Worldwide: International Trade 2024

Introduction

Recent events, including the trade conflict between the USA and China, the COVID-19 pandemic and the Russian invasion of Ukraine, have heightened global interest in international trade and national/economic security.

The following key developments have been implemented in Japan, as further explained in detail below:

• enactment of the Economic Security Promotion Act;
• strengthening of foreign direct investment regulations in order to secure stable supply chains;
• tightening of export regulations on advanced semiconductor manufacturing equipment; and
• publication of reference material on practical approaches for business enterprises to respect human rights in responsible supply chains.

The Economic Security Promotion Act

The Economic Security Promotion Act (the "Act") was enacted during the ordinary session of the Diet on 11 May 2022. The Act consists of the following four "pillars".

Strengthening of the supply chains of important items and raw materials

In order to mitigate the increasingly serious impact that a potential supply disruption of semiconductors and pharmaceuticals may cause due to the reliance of industrial infrastructures and medical services on digitalisation, and in order to counter a relative decline in Japan's ability to secure critical supplies in times of supply disruptions of essential items due to the growth of emerging countries and the deepening of global value chains, the following measures are being implemented in accordance with a basic policy that is formulated in greater detail by the national government:

• designation of specified key items and materials that are to be the subject of the measures, including antibacterial products, fertilisers, permanent magnets, machine tools and industrial robots, semiconductors, storage batteries, and natural gas;
• public support for private sector companies that contribute to the stable supply of specified key items and materials, in exchange for submitting a plan to the relevant authorities by such companies outlining the manner in which they hope to contribute to the stabilisation of the supply of such specified key items and materials; and
• government measures to secure the stable supply of such specified key items and materials.

Securing the safety and reliability of key infrastructures

In order to mitigate the risk of cyber-attacks due to the large-scale digitalisation of critical facilities of key infrastructures, a prior assessment system will be applied to the introduction of specified critical facilities for certain key infrastructures, as well as the commission of maintenance and management of such specified critical facilities. Businesses/business operators that will be particularly affected include:

• designated companies that operate specified key infrastructures, including businesses such as electricity, gas, water supply, banking, insurance and credit cards;
• companies that supply specified critical facilities of the designated businesses; and
• companies that are commissioned to manage and maintain the specified critical facilities of the designated businesses.

During its pre-assessment of the supply of specified critical facilities and commission of management and maintenance thereof, the Japanese government will ask these companies, including foreign companies, to provide information regarding their sales activities vis-à-vis foreign governments and the nationality of their executives.

Implementing systems to develop and support key technologies by public and private sectors

A framework of government support and co-operation between the public and private sectors for the appropriate management of sensitive information is implemented with respect to advanced technologies critical for the stability of people's daily lives and economic activities. The framework required for the proper management of the information and the costs associated therewith will be covered by funds which will consist of public contributions. The specified key technologies the funds will be covering include:

• space and aeronautical engineering;
• marine engineering;
• cybersecurity;
• biotechnology;
• quantum technology; and
• artificial intelligence.

Prevention of leakage of sensitive data relating to inventions by non-disclosure of relevant patent information

In order to reinforce measures for the prevention of leakage of sensitive information through patent application procedures pertaining to inventions of which the disclosure may be likely to harm the security of Japanese citizens, the Act introduces a system whereby the Prime Minister is authorised to order that an invention be kept secret, and to withhold the publication of a patent application and the granting of such patent for a period of up to one year, which may be renewed for additional one-year periods.

The Japan Patent Office (JPO) will screen all patent applications and refer to the Prime Minister applications where the inventions fall within one of the specified technological areas. The Prime Minister will issue a secrecy order when the disclosure of an invention is detrimental to national security, and measures to safeguard the information pertaining thereto. The specified technological areas include technologies having both commercial and military applications, some of which are subject to the Act only when the inventions are made for military purposes, or when the inventions are made using government funding.

In addition, the Act prohibits anyone from filing an application for patent in a foreign country for inventions made in Japan and falling within the specified technological areas for the first ten months following the filing for the patent in Japan, or prior to receiving a notification that such patent application is not subject to it being sent to the Prime Minister or having a secrecy order issued, whichever is earlier. Violation of this rule is subject to penalties.

Future prospects

The implementation of these four pillars has already started, set to be fully in effect by May 2024. In addition, the Minister in charge of Economic Security is considering an amendment to the Act that would introduce a clearance system for authorising Japanese companies to access classified information in order to participate in international joint development projects.

Strengthening of Foreign Direct Investment Regulations to Secure Stable Supply Chains

Background

Under the Foreign Exchange and Foreign Trade Act (FEFTA), foreign investors investing in or taking certain measures with respect to Japanese companies that are engaged in designated business sectors, including core business sectors, are subject to prior notification and review by the Japanese government.

Following the designation of specified key items and materials in order to ensure stable supply chains under the Act, the relevant public notices (or kokuji) issued under the FEFTA were amended in order to safeguard the integrity of certain supply chains and to enhance technology leakage risk management, including the risk of the diversion of technology to military use.

Addition of core business sectors

The following business sectors were added to the core business sectors:

• fertilisers (importing business) (limited to imports of potassium chloride and ammonium dihydrogen phosphate);
• permanent magnets (manufacturing business and raw material manufacturing business);
• machine tools and industrial robots (manufacturing business, etc);
• semiconductors (manufacturing business of manufacturing equipment, etc);
• storage batteries (manufacturing business and raw material manufacturing business);
• natural gas (wholesale business);
• metals and mineral products (refining business);
• marine equipment (manufacturing of engines, etc) (limited to diesel engines and navigation tools used to ensure the safety of navigation and propellers); and
• metal 3D printers (manufacturing business and metal powder manufacturing business).

In addition, the amendments clarify that aircraft manufacturing, which had already been specified as a core business sector, includes the manufacturing of drones. The manufacturing of antibacterial products and the petroleum refining businesses were also added to the core business sectors. Following the amendments, all of the businesses regarding the specified key items and materials have been classified as core business sectors.

Tightening of Export Regulations on Advanced Semiconductor Manufacturing Equipment

Background

In July 2023, Japan's Ministry of Economy, Trade, and Industry (METI) implemented new export regulations that could significantly reshape the global semiconductor industry. Under the new regulations, the METI requires exporters of advanced semiconductor manufacturing equipment to be licensed. This development builds on a trend initiated by the USA, which introduced export restrictions on advanced chips and manufacturing equipment to China in October 2022. This regulatory development is crucial because it has potential to redefine the dynamics of international semiconductor trade.

Overview of Japan's export control system

The new rules operate within Japan's export control system, which is governed by laws including the FEFTA. The FEFTA requires exporters to obtain an export licence from the METI for certain goods or technologies. Such specified goods or technologies come from the Export Trade Control Order (ETCO) enacted under the mandate of the FEFTA. The recent amendment concerns the Ministerial Ordinance Specifying Goods and Technologies (MOSGT) under the ETCO.

Expansion of regulated semiconductor manufacturing equipment

The amendment to the MOSGT expanded the regulations concerning "equipment for manufacturing or testing of semiconductor devices or materials, or components or accessories therefor". Prior to the amendment of the MOSGT, the exportation of ten types of semiconductor manufacturing equipment required a licence, whereas the amendment expanded this number to 33.

These newly regulated items include equipment used in the design, front-end and back-end processes of semiconductor manufacturing, in line with Japan's industrial strengths. The exportation of these items to all countries requires a licence, and transactions involving technology related to the manufacture, development and use of the new items are also regulated pursuant to the Foreign Exchange Order.

Revision of the bulk export licence system

The bulk export license system was also revised. The system allows exporters to cover multiple exports using a single "bulk licence", instead of requiring individual licences for each export.

Under this system, there are three types of bulk licence:

• general bulk licence – applicable to exports of less sensitive goods/technologies to specific countries;
• special general bulk licence – covers exports to a broader range of countries, provided the exporter has an export compliance programme; and
• specific bulk licence – allows exports to the same counterparty with whom the exporter has an ongoing business relationship.

The exportation of the newly regulated items to "Group i-1 (い①)" countries (including the USA) can be covered by a general bulk licence or a special general bulk licence, reflecting the mutual trust between these countries. For "Group to-2 (と②)" countries, a special general bulk licence will be issued. However, for "Group to-3 (と③)" countries (such as China), only a specific bulk licence will be issued, which is limited to an export to the same counterparty with an ongoing business relationship.

In conclusion, it is crucial for international companies that export or import targeted semiconductor products from Japan to carefully verify the eligibility and procedures for obtaining either bulk or individual export licences. This should take into account factors such as:

• the destination of the product;
• end users;
• intended use; and
• the existence of ongoing business relationships with importers and/or end users.

Publication of Reference Material on Practical Approaches for Business Enterprises to Respect Human Rights in Responsible Supply Chains

Background

On 4 April 2023, the METI released a document entitled Publication of Reference Material on Practical Approaches for Business Enterprises to Respect Human Rights in Responsible Supply Chains (the "Reference Material"). The Reference Material was drafted with the intention to provide companies doing business in Japan with a greater understanding of the practical matters and considerations they should take into account in order to respect human rights based on the Guidelines on Respect for Human Rights in Responsible Supply Chains released on 13 September 2022.

The Reference Material is not intended to exhaustively cover all aspects in the business and human rights arenas. It focuses on presenting:

• key points for establishing a human rights policy; and
• the process flow for risk identification and assessment of human rights violations in the form of human rights due diligence ("Human Rights DD").

Key points for establishing a human rights policy

The Reference Material serves as a useful guidance in the formulation process of a human rights policy, and provides specific examples of items that companies should consider implementing with respect thereto. In particular, these specific examples constitute a good reference point for companies that have just begun their efforts to incorporate human rights into their business processes. Examples of items are as follows:

• positioning of the human rights policy in internal company documents;
• coverage of the human rights policy;
• expressing expectations for respecting human rights vis-à-vis employees, business partners and other related parties;
• expressing a commitment to respect internationally recognised human rights;
• clarifying the relationship between the responsibility to respect human rights and legal compliance with laws and regulations;
• key issues faced by a company in connection with human rights; and
• how to implement human rights efforts.

Process flow for identifying and assessing negative impact on human rights

The Reference Material provides an example of the process flow for identifying and assessing negative impact on human rights, the first step of due diligence:

• identification of business fields which pose material risk;
• identification of the processes where adverse impact arises; and
• assessment of the business enterprise's involvement in adverse impact and prioritisation.

The Reference Material contains useful examples as to each step set out above. In particular, Attachment 1 includes the respective representative human rights risk faced by various business sectors (provisional translation of Human Rights Issues by Sector in the UNEP FI Human Rights Guidance Tool for the Financial Sector), by product and by region, together with examples of human rights violations. In order to identify business fields which carry material risk, companies can check the representative human rights risk set out in Attachment 1. In addition, companies are strongly advised to assess and identify specific, individual human rights risk applicable to them.

Originally Published by Chambers and Partners

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.