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Promissory Note Maturity Date to be Shortened by Half; Government to Revise Regulations for First Time in 60 Years

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The government will revise the regulations governing promissory notes related to subcontractors, tightening the maturity date from 120 days to 60 days in principle. It is the first revision of its kind in about 60 years.

Large companies often defer payments to small and medium-sized subcontractors by issuing promissory notes, which are promises to pay sometime in the future. However, under the current rules, it can take several months for the promisee to receive cash.

The government aims to encourage capital investment and wage increases by reviewing existing business practices unique to Japan that put pressure on cash flow for small and medium-sized enterprises, whose operations are becoming increasingly difficult due to labor shortages and high prices.

A draft of the revised regulations is expected to be released as soon as the end of the month. The government will then begin soliciting public opinions and aims to apply the revised regulations starting in November.

According to the draft, the government will give instructions based on the regulations if the payer issues a promissory note that exceeds the 60-day maturity date. Under the existing regulations, large companies that issue a promissory note can defer payment, but receiving cash can take several months for the small and medium-sized companies that are issued the note. If the payee receives cash before the due date, a discount is applied, effectively reducing their sales.

In many cases, recipients are forced to borrow money to secure immediate working capital while waiting for the settlement of their promissory notes. The consequent concern about cash flow is one of the reasons small and medium-sized companies are hesitant to make capital investments or raise wages.

The current rule of 120 days for the maturity date of promissory notes ― 90 days for the textile industry ― was introduced in 1966, during the period of economic growth.

At the time, amid strong demand for funds, even large companies could not always obtain loans from banks quickly, and the long maturity date for promissory notes was acceptable to cover the issuer’s current cash shortage.

However, even amid the subsequent slump in demand for funds after the collapse of the bubble economy in the 1990s, the regulations were not revised, and small and medium-sized enterprises continued to suffer disadvantages.

In 2021, the government asked the private sector to change their promissory notes’ maturity dates to within 60 days. The government had also indicated that it intended to change the legal standards in the future. However, this unenforceable request was ineffective in changing the practice.

The government aims to abolish promissory notes by 2026. Major banks have begun to stop issuing paper notes to new checking account holders, but movement toward abolition has been slow.

According to the Finance Ministry’s Surveys for the Financial Statements Statistics of Corporations by Industry, the balance of notes payable was ¥23 trillion at the end of fiscal 2022, down significantly from the peak of ¥107 trillion at the end of fiscal 1990, but up slightly for two consecutive years.

Increasing wages at small and medium-sized enterprises, which account for 70% of employment, is essential for improving the Japanese economy. The current review of business practices that hinder investment in growth needs to be further accelerated.
 
 

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