１．The Importance of Establishing a Compliance Framework

Japan’s Companies Act requires “large companies” to establish internal control systems. However, compliance is not important for large companies alone. Even for small and medium-sized enterprises (SMEs), failure to put compliance and internal controls in place can give rise to serious risks for the company.

The same applies to SMEs that are under no obligation to establish an internal control system and to foreign-affiliated companies that have only just entered Japan; if anything, companies whose frameworks are not yet in place tend to see risks materialize more readily. For foreign companies in particular, because of differences in culture, business customs, and legal systems, “things that were never a problem in the home country” are apt to become major risks in Japan. This article explains, topic by topic, the minimum points you should have covered.

２．Specific Examples of Compliance Items Requiring Attention

(1) Tax and accounting management

Tax and accounting tend to be put off in the period just after incorporation, but if sales expand while management remains sloppy, at some point the company may suddenly be found—in an investigation by the Regional Taxation Bureau or (where the company imports or exports) Customs—to have failed to report income and the like, and may be assessed substantial additional taxes. Having a retained lawyer and a licensed tax accountant involved from the time of incorporation, while sales are still small, and getting the basics in order, will help contain major risks and costs in the future.

(2)  Management of trade secrets (removal by departing employees)

Cases in which customer information or technology and know-how are taken out by departing employees never cease.

Under Japan’s Unfair Competition Prevention Act, for information to be legally protected as a “trade secret,” it must, among other requirements, be kept and managed as a secret (the “confidentiality management” requirement); unless the information is properly managed on a day-to-day basis, no legal protection will be available even if it is taken out. Measures such as executing NDAs and written undertakings (at the time of hiring and at the time of departure), applying “confidential” markings and limiting access rights, and confirming the return of data upon departure are important.

(3) Management of contractors (the Subcontract Act / the new Freelance Act)

When outsourcing work to outside parties, attention must be paid to the laws that regulate transactions with contractors. The so-called Subcontract Act prohibits reducing agreed fees, delaying payment, “beating down” prices, and the like; it was amended and renamed in January 2026 and is now the “Toriteki Act” (Act on the Optimization of Transactions with Small and Medium-sized Entrusted Business Operators), under which the regulations have been strengthened.

In addition, the new Freelance Act, which came into force in November 2024, requires—with respect to work entrusted to individuals (“specified entrusted business operators”)—that the terms of the transaction be clearly set out and that remuneration be paid by the due date (in principle, within 60 days); because it has no capital-amount threshold, it can apply even to small-scale businesses.

Violations carry the risk of guidance or recommendations from the Japan Fair Trade Commission and other authorities and of the company’s name being made public (published cases have also been increasing in recent years), so companies are expected to put their contracts, written orders, and payment terms in proper order.

(4) Harassment measures

In Japan, under the amended Act on Comprehensively Advancing Labor Measures (the “Power Harassment Prevention Act”; its obligations were extended to SMEs as well from April 2022), companies are required to take measures to prevent harassment. What requires attention is that conduct once not recognized as harassment in Japan has in recent years come to be regarded as such, and acts done without any ill intent by officers or employees of foreign companies can still lead to disputes. The following are typical examples peculiar to Japan.

In both cases the actor often has no ill intent; in Japan, however, great weight is placed on how the conduct is received by the employee. The risks are wide-ranging: (i) labor disputes citing harassment are by no means rare, and if an employee turns to the Labour Standards Inspection Office or the Labour Bureau, the company will be compelled to deal with the authorities; (ii) dismissing an employee who has complained of harassment at the company’s convenience is readily found unlawful as disadvantageous treatment, making dismissal all the more difficult; (iii) if the problem is left unaddressed, not only the company but also its directors personally may be held liable in damages for breach of their duty of care as prudent managers (zenkan chui gimu); and (iv) an outflow of talent and difficulty in recruiting caused by word of mouth can also result.

Japanese companies generally take measures such as expressly setting out prohibited conduct in their work rules and harassment-prevention regulations, establishing consultation (whistle-blowing) contact points, conducting regular training, and putting in place procedures for fact-finding investigations and the prevention of recurrence

(5) Anti-social forces checks

“Anti-social forces” refers to organized crime groups (boryokudan), persons affiliated with them, and the like. In Japan, each prefecture has enacted an “Organized Crime Group Exclusion Ordinance,” pressing forward with the exclusion of anti-social forces. In many cases, these ordinances require      business operators, on a best-efforts basis, to include an anti-social forces clause when concluding a contract.

Against this background, confirming at the time of contracting that the counterparty is not an anti-social force (an “anti-social forces check”) and including an anti-social forces clause in the contract have become standard practice regardless of company size. The clause may look unfamiliar to foreign companies, but when a contract is concluded with a Japanese company, this clause is almost invariably inserted.

３． Conclusion

The point that “neglecting internal controls leads to serious risks” is not someone else’s problem for SMEs or for foreign-affiliated companies that have just entered Japan. When starting a business in Japan, we strongly recommend consulting lawyers, licensed tax accountants, and other professionals at an early stage and putting the necessary internal control framework in place.

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