Banking & Finance

Japan’s 2025 Secured-Transactions Reform: Key Changes and Business Implications

Japanese Attorney at Law - Bengoshi L.L.

• 8 min read
Slide summarizing Japan’s 2025 secured-transactions reform—registration priority rule, codified jōto tanpo, pooled-asset collateral, and lender compliance checklist.

TL;DR
Japan is preparing sweeping secured-transactions reforms covering security interests in movable assets, receivables and even entire business undertakings. Expected statutes will codify case-law devices such as jōto tanpo, introduce a registration-priority rule, clarify private enforcement, and improve asset-based-lending (ABL) opportunities. Companies and lenders must update collateral documentation, enhance registry due-diligence, and follow MOJ guidance as the 2025 bill advances.

Table of Contents

  1. Background: Reliance on Non-Statutory Security and the Need for Reform
  2. Key Directions and Concepts of the Reform
  3. Proposed Mechanisms and Rules
  4. Implications for US Businesses
  5. Conclusion

Japan is currently in the advanced stages of a significant legislative overhaul concerning security interests, particularly those related to movable assets and claims. This reform, deliberated within the Legislative Council of the Ministry of Justice (specifically, the Security Law Subcommittee - 法制審議会担保法制部会), aims to modernize a legal area traditionally governed more by case law and customary practices than by comprehensive statutes. While the final details are still being refined pending the release and finalization of an interim proposal (中間試案), the direction of the reforms suggests potentially substantial impacts on business financing, credit transactions, and enforcement practices in Japan.

Background: Reliance on Non-Statutory Security and the Need for Reform

Unlike legal systems with comprehensive frameworks like the Uniform Commercial Code (UCC) Article 9 in the United States, Japanese law regarding security interests in movable property and claims has historically relied heavily on non-statutory devices developed through court precedents and practice. The two most prominent examples are:

  1. Joto Tanpo (譲渡担保 - Security Assignment): This involves the formal transfer of title to an asset (movable property or claims) from the debtor to the creditor for security purposes, with the understanding that title reverts upon repayment of the debt. Despite the transfer of title, the debtor usually retains possession and use of the asset.
  2. Shoyuken Ryuho (所有権留保 - Retention of Title): Commonly used in installment sales, the seller retains title to the goods until the purchase price is fully paid by the buyer, who has possession and use.

While Japanese courts have adapted these concepts to function much like formal security interests – recognizing the creditor's right to priority payment upon default and treating them as security rights (別除権 - betsujo-ken) rather than absolute ownership rights in bankruptcy proceedings – the lack of a clear, unified statutory framework has created complexities and uncertainties. This is particularly true for modern financing techniques like Asset-Based Lending (ABL), which often relies on security interests over fluctuating pools of assets like inventory or receivables. The current system, fragmented and reliant on judicial interpretation, has been seen as a potential impediment to unlocking the full potential of using movable assets and claims as collateral, prompting the ongoing legislative reform efforts.

Key Directions and Concepts of the Reform

The ongoing discussions reveal several core principles and directions for the new legislation:

1. Legislative Approach: Regulating Transactions vs. Creating New Rights

A fundamental debate has centered on the best legislative method .

  • Security Purpose Transaction Regulation Model (担保目的取引規律型): This approach focuses on regulating the legal effects of transactions entered into for security purposes (like joto tanpo or shoyuken ryuho), aligning their outcomes with those of typical security interests without necessarily creating an entirely new type of security right. This maintains continuity with existing practices, especially regarding registration systems for assignments.
  • Security Interest Creation Model (担保物権創設型): This involves creating a new, distinct statutory security interest for movables and claims, akin to the UCC's approach. Proponents argue this offers greater clarity and conformity with international standards.

Current discussions suggest a leaning towards, or at least a strong consideration of, the "Transaction Regulation Model" or a hybrid approach . The idea is to preserve the familiar forms of transactions while ensuring their effects (priority, enforcement, treatment in bankruptcy) are governed by clear, security-focused statutory rules . The emphasis is on substance over form, treating arrangements intended as security as security, regardless of their nominal structure.

2. Continuity with and Codification of Case Law

The reforms are not intended to erase decades of jurisprudence but rather to build upon it, codifying established principles while resolving ambiguities . Key judge-made rules that are likely to be reflected in the new law include:

  • Treatment in insolvency as security rights (betsujo-ken), not ownership rights allowing reclamation (torimodoshi-ken - 取戻権) .
  • Recognition of a right similar to subrogation (butsujo daii - 物上代位), allowing the security interest to attach to proceeds .
  • Allowance for multiple security interests (joto tanpo) over the same asset, establishing priority based on perfection timing .

3. Broadening the Scope of Secured Assets

The reforms explicitly address security interests not only in individual movable assets and claims but also in more dynamic forms of collateral crucial for modern business:

  • Security over Pools of Assets (集合財担保 - Shugozai Tanpo): This addresses security interests over fluctuating collections of assets, such as inventory or accounts receivable . The new law aims to provide clear rules for creating, perfecting, and enforcing security interests in these pools, which is vital for ABL. Discussions include how to legally conceptualize these pools – whether as a single "aggregate" (集合物論 - shugobutsu ron, traditionally applied to movables) or as a bundle of individual, changing assets (a view often applied to receivables) . Regardless of the theoretical underpinning, the goal is to create a reliable framework for financing based on these asset categories.
  • Security over Business Undertakings (事業の担保化 - Jigyo no Tanpoka): A more ambitious concept being explored is the possibility of creating a security interest over an entire business as a going concern . This would potentially cover not just tangible assets and receivables but also intangible assets like goodwill, contractual rights, and licenses, treated as an organic whole. The potential advantage lies in enabling recovery based on the business's going-concern value, rather than just the liquidation value of individual assets, thereby facilitating restructuring and preserving value . This contrasts with the current practice of taking "blanket security" (包括担保 - hokatsu tanpo), which involves accumulating individual security interests over substantially all of a company's assets rather than securing the "business" itself .

Proposed Mechanisms and Rules

Several key mechanisms are under consideration to implement the modernized framework:

1. Perfection and Priority: The Registration Priority Rule (登記優先ルール)

A significant proposed change concerns priority rules . Currently, priority between competing interests (e.g., two joto tanpo claims over the same asset) is generally determined by the time of perfection, which can be achieved either through physical delivery or registration (for assignments). Possession includes constructive possession (senyu kaitei - 占有改定), where the debtor retains physical possession but holds the asset on behalf of the creditor – a method whose perfection is not publicly visible.

The reform proposes a "registration priority rule" :

  • A security interest perfected by registration would generally take priority over an interest perfected only by delivery (including senyu kaitei), even if the delivery occurred earlier.
  • This effectively creates a two-tiered system of perfection: delivery perfects the interest against general creditors and bankruptcy trustees, but registration is needed for priority against other registered secured parties.
  • This aims to enhance predictability and reduce the risk of hidden liens (kakureta tanpo), making the public registry the primary source for determining priority among secured creditors.

To manage priorities among registered interests, the introduction of a "related security interest schedule" (関連担保目録 - kanren tanpo mokuroku) is also contemplated, allowing parties to see other registered claims against the same collateral .

2. Special Considerations for Retention of Title (所有権留保)

Shoyuken ryuho functions economically as a purchase-money security interest (PMSI). The reforms appear poised to integrate it more formally into the security interest framework :

  • Perfection Required: Like other security interests, shoyuken ryuho would likely need to be perfected (e.g., through delivery or potentially registration) to be effective against third parties, particularly in bankruptcy.
  • Potential Super-Priority: Recognizing its purchase-money nature, perfected shoyuken ryuho securing the purchase price of the specific asset would likely be granted priority over pre-existing, non-purchase-money security interests (like a blanket joto tanpo over inventory) covering the same asset. This aligns with the economic function of ensuring suppliers are paid for the assets they provide. However, "expanded" retention of title clauses securing debts other than the purchase price may not receive this priority .

3. Enforcement: Codifying Private Sale Rules (私的実行)

A major benefit of joto tanpo has been the ability for creditors to enforce privately (私的実行 - shiteki jikko) without necessarily resorting to court-supervised auctions. The reforms aim to codify and regulate this process to ensure fairness to the debtor and junior creditors . Key elements include:

  • Notice: Requirement for the secured party to notify the debtor (and potentially junior creditors) of the intention to enforce .
  • Valuation and Surplus (清算金 - Seisankin): Clear rules on valuing the collateral, applying proceeds to the debt, and the obligation to return any surplus (seisankin) to the debtor or junior creditors. This applies whether the creditor appropriates the asset (kizoku seisan - 帰属清算) or sells it to a third party (shobun seisan - 処分清算) . The standard is generally fair market value at the time of enforcement .
  • Debtor Protections: Provisions allowing the debtor a period to redeem the collateral by paying the debt (受戻権 - ukemodoshi ken) . The exact duration of this period (e.g., a short period after notice, or until the surplus is paid) is part of the discussion .
  • Facilitating Possession: Recognizing that private enforcement is difficult if the debtor refuses to surrender possession, mechanisms involving court assistance to obtain possession, potentially short of a full judicial foreclosure, are being considered . This aims to make private enforcement more effective.
  • Emphasis on Renegotiation: Some commentary highlights that the very nature of security over operating assets (like pooled inventory or receivables) incentivizes renegotiation between creditor and debtor even after default, as abrupt enforcement can destroy value . The enforcement procedures may implicitly or explicitly provide opportunities for such renegotiation before final disposition .

Implications for US Businesses

These potential reforms carry several implications for US companies doing business in or with Japan:

  • Enhanced Financing Options: The clarification and expansion of security interests over movables, receivables, pooled assets, and potentially entire businesses could significantly boost ABL and other forms of non-real estate financing in Japan. This may provide more financing avenues for subsidiaries or partners lacking substantial land assets.
  • Improved Certainty for Lenders: For US lenders, the move towards clearer statutory rules and a registration-based priority system should increase predictability and reduce the risks associated with hidden liens or ambiguous case law, making cross-border lending potentially more attractive.
  • Due Diligence is Crucial: The increased emphasis on registration means thorough searches of relevant registries (like the Movables and Claims Assignment Registration Files - 動産・債権譲渡登記ファイル) will become even more critical when lending to Japanese companies, acquiring assets, or assessing counterparty risk.
  • Adapting Documentation: Security agreements involving Japanese assets or parties will need to be reviewed and likely revised to align with the new statutory terminology and requirements once the law is enacted.
  • Understanding Enforcement: While private enforcement is being codified, understanding the specific notice requirements, redemption periods, valuation standards, and the process for handling surplus or deficiency will be essential for enforcing creditors.
  • Business Security Interests: If the concept of securing an entire business undertaking becomes law, it could open new possibilities for acquisition finance or large-scale corporate lending, but also require careful analysis of its scope and interaction with other creditors' rights.

Conclusion

Japan's security law reform represents a major effort to modernize its commercial law infrastructure. By providing clearer statutory rules for security interests in movable assets and claims, codifying principles previously governed by case law, and potentially introducing novel concepts like security over business undertakings, the reforms aim to facilitate financing, particularly ABL, and enhance legal certainty. The proposed registration priority rule marks a significant shift designed to increase transparency.

While the final form of the legislation is yet to be determined, the direction indicates a move towards a more unified and predictable system. Businesses operating in Japan, foreign lenders, and investors should closely monitor the progress of these reforms, as they are likely to reshape the landscape of secured transactions and corporate finance in the country significantly. Understanding the new rules governing perfection, priority, and enforcement will be key to navigating the evolving legal environment effectively.