Innovation is another major feature of Japan's economy, and the country ranked 13th in the Global Innovation Index 2021 by the World Intellectual Property Organisation.  

Japan's intellectual property development and accumulation, as well as the quality of its research output, are a direct result of the country’s commitment to research and development (R&D) expenditure, which consistently ranks very high, as a percentage of gross domestic product (GDP), amongst G7 countries. Along with its status as a world-class innovation hub, Japan offers a good business environment with sophisticated information technology (IT) infrastructure, a world-class transportation network, and a large market size.  

The Japanese government has been actively promoting structural reforms in its economy to encourage inward foreign direct investment (FDI). Reforms include the designation of a National Strategic Special Zone to attract international businesses and the simplification of administrative procedures to enhance efficiency.  

The market size for financial technology (fintech)-related businesses is expected to grow to over USD10 billion (JPY1,210 billion) by 2022, according to the Yano Research Institute. The Japanese government has modified regulations to promote growth in the fintech sector with amendments such as the Banking Act, which was revised to encourage banks to establish IT-related subsidiaries for developing fintech businesses. This enhanced the technical aspect of Japanese banks’ financial products and services and facilitated them to open their application programming interfaces (APIs) to fintech firms. 

Corporate Treasury in Japan  

Japan is the world's third-largest economy and a global manufacturing powerhouse. In this section, we highlight some of the key factors relevant to treasury and cash management in Japan.   

Financial Market Development 

• Tokyo is ranked 7th in the 2021 Global Financial Centres Index by Z/Yen Group.  
• Japan has an excellent business infrastructure, a highly educated workforce and a strong rule of law.  
• Japan has relaxed almost all of its foreign exchange (FX) controls. Those that remain have little impact on normal business transactions.   

Sophistication of Banking Systems  

• There are more than 100 city banks, trust banks and regional banks in Japan, as well as around 40 branches of foreign banks. 
• Japan's foreign-exchange market accounts for around 4.5% of global daily turnover, according to the Bank for International Settlements.  
• Japan's debt market is dominated by government bonds. Its corporate bond market is the largest and the most liquid in Asia. The local currency bond market was valued at USD 11,603.76 billion in March 2021.  

Regulatory Bodies  

• The banking industry is regulated by the Financial Services Agency. The Bank of Japan (BOJ) is the central bank.   

Tax  

• The corporate income tax rate is 23.2% for companies with paid-in capital of more than JPY100 million. For companies with paid-in capital of less than JPY100 million, except for a company wholly owned by a company that has paid up capital of JPY500 million and above, the rate is 15% on the first JPY8 million per annum of taxable income and 23.2% on taxable income in excess of JPY8 million per annum.  
• Companies pay national local corporate tax at 10.3% of their corporate tax liabilities.  
• Other corporate tax liabilities for companies include standard enterprise tax, local corporate special tax, size-based enterprise tax and inhabitant's tax.  
• When all the above taxes are combined, Japan has an effective tax rate of 30.62%.  
• Resident companies are taxed on their worldwide income, whilst non-resident companies are taxed on Japan-sourced income.  
• Profits of a branch of a foreign company are taxed at the same rate as resident company’s profits. There is no branch profits remittance tax on the remittance of profits to the head office by the branch of a foreign company.  
• The consumption tax (or value-added tax) is 10%, with certain goods and services being zero-rated, whilst others are exempted e.g. a lower consumption tax of 8% is paid on certain goods, including food.  
• Interest expenses that are used for business purposes are generally tax-deductible, subject to thin capitalisation rules and earning stripping rules.  
• Stamp duty is levied on certain documents prepared in Japan. The tax is based on the amount stated in the document, for up to a maximum of JPY 600,000.  
• Withholding taxes (WHT) of 20% on dividends and 0% or 20% on interest are charged to resident companies. For non-resident companies where no tax treaty is in place, WHT of 15% or 20% is charged on dividends and 0%, 15% or 20% is charged on interest. Where a tax treaty is in place and the non-resident can provide a Certificate of Residence, WHT ranges from 0% to 20% for dividends and 0% to 25% for interest.  
• Japan has tax treaties with more than 80 countries and territories.  
• Japan is a signatory to the Organisation for Economic Co-operation and Development's Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations to provide a single, global picture on some key indicators of economic activity within multinational enterprises.  

Benefits for Regional Treasury Centres 

• Japan is a treasury centre location for multinational corporations with JPY accounts. 
• Notional pooling is available in Japan, although it is not widely used. 
• Cash concentration is widely available and permitted between resident and non-resident entities. 
• Residents are permitted to establish cross-border physical cash pools within Japan and abroad.