Legal Significance of 'Merchants' and 'Business Operations' in Japanese Commercial Law

For all companies that conduct or are planning to conduct business activities under the Japanese legal system, accurately understanding the two fundamental concepts of “merchant” and “business operations” is the first step in managing legal risks and ensuring smooth business operations. The Japanese Commercial Code, positioned as a special law within the Japanese Civil Code, establishes unique rules to ensure the speed and safety specific to commercial transactions. The entities subject to this Commercial Code are known as “merchants.” Whether an individual or corporation qualifies as a “merchant” has a direct impact on the applicable laws to their activities, the interpretation of contracts, and even specific legal issues such as the statute of limitations for claims. For instance, claims arising from transactions conducted by a merchant may be subject to a shorter statute of limitations than those under civil law. Thus, determining whether your company or your business partners qualify as “merchants” holds significant importance in daily business practices. This article provides a professional and clear explanation of the definition of “merchant” as set forth in the Japanese Commercial Code, its scope, and the concept of “business operations,” which is central to a merchant’s activities, based on specific legal provisions and important case law.

The Definition of a “Merchant” Under Japanese Commercial Law

Japanese Commercial Law provides a clear definition of the “merchant,” who is subject to its application. Article 4, Paragraph 1 of the Japanese Commercial Code states, “In this law, a ‘merchant’ refers to a person who makes commercial transactions in their own name as a business.” This definition comprises two essential elements: conducting transactions “in their own name” and as a “business.”

Firstly, the requirement to act “in their own name” means that the individual becomes the subject of legal rights and obligations . This concerns not who physically performs the act but to whom the rights (for example, the right to receive payment for goods) and obligations (for example, the duty to deliver goods) legally belong as a result of the transaction . For instance, even if the CEO of a corporation signs a contract, the party to the contract is not the CEO personally but the corporation itself. In this case, since the corporation is the subject of the rights and obligations, it is the corporation that has acted “in their own name,” making it the merchant . This distinction is fundamental to corporate governance as it clearly separates corporate liability from individual liability.

Secondly, the requirement to act as a “business” indicates the intention to engage in similar acts repeatedly and continuously with a profit-making purpose (profitability) . What is crucial here is the objective intention to pursue a profit, regardless of whether a profit is actually made . Even a single transaction may meet the “business” requirement if it is intended as part of a continuous business activity. Those who fulfill these two criteria become the most basic “merchants” under Japanese Commercial Law.

Scope of Individuals Considered “Merchants” Under Japanese Commercial Law

Japanese Commercial Law classifies “merchants” into two categories. One is the “actual merchant,” who fits the definition mentioned earlier, and the other is the “quasi-merchant,” who is deemed a merchant based on certain business forms.

An actual merchant, according to Article 4, Paragraph 1 of the Japanese Commercial Code, refers to “a person who makes it their business to engage in commercial transactions in their own name.” This pertains to entities whose core business activities are legally defined as “commercial transactions.”

In contrast, quasi-merchants are defined under Article 4, Paragraph 2 of the Japanese Commercial Code. According to this provision, “a person who makes it their business to sell goods through a store or other similar facilities” or “a person who operates a mining business” is considered a merchant, even if their activities do not strictly qualify as commercial transactions. The rationale behind this provision is the notion that the external form and facilities of a business possess a commercial reality that necessitates the protection of transactional safety.

To understand this distinction, let’s consider a concrete example. For instance, if a farmer sells vegetables harvested from their own field on the street without a permanent store, this is regarded as the sale of primary produce and does not usually qualify them as a merchant. However, if the same farmer establishes a permanent store and continuously sells vegetables there, they would be considered a quasi-merchant as “a person who makes it their business to sell goods through a store.” In this case, whether the goods sold are the farmer’s own produce is irrelevant; the objective fact that they conduct business using a store, a commercial facility, serves as the basis for bringing them under the discipline of the Commercial Code.

Why Are Companies Considered Merchants?

In Japan, corporations such as joint-stock companies (kabushiki kaisha) and limited liability companies (godo kaisha) established under the Japanese Companies Act are generally treated as “merchants.” This conclusion becomes clearer when understanding the application of laws within the Japanese legal system.

In the Japanese legal system, there is a relationship between general laws and special laws. The Japanese Civil Code, which governs private legal relationships including commercial transactions, is the “general law,” while the Japanese Commercial Code, which specializes in commercial transactions, is a “special law” of the Civil Code. Matters concerning companies are further regulated by the Japanese Companies Act, which is positioned as a “special law” to the Commercial Code. Therefore, if there are provisions in both the Companies Act and the Commercial Code regarding a certain matter, the Companies Act, being the special law, takes precedence. The order of application is “Companies Act > Commercial Code > Civil Code.”

The basis for a company being a merchant is inherent in its purpose of establishment. The Japanese Companies Act does not directly define a company as a “merchant.” However, a company under the Companies Act is a corporate entity that plans to distribute profits to shareholders and allocate residual assets, with its essential purpose being the pursuit of profit through its business activities. This profit-seeking nature is interpreted as naturally fulfilling the requirement of “engaging in business” as stipulated in Article 4, Paragraph 1 of the Japanese Commercial Code. Therefore, from the moment of its establishment, a company automatically acquires the status of a merchant, regardless of whether it individually conducts specific commercial transactions, by virtue of its very existence.

When Does One Acquire the Status of a Merchant in Japan?

In contrast to corporations, which become merchants at the time of their establishment, it is a very important practical issue when individuals such as sole proprietors acquire the status of a merchant. The status may be recognized not at the official start of the business but at an earlier stage.

A leading case on this point is the decision of the Supreme Court of Japan on June 19, 1958 (Showa 33). This decision stated, “A person who has engaged in preparatory actions with the purpose of starting a specific business acquires the status of a merchant by realizing the intention to start the business through these actions.” This means that a person is considered a merchant from the time they engage in ‘preparatory actions for opening a business.’ If certain preparatory actions objectively indicate the intention to start a business, the legal status as a merchant may be recognized. Examples of such preparatory actions include borrowing business funds, signing a lease for a business property, or ordering necessary equipment and signage for the business.

The purpose of this case law is to protect the counterparties in transactions during the preparatory stage of opening a business. For instance, there was a case where a person who borrowed money to open a cinema argued for the application of the shorter commercial statute of limitations for disputes related to the borrowed money, which is applicable among merchants. By placing legal relationships arising from such preparatory actions under the discipline of commercial law, the stability and predictability of transactions are ensured.

However, there is an important constraint to this rule. The Supreme Court of Japan’s decision on February 24, 1972 (Showa 47), stated that for preparatory actions to be the basis for acquiring merchant status, “the actions must be objectively recognizable as preparatory for the business.” In other words, the subjective intent of the actor alone is insufficient; it must be clear from an external perspective that the actions are preparations for a business. This requirement of objectivity serves as an important check to prevent counterparties from being unexpectedly subjected to the application of commercial law.

The Concept and Scope of “Business” Under Japanese Commercial Law

The concept of “business,” which forms the core of the definition of a “merchant,” is also essential for understanding Japanese Commercial Law. Generally, “business” refers to the continuous and repetitive performance of similar acts with the aim of making a profit. This concept plays a role in defining the scope of application of commercial law in Japan.

However, not all economic activities fall under the category of “business” as defined by Japanese commercial law. Japanese commercial law and case law exclude certain activities from the scope of “business.”

Firstly, the actions of company employees and factory workers, who engage in labor primarily to earn wages, are not included in “business.” This is explicitly stated in Article 502 of the Japanese Commercial Code.

Secondly, the activities of highly specialized professionals such as doctors, attorneys, and certified public accountants have traditionally been distinguished from “business” under commercial law. This is because these activities place more emphasis on public interest and the provision of specialized knowledge and skills rather than on profitability.

Thirdly, the acts of primary producers in agriculture and fisheries, who sell their own products without commercial facilities like stores, are also not generally considered “business.”

These distinctions indicate that the target of regulation by commercial law is the typical “commercial enterprise activity” that seeks profit through organized and repetitive transactions. Therefore, when determining whether an activity qualifies as “business,” it is necessary to consider not just the fact that monetary compensation is received, but also the purpose, form, and social positioning of the activity as a whole.

Case Law on Entities Not Considered Merchants: The Shinkin Bank Example in Japan

While companies are naturally considered merchants, there are organizations that, despite having corporate status, are not deemed merchants. A prime example of this is cooperative financial institutions such as Shinkin banks and agricultural cooperatives. Understanding the legal status of these organizations highlights the requirement of ‘profitability,’ which is essential to the nature of a merchant.

The Supreme Court of Japan has established the position that Shinkin banks do not qualify as merchants through a series of rulings. For instance, the Supreme Court of Japan’s decision on October 18, 1988 (1988), clearly indicated that the operations of Shinkin banks are not aimed at profit-making and therefore do not fall under the category of merchants as defined by the Commercial Code. The basis for this lies in the fact that Shinkin banks are corporations with a non-profit personality, established for the prosperity of the local community and mutual aid among members, in accordance with the Shinkin Bank Law.

The concrete impact of this legal distinction becomes apparent in actual disputes. In one case, the issue was the interest rate on delayed repayment of deposits by a Shinkin bank. If the Shinkin bank were a merchant and the deposit contract a commercial transaction, the relatively high statutory interest rate for commercial transactions set by Article 514 of the Japanese Commercial Code would apply. However, the court concluded that since the Shinkin bank is not a merchant, the transaction does not qualify as a commercial act, and therefore, the lower statutory interest rate prescribed by the Japanese Civil Code should be applied.

This case illustrates that the determination of whether a corporation is a merchant or not is not merely an academic classification but a practical issue that directly affects the amount of monetary obligations. The watershed in this judgment is whether the fundamental purpose of the organization, as stated in its articles of incorporation or founding law, lies in the pursuit of profit or in non-profit objectives such as mutual aid.

Comparison Between True Merchants and Quasi-Merchants Under Japanese Commercial Law

Organizing the differences between true merchants and quasi-merchants as we have discussed thus far, the table below illustrates the essential distinctions in their legal basis, requirements, and the relationship with commercial transactions.

Understanding the Small-Scale Merchant System Under Japanese Commercial Law

Japanese Commercial Law does not impose the same obligations on all merchants. There is a special system in place to alleviate the burden for particularly small-scale business operators, known as the “Small-Scale Merchant” system.

Article 7 of Japanese Commercial Law stipulates that certain provisions do not apply to “Small-Scale Merchants” . A “Small-Scale Merchant” is defined as one “whose assets used for business do not exceed the amount specified by the Ministry of Justice ordinance” . The specific amount is set at “500,000 yen” according to Article 3 of the Enforcement Regulations of the Japanese Commercial Law . This value is determined based on the amount of assets listed on the balance sheet for the last fiscal year .

When qualifying as a Small-Scale Merchant, several important obligations are exempted. Among these, the most practically significant are the freedom from the obligations to register a trade name (commercial registration), the responsibility associated with the continued use of a trade name, and the creation of commercial books . As a result, small-scale sole proprietors and the like can significantly reduce the administrative burden and costs when starting their businesses. This system exemplifies the intention of Japanese Commercial Law to provide flexible regulation according to the scale of the business.

Conclusion

As we have seen in this article, the definition of a “merchant” under Japanese Commercial Law is not merely a legal classification but a critically important concept that serves as the starting point for the application of legal regulations to business activities. The requirements of “in one’s own name” and “as a business,” the early acquisition of merchant status through preparatory activities for opening a business, and the inherent merchant status of companies, are interpretations that cover a wide range. Furthermore, as the case of credit cooperatives demonstrates, not just the form of the corporation but also the fundamental presence or absence of “profit-seeking” is key in determining merchant status. This foundational knowledge is essential for all business managers and legal professionals operating in Japan.

Monolith Law Office boasts a wealth of experience representing a multitude of domestic and international clients in complex legal issues related to Japanese Commercial Law and Corporate Law. Our firm is staffed with experts who are not only qualified as Japanese attorneys but also hold foreign legal qualifications and are English speakers, enabling us to accurately address the unique challenges that arise in the context of international business. From consultations on the basic concepts of commercial law discussed in this article to more complex corporate legal matters, we are committed to robustly supporting your business from a legal standpoint.