COVID-19 to Seal Demise of Paper and “Hanko” Dependence in Japan?

Economy Society

Reliance on seals inhibits productivity in Japan, despite there being no requirement in civil law for their use in concluding contracts. Can the country catch up with the global trend toward paperless contracts?

The spread of COVID-19 in Japan has prompted radical change to lifestyles and government and business procedures. It has also exposed long-ignored issues in Japanese society, such as excessive concentration of business in Tokyo, the inscrutability of political decision-making, the lag in transitioning to paperless systems, and under-utilization of IT in education.

We asked a range of experts about Japan’s attachment to paper and seals (hanko), which has impeded government efforts to reduce public movement by 80%. Will the current crisis drive this culture into extinction and usher in the electronic contract?

Childcare Centers Hindered by Hanko

Komazaki Hiroki, managing director of Florence, a nonprofit organization supporting child-rearing in Japan, claims that “childcare centers, which are already suffering due to the ‘corona shock’ are also hindered by the need for hanko.”

He says that since the state of emergency was declared in Japan, many centers have had to suspend or reduce operations. Those that remain open have taken comprehensive measures to prevent infections, notably for children whose parents work in the medical field. The Japanese government has called for 70% of the workforce to stay at home. At Florence, those who can are choosing to work remotely.

Yet Komazaki identifies a major obstacle to telecommuting. “We need to manually certify all application documents with the company seal to submit to the local authorities, so we have to go to the office.”

Furthermore, the organization must submit copious official documents. To relocate a child, for example, requires five application forms for the Tokyo Metropolitan Government, plus up to a dozen separate forms for local authorities within Tokyo.

Florence employees must go to work to certify documents.
Florence employees must go to work to certify documents.

Komazaki also laments that “each day, our employees are exhausted struggling to respond to the impact of the coronavirus crisis, yet they still need to visit the office, risking potential infection, just for a stamp on a form.” He believes that the authorities should expedite procedural reforms to eliminate the need for seals, or to accept cloud-based digital signatures and seals as an alternative.

Government Offices Rife with Paper and Seals

Shirakawa Tōko, visiting professor at Sagami Women's University, is well-informed on work-style reform. She too takes issue with the current circumstances, where staff members are forced to go to the office to access seals.

Shirakawa Tōko, visiting professor at Sagami Women's University.
Shirakawa Tōko, visiting professor at Sagami Women's University.

“It’s inappropriate, considering the risk to society as a whole. Merely blacklisting companies that don’t protect employees is meaningless. Nowhere is more overwhelmed with paper and seals than government offices. It’s often said that Kasumigaseki (the center of Japan’s bureaucracy, in Tokyo) is the main impediment to workplace reform in Japan. No matter how much the private sector tries to reform its work-style, in the end, it is restricted by bureaucratic practices. Surely it would be better to reduce the risks, and take into consideration those who have to post paper documents and delivery personnel.”

According to Shirakawa, certain foreign-owned firms changed their policies after the state of emergency declaration, and now let employees take the company seal out of the office to affix seals to documents for the government.

“Some companies introduced teleworking systems in preparation for the Tokyo Olympic and Paralympic Games. But the current need arose earlier than expected, and most had not run proper trials to telework for an extended period. Overseas, teleworking is going smoothly because the rate of adoption was already higher than Japan. In Hong Kong, for example, it became established during anti-government demonstrations, when commuting was difficult. Other Asian countries had experience from the SARS epidemic. In Japan, although the systems were created, people lacked the experience.”

“Seal Relay” Inhibits Productivity

Digital signatures could provide the technology to change the entrenched reliance on paper and seals.

Cloudsign, a company that specializes in this technology, has an 80% share of the Japanese market. Tachibana Daichi, director of legal firm Bengo4.com and manager of the Cloudsign business division, discusses the company, launched in October 2015. “My impetus was the issues I identified with contracts while working as a lawyer. At the time, contract negotiations took around a month, then, after agreement had been reached, it took a further month just to exchange documents to affix the required seals. Eliminating this ‘seal relay’ would greatly expedite trade and thereby improve competitiveness and productivity for Japanese industry. We launched Cloudsign with this in mind, hoping to contribute to society.”

Currently, around 65,000 companies use the service. While the majority are small- or medium-sized businesses, the overwhelming majority of contracts are for large corporations.

“After four years, with advances in cloud-based digital signatures, more major companies are signing up. But businesses that still rely heavily on fax communication, such as real estate and construction, are lagging behind.”

Tachibana Daichi, director of legal firm Bengo4.com, Inc., and manager of the Cloudsign business division.
Tachibana Daichi, director of legal firm Bengo4.com, Inc., and manager of the Cloudsign business division.

Not Required by Civil Law

Tachibana went into the legal reasons behind the inertia of the country’s seal culture. “Japan’s Civil Code makes no mention of seals in relation to the conclusion of contracts. Because a contract is established when both parties reach an agreement, there is no legal barrier to eliminating the use of seals. Real estate agency sales contracting still obliges the parties to meet and exchange written documentation, but such legal requirements are the exception. In contrast, legal restrictions surrounding electronic contracts are being gradually relaxed. For example, in 2019, the ban was lifted on electronic notification of work conditions when concluding an employment agreement.”

So why the adherence to the use of seals? Tachibana believes that “even if one company eliminates the need for seals, they could lose business if trading partners do not consent. There are around 4 million companies in Japan, but because 3.9 million are still using seals a company that introduces Cloudsign will be unable to use it for all contracts if certain partners don’t approve. Structurally, the use of digital contracts will not become widespread until society changes as a whole.”

Can Japan Catch Up?

In the West, digital contracts are becoming increasingly popular.

US company DocuSign operates in 180 countries, has 560,000 paid corporate users, and boasts sales of around $1 billion (¥100 billion). In the United States, the term “docusign” in contracting has become genericized in the same way as xerox.

Doi Wataru, marketing director at DocuSign Japan, helped establish the company here. He claims that, when the company was first launched, America was even more contract-centered than Japan.

“When the company was founded in 2003, America was even more reliant on contracts than Japan. Real estate deals involved long paper contracts, and the parties had to handwrite their name, address, and signature on each page. Company founder Tom Gonser questioned this practice, and pondered the possibility of a paperless system, where a mobile device could be used to produce a signature, anywhere, anytime. Digital signatures have become widely accepted in the United States. In real estate, many buyers and sellers now disdain paper contracts, and agents who lag behind in digitization sometimes meet with rejection.”

Digital signatures using DocuSign.
Digital signatures using DocuSign.

Potential for Digital Contracts in Japan

DocuSign expanded into Europe six years ago, then launched services in Japanese in 2017. Doi recalls that “in 2014, we began investigations to launch in Japan. When our management team visited, they noted that many companies relied on paper contracts and faxes, and recognized the market potential. Japan had world-leading productivity in automobile and other manufacturing, but there was still much room to improve office operations.”

But has Japan’s fixation with paper and seals waned since then?

“The law has changed significantly. Recently, we’ve had more inquiries due to the coronavirus, and small businesses and start-ups are rapidly signing up. Mitsui & Co., one of Japan’s largest trading companies, introduced DocuSign at the end of 2019. According to our American CEO, we currently have just 4% of the global market share for the total contract market, including paper. There is still much scope for expanding the use of digital contracts in Japan, where many people are still attached to paper.”

A contract with a digital signature.
A contract with a digital signature.

Changes During the Epidemic Set to Continue

COVID-19 has highlighted how Japan’s paper and seal culture impedes productivity, and even puts people’s lives at risks. How much longer will these practices continue? Tachibana from Cloudsign believes that changes made during the epidemic will continue afterward. “With people unable to commute, and forced to live confined at home, companies have been compelled to increase digitization. After the crisis abates, I doubt that seals will see a revival. On the contrary, I think that changes made during the epidemic will expand afterward.”

The post-coronavirus era promises to continue the reforms made during the crisis.

(Originally published in Japanese on FNN’s Prime Online on April 27, 2020. Translated and edited by Nippon.com.)

https://www.fnn.jp/

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