Interest-free loans are allowed under the Japanese Civil Code so parties are free to contract into zero-interest loan agreements as they wish. However, there are limits on how much interest a lender can charge on a loan. The Interest Rate Restriction Law provides that the maximum allowed interest rate is 15% annually for amounts of 1 million yen or more.
Therefore, while parties are normally allowed to agree to whatever terms they want in a contract, a term that sets an interest rate of 20% would be illegal. This does not necessarily mean that the entire contract would be invalidated. Instead, it is more likely that a court considering a 20% interest clause would simply reduce the amount of interest to the legally allowed maximum of 15%.
If you have any questions about contracting in Japan, please contact our office to set up a legal consultation.