If My Company's Property Rights in Japan Are Restricted by Lawful Government Action: Am I Entitled to "Just Compensation"?

Japanese Attorney at Law - Bengoshi L.L.

29 May 2025 • 9 min read

Businesses invest significantly in property, both real and intellectual, as a cornerstone of their operations and growth. In Japan, as in many other nations, private property rights are constitutionally protected. However, these rights are not absolute and may be restricted or even taken by governmental entities for public purposes. When such governmental actions are lawful but nevertheless impinge upon a company's property interests—through land use regulations, zoning changes, or direct expropriation for public projects like infrastructure development—the critical question of financial redress arises. This article explores the Japanese legal framework for "loss compensation" (sonshitsu hoshō), distinct from compensation for unlawful state acts, focusing on when it is required and what standard of "just compensation" a business might expect.

Constitutional Foundation: Article 29 and the Right to Property

The bedrock of property rights protection and loss compensation in Japan is Article 29 of the Constitution of Japan. This article has three key paragraphs:

Article 29(1): "The right to own or to hold property is inviolable." This establishes the fundamental nature of property rights.
Article 29(2): "Property rights shall be defined by law, in conformity with the public welfare." This acknowledges that property rights are not limitless and are subject to regulations and restrictions necessary for the broader public good. These are often referred to as inherent social constraints or limitations.
Article 29(3): "Private property may be taken for public use upon just compensation therefor." This is the crucial provision mandating compensation when private property is expropriated or subjected to restrictions that go beyond general social duties for public purposes.

It is essential to distinguish loss compensation under Article 29(3), which arises from lawful governmental actions, from state compensation (kokka baishō) under the State Compensation Act, which provides remedies for damages caused by unlawful acts of public officials. Loss compensation addresses situations where the government acts within its legal authority but, in doing so, imposes a particular burden on specific property owners for the benefit of the public.

When is Compensation Required? The "Special Sacrifice" Doctrine

Not every governmental restriction on property rights triggers an obligation to pay compensation. Article 29(2) of the Constitution itself recognizes that property rights are subject to limitations necessary for the "public welfare." These are considered general social constraints that all property owners must endure as part of living in an organized society. For example, general zoning laws, building codes, or environmental regulations that apply broadly are typically seen as falling within this category of non-compensable social duties.

Compensation under Article 29(3) is generally required only when a lawful governmental restriction imposes a burden on a specific individual or entity that is deemed to go beyond these general social constraints, thereby constituting a "special sacrifice" (tokubetsu no gisei) for the public good. Identifying whether a particular restriction amounts to a "special sacrifice" is often a complex determination, turning on the nature, extent, and impact of the governmental action.

Restrictions imposed under the state's "police power"—that is, regulations aimed at protecting public health, safety, morals, order, and general welfare—are often considered to be within the scope of inherent social constraints that property owners must bear without compensation.

The Nara Prefecture Reservoir Ordinance Case (Supreme Court, Grand Bench, June 26, 1963; related to case 25-2) is illustrative. An ordinance prohibited the cultivation of crops on reservoir embankments to prevent erosion and potential dam failure, thereby averting disasters. The Supreme Court held that this restriction, aimed at disaster prevention and serving the public welfare, imposed a duty that property owners should naturally endure as a social constraint. Consequently, no compensation under Article 29(3) was required for the inability to cultivate on the embankments.
Similarly, in the Relocation of Gasoline Storage Tanks Case (Supreme Court, February 18, 1983; related to case 25-3), a company operating a gas station had to relocate its underground storage tanks. This was because public road construction nearby brought a newly built subway tunnel within a statutorily prohibited proximity to the existing tanks under the Fire Service Act (a safety regulation). The company sought compensation for the relocation costs under the Road Act, which provides for compensation for losses caused by road works. The Supreme Court denied this claim, reasoning that the need to relocate stemmed from the pre-existing safety requirements of the Fire Service Act (a police power regulation) being triggered or "actualized" by the new road/subway construction. The loss was attributed to the inherent societal obligation to manage dangerous materials safely—a concept sometimes referred to as "state responsibility" or jōtai sekinin for dangerous objects—rather than being a direct taking or damage compensable under the Road Act's specific loss compensation provisions.

Land Use Regulations, Development Restrictions, and the "Special Sacrifice" Threshold

Land use regulations, such as zoning or restrictions within protected areas like national parks, can present more nuanced scenarios. While general regulations are typically non-compensable, a restriction might cross the line into a "special sacrifice" if it disproportionately burdens specific landowners or effectively deprives them of any viable economic use of their property.

The Natorigawa Gravel Collection Case (Supreme Court, Grand Bench, November 27, 1968; related to case 25-1) is a landmark decision in this area. A business had been lawfully collecting gravel from a riverbed. Subsequently, new regulations (the River Area Restriction Ordinance) were enacted requiring a permit for such activities, and the business was effectively prevented from continuing its operations as before. The Supreme Court acknowledged that a new permit requirement, in itself, could be a general restriction imposed for the public welfare and might not automatically necessitate compensation. However, the Court also stated that if the application of such a general restriction, in specific circumstances, resulted in a particular business suffering losses that went beyond the level of general endurance expected of all citizens—for instance, by making an existing lawful business unviable—then this could indeed constitute a "special sacrifice." Crucially, the Court held that in such a situation, compensation could be claimed directly under Article 29(3) of the Constitution, even if the specific ordinance or law imposing the restriction did not itself contain a compensation provision. The ordinance was not deemed unconstitutional for lacking a compensation clause precisely because a direct constitutional claim for compensation remained possible if a special sacrifice was proven.
Conversely, in the Morioka Urban Planning Road Case (Supreme Court, November 1, 2005; related to case 25-4), landowners had faced building restrictions on their property for over 60 years due to its designation as part of a planned urban road that had yet to be constructed. Despite the exceptionally long duration of the restriction, the Supreme Court found that the loss suffered by the landowners did not, in that specific case, exceed the scope of general social constraints that should be endured. It was therefore not deemed a "special sacrifice" requiring direct compensation under Article 29(3). This suggests a high threshold for finding a special sacrifice in the context of long-term planning restrictions. However, a concurring opinion by Justice Fujita in that case did emphasize that the length of the restriction should be a significant factor in the "special sacrifice" analysis.
The Minami-Izu Villa Non-Permission Case (Tokyo District Court, September 18, 1990; related to case 25-5) involved the denial of a permit to construct a villa within a designated special area of a National Park. The court denied compensation, finding the restriction to be within the inherent limitations of property rights necessary for the protection of significant scenic beauty. The court considered several factors: the high degree of protection warranted for the area's natural landscape, the potential adverse impact of the proposed villa on that landscape, and the fact that the land had no prior history of such development, nor was such development objectively foreseeable. The denial of the permit was seen as a reasonable measure to preserve an important public asset, and the resulting restriction on the landowner's desired use was deemed a non-compensable social obligation.

These cases demonstrate that the "special sacrifice" determination is highly fact-specific, involving a balancing of the public interest served by the restriction against the severity of the impact on the individual property owner, the nature of the property right affected, and the extent to which the owner is singled out to bear a burden that should be shared by the public as a whole.

The Standard of "Just Compensation" (Seitō na Hoshō)

Once it is established that a lawful governmental action constitutes a "taking for public use" or imposes a "special sacrifice" requiring compensation under Article 29(3), the next critical question is the measure of that compensation. The Constitution requires "just compensation."

"Substantial Compensation" vs. "Complete Compensation"

Historically, Japanese jurisprudence has seen some evolution in interpreting "just compensation."

The Land Reform and Compensation case (Supreme Court, Grand Bench, December 23, 1953; related to case 25-6), which arose from the unique circumstances of extensive post-World War II agricultural land reforms, established what is known as the "substantial compensation theory" (sōtō hoshōsetsu). In this context, the Court held that "just compensation" meant a "reasonable and appropriate amount" calculated based on prices that could be considered fair given the prevailing economic conditions at the time of the taking or restriction. It was explicitly stated that this amount did not necessarily have to perfectly align with the full, theoretical market value that might have existed in normal market conditions or absent the public intervention. This approach allowed for broader socio-economic policy considerations during a period of national reconstruction.
However, particularly in the context of ordinary expropriations of land for public projects under the Land Expropriation Act (Act No. 219 of 1951), the judicial interpretation has strongly leaned towards, or explicitly mandated, a standard of "complete compensation" (kanzen hoshō). The Kurayoshi Urban Planning Road Case (Supreme Court, October 18, 1973) stated that loss compensation under the Land Expropriation Act should be "complete," meaning it should be sufficient to enable the expropriated owner to acquire an equivalent substitute property in the vicinity. This is generally understood to mean compensation reflecting the fair market value of the property taken.
The Kansai Electric Power Substation Land Case (Supreme Court, June 11, 2002; related to case 25-7), while referencing the "substantial compensation" language from the older Land Reform case, ultimately upheld a valuation method under Article 71 of the Land Expropriation Act. This method involved determining the "reasonable price" at the time of the project approval notification (the official start of the expropriation process), and then adjusting this price for general changes in commodity price levels up to the time of the expropriation ruling by the Expropriation Committee. The Court found this method to be constitutionally permissible because it aimed to provide compensation that would, in effect, maintain the property owner's overall financial position as if the expropriation had not occurred. This was deemed consistent with the idea of complete compensation because it systematically excluded any changes in land value specifically caused by the public project itself (either increases or decreases).

Key Valuation Principles in Expropriation

When property is expropriated, "just compensation" is generally determined based on several principles:

Fair Market Value: The primary benchmark is the fair market value of the property – the price that a willing buyer would pay to a willing seller in an open market transaction, neither being under compulsion to buy or sell, and both having reasonable knowledge of relevant facts.
Exclusion of Project Influence: Crucially, any increase or decrease in the property's value that is attributable to the public project for which it is being taken is typically disregarded in the valuation. The Kurayoshi Urban Planning Road Case explicitly affirmed that land already subject to building restrictions because of the specific public project for which it is being expropriated should be valued as if those project-induced restrictions did not exist. This ensures that the owner is compensated for the value their property had independent of the project's influence.
Highest and Best Use: The valuation usually considers the property's highest and best lawful use, meaning the use that would produce the greatest economic return, regardless of its current actual use, provided such use is legally permissible, physically possible, and financially feasible.
Timing of Valuation: The Land Expropriation Act specifies the timing rules for valuation. As discussed in the Kansai Electric Power case, a common method involves assessing value as of the date of the official "project approval notification" (jigyō nintei no kokuji), which is the formal government decision authorizing the project to proceed with expropriation powers. This initial value is then typically adjusted to account for general inflation or deflation (but not project-specific land value changes) up to the date of the Expropriation Committee's formal ruling on compensation.
Incidental and Consequential Losses: "Just compensation" is not always limited to the direct market value of the property taken. Depending on the circumstances and the provisions of the relevant law (like the Land Expropriation Act), compensation may also cover necessary incidental losses directly resulting from the taking. This can include reasonable relocation expenses for a displaced business, loss of business goodwill under specific conditions, costs of adapting any remaining portion of the property (severance damages), and other demonstrable consequential damages.

Procedural Pathways

For businesses whose property is targeted for expropriation, the Land Expropriation Act provides a detailed procedural framework. This typically involves:

Notification of project approval.
Attempts at voluntary negotiation between the project implementer and the landowner.
If negotiations fail, the project implementer can apply to the relevant Prefectural Expropriation Committee for an expropriation ruling.
The Expropriation Committee conducts hearings, examines evidence, and issues a ruling that determines the scope of expropriation and the amount of compensation.
Parties dissatisfied with the Expropriation Committee's ruling, particularly regarding the amount of compensation, can file a lawsuit in court to challenge it.

For restrictions not involving direct expropriation but potentially amounting to a "special sacrifice," a claim for compensation might need to be pursued directly under Article 29(3) of the Constitution if the specific regulatory law does not provide a compensation mechanism, as suggested by the Natorigawa case.

Conclusion

The Japanese Constitution, through Article 29, provides a robust, albeit nuanced, protection for private property rights against lawful governmental interference. While property rights are subject to inherent social constraints for the public welfare, the imposition of a "special sacrifice" on a particular owner for public use triggers the right to "just compensation." Distinguishing between non-compensable general restrictions and compensable special sacrifices involves a careful, fact-specific analysis.

When compensation is due, particularly in cases of expropriation, the standard generally aims for "complete compensation," reflecting fair market value unaffected by the project for which the property is taken, and may include certain incidental losses. While the "substantial compensation" theory articulated in the post-war Land Reform era remains a part of Japanese constitutional jurisprudence, its application today is likely confined to truly exceptional national circumstances, with the principle of full indemnification being the norm for most contemporary takings. For businesses with property interests in Japan, understanding these constitutional principles and the statutory frameworks like the Land Expropriation Act is essential for assessing their rights and avenues for redress when faced with governmental actions that impact their property.