SIFMANet Tokyo Report

The ongoing war in Ukraine has placed significant pressure on allied nations to enforce sanctions that limit Russia’s ability to fund and resource its military in the invasion. As a G7 member – and with an eye on the need for reciprocal allied unity in the face of any future potential “Taiwan crisis” – Japan has implemented measures to align with allied sanctions regimes, including restrictions targeting critical sectors of the Russian economy. However, Japan’s unique position as a major importer of Russian energy, coupled with its geographic proximity to nations facilitating sanctions circumvention, presents distinct challenges.

To further explore national efforts to implement and enforce sanctions against Russia, RUSI’s Centre for Finance and Security (CFS), in collaboration with the Japan Institute of International Affairs, convened a roundtable discussion with government officials, academics and representatives from the Japanese business community in Tokyo in November 2024. This event is part of the in-country engagements conducted by the CFS-led Sanctions and Illicit Finance Monitoring and Analysis Network (SIFMANet), supported by the National Endowment for Democracy. The event was supplemented by a series of one-on-one meetings in Tokyo during the visit. None of the discussions from the event or meetings are attributable.

Overview of Japan’s Sanctions Legislative Frameworks

The roundtable opened with an overview of the existing legislative and operational frameworks related to sanctions in Japan. Government representatives described how Japan has introduced substantial measures to enforce sanctions against Russia under the Foreign Exchange and Foreign Trade Act (FEFTA), legislation dating from 1949. These efforts include restrictions on specific sectors such as high-tech exports, financial transactions and energy imports. Taking these actions under FEFTA has allowed Japan to align with G7 sanctions while introducing domestic enforcement mechanisms, despite FEFTA not being specifically designed with its current use in mind.

Under FEFTA, Japan has a dual enforcement regime, encompassing both criminal and administrative measures. The Ministry of Economy, Trade and Industry (METI) can also conduct post-event reviews and on-site investigations to identify violations, with penalties ranging from fines to a one-year export ban for companies that breach sanctions. Participants noted that such measures are particularly punitive for firms reliant on Russian markets, as they risk significant financial losses or insolvency.

However, given that FEFTA was not designed with sanctions implementation in mind, participants highlighted that FEFTA is insufficiently equipped to address the specific challenges of circumvention and transhipment through third countries posed by Russia. FETFA does not include any provisions related to circumvention but the Japanese government has explicitly stated that it interprets FEFTA to also apply to cases involving sanctions circumvention. In June 2024, the government announced additional export bans targeting entities in China, India, Kazakhstan and Uzbekistan suspected of participating in sanctions circumvention, underlining its commitment to countering circumvention. In recent actions, the government further clarified that regarding payment and capital transaction restrictions, “the applicability of the regulations will be determined not by the formal name of the party, but by comprehensively considering the actual parties and the decision-makers of payments and capital transactions, and the beneficiaries”. Participants agreed that this extends the regulations to cases of circumvention where a third party’s name is used. Similarly, for export controls, the government has affirmed that “the act of exporting items designated as prohibited for export to Russia through countries or regions other than Russia (circumventing exports) is a violation of the export ban measures under the Foreign Exchange and Foreign Trade Act”. This clarifies that restricted exports routed through third countries to reach Russia are also violations of the export ban.

Under FEFTA, the government can issue cabinet orders to specify the items to be controlled, which provides a degree of flexibility in interpreting and implementing the law. Despite this flexibility, participants agreed that the lack of explicit provisions to address circumvention and transhipment creates enforcement gaps and confusion among private sector actors. Moreover, enforcement capacity remains limited. METI, which oversees sanctions compliance, has limited personnel dedicated to Russia-related sanctions enforcement. Participants further indicated that Japan’s judicial and law enforcement agencies also face considerable challenges in achieving convictions, primarily due to high evidentiary standards and difficulties in proving that exporters knowingly violated sanctions.

Government representatives at the roundtable did note that Japan has successfully achieved its first conviction related to a violation of Russian sanctions. In July 2024, the Osaka Prefectural Police arrested the representative director of a trading company, a Russian national, accused of illegally exporting one marine engine, four jet skis, boat trailers and motorcycles. The goods were allegedly exported to Russia from Osaka in January 2023 without obtaining the required government approval and routed through South Korea. The individual was convicted in October 2024 and sentenced to three years in prison and a ¥5-million fine. Participants described this as an exemplary case of Japan’s increasing determination to enforce sanctions against Russia, including its willingness to pursue and penalise circumvention.

Persisting Challenges in Sanctions Implementation

While Japan has demonstrated a strong commitment to implementing sanctions against Russia, enforcement remains hindered by more than just resource limitations within the government. Additional challenges, including regulatory gaps, limited understanding of circumvention risks, and international alignment among sanctioning countries, further complicate efforts to ensure the effective implementation of sanctions in Japan.

Opacity of Beneficial Ownership in Japan

Advancing the transparency of beneficial ownership in Japan has been a focal point in the country’s efforts to combat money laundering and terrorist financing. The Financial Action Task Force (FATF) has conducted evaluations to assess Japan’s compliance with international standards in this area. In its 2021 Mutual Evaluation Report, FATF identified significant deficiencies in Japan’s framework for transparency and beneficial ownership of legal persons and arrangements. The report highlighted that the mechanisms in place were insufficient to ensure that accurate and up-to-date beneficial ownership information was available to competent authorities in a timely manner.

The 2024 Follow-up Report by the FATF acknowledged that Japan has made progress in strengthening its framework, but challenges remain. In the SIFMANet series of country workshops, participants repeatedly note the importance of accurate and accessible beneficial ownership information. This shortcoming in Japan continues to pose challenges for effective enforcement of sanctions and the prevention of illicit financial activities.

Private Sector Awareness of Circumvention Risks

Sanctions circumvention remains a significant challenge for Japan, with restricted goods exported from Japan often finding their way to Russia via third countries. Participants highlighted that Southeast Asia and the UAE have become key transit points for Japanese goods, with Malaysia standing out as a major hub for re-exports. They added that exports to Mongolia have also doubled, raising concerns about the potential for these goods to be redirected to Russia. Despite the risks, many participants noted that there is limited awareness among Japanese businesses, particularly non-financial corporations, about the complexities and consequences of sanctions compliance.

Government representatives stated that they conduct numerous outreach initiatives to the private sector, targeting machine tools manufacturers, the automobile industry, and trading companies, among others. The aforementioned case marking the first conviction for sanctions violations in Japan was regarded as a warning to businesses that indirect violations such as diverting goods through third countries can result in severe legal and reputational consequences. However, challenges persist. METI has implemented measures to identify high-risk activities by monitoring customs clearing data and promoting internal investigations within companies. Yet, proving the origin of goods exported to Russia from third countries and evidencing the exporter’s knowledge of circumvention pose significant challenges.

Participants further highlighted that many Japanese companies lack a full understanding of the risks associated with US secondary sanctions, which can have financial repercussions for Japanese businesses. Past incidents, such as Tokyo-Mitsubishi UFJ’s $250-million fine for breaching US sanctions against Iran, underscore the potential penalties for non-compliance. Recognising these gaps, METI has prioritised providing guidance to businesses, encouraging enhanced due diligence and promoting internal compliance mechanisms.

Nevertheless, representatives from the private sector emphasised that the complexity of overlapping sanctions regimes continues to create confusion for businesses, often leading to overcompliance. This trend is exemplified by Uniqlo’s decision to suspend operations in Russia in March 2022, despite not being directly affected by sanctions. Such overcompliance highlights the reputational risks that drive many companies to operate with caution, even when legal frameworks do not explicitly require them to withdraw.

Japan’s Restrictions on Car Exports to Russia

Japan’s sanctions against Russia have notably impacted the automotive sector, an area highlighted by some participants. In April 2022, Japan banned the export of luxury cars valued over ¥6 million to Russia, including all hybrids, plug-in hybrids and electric models, as well as petrol and diesel vehicles with an engine size exceeding 1,900cc. These restrictions significantly reduced Japanese car exports to Russia, which totalled approximately ¥600 billion in 2022, declining 30% from the year before.

In late 2024, Japan adjusted its policy, permitting the export of “mild hybrid vehicles”, which use electric motors to assist petrol engines but cannot operate solely on electric power. This move allowed Japanese manufacturers such as Honda, Mazda, Mitsubishi, Nissan, and Suzuki to resume limited exports, addressing domestic economic concerns while maintaining alignment with broader sanctions.

Participants noted that with this policy shift, Japan seeks to balance its commitment to international sanctions with the economic and influential interests of its automotive industry. Core restrictions on vehicles with larger engine capacities and fully electric or plug-in hybrid systems remain in place, underscoring Japan’s commitment to limiting goods that could support Russia’s industrial or military sectors. This partial relaxation of automotive export controls also allows Japan to somewhat counteract the growing dominance of Chinese car brands in the Russian market, which have risen from a 9% to a 57% market share following Western sanctions.

Japan’s evolving automotive sanctions highlight the complexities of balancing geopolitical objectives with economic considerations, demonstrating the careful navigation required to enforce effective sanctions while minimising unintended domestic impacts – and potentially negative political consequences.

Japanese Piano Exports to Russia

The export of Japanese pianos to Russia has drawn attention as an example of sanctions evasion through transhipment and re-export routes. While Japan imposed export bans on luxury goods, including grand pianos over ¥200,000, Japanese pianos have been identified in the Russian market, often reaching their destination through intermediaries in third countries.

Participants found that the trade in pianos highlights the challenges Japan faces in enforcing sanctions in the context of complex global supply chains. Pianos exported from Japan are often routed through third countries where they are re-exported to Russia. These intermediaries exploit gaps in enforcement and regulatory oversight, making it difficult to trace the origin of goods and establish clear links to Japan.

Despite the restrictions, some companies have continued to engage in trade indirectly, highlighting the lack of explicit legal prohibitions on transhipments through third countries. This has prompted calls for stronger legislative measures to address the gaps in Japan’s sanctions framework and enhance enforcement capabilities.

Energy Security: The Central Challenge

Energy has been a focal point in Japan’s approach to sanctions against Russia, highlighting the complex interplay between national security, international alignment and economic stability. Japan imports almost 90% of its energy. Limited domestic gas resources mean that Japan relies on imported liquified natural gas (LNG) for nearly all of its gas requirements, making it the second-largest global LNG buyer after China, with 8.8% of its LNG need coming from Russia. Japan’s reliance on Russian energy presents unique challenges in balancing its commitments to international sanctions regimes with the need to ensure uninterrupted energy supplies. This dependency is further amplified by Japan’s participation in the Sakhalin II project, a vital source of LNG for the Japanese market.

While Japan has imposed an oil import ban as part of its sanctions against Russia, LNG imports have been excluded from these sanctions, reflecting Japan’s concern over energy security and the tight global LNG market. Participants noted that unlike countries such as the US, the UK, Australia and Canada, which have reduced their reliance on Russian LNG, Japan faces strategic challenges similar to the EU, given its higher dependency. Private sector participants from the energy industry justified this position by emphasising that restricting LNG imports would likely lead to significant price hikes and market volatility, further straining Japan’s economy and affecting global energy markets.

The challenge is exacerbated by Russia’s strategic manipulation of energy exports. Representatives from the energy sector noted that under the currently tight global LNG market, limiting supply would drive up global prices, which would benefit Russia financially, even as volumes decline. Japan thus faces the dual challenge of supporting international sanctions while ensuring that its actions do not inadvertently strengthen Russia’s revenue streams through price inflation.

To mitigate its energy security risks, Japan has taken steps to diversify its energy portfolio. Efforts include increasing imports from other regions, such as Australia and the Middle East, and investing in renewable energy sources to reduce overall dependency on fossil fuels. However, a growing dependence on Middle Eastern oil, transported through the highly sensitive Hormuz Strait, exposes Japan to significant geopolitical risks. Any deterioration in relations with Iran, or instability in the region, could severely impact Japan’s energy supplies.

However, these strategies will take time to implement and may not immediately offset Japan’s reliance on Russian energy. For the foreseeable future, Japan remains vulnerable to fluctuations in global energy markets and geopolitical risks. This dependence complicates its ability to fully align with sanctions regimes, as seen in the continued participation in Sakhalin II, which has been excluded from international sanctions regimes, including the recent US sanctions against Gazprombank.

Participants also highlighted the potential risks of future sanctions on China. As a major trading partner and key energy supplier, sanctions on China would pose significant economic challenges to Japan. This consideration further complicates Japan’s energy and sanctions policies, as it must navigate a complex web of international alliances and dependencies.

Recommendations

As a G7 member, Japan is committed to implementing sanctions on Russia in response to its full-scale invasion of Ukraine, yet notable shortcomings exist in Japan’s ability to contribute fully to restricting the funding and resourcing of the Kremlin’s illegal war. To bolster its capacity, Japan should consider the following recommendations:

1. Strengthen legislative frameworks: Japan should amend FEFTA to explicitly address circumvention tactics and transhipment through third countries. Establishing these provisions would clarify compliance obligations in the private sector and enhance enforcement capabilities by reducing reliance on interpretative measures. Legislative advances should integrate specific clauses to tackle opacity in beneficial ownership to aid in tracing and countering sanctions violations.

2. Enhance resources for enforcement agencies: Key agencies such as METI should be supported by increasing its staffing and resources to strengthen oversight, enable more investigations and support compliance outreach. This would enable the development of specialised teams dedicated to monitoring high-risk trade flows, particularly in sectors such as automotive, machine tools and energy exports.

3. Target circumvention networks: Japan should strengthen international cooperation to address sanctions circumvention, particularly in Southeast Asia. This includes focused outreach to high-risk countries in the region, where goods such as machine tools and precision motors are being re-exported to Russia. This approach should include enhancing intelligence-sharing mechanisms among G7 nations to identify and disrupt trade networks supporting sanctions evasion.

4. Promote private sector awareness: National authorities should continue to provide targeted guidance and educational programmes for industries at risk of sanctions violations, including car manufacturers, machine-tool exporters and precision instrument suppliers. This outreach should highlight the risks of US secondary sanctions and promote the adoption of robust internal compliance systems across Japanese companies.

5. Address energy security while maintaining sanctions: Japan should develop a long-term strategic plan to diversify energy imports, reducing reliance on Russian LNG. The government should collaborate with international partners to stabilise global LNG markets, mitigating price hikes and ensuring energy security without undermining the international sanctions regimes.

Japan’s sanctions against Russia demonstrate its commitment to international security and alignment with G7 priorities, yet there is a sense that the country is “muddling through”, confronted as it is by a series of legislative and capacity shortcomings. Furthermore, the challenges posed by its prioritisation of energy security and the complexities of circumvention highlight the need for Japan to further its efforts. Strengthening legislative frameworks, enhancing enforcement capabilities and fostering international collaboration will be crucial in ensuring that Japan’s sanctions regime achieves its intended objectives while maintaining economic resilience.

Gonzalo Saiz is a Research Fellow at the Centre for Finance and Security at RUSI, focusing on sanctions and counter-threat finance. His research focuses on sanctions implementation, circumvention and evasion tactics, and sanctions enforcement, primarily through SIFMANet (Sanctions and Illicit Finance Monitoring and Analysis Network). Gonzalo’s research on counter-threat finance includes work on the abuse of non-profit organisations for terrorist financing, crime-enabled terrorist financing, and the financing of right-wing extremism.