Japan payroll and benefits guide
What global businesses need to know about payroll in Japan
Japan may have the fifth-biggest economy in the world by GDP (having recently been overtaken for fourth by India), but its economic outlook isn’t especially positive.
Relatively high inflation rates have caused major rises in the cost of living, while declining exports have caused its GDP to largely stagnate. Additionally, Japan’s ageing population and record low birth rate means companies in the country are finding it harder and harder to acquire and maintain the talent and skills they need.
However, this doesn’t mean that this is a bad time for foreign businesses to enter the Japanese marketplace. In fact, workers and enterprises from abroad could be well-placed to plug some of those talent gaps that have emerged. Furthermore, the Japanese yen has weakened significantly in recent years: between August 2020 and August 2025, the yen lost 30% against the pound sterling, 27% against the US dollar, and 26% against the euro, This means foreign investors can get much more for their money.
Nevertheless, Japan is a very traditional country with its own unique workplace characteristics, while the amount of administration and complexity involved in payroll can be high. This guide covers all the key facts around running payroll in Japan.
Getting Started
Setting up your payroll in Japan will depend on what type of corporate structure is used. Most foreign companies will setup either as a Godo-Kaisha (limited liability company) or a Kabushiki-Kaisha (corporation). The main difference between the two is that the latter must get certified articles of incorporation, and must publish financial statements.
There is no minimum start-up capital requirement for either option, although the setup admin costs for limited-liability companies are generally lower.
Several administrative steps need to be undertaken, including:
- Preparation of articles of incorporation and corporate seals
- Opening a bank account and transferring capital into it
- Applying for incorporation
- Registration with other relevant government and tax authorities
- Applying for a Business Manager visa, for any foreign national who is coming in to run the Japanese operation
At face value, this may all sound relatively straightforward, but there are some potential complications to consider that are specific to foreign enterprises. For example, any registration documents in a language other than Japanese have to be accompanied by a Japanese version, and you may need to obtain a signature seal certificate from a Japanese embassy or consulate to be able to officially sign key documents.
Additionally, a Japanese bank account is required for running payroll and remitting tax and social security payments, and setting one up can be extremely difficult due to strict laws around anti-money laundering and business compliance. You should allow extra time to complete this part of the process, and working with someone with Japan-specific expertise can be extremely helpful.
Employment Considerations in Japan
Written contracts are mandatory in Japan, and must set out all relevant information around the employment of a worker: any clauses that are in violation of Japan’s Labor Standards Law are automatically considered invalid. Most of these contracts are renewed year to year, although fixed-term contracts of longer than three years are not permitted. Unions are common in Japan, although foreign workers may find it hard to gain membership or representation, especially if they aren’t proficient in Japanese.
It is perhaps most important to point out that terminating employment in Japan is extremely difficult. This is due to a huge range of laws protecting employee rights, and the role that collective bargaining can play in strengthening this even further.
Working hours is a key area where cultural considerations need to be taken into account. Officially, Japan has a standard working week of 40 hours across five days. However, managerial staff are exempt – and in any case, Japan has a long-held culture of employees working extremely long hours to give them a better chance of climbing the corporate ladder. This is a culture-specific practice that primarily applies to Japanese employees, and foreign workers aren’t normally expected to follow the same expectations.
Overtime arrangements must be agreed between employee and employer, and approved by labor standards officials. Employees who are officially requested to work overtime should not work more than an extra five hours per day, 45 hours per month, or 365 hours within a year. However, it remains common for some workers to voluntarily put in unpaid overtime as part of the long hours culture.
Overtime and any work between 10pm and 5am should generate an additional 25% on top of normal salary, and work at weekends and holidays an additional 35%. These entitlements can also combine: for example, overtime work at night should generate an extra 50%, and night-time work on holiday days an extra 60%.
Notice periods in Japan in cases of termination are 30 days, or 30 days pay in lieu, although this still requires the (often difficult) justification of due cause. Probation periods don’t have a fixed period enshrined in law, but usually run between three and six months. However, if an employer decides to let an employee go after this period, all the normal rules around termination apply.
Compensation, Bonuses and Severance
Minimum wages in Japan vary across different local areas, known in Japan as prefectures. Japan has 47 prefectures in total, which can make payroll very complex if you employ people in many different areas of Japan.
The average minimum wage is set to jump by a record 6% in October 2025, reflecting Japan’s high inflation and living costs. The highest rate, which applies in Tokyo, will be 1226 yen per hour (approx. £6.15; $8.35; €7.15), while every part of Japan will have a rate over 1000 yen per hour (approx. £5.00; $6.80; €5.85) for the very first time.
Wages are normally paid on or around the 25th of each month, either directly to an employee or into a bank account. It’s common for transport allowances to make up a proportion of salaries to cover the cost of commuting, especially in big cities where most employees are likely to use public transport.
However, a large proportion of Japanese earnings are made up of bonuses. Indeed, bonuses can make up as much as a third of an employee’s entire earnings for the year. These traditionally take the form of 13th and 14th-month bonuses, paid in the summer and December respectively – but they aren’t mandatory, and are less common among foreign businesses in Japan that prefer a Western-style 12-month payroll setup. It’s also important to note that these bonuses are subject to income tax and social security contributions.
There is no legal framework around severance pay, but employers will generally come to an agreement with employees on the value of a one-off severance payment. As the rules around termination are so strict, this is normally the easiest way forward for both parties.
Tax and Social Security
Income tax, social insurance and national labor insurance deductions are withheld at source by employers, who should register with each relevant authority as part of the setup process. Japan has seven progressively higher rates of income tax: the first rate of 5% applies to the first 1.95 million yen (approx. £9,800; $13,300; €11,400) earned each year; the highest of 45% applies to all earnings over 40 million yen (approx. £201,000; $273,000; €234,000).
Corporate tax rates are 23.2% for large businesses (defined as those with paid-in capital of more than 100 million yen (approx. £502,000; $682,000; €584,000). For small and medium-sized enterprises, tax rates vary between 15% and 23.2% depending on the size of their taxable income each year.
Companies in Japan are also required to pay a number of other smaller taxes, including local corporate taxes, enterprise tax, and inhabitants tax, which generally brings the total tax rate to between 30% and 35%.
VAT in Japan is known as Consumption Tax and runs at 10%, except for food, non-alcoholic drinks and newspaper subscriptions where it is 8%.
In April 2025, a number of small revisions were made to Japan’s social security contribution rates, which now stand as follows:
- Health insurance: 4.955% employer, 4.955% employee
- Nursing care insurance: 0.795% employer, 0.795% employee (applies only to employees aged between 40 and 64)
- Welfare insurance: 9.15% employer, 9.15% employee
- Child allowance contribution: 0.36% employer
- Employment insurance: 0.9% employer, 0.55% employee
- Worker injury fund: 0.3% employer
As a result of employers paying the social insurance tax, all employees in Japan (including foreign workers) carry a government-subsidized social insurance card that qualifies them for a 70% discount on services in any medical facility.
Different stipulations are in place for global companies paying foreign expatriates separately from the Japanese payroll system. The expats receive significant tax benefits by being paid offshore, but lose key benefits of the Japanese payroll system, including health insurance and other measures. Those areas will need to be handled individually by the expat employee.
Holidays and Leave in Japan
Japan is known for its working culture of long hours and presenteeism. Many employees don’t use all their paid leave entitlement, even when unused days are rolled over into the following year.
Employees start to receive paid leave entitlement after six months of service, and increases kick in every 12 months thereafter (i.e. after 1.5 years, 2.5 years, and so on). Initial entitlement is ten days per year, then increasing to 11, 12, 14, 16 and 18 days, and finally to 20 days after 6.5 years of service.
Employees are entitled to time off on Japan’s 16 days of public holiday each year. Public holidays that fall on weekends often result in the ‘day off’ being transferred to the following Monday. Paying employees on public holidays isn’t a legal requirement, but is common practice.
The same applies to sick pay, where employers can choose whether or not to provide paid sick leave entitlement, or leave employees to claim social insurance. It’s not unusual for Japanese employees to use some of their annual leave entitlement when they’re ill.
Maternity leave entitlement is 14 weeks – six before the birth and eight after. Mothers are entitled to a lump-sum maternity payment per child of 420,000 yen (approx. £2,100; $2,900; €2,450). Alternatively, they can receive two-thirds of their usual salary for the 14-week period if they are signed up to the health insurance provision of their employer.
After this, both mothers and fathers can take ‘child care leave’ up until the child’s first birthday. Both of these schemes are paid at two-thirds of base salary and are covered by social insurance. This runs for a maximum of four weeks, and can be taken in one or two blocks.
In October 2025, new legislation takes effect that gives further rights to employees who have children who have yet to start school. Employers are being encouraged to enable remote working for employees with children under three.
But there are also some mandatory measures for parents of children who are at least three and have yet to start school. Employers are required to implement at least two of the following five measures: flexible working hours, shortened working hours, additional childcare leave, childcare facilities on site, or a minimum of ten days a month of remote working.
Furthermore, if you employ over 300 people in Japan, you’ll be required to publicly disclose the percentage of male employees taking childcare leave.
Employees in Japan are entitled to five days of bereavement leave in the event of a death in their immediate family, and a further two days if they are required to arrange the funeral. There is also an entitlement of up to three months of unpaid leave to care for a family member.
Payroll in Japan: a summary
These are unusually turbulent times for the Japanese economy, but the relatively weak standing of the yen at present means this could be a good time for foreign investment. Nevertheless, Japan is a highly complex place to run payroll, and some of the specific cultural considerations also mean that foreign businesses have to tread carefully. More than most other countries, Japan is a place where in-country payroll expertise can be especially helpful in putting your payroll operations on the right track.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional. Click here to see more country payroll guides from CloudPay.