Trade Policy Overview of Japan in 2023
Japan’s economy is highly dependent on foreign trade. Merchandise exports from Japan stood at US$746.9 billion in 2022, down a bit from US$756 billion in 2021. Merchandise imports, on the other hand, amounted to US$897.2 billion in 2022, a significant rise from US$769 billion in 2021. The service trade has also showed deficit, widening to US$40 billion in 2022.
China remained the top destination for Japanese exports in 2022, accounting for about 23% of total exports. The US closely followed, accounting for about 19%. The other top export destinations were Taiwan, South Korea, and Hong Kong. Top exports included non-electrical machinery (19.7% of exports), followed by transport equipment (19.5%), electrical machinery (18.4%), and chemicals (12.7%). China stood as the single largest source of Japan’s imports in 2022 (with a 25.8% share), followed by the US, Australia, Taiwan and South Korea. The top imports in 2022 were mineral fuels, electrical machinery, chemicals, manufactured goods, and non-electrical machinery.
Japan is a member of the World Trade Organization, the OECD, and the Group of Seven highly industrialized democracies. Japan has 18 bilateral free-trade agreements (FTAs) or economic-partnership agreements in force as of 2023, including deals with the US, the UK, the EU, and the ten-member Association of South-East Asian Nations (ASEAN). Partners in the other agreements include Australia, Brunei, Chile, India, Indonesia, Malaysia, Mexico, Mongolia, Peru, the Philippines, Singapore, Switzerland, Thailand, and Vietnam.
The country is also a signatory of the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a mega-regional agreement that went into force at the end of 2018. Japan is also party to the Regional Comprehensive Economic Partnership, which ASEAN signed with its FTA partners in 2020 and which went into force in January 2022.
The administration of Kishida Fumio, who became prime minister in October 2021, has been proactive in expanding cooperation with Asian and European countries, with a view to countering China’s rising influence. Japan, along with 13 other nations (including South Korea, India, and Australia), joined the US-led Indo-Pacific Economic Framework (IPEF) in May 2022. The IPEF targets supply-chain disengagement from China and supply-chain resilience among partner countries.
Relations with South Korea remain tense, resulting from long-standing disputes between the two countries over historical issues that have their origins in Japan’s colonial rule over the Korean peninsula. They have soured further in recent years amid conflicts over international trade. Mr. Kishida and South Korean President Yoon Suk-yeol, who took office in May 2022, will work to improve bilateral relations; Yoon Suk-yeol has indicated willingness to set aside historical disputes in favor of ending bilateral trade conflict and enhancing security ties. This will benefit businesses in both countries. Japan is likely to lift restrictions on exports of key technology components to South Korea, which were imposed in 2019 over domestic political concerns, and to lift the downgrade of South Korea’s preferred trading partner status during 2023–26.
Import
Import Taxes & Tariffs
Japan’s Ministry of Finance formulates tariff policies, and its Customs and Tariff Bureau oversees implementation. Major legislation governing customs tariffs include the Customs Law, Customs Tariff Law, Temporary Tariff Measures Law, and the Customs Tariff Law Schedule.
As a member of the Harmonized System, Japan shares a common international (maximum six-digit) trade-classification system. Import-tariff rates can be divided into law-based tariff rates and treaty-based tariff rates. Law-based tariffs (state-set tariffs) include the general rate, temporary rate, and preferential rate. The Customs Tariff Law sets out the general (basic) rate that has gone unchanged for a long time. The Temporary Tariff Measures Law sets out the temporary rate that applies for a specified period. The preferential rate under Japan’s Generalized System of Preferences Scheme is applicable to developing countries.
Treaty-based tariffs (also known as the conventional most-favored-nation, MFN, rate) include World Trade Organization (WTO) or bound rates, which apply to all members of the WTO. A separate set of tariffs is set forth in economic-partnership agreements (EPAs) that apply to signatories of EPAs with Japan. Tariff status varies from country to country (for example, least-developed countries are generally granted zero tariffs); the updated table of country-specific tariff information is available from the Japan Tariff Association. Tariffs on goods from the US generally declined under the free-trade agreement between Japan and the US, which went into force in 2020.
The average applied tariff rate in Japan is one of the lowest in the world. According to the most recent tariff profile for Japan published by the WTO, the simple average applied MFN tariff for 2021 is as follows: 4.2% for all products (down from 4.4% in 2020), 2.5% for non-agricultural products (unchanged from 2020), and 14.9% for agricultural products (down from 17.8% in 2020). Japan is a signatory to the WTO Information Technology Agreement, which eliminates tariffs on most information-technology products.
Ad valorem tariffs cover about 96.5% of Japan’s tariff items. Nevertheless, specific tariffs apply to a range of imported products, including alcoholic beverages, foodstuffs, petroleum products, and vegetable oils. Japan uses high tariffs to protect its high-cost but politically sensitive farming sector. Meanwhile, the government is obliged to maintain WTO-imposed minimum-access quotas under the tariff plan.
Though tariffs are generally low, Japan has barriers to imports including technical standards unique to Japan, prior export requirements, regulations favoring local products, and formal and informal cartels.
A simplified tariff system for low-value imported freight worth less than ¥200,000 (such as small packages for personal imports) simplifies determination of tariff rates. Importers may choose either the normal rate or the simple tariff, which might be higher or lower. It is possible to obtain an advance ruling on tariff classification and duty rates from a local customs office.
Besides customs duty, there is a 10% consumption tax (general excise tax) on all goods sold in Japan. The levy applies to the cost-insurance-freight (cif) value of the product plus the import duty. Packages containing items with a value of ¥10,000 or less are exempt from duty and consumption tax—except for certain products, such as leather goods.
Tariffs have fallen to zero in many major sectors—such as cars, car parts, computers, crude oil, industrial machinery, and software. Japan is the only industrialized country that places no customs duties on imported cars. Import duties on agricultural items continue to decrease under the WTO agreements, the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, in force from 2018), and the Japan-EU Economic Partnership Agreement (EPA, in force from 2019). As a concession during negotiations under the CPTPP, Japan agreed to increase rice import quotas from 2019 to 2031; this concession benefits mainly CPTPP members Australia, Vietnam, and Thailand, who are the primary competitors in Japan for US-grown rice. Japan also agreed to reduce tariffs on beef products to 9% over 15 years, marking a drop from previous levels of 25–50%. In addition, the government cut tariffs and quotas on sugar, dairy powder, cheese, and protein powders. Under the EPA, Japan maintained full protection for rice and partial protection for wheat, barley, and sugar but agreed to halve tariffs on EU beef to 14% and eliminate duties on cheese and wine. Japan also agreed to reduce tariffs on EU pork by 60% within 12 years, the first time it has resorted to such a massive cut on an agricultural product in any trade deal.
A 2013 amendment to the Customs Tariff Law redefines transaction value, which is the principal method of defining customs value and is generally the invoice price, plus additions for international freight, insurance, and certain royalty payments. The amended Article 4 of the law excludes from the definition transactions where the buyer does not have a place of business in Japan. A nonresident entity’s purchase price will not be accepted as a customs value under the new transaction value method, and nonresident importers are now required to calculate the customs value of imported merchandise using alternative methods. Generally, the deductive method or computed method will apply, but the fallback method may also be possible in certain cases.
To avoid potential future conflicts with customs authorities and costly customs claims, it’s wise to seek either an informal or formal agreement from customs ahead of time. Generally, importers who are utilizing these alternative methods for calculating customs valuation will also be required to present documentation.
Import Restrictions
Currently, most goods are considered freely importable, with exceptions as delineated in the Foreign Exchange and Foreign Trade Law of 1997. Such exceptions necessitate approval to protect foreign trade and the national economy. They involve adherence to UN resolutions and various international agreements, such as wildlife protection under the Washington Convention and hazardous waste control under the Basel Convention. Import licensing is mandatory for specific drugs, chemicals, and fisheries products, along with the regulation of items like ammunition, military aircraft, and nuclear-related substances.
In 2017, the law was amended, intensifying the penalties for violations concerning the import and export of weapons, including technology transfers. Penalties increased to ¥700 million or five times the import/export value, from the earlier ¥7 million. The revised law also put in place mechanisms to deter individuals and businesses from circumventing import/export restrictions. This included banning board members of penalized companies from holding similar positions elsewhere and introducing notification requirements for foreign investment in sensitive Japanese technologies.
After South Korea removed Japan from its “whitelist” of countries with preferential trade status in 2019, some imports from South Korea may have additional clearance requirements. This was in response to a similar move by Japan.
Customs authorities must be notified of imports upon arrival, with necessary documents like an invoice and a certificate of origin for clearance. Most import procedures have been computerized.
Import controls fall under the jurisdiction of the Ministry of Economy, Trade and Industry (METI), and the Customs and Tariff Bureau of the Ministry of Finance (MOF) maintains a list of prohibited items including certain drugs, firearms, explosives, counterfeit money, and materials considered immoral or harmful.
Some imports may face additional constraints under various domestic laws. Importation of restricted or banned goods necessitates an import permit and official approval. A multitude of laws govern these procedures, including environmental regulations and restrictions on harmful waste, chemicals in food and cosmetics, and more.
Parcels exceeding ¥200,000 in value must be officially declared. The Japanese Measurement Law of 1992 requires metric units on imported products and documents, and there are specific country-of-origin regulations.
Products intended for sale in Japan must meet prescribed standards and are subject to testing and certification. Major laws set these standards, including Food Sanitation Law, Building Standards Law, Road Vehicles Law, and others. The Japan Industrial Standards Committee (JISC) accredits certification bodies, and the Japan Agricultural Standards (JAS) mark is another widely used quality label.
Laws related to genetically modified organisms (GMOs) necessitate governmental approval and rigorous planning. Imports under official quotas require license approval. While Japan has gradually liberalized its regulations on farm imports, it still maintains quotas on numerous agricultural products.
Antidumping filing proceedings take approximately one year, with rare instances of antidumping clampdowns. Japan has agreements with several countries, including the US, to expedite border clearance, but this does not apply to goods originating from areas suspected of nuclear contamination due to the 2011 Fukushima disaster.
Japan also has mutual recognition agreements regarding the Authorized Economic Operator (AEO) program with countries like Australia, Canada, China, and others. Certified Japanese companies can expect fewer inspections in these territories, and vice versa, aiding in the streamlined process of international trade.
Export
Free Trade Zones
Naha, situated as the capital of Okinawa prefecture, boasts the distinction of hosting Japan’s only free-trade zone (FTZ). This zone was brought to life in 1987 through the Okinawa Development Special Measures Act, sprawling across an area of 23,691 square meters in close proximity to both Naha airport and port. Tailored to attract both domestic and international businesses, the Naha FTZ extends various financial incentives.
Among the benefits are specific industry zones, including the Information and Communications Industry Promotion Zone and the Financial Business Promotion Zone, each offering unique opportunities for businesses within those sectors. Furthermore, companies operating within the zone can avail themselves of a substantial 35% reduction in corporate income tax over a ten-year span. This is in addition to other concessions involving national and regional taxes as well as import duties.
One noteworthy aspect of the Okinawa FTZ is the role played by the Okinawa Development Finance Corporation. This entity, tasked with fostering regional development, provides long-term loans at reduced interest rates to foreign businesses establishing themselves within the zone. The combination of tax advantages and financial support makes the Naha FTZ a strategic location for companies looking to tap into the Asian market. This could serve as a model for other regions in Japan, considering global trends in trade liberalization and economic cooperation, potentially offering opportunities for growth and international collaboration within the country.
Export Restrictions
Japan’s Customs Law strictly prohibits the export of certain items, including narcotics, stimulants, child-exploitative pornography, and items that violate intellectual-property rights.
Apart from these specific bans, export restrictions are typically not in place, though customary declarations to customs authorities are necessary, paralleling import declaration procedures.
However, the Ministry of Economy, Trade and Industry (METI) has implemented regulations on certain exports for security and economic reasons. These controls encompass matters such as nuclear power and weapons.
In 2019, Japan updated its Export Trade Control Order, classifying countries into Groups A, B, C, or D based on export ease. Group A, or the “whitelist,” enjoys privileged trade status, allowing bulk exports without separate licenses. Countries in Group B have less rigorous licensing, while Groups C and D have more controls. South Korea’s removal from the whitelist in 2019 stirred controversy but, relations are expected to improve in the coming years.
A landmark change occurred in 2011 when Japan’s security council relaxed a 1967 ban on military equipment exports. This permitted joint development of nonlethal defense equipment, though exports were still mainly confined to allies like the U.S.
UN sanctions and the Foreign Exchange and Foreign Trade Act (FEFTA) of 1997 also impact export regulations. The 2009 amendment to the FEFTA introduced the Standards for Exporters, requiring strict control over sensitive exports. Additionally, a 2017 amendment increased fines for illegal exports of weapons of mass destruction to ¥30 million (for individuals) or ¥1 billion (for companies) and up to ten years in prison. For ordinary weapons, the fines are ¥20 million (individual) or ¥700 million (companies).
Moreover, the Customs Tariff Law adds a legal basis for customs actions against the export of goods infringing upon intellectual property rights. This particular amendment targets counterfeit goods, authorizing Japanese customs to impound such items.
The multifaceted nature of Japan’s export regulatory environment illustrates the nation’s intricate balance between fostering trade, ensuring national security, adhering to international agreements, and maintaining ethical standards. The continuous evolution of these regulations mirrors Japan’s response to both internal priorities and global challenges.
Export Credits & Insurance
The Japanese government offers official insurance coverage for imports, intermediary trade with developing countries, exports, and foreign direct investments by domestic firms. The insurance market was deregulated in 2005, allowing private domestic and foreign insurers to enter, whereas previously, the state-owned Nippon Export and Investment Insurance (NEXI) exclusively provided these services.
NEXI’s offerings include ten different insurance types, such as:
- Export Credit Insurance: Protecting against losses if Japanese companies can’t export goods due to force majeure or bankruptcy.
- Insurance for Loans: Available for commercial banks that cannot receive repayments from overseas importers.
- Insurance for SMEs: Covering exports and loans.
- Overseas Investment Insurance: Covers losses for long-term business funds or investments in foreign subsidiaries.
- Various Sector-Specific Insurances: Covering defaults, import failures, natural resources, energy, and standing orders.
A special variant of export-credit insurance also covers intellectual property licenses, and in 2016, Japan’s Patent Office (JPO) launched the country’s first insurance scheme to cover legal costs for SMEs involved in overseas intellectual property disputes. Furthermore, overseas investment insurance may also cover losses from force majeure on real property or equipment brought from Japan. The maximum term for this insurance is 30 years.
In 2019, regulations were revised to allow NEXI to cover damages from country risks like wars and natural disasters. An amendment in July 2022 expanded coverage to include extraordinary risks, such as infectious diseases affecting construction projects, and strengthened supply chains.
The Japan Bank for International Cooperation (JBIC) has facilitated official export credit since 1999, primarily supporting deals like machinery and equipment sales to developing countries. Eligibility includes various capital goods, services, and construction projects. JBIC provides direct loans and co-financing, covering 50–60% of exported value.
The terms and interest are guided by the OECD-established Arrangements on Officially Supported Export Credits, with loan durations ranging from 3–15 years.
Private financing is mainly sourced via commercial banks, with interest rates generally 2–3% higher than JBIC. Additionally, the relationship between general trading companies (sogo shosha) and exporters plays a vital role in Japan’s private export-financing landscape. These companies, often part of large industrial groups (keiretsu), act as intermediaries for SMEs, offering comprehensive financial services and risk protection.
These various programs and techniques illustrate Japan’s multifaceted approach to fostering international trade, ensuring both the protection and growth of domestic businesses while engaging responsibly with global partners.
