JAPAN: An Introduction to Construction
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Recent Projects in Japan
While Japanese factory construction was until recently outbound-focused, with domestic companies constructing plants overseas, many such companies are now concentrating their efforts in Japan. This is due to a number of factors in Japan, including:
• the recent rapid depreciation of the yen;
• surging inflation;
• prices remaining significantly lower than in other developed countries; and
• the availability of highly skilled labour at comparatively lower wages to other countries.
Shiseido, a major cosmetics company, is one example of a company that has returned to Japan. In December 2019, it built a new factory in Tochigi, the company’s first plant in Japan for 36 years.
Furthermore, there are recent instances of foreign companies constructing factories in Japan, which is a relatively new occurrence. An interesting example of this is the semiconductor factory currently being constructed in Kumamoto by Taiwan’s TSMC group. With a project cost of approximately JPY1 trillion, it is one of the biggest projects in western Japan. Against a backdrop of a global semiconductor shortage, the project represents success for the Japanese government in its bid to attract inbound investment in semiconductor factories amid increasingly fierce international competition. The government offered subsidies of up to JPY476 billion in total with the intention of stabilising the production of advanced semiconductors and boosting the domestic semiconductor industry. Another large-scale project is the semiconductor factory planned to be built in Mie Prefecture by Kioxia Corporation (Toshiba’s semiconductor spin-off) with US company Western Digital. This will also be supported by a government subsidy of up to JPY92.93 billion.
Redevelopment of Tokyo
Several large-scale redevelopment projects are underway in Tokyo, with the majority concentrated around the Tokyo station area. Of particular note is the Tokyo Torch Tower, which upon completion in 2027 will be Japan’s tallest building. Another noteworthy redevelopment plan is the “Tokyo Cross Park Project”, which includes the redevelopment of the Imperial Hotel (which has hosted numerous state guests). Furthermore, the Jingumae area is undergoing redevelopment, including the reconstruction of the ballpark and rugby stadium, in a project with a total cost of approximately JPY350 billion.
In addition, many projects are underway to replace ageing public facilities utilising the PFI (private finance initiative) method. These include the Nagoya Congress Center and the National Theater, for which public bidding was held last year and which are scheduled to open to the public in 2027 and 2029 respectively. Furthermore, extensive demand for construction is expected in the Kansai Region ahead of the 2025 Osaka EXPO.
Recent Infrastructure-Related Amendments to Laws
Due to recent increases in the cost of construction, the Order for Enforcement of the Construction Business Act was amended to revise certain financial requirements and matters as follows (amounts in brackets below apply to general civil engineering work and general building work):
• minimum subcontracting amount requiring a Special Construction Licence/appointment of a managing engineer/preparation of a work ledger – raised from JPY40 million (JPY60 million) to JPY45 million (JPY70 million);
• minimum contracting amount requiring a dedicated chief engineer and managing engineer – raised from JPY35 million (JPY70 million) to JPY40 million (JPY80 million); and
• maximum subcontracting amount for specialist work (not requiring appointment of a chief engineer) – raised from JPY35 million to JPY40 million.
Furthermore, amendments have been made to the Construction Business Act and the Act for Promoting Proper Tendering and Contracting for Public Works, which improve working conditions for construction workers.
Licences Under the Construction Business Act
The Construction Business Act requires companies (Japanese or otherwise) to obtain a Construction Licence (“Licence”) for the performance of construction work above a certain value. There are two types of Licence:
Ordinary Construction Licence – the Construction Business Act only defines “construction work” as “the civil engineering and construction work listed in the left column of the Appended Table 1”. This table lists 29 categories of work in total, consisting of two categories of “general work” (general civil engineering work and general building work, as described above) and 27 categories of “specialist work” (including electrical work and piping work). The general tendency is for the authorities to construe “construction work” fairly widely.
Special Construction Licence – this is required instead of an Ordinary Construction Licence where the minimum subcontracting amount exceeds that described in the table above.
A Licence is not required for minor work such as general building work costing less than JPY15 million, or for other types of work costing less than JPY5 million. However, in making this determination, the cost of materials and equipment will also be included in the calculation of the contracting amount.
Licences are valid for five years. If the applicant operates in more than one prefecture, the Licence application should be made to the Ministry of Land, Infrastructure, Transport and Tourism (MLIT), whereas if the applicant only operates in one prefecture, it can apply to the prefectural governor. In the case of overseas companies, some additional aspects need to be examined and approved by the MLIT. The examination period is between 30 and 120 days, but this does not include time for prior consultation and preparation. Consultation with lawyers and other professionals at an early stage is recommended.
Major Deviations Between Japanese and International Standard Form Contracts for Construction
For public works, the standard form contracts for public construction projects created by the Central Council for Construction Business (Chuo Kensetsugyo Shingikai) are widely used. On the other hand, the private sector typically prefers the standard form for private construction projects jointly created by seven major architecture and construction associations (Minkan (Nanakai) Rengou Kyoutei Yakkan) (GCCC).
These standard forms only cover construction. For projects involving design and construction, parties can select the Japan Federation of Construction Contractors’ standard form contract for design and construction projects, and for EPC contracts, the standard form contract for domestic plant construction projects (prepared by the Engineering Advancement Association of Japan or the ENAA ) is available.
All of these standard forms deviate significantly from international standard contract conditions such as those of the International Federation of Consulting Engineers (FIDIC) and the American Institute of Architects (AIA). To explain at a very high level, international standard construction contracts typically anticipate that a project may end in dispute, and therefore seek to include clear and detailed provisions relating to anticipated risks. By contrast, parties to Japanese construction contracts historically prefer simpler contracts, with the result that Japanese standard contracts have less detailed provisions compared to international versions, and occasionally use vaguer (or less explicit) language with respect to rights and obligations.
The following are some key differences between the provisions of the GCCC in Japan and FIDIC.
Performance guarantee/defect liability
FIDIC requires the contractor to guarantee performance by procuring performance security for the period up to performance certificate issuance. Conversely, the GCCC does not contain provisions relating to performance guarantees or performance security (and furthermore does not require the contractor to pay performance liquidated damages). However, the contractor does assume defect liability for a period of two years from the day the work is delivered to the owner (the period varies by project).
Under FIDIC, indirect and consequential loss (including lost profits) are generally excluded, and a maximum liability cap is stated. The GCCC does not contain provisions excluding such losses or capping liability, and parties remain liable for ordinary and reasonably foreseeable loss or damage under Japanese law.
Complaints and dispute resolution procedures
FIDIC stipulates a detailed complaints procedure, and provides that the contractor forfeits its rights where it fails to provide notice within a specified period. The GCCC, on the other hand, does not include a complaints procedure at all.
For dispute resolution, FIDIC provides that, based on the engineer’s decision, arbitration will be used if the dispute cannot be resolved through the dispute adjudication board. Under the GCCC, disputes are resolved through mediation or conciliation by the Construction Works Dispute Settlement Board (nevertheless, many construction contracts provide for a district court to be the court of exclusive jurisdiction in the first instance).
Japanese standard forms are premised on a relationship of mutual trust between the parties, where issues are resolved through discussion between the parties. Therefore, using Japanese standard forms without amendment entails a certain degree of risk, particularly if one or more of the parties is an overseas company, where communication and mutual understanding between the parties can prove more challenging.
If an overseas company intends to enter into a domestic construction contract with a Japanese company, it would be advised to take appropriate measures (including appointing a law firm) to bridge the gap between international and Japanese standard form provisions (eg, by incorporating special provisions based on FIDIC).