Japan Business Law: Significant Revisions Coming to Japanese Civil Code

On May 26, 2017, the House of Councillors approved and adopted revisions to the Civil Code by majority vote, addressing credit obligations (law of obligations) established in corporate and consumer contracts.
With approximately 200 areas revised, this was the most fundamental revision in approximately 120 years.

Let’s take a look at the main areas of revision.

① Extinctive Prescription

The text was standardized, “5 years upon creditors being aware of their ability to exercise their rights (10 years if they were unaware of this ability).”

In the current Civil Code, the extinctive prescription for credit (claims) is, in principle, 10 years. However, this was dependent on the type of credit, with commercial credit (trades between companies, etc.) set at 5 years, and payments on credit for hotel accommodations and drinking establishments set at 2 years.

While this revision standardizes the code, rights for worker wage claims remains at 2 years.
The impact of these revisions is causing concern over the possibility that the Labor Standards Act may also be revised.

②Statutory Interest Rate

Decreased from 5% to 3% annually.
In addition, the rate will transition to a fluctuating system every three years based on changes in market interest rates.

The statutory interest rate is used for calculating insurance amounts for car insurance, etc. If the statutory interest rate falls, the insurance amount (for the beneficiary) is expected to increase.

③Guarantors

When receiving capital from financial institutions, or designating a third party as a joint guarantor for housing rental contracts, prior confirmation of intent from a notary public will now be required in order to protect the individual guarantor.

This revision is expected to result in increased use of rental guarantee companies in lieu of individual guarantors.

④Return of Security Deposits

Previously vague rules on security deposits and restitution have been rewritten for clarity. Restitution for normal wear and time-related degradation to property will be the responsibility of the landlord (creditor). Restitution for damage caused by negligence or intention will be the responsibility of the renter.

The following was also revised for clarity: “The landlord must return the security deposit when the renter leaves the property as legally prescribed.”

⑤Terms and Conditions of Agreements

In regards to credit card agreements, insurance agreements, and deposit agreements, the law now states “Unilaterally causing harm the other party’s monetary interests will be deemed invalid.”

There are many more areas revised that cannot be included here.

As there are a wide range of industries targeted by these revisions, there will be an approximately three-year observation period, and the law is expected to be implemented in 2020.

The revisions will have an indirect impact on the accounting and tax preparation industries. We recommend you to precisely understand the revisions and to prepare for them.