Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
Construction and projects in Japan: overview
by Russell K Kawahara and Miho Niunoya, Atsumi & Sakai
Country Q&A | Law stated as at 01-Mar-2019 | Japan
A Q&A guide to construction and projects law in Japan.
The Q&A gives a high level overview of the main trends and significant deals; procurement arrangements;
transaction structures and corporate vehicles; financing projects; security and contractual protections that funders
require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual
provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and
consents; projects insurance; employment laws; health and safety; environmental issues; corrupt business practices
and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax
liability; and proposals for reform.
To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.
This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit
www.practicallaw.com/construction-guide.
Overview of the construction and projects sector
1. What are the main trends in the local construction and projects market? What are the most
significant deals?
Main trends
In recent years, the number and volume of construction and infrastructure projects in Japan have been increasing
and are expected to continue to increase at least until the Tokyo Olympics, which will be held in the summer of 2020.
This increased construction activity reflects the demand arising from the need to:
•
Prepare for the 2020 Summer Olympics.
•
Clean up and rebuild the Tohoku region following the Great East Japan Earthquake of 11 March 2011.
•
Rebuild following, and prepare for, natural disasters such as typhoons and heavy rains that struck large parts
of Western Japan in early 2018.
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
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Respond to steady demand for new buildings and infrastructure reflecting dynamic economic growth, urban
planning and application of new technologies (see below, Major projects).
As a result, manpower and construction materials have been in short supply, and construction costs have continued
to increase rapidly.
Coincidentally, there has been a shift from the construction of new infrastructure to the maintenance of existing
infrastructure in Japan, which may be another manifestation of the strains on the construction industry in Japan.
In the energy field, the development of solar power plants is continuing, even though the Japanese Government
decreased the procurement price of solar power. The development of other types of renewable energy, especially
offshore wind power projects, are rapidly increasing and expected to go into high gear next year.
Major projects
These include the following:
•
Linear Motor Car Project.The Linear Motor Car Project is a maglev bullet train proposed to run between
Shinagawa Station in Tokyo and Shin-Osaka Station in Osaka (285.6 kilometres in total). At the maximum
speed of 505 kilometres an hour (314 mph), passengers will be able to travel between Tokyo and ShinOsaka in 67 minutes. The project will proceed in two phases, with the first phase being a line between
Shinagawa Station and Nagoya Station scheduled to open in 2027 and the second phase between Nagoya
Station and Shin-Osaka Station scheduled to open in 2037. The construction of the linear motor car line
started in December 2014 and now the construction works of tunnels, stations and emergency exits are
proceeding. Almost 90% of the 286-kilometre (178-mile) line between Shinagawa Station and Nagoya will
be underground. The area near Nagoya Station is part of a large redevelopment plan, as it is expected that
economic growth and activity will be stimulated by the opening of the Linear Motor Car Station there. The
total construction cost is projected to be about JPY5.523,200 trillion.
•
Hokkaido Shinkansen. The Hokkaido Shinkansen (Shinkansen in Hokkaido Area) between Shin-Aomori
Station in Aomori Prefecture on the Island of Honshu and Sapporo Station on the Island of Hokkaido (360
kilometres) is under construction. The first phase between Shin-Aomori Station and Shin-Hakodate Hokuto
Station (149 kilometres) which includes the Seikan Tunnel on the seabed between Honshu and Hokkaido
was completed and started operation in March 2016. Now the construction of the remaining portion between
Shin-Hakodate Hokuto Station and Sapporo Station (211 kilometres) is proceeding and is planned to start
operation by the end of March 2031.
•
Redevelopment of Tokyo. In anticipation of the Tokyo Olympics and Paralympics 2020 and to make
Tokyo more competitive with other global cities, many regions in Tokyo are under redevelopment, including
Shibuya, Toranomon and Shinagawa.
•
Redevelopment of Shibuya station area. Shibuya station and the land around the station (5.5 hectares)
have been under redevelopment since 2010. Shibuya station is the fourth busiest station in Japan, servicing
eight train and subway lines and a number of bus lines. However, the station is old and its layout is too
complex. The buildings in front of the station have also aged. Therefore, a plan was launched to completely
redevelop the station and its surrounding area between 2010 and 2026.
•
The construction works involving the station itself have largely been completed, and a new shopping
building, Shibuya Hikarie, was completed and started operation in 2012. In 2018, Shibuya Stream, a
new 35 storey complex along the Shibuya River, opened and features restaurants and cafes with seating
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
designed for open-air dining, a hotel, an event hall and office space. The construction of the tallest building
in the redevelopment plan, which will be 46-storeys high (228.3 metres), started in 2014. This building
is scheduled to begin operations before the 2020 Olympics for office use and retail shopping malls. This
building will become the symbolic tower of the Shibuya area.
•
Redevelopment of Toranomon area. The Toranomon area which is adjacent to Kasumigaseki, the
national government office area, is under redevelopment. In 2014, Toranomon Hills, a 52-storey high
skyscraper project was built over the extension of a highway known as McArthur Dori. The extension of the
highway had been planned since the end of World War II, but could not be completed earlier because of the
difficulty of acquiring the necessary land rights. Eventually, the highway is envisioned as becoming a treelined boulevard featuring shops and cafes similar to the Champs-Élysées. A new subway station is also under
construction and scheduled to be opened by the 2020 Olympics.
•
Toranomon–Azabudai District Redevelopment. Near Toranomon Hills, Mori Building Co., Ltd. Is
leading the redevelopment of a 8.1 hectare area spanning portions of Toranomon, Azabudai and Roppongi
known as the Toranomon Azabudai District Redevelopment project. The project is aimed at creating a
favourable environment for foreigners living in Tokyo and will include construction of seven new buildings,
including a 300-metre high (65-storey) building which when complete will be the tallest building in Japan,
an international school, 1300 apartments and service apartments, office buildings and retail stores as well
as a network of outdoor and underground walkways connecting Kamiyacho and Roppongi 1-Chome subway
stations. The project is scheduled to be completed in 2022.
•
New Shinagawa Station and Vicinity. A new train station for the JR Yamanote Line and Keihin Tohoku
Line between Shinagawa Station and Tamachi Station is being developed in the Konan area of Minato Ward
of Tokyo. The station complex was designed by famed architect, Kengo Kuma, and is said to be inspired
by origami (traditional Japanese folding paper). The station building will be a three-storey structure with
a 4,000-square metre glass and steel roof supported by wooden pillars. The station is scheduled to be
provisionally opened before the Tokyo Olympics in 2020, with completion of all facilities by 2024.
•
The station area project is part of the plan to make the Shinagawa area Tokyo’s entry area to the rest of the
world. It is envisioned as an international exchange hub and will include the development of high rise office
buildings on 130,000 square meters of land just west of the station. The station is located twenty minutes
away from Haneda Airport and will also be served by the Bullet Train (shinkansen). The area has been
designated by the Japanese government as a Special Zone for Asian Headquarters which means that tax
incentives will be granted to foreign companies that establish their regional headquarters or research and
development facilities in the zone.
•
Reconstruction of disaster areas and National Resilience. Recently, Japan has suffered huge
damage from many natural disasters, such as the earthquake in the North-Osaka Area, heavy rain and floods
in western Japan, earthquake and landslides in Hokkaido, and the high waves and landslides in the Kinki
Area due to strong typhoons. Reconstruction of these disaster areas has been proceeding.
•
In 2014, the government issued the Basic Plan of National Resilience to protect the lives and assets of people
and the important infrastructure of society to make plans to prepare the measures to be taken and increase
the budget for the national resilience to such disasters.
•
Offshore wind power projects. Especially notable among these are the large scale offshore wind power
projects in Akita Prefecture (about 1620MW in total) and Aomori Prefecture (about 1880MW in total).
•
In July 2016, the revised Port and Harbor Act was implemented. Under this new Act, a system of longterm (up to 20 years) exclusive use of port areas for offshore wind power was introduced which led to the
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
increase in the development of offshore wind power projects. Under this new system, the bidding process
was conducted by Kitakyushu Port and Kashima Port.
•
The lack of any uniform national law governing the general sea areas has restricted the development of such
projects. Each local public body issues ordinances on the exclusive use of general sea areas. These ordinances
require the owner/developer of the offshore wind power project to discuss with and obtain the consents
from each relevant stakeholder of the sea area, such as local fishermen, before applying for exclusive use. In
addition, most of the ordinances grant exclusive use for only three to five years, making it difficult to obtain
financing.
•
To address this problem, a Bill passed the Diet in November 2018 to provide a process by which business
users could be granted the exclusive use of specific sea areas for up to 30 years. Under this new law, it is
expected that there will be a significant development of offshore wind power facilities in the extensive
general sea areas.
Procurement arrangements
2.Which are the most common procurement arrangements if the main parties are local? Are these
arrangements different if some or all of the main parties are international contractors or consultants?
The most common procurement arrangement is a competitive bid based on price only. However, recently, bids based
on the price as well as other aspects of the bidders' proposals have been increasing for larger projects. A public bid
is required for deals that are subject to the rules of the World Trade Organization. There is no difference between
local deals and international deals.
Transaction structures
3. What transaction structures and corporate vehicles are most commonly used in both local and
international projects?
Local projects
The most basic construction project will involve an owner and a construction company or consortium. The owner
can be:
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
•
An individual (or a group of individuals).
•
A legal entity (for example, a corporation or a special purpose vehicle).
•
In the case of public works and/or infrastructure projects, a governmental or a quasi-governmental entity.
See Question 4 for further detail on the use of special purpose vehicles and other financing structures.
The most common construction structure is a single construction company or a joint venture that consists of two or
more construction companies. In the case of a design-build project, there will usually be a consortium comprised of
a design company and a construction company. Alternatively, a large general contractor that has its own architect
office will handle the project. In the case of private finance initiative and public private partnership projects that
include operation and maintenance, a consortium will be formed among a design company, a construction company,
an operation and maintenance company and other types of companies.
International projects
The structures are the same for local and international projects (see above, Local projects).
Finance
4. How are projects financed? How do arrangements differ for major international projects?
Land and buildings are separate estates in Japan. For the construction of a new building, the contractor will generally
be the owner of the building until the building is completed and delivered to the owner (which is usually the
landowner or the lessee of the ground). On receipt of final payment from the owner, the contractor will deliver the
completed building to the owner and the building will be registered for the first time in the real estate registry. In this
context, owners and contractors typically use common corporate finance debt for construction projects. In practice,
the owner pays the construction price to the contractor in several instalments as certain phases of the project are
completed. The owner can use corporate finance debt to fund these payments. The contractor will fund the costs of
construction through corporate finance debt, which can be repaid as it receives payments from the owner.
Project finance tends to be used in:
•
Private finance initiative projects.
•
Renewable energy projects.
Limited recourse finance is typically used for major real estate development projects.
The two most commonly used structures are the:
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
•
GK-TK structure. Under this structure, a limited liability company (godo kaisha) (GK) is established as a
special purpose company that obtains equity by entering into anonymous partnership agreements (tokumei
kumiai) (TK) with passive investors. The GK will also obtain limited recourse debt from banks.
•
TMK structure. Under this structure, a special purpose company (tokutei mokuteki kaisha) (TMK) is
established. The TMK obtains equity primarily by issuing preferred equity to investors. The TMK will issue
bonds to obtain limited recourse financing from certain qualified institutional investors. A TMK can also
obtain bank loans, in addition to the issuing of bonds.
The GK-TK structure is often adopted in renewable energy projects involving international investors. There is
otherwise no difference between local and international projects.
Security and contractual protections
5. What forms of security and contractual protections do funders typically require to protect their
investments?
Security
In the case of corporate finance, the typical security is a mortgage over the land or building owned by the borrower.
In the case of project finance or real estate finance, the security package will include:
•
A mortgage over the land or any other assets involved in the project.
•
Pledges over insurance, bank accounts, equity, and over any rights to claim for payments.
Bonds issued by TMKs (tokutei mokuteki kaisha) (see Question 4) are usually only secured by a statutory preferential
lien on the company (ippan tampo).
There is no difference between local and international projects.
Contractual
In the case of corporate finance, the following contractual protections are typically used to provide credit support
to the financing:
•
Parent company guarantees.
•
Guarantees from the company's representative director (in the case of a small company).
•
Mortgages over other real estate property owned by the borrower or its parent company.
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
In the case of project finance or real estate finance, contractual protections include:
•
Collateral assignment of some assets for security purposes (joto tanpo).
•
Reservation of assignment of contractual rights, which is a security interest that provides the lender the
option to have the contract rights assigned to it or to a designated third party on the occurrence of a trigger
event.
•
Negative pledges.
•
Representations and warranties by the borrower.
•
Sponsor letters (covering "bad boy" acts and certain other specified risks).
There is no difference between local and international projects.
Standard forms of contracts
6. What standard forms of contracts are used for both local and international projects? Which
organisations publish them?
Local projects
Public construction projects. A standard form contract prepared and published by the advisory board
established under the Construction Industry Act (Chuo Kensetsugyo Shingikai is used for traditional public
construction projects.
For private finance initiative projects and public private partnerships, the Prime Minister's Cabinet Office published
a form for use in simple build-transfer-operate projects, which is a category of projects under the Private Finance
Initiative Act. However, this form has not been widely accepted, as many more suitable forms already existed, which
are available on the websites of the relevant public entities.
Private construction projects. In traditional private projects, the standard form contract prepared and
published jointly by seven major architect associations and construction company associations (Kyu-Shikai Rengou
Yakkan) is typically used. No particular form is used when project finance and real estate finance are used, but there
are various precedents and sample contracts available.
International projects
Public construction projects. There is no difference between local and international projects (see above, Local
projects).
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
Private construction projects. In international projects, the standard form contract prepared and published
jointly by seven major architect associations and construction company associations (Kyu-Shikai Rengou Yakkan)
is typically used. However, depending on the bargaining power of the parties, the parties can use the forms prepared
by:
•
The International Federation of Consulting Engineers (FIDIC).
•
The Engineering Advancement Association of Japan (ENAA).
•
The American Institute of Architects (AIA).
•
Any other organisations.
Contractual issues
Contractors' risks
7. What risks are typically allocated to the contractor? How are these risks offset or managed?
Price escalation, including labour cost escalation, is a risk typically allocated to the contractor. The exceptions that
are typically agreed in the construction contract are that:
•
Any price escalation (including labour cost escalation) after one year has passed from the date of execution
of the construction contract is allocated to the owner.
•
The risk arising from dramatic changes of economic condition is allocated to the owner.
Risks relating to ground conditions are usually borne by the owner, unless the condition could have been discovered
through an investigation to be conducted by the contractor at the pre- or early construction stage. The owner usually
bears the risk of force majeure events, provided that this is reasonable. However, in public projects, the contractor
usually assumes responsibility for 1% of damages and increased costs.
In the case of private finance initiative and public private partnerships, the contract usually provides for a much
more detailed allocation of risk, as it usually includes provisions relating to the operation/maintenance of the project
for more than 15 years.
There is no difference between local and international projects.
Excluding liability
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
8. How can liability be excluded or restricted under local law?
While it is possible to exclude liability for consequential loss and/or loss of profit, liability for these is not typically
excluded. Under the Japanese Civil Code, the general rule is that only damages that can reasonably arise from a
breach must be compensated by the party in breach, which may act as a limitation of liability.
Additionally, it is common to establish different defect liability periods for defects caused by gross negligence/wilful
misconduct and those arising from other causes.
Caps on liability
9. Do the parties usually agree to a cap on liability? If yes, how is this usually fixed? What liabilities,
if any, are typically not capped?
Except for liquidated damages clauses covering delays in completing the work (see Question 11), it is not usual to
agree on a cap of liability, although it is legally permitted.
Force majeure
10. Are force majeure exclusions available and enforceable?
Force majeure clauses are enforceable and quite common. The owner generally bears the risk of force majeure events.
However, in public construction projects, it is common for the contractor to assume the risk of 1% of the damages
and increased costs.
In typical construction contracts, the definition of force majeure tends to be limited to natural disasters. In contracts
used in project finance, the scope of force majeure events is commonly wider, and covers any event that cannot be
predicted nor avoided.
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
Material delays
11. What contractual provisions are typically negotiated to cover material delays to the project?
The parties typically negotiate a liquidated damages clause to cover material delays, under which the contractor
must compensate for damages up to a maximum of a fixed percentage of the contract price. Usually, the owner can
terminate the construction contract if the contractor fails to attempt to cure the delay within a reasonable period.
The construction contract usually allows the contractor to propose changes to the scheduled completion time if the
delay is caused by the owner or by a force majeure event.
There is no difference between local and international projects.
Material variations
12. What contractual provisions are typically negotiated to cover variations to the works?
Provisions for changing the completion time and the contract price are the most frequently negotiated to cover
variations to the works, including those caused by the owner's orders.
Other negotiated provisions
13. What other contractual provisions are usually heavily negotiated by the parties?
The defect liability period is one of the most typically negotiated provisions, especially for projects involving the
construction of plants. The defect liability period will differ according to the type of machines and parts of the plant,
and the respective bargaining power of the owner and contractor.
Architects, engineers and construction professionals
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
14. How are construction professionals usually selected? Following selection, how are they then
formally appointed?
Architects, engineers and other construction professionals who have licences and/or experience in the field are
employed by architect firms, construction companies or consulting companies. In public projects, these companies
are selected in principle through a formal tender process. In private projects, these companies or construction
professionals are typically selected after the owner receives and reviews competitive quotes.
There is no difference between local and international projects.
15. What provisions of construction professionals' appointments are most heavily negotiated? Are
liabilities commonly limited or capped in construction professionals' appointments?
Negotiated provisions
Provisions that are typically negotiated are those related to:
•
Defect liability.
•
The obligation to inspect the plans, ground and other conditions in advance.
•
Change order.
•
Force majeure and insurance.
•
Copyright.
Liability
There are usually no provisions on limitation of liabilities. There is no difference between local project and
international project in this context.
Payment for construction work
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
16. What are the usual methods of payment for construction work? Are there ways for the contractor
and consultants to secure payment or mitigate risks of non-payment under local law?
Methods of payment
Payments to contractors are usually made by bank wire transfer or instrument (tegata). Cheques are rarely used
in Japan. Accordingly, the concept of joint cheque does not exist. Owners usually only make payments directly to
the general contractor. On receipt of payment, the general contractor must pay subcontractors within certain legally
mandated deadlines.
Securing payment
A contractor can have a statutory retention right (ryuchiken) until delivery of the work product to the owner. It is
also possible to register a statutory lien (sakidoritokken) over the land on the real estate registry before starting
construction.
The Construction Business Act and the Act against Delay in Payment of Subcontract Proceeds, Etc. protect
subcontractors against any unreasonable delay of payment by the general contractor.
Subcontractors
17. How do the parties typically manage their relationships with subcontractors?
A general contractor and a subcontractor will enter into a contractual agreement. Parties typically use the standard
form contract published by Kyu-Shikai Rengou Yakkan (see Question 6).
Under Japanese law, the client (funder, owner) is not liable to pay a subcontractor directly.
Licensing
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
18.What licences and other consents must contractors and construction professionals have to carry out
local construction work? Are there any specific licensing requirements for international contractors
and construction professionals?
A contractor must have a construction business licence (Construction Business Act (Kensetsugyou-hou)). An
architect must have an architect licence (Act on Architects and Building Engineers (Kenchikushi-hou)). These
licences are granted by the Minister of Land, Infrastructure, Transport and Tourism or the governor of the local
government, depending on the type of licence.
There are no specific licensing requirements for international contractors and construction professionals.
International contractors and professionals must comply with the same requirements as those governing domestic
contractors and professionals.
To participate in bids for construction projects or procurement held by the national government or local
governments, a construction company must be registered on a list prepared by the relevant government. To be
registered, the relevant government must verify that certain requirements are fulfilled.
19. What licences and other consents must a project obtain?
Before
In most cases, a building certification (that is, a confirmation of the building plan) must be obtained before
construction. The owner is responsible for submitting the application for building certification. Typically, the
architect or design firm will submit the application on behalf of the owner. Additionally, the owner must submit a
notice of commencement of construction work to the governor of the relevant prefecture.
During
The owner must have the work inspected by the relevant local government authorities or a certified inspection
organisation during the construction period after the completion of certain works specified in the law and local
regulations. The owner must apply for building certification within four days after completion of these specified
works. After the inspection is completed, a certificate of interim confirmation is issued, and the construction can
be resumed.
On completion
A final inspection is required on completion of the construction of the building. The owner must apply for a building
inspection within four days after completion of the work. If the building passes the inspection, a certificate of
completion is issued.
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
Projects insurance
20. What types of insurance must be maintained by law? Are other non-compulsory types of insurance
maintained under contract?
Compulsory insurance
A construction company must maintain labour insurance and social insurance. Labour insurance includes labour
accident insurance. There is no difference between Japanese workers and foreign workers with respect to the
availability and coverage of labour insurance.
Non-compulsory insurance
Under construction contracts, contractors often have the obligation to maintain:
•
Liability insurance against personal injury and property damage.
•
Fire insurance.
•
Automobile insurance.
•
Product liability insurance.
It may be possible to obtain single project insurance, depending on the type of insurance required.
Employment laws
21. What are the main requirements for hiring local and foreign workers?
Local workers
There are no specific requirements for hiring local workers for construction work.
Foreign workers
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
In principle, it is not possible to hire foreign nationals for construction work in Japan, except for foreign nationals
who hold certain visas for specialised skills (such as engineers). However, in 2014, the Japanese Government
changed its policy and temporarily liberalised the rules governing the ability of foreign nationals to be employed for
construction work. This new system was implemented to address the construction demand arising from the Olympic
Games (to be held in 2020). The new system is only applicable for the period between April 2015 and March 2021.
Under the new system, a foreign worker who has completed practical education for three years in Japan can be
employed for construction work in Japan for several years.
22. Which employment laws are relevant to projects?
The following laws are relevant to projects:
•
Labour Standard Act.
•
Minimum Wage Act.
•
Industrial Safety and Health Act.
23. Must an employer pay statutory redundancy or other payments at the end of a project? Are all
employees eligible?
If an employee is hired for a specific limited period (that is, a contract worker), the employer does not need to make
any payment at the end of this period.
To terminate the employment of full-time employees, an employer must:
•
Have a justified reason.
•
Make certain payments, in accordance with the applicable laws and work rules.
Health and safety
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
24. Which health and safety laws apply to projects?
The Industrial Safety and Health Act requires a company to:
•
Designate certain managers responsible for health and safety.
•
Take necessary measures to avoid accidents.
•
Provide health and safety training to its employees.
•
Provide certain required healthcare checks to its employees.
In addition, a construction company has several other obligations, such as installing and maintaining machinery and
equipment that are necessary to rescue employees in the event of labour accidents and drilling to rescue employees
in labour accidents.
General contractors must take measures to ensure that subcontractors comply with the Industrial Safety and Health
Act. Failure to comply with the Act can be subject to penalties, which will depend on the nature of the breach (for
example, a fine of up to JPY500,000, imprisonment for up to six months, and so on).
If a labour accident occurs, a company must compensate the affected employees. For example, a company must offer
compensation for curing any injury and/or sickness and offer 60 days' salary if the employees cannot work due to the
injury or sickness caused by the labour accident. In most cases, this compensation is covered by labour insurance.
Environmental issues
25. Which local laws regulate projects' effects on the environment?
Air
Under the Air Pollution Control Act, a contractor must not emit any specified gas or material (for example, soot and
smoke), and volatile organic compounds, in amounts that exceed the specified limit. This Act also strictly regulates
the procedure for certain construction work, including the dismantling of existing buildings containing asbestos.
Additionally, there may be stricter regulations at the prefectural level.
Water
Under the Water Pollution Control Act, a contractor must not emit wastewater that fails to comply with water quality
standards. In addition, each prefecture may have stricter local regulations.
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
To discharge wastewater into a river, permission must be obtained from the manager of the river.
Waste
Under the Waste Disposal Treatment Act, waste materials produced during construction work must be disposed of
in accordance with the Act. In particular, the disposal of waste materials that include asbestos is subject to a special
procedure (which is specified in the Act).
Environmental impact assessments (EIAs)
Under the Environmental Impact Assessment Act and the Environmental Impact Assessment Local Regulation, an
EIA must be conducted before the commencement of specified projects (for example, toll roads, railways, airports,
electricity generation plants, development of residential areas, industrial parks, and so on), depending on the scale
of the project, the output of electricity and other criteria.
Sustainable development
Under the Construction Material Recycling Law, contractors must recycle materials obtained through demolition
of a project.
The noise and oscillation caused by construction works are also regulated under the Noise Control Act and the
Oscillation Control Act.
26. Do new buildings need to meet carbon emissions or climate change targets?
Under the Act on Rationalisation of Use of Energy, Etc., contractors are subject to a "best efforts" obligation to
save energy in accordance with the national standard for large scale buildings. The "net zero-energy building" is
a recommended target, but not yet an obligation. Some local governments (for example, the Tokyo Metropolitan
Government) also issued local regulations that require large scale offices to decrease carbon emissions.
Prohibiting corrupt practices
27. Are there any rules prohibiting corrupt business practices and bribery (particularly any rules
targeting the projects sector)? What are the applicable civil or criminal penalties?
Rules
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
The Criminal Act prohibits providing and receiving bribery to and from a government official.
Under the Political Funds Control Act, a company can only make donations to certified political parties and
their registered funding organisations, and cannot donate to individual politicians. This Act also imposes other
restrictions on donations (for example, restrictions on the amount of donation made by the same person/company).
Penalties
The following criminal penalties apply:
•
A person who provides a bribe can be subject to imprisonment for up to three years or to a fine of up to
JPY2.5 million.
•
A person who receives a bribe can be subject to imprisonment for up to seven years.
•
A person who provides money for lobbying can be subject to imprisonment for up to one year or to a fine of
up to JPY2.5 million.
•
A person who violates the Political Funds Control Law can be subject to imprisonment for up to three years
or to a fine of up to JPY500,000.
Bankruptcy/insolvency
28. What rights do the client and funder have on the contractor's bankruptcy or insolvency?
In the case of bankruptcy of the contractor, the bankruptcy trustee can decide whether to continue existing
construction contracts (Bankruptcy Act). Although the owner typically has a contractual right to terminate the
construction contract if the contractor becomes insolvent or bankrupt, the right of the bankruptcy trustee to continue
or terminate the contract has priority. Therefore, if the bankruptcy trustee decides to continue an existing contract,
the owner will not be able to exercise its contractual right to terminate. However, the owner can send a formal request
to the bankruptcy trustee to indicate whether it wishes to terminate the construction contract. If the owner does not
receive a response within a reasonable time, the contract is deemed to be terminated.
PPPs
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
29. Are public private partnerships (PPPs) common in local construction projects? If so, which sectors
commonly use PPPs?
PPPs are becoming more popular in Japan. In June 2017, the Japanese Government published the PPP/PFI
Promotion Action Plan 2017, which:
•
Added MICE (meetings, incentives, conventions and exhibitions) and ports as target sectors for the use of
concessions. Under the Action Plan before the 2017 revisions, the target sectors were airports, water supply,
sewage water treatment systems, highways, cultural facilities and public residences.
•
Provides for the use of public land for PPP projects.
The Japanese Government targets to launch a total JPY21 trillion of PPP projects over ten years from April 2013.
In addition, in December 2015, the Japanese Government issued a guideline encouraging the ministries and the
local governments governing populations of 200,000 or more citizens to consider using PPP and private finance
initiative models for public works, rather than other models. It is expected that all ministries and 80% of the local
governments will prepare and enact their own regulations to follow the guideline. As a result, the amount of new PPP
projects is increasing and the sectors in which PPP projects are used are expanding. For example, the development
of a harbour for cruise ships and the development of a horse race track using PPP schemes are currently under
planning. More creative proposals from the private sector tend to be accepted as PPP projects.
30. What local laws apply to PPPs?
The Act on Promotion of Private Finance Initiative (PFI) specifically provides the legal framework for PFI in Japan.
31. What is the typical procurement/tender process in a PPP transaction? Does the government or
another body publish standard forms of PPP project agreement and related contracts?
The process in PPP transactions is governed by the:
•
General tender process provisions for public tenders, as specified in the Cabinet Order on Budgets, the
Settlement of Accounts, and Accounting, the Local Autonomy Act, and the Act for Promoting Proper
Tendering and Contracting for Public Works.
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
•
Act on Promotion of Private Finance Initiative (PFI Act).
The main stages of the tender process are as follows:
•
The relevant public authority publishes an outline of the project plan.
•
The public authority determines that the project will be conducted under the PFI Act.
•
The public authority publishes the tender documents, including information on the tender process and
selection system, essential information on the project, contract forms, work requirements, monitoring
system, draft agreements to be executed by the public authority and so on.
•
The public authority selects the winning bidder, taking into account both the price and the proposals
submitted.
See Question 6 for details on standard forms of contracts.
Dispute resolution
32. Which are the most common formal dispute resolution methods used? Which courts and
arbitration organisations deal with construction disputes?
Formal dispute resolution methods
Court litigation is the most common method used for resolving construction disputes.
In the case of international projects, arbitration or mediation under the rules of the Japan Commercial Arbitration
Association (JCCA) are sometimes used as an alternative.
Courts and arbitration organisations
The Tokyo District Court and Osaka District Court have a separate department dedicated to construction disputes
only. Members of these departments include construction specialists, from whom the court can obtain advice. At
the outset of the litigation process, the court will often require the parties to try to resolve their dispute through a
court-supervised conciliation (chotei) procedure.
The JCCA offers arbitration and mediation services to international parties (www.jcaa.or.jp/e/index.html (in
English)).
The Committee for Adjustment of Construction Work Disputes offers the following dispute resolution services to
domestic parties (www.mlit.go.jp/totikensangyo/const/totikensangyo_const_tk1_000084.html (in Japanese)):
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
•
Arbitration (chusai).
•
Mediation (assen).
•
Conciliation (chotei).
33. What are the most commonly used alternative dispute resolution (ADR) methods?
Conciliation at the Construction Dispute Resolution Board (kenchiku funsou shinsakai), which is the ADR
organisation established under the Construction Business Act, is the most popular form of ADR method for domestic
construction disputes. In international construction disputes, arbitration under the rules of the Japan Commercial
Arbitration Association may be the most common form of ADR method.
See also Question 32.
Tax
34. What are the main tax issues arising on projects?
The taxes arising on projects include:
•
Real estate acquisition tax (fudousan shutoku zei), which is imposed on the acquisition of land and buildings
based on the purchase price, and is payable to the tax office of the prefecture in which the project is located.
•
Registration and licence tax (touroku menkyo zei), which is imposed on registration of ownership, use rights
and security over real estate property, and is payable to the Government's Legal Affairs Bureau.
•
Fixed asset tax (kotei shisan zei), which is imposed on owners of real estate and payable to the city or
municipality in which the project is located.
No acquisition tax is payable in the case of a newly constructed building, but registration and licence tax will be
payable when the building is first registered by the contractor or first owner.
The amount of the registration and licence tax and fixed asset tax is calculated based on the assessed value of real
estate property in the area (Rosenka), which is determined and published by the head of the National Tax Office.
The Rosenka is updated every three years, reflecting the actual increase or decrease in value of real estate of the
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
area. However, there is no tax that reflects the increase in land value following completion of a specific project.
Additionally, there are no contributions imposed to fund infrastructure.
35. Are any methods commonly used to mitigate tax liability on projects? Are there any tax incentives
to carry out regeneration projects?
Mitigating tax
Other than the tax incentives listed below, there are no methods commonly used to mitigate tax liability on public
private partnership (PPP) projects. Instead, subsidies may be available to serve certain political objectives. For
example, some subsidies are available for the review/study of new PPP projects, the introduction of highly efficient
materials, net zero energy buildings, and so on.
Tax incentives
Tax benefits and incentives include:
•
Green investment tax cuts, which reduce the tax applicable to renewable energy projects and emission
limitation facilities of a certain scale.
•
Reduction of fixed asset property tax on newly built residential properties, especially for properties that
obtained a certificate of residence in good condition for a long period.
•
Tax reductions for carrying out seismic reinforcement work and other renovation work on residential
properties.
•
Tax reductions relating to the maintenance and regeneration of specific areas (for example, historical
buildings).
Other requirements for international contractors
36. Are there any specific requirements that international contractors or construction professionals
must comply with?
There are no particular requirements specifically applicable to international contractors or construction
professionals.
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
Reform
37. Are there any proposals to reform construction and projects law? Are there any new legal or
regulatory trends affecting projects?
Reform proposals
The Port and Harbour Act was amended on 2 June 2017. Under the new Act, private cruise companies that construct
tourist terminals and other facilities in the ports designated by the Japanese Government will gain the priority right
to use the quay. The Japanese Government plans to designate six ports that will be eligible for this treatment under
the new Act.
Amendments of the Water Supply Act were submitted to the Diet in March 2017. These amendments allow the use
of public private partnerships for water supply projects, including concessions.
Trends
See Question 21, Foreign workers, and Question 29.
Contributor profiles
Russell K Kawahara, Partner
Atsumi & Sakai
T +81 3 5501 1054
F +81 3 5501 2211
E russell.kawahara@aplaw.jp
W www.aplaw.jp
Professional qualifications. California, US, Attorney-at-Law, 1982; Japan, Registered Foreign
Attorney (Gaikokuho Jimu Bengoshi), 2002
Areas of practice. Real estate; real estate finance; construction.
Non-professional qualifications. Juris Doctor, University of Chicago Law School; BA in Economics
and History with Distinction, Stanford University
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
Recent transactions
•
•
Representation of corporate, financial institutions and investment fund clients in connection with
cross-border real estate transactions, including:
•
construction, acquisitions and disposals, and asset management of commercial, residential,
industrial, logistics, retail, hotel, and resort properties;
•
secured financings structured as loans or TMK bond issuances;
•
joint ventures and investment structuring;
•
workout and distressed asset transactions; and
•
asset management issues.
Recognised as an Asialaw Profiles Market Leading Lawyer (Construction & Real Estate) from
2017 to 2019; a Leading Individual in Real Estate and Construction Law by The Legal 500 Asia
Pacific in 2019, a Leading Lawyer in Real Estate in Japan by Chambers Asia Pacific from 2011 to
2017, and an Asialaw Profiles Leading Lawyer (Real Estate) in 2011.
Languages. English, Japanese
Professional associations/memberships. State Bar of California; Dai-Ichi Tokyo Bar Association;
Urban Land Institute, Japan Chapter (Executive Committee).
Publications.
•
Construction and projects in Japan, Construction and Projects Global Guide 2015-2017,
Practical Law, (Thomson Reuters) (co-author).
•
Global Legal Insights - Corporate Real Estate, First Edition, Japan Chapter, Global Legal
Group (2014) (co-author).
•
Real Estate Investment in Japan, Rechtshandbuch Immobilien Investitionen, chapter on
Japanese real estate investment, Verlag C.H.Beck (2009) (co-author).
Miho Niunoya, Partner
Atsumi & Sakai
T +81 3 5501 1163
F +81 3 5501 2211
E miho.niunoya@aplaw.jp
W www.aplaw.jp
Professional qualifications. Japan, Attorney-at-Law (Bengoshi)
© 2020 Thomson Reuters. All rights reserved.
24
Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
Areas of practice. Domestic and overseas construction; PPP; energy; project finance; resolution of
construction disputes.
Non-professional qualifications. LLM, Northwestern University School of Law; LLB, Hitotsubashi
University
Recent transactions
•
Advising clients for PPP projects in the meeting, incentive travel, convention and exhibition
industry.
•
Advising clients on PPP projects of city development, hospitals, schools, sport centres, airports,
various water supply and waste water treatment facilities, and waste disposal plants, with or
without project finance.
•
Advising on the development and mergers and acquisitions of various renewable energy facilities.
•
Advising on the acquisition of a coal power plant under a BOT scheme in Vietnam.
•
Awards consistently granted in the construction and energy areas by Chambers, Legal 500, IFLR,
The Best Lawyers, and Asialaw Profiles.
Languages. English, Japanese
Professional associations/memberships. Tokyo Bar Association; Japan Association of the
Law of Finance; Dispute Handling Committee of the Real Estate Transaction Improvement
Organization;Administrative Agency Evaluation Board (incorporated by Ministry of Internal Affairs and
Communications), expert panel member; member of the Edogawa Ward Public Works Procurement
Oversight Committee; PFI operator selection committee member of PPP projects
Publications.
•
Chambers Global Practice Guides - Project Finance 2019, Japan Chapter, Chambers and
Partners (2018) [Co-author]
•
Guide to PPP/PFI Practices Covering Concessions, Conventional Type and New Methods,
CHUOKEIZAI-SHA, INC. (2018) [Co-author]
•
Getting the Deal Through - Construction 2019, Japan Chapter, (Law Business Research Ltd.)
(co-author).
•
Getting the Deal Through - Public-Private Partnerships 2019, Japan Chapter, (Law Business
Research Ltd.) (co-author).
•
Construction and projects in Japan, Construction and Projects Global Guide 2015-2017,
Practical Law, (Thomson Reuters) (co-author).
•
Recent Change of Regulations and Practice in Construction and Energy in Japan, (Lawyer
Issue) (2016).
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Construction and projects in Japan: overview, Practical Law Country Q&A 9-630-4982
END OF DOCUMENT
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