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Overview of Nonprofit Sector in Japan
                             Aki Okabe
 

Japanese Diet (National Parliament) passed a long overdue Nonprofit Organization Law (Law to Promote Specified Nonprofit Activities) in March 1998. The Law (English summary, Japanese full text ) enabled small civic groups to incorporate for the first time in Japanese history. The NPO (Nonprofit Organization) Law, with associated legislations on the prefectural level, was implemented in December 1998. As of late October 2000, 3280 organizations nationwide applied for incorporation and 2697 of them were approved (See current statistics).  Details of the Law will be discussed later in this article.

Traditional Nonprofits

So, there were no nonprofit organizations before the NPO Law, at least technically speaking. There were, however, many private organizations doing nonprofit work that were incorporated in different types of corporations: public benefit corporations (Koeki Hojin), school corporations (Gakko Hojin), social welfare corporations (Shakai Fukushi Hojin), readjustment relief corporations (Kosei Hogo Hojin), and religious corporations (Shukyo Hojin). There are about 230,000 of them. They are more or less established bigger organizations (frequently with strong government control). There are also many unincorporated groups doing nonprofit work. In one estimate, they number more than one million.

Tax collecting agencies tend to have an accurate number of corporations that are established well enough to be milked. In 1995, the National Tax Agency (Kokuzeicho) counted 232,776 incorporated nonprofits and 5,680 unincorporated associations, alongside with 57,626 cooperatives and 2,369,282 business corporations. (See Figure I.)
 

Figure I  Corporations in Japan (according to Tax Law) 1995
 

                                                                   Tax
                                                                   Exempt
Public Corporations                                                 *3

  Special Corporations (Tokushu Hojin)                       67       26

Public Benefit Corporations (Koeki Hojin) *1            232,776   17,000

  Public Benefit Corporations (Koeki Hojin) *2           25,927      880
  (as defined by Civil Law)
     Foundation Corporations (Zaidan Hojin)              13,476      819
     Association Corporations (Shadan Hojin)             12,451       61
  School Corporations (Gakko Hojin)                       7,566    1,125
  Social Welfare Corporations (Shakai Fukushi Hojin)     14,832   14,842
  Readjustment Relief Corporations (Kosei Hogo Hojin)       163      163
  Religious Corporations (Shukyo Hojin)                 184,288        0

Cooperative Corporations                                 57,626        0

  Consumer Cooperatives (Shohi Seikatsu Kyodo Kumiai)       978        0
  Agricultural Cooperatives (Nogyo Kyodo Kumiai)          7,035        0
  Fishermen's' Cooperatives (Gyogyo Kyodo Kumiai)         3,259        0
  Forestry Cooperatives (Shinrin Kumiai)                  4,245        0
  Small business Cooperatives (Chusho Kigyo Kyodo Kumiai)24,662        0
  Others                                                 17,447        0

Ordinary (Business) Corporations                      2,369,282        0

  Stock Corporations (Kabushiki Gaisha)               1,123,876        0
  Limited Corporations (Yugen Gaisha)                 1,183,130        0
  Associate Corporations (Gomei Gaisha)                   6,823        0
  Limited Associate Corporations (Goshi Gaisha)          29,569        0
  Medical Corporations (Iryo Hojin)                      19,718        0
  Others                                                  6,166        0

Unincorporated Associations (Jinkaku naki Shadan)         5,680        0

Foreign Corporations (Gaikoku Hojin)                      1,680        0

Total                                                 2,667,111   17,026
 

*1, *2  The civil law and tax law each specifies "public benefit corportaions."  They are different. The civil law public benefit corporations are more specific and are included in the more general tax law public benefit corporations..

*3  Tax exempt corporations are Tokutei Koeki Zoshin Hojin (Specific Public Interest Promotion Corporation), a tax law designation which is separate from civil law designation for corporate legal status. The tax exempt status enables organizations to receive tax deductible contribution from corporations and individuals.

Source: Yamauchi Naoto, "Nonprofitto Ekonomi 12: NPO no Seido Kaikaku," Keizai Semina, March 1997, p.63. Compiled from Okurasho, Tokutei Koeki Zoshin Hojin Ichiran, Kokuzeicho, Tokei Nenposho, and Kokuzeicho, Kaisha Hyohon Chosa.

Closest to the general term "nonprofit organizations" were 25,000 "Public Benefit Corporations" (Koeki Hojin) specified in national Civil Law.  Though legally being private nonprofits, Koeki Hojin are criticized to be heavily controlled by the government. They need permission to incorporate from a government agency with jurisdiction over their activity area. It sometimes takes several years to get the permission. Koeki Hojin are also subject to minimum asset requirement to incorporate, usually more than 100 million yen ($8 million) to be owned by the organizations. Koeki Hojin frequently accept retired government officials as management personnel (the practice called Amakudari, or "descending from the heaven" ).

Different specific laws incorporate other types of organizations. Private School Corporation Law of 1949 specifies the incorporation of school corporations, Social Welfare Service Law of 1951 social service corporations, Religious Corporation Law of 1951 religious corporations, Medical Service Law medical corporations, etc. They more or less share the same trait of Koeki Hojin: strict control by the government.

In Japan, the government requires even for-profit corporations to have minimum amount of assets when they incorporate: 10 million yen for Kabushiki Gaisha (stock companies) and 3 million yen for Yugen Gaisha (limited companies). For-profit corporations, however, can incorporate almost automatically if they meet law specified requirements. Not-for-profit  corporations have to go through strict government approval process, while subjected to minimum assets requirement discussed above.

Unincorporated Associations

Amenomori estimates that there are about 1.1 million unincorporated Associations in Japan (See Figure II). Most numerous among them are civic groups, which  are all sorts of informal civic activity organizations, including environmental, civil and women's rights, peace, consumer, international exchange, hobby, mutual help and other groups. Their number 556,000 is based on the Economic Planning Agency's estimate in 1983. (EPA's recent study uses more conservative figures of 82,000 unincorporated groups and total 85,786 civic activity organizations if  incorporated groups included (Shimin Katsudo Kihon Chosa (Civic Activity Basic Study) of 1997). They are not necessarily meant to be total counts. The prefectural governments provided lists of civic organizations known to them.).

Figure II  Unincorporated Associations (Nin'i Dantai)

 Civic Groups (Shimin Dantai)                      556,000
 Children's Associations (Kodomo-kai)              150,000
 Seniors' Clubs (Rojin-kai)                        130,000
 Neighborhood Associations (Jichi-kai/Chonai-kai)  275,000
-------------------------------------------------------------
                     Total                       1,111,000

Source: Takayoshi Amenomori, "Defining Nonprofit Sector: Japan." Working Papers of the Johns Hopkins Comparative Nonprofit Sector Project, no. 15, edited by L.M. Salamon and H.K. Anheier. Baltimore: The Johns Hopkins Institute for Policy Studies, 1993

Other categories of unincorporated associations - children's associations, seniors' clubs, and neighborhood associations - are traditional, sometimes conservative organizations. For example, neighborhood associations (Jichi-kai/Chonai-kai) have an origin in Goningumi ("Group of Five") in the Edo period that were used for mutual help as well as surveillance of people. Amenomori writes, "(I)n most cases, they (current neighborhood associations) act as a communication channel between the residents and the local government. Circulation and distribution of information and official announcements, collaboration with the national census, or the distribution of insecticides are among the most common activities" (Takayoshi Amenomori, "Defining Nonprofit Sector: Japan." Working Papers of the Johns Hopkins Comparative Nonprofit Sector Project, no. 15, edited by L.M. Salamon and H.K. Anheier. Baltimore: The Johns Hopkins Institute for Policy Studies, 1993, p.16).

The new NPO Law shed light precisely to this segment of the nonprofit sector: the unincorporated. In Effect, the nonprofit organization in Japan is not a general term that embraces all kinds of private civic organizations. It legally and primarily refers to small civic organizations that have not been incorporated by traditional corporation laws.

Economic Scale of Nonprofit Sector in Japan

Japan's nonprofit sector produces 2.3% of GDP and 2.2% of national output, according to the national Economic Planning Agency (EPA). The EPA's 1998 report, one of the first of this kind in Japan, showed that the nonprofit sector plays a significant role in national economy (See Figure III). Another study in 1994 set Japan's nonprofit sector expenditure at 3.2% of GDP (See Figures IV and V.)

Figure III  Added Value and Output of Nonprofits, 1995

                        Value Added, yen (%)          Output
Medical                  3,248,700,000 (28%)   6,537,600,000 (31%)
Education                4,199,300,000 (37 )   5,309,200,000 (26 )
Social Insurance/Service 2,010,100,000 (18 )   3,529,800,000 (17 )
Religion                   828,500,000 ( 7 )   1,743,600,000 ( 9 )
Civic Activity Groups       28,700,000  -        116,000,000 ( 1 )
Others                   1,131,100,000 (10 )   3,134,800,000 (15 )
-------------------------------------------------------------------
                        11,446,400,000        20,371,000,000
% of GDP                    2.3%                   2.2%

Medical Corporations     3,766,900,000         6,895,100,000
 (Quasi-for-profit)
-------------------------------------------------------------
  Total                 15,213,300,000      27,266,100,000
% of GDP                    3.1%                  2.9%

Source: Economic Planning Agency, Economic Analysis of Private Nonprofit Activity Organizations, March 1998 (Overview)
 

Figure IV  Civic Activity Groups

Output        116,000,000
Volunteering  652,300,000
--------------------------
Total Output  768,300,000

Figure V  Comparison of Nonprofit Sectors in the World

         Staff      % of Total    Annual          % of
         (fte)      Employment    Expenditure     GDP
U.S.     7,120,000    6.8%        $340.9 billion  6.3%
Japan    1,440,000    2.5           94.9          3.2
Germany  1,018,000    3.7           53.7          3.6
U.K.       946,000    4.0           46.6          4.8
France     803,000    4.2           39.9          3.3
Italy      417,000    1.8           21.6          2.0
Hangery     33,000    0.8            3.9          1.2

Source: Lester M. Salamon and Helmut Anheier, The Emerging Sector: The Nonprofit Sector in Comparative Perspective - An Overview, John Hopkins University, 1994
 

Nonprofits Without Tax Benefits

As mentioned before, the Diet in March 1998 finally passed the NPO Law (Law to Promote Specified Nonprofit Activities), which for the first time in Japanese history enabled small civic groups to incorporate.

A breakthrough?  Yes, but...

"What's the benefit?" one of the civic activists visiting from Japan asked the writer recently. "There is no tax deduction. We might even have to pay higher tax."

The new NPO Law provides no tax deduction for those contributing to nonprofits. NPOs have to pay corporate tax (on their "profit" making activities) at the same rate as businesses. In the beginning there was even a worry that small informal groups, which had been previously ignored by tax agencies, might suddenly have to pay local corporate taxes (fixed per-head Kinto-wari Juminzei; prefectural minimum 20,000 yen and local 40,000 yen) once they become formal nonprofits. (Luckily most prefectural and local governments are moving to exclude nonprofits from these Kinto-wari requirements).

Then what are the benefits of incorporating a nonprofit?

The emphasis of NPO Law advocates seems focused on the "conceptual" side of the new legislation, namely the significance of a responsive civic organization to become formally incorporated, the ability to become a legal party of contacts, the enhancement of freedom of association, etc. To be sure, the Diet upon the passage of the law also made a special resolution that they will return to considering tax benefits and other NPO support measures within two years of the implementation of the Law.

Many agree that the law is only the first step in the long process of developing the NPO infrastructure in Japan. Civic groups worked hard for passage of the law. Diet members, working with those groups, themselves introduced the bills, a unique move in the Japanese legislative environment where bureaucrats usually draft bills for the Diet. A whole new awareness and movement for nonprofit sector empowerment has sprung up on the grassroots, while legislative efforts going on. Nonprofit support organizations have proliferated and NPO office centers are being built around the nation. The NPO Law was just an early fruit in this lasting process of nonprofit infrastructure building.

Advocates also maintain that incorporation alone does have practical benefits. In the pre-NPO law Japan, if a group rent an office space, the representative of that organization personally became the legal tenant of that space, because the unincorporated group was unable to become a contract party. The representing person also had office telephone installed in his/her name, and opened a group bank account in his/her name. He/she filed law suits, was filed law suits against, loaned money, and received grants or donations, all in his/her name for the group.

Do you contribute your sizable money if it technically goes to a private person? That was a real concern before the NPO Law. Actual cases are reported in which donors held back because of this awkward situation.  Or, what happens if the representing person dies?  What if his/her relatives claim that the group's office or bank money was his/her personal assets? What happens to the representing person if the group made a huge debt, or lost a liability law suit?

The NPO Law can solve these problems. It helps nonprofits to have more stable social status. Making incorporation easy, the NPO Law enhanced the freedom of association, one of the basic rights in modern civil society.

The NPO Law Basics

The below are the basic features of the NPO Law.

The official name of the NPO Law is the "Law to Promote Specified Nonprofit Activities." The original name "Civic Activities Promotion Law" was abandoned in the final session of the Upper House in early 1998. The conservative Liberal Democratic Party (LDP) reportedly opposed  in closed door negotiations to the term "civic" (shimin), saying it sounds too anti-governmental,

The law states its purpose as follows:
"This law aims to contribute to the public interest by promoting the sound development of specified nonprofit activities as voluntary activities, such as volunteer activities, performed by citizens to contribute to society through the incorporation of organizations that conduct these specified nonprofit of activities." (Chapter 1, I)

The law defines the term "specified nonprofit activities" into the following 12 categories:
1. Activities to promote health, medical care, or welfare
2. Activities to promote social education
3. Activities to promote community development
4. Activities to promote culture, the arts, or sports
5. Activities to protect the environment
6. Disaster relief activities
7. Activities to ensure community safety
8. Activities to protect human rights or promote peace
9. International cooperation activities
10. Activities to promote the creation of a gender equal society
11. Activities to promote the sound nurturing of youth
12. Liaising, advising, or support activities related to the operation or activities of organizations performing any of the activities listed above
(Chapter 1 II.A. Attachment)

The law specifies that "the main purpose of activities" of the nonprofit should not be religious or political (Chapter 1, II B 2). Of cause, the organization can not "make a profit for a certain individual, corporation, or other organization" (Chapter 2, Section 1, I A), even though it can "engage in profit making projects" as long as the "profit" is used for its nonprofit activities (Chapter 2, Section 1, II). The law also bans gangsters to incorporate a nonprofit (Chapter 2, Section 2, II A 3; Chapter 2, Section 3, I).

There is no requirements of minimum asset holding for incorporation. This is a big difference from the traditional Civil Law incorporation of public benefit corporations.

The prefectural government serves as the "competent authority" to certify incorporation of groups that establish office(s) in a prefecture. The national Economic Planning Agency (EPA) serves as the competent authority for those with offices in two or more prefectures. These agencies give "certifying approval" (Ninsho) of incorporating a group. The traditional civil law public benefit corporations had to have "approval" (Ninka) from competent agencies. Ninsho is more light handed than Ninka. Without arbitrary discretion, the competent agencies must give "certifying approval" as long as the applicant legally and technically meets the law-specified requirements.

When applying for incorporation, the group must provide to the competent agency 1) the articles of incorporation, 2) a list of officers, 3) a list of ten or more members, 4) a document to verify the purposes of the organizations and non-affiliation with criminal (gangsters) organizations, 5) a prospectus. 6) a list of founders, and 7) minutes of a meeting that decided incorporation, a list of assets, a document to state the fiscal year, operating plans and budget estimates for the year of incorporation and the following year.

The competent authority must certify the incorporation within four months (Chapter 2, Section 2 II A). This is an improvement from the traditional Civil Law incorporation, which took several years to get approval.

Every year, the incorporated nonprofit corporation prepares, keeps, and submits to the competent agency the documents below. The competent authority ensures the public access to the information.
(1) an activities report
(2) an inventory of assets
(3) a balance sheet
(4) a statement of revenues and expenditures
(5) a list of officers
(6) a document stating the names of all of those officers on the list of officers that received remuneration, and
(7) a document stating the names and addresses of ten or more members.