Legal Update

Japan’s Fast-Changing Business Laws: Labor, IP, Contracts & Governance Explained (2025)

Japanese Attorney at Law - Bengoshi L.L.

• 11 min read
Slide summarising Japan’s 2024-25 legal updates: overtime caps, freelance law, AI copyright, Civil Code non-conformity, corporate governance reforms
TL;DR
Japan has overhauled core business laws—from 2024 overtime caps and the new Freelance Protection Act to AI-era IP rules, contract “non-conformity” remedies, and tougher corporate-governance expectations. International companies must adapt HR policies, IP strategies, contract drafting, and board practices now to stay compliant and competitive.

Table of Contents

  1. Transformation in Labor and Employment Law
  2. Intellectual Property in the Age of AI and Globalization
  3. Navigating Contracts and Commercial Transactions
  4. Corporate Governance and Other Developments
  5. Conclusion

Japan's legal environment is continuously evolving, presenting both opportunities and challenges for international companies. Recent years have seen significant legislative reforms and notable court decisions impacting various facets of business operations, from labor practices and intellectual property management to contract law and corporate governance. Staying abreast of these changes is crucial for effective risk management and strategic planning. This article provides an overview of key recent developments relevant to US businesses interacting with the Japanese market.

I. Transformation in Labor and Employment Law

Japan is actively reforming its labor laws to address demographic shifts, changing work styles, and the need for greater flexibility and fairness. Several recent changes demand attention from employers.

A. Overtime Regulations and the "2024 Problem"

A major shift involves the enforcement of stricter overtime work caps. While large enterprises have been subject to these limits for some years under the revised Labor Standards Act, a grace period for certain industries, notably construction and logistics (drivers), ended on April 1, 2024. These sectors now face the same maximum overtime limits: generally 45 hours per month and 360 hours per year, with exceptions allowing up to 720 hours annually under specific, temporary circumstances (subject to stricter monthly caps and limitations on the number of months exceeding 45 hours).

This has significant implications, often referred to as the "2024 problem," particularly for supply chain management and project timelines involving these industries. Businesses relying on Japanese partners in construction or logistics need to anticipate potential cost increases, longer lead times, and the need for more meticulous planning to ensure compliance and avoid disruptions. Companies directly employing workers in Japan must ensure their internal rules, time-tracking systems, and workload management align with these regulations across all employee categories previously subject to the grace period. This includes revising the Article 36 agreements (サブロク協定 - saburoku kyōtei) which govern overtime work.

B. Promoting Work-Life Balance: Childcare and Caregiver Leave Enhancements

Responding to societal needs and aiming to boost workforce participation, Japan has progressively enhanced its systems for childcare and family care leave. Amendments to the Act on Childcare Leave, Caregiver Leave, and Other Measures for the Welfare of Workers Caring for Children or Other Family Members (育児介護休業法 - ikuji kaigo kyūgyō hō) continue to refine these entitlements.

Recent and upcoming changes (effective in stages, including 2025) focus on:

  • Increased Flexibility: Potentially allowing more flexible scheduling or shorter work hours for employees balancing work with childcare or elder care responsibilities. Specific requirements may mandate companies offer multiple options like flex-time, staggered hours, or remote work arrangements for employees with young children.
  • Enhanced Disclosure & Goal Setting: Larger companies (thresholds being adjusted, potentially impacting employers with over 100 or even 51 employees for certain social insurance aspects) face stricter obligations regarding the public disclosure of parental leave uptake rates. Future amendments may mandate setting numerical targets for leave acquisition and monitoring working hours to foster a supportive environment.
  • Financial Support Adjustments: Revisions to the Employment Insurance Act aim to bolster financial support during childcare leave, potentially adjusting benefit rates to encourage uptake, particularly among fathers. Rules regarding social insurance premium exemptions during leave are also being reviewed.

Employers need to update their work rules (就業規則 - shūgyō kisoku), inform employees of their expanded rights, and potentially adapt HR systems and management training to accommodate these changes, fostering a workplace culture where taking leave is normalized.

C. Expanding Employment Opportunities and Security

Efforts are underway to ensure broader and more stable employment, particularly for older workers and non-regular employees.

  • Toward Employment Until 70: The Act on Stabilization of Employment of Elderly Persons (高年齢者雇用安定法 - kōnenreisha koyō antei hō) currently mandates employers take measures to secure employment opportunities until age 65 (e.g., raising the retirement age, abolishing it, or implementing a continuous employment system). Furthermore, it establishes a "best efforts" obligation (努力義務 - doryoku gimu) for employers to secure work opportunities for individuals until age 70. While not yet a strict legal requirement to employ until 70, the direction signals a need for companies to plan for an aging workforce, potentially revising retirement systems and exploring diverse work arrangements for senior employees.
  • Freelancer Protection: Recognizing the rise of non-traditional work arrangements, Japan enacted the Act on the Promotion of Appropriate Transactions for Specified Consigned Business Operators (特定受託事業者に係る取引の適正化等に関する法律), commonly known as the Freelance Protection Act, set to take full effect around November 2024. This law aims to prevent unfair treatment of freelancers by mandating clear contract terms (specifying scope of work, remuneration, payment dates, etc.), prohibiting unjust refusals to receive deliverables or unwarranted reductions in payment, and establishing dispute resolution mechanisms. Businesses engaging freelancers in Japan must ensure their contracts and practices comply with these new requirements, providing greater transparency and fairness.
  • Expanding Social Insurance for Part-Time Workers: The scope of mandatory enrollment in employee health insurance and pension insurance (厚生年金保険 - kōsei nenkin hoken) for short-term workers continues to expand. From October 2024, companies regularly employing 51 or more insured individuals must enroll part-time workers who meet specific criteria (e.g., work hours, expected employment duration, salary thresholds). This requires affected businesses to adjust their payroll and HR processes.

D. Clarifying Worker Status: Recent Case Law

Court decisions continue to refine the definition of "employee" under various laws. For instance, a Tokyo High Court decision on September 19, 2024 (related to Labor Tribunal case record number 1319, page 61) addressed the status of a live-in housekeeper who also provided home-visit nursing care services under an employment contract. The court ruled that such an individual does not fall under the category of "domestic employees" (家事使用人 - kaji shiyōnin) typically excluded from certain protections under Article 116, Paragraph 2 of the Labor Standards Act. This highlights the fact-specific nature of employment classification and the importance of correctly applying labor protections even in seemingly non-traditional domestic roles when they integrate broader care services under an employment relationship.

II. Intellectual Property in the Age of AI and Globalization

Japan's intellectual property framework is adapting to rapid technological advancements, particularly the rise of generative AI, and the increasing importance of intangible assets in the global economy.

A. Generative AI and Copyright/IP Rights

The explosive growth of generative AI presents complex questions regarding authorship, infringement, and the use of copyrighted materials for training data. Japan is actively grappling with these issues:

  • Government Study Groups: The government, through bodies like the Intellectual Property Strategy Headquarters (知的財産戦略本部 - chiteki zaisan senryaku honbu) and relevant ministries (like the Agency for Cultural Affairs - 文化庁, bunka chō), has established working groups (e.g., "AI時代の知的財産権検討会" - AI Era IP Rights Study Group) to examine the implications.
  • Clarifying Existing Law: Efforts are underway to clarify how existing copyright law applies to AI development and output. Japan's Copyright Act (著作権法 - chosakuken hō) generally permits the use of copyrighted works for information analysis (e.g., AI training) under certain conditions (Article 30-4), provided it doesn't unreasonably prejudice the copyright holder's interests. However, the precise boundaries are under intense discussion, particularly regarding commercial AI models and the nature of the generated output.
  • Infringement Risks: Using AI tools to generate content carries potential infringement risks if the output closely resembles existing copyrighted works or if the training data itself was illicitly sourced. Businesses using AI tools need to be mindful of these risks.
  • Guidance and Best Practices: Government bodies are releasing reports and guidelines. For example, the Agency for Cultural Affairs published preliminary thoughts on AI and copyright in March 2024 and potentially checklists or guidance documents later that year. These aim to foster common understanding among stakeholders (AI developers, content creators, users) and promote responsible AI development that respects IP rights. The focus is on balancing innovation with protection, potentially encouraging voluntary measures like watermarking or provenance tracking for AI-generated content.
  • International Alignment: Japan is also monitoring international developments, such as the EU AI Act, to ensure its approach remains somewhat harmonized with global trends.

Businesses developing or utilizing AI in Japan should closely follow these discussions and evolving guidelines to mitigate legal risks and ensure compliance.

B. Strengthening Protection for Brands, Designs, and Trade Secrets

Recent amendments to the Unfair Competition Prevention Act (不正競争防止法 - fusei kyōsō bōshi hō), effective April 1, 2024, enhance protections vital for businesses:

  • Digital Space Protection: The definition of unfair competition has been expanded to better address the infringement of brand and design value in the digital realm, such as mimicking product forms or packaging online.
  • Trade Secret Safeguards: Measures to protect trade secrets and "limitedly provided data" (限定提供データ - gentei teikyō dēta) have been strengthened, potentially impacting how businesses manage confidential information shared under specific agreements.
  • Damages Calculation: Provisions for calculating damages in infringement cases have been updated, possibly making it easier for rights holders to seek adequate compensation.

Parallel changes to the Design Act (意匠法 - ishō hō) and Trademark Act (商標法 - shōhyō hō) effective around the same period (January/April 2024) aimed to broaden the scope of protectable designs and trademarks and ease requirements related to exceptions for novelty loss, facilitating easier IP registration.

C. Focus on Intangible Asset Utilization

There's a growing emphasis in Japan on companies effectively managing and leveraging their intellectual property and other intangible assets for corporate value creation. Revised guidelines, such as the "Guidelines for Disclosure and Governance of Intellectual Property and Intangible Asset Investment and Utilization Strategies Ver. 2.0" (知財・無形資産の投資・活用戦略の開示及びガバナンスに関するガイドライン Ver. 2.0), encourage companies to:

  • Articulate Strategy: Clearly outline their vision for using intangible assets in business development.
  • Engage Investors: Disclose relevant information and engage in dialogue with investors about how these assets contribute to long-term value.
  • Strengthen Governance: Implement governance structures that effectively oversee IP strategy and management.

This trend suggests increased scrutiny from investors and stakeholders on how companies, including foreign subsidiaries, manage and report on their valuable intangible assets in Japan.

D. Efficient IP Administration

The Japan Patent Office (JPO) continues efforts to streamline patent examination. Reports indicate that the average time from request to first action (FA period) and the total time to grant have shortened significantly, meeting government targets (e.g., FA period around 9.4 months, total pendency around 13.8 months reported for FY2023). Furthermore, foreign patent application filings in Japan have shown an increasing trend in recent years, reflecting continued international interest in the Japanese market.

III. Navigating Contracts and Commercial Transactions

The landscape of contract law has also seen important adjustments, particularly following major revisions to the Civil Code (民法 - Minpō) that took effect in April 2020, with subsequent case law clarifying their application.

A. "Non-Conformity" Replacing "Defect" Liability

One of the most significant changes introduced by the revised Civil Code was the replacement of the concept of "defect" (瑕疵 - kashi) with "non-conformity with the contract" (契約不適合 - keiyaku futekigō). This applies broadly, including to sales contracts, contracts for work (like construction or software development), and service agreements.

Under the new regime, if the subject matter of the contract (goods, completed work, etc.) does not conform to the terms agreed upon regarding type, quality, or quantity, the buyer/ordering party has several remedies:

  • Repair/Replacement/Completion: Demand correction of the non-conformity.
  • Price Reduction: Request a reduction in the contract price.
  • Damages: Claim compensation for losses incurred.
  • Termination: Cancel the contract (subject to certain conditions, generally requiring prior demand for cure unless cure is impossible or refused).

This shift emphasizes the importance of clearly defining the specifications, quality standards, and quantity requirements within the contract itself. What constitutes "conformity" is measured against the specific agreement between the parties.

Recent court decisions are beginning to interpret the scope of non-conformity in various contexts. For example, a Tokyo District Court decision dated July 14, 2021, addressed alleged non-conformity (minor cracks in a staircase wall) in a construction context. The court considered factors like the inevitability of minor vibrations and expert opinions, ultimately finding that the observed cracks did not constitute non-conformity under the specific circumstances, as they didn't negatively impact the building's integrity. This illustrates that the bar for establishing non-conformity requires demonstrating a deviation from the agreed-upon contractual standards that has tangible consequences.

B. Liability in Contracting: Duty of Explanation

Parties engaging in contracts, particularly businesses dealing with consumers or less sophisticated parties, have a duty to provide adequate explanations. Failure to do so can lead to liability. An older but illustrative case (referenced in materials from 2018) involved a construction contract where the contractor was found liable for providing misleading or incomplete explanations regarding investment risks (e.g., omitting potential costs like property taxes and repair expenses, providing overly optimistic rent/occupancy projections). While specific regulations like the Consumer Contract Act may apply in B2C contexts, the underlying principle of good faith negotiation requires a degree of transparency, especially concerning factors crucial to the counterparty's decision-making. Businesses should ensure their sales and contracting processes involve clear, accurate, and comprehensive explanations, particularly regarding potential risks and costs.

C. Termination Rights in Construction Contracts

The revised Civil Code also removed a previous restriction (former Article 635 proviso) that prevented the ordering party from terminating a construction contract even if the completed building had significant defects (now non-conformities). Now, termination is generally possible, subject to the standard requirements for contract cancellation, providing ordering parties with stronger recourse in cases of seriously flawed construction work.

IV. Corporate Governance and Other Developments

A. M&A and Shareholder Disputes

Disputes related to mergers and acquisitions, particularly concerning share valuation in squeeze-out transactions or defenses against hostile takeovers, continue to generate notable court decisions. For example:

  • A Tokyo District Court decision dated March 23, 2023 (related to Commercial Law Practice Materials No. 470, page 130) involved a petition to determine the fair share purchase price following a tender offer.
  • An Osaka High Court decision dated July 21, 2022 (related to Financial Law Affairs No. 2209, page 40) addressed the validity of issuing share options (stock acquisition rights) as a defensive measure against a takeover, finding the specific allocation lacked reasonableness and granting a preliminary injunction against it.

These cases underscore the courts' role in scrutinizing the fairness of M&A processes and the proportionality of defensive tactics.

B. Commercial Registration Changes

A recent amendment to the Commercial Registration Rules (商業登記規則 - shōgyō tōki kisoku) introduces a measure allowing representative directors of stock companies (株式会社 - kabushiki-gaisha) to opt for non-disclosure of their full home address on the publicly accessible corporate registry. While the name remains public, this change aims to address privacy concerns. Businesses dealing with Japanese companies should be aware that verifying a representative's full address might require different procedures if this option is exercised.

C. Economic Security Legislation

Japan has enacted legislation aimed at strengthening economic security, such as the Act on the Protection of Specified Essential Infrastructure and the Act on the Promotion of Japan's Economic Security by Integrated Implementation of Economic Measures (経済安全保障推進法 - keizai anzen hoshō suishin hō). These laws involve frameworks for securing critical supply chains, ensuring the reliability of essential infrastructure, supporting R&D in critical technologies, and establishing non-public patent systems in sensitive areas. They also introduce concepts like security clearances for accessing sensitive economic information (though the full scope and impact on foreign businesses are still developing). Companies operating in strategic sectors need to monitor the implementation of these regulations closely.

Conclusion

Japan's legal system is actively adapting to domestic and global pressures, impacting how businesses operate across labor, IP, contracts, and corporate governance. Key trends include a push for improved work-life balance and broader labor protections, navigating the complex IP implications of AI, emphasizing contractual clarity under the revised Civil Code, and bolstering economic security. For US businesses engaged with Japan, understanding these developments is not just about compliance; it's about strategically positioning for success in a dynamic market. Proactive engagement with legal counsel familiar with both US and Japanese law is essential to navigate these changes effectively.