Japan's Subcontract Act Just Changed: What the New Proper Transactions Act Means for Foreign Businesses

Introduction

On January 1, 2026, one of Japan's most important business regulations underwent its most significant overhaul in decades. The Act against Delay in Payment of Subcontract Proceeds, commonly known as the Subcontract Act (下請法, Shitauke-hō), has been amended and effectively renamed. Its new formal title is the Act against Delay in Payment of Fees to Small and Medium-Sized Entrusted Business Operators in Manufacturing and Other Specified Fields, commonly referred to as the Proper Transactions Act (取適法, Toriteki-hō).

This is not a minor technical update. The amendments expand the scope of regulated businesses, introduce new prohibited practices, and fundamentally shift the philosophy from a hierarchical "subcontracting" framework to one emphasizing equal partnership between contracting parties. For foreign businesses operating in Japan, these changes carry particular significance: companies that were previously outside the scope of the law may now find themselves subject to its requirements.

Background: Why Was the Subcontract Act Reformed?

The original Subcontract Act, enacted in 1956, was designed to protect smaller businesses from unfair practices by larger companies in subcontracting relationships. For decades, its applicability was determined solely by the capital (stated capital) of the contracting parties. While effective in many cases, this capital-based threshold created a significant gap: companies with relatively low registered capital but substantial business operations, including many Japanese subsidiaries of foreign corporations, often fell outside the law's reach.

In recent years, Japan has faced a convergence of economic pressures. Rising labor costs, increasing raw material prices, and surging energy expenses have squeezed margins across supply chains. Smaller businesses, despite bearing the brunt of these cost increases, have struggled to pass them on to their contracting partners. The government recognized that achieving "structural price pass-through" (構造的な価格転嫁, Kōzō-teki na Kakaku Tenka) across the entire supply chain was essential for enabling wage growth and maintaining economic vitality.

The bill to amend the Subcontract Act was passed by the House of Councillors on May 16, 2025, and came into force on January 1, 2026.

Key Changes at a Glance

The amendments introduce five major categories of change. Each carries direct implications for how businesses structure their contractor and supplier relationships in Japan.

1. Terminology and Philosophy Shift

The most visible change is the shift in terminology. The concepts of "parent enterprise" (親事業者, Oya Jigyōsha) and "subcontractor" (下請事業者, Shitauke Jigyōsha) have been replaced with "contracting business" (委託事業者, Itaku Jigyōsha) and "small and medium-sized contractor" (中小受託事業者, Chūshō Jutaku Jigyōsha).

This is more than cosmetic. The old terminology reinforced a hierarchical relationship that the government now explicitly seeks to move away from. The new framework emphasizes an equal partnership model where both parties negotiate on fair terms.

2. Expanded Scope: Employee-Based Criteria

This is arguably the most impactful change, especially for foreign-affiliated companies in Japan.

Under the previous law, applicability was determined solely by stated capital thresholds:

Manufacturing-type transactions: Contracting businesses with capital exceeding JPY 300 million dealing with businesses at JPY 300 million or below, or contracting businesses with capital between JPY 10 million and JPY 300 million dealing with businesses at JPY 10 million or below.
Service-type transactions: Contracting businesses with capital exceeding JPY 50 million dealing with businesses at JPY 50 million or below, or contracting businesses with capital between JPY 10 million and JPY 50 million dealing with businesses at JPY 10 million or below.

The amended law now adds employee count as an alternative criterion:

Manufacturing sector: Contracting businesses with more than 300 employees dealing with businesses having 300 or fewer employees.
Service sector: Contracting businesses with more than 100 employees dealing with businesses having 100 or fewer employees.

A company meeting either the capital threshold or the employee threshold will be subject to the law. This is an "or" condition, not an "and" condition.

3. Promissory Note Payment Ban

The amended law prohibits contracting businesses from settling fees owed to small and medium-sized contractors using promissory notes, electronically recorded monetary claims, or factoring arrangements if the contractor cannot receive the full payment amount by the payment due date.

Additionally, the payment due date must be set as soon as possible and, in any event, no later than 60 days from the date of receiving goods or completion of services. Delayed interest now applies to payment reductions not attributable to contractors, calculated from 60 days after the start date through the actual payment date.

4. Price Negotiation Obligations

One of the most significant new protections is the prohibition against unilateral price determination. Under the amended law:

When a small or medium-sized contractor requests price negotiations, the contracting business must respond to the request.
The contracting business must provide necessary explanations and information during negotiations.
Determining contract fees without proper negotiation or adequate information sharing is now a prohibited practice.

This directly addresses one of the most common complaints from smaller businesses: that larger contracting partners would simply dictate prices without meaningful discussion, particularly when costs for labor, materials, or energy had increased.

5. New Transaction Category: Transportation Commissions

The amended law introduces a new category of covered transaction: "specified transportation commission" (特定運送委託, Tokutei Unsō Itaku). This covers situations where a business entrusts the transportation of goods it sells, manufactures, or repairs to a logistics operator for delivery to the transaction counterparty.

Impact on Foreign Companies in Japan

The expanded scope of the Proper Transactions Act has particular relevance for foreign businesses operating in Japan. Here is why:

Many foreign-affiliated companies are newly covered. Japanese subsidiaries of foreign corporations are frequently established as limited liability companies (合同会社, Gōdō Kaisha) or with relatively low stated capital. Under the old capital-only criteria, these companies often fell outside the Subcontract Act's scope, even when they had hundreds of employees and significant business operations. With the addition of employee-based thresholds, a foreign-affiliated company with more than 300 employees in manufacturing (or more than 100 in services) is now subject to the law, regardless of its registered capital.

Anti-circumvention provisions apply. The amended law also prohibits attempts to circumvent these thresholds by using subsidiaries or similar entities. Structuring transactions through low-capital intermediary companies to avoid compliance obligations is explicitly addressed.

The obligations are immediate. The law took effect on January 1, 2026. Companies that fall within the expanded scope need to be compliant now. There is no transitional grace period for businesses newly brought under the law's coverage.

Compliance Checklist for Affected Businesses

If your business in Japan meets the new criteria, either through capital thresholds or employee count, the following steps are essential:

Review and Update Contracts

Audit all existing agreements with smaller contractors and suppliers.
Ensure contracts clearly specify payment terms, pricing mechanisms, and delivery obligations.
Remove any provisions for promissory note payments or other prohibited payment methods.

Revise Payment Workflows

Confirm that all payments to covered contractors are made within 60 days of receiving goods or service completion.
Transition away from promissory notes and similar instruments to direct bank transfers or other compliant methods.
Implement systems to track payment deadlines and flag potential delays.

Establish Price Negotiation Procedures

Create formal procedures for responding to price negotiation requests from contractors.
Train procurement and purchasing teams on the obligation to engage in good-faith negotiations.
Document all price negotiations, including explanations provided and information shared.

Update Written Documentation

Ensure that written order documents (発注書面, Hatchū Shomen) are delivered to contractors immediately upon placing an order.
Note that electronic delivery of required documents is now permitted without requiring prior contractor consent.

Internal Training

Educate management, procurement, and legal teams on the new requirements.
Pay particular attention to the prohibition against unilateral price determination, as this represents a significant change in how negotiations must be conducted.

Enforcement and Penalties

The Japan Fair Trade Commission (公正取引委員会, Kōsei Torihiki Iinkai) and the Small and Medium Enterprise Agency (中小企業庁, Chūshō Kigyō-chō) are the primary enforcement bodies. Under the amended law, enforcement has been strengthened in several ways:

Expanded administrative authority: Relevant administrative agencies can now share information across sectors and provide guidance to contracting businesses. Competent ministers of various industry ministries have been granted new authority to provide advice and guidance.
Escalating enforcement: New provisions allow authorities to present specific improvement measures to business operators who have not improved despite initial guidance and advice.
Financial penalties: Violations can result in fines of up to JPY 500,000 for the individual representative, agent, or employee who committed the violation, along with potential fines for the corporation itself.
Cease-and-desist orders: The Fair Trade Commission can issue formal recommendations and orders requiring corrective action.

While the direct financial penalties may appear modest, the reputational impact of being publicly identified as a violator can be far more damaging in Japan's compliance-conscious business environment. Public disclosure of enforcement actions is standard practice and can significantly affect business relationships.

Looking Ahead

The Proper Transactions Act represents a fundamental shift in how Japan regulates business-to-business transactions. By moving from a capital-only framework to one that also considers employee count, the law closes a long-standing gap that allowed many substantial businesses, including foreign-affiliated companies, to operate outside its protections.

For foreign businesses in Japan, the message is clear: review your contractor relationships, update your payment practices, and ensure your procurement teams understand the new obligations. The cost of proactive compliance is far lower than the cost of enforcement action, both financially and reputationally.

Disclaimer

This article provides general information about recent amendments to Japan's Subcontract Act and should not be considered legal advice. The specific application of the Proper Transactions Act depends on individual business circumstances, including transaction types, company size, and industry sector. Businesses are strongly encouraged to consult with qualified legal professionals for guidance tailored to their specific situations.