Monetary Claims in Japan: Navigating "Kingaku Saiken," Foreign Currency Obligations, and the Debtor's Right of Substitution

Monetary claims (金銭債権 - Kinsen Saiken) are the lifeblood of commerce, forming the basis of countless transactions daily. In Japan, as in any developed economy, the Civil Code provides a framework for understanding and regulating these obligations. For international businesses, a clear grasp of how Japanese law categorizes monetary claims, deals with different currencies, and handles the intricacies of payment can be crucial for smooth operations and risk management. This article explores the key classifications of monetary claims under the Japanese Civil Code, with a particular focus on the treatment of foreign currency obligations and the debtor's and creditor's rights concerning the currency of payment.

The Essence of Monetary Claims (Kinsen Saiken)

At its most fundamental, a monetary claim is an obligation whose object is the delivery or payment of money. Money, in this legal context, serves its traditional economic functions: a general measure of value, a means of value accumulation, and a medium of exchange. The Japanese Civil Code provides specific rules tailored to the unique nature of money as the subject of an obligation.

Classifications of Monetary Claims in Japan

Japanese law distinguishes between several types of monetary claims, each with slightly different characteristics and governing rules:

1. Fixed Amount Claims (金額債権 - Kingaku Saiken):
   This is the most straightforward and common type of monetary claim. It refers to an obligation to pay a precisely defined sum of money, such as "one million yen" or "USD 50,000." In a kingaku saiken, the primary concern is the numerical amount; the specific denomination or type of currency units used for payment is generally secondary, as long as it constitutes legal tender. Article 402, Paragraph 1 of the Civil Code states that if the subject of a claim is a specific type of currency, but that currency is not available at the time of performance, the debtor may pay in any other currency. For simple fixed amount claims (where no specific type of currency is designated, only an amount), the debtor generally has the option to pay using any combination of notes and coins that are legal tender in the designated currency of account.
2. Relative Specific Currency Claims (相対的金種債権 - Sōtaiteki Kinshu Saiken):
   This type of claim involves an obligation to pay a specific monetary sum using a particular type of currency. An example would be a contract stipulating "payment of one million yen exclusively in 10,000 yen banknotes." Such clauses, sometimes referred to as kinshu yakkan (金種約款), can be employed for various reasons, including managing risks associated with fluctuations in the value of different denominations or types of currency, although this is less common with modern fiat currencies of the same jurisdiction. The Civil Code acknowledges such agreements (Article 402, Paragraph 1, proviso). However, if the specifically designated type of currency ceases to be legal tender by the due date for performance, the debtor is then obligated to make payment using another form of legal tender (Article 402, Paragraph 2). It's important to understand that "currency" (通貨 - tsūka) in this context refers to money that has compulsory circulation power (強制通用力 - kyōsei tsūyōryoku) as legal tender. Notably, virtual currencies or cryptocurrencies are generally not considered "currency" in this legal sense under current Japanese interpretations, as they lack state-backed compulsory circulation power.
3. Absolute Specific Currency Claims (絶対的金種債権 - Zettaiteki Kinshu Saiken):
   Here, the obligation is to deliver a specific quantity of a certain type of coin or banknote, valued not for their monetary face value but as collectible items or specific physical objects. An example would be an obligation to deliver "one hundred 500-yen coins minted in the first year of the Heisei Era." Such a claim is treated more like a generic obligation (shurui saiken) for specific kinds of items, where the physical characteristics of the coins themselves (their mint year, condition, etc.) are paramount, rather than their function as a medium of exchange.
4. Specific Monetary Claims (特定金銭債権 - Tokutei Kinsen Saiken):
   This refers to an obligation to deliver particular, individually identified pieces of money, such as "this specific antique gold coin currently on display in the seller's shop." This type of claim is treated as a claim for a specific thing (tokuteibutsu saiken), where the uniqueness of the physical item is the essence of the obligation.

Foreign Currency Obligations (Gaikoku Kinsen Saiken)

With the globalization of business, obligations denominated and/or payable in foreign currencies are common. Japanese law has specific provisions to address these:

Definition and Distinctions

A "foreign currency obligation" (Gaikoku Kinsen Saiken) is typically understood as a claim where a sum expressed in a foreign currency is also intended to be paid in that same foreign currency (e.g., an invoice for USD 100,000, with payment to be made in US dollars).

This should be distinguished from situations where a foreign currency is used merely as a unit of account to stabilize the value of a debt, but the actual payment is agreed to be made in Japanese Yen (e.g., "an amount equivalent to EUR 50,000, payable in JPY at the exchange rate on date X"). In the latter case, the obligation is fundamentally a JPY obligation, with the foreign currency serving as a reference for calculating the JPY amount.

Payment in the Specified Foreign Currency

Article 402, Paragraph 3 of the Civil Code, by applying Paragraph 1 of the same Article by analogy, establishes that if a claim is for the payment of foreign currency, the creditor can demand, and the debtor can make, payment in that specified foreign currency. This provision facilitates international transactions. However, it's crucial to note that this does not confer the status of Japanese legal tender upon the foreign currency. The effectiveness of such payment in discharging the debt stems from the parties' agreement to transact in that foreign currency.

The Debtor's Right of Substitution (債務者の代用権 - Saimusha no Daiyōken)

A significant feature of Japanese law regarding foreign currency obligations is the debtor's right of substitution, as stipulated in Article 403 of the Civil Code. Even if a creditor demands payment in the contractually specified foreign currency, the debtor generally has the right to discharge the obligation by paying in Japanese Yen. This payment must be made at the exchange rate prevailing at the place of performance at the time of payment. For example, if a Tokyo-based company owes a US company USD 100,000 payable in Tokyo, it can opt to pay in JPY converted at the USD/JPY exchange rate in Tokyo at the moment it makes the payment.

This right makes foreign currency obligations a type of "alternative obligation" (nin'i saiken), where the primary obligation is to pay in the foreign currency, but the debtor possesses a secondary option to pay in JPY.

• Determining the Exchange Rate: The exchange rate used is that of the "place of performance." If no such rate is available directly at the place of performance, the rate of the region governing that place is used.
• Timing of the Exchange Rate: A pivotal Supreme Court judgment (July 15, 1975, Minshu Vol. 29, No. 6, p. 1029) clarified the timing for determining this exchange rate. The rate is the one prevailing at the actual time of payment. If the matter is litigated and a JPY amount is to be determined by the court, the rate used is that prevailing at the time of the conclusion of oral arguments in the fact-finding instance of the court. The rationale is that the substitute JPY payment effectively discharges the obligation at the moment it is made, hence the contemporaneous rate is most appropriate.

The Creditor's Right of Substitution (債権者の代用権 - Saikensha no Daiyōken)

The same Supreme Court judgment of July 15, 1975, also recognized a corresponding right for the creditor to demand payment in Japanese Yen, even if the contract stipulated payment in a foreign currency. If the creditor exercises this option and specifically demands payment in JPY, the debtor then loses the right to pay in the originally specified foreign currency.

The rationale behind allowing the creditor this option includes:

1. Nature of Foreign Currency: Often, specifying a foreign currency in a contract is primarily about expressing a certain economic value rather than demanding the physical delivery of those specific foreign banknotes or coins as unique items.
2. Interpretation of Japanese Law: While the Civil Code does not explicitly grant creditors this right in the same way it grants the substitution right to debtors (Art. 403), the combined effect of Articles 402 and 403 has been interpreted by courts as implicitly allowing for JPY as a default payment and enforcement currency within Japan.
3. Procedural Convenience: Demanding and enforcing judgments in JPY is often more straightforward within the Japanese judicial system.

The exchange rate and its timing for the creditor's substitution are the same as for the debtor's: the rate at the actual time of payment or at the conclusion of oral arguments in the fact-finding court.

The "Sovereign Right over Currency" (通貨高権 - Tsūka Kōken) and its Modern Interpretation

Historically, the concept of a state's "sovereign right over currency" (tsūka kōken) played a role in these discussions. This principle suggests that a state has the ultimate authority over its currency system, and for obligations to be performed within its territory, payment in its own legal tender should not be obstructed. From this perspective, Article 403 (granting the debtor the right to pay in JPY) could be seen as an embodiment of this sovereign prerogative. A strict interpretation might even suggest that an agreement absolutely requiring payment only in foreign currency for a domestic transaction, to the exclusion of JPY, could be contrary to this public policy principle and potentially unenforceable.

However, there has been a significant evolution in legal thinking, particularly reflected in commentary on the more recent revisions of the Civil Code. The increasing globalization of trade and finance, along with international legal norms that increasingly favor party autonomy in choosing the currency of their transactions (e.g., as seen in principles like the UNIDROIT Principles of International Commercial Contracts or the Principles of European Contract Law, Art. 7:108(1) which allows payment in the currency of the place of payment if the contractual currency is unavailable), has led to a re-evaluation of Article 403.

The contemporary understanding, and one that aligns with a more flexible interpretation of party autonomy, is that Article 403 should be viewed primarily as a default rule (任意法規 - nin'i hōki) that applies in the absence of a clear contrary agreement between the parties. This means:

• If a contract specifies payment in a particular foreign currency, that is the primary obligation. The debtor must generally perform in that currency if the parties have, explicitly or implicitly, excluded the JPY substitution right.
• Similarly, the creditor can generally only demand performance in the contractually specified foreign currency if the parties' agreement points clearly in that direction.

This interpretation actually aligns more closely with the original drafting intentions behind Article 403 during the Meiji era. Initial drafts of the provision reportedly contained a proviso explicitly allowing parties to agree otherwise, which was later removed on the understanding that the general principle of freedom of contract (now more clearly articulated in Article 91 of the Civil Code) would cover such situations.

Practical Considerations for International Monetary Obligations

For businesses engaging in transactions involving Japanese law and different currencies, these rules have important practical implications:

1. Clarity in Contract Drafting:
   • Currency of Account vs. Currency of Payment: Be explicit. Clearly state the currency in which the obligation is denominated (currency of account) AND the currency in which actual payment is to be made.
   • Excluding/Modifying Substitution Rights: If the intention is to insist on payment exclusively in a specific foreign currency, or to disallow the JPY substitution right under Article 403, this should be clearly stipulated in the contract. Given the default rule interpretation, clear language overriding the statutory option is advisable. Conversely, if flexibility is desired, the default rules may suffice or specific substitution conditions can be outlined.
2. Managing Exchange Rate Risk:
   • The default rule (payment-time exchange rate) introduces exchange rate volatility. If this is undesirable, parties should contractually specify:
     • A fixed exchange rate.
     • A specific date or period for determining the applicable exchange rate.
     • A particular source or method for obtaining the exchange rate (e.g., a specific bank's rate at a specific time).
3. Dispute Resolution and Enforcement:
   • If litigation in Japan is a possibility, consider how a Japanese court might handle a foreign currency claim if a judgment in JPY is sought or rendered. If the contract is clear about the currency of payment and any substitution rules, this will guide the court.

Conclusion

Monetary claims form the backbone of commercial activity, and Japanese law provides a detailed, albeit evolving, framework for their regulation. While simple fixed-amount claims in Yen are straightforward, obligations involving specific types of currency or foreign currencies introduce complexities. The debtor's statutory right to substitute JPY for a foreign currency obligation, and the corresponding creditor's right recognized by case law, highlight the practical considerations surrounding exchange rate risk and the currency of actual settlement. The modern trend towards interpreting Article 403 as a default rule underscores the increasing importance of party autonomy and precise contractual drafting to clearly define the terms of monetary obligations, particularly in international dealings, to mitigate uncertainty and ensure that financial commitments are met as intended.