Japan’s Regulatory Sandbox

At the end of 2017, the Japanese cabinet under Prime Minister Shinzo Abe published a major policy paper, the “New Economic Policy Package”, addressing the challenges that the country is facing and needs to overcome. The strategy outlined herein looks at specific areas of improvement in two areas of focus: human resources & productivity, and economic development, with a target to implement specific policy changes by 2020.

This macro vision is now starting to percolate through the various government agencies and one notable recent update concerns the Office of the Prime Minister launching a Regulatory Sandbox scheme.

The Regulatory Sandbox is a bold exercise by Abe’s cabinet to harness the power of innovation, ingenuity and technology from both domestic companies as well as foreign ones. Most of the documentation regarding the Regulatory Sandbox is in Japanese, but an overview document in English is available. The document itself is very interesting as it describes the long term social and economic challenges that Japan faces, such as an aging population, the need to modernize education and empowering the workforce.

The Regulatory Sandbox is one of the measures under the Act on Special Measures for Productivity Improvement and the Ministry of Economy, Trade and Industry (“METI”) is responsible for its implementation.
As described by METI, the purpose of the Regulatory Sandbox is to “develop an environment in which businesses are able to conduct demonstration tests and pilot projects for new technologies and business models that are not envisaged under existing regulations with a limited number of participants and within the predetermined implementation periods. This environment will allow businesses to conduct demonstration tests and pilot projects quickly and collect data that may contribute to regulatory reforms”. There is no limit to the type of technology that can access the Regulatory Sandbox or the industry it is meant to be applied to, however four areas of particular focus have been highlighted:

• Internet of Things (“IoT”);
• Artificial Intelligence (“AI”);
• Big Data, and
• Blockchain.

The department within METI responsible for the Regulatory Sandbox is the Industrial Structure Policy Division, Economic and Industrial Policy Bureau.

The Regulatory Sandbox will not only look at the social and economic viability of the technology proposed but also at how such technology fits in with current regulation and the eventual changes that would need to be made. Although the companies participating are required to interpret the relevant regulatory provisions relating to new technologies being proposed, the Ministry of Regulatory Affairs will be responsible for reviewing the participants’ regulatory interpretation and in principle will need to respond to queries within one month.

Although the official page mentions in its FAQ that there is no special subsidy for successful applicants, the full text reveals that there are three legislative measures that can support companies with promising technology but that lack the necessary funds to see such process through: the special cases under the Small Business Credit Insurance Act and the Small and Medium Enterprise Investment Training Corporation Act, as well as debt guarantee provided by the Independent Administrative Agency Small Business Infrastructure Development Organization.

There is no clear cut timetable for the operation of the sandbox, although it will presumably run until 2020 to coincide with the target date for the New Economic Policy Package. However, the government expects individual projects admitted to the Regulatory Sandbox to last between three and six months.

As mentioned previously, the Regulatory Sandbox is open to both domestic companies as well as foreign ones. In order to facilitate access by foreign companies, the overseas offices of the Japan External Trade Organization (“JETRO”) will handle enquiries and applications for non-Japan based firms. With seventy-three offices in fifty-five countries covering all the continents, JETRO is an ideal choice to support the internationalization of the Regulatory Sandbox.

On a personal note, the Financial Services Agency (“FSA)” in Japan has been running a similar program and it would be interesting to see how the FSA will work with the other government authorities to support the recently launched Regulatory Sandbox.

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