The Concept of "Commercial Transactions" in Japanese Commercial Law: An Explanation of Its Classification and Scope

Understanding how Japanese law disciplines business transactions is crucial when expanding operations in Japan. The Japanese legal system has two main pillars: the “Japanese Civil Code,” which governs general legal relations between private individuals, and the “Japanese Commercial Code,” which establishes specific rules for corporate activities and commercial transactions. Depending on whether a transaction falls under the Civil Code or the Commercial Code, there are significant differences in the legal treatment of contract formation requirements, the rights and obligations of the parties, and the statute of limitations for claims. For example, under the Japanese Civil Code, the general statute of limitations for claims is based on Article 166 of the revised Civil Code, which is, in principle, “five years from the time the right can be exercised” or “ten years from the time the right becomes exercisable.” Previously, a five-year short-term statute of limitations applied to claims arising from commercial transactions under the Commercial Code (former Article 522), but with the Commercial Code revision in 2005 and the Civil Code revision in 2020, the special provisions of the Commercial Code were abolished, and now the general principles of the Civil Code apply. This difference has a direct impact on credit management and dispute resolution strategies, making it the first step in business risk management to accurately determine whether your company’s activities fall under the “commercial transactions” of the Japanese Commercial Code. This article focuses on the concept of “commercial transactions,” systematically explaining its legal definition, main classifications, and what types of activities each classification includes, based on Japanese laws and case law.

The Framework of Commercial Transactions Under Japanese Commercial Law

Japanese Commercial Law classifies “commercial transactions” based on specific lists and definitions. To understand this classification, it is effective to first grasp two conceptual distinctions: “principal commercial transactions” and “auxiliary commercial transactions.”

Principal commercial transactions refer to acts that form the core of a company’s business activities and are themselves the objectives of the business. These are the transactional activities that constitute the very reason for a company’s existence. Japanese Commercial Law further subdivides these principal commercial transactions into two legal types. One is “absolute commercial transactions,” which are always considered commercial due to the objective commercial nature of the acts themselves. The other is “business commercial transactions,” which are no different from general civil acts but acquire the nature of commercial transactions only when they are performed repeatedly and continuously as part of a business.

In contrast, auxiliary commercial transactions refer to acts that a merchant performs in a supporting role to carry out their principal commercial transactions. For example, the act of a manufacturer borrowing funds from a bank to build a factory for the principal commercial transaction of manufacturing and selling products, or the act of commissioning an advertising agency to advertise the products, fall under this category. Auxiliary commercial transactions are not the primary business objectives of a company. However, they are closely related to and support the main business activities, and thus are treated as commercial transactions under commercial law. The distinction between principal and auxiliary commercial transactions is a fundamental concept for understanding the scope of application of commercial law.

Fundamental Commercial Transactions: Absolute Commercial Transactions Under Japanese Law

Absolute commercial transactions are defined in Article 501 of the Japanese Commercial Code and are considered commercial transactions regardless of whether the actor is a merchant or not, and whether the act is performed repeatedly as a business or just once. These acts inherently have a speculative or financial nature, and due to the strong demand for speed and stability in transactions, they are treated specially under the law. Article 501 of the Japanese Commercial Code lists the following four types as absolute commercial transactions:

Firstly, “acts intended to acquire movable or immovable property or securities for compensation with the intention of transferring them for profit” (Article 501, Item 1 of the Japanese Commercial Code). This is commonly referred to as “speculative acquisition” and “speculative transfer.” A typical example is the act of purchasing goods for resale to make a profit. The key point here is the “intention to transfer for profit,” that is, the presence of speculative intent. If this intent exists, even the one-time resale of artwork by an individual could potentially be considered an absolute commercial transaction.

Secondly, “acts intended to acquire movable property or securities for compensation for the purpose of fulfilling a supply contract obtained from another person” (Article 501, Item 2 of the Japanese Commercial Code). This refers to transactions where an intermediary, who is not the producer, enters into a contract to supply goods to a customer and purchases the goods from a supplier to fulfill that contract. For example, a company that enters into a contract to deliver specific machinery to a customer and then purchases that machinery from the manufacturer is included in this category.

Thirdly, “transactions conducted at an exchange” (Article 501, Item 3 of the Japanese Commercial Code). This refers to standardized transactions conducted in specific markets, such as stock exchanges or commodity exchanges. Typical examples include the buying and selling of stocks or commodity futures trading. Transactions in these highly organized markets are naturally considered commercial transactions.

Fourthly, “acts related to bills of exchange and other commercial papers” (Article 501, Item 4 of the Japanese Commercial Code). Acts such as issuing, endorsing, and accepting bills of exchange and checks are considered commercial transactions in themselves, due to their development as means of settlement and credit in commercial transactions.

It is important to note that these absolute commercial transactions are subject to the discipline of commercial law, even if performed by individuals who do not run a business.

Fundamental Business Activities: Commercial Transactions in the Course of Trade Under Japanese Law

Commercial transactions in the course of trade, as listed in Article 502 of the Japanese Commercial Code, differ from absolute commercial transactions in that they are considered commercial transactions only “when conducted as part of a business” . Here, “as part of a business” means carrying out similar activities repeatedly and continuously with the intention of making a profit . Therefore, if these activities are conducted only once or for non-profit purposes, they are not considered commercial transactions in principle and are subject to the application of the Japanese Civil Code.

Article 502 of the Japanese Commercial Code exemplifies the following activities:

• Acquisition or leasing of movable or immovable property with the intention of renting it out for profit (Item 1): This includes real estate rental and leasing businesses .
• Manufacturing or processing activities conducted for others (Item 2): This includes manufacturing contracts and processing orders .
• Supply of electricity or gas (Item 3)
• Transportation activities (Item 4): This applies to the transportation industry .
• Contracting for work or labor (Item 5): This includes the construction industry .
• Publishing, printing, or photography activities (Item 6)
• Transactions in establishments aimed at attracting customers (Item 7): This applies to hotel and theater businesses.
• Currency exchange and other banking transactions (Item 8)

Whether these activities are recognized as commercial transactions depends on the specifics of each case. For example, the Sendai High Court’s decision on November 26, 1958, ruled that the activities of a moneylender who lends only their own funds do not fall under “banking transactions” as per Item 8 of Article 502 of the Japanese Commercial Code, as they differ from typical banks that accept deposits and make loans . This demonstrates that even if an activity is listed in the statute, its interpretation is strictly applied.

Particularly important is the treatment of activities during the preparatory stage before starting a business. On this point, the Supreme Court of Japan’s decision on June 19, 1958, stated that “a person who has carried out preparatory activities with the purpose of starting a specific business has realized their intention to start the business through these activities, thereby acquiring the status of a merchant,” and that these preparatory activities also become commercial transactions . For instance, renting a space or purchasing kitchen equipment to open a restaurant, even if no revenue has been generated yet, can be objectively recognized as preparatory activities for opening a business and thus fall within the scope of commercial transactions in the course of trade, making the entity a merchant.

The recognition of “commercial transactions in the course of trade” has significant legal implications. When an activity is recognized as such, it usually means that the entity conducting the activity obtains the status of a “merchant” under the Japanese Commercial Code. Once an entity becomes a “merchant,” the provisions of Article 503 of the Japanese Commercial Code, which will be discussed later, are triggered, and all other ancillary activities carried out by the merchant for the business are comprehensively included within the scope of the Commercial Code as “auxiliary commercial transactions.” Therefore, the recognition of commercial transactions in the course of trade is a critical juncture that determines whether the entire activities of a business are subject to the discipline of the Commercial Code or not.

Comparing Absolute and Business-Related Commercial Transactions Under Japanese Law

To summarize the main differences between absolute commercial transactions and business-related commercial transactions as previously explained, they are as follows. The most fundamental difference lies in the requirements for an act to be considered a commercial transaction. Absolute commercial transactions focus on the objective nature of the act itself, recognizing its commercial nature regardless of the attributes or the repetitive intent of the actor. On the other hand, business-related commercial transactions require not only the nature of the act but also the subjective and repetitive manner of the actor as “in the course of business” for the act to be recognized as a commercial transaction. This difference is also reflected in the requirements related to the subject of the act and the frequency of its occurrence.

The table below summarizes these differences.

The Scope of Auxiliary Commercial Transactions Under Japanese Commercial Law

Auxiliary commercial transactions are defined in Article 503, Paragraph 1 of the Japanese Commercial Code as “acts performed by a merchant for the purpose of their business” . This encompasses all acts that are incidental to the performance of the aforementioned basic commercial transactions (absolute or business-related commercial transactions). Typical examples include borrowing funds to purchase goods, employing staff, purchasing vehicles for business use, and leasing office space .

What particularly strengthens the concept of auxiliary commercial transactions is the provision set forth in Article 503, Paragraph 2 of the Japanese Commercial Code, which presumes that “acts of a merchant are for the purpose of their business” . This presumption is extremely important from the perspective of legal burden of proof. It means that the party claiming that a certain act was performed independently of the merchant’s business bears the responsibility of proving that fact. The Supreme Court of Japan’s decision on February 22, 2008 (2008), also confirms that the burden of argument and proof to overturn this presumption lies with the party denying the commercial nature of the act .

Notably, a company is inherently a merchant under Article 5 of the Japanese Companies Act, as it is authorized to perform acts for the purpose of its business within the scope of its legal capacity. Therefore, proving that a company’s act is not “for the purpose of business” is practically very difficult, and almost all acts of a company are deemed to be auxiliary commercial transactions by this presumption.

An excellent example demonstrating the extensive influence of this presumption is the Supreme Court of Japan’s decision on October 6, 1967 . In this case, a credit guarantee association, which was not a merchant, guaranteed the debt of a principal debtor who was a merchant, based on the latter’s request. Subsequently, the guarantee association paid off the debt on behalf of the principal debtor and acquired a right of subrogation against them. The dispute was whether the statute of limitations for this right of subrogation was five years under the Commercial Code or ten years under the Civil Code. The Supreme Court ruled that although the guarantee association itself was not a merchant, the act of guaranteeing by the principal debtor (a merchant) was an auxiliary commercial transaction performed for the purpose of their business. Consequently, the right of subrogation acquired by the guarantee association was also deemed to be akin to a right arising from a commercial transaction, and thus subject to the shorter five-year statute of limitations . This decision illustrates how the commercial nature of a merchant’s act can extend to the legal relationship with the counterparty (even if they are not a merchant) and transform the nature of their rights.

In this way, the concept of auxiliary commercial transactions and the strong presumption supporting it expand the scope of the Japanese Commercial Code to encompass the entire spectrum of corporate activities, embodying the basic philosophy of Japanese commercial law to facilitate the swift and certain handling of business transactions.

Conclusion

In this article, we have explained the concept of “commercial transactions” under Japanese Commercial Law, including their classification and legal implications. Commercial transactions are broadly divided into “absolute commercial transactions,” which are always considered commercial based on the objective nature of the act; “business-related commercial transactions,” which become commercial through their conduct as a business; and “auxiliary commercial transactions,” which support the business activities of merchants. In particular, acts by merchants are strongly presumed to be for the sake of business, meaning that most actions taken by companies fall under the application of commercial law. Understanding this classification and identifying which category your company’s transactions fall into is essential for negotiating contract terms, managing receivables, and preparing for potential legal disputes, among all other aspects of corporate legal affairs. Accurately understanding and appropriately responding to Japan’s complex rules of commercial transactions is key to success in the Japanese market.

Monolith Law Office has a wealth of experience in providing legal services related to issues under Japanese Commercial Law to a wide range of clients, both domestic and international. Our firm is staffed with professionals who are not only qualified as Japanese attorneys but also hold foreign legal qualifications and are English speakers. We can provide high-quality support tailored to the realities of business in both Japanese and English, including interpreting the concept of commercial transactions explained in this article, determining whether specific transactions qualify as commercial transactions, and reviewing and drafting contracts associated with business activities in Japan. Utilize our expertise to ensure that your business fully complies with Japanese regulatory requirements and operates smoothly.