Japan is known for its bright city lights, tall buildings and weird and wonderful technological innovations. However, behind the scenes the country’s innovation, especially in the legal sector, is suffering due to its conservative culture and demographic problems. Ken Onda, business intern at Obelisk Support, takes a look at these conflicting elements and what needs to be done to sustain legal innovation in Japan.
The Status of Women in Law
A recent domestic scandal, where one of the most prestigious medical universities in the country admitted to manipulating entrance exam scores of female candidates to keep their pass rate under 1 out of 3, drew attention to Japan’s ingrained conservative outlook on gender roles and the lack of progress being made on equality across professional and technological industries. The fixing was allegedly done due to the belief that women had a higher chance of leaving the medical profession after conceiving children, causing “an intolerable burden for already overworked doctors”.
It is no surprise on hearing this news that Japan is ranked 114th out of 144 countries in gender equality, one of the worst for a developed country. In the legal sector, female attorneys make up merely 18.2% of Japan’s lawyer population, according to the Japan Federation of Bar Associations. Of that 18.2%, only 11% are partners. This is a quite unbelievable disparity between men and women. Despite its shrinking demographic with 30% of its population 65 or over, Japan continues to discriminate against half of its population. This lack of representation is one of the reasons why Japan is suffering economically, and is increasingly unable to deal with international legal matters and lacking innovation in the legal sector.
Conservatism vs Legal Innovation
As far as the structure of its legal system, Japan has fewer per capita lawyers compared to other industrialised nations such as the US and EU countries. There are fears that at the current state, Japan will face a major problem in an ever-globalising world. Japan has adopted a Western legal system to settle legal disputes in courts despite significant cultural mismatch. Japanese people tend to resolve issues privately through negotiation without the involvement of lawyers. If there is no resolution, the conflicting parties will often go directly to court and litigate without private/commercial mediation. However, as lawyers are often not taught about mediation during university, they are not well equipped to solve problems in non-litigious ways.
Chart source: Wall Street Journal
This is a problem as when foreign entities – especially those in the West – try to do business with Japan, they are often caught off guard by the norms within the Japanese legal industry. This makes them less willing to work with Japanese entities, which is a significant barrier to collaborative innovation.
Moreover, the driving force of innovation – start-ups – are the most under-supported sector in Japan. Japan embodies a vertical collectivism, where bureaucracy, group-thinking and strict regulation dominate. It is a country where people are generally less inclined to take risks. For instance, Japanese landlords often want to see at least 2 years of profits before renting space to a company. It is therefore no surprise that venture capitalists often do not invest on high-risk ventures such as emerging technologies in the legal sector.
Although Japan invests heavily in R&D and is known for its technological advancement, it lacks entrepreneurship and application and capitalisation of its research due to its culture and regulation. Japan is still at its core a highly conservative country that does not embrace change readily as other developed nations, especially concerning new technologies. Japanese corporations such as Fujitsu, Hitachi and Sony are too slow and bureaucratic to keep up with agile foreign competitors in countries such as the US, Germany and South Korea.
Japan’s Missing In-House Lawyers
Japan is facing a major demographic problem involving shrinking population, going below the replacement rate. Subsequently, its market is also shrinking. For this reason, many Japanese companies are being more inclined to enter foreign markets, such as by conducting outbound M&A. However, due to the lack of experience in M&A and human resources, especially for SMEs, most of these deals fail according to the Asia Business Law Journal. This is exacerbated by the fact that Japanese firms tend to not employ in-house lawyers, but instead, make their departments deal with their own respective legal issues (e.g. a finance department deals with finance-related legal issues). This means that senior management is not given legal guidance when going through an M&A deal that is often full of legal issues. This increases the likelihood of the M&A deal not going through. Even when there is a legal department present, they often take traditional roles such as reviewing contracts and dealing with litigation. According to the Association of Corporate Legal Departments in Japan, only 6% of in-house lawyers felt that senior management frequently implemented the advice of in-house legal counsel.
Illustrating this trend, only 5% of qualified lawyers in Japan work as a legal counsel. One of the main reason for this is because the Japanese Bar Exam has been deliberately designed to be one of the hardest in the country to pass. On average, people take the exam 6 times before finally passing to qualify as a lawyer. For this reason, a lot of Japanese law students go on to work after graduation as in-house counsels without being qualified. Could foreign-qualified lawyers be the answer to Japan’s lack of qualified lawyers?
Not so. The barrier for foreign lawyers to work in Japan is high, as it requires extensive documentation and in-person visits to the Japanese Bar and Ministry of Justice, taking at least 5 months. Conversely, hiring foreign-qualified lawyers for matters such as international arbitration is seen as a strenuous process for firms in Japan and in practice, not common. The resulting short supply of lawyers stunts the demand for innovation and change in the Japanese legal industry.
The Bottom Line
There is a serious need for legal innovation in Japan. To do this, the country first needs to address the core issue regarding gender discrimination. There needs to be progressive reforms and auditing of university admission process by the government to break entry barriers for women in male-dominated professions such as law and STEM. Additionally, university teaching of law should include the concept of mediation, as often practiced internationally, and the general practice of law around the world, especially in Western cultures. This is essential to keep Japan in the global stage.
Then there is the lack of supply of qualified lawyers, especially in-house counsels. This will be a major problem in the coming years for Japan due to the rapid pace of globalisation, and increasing importance of IP and technology. The scarcity of in-house counsels means that Japan is increasingly unable to deal with international disputes, especially for SMEs. Despite the efforts to increase number of lawyers in Japan, little progress has been made. Japan needs to encourage not only domestic lawyers, but also foreign lawyers. On the one hand, the Japanese Bar Exam should ease its examination requirements while not losing its quality in order to encourage fresh law graduates to take the exam. On the other and, work barriers for foreign-qualified lawyers should be loosened to also increase the global availability of lawyers.
Finally, Japan needs to change its approach to business. In the age of rapid technological advancements, Japan needs to move to a more agile approach to business and loosen regulations to enable startups and entrepreneurship to thrive. Japan needs to place as much emphasis on commercialisation of technologies as it does on R&D. It will be interesting to watch progress over the next decade to see how the country can reconcile its contradictions to perform to its full potential on the global stage.
