The end of the paperchase

Japan finally gets serious about digitalisation

November 2020 Feature / Text by Tim Hornyak 

During a recent ceremony at a Buddhist temple in Shinjuku, a priest chanted sutras to memorialise the departed. However, he wasn’t eulogising a person, but hanko: corporate and personal seals used to authenticate contracts and a host of other documents. The funeral for the approximately 50 seals was requested by three companies, including Sakura Internet, which said the chops were no longer needed to validate contracts.

Funerary rites to express appreciation to inanimate objects are nothing new in Japan. They are regularly held for dolls, and have even been given for needles, pagers, and Aibo robots. But the ritual performed for hanko signals a shift to digital processes in communications, business, and other transactions across a range of industries and professions.

Japan has clung stubbornly to old-world paper technologies such as cash, business cards, and fax machines, and hanko is the granddaddy of them all. Seals for authentication date back more than 3,000 years to China’s Shang dynasty and were formalised in Japan in the mid-19th century.

It took the coronavirus pandemic to change things. Complaints that face-to-face meetings for hanko impressions were hindering companies from introducing telework seem to have finally pushed the Japanese government to embrace digital alternatives. However, even as recently as June, a group of Liberal Democratic Party lawmakers was demanding the hanko system be preserved. Taro Kono, minister in charge of administrative reform, has said that more than 90% of 10,000 types of administrative procedures that require hanko can be simplified. Last month, Prime Minister Yoshihide Suga instructed his government to do away with hanko, allowing more government services to go online.

Less than 12% of administrative work in Japan is conducted online, Reuters reported, and the annual personnel cost of not going digital is equivalent to 323 million working hours or nearly $8 billion.

“Digitalising procedures for businesses is definitely to be welcomed,” says Tobias Schiebe, an attorney at Arqis, a Tokyo-based European law firm that specialises in corporate, commercial, HR, and data law.

“Not only will it make administrative tasks more cost-efficient and faster — both for the public purse and for businesses — but it will also allow businesses to grant their employees more flexibility regarding remote-work models if paperwork is no longer necessary. Also, the government should lead by example in this regard, thus increasing trust in the legal reliability of digital procedures.”

Schiebe points to the Ministry of Economy, Trade and Industry’s gBizID authentication service as an example of the changes taking place. Businesses can access various government services with a single ID. It’s necessary for some procedures such as certain METI subsidy applications, but many companies still haven’t signed up.

Another obstacle is the courts. Stamping a contract with a registered seal is widely considered stronger proof of consent than e-signatures, says Schiebe, adding that since courts enjoy wide discretion in evaluating evidence, parties may be hesitant to rely on e-signatures for important transactions.

Japan’s insurance market, the second-largest in the world, is also ripe for digitalisation. It has relied on an army of hundreds of thousands of saleswomen who go door to door selling policies. The pandemic has forced a rethink. Mitsui Sumitomo Aioi Life Insurance, for example, now offers cancer insurance through multifunction copiers at convenience stores. But there’s still a lot that needs to change.

“Some regulations require insurers to provide physical documents to customers when selling particular products, meaning sending digital documents is not enough in certain areas,” says Kazutaka Matsuda, chairperson of the EBC Insurance Committee. “The regulators have taken concrete steps for deregulation in this area, so there is some good momentum. From insurance companies’ point of view, digital solutions mean not only agility but cost reductions, the ability to invest in more important areas, and to lower pricing.”

Taxation and accounting is another area being digitalised. The government may abolish a rule requiring paper documents, such as bills for tax-deductible expenses, to be preserved for a certain period if they are digitalised instead, according to a Jiji Press report from September. The more companies go paperless, the less office space they would need, reducing overhead.

In 2023, Japan will introduce an invoicing system for consumption tax that is similar to one used in Europe, where tax IDs are issued on customer invoices. The government has indicated that these invoices can be maintained electronically, which will save businesses time and money. Meanwhile, the Diet passed a package of tax reforms in March that added flexibility for taxpayers to maintain documents related to electronic transactions in electronic format, prompting many to start reducing their dependence on paper documents. Then the coronavirus pandemic struck Japan.

“Suddenly, we see companies not just discussing the new law, but moving much faster to take advantage of it,” says Ryann Thomas, a tax partner at PwC Tax Japan. “We expect that trend to continue, as companies become accustomed to flexible working arrangements and want to maintain them for the long term.”

Multinational enterprises, including Japanese ones, have moved to shared service centres, sometimes to take advantage of lower costs, but often to take advantage of centralisation of systems and other work process synergies, says Thomas. But if a company is required to produce paper books and records for tax or other purposes in Japan, that creates an obstacle to extending those benefits to the enterprise’s Japanese operations. What’s more, the need to prepare certain corporate documents — whether accounting or otherwise — has prevented the full adoption of flexible working arrangements in Japan.

“Change should slowly expand beyond the large Japanese and foreign multinational corporations,” says Thomas. “We already see some companies requiring their suppliers to issue invoices electronically.”

Change can be maddeningly slow in Japan, but usually it’s a question of attaining critical mass.

“As is often the case in Japan,” says Schiebe, “once the decision is made and supported by all important stakeholders, the implementation may happen faster than you think.” •