Interest Claims in Japanese Law: Understanding "Risoku Saiken," Agreed Interest vs. Statutory Interest, and the New Floating Statutory Rate

Interest claims (利息債権 - Risoku Saiken) are a fundamental component of countless financial and commercial dealings in Japan. Whether arising from loan agreements, deposits, or as a consequence of legal provisions, understanding how Japanese law governs the calculation and recovery of interest is essential for businesses. This article provides an in-depth look at "Risoku Saiken," distinguishing between agreed and statutory interest, clarifying what legally constitutes "interest," and detailing the significant recent shift to a floating statutory interest rate system.

Defining Interest Claims (Risoku Saiken) and "Interest" (Risoku)

An "interest claim" (Risoku Saiken) is, quite simply, a claim for the payment of interest. Such claims can originate from two primary sources:

1. Agreed Interest Claims (約定利息債権 - Yakujō Risoku Saiken): These arise from contractual agreements between parties. Common examples include interest stipulated in contracts for loans of money for consumption (金銭消費貸借 - kinsen shōhi taishaku; Civil Code, Art. 587) or interest on deposits made with financial institutions (消費寄託 - shōhi kitaku; Civil Code, Art. 666). For instance, a business securing a loan from a bank will typically agree to an interest rate, giving rise to an agreed interest claim for the bank. Similarly, a corporate deposit may earn agreed-upon interest.
2. Statutory Interest Claims (法定利息債権 - Hōtei Risoku Saiken): These claims arise directly from provisions of law, irrespective of a specific agreement to pay interest. Examples include the statutory interest applicable to reimbursement claims among joint and several obligors (Article 442, Paragraph 2 of the Civil Code) or, in certain circumstances, interest on the proceeds of a sale (Article 575). If, for example, a co-surety pays more than their share of a debt, their claim for reimbursement from other co-sureties may carry statutory interest.

What Legally Constitutes "Interest" (Risoku)?

Japanese law defines "interest" (risoku) specifically as income or profit generated from a principal amount (元本 - ganpon) that is considered as circulating capital. It is essentially the consideration paid for the use of this principal (which can be money or other fungible goods), calculated based on the principal sum, the duration of its use, and a specified interest rate. It's crucial to distinguish true "interest" from other payments that might be colloquially referred to as such:

• Not Interest:
  • Rent or lease payments for the use of fixed capital like land, buildings, or machinery are not considered interest.
  • "Delay Interest" (遅延利息 - Chien Risoku): When a monetary obligation is not performed by its due date, damages for this delay are often calculated as "delay interest" (governed by Article 419, Paragraph 1 of the Civil Code). However, this is legally classified as damages for non-performance, not interest for the use of principal. For instance, if a buyer fails to pay for goods on time, the seller may claim delay damages, often expressed as a percentage, but this is distinct from interest on a loan. Similarly, the "interest" a bad-faith beneficiary of unjust enrichment must pay (Article 704) is typically understood as a form of delay damages.
  • "Intermediary Interest" (中間利息 - Chūkan Risoku): In personal injury or wrongful death cases, when calculating lump-sum damages for lost future income or future care expenses, an amount representing "intermediary interest" is deducted to account for the early receipt of funds (Articles 417-2, 722, Paragraph 1). Though statutory interest rates might be used in this calculation, this deduction is not "interest" in the sense of consideration for capital use.
  • Fees and Commissions: Various charges such as credit card annual fees, syndicate loan arrangement fees, or other forms of remuneration and handling fees are not classified as interest. (However, it's worth noting that the Interest Limitation Act has a concept of "deemed interest" (minashi risoku) which can include some of these charges for regulatory purposes.)
  • Consideration for the use of principal that is not determined by a rate (e.g., a fixed one-time charge for a loan regardless of duration) would also not fit the definition of interest.
• Statutory "Interest" in Specific Contexts: Some legal provisions use the term "statutory interest" for payments that aren't strictly consideration for the use of principal, such as on reimbursement claims between joint obligors or by a guarantor who has paid on behalf of the principal debtor (e.g., Article 442, Paragraph 2; Article 459-2, Paragraph 2). While termed "interest," their legal nature is more akin to a statutory addition to the reimbursement amount, though rules applicable to interest may still apply by virtue of the statutory language.

Finally, the items paid as interest need not be of the same kind as the principal (e.g., a loan of rice could theoretically have interest payable in money, if so agreed and permissible).

A brief note on negative interest rates (マイナス金利 - mainasu kinri): Following the Bank of Japan's introduction of a negative interest rate policy on certain bank reserves, questions arose about its impact on general lending contracts. The prevailing contractual interpretation is that interest is fundamentally a payment from the borrower to the lender for the use of capital. Therefore, unless a contract explicitly provides for the lender to make interest-equivalent payments to the borrower (which would be highly unusual and distinct from the nature of interest itself), a negative calculation result for interest would typically mean no interest is due from the borrower, rather than implying a payment obligation on the lender.

Interest Rates (利率 - Riritsu): Agreed vs. Statutory

The rate at which interest accrues can be determined either by agreement or by law.

Agreed Interest Rate (約定利率 - Yakujō Riritsu)

Parties are generally free to agree on an interest rate for their transactions, based on the principle of freedom of contract. This agreed rate (yakujō riritsu) is typically found in the contract itself or established by relevant commercial custom. However, this freedom is not absolute. Key limitations include:

• The Interest Limitation Act (利息制限法 - Risoku Seigen Hō): This act sets ceilings on interest rates for money lending, and any agreement for interest exceeding these limits is partially void (discussed further below).
• Public Policy (公序良俗 - Kōjo Ryōzoku): Excessively high or exploitative interest rates may be deemed contrary to public order and morals (Article 90 of the Civil Code) and thus void.

If an obligation is agreed to be interest-bearing, but the parties fail to specify a particular rate, the statutory interest rate will apply by default.

Statutory Interest Rate (法定利率 - Hōtei Riritsu)

The statutory interest rate (hōtei riritsu) applies when interest is mandated by law (e.g., for certain types of statutory claims) and no other rate is specified by that law (Article 404). It also serves as the default rate for agreed interest claims where no rate was fixed.

A significant reform in the Japanese Civil Code (effective April 1, 2020) was the introduction of a floating statutory interest rate system, replacing the previous fixed rates (which were generally 5% per annum for civil matters and 6% for commercial matters). The new system under Article 404 operates as follows:

• Initial Rate: The statutory rate was initially set at 3% per annum when the amended law came into force.
• Review Mechanism: The rate is subject to review every three years. The review is conducted by government ordinance.
• Basis for Review - The "Base Rate" (基準割合 - Kijun Wariai): The review is based on changes in a "base rate," which is calculated as the average of short-term lending rates (for loans of less than one year) offered by banks over a 60-month (5-year) period, ending two years before the start of each three-year review term. This base rate is officially announced by the Minister of Justice.
• Adjustment Trigger and Method: The statutory interest rate is adjusted if the difference between the current three-year period's base rate and the base rate at the time of the last statutory rate change (or the initial 3% implementation if no change has occurred) is 1% or more. If such a difference exists, the statutory rate is increased or decreased by that difference (rounded down to the nearest full percentage point) from the rate of the "most recent period of change". For example, if the previous statutory rate was 3% and its corresponding base rate was 1.5%, and the new base rate for the current review period is calculated at 2.8%, the difference (1.3%) is greater than 1%. Thus, the statutory rate would increase by 1% (1.3% rounded down) to 4%. If the difference were, say, 0.4%, no change would occur. This creates a system of a "gentle floating rate".
• Unification: The reform also abolished the previous distinction between civil and commercial statutory interest rates; there is now a single, unified statutory rate.

Timing for Application of the Statutory Rate

The introduction of a floating statutory rate makes the timing for its application crucial:

• For Interest-Bearing Claims (e.g., loans with statutory interest): According to Article 404, Paragraph 1, if an obligation is to bear interest and no rate is agreed, the applicable statutory rate is the one in effect "at the first point in time when the interest arose". This means that once interest starts accruing on a particular principal claim, the statutory rate applicable to that claim is fixed at that initial point and will not change even if the general statutory rate fluctuates later during the life of the claim. This rule promotes clarity and prevents parties from opportunistically choosing favorable rate periods. The "first point in time when interest arose" is typically when the principal amount is delivered to the debtor (e.g., in a loan agreement, see Article 589, Paragraph 2).
• For Damages for Delay of Monetary Obligations (Delay Interest): Article 419, Paragraph 1 stipulates that the amount of damages for non-performance of a monetary obligation is determined by the statutory rate (unless an agreed rate is higher and applicable) in effect "at the first point in time when the debtor became responsible for the delay" – essentially, when the debtor defaulted. This default point varies: for tort claims, it's generally the time of the tort; for contractual claims, it could be a fixed due date or upon demand, depending on the contract terms.
• For Intermediary Interest Deduction (in lump-sum damages): When calculating lump-sum damages for future losses (e.g., lost income in an injury case), the statutory rate used for discounting to present value (intermediary interest deduction) is the rate in effect "at the point in time when the claim for damages arose" (Article 417-2, also applicable to torts via Article 722, Paragraph 1). For a tort claim, this would be the rate at the time of the tortious act.

Compound Interest (重利 - Jūri / 複利 - Fukuri)

Compound interest, or interest on interest, is also addressed:

• Definition: Typically refers to "capitalized compound interest" (組入重利 - kumi-ire jūri), where interest that has fallen due is added to the principal amount, and this new, larger principal then accrues further interest.
• Agreements for Compound Interest: Parties are generally free to agree on compound interest, provided such an agreement does not contravene the Interest Limitation Act or general principles of public policy (e.g., it is not usurious). A Supreme Court judgment of April 21, 1970 (Minshu Vol. 24, No. 4, p. 298) affirmed the validity of such agreements (including reservations for compound interest).
• Statutory Right to Capitalize Overdue Interest (Article 405): If interest payments for one year or more are overdue, and the creditor has demanded payment of this overdue interest but the debtor has failed to pay, the creditor has a formative right (形成権 - keiseiken) to unilaterally declare this overdue interest to be part of the principal, thereby making it interest-bearing going forward.
• Applicability to Delay Damages: The prevailing view among scholars is that Article 405 can be applied by analogy to delay damages (often called "delay interest") in the context of loan agreements if they remain unpaid for a year or more after demand. However, this is generally not extended to delay damages arising from torts.

Interrelation of Principal and Interest Claims

The principal claim (元本債権 - ganpon saiken) and the interest claims arising from it are legally distinct. Interest claims themselves can be further categorized:

1. Basic Interest Claim (基本的利息債権 - Kihonteki Risoku Saiken): This is the underlying right or status that generates the entitlement to interest. It is inherently accessory (付従性 - fujūsei) to the principal claim and generally shares its fate upon transfer or extinction (随伴性 - zuihansei).
2. Branch Interest Claims (支分的利息債権 - Shibunteki Risoku Saiken): These are the claims for specific, individual installments of interest as they accrue and fall due.
   • Future Branch Interest Claims: Claims for interest installments that have not yet accrued are generally considered accessory to the principal claim and follow it. However, it is possible to assign these future interest claims separately, as a form of assigning future claims.
   • Accrued Branch Interest Claims: Once an interest installment has accrued and become due, the claim for that specific amount becomes largely independent of the principal claim. It is not automatically extinguished if the principal claim is later paid or becomes time-barred (though this is subject to some debate). Such accrued claims can be assigned independently and are subject to their own statute of limitations period.

The Interest Limitation Act (Risoku Seigen Hō) and its Impact on Agreed Interest

A critical piece of legislation affecting agreed interest rates in Japan is the Interest Limitation Act (利息制限法 - Risoku Seigen Hō). Its primary purpose is to protect borrowers, particularly in consumer lending contexts, from the imposition of excessively high interest rates by lenders who might exploit a borrower's distress or lack of financial sophistication.

• Scope of Application: The Act primarily applies to interest agreements connected to loans of money for consumption (金銭消費貸借 - kinsen shōhi taishaku). It generally does not apply to other types of charges like lease fees or credit card service fees, although these could be scrutinized under general public policy if grossly excessive.
• Statutory Maximum Interest Rates (ILA Article 1): The Act sets clear ceilings on permissible interest rates, which vary according to the principal amount:
  • For principal amounts less than ¥100,000: 20% per annum.
  • For principal amounts of ¥100,000 or more but less than ¥1,000,000: 18% per annum.
  • For principal amounts of ¥1,000,000 or more: 15% per annum.
• "Deemed Interest" (Minashi Risoku) (ILA Article 3): To prevent circumvention of the rate caps, the Act stipulates that any money, regardless of its name (e.g., "gratuity," "discount fee," "handling charge," "investigation fee"), received by the creditor in connection with a loan of money, other than the repayment of principal, is generally deemed to be interest for the purposes of calculating compliance with the maximum rates. Costs associated with contract formation or debt performance are generally excluded from this deeming provision (though different rules may apply under the separate Investment Act - 出資法 - Shusshihō, which criminalizes certain usurious rates).
• Consequences of Violating the Act (ILA Article 1): Any portion of an interest agreement that stipulates a rate exceeding these statutory maximums is void (ichibu mukō - partially void).
• Treatment of Overpayments (Kabarai-kin): If a borrower makes payments of interest that, when calculated correctly under the Act, exceed the permissible limits, the borrower is entitled to claim a refund of the excess amount as unjust enrichment. Any such overpayment is legally considered to have been applied first to any valid outstanding interest within the limits, and then to the principal of the loan. This principle was firmly established by the Supreme Court (e.g., judgment of November 13, 1968, Minshu Vol. 22, No. 12, p. 2526 ), which effectively rendered inoperative an earlier provision of the ILA that had prevented recovery of "voluntarily" paid excess interest.
• Extremely Usurious Loans: Beyond the civil invalidity under the ILA, loan agreements stipulating extraordinarily high interest rates (e.g., exceeding 109.5% per annum when made by a registered moneylender) can be deemed entirely void under Article 42, Paragraph 1 of the Money Lending Business Act (Kashikingyōhō) as being grossly contrary to public policy. In such severe cases, the lender might even be barred from recovering the principal amount itself, due to the doctrine of "illicit cause payment" (不法原因給付 - fuhō gen'in kyūfu; Civil Code, Art. 708), where the law refuses to assist a party to an illegal transaction.
• Interest Withholding/Discounting (Tenbiki) (ILA Article 2): The Act also addresses situations where interest is deducted from the loan principal upfront (tenbiki). If the amount withheld as interest (calculated on the nominal principal) effectively results in an interest rate on the actual amount received by the borrower that exceeds the statutory limits, the excess portion of the withheld amount is deemed to be a repayment of the nominal principal, not valid interest. This requires a careful distinction between the "legal principal" (the agreed loan amount) and the "computational principal" (the net amount disbursed to the borrower) for assessing compliance.

Conclusion

Interest claims under Japanese law are governed by a combination of contractual freedom, statutory provisions, and specific regulatory acts like the Interest Limitation Act. The recent introduction of a floating statutory interest rate adds a dynamic element to long-term obligations where no rate is agreed. For businesses, meticulous attention to the terms of interest agreements, awareness of the maximum permissible rates under the Interest Limitation Act, and understanding the nuances of how different types of payments are legally characterized are all essential for ensuring compliance and managing financial rights and obligations effectively in Japan.