Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Shipping volume discussing topics including sources of finance, compliance initiatives and foreign court decisions within key jurisdictions worldwide.

1 What is the current state of the shipping industry in your country?

Japan is a major shipping nation. As of the end of 2017, Japanese companies operated 11.7per cent of the deadweight tonnage (DWT) of the world fleet, or 223,615,000 DWT out of a total 1,910,012,000 DWT (for ships over 1,000 GT), which was second only to Greece. Despite falling behind South Korea and then China at the beginning of the 21st century, it has also continued in recent years to deliver around 20 per cent of the newbuild gross tonnage worldwide, with the ratio reaching 25.2 per cent, or 14,430,000 GT out of a total 57,320,000 GT during 2018.

As the Japanese shipping industry has a relatively high reliance on the dry bulk market, the continued recovery of the sector during 2018 helped the industry as a whole. Meanwhile, Ocean Network Express Pte Ltd (ONE), which was launched on 1 April 2018 by a joint merger between the container liner divisions of Nippon Yusen Kabushiki Kaisha (NYK), Mitsui OSK Lines (MOL) and Kawasaki Kisen Kaisha (‘K’ Line), started off poorly and suffered a loss of US$586 million against a revenue of US$10.88 billion during fiscal year 2018. The heavy losses were reportedly caused in part by initial issues with data and system integration, and have hurt the performances of its joint owners. However, ONE has expressed optimism that the issues are resolved, and forecast a profit of US$85M during fiscal year 2019.

On the shipbuilding side, Japanese builders were reported to have received export orders for 215 newbuilds (10.78 million GT) in 2018. This was the third consecutive year with an increase in the amounts of order, but also the third consecutive year with zero orders for LNG carriers, on which the heavy industry shipbuilders have been focusing. Of the 215 orders, 156 were bulk carriers, 32 were oil and chemical tankers and 26 were containerships. The total orderbook for Japanese shipyards at the end of December 2018 was 512 ships (11.67 million CGT), which was a slight decrease from the previous year (516 ships and 12.89 million CGT).

2 What are the prevailing shipping market trends affecting your country?

Being a prominent shipping nation with its fleet operating worldwide, Japan is affected by the same global shipping market trends affecting the entire world.

As mentioned at the outset, the continued gradual improvement in the bulker market has helped the Japanese shipping industry as a whole. It is expected that an increasing number of older bulk carriers will be scrapped before the Sox regulations come into effect in 2020, while the number of new building deliveries is expected to remain relatively low. Together with the continued demand for iron ore in China, and increase in grain cargoes, it is hoped that the bulk carrier market will continue to improve, despite some concerns over US–China trade disputes and decreases in coal cargoes.

Meanwhile, for oil tankers, the same trend applies for ship scrapping and renewals, but the number of new building tankers entering the market is expected to be high, countering the scrappings around 50-60 VLCCs being reported scheduled for delivery during 2019. For chemical tankers, although the slow worldwide market and excess tonnage kept the market from improving in 2018, the industry hopes that the market has hit bottom and is hopeful for an improvement by late 2019.

With regard to container ships, the joint owners of ONE say that the initial issues have been resolved and that they hope to recover the trust of the market and are in position to begin reaping the benefits of synergy. It is also hoped that the strong North American market, where the joint owners of ONE have traditionally enjoyed a relatively large market share, will continue to support ONE’s recovery.

3 Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?

Protectionist policies by the US, the heightening of US–China trade conflicts, announcements of new tariffs, developments in the North Korean Nuclear negotiations and tensions between the US and Iran are some of the recent international political developments that will have an impact on Japan’s shipping market.

As to legislative developments, the amendments to the Japanese Commercial Code concerning shipping, etc, came into effect on 1 April 2019. Among the notable amendments are the newly instated obligation of a shipper to notify a carrier with regard to the carriage of dangerous goods, and the instatement of a new section concerning time charter parties.

Further, amendments to the law of obligations within the Japanese Civil Code will come into effect on 1 April 2020. Some of the notable amendments are the introduction of regulatory rules concerning standard terms and conditions, amendments to the general time bar (five years from the time when the claim was recognised for contractual obligations, five years from the time when the victim became aware of the damages and perpetrator for death and personal injury tort claims, and threeyears from the same time for other tort claims) and changes to the standard rate of interest (a floating rate of interest in 1 per cent increments starting at 3 per cent p.a. in 2020).

4 What are the key regulatory and compliance issues for your country’s shipping market? What’s coming up in the near future?

Environmental Regulations, such as the IMO Ballast Water Management Convention entering force in September 2017, and MARPOL requirements, such as the NOx Emission Tier III standard, which took effect from 1 January 2016 and the SOx requirement to be implemented in January 2020 continue to be the key regulatory issues, which will all affect compliance costs for owners and shipbuilders by the millions of dollars, but are also hoped to accelerate the pace of scrapping and fleet renewal.

Freight rates are expected to increase to absorb compliance costs.

5 What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?

Bank loans have traditionally been the Japanese shipping industry’s primary source of finance. Japanese megabanks, regional banks and Credit Unions offer ship finance, while public financial institutions such as the Development Bank of Japan and Japan Bank for International Cooperation also provide export loans to overseas importers, etc, to help finance the export of ships built by Japanese yards.

With the exception of export loans, Japanese banks have traditionally provided finance to Japanese owners, with the megabanks focusing on the reliability and profitability of the charterers or operator,s while the local banks focused on its relations with local owners and shipyards. However, there has been a recent trend of overseas shipping companies seeking finance from Japanese banks, caused by the decrease in lending by European banks. An increasing number of Japanese banks have reportedly decided to answer this demand, owing in part to the lack of financing opportunities in the domestic market.

The advantage for overseas owners of financing a vessel through Japanese banks in the Japanese market would be the general availability of loans and perhaps the relatively low interest rates.

As an alternative to direct bank loans, Japanese trading houses are starting to act as intermediaries for domestic bank loans to foreign owners, whereby the trading houses obtain loans from banks, and pass on the loan to the end borrowers with a surcharge. There have also been reports of Japanese trading houses acting as guarantors for overseas borrowers for Japanese bank loans. The difficulties of a stringent credit check by Japanese banks may be alleviated through these methods, but in return the borrower will have to pay a commission to the trading houses.

One further development in Japanese ship financing is the rise of shipping funds. In 2007, Mizuho Securities and Dai-ichi Life Insurance established Anchor Ship Investment Co, Ltd, which managed Japan’s first domestic ship investment fund with an investment of ¥130 billion. A second fund managed by Anchor Ship Partners Co, Ltd was put together with an investment of not less than ¥200 billion in 2011, and a third was put together in 2014, concentrating on larger-scale projects. Unlike some speculative funds that entered and left the market during the early 2010s, the Anchor Ship group has focused on gaining stable long-term returns for its investments, and has become increasingly visible in the Japanese shipping market.

6 Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?

In very general terms, there are few Japanese court decisions or arbitration awards on shipping matters rendered in a given year, owing in part to the tendency towards amicable settlement.

That said, the administrator of the shipowner’s limitation proceedings of the MOL Comfort, which was a container ship broken in two and sank off the coast of Yemen while laden with over 4,000 containers over the course of June to July 2013, recently announced his intention to release an opinion regarding the liability of the fund applicant (MOL) and beneficiaries (vessel interests and charterers) hopefully by the end of 2019. Although the opinion will be subject to objection and appeal, upon which it would ultimately be resolved through the three-tier litigation system, it will be one step towards the conclusion of the years-long proceedings that have involved a large part of the Japanese shipping lawyers for six years now.

7 What is the outlook for your country’s shipping market? Which sectors are likely to grow, and which not?

As discussed in the 2018 Japanese chapter of Market Intelligence, the Japanese shipping industry has been undergoing various internal reforms in recent years to reduce exposure and improve efficiency. The consolidation of the containership businesses of NYK, MOL and ‘K’ Line into ONE and the reorganisation of the shipbuilding industry are other developments affecting the future of the Japanese shipping industry. Although these reforms and consolidations are still works in progress, the fundamental strength of the Japanese shipping industry as a whole appears sound and the various sectors appear to be on the way to a full recovery.

The Inside Track

What are the particular skills that clients are looking for in an effective shipping lawyer?

Expertise in the local law (especially regarding jurisdiction and conflict of laws) being a given, the most sought-after skills are command of the English language, commercial awareness, multi-jurisdictional connections and experience.

What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?

There are various considerations in arranging shipping finance, such as the type and structure of financing, the financing entity, assessment and management of risks, security, insurance and plans for the future operation of the vessel, etc.

From a lawyer’s standpoint, however, the most crucial issue is how such considerations are reflected in the contractual documents. Content-wise, the most important part of the contract would be the jurisdiction and governing law clause, because these are the bases upon which the contract will be interpreted. Clients should also be aware that finance documents require a certain amount of time to properly review, and that lawyers should always be provided with ample time to go over them. Although some clients may prefer providing their lawyers with documentation at the last minute, perhaps to save time and costs, it should be kept in mind that preventive law is always less expensive than litigation.

What are the most interesting and challenging cases you have dealt with in the past year?

While there have been a number of serious marine casualties and personal injury claims, their numbers appear to be in decline, with the advent of technology.

A type of claim that we have seen relatively more of in recent years is claims against builders or part makers for faulty manufacturing or design. Since under Japanese law multiple grounds of claim may co-exist without excluding each other (typically, tort claims or product liability claims), the relationship between such claims may produce a complicated legal relationship under which remedy may be sought in creative ways, however, under multiple time bars. As with claims for damage to fixed or floating objects, which we discussed last year, it is advisable that these cases are referred to Japanese lawyers as soon as possible.