Tough conditions and expansive local rivals make Japan only for the committed, reports Elizabeth Broomhall

When the Japanese Government allowed foreign law firms to open offices in the country in 1987 to provide international advice, UK and US advisers started piling onto the bustling streets of Tokyo, then lured by the presence of the world's biggest banks and insurance companies as well as its booming technology and automobile industries.

But the boom was short-lived and by 1992, Japan had entered a full-stage recession, with share prices, GDP, real estate value and demand for Japanese products taking a nosedive.

Ever the optimists, many law firms continued to take advantage of further liberalisation in 1994, which allowed them to set up joint enterprises with domestic players to provide Japanese law advice, and in 2005, when it became possible for international and local firms to merge.

However, with the local economy declining over the past two decades, firms with offices in Japan have not had an easy ride, faced with limited domestic work and stiff competition from Japanese counterparts.

"Culturally, Japan is a very difficult market for a foreigner to survive in," said a legal recruiter based in Japan. "With the exception of Baker & McKenzie and Morrison & Foerster, most operations just haven't worked out and some have been disastrous.

"Japanese firms have proved to be much more worthy than [some international firms] expected, with some of the joint ventures slimmed out because the Japanese firms have just got bigger and stronger." 

Slaughter and May pulled the plug on its venture in 1995, having opened in 1987, while Cleary Gottlieb Steen & Hamilton closed its local arm in 2006.

And those that have maintained their commitment to the region have come under continued pressure. Many have shrunk their Tokyo offices in recent years.

Linklaters, for example – which merged with local outfit Mitsui Yasuda Wani & Maeda in 2005 – saw eight lawyers leave at the end of 2011.

Allen & Overy (A&O) saw two bengoshi (advocates) corporate partners leave around the same time, with a number of bengoshi associates also understood to have left.

Even Clifford Chance (CC), which has the largest Tokyo offering of any magic circle firm – with about 50 lawyers, compared with around 26 at Linklaters and 21 at A&O – admits a slowdown in activity in the wake of the 2011 tsunami.

Jiro Toyokawa, a bengoshi partner at Bakers, says: "It has been a bad time for British firms. They are quite sensitive to profitability because most need to disclose the figures. Japan is quite an expensive place to do business. You have to hire highly educated bilingual staff, which is expensive."

But it has not all been bad news. While the domestic economy has continued to decline, government attention on outbound M&A against a strong yen has brought in a steady stream of international work.

With limited power supplies and a period of uncertainty in the energy sector following the 2011 tsunami, the country has also been eyeing large investments in energy projects in South East Asia.

Last November, Japanese group Tokyo Electric Power Company paid $1bn (£621m) for a stake in one of Australia's largest liquefied natural gas projects – the Chevron-backed Wheatstone Project – with A&O, White & Case and Australia's Allens scoring lead roles.

That same month, it emerged that A&O had also advised on Japanese pharma group Shionogi's purchase of a 10% stake in Pfizer and GlaxoSmithKline's joint venture ViiV Healthcare.

As such, many of the big UK firms in Tokyo are focusing on project finance and corporate work (with some exceptions), while US firms tend to stick to US aspects of corporate, M&A and securities deals.

"Foreign firms [generally] fall into two groups: those seeking to practise local law and those who aren't," says David Sneider, the head of Simpson Thacher & Bartlett's Tokyo office.

"Outbound investment by Japanese companies has been quite active in the past several years and I think a number of firms have benefited from that.

"There are also a number of success stories out there because people have found areas where they have good relationships and expertise, and they are able to get a steady flow of work."

Latham & Watkins Asia head David Miles (pictured, right) adds: "There are some very powerful local firms and no international firm is really going to penetrate that market.

"We have Japanese lawyers, but it isn't with the intention of taking on the local market because we don't see that as a smart thing to do. We are never going to win that battle.

"It's a very different market for international firms to operate in [compared with the rest of Asia] and I think if you're going to be there, you need to decide how."

Certainly, partners believe the market is more stable than in recent years, with some firms starting to hire again. Earlier this month, Bakers recruited Japanese-speaking registered foreign lawyer Kensaku Takase from Hogan Lovells to boost its intellectual property practice.

Last October, White & Case strengthened the English law side of its finance practice in Japan with the hire of Tim Jeffares from CC, who joined as of counsel.

In August 2012, Ashurst hired SNR Denton Moscow projects partner Myles Mantle as a counsel for its Tokyo branch, while in April, Freshfields Bruckhaus Deringer nabbed Milbank Tweed Hadley & McCloy Tokyo finance head Mark Plenderleith.

Tom Brown, the Asia managing partner for A&O, comments: "Where we've ended up, we have Japanese law capability and while this is incredibly important to our offering, it does not stand on its own to do just Japanese law transactions.

"This capability also complements what we do on the international side, particularly in relation to our strong outbound M&A and energy and project finance practices. It is working for us well."

CC Tokyo corporate partner Andrew Whan says he believes those already in Japan will now be there for the long term: "It's a really tough market, but CC is certainly here to stay, and I think a number of our English competitors have the same view.

"Japan is still the world's third largest economy, and the view of the majority of English firms is that it's a market they need to be in."

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