:

• identifying adverse human rights impacts on the company, its suppliers, and others concerned;
• preventing and mitigating adverse human rights impacts;
• assessing the effectiveness of the efforts; and
• explaining and disclosing information on how to address adverse impacts.

It is noteworthy that the Guidelines do not oblige companies to address all the adverse impacts identified but instead ask companies to prioritise adverse human rights impacts depending on their severity, as it would be too impractical to tackle every adverse impact.

Finally, with regard to (iii) the remedies, in order to promptly deal with grievances over adverse human rights impacts and provide relief directly to the victim, companies are encouraged to either establish a regime to deal with grievances concerning the company and its stakeholders, or to participate in a grievance mechanism established by an industry organisation or equivalent.

Future prospects

The state of implementation regarding respect for human rights in Japan varies significantly among companies. Some mature companies are taking cutting-edge initiatives, while others are just beginning the information gathering process. According to the results of the “Questionnaire survey on the efforts of Japanese companies to respect human rights in supply chains”,  conducted by the Japanese government in November 2021, 69% of the respondent companies have established a human rights policy, and 52% have implemented or were in the process of implementing an HRDD. However, since respondents are primarily limited to listed companies, many other Japanese companies, especially small and medium enterprises, have neither established a human rights policy nor a grievance system, nor have they conducted an HRDD.

On the other hand, although the Guidelines constitute only soft law and have no legally binding effect, many Japanese companies are paying attention to them, and business and human rights have become a hot topic in Japan. These issues become increasingly important in Japan, and will undoubtedly become a norm that must be observed by companies wishing to do business in Japan.

Sanctions in Relation to the Situation in Ukraine

Overall

In response to Russia’s military invasion of Ukraine, the Japanese government has been imposing economic sanctions against or in relation to Russia, Belarus and certain areas of Ukraine since February 2022. In doing so, Japan acts in coordination with the US, the EU and other countries, to the extent possible, in terms of the direction of sanction measures, sanctioned persons, and items subject to export ban. Japanese sanctions, however, do not always have the same impact as those of other countries since each country or organisation has its own sanction framework.

Japanese economic sanctions are mainly based on the Foreign Exchange and Foreign Trade Act. This act regulates cross-border issues or relations between Japan and foreign countries, and this gives rise to certain particularities in relation to the Japanese economic sanctions. Based on this act, competent authorities issue notifications that make specific transactions or actions subject to their permission or approval, which permission or approval in principle will not in practice be granted, thus effectively prohibiting the transaction or action in question.

Asset freeze

In relation to the situation in Ukraine, Japan compiles a long list of persons subject to an asset freeze, including entities/banks and their subsidiaries, and individuals, in or associated with Russia, Belarus and certain areas of Ukraine. The Japanese asset freeze measure is not such that it bans any transactions with sanctioned persons or freezes their assets in Japan. Rather, it prohibits international payments (in cash or kind, or by crypto-assets or offsetting) and certain types of capital transactions (bank deposits, trust settlements and loans) with the parties subject to the prohibition. For example, it prohibits payments by a Japanese resident to a sanctioned person, and payments by a non-Japanese resident to a sanctioned person made overseas via Japan. The asset freeze measure in relation to the situation in Ukraine does not yet restrict the receipt of payments from a sanctioned person.

Bans on exports and imports

Bans on exports and imports are also in place in relation to the situation in Ukraine. Particularly, it is banned to export a wide range of products and related technologies to Russia, Belarus or certain areas of Ukraine, and also to export any products and technologies to sanctioned persons. The list of persons subject to the export ban is different from that of the asset freeze. Export ban targets the movement of products as they are transferred across the border from Japan and finally delivered to a sanctioned area or person.

Ban on new investments

In May 2022, the G7 agreed to ban new investment in Russia, and this has been implemented in Japan in the following way. For example, a Japanese resident is not allowed to acquire new or additional equity interests in a non-Japanese company, either Russian or non-Russian, in relation to a Russian business, such that said acquisition would allow it to hold 10% or more of the target’s shares, or to extend a loan of more than a one-year term to a non-Japanese company in which it holds 10% or more shares, in relation to a Russian business. This means that a Japanese company may not provide financial support to its existing Russian subsidiary by way of additional investments or long-term loans.

Competition Policy Issues in Relation to Activities to Achieve Carbon Neutrality

In October 2020, Japan declared that it aims to achieve carbon neutrality by 2050. Significant efforts, including industrial reform, innovation, and large-scale investment are required in order to achieve this goal, and there are various areas where the collaboration of multiple companies is needed. Active discussions on how the Anti-monopoly Act would be applied and how competition policy can play a role in enhancing this effort have begun in Japan. 

As a part of this discussion, the Japan Fair Trade Commission (JFTC) and the Competition Policy Research Centre jointly held a symposium titled “Green Growth and Competition Policy” on 25 March 2022. The Study Group on Competition Policy for the Realisation of a Green Society, established by the Ministry of Economy, Trade and Industry, published its report concerning competition policy issues, on 20 September 2022. The report clarifies that, on one hand, as it has been in the past, it is necessary to strictly deal with and correct collaboration agreements between companies which unfairly restrict innovation towards carbon neutrality, but on the other hand, it is necessary to strongly support autonomous joint efforts of multiple companies that will contribute to the transformation of industrial structure for carbon neutrality.

While it is under discussion as to whether new guidelines are necessary in this regard, there are guidelines issued by the JFTC that can be referred to in relation to the efforts made by companies towards carbon neutrality, including, but not limited to, the Guidelines Concerning the Activities of Trade Associations (the “Guidelines on Trade Associations”), the Guidelines Concerning Joint Research and Development and the Guidelines Concerning Joint Activities for Recycling. For example, the Guidelines on Trade Associations clarify that self-regulation of trade associations on the variety, quality, standards and other aspects of goods and services, are reviewed in terms of three aspects; ie, (i) whether the activity unjustly harms the interests of users, (ii) whether it unjustly discriminates among firms, and (iii) whether the activity is within the necessary scope to achieve its social and public goals or other legitimate purposes. In addition, the JFTC publishes results of its consultations with companies, and these are also useful when assessing the legality of the joint efforts undertaken by companies.

Discussions on competition policy in relation to green policy are expected to continue to give more clarity on how joint efforts of companies are assessed under the Anti-monopoly Act in Japan.

Deemed Export Control

A new guideline regarding Deemed Export Control has been in effect since May 2022.

Deemed export control is a system put in place to control transactions that provide certain sensitive technology to “non-residents” in Japan. Its goal is to contribute to the maintaining of international peace and security, and it requires that certain transacting parties seek prior permission from the Ministry of the Economy, Trade and Industry (METI) under the Foreign Exchange and Foreign Trade Act (FEFTA).

In the past, not only Japanese nationals, but also foreign nationals working in offices in Japan were, in principle, considered “residents”, and the provision of technology between such “residents” was not subject to deemed export control regulation. Therefore, the provision of technology within a company was, in principle, exempted from control. In addition, since foreign nationals such as researchers and foreign students who have been in Japan for more than six months were also considered “residents”, the provision of technology by universities and such institutions to such persons was sometimes excluded from the deemed export control.

In order to address the above issue, under the new guidelines, it has been clarified that even the provision of technology to a “resident” (regardless of nationality) is subject to deemed export control if such provision is considered to be virtually the same as the provision of technology to a “non-resident”, or in other words, if a “resident” is under the strong influence of a “non-resident”.

The following are three types of cases in which a “resident” is considered to be virtually identical to a “non-resident” (specific types). Providing sensitive technology controlled by the FEFTA to a natural person who is a “resident” falling under one of the specified categories requires prior permission from METI.

• Persons who have entered into an employment contract or other contract with a foreign government or foreign corporation etc, and are subject to the instructions and orders of that foreign government or foreign corporation etc, or owe a duty of care to them.
• Persons who receive, or who have been promised, a large amount of money or other significant benefits from a foreign government or foreign juridical person.
• A person who receives instructions or requests from a foreign government etc, with respect to certain actions in Japan.

Under this new guideline, if a person who has an employment contract with a foreign company is dispatched to a Japanese company and such person receives sensitive information from the Japanese company, such a transfer of information would be subject to deemed export control.