Investment Treaty Arbitration: Japan

Arab Republic of Egypt BIT (14 January 1978)

No

Yes

Yes

Yes

No

No

No

Yes

Argentina BIT (not in force)

Yes

Yes

Yes

Yes

No

6 months

No

Yes

Armenia BIT (15 May 2019)

Yes

Yes

Yes

Yes

No

6 months

No

Yes

Bahrain BIT (not in force)

Yes

Yes

Yes

Yes

No

6 months

Yes

Yes

Bangladesh BIT (25 August 1999)

No

Yes

Yes

Yes

No

Yes

Yes

Yes

Cambodia BIT (31 July 2008)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

China BIT (¹⁴ May 1989)

No

Yes

Yes

Yes

No

6 months

No

Yes

Colombia BIT

(11 September 2015)

Yes

Yes

Yes

Yes

Yes

7 months and 15 days

No

Yes

ECT (16 April 1998)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Georgia BIT (23 July 2021)

Yes

Yes

Yes

Yes

No

6 months

Yes

Yes

Hong Kong, China SAR BIT (18 June 1997)

Yes

Yes

Yes

Yes

Yes

6 months

Yes

Yes

Iran BIT (26 April 2017)

Yes

Yes

Yes

Yes

Yes

6 months

Yes

Yes

Iraq BIT (25 February 2014)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Islamic Republic of Pakistan BIT (29 May 2002)

No

Yes

Yes

Yes

No

Yes

Yes

Yes

Israel BIT

(5 October 2017)

Yes

Yes

Yes

Yes

No

6 months

No

Yes

Ivory Coast BIT (26 March 2021)

Yes

Yes

Yes

Yes

No

6 months

No

Yes

Jordan BIT (1 August 2020)

Yes

Yes

Yes

Yes

No

6 months

No

Yes

Kazakhstan BIT (25 October 2015)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Kenya BIT (14 September 2017)

Yes

Yes

Yes

Yes

No

6 months

Yes

Yes

Korea, China

MIT (17 May 2014)

Yes

Yes

Yes

Yes

Yes

4 months

Yes

Yes

Kuwait BIT (24 January 2014)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Laos People’s Democratic Republic BIT (3 August 2008)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Morocco BIT (23 April 2022)

Yes

Yes

Yes

Yes

No

6 months

Yes

Yes

Mozambique BIT (29 August 2014)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Myanmar BIT (7 August 2014)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Oman BIT (21 July 2017)

Yes

Yes

Yes

Yes

Yes

6 months

Yes

Yes

Papua New Guinea BIT (17 January 2014)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Peru BIT (10 December 2009)

Yes

Yes

Yes

Yes

No

6 months

Yes

Yes

Republic of Korea BIT (1 January 2003)

Yes

Yes

Yes

Yes

No

3 months

Yes

Yes

Russian Federation BIT (27 May 2000)

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Saudi Arabia BIT (7 April 2017)

Yes

Yes

Yes

Yes

No

6 months

Yes

Yes

Sri Lanka BIT (4 August 1982)

No

Yes

Yes

Yes

No

No

No

Yes

Turkey BIT (12 March 1993)

No

Yes

Yes

Yes

No

Yes

Yes

Yes

UAE BIT (26 August 2020)

Yes

Yes

Yes

Yes

Yes

6 months

Yes

Yes

Ukraine BIT (26 November 2015)

Yes

Yes

Yes

Yes

Yes

6 months

Yes

Yes

Uruguay BIT (14 April 2017)

Yes

Yes

Yes

Yes

No

6 months

No

Yes

Uzbekistan BIT (24 September 2009)

Yes

Yes

Yes

Yes

Yes

3 months

Yes

Yes

Vietnam BIT (19 December 2004)

Yes

Yes

Yes

Yes

No

3 months

Yes

Yes

ASEAN EPA (1 December 2008)⁶

Yes

Yes

Yes

Yes⁷

No

180 days

Yes

Yes⁸

Australia EPA (15 January 2015)⁹

Yes

Yes

Yes

Yes

No

N/A

N/A

N/A

Brunei EPA (31 July 2008)

Yes

Yes

Yes

Yes

No

5 months

Yes

Yes

Chile EPA (3 September 2007)

Yes

Yes

Yes

Yes

No

6 months¹⁰

No

Yes

CPTPP (30 December 2018)¹¹

Yes

Yes

Yes

Yes

No

6 months

No

Yes

India EPA (1 August 2011)

Yes

Yes

Yes

Yes

Yes

6 months

Yes

Yes

Indonesia EPA (1 July 2008)

Yes

Yes

Yes

Yes

No

5 months

Yes

Yes

Malaysia EPA (13 July 2006)

Yes

Yes

Yes

Yes

No

5 months

Yes

Yes

Mexico EPA (1 April 2005)

Yes

Yes

Yes

Yes

No

180 days

No

Yes

Mongolia EPA (7 June 2016)

Yes

Yes

Yes

Yes

Yes

120 days

Yes

Yes

Peru EPA (1 March 2012)¹²

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Philippines EPA (11 December 2008)¹³

Yes

Yes

Yes

Yes

No

N/A

N/A

N/A

RCEP (1 January 2022)¹⁴

Yes

Yes

Yes

Yes

No

N/A

N/A

N/A

Singapore EPA (30 November 2002)

Yes

Yes

Yes

Yes¹⁵

No

5 months

Yes

Yes

Switzerland EPA (1 September 2009)

Yes

Yes

Yes

Yes

Yes

6 months

No

Yes

Thailand EPA (1 November 2007)

Yes

Yes

Yes

Yes

No

6 months

No

Yes

Vietnam EPA (1 October 2009)¹⁶

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Scope of definition

The definition of ‘investor’ in Japan’s international investment agreements (IIAs) generally covers ‘nationals’ and ‘citizens’ of a contracting party.

Under the BITs with Hong Kong,¹⁷ Israel, and the EPAs with Brunei, Malaysia, Singapore and Switzerland, ‘investor’ includes also a ‘permanent resident’ of those countries, however, not a permanent resident of Japan.

Under the ASEAN EPA and the RCEP, ‘investor’ includes a permanent resident of a contracting party, where both that party and the host state ‘recognise permanent residents and accord substantially the same treatment to their respective permanent residents as they accord to their respective nationals in respect of measures affecting investment.’

The CPTPP is the only example where a permanent resident of Japan as well as that of another contracting party is protected as an investor.

Dual nationals

Under the BITs with Colombia and Uruguay, ‘natural persons who are nationals of both Contracting Parties’ are not protected ‘unless such nationals have at the time of, and ever since the investment been domiciled outside’ the territory of the host state. The Morocco BIT provides that ‘a natural person who is a dual national shall be deemed to be exclusively a national of the State of his or her dominant and effective nationality.’

The Israel BIT and the Philippines EPA expressly define an ‘investor of a Party’ as a national of either contracting party.

Seat or place of business

For a legal entity to qualify as an ‘investor’, most of Japan’s IIAs provide that companies and ‘enterprises’ must be duly constituted under the applicable laws and regulations of a contracting party.

Only a few of Japan’s BITs take a different approach and require that a company be seated within the territory of the contracting party.¹⁸ The Iran BIT requires that an investor’s headquarters or real economic activities be located in the home state.

Under the BITs with Colombia, Israel and Morocco, and the EPAs with India and Switzerland, a company must carry out ‘substantial business activities’ within the territory of the respective contracting party. Similarly, the Singapore EPA excludes ‘an enterprise owned or controlled by persons of non-Parties and not engaging in substantive business operations in the territory of the other Party’ from the scope of ‘investor.’

Denial and extension of benefits

Many of Japan’s IIAs provide for a ‘denial of benefits’ clause pursuant to which a contracting party can deny treaty protection to an investor of the other contracting party that is ‘owned or controlled by an investor of a non-Contracting Party’ if the ‘denying Contracting Party … does not maintain diplomatic relations with the non-Contracting Party’ or ‘adopts or maintains measures with respect to the non-Contracting Party that prohibit transactions with the enterprise’.¹⁹

Except for the Colombia BIT, these IIAs also allow the host state to deny the benefit of the treaties to an enterprise of the other contracting party that is ‘owned or controlled by an investor of a non-Contracting Party’ (or the host state) and ‘the enterprise has no substantial business activities’ within the territory of the other contracting party. It should be noted that denial of benefits clauses had generally been ‘subject to prior notification and consultation’. This requirement has been eliminated from many of the recent IIAs (with the exception of the BITs with Kenya, Morocco and Oman) to ensure that the denial of benefits clause can be invoked in an investor-state arbitration.

By contrast, a few of Japan’s BITs contain a provision expanding treaty protection to ‘a [non-Contracting] company in which investors of either Contracting Party have a substantial interest’, unless the non-contracting party and the other contracting party have concluded an IIA.²⁰ ‘Substantial interest’ means ‘exercise of control or decisive influence’ by the investor of either contracting party on the company of the non-contracting party.

Concrete steps for making an investment

Many of Japan’s IIAs define an ‘investor’ as a natural person or enterprise that ‘seeks to make, is making, or has made investments’²¹ in the territory of the other contracting party. The BITs with Colombia, Myanmar, Peru and Uruguay, and the CPTPP and the RCEP expressly establish that this is only the case where ‘the investor has taken concrete steps necessary to make investments’. Such ‘concrete’ steps include an application by the investor for a permit or licence, or the obtaining of financing for making such investments.

Assets qualifying as ‘investments’

Most of Japan’s IIAs contain a broad definition of the term ‘investment’, which is defined as ‘every kind of asset owned or controlled’ by an investor. In most cases, the IIAs further include a non-exhaustive list of assets that qualify as ‘investment’, in particular, enterprises, shares, bonds, derivatives, rights under contracts, claims to money, intellectual property rights, rights conferred pursuant to laws and regulations such as concessions and any other movable and immovable property. By contrast, a few of Japan’s IIAs, such as the EPAs with Mexico and Thailand, define ‘investment’ by providing an exhaustive list of assets.

A number of the more recent IIAs²² expressly state that only assets with ‘characteristics of an investment’ are eligible ‘investments’, for instance, ‘the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk’. The Argentina BIT, the Malaysia EPA and the CPTPP stipulate further factors for determining whether an asset has ‘characteristics of an investment’ with regard to ‘rights conferred pursuant to laws and regulations, or contracts such as concessions, licences, authorisations and permits’, such as ‘the nature and extent of the rights that the holder has under the domestic law of the country’.

The BITs with Argentina and Uruguay, the CPTPP, and the RCEP illustrate the kind of debt likely to have characteristics of an investment. Many of Japan’s IIAs clarify that a ‘change in the form in which assets are invested does not affect their character as an investment’.

Assets excluded from scope of ‘investments’

Assets most frequently excluded from the scope of ‘investments’ in Japan’s IIAs include:

• ‘orders or judgments entered in a judicial or administrative action’;²³
• an ‘equity participation in a state enterprise’; ²⁴
• ‘claims to money’ that:

(i) ‘are immediately due and result solely from export and import contracts for the sale of goods or services’ (other than contracts-based orders habitually secured); or

(ii) ‘result from credit granted in relation to the contracts referred to in (i)’ with a maturity date of less than 12 months; and²⁵

• debts of a contracting party or a state enterprise.²⁶

The BITs with Israel, Jordan, Morocco and Peru, the EPAs with ASEAN and Mexico, and the RCEP also exclude ‘claims to money arising solely from commercial contracts for the sale of goods or services’, and ‘credits granted in relation/connection with a commercial transaction’. The Uruguay BIT excludes ‘claims to payment that are immediately due and result from the sale of goods or services are not investments’.

The UAE BIT specifically excludes natural resources from its ambit of protection.

The RCEP clarifies that market share, market access, expected gains and opportunities for profit-making are not, by themselves, investments.

Investments made in accordance with host states’ laws

The BITs with Georgia, Iran, Israel, Jordan, Morocco and Ukraine, and the Indonesia EPA expressly provide that only investments made in accordance with the laws and regulations of the host state shall be protected.

Ownership/control/indirect control

Some IIAs, for example, the BITs with Bahrain, Cambodia, Colombia, Georgia, Iraq, Ivory Coast, Kenya and Morocco, the Mongolia EPA, and the RCEP (only for Thailand) define that an enterprise is ‘owned’ if an investor owns more than 50 per cent of the equity interest in it, and is ‘controlled’ if the investor has the power to name a majority of its directors or otherwise to legally direct its actions.

The definition of ‘investment’ under most of Japan’s IIAs²⁷ explicitly covers assets under the indirect control of an investor.

Temporary scope of protection

Some of Japan’s IIAs provide that they apply to investments made prior to their entry into force.²⁸

This is to be distinguished from IIAs that expressly exclude claims arising out of events that occurred prior to their entry into force. These are, for example, the BITs with Argentina, Armenia, Bahrain, Cambodia, Colombia, Georgia, Iran, Israel, Ivory Coast, Laos, Jordan, Kazakhstan, Kenya, Kuwait, Morocco, Mozambique, Myanmar, Oman, Papua New Guinea, Peru, Saudi Arabia, UAE, Ukraine, Uruguay, Uzbekistan and Vietnam, China–Korea MIT, and the EPAs with Mongolia and ASEAN.

Similarly, the CPTPP and the RCEP provide that the investment chapter ‘shall not bind [a Contracting Party] in relation to an act or fact that took place or a situation that ceased to exist before [its] entry into force’.

Sunset clause

All of Japan’s BITs as well as the China–Korea MIT and the ECT provide for a ‘sunset clause’ that extends treaty protection to investments made prior to the termination of the respective treaty for a specific period post-termination. The Kuwait BIT and the ECT provide for the longest protection period of 20 years. Various other BITs remain applicable for up to 15²⁹ or 10³⁰ years.

Among Japan’s EPAs, only the ones with India and Mongolia contain a sunset clause with a 10 year post-termination protection.

Admission / approval of investment

A ‘covered investment’ under the ASEAN EPA must have been ‘admitted’ in accordance with host state’s ‘laws, regulations and national policies’, where applicable.

Some of Japan’s IIAs contain a slightly different version of the provision and provide that each Contracting Party shall, subject to its laws and regulations, encourage and create favourable conditions for investors of the other Contracting Party and shall admit such investment’.³¹

Similarly, the RCEP provides that:

'[s]ubject to laws and regulations, each Party shall endeavour to facilitate investments among the Parties, including through (a) creating the necessary environment for all forms of investment; (b) simplifying its procedures for investment applications and approvals; (c) promoting the dissemination of investment information, including investment rules, laws, regulations, policies, and procedures; and (d) establishing or maintaining contact points, one-stop investment centres, focal points, or other entities in the respective Party to provide assistance and advisory services to investors, including the facilitation of operating licenses and permits.'

Occurrence of FET standard

Almost all of Japan’s IIAs establish an obligation upon the contracting party to accord FET to investments of investors of the other contracting party.

Only the BITs with Bangladesh, China, Egypt, Mongolia, Pakistan, Sri Lanka and Turkey do not contain an FET standard.

FET standard and customary international law

Many of Japan’s IIAs tie the level of FET to the standard under customary international law.³²

Particular features of FET standards

The BITs with Argentina, Colombia, Morocco, Peru and Uruguay, the Mongolia EPA and the CPTPP clarify that the FET standard under customary international law ‘includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process’. Similarly but with a slight difference, the RCEP provides that the FET standard 'requires' each Party not to deny justice in any legal or administrative proceedings.

The BITs with Argentina, Colombia, Kenya, Peru and Uruguay, the China–Korea MIT, the EPAs with ASEAN, Australia, Chile, India, Mexico, Mongolia and Thailand, the CPTPP, and the RCEP confirm that ‘a determination that there has been a breach of another provision of the IIA, or of a separate international agreement, does not establish that there has been a breach of paragraphs fair and equitable treatment.’ The BITs with Colombia, Morocco and Peru further clarify that the standard covers the obligation to ‘guarantee access to the [Contracting Parties’] courts’. As states have become more cautious about the concept of legitimate expectations, a few recent IIAs (eg, the Argentina BIT and the CPTPP) clarify that ‘the mere fact that a Contracting Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach of’ the standard, ‘even if there is loss or damage to the covered investment as a result.’

Moreover, the CPTPP clarifies that ‘the mere fact that a subsidy or grant has not been issued, renewed or maintained, or has been modified or reduced, by a Party, does not constitute a breach of’ the standard, ‘even if there is loss or damage to the covered investment as a result’.

General requirements

The expropriation clause in Japan’s IIAs generally prohibits a contracting party from ‘expropriating’ or ‘nationalising’ investments or to ‘take any measure equivalent to expropriation or nationalisation’³³ except (a) for a public purpose; (b) in a non-discriminatory manner; (c) upon payment of prompt, adequate and effective compensation; and (d) in accordance with due process of law.

Right to regulate for a public purpose

Some of Japan’s IIAs expressly contain the host state’s right to regulate for a public purpose.

The Peru BIT and CPTPP align the meaning of ‘public purpose’ with the domestic law concepts of ‘public necessity’, ‘public interest’ or ‘public use’, or ‘public necessity’ or ‘national security’, respectively. Similarly, the Colombia BIT specifies that ‘public purpose’ may be referred to as ‘public purpose’ or ‘social interest’ under Colombian domestic law.

Under the BITs with Brunei and Malaysia, which concern direct expropriations of land, the purpose must conform with the one set out in the relevant domestic law.

The ASEAN EPA and the RCEP provide that expropriation relating to land shall be as defined in the existing domestic laws and regulations of the expropriating party, and the compensation shall be subject to any subsequent amendments to the laws and regulations relating to the amount of compensation where such amendments follow the general trends in the market value of the land.

Indirect expropriation

The BITs with Argentina, Morocco and Peru, the China-Korea MIT, the EPAs with ASEAN, Australia, Chile, India and Mongolia, the CPTPP and the RCEP set out factors for determining ‘indirect expropriation’. These treaties, with the exception of the EPAs with Chile and India, as well as the BIT with Georgia clarify that non-discriminatory measures designed or applied for legitimate public welfare objectives do not constitute indirect expropriation.

Access to local courts

Many of Japan’s IIAs grant a right of access to courts to investors affected by expropriation both with regard to the merits of the investor’s case and the amount of compensation payable.³⁴

IP-related exclusions

The BITs with Argentina, Armenia, Bahrain, Colombia, Georgia, Israel, Ivory Coast, Jordan, Kenya, Morocco³⁵ and Uruguay, and EPAs with ASEAN, Australia, Chile and India, the CPTPP, and the RCEP expressly provide that the provisions concerning expropriation do not apply to the ‘issuance of compulsory licences’, or the ‘revocation, limitation or creation of intellectual property rights’, insofar as such measures are consistent with the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement) in Annex 1C to the WTO Agreement.

Taxation

A number of Japan’s newer generation IIAs exclude taxation measures from the scope of the expropriation standard. The India EPA and the RCEP entirely exclude taxation measures from treaty protection, while some other IIAs exclude ISDS for tax measures that the competent authorities of both contracting parties have determined as not amounting to expropriation.³⁶

Under the BITs with Bahrain and Cambodia, the expropriation clause applies to taxation measures. Other treaties clarify circumstances (through a note or agreed minute) in which taxation measures do not constitute expropriation.³⁷

The RCEP provides for the work programme, under which the parties shall, without prejudice to their respective positions, enter into discussions on the application of article 10.13 (Expropriation) to taxation measures that constitute expropriation, no later than two years after the date of entry into force of the agreement.

Scope of treatment

Japan’s IIAs generally provide for national treatment and MFN treatment.

The only exceptions are the EPAs with ASEAN (in which the MFN standard only applies to compensation for losses or damages) and Singapore (under which the contracting party merely has a duty to ‘favourably consider’ a possible MFN treatment), and the RCEP (under which the MFN clause shall not apply to Cambodia, Lao, Myanmar and Vietnam). 

Under the IIAs covering the pre-establishment phase of an investment, national and MFN treatment is usually accorded with respect to the ‘establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments’.³⁸

Other IIAs (such as the BITs with Bahrain, Iran, Iraq and Jordan) principally cover the post-establishment phase of investment and do not accord national and MFN treatment with respect to the pre-establishment phase. Under some BITs,³⁹ contracting parties are, however, obliged to ‘endeavour’ to accord MFN treatment with respect to these pre-establishment activities and to conduct good-faith negotiations. In a similar vein, the Thailand EPA establishes an obligation for the contracting party to ‘consider a request’ of a possible MFN treatment for such activities.

The BITs with Kenya and UAE cover both the pre- (ie, admission of investments) and post-establishment phase of an investment (ie operation, management, maintenance, use, enjoyment and sale or other disposal of investments). However, particular matters or measures concerning the admission of investments (such as the acquisition of land, subsidies, government procurement) are expressly excluded from the scope of MFN treatment.

The BIT with Argentina, the CPTPP and the RCEP include provisions or footnotes to clarify that whether the treatment is accorded in 'like circumstances' under the national treatment and the MFN treatment depends on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives.

Access to local courts

With the exception of the BITs with Iran and Morocco, the Chile EPA, the ECT, the CPTPP and the RCEP, most of Japan’s IIAs contain an independent clause granting national and MFN treatment with respect to access to the courts and administrative tribunals of a contracting party. The Australia EPA accords to an investor national treatment in this respect but excludes MFN treatment in relation to access granted to non-parties under an international agreement or judicial cooperation agreements.

Limitations of national treatment

Many of Japan’s IIAs⁴⁰ limit the scope of the national treatment standard and foresee certain special formalities (eg, registration requirements) regulating investments, which may, however, not interfere substantially with the treaty protections.

For instance, under the Malaysia EPA, national treatment does not apply to the establishment, acquisition and expansion of portfolio investments. The Thailand EPA only limits the scope of the national treatment standard with regard to ‘certain sectors’. The China BIT contains an exclusion for discriminatory measures that are ‘really necessary for the reason of public order, national security or sound development of national economy.’⁴¹

Under most investment treaties, the national treatment standard does not extend to tax matters. The EPAs with Switzerland and Australia provide otherwise. Under the former, national and MFN treatment applies to tax measures provided there is no double taxation treaty between the contracting parties. Under the Australia EPA, indirect taxes generally fall under the scope of the national and MFN treatment standards.

The China–Korea MIT provides that national treatment does not apply to any non-conforming measures existing at the date of entry into force of the treaty. 

Common Exceptions to MFN

Japan’s IIAs typically include the following exceptions to MFN treatment:

• preferential treatment by virtue of any existing or future customs union, economic or monetary union, free trade area, or similar international agreements to which the former contracting party is a party or may become a party in the future.⁴² Additionally, the China–Korea MIT and the Kazakhstan BIT further exclude international agreements for ‘facilitating small scale trade in border areas’ or involving ‘aviation, fishery, and maritime matters’;
• special tax advantages accorded to investors of a non-contracting party, on the basis of reciprocity with the non-contracting party, or by virtue of any agreement relating to taxes in force between the former contracting party and the non-contracting party;⁴³ and
• in some of the newer IIAs, the settlement of investment disputes that is provided for in other international agreements between a contracting party and a non-contracting party.4⁴

A limited number of Japan’s IIAs contain particular limitations to MFN treatment. For example, the BITs with Bangladesh, Hong Kong, Mongolia, Pakistan, Russia and Turkey limit MFN protection to treatment no less favourable than that accorded to investors of any third party in connection with matters relating to the registration and nationality of aircraft and the acquisition of ships, and, in the case of the Turkey BIT, the acquisition of immovable property and the establishment of bank branches.

Non-conforming measures

Japan’s IIAs under which national and MFN treatment also apply with respect to the pre-establishment phase of an investment, generally provide that national and MFN treatment do not apply to any non-conforming measure that is maintained by the central government of a contracting party, or by a local government on the date of entry into force, with respect to certain sectors or activities specified in the attached Schedules or Annexes.⁴⁵ However, they usually oblige each contracting party, where appropriate, to reduce or eliminate the non-conforming measures that it adopts or maintains.

Under some of Japan’s IIAs,⁴⁶ the existing non-conforming measures to be excluded from the application of national and MFN treatment are specified in the attached Schedules (existing measures reservation); and national and MFN treatment do not apply to any non-conforming measure that a contracting party adopts or maintains with respect to sectors, sub-sectors, or activities specified in the attached Schedules (future measures reservation).

Non-conforming measures also include:

• subsidies or grants provided by a contracting party, including government-supported loans, guarantees, and insurance;⁴⁷
• any measures covered by the exceptions to, or derogations from, obligations under articles 3 and 4 of the Trade-Related Aspects of Intellectual Property Rights in Annex 1C to the WTO Agreement; and⁴⁸
• any measure that a contracting party adopts or maintains with respect to government procurement.⁴⁹

The ASEAN EPA provides that the contracting parties will enter into consultations on the Schedules of non-conforming measures (Work Programme) immediately after the entry into force of the First Protocol, and pending the work programme, national treatment will not apply.

Variation of wording

All of Japan’s IIAs grant protection and security for investments. However, the wording differs from treaty to treaty. ‘Full protection and security’ is the most common language, ‘most constant protection and security’ appears in some treaties, and ‘full and constant protection and security’ is adopted in the BITs with Korea and Vietnam.

Equating to customary international law

Many of Japan’s IIAs provide that each contracting party shall, in its area, accord to investments by investors of the other contracting party treatment in accordance with (customary) international law, including full protection and security.50 The CPTPP further clarifies that ‘full protection and security’ requires the host state to provide the level of police protection required under customary international law, which excludes ‘legal protection.’ The RCEP also clarifies that full protection and security requires each party to take such measures as may be reasonably necessary to ensure the physical protection and security of the covered investment.

Scope

About half of Japan’s IIAs and a few of Japan’s EPAs contain umbrella clauses.51

Qualifications of the obligation

Most of Japan’s IIAs that contain an umbrella clause simply refer to ‘any obligations’. However, the BITs with Colombia and Laos, the China–Korea MIT, and the EPAs with Mongolia and Switzerland require the contracting parties to observe any ‘written’ obligations. The Colombia BIT, and the EPAs with Mongolia and Switzerland, qualify the obligation in respect of specific investments by an investor of the other contracting party, which the investor could have relied on at the time of the establishment, acquisition or expansion of such investments. The Colombia BIT further qualifies the obligations deriving from a written agreement concluded with the central government of the host state.

Armed conflict / civil unrest

All of Japan’s IIAs provide for national treatment and MFN treatment regarding compensation for losses or damage suffered by armed conflict or civil unrest, although the Singapore EPA limits the treatment to such that a contracting party accords to its own investors. Notably, the Hong Kong BIT imposes an obligation that a contracting party shall accord ‘restitution or reasonable compensation’; however, the protocol to the same BIT clarifies that ‘[n]otwithstanding the provisions of paragraph 2 of Article 6 of the Agreement, the Government of Japan shall accord to investors of Hong Kong restitution or compensation, subject to its laws and regulations’.⁵²

The Argentina BIT, Chile EPA, and the CPTPP exclude national treatment and MFN treatment in relation to state subsidies, grants, government loans, guarantees and insurance, and such an exclusion also applies to compensation for losses caused by armed conflict.

Prohibition of Performance requirements

Under many of Japan’s IIAs, a contracting party is prohibited from imposing performance requirements for investments (in the nature of local content requirements, export requirements, export-import balancing requirements, or technology transfer requirements) on investors of the other contracting party.⁵³

The newer IIAs (eg, the BITs with Ivory Coast or Mozambique and the CPTPP) generally do not preclude the contracting parties from conditioning the receipt of an advantage on compliance with some of the listed performance requirements such as technology transfers, local research and development, local employment. A notable exception is the Uzbekistan BIT, which does not preclude the contracting parties from conditioning the receipt of an advantage, on compliance with any of the listed performance requirements.⁵⁴

The Bahrain BIT only precludes the contracting parties from taking any measure which is inconsistent with the obligations of the contracting parties under Article 2 of the Agreement on Trade-Related Investment Measures in Annex 1A to the WTO Agreement. The BIT provides that the parties shall undertake a review of the agreement by, for example, adding the provisions of prohibition of performance requirements such as those with regard to transfer of technology or a licence contract with a view to further protecting and promoting investment between the contracting parties.  

Free transfer of payments

All of Japan’s IIAs contain provisions along the lines that all transfers relating to investments in the host state’s area of an investor of the other contracting party may be freely made into and out of its area without delay. Most of these IIAs allow the contracting party to take measures according to the laws and policies of the host state, including those concerning bankruptcy, securities, and criminal or penal offences, judgments or orders in adjudicatory proceedings.⁵⁵ Beyond that, the China BIT provides for an extremely broad scope for general restrictions, not precluding the contracting parties from imposing exchange restrictions in accordance with its applicable laws and regulations.

Almost all of Japan’s IIAs lay down exceptional restrictions on capital transfer, save for the Hong Kong BIT, which provides no such exceptional restrictions, and the BITs with Egypt and China, which do not require any exceptional situations for limiting regulations on capital transfer.

Usually,⁵⁶ in the event or threat of ‘serious financial difficulties’ or ‘exceptional financial, economic circumstances’ and in cases where, in exceptional circumstances, movements of capital cause or threaten to cause serious difficulties for macroeconomic management (ie, monetary and exchange rate policies), free transfer provisions allow the imposition of temporary restrictions (specifically exchange restrictions) with respect to cross-border capital transactions or transfers. The BITs with Sri Lanka and Turkey, and the Malaysia EPA extend this right to exceptional ‘industrial circumstances’.

However, it is generally required for such measures to conform with the articles of agreement of the International Monetary Fund (and often other conditions are prescribed, for example, under the BITs with Bahrain, Colombia, Georgia and Ivory Coast, and the Thailand EPA).

Non-impairment

Some of Japan’s IIAs impose a general obligation upon contracting parties not to impair the operation, management, maintenance, use, enjoyment or disposal of investments through unreasonable, discriminatory or arbitrary measures.⁵⁷

Transparency

With some exceptions,⁵⁸ a transparency obligation is set forth in most of Japan’s BITs and all of Japan’s EPAs. Under these IIAs, a contracting party is required to make publicly available its laws, regulations, administrative procedures, rulings of general application, and international agreements which pertain to or affect investments. The RCEP provides for the parties' obligation to promote the dissemination of investment information, including investment rules, laws, regulations, policies and procedures, in the article regarding the facilitation of investment.

However, the contracting party is allowed not to do so if such documents contain confidential information, the disclosure of which would be contrary to public interest, or prejudice privacy or legitimate commercial interests.

General exceptions

Japan’s IIAs generally set forth the following exceptions to substantive protections, on the condition that they are not applied in an arbitrary manner or do not constitute an unjustified discrimination:

• measures adopted by a contracting party that are necessary to secure compliance with laws or regulations in relation to preventing fraud, protecting data privacy, and safety;⁵⁹
• measures adopted by a contracting party that are necessary to protect national treasures;⁶⁰
• measures adopted by a contracting party that are necessary to conserve living or non-living natural resources, if made effective in conjunction with restrictions on domestic production or consumption;⁶¹ and
• measures adopted by a contracting party that are necessary to protect human, animal, or plant life or health; or maintain public order, insofar as a genuine and sufficiently serious threat posed to one of the fundamental interests of society exists.⁶²

With respect to national security exceptions, Japan's IIAs usually allow: (i) measures necessary to protect ‘essential security interests’: (a) at a time of war or other emergency; or (b) pertaining to the implementation of policies with respect to the non-proliferation of weapons; or (ii) actions taken pursuant to obligations under the United Nations Charter for the maintenance of international peace and security.⁶³

The India EPA allows the taking of ‘any action which [a Contracting Party] considers necessary for the protection of its essential security interests to protect critical public infrastructure, including communications, power, and water infrastructure, from deliberate attempts to disable or degrade such infrastructure’.

The Russia BIT provides that ‘each Contracting Party shall reserve the right to determine economic fields and areas of activities where activities of foreign investors shall be excluded or restricted, in accordance with its applicable laws and regulations, if it is really necessary for the reason of national security’.

The Investment Chapter of the RCEP, and the CPTPP allow a contracting party to apply measures that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

There are other common exceptions that relate to:

• provisions that derogate from obligations under multilateral, or more broadly, international agreements, with respect to the protection of intellectual property rights.⁶⁴ Noteworthy, however, is the fact that Japan’s BITs with China, Sri Lanka and Turkey state that they do not give rise to any rights or obligations in relation to copyright; and
• measures relating to financial services, taken for prudential reasons.⁶⁵

It should be noted that the ASEAN EPA and RCEP exclude such matters as government procurement and subsidies, or grants provided by a party from the scope of application of the Investment Chapter.

Scope of dispute

Most of the old generation IIAs before the Korea BIT (eg, BITs with Sri Lanka, Turkey and Hong Kong) grant an investor of a contracting party the right to submit ‘any dispute’ ‘concerning an investment’ to arbitration. This in turn allows an investor of a contracting party to bring not only a dispute arising out of a breach of substantive standard of the IIA, but also a dispute concerning any other legal instruments under which the host state assumes obligations (eg contract or domestic law) to the extent the contract concerns an investment made by the investor.

However, since the introduction of the Korea BIT, most of Japan’s IIAs provide that an ‘investment dispute’ may be submitted to arbitration. ‘Investment dispute’ is usually defined as ‘a dispute between a Contracting Party and an investor of the other Contracting Party that has incurred loss or damage by reason of, or arising out of, an alleged breach of any right conferred by this Agreement with respect to an investment of an investor of that other Contracting Party’. This limits the host state’s consent to arbitration to disputes arising out of a breach of the IIA’s substantive standards.

More recently, Japan concluded a few IIAs (eg, Ivory Coast BIT) in which a contracting party consents to arbitration for a dispute arising out of a breach of an ‘investment agreement’ between an investor or its locally established company and the host state, as well as a dispute arising out of a breach of a substantive standard of the IIA.

ICSID or ad hoc arbitration

Most of Japan’s recent IIAs provide a choice between recourse to ICSID, UNCITRAL ad hoc arbitration or arbitration as otherwise agreed by the parties. Special alternative fora include the SCC (ECT) and KLRCA (Malaysia EPA).

Cooling-off period

Most of Japan’s IIAs have a cooling-off requirement or period of three to six months (except for the Colombia BIT with seven months and 15 days; the BITs with Sri Lanka and Egypt do not establish any cooling-off requirement).

Conduct of the arbitration

The ASEAN EPA and the CPTPP stipulate that the tribunal ‘shall address and decide as a preliminary question any objection … that, as a matter of law, a claim submitted is not a claim for which an award … may be made … or that a claim is manifestly without legal merit’.66

The BITs with Bahrain, Cambodia, Georgia, Ivory Coast, Kenya and Morocco, EPAs with Brunei, India, Indonesia and Malaysia, and the CPTPP allow the non-disputing party to the IIA to make submissions regarding the interpretation of the agreement.67 Pursuant to the ASEAN EPA, the tribunal shall at the request of a disputing party or on its own account request a joint interpretation of any provision in the investment chapter by the contracting parties within 60 days. If the contracting parties fail to do so, the tribunal shall decide the issue on its own account after being forwarded any interpretation submitted by either contracting party.68 Alternatively, a joint decision on the interpretation of any provision of the investment chapter can be made by the Joint Committee, which shall be binding on the tribunal.69

The CPTPP grants the tribunal the power to allow amicus curiae submissions by any person or entity with a significant interest in the arbitral proceedings regarding a matter of fact or law within the scope of the dispute that may assist the tribunal in evaluating the disputing parties’ arguments.70

Exhaustion of local remedies requirement

Japan’s IIAs generally do not contain an exhaustion of local remedies clause, except for the Colombia BIT and the Korea–China MIT, which establish that the local administrative remedies/review procedures may not exceed six and four months, respectively.

Fork-in-the-road clause and waiver clause

Except for the BITs with Egypt and Sri Lanka, all of Japan’s IIAs (with an ISDS chapter) contain a fork-in-the-road or waiver clause, or both.

Some BITs and EPAs71 expressly establish that an investor is not precluded from seeking interim (non-monetary) injunctive relief before the local courts.

Prohibition of diplomatic protection

A number of Japan’s BITs and EPAs72 prohibit either contracting party to ‘give diplomatic protection, or bring an international claim, in respect of an investment dispute’ between an investor and the other contracting party, unless the latter ‘fail[s] to abide by … an award’.

Time limits

Most of Japan’s recent IIAs provide for a limitation period of three years from the date on which the investor first acquired (or should have acquired) knowledge of the loss (eg, BITs with Bahrain, Cambodia, Georgia, Ivory Coast, Korea, Morocco and Peru, and EPAs with India, Malaysia and Mexico) or five years from the dates referred to above (eg, BITs with Kuwait, Iraq and Saudi Arabia, and Switzerland EPA) within which to commence arbitration, with the exception of the Thailand EPA (two years) and CPTPP (three years and six months).

Other

The EPAs with Philippines and Australia do not contain ISDS provisions, which are yet to be negotiated.73 The EPAs with Vietnam and Peru have incorporated their respective BITs into the EPAs by reference.74

The RCEP's ISDS chapter is subject to further discussions among the parties under the work programme.

Effective as of August 2020, a notice of a dispute should be served on the Economic Dispute Settlement Division, the International Legal Affairs Bureau of the Ministry of Foreign Affairs, which is responsible for, among others, 'the matters concerning settlement of disputes under international agreements governing economic matters',75 which includes investor-state dispute settlement under Japan’s IIAs. Some of Japan’s IIAs state that a notice of a dispute shall be served on the Ministry of Foreign Affairs (eg, the Colombia BIT, article 41, the Ivory Coast BIT, article 24(1)(a) and the Mexico EPA, article 94(2)(b)). Although the Georgia BIT (article 24(1)(a)) and the CPTPP (in its Investment Chapter, Annex 9-D) goes on to specify that a notice shall be served on the Ministry’s Economic Affairs Bureau, the notice should be served on the aforementioned division at the International Legal Affairs Bureau, because the responsibility of the Economic Affairs Bureau to deal with investor-state dispute settlement was transferred to the International Legal Affairs Bureau on 3 August 2020.76 In fact, the Bahrain BIT, which was agreed in June 2022, designates the International Legal Affairs Bureau as the place to which notices and other documents relating to arbitration shall be delivered (the Bahrain BIT, article 17(1)(a)). 

We are not aware of any publicly available information on that point (as of July 2022).

However, it would be reasonable to expect that the Ministry of Foreign Affairs, in collaboration with the ministry responsible for the measure at issue, would take the lead in managing investment treaty arbitrations given that it plays a major role in negotiating investment treaties and has the authority to interpret treaties. Other ministries may be involved depending on the substance of the dispute.

In the event that an investment treaty arbitration is filed, in-house legal counsel for the government of Japan will likely provide some initial legal advice. If additional legal advice becomes necessary, external legal counsel will likely be hired. We have no information on whether Japan would necessarily go through a formal public procurement process when hiring external counsel.

Japan ratified the Washington Convention in 1967. There is no specific implementing legislation.

Japan acceded to the New York Convention in 1961. Although there is no specific domestic legislation for the implementation of the New York Convention, Chapter 8 of the Arbitration Act (Act No. 138 of 2003, as amended) adopts the UNCITRAL Model Law on International Commercial Arbitration of 1985 and governs the recognition and enforcement of arbitral awards irrespective of whether or not the place of arbitration is in Japan.

The Arbitration Act of Japan applies to both domestic and foreign arbitral proceedings, irrespectively of whether it is investment or commercial arbitration.

To our knowledge, there has been no adverse investment treaty award against Japan (as at July 2022).

The government of Japan has repeatedly indicated that investor-state arbitration is essential to protect Japanese businesses investing overseas. It considers that the legally binding dispute settlement mechanism enhances the predictability and legal stability of the business environment of the host state. The government has also expressed its intention to continue to pursue inclusion of investor-state arbitration clauses in the future negotiation of BITs.

In a House of Representatives Committee on Foreign Affairs session of 16 May 2018, Japan’s then Foreign Minister Kono stated, in response to questions concerning the EU’s investment court approach, that he considers that investor-state arbitration remains the best option for Japan despite the concerns raised by the EU and other stakeholders. Then Minister Kono further stated that Japan should contribute to the discussion about a reform of investor-state arbitration (rather than pursuing the investment court approach proposed by the EU). In line with this policy, Japan, in alliance with other countries such as Chile, Israel, Mexico and Peru, has supported incremental reform of the arbitration mechanism rather than the establishment of a multilateral investment court in the discussions on ISDS Reform within the Working Group III of UNCITRAL, which started in 2017. 

To our knowledge, Japanese courts have not yet had to deal with investment treaty arbitrations (as of July 2022). There is one court judgment that addressed the interpretation of an MFN clause in the Japan–Hong Kong BIT (Judgment of Tokyo High Court, 30 August 2011).

The Trade Insurance and Investment Act (Act No. 67 of 1950)

The Trade Insurance and Investment Act (Act No. 67 of 31 March 1950) provides for the establishment of a government-owned special company, Nippon Export and Investment Insurance (NEXI). Its purpose is to provide insurance against risks in external transactions for which ordinary insurance cannot provide relief, including overseas investment insurance.

Overseas investment insurance is defined as trade insurance indemnifying losses incurred through, among others: (i) government seizure of rights to dividends, shares or real estate; (ii) impossibility of continuation of business or inability to utilise rights for business due to specified reasons beyond the investor’s control (eg, war, revolution, terrorism, civil war, strife, natural disasters, economic sanctions, general strike and nuclear incident); (iii) impossibility of continuation of business arising from infringement by a foreign state government of rights to real estate, production facilities or raw materials, mining rights, intellectual property rights, or other rights and returns that are crucial for operation of business; or (iv) restrictions on or impediments to exchange transactions. NEXI also offers certain insurance with lower premiums and wider coverage for investments and loans that enhance Japan’s supply of natural resources and energy, and an untied loan insurance for the making of loans or purchasing of bonds abroad. These insurances can be used by Japanese companies (and in the case of loan insurance, also Japanese commercial banks), and cover foreign investments including capital investment (ie, establishment of a subsidiary in a foreign state, establishment of a joint venture with a foreign company, and investment in an existing foreign company), purchase of stocks, purchase of real estate and other rights, such as mining rights, and provision of loans or guarantees to foreign governments or foreign companies.

To exercise their rights under a NEXI plan, insured entities must notify NEXI within one month of becoming aware of circumstances that may increase the risk of a loss. Insured entities must also notify NEXI when they actually suffer losses (for example, when such entities suffer damage due to war, revolution, natural disaster, economic sanctions, infringement of rights by a foreign state government), within one month of becoming aware of their losses. Should an insured entity receive payment related to the amount that is the subject of a notification of loss, then it must notify NEXI of those payments within one month and before submitting the request for insurance money. The insurance money should be requested within nine months of the occurrence of losses, and after the notification of losses has been submitted.

It should be noted that in NEXI practice, ‘infringement of rights by a foreign state government’, which is one of the risks covered by the investment insurance, includes infringement of insured investor’s rights under an IIA. Therefore, an insured investor can claim insurance money if its business in the host state could not continue due to an action of the host state that constitutes a breach of the IIA.

To date, no awards have been rendered against Japan as a respondent in an investor-state dispute (as of July 2022). On the investor side, the following award and decisions have been issued involving Japanese companies (Energy Charter Treaty):

• JGC Corporation v. Kingdom of Spain (ICSID Case No. ARB/15/27), Decision on Jurisdiction, Liability and Certain Issues of Quantum of 21 May 2021, and Award of 9 November 2021 (not publicly available as of July 2022); and
• Eurus Energy Holdings Corporation v Kingdom of Spain (ICSID Case No. ARB/16/4), Decision on Jurisdiction and Liability of 17 March 2021.

There are also two cases in which an award was rendered involving at least an affiliate of a Japanese company:

• Saluka Investments BV v The Czech Republic (UNCITRAL), Partial Award of 17 March 2006; and
• Bridgestone Americas, Inc and Bridgestone Licensing Services, Inc v Republic of Panama (ICSID Case No ARB/16/34), Award of the Tribunal of 17 August 2020.

One case of a Japanese company against the People's Republic of China – Macro Trading Co, Ltd v People’s Republic of China (ICSID Case No. ARB/20/22) – has been discontinued for non-payment of the required advances on 10 September 2021.

Another case in which the parties were affiliates of Japanese companies – Nusa Tenggara Partnership BV and PT Newmont Nusa Tenggara v Republic of Indonesia (ICSID Case No ARB/14/15) – has been discontinued by order of the Secretary General on 29 August 2014.

Nissan Motor v Republic of India (UNCITRAL) was reportedly concluded by a settlement in May 2020. Thus, no award has been rendered in this case.

Recently, an international arbitration was initiated against Japan under the Japan–Hong Kong BIT.

Japanese companies have initiated three ICSID cases against Spain that are currently pending:

• JGC Corporation v Kingdom of Spain (ICSID Case No. ARB/15/27) (annulment proceedings);
• Eurus Energy Holdings Corporation v Kingdom of Spain (ICSID Case No. ARB/16/4);
• Itochu Corporation v Kingdom of Spain (ICSID Case No. ARB/18/25); and
• Mitsui & Co, Ltd v Kingdom of Spain (ICSID Case No. ARB/20/47).

There are also two cases initiated by affiliates of Japanese companies that are currently pending:

• SMM Cerro Verde Netherlands BV v Republic of Peru (ICSID Case No. ARB/20/14). SMM Cerro Verde Netherlands is a subsidiary of Sumitomo Metal Mining Co, Ltd; and
• Earlyguard Limited v Republic of India (UNCITRAL). Earlyguard is a subsidiary of Mitsui & Co, Ltd.