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IV. TRADE POLICIES BYSECTOR
(1) Overview
1. Since Japan'slastTrade Policy Review, theGovernment hasplaced further emphasis on
deregulation andstructural reform.1InNovember 1996, Prime Minister Hashimoto announced the
"SixReforms", inadministration, fiscal structure, social security, economic structure, financial system
andeducation. Inaddition, theDeregulation Action Program hasbeenrevised twice since itsfirst
announcement inMarch 1995; andtherehasbeensome progress inderegulation oftheservices sector,
e.g.liberalization oftelecommunications inlinewiththeconclusion oftheNegotiations onBasic
Telecommunications inFebruary 1997. Japan alsoannounced inNovember 1996aplantointroduce
a"Big-Bang" inthefinancial system.
2. In1994, productivity growth inJapan, according totheJapan Productivity Centre for
Socio-Economic Development (JPC), wasthelowest of12OECD countries (including Korea); Japan
ranked tenthinabsolute productivity levels. Anumber ofstudies point totheco-existence ofindustries
ofhighandlowproductivity inJapan.2Thegapinproductivity levels between themost andleast
productive sectors oftheeconomy, onthebasisofSystem ofNational Accounts (SNA) classifications,
showed analmost 5percentage point decline intheperiod 1991 to1993, butthegapwasstillgreater
thanwithin most ofJapan'sdeveloped-country trading partners.3In1993 (asin1991), thegreatest
productivity differentials relative totheaverage wereinagriculture, forestry andfishery, at35percent
oftheJapanese average, andthatofelectricity, gasandwater, at491percent(figures forselected
years aregiven inChart IV.1).4
3. Another measure ofperformance invarious Japanese sectors isthatofdifferentials indomestic
andinternational prices. According totheauthorities, delays inprice-differential adjustments have
beenobserved, interalia,inclothing, shoes, rent,energy andtransport5;inorder tobring domestic
prices intolinewithinternational prices itwould benecessary toreduce thehighunitlabour costs in
thenon-manufacturing sector.6Unlike themanufacturing sector, thenon-manufacturing sector has
notgenerally beenexposed tointernational tradeandissubject toagreatdealofgovernment regulation.7
1See,forexample, Government ofJapan (1996).
2E.g.Mitsubishi Economic Research Institute (MERI, 1997).
3Incomparison withtenother OECD countries, thehighest labour productivity gapwasinBelgium, with
thehighest some 31times more productive thanthelowest, followed byJapan andItaly, withabout 11times.
4Thehighcapitalintensitylevelsoftheutilitiesindustrynotwithstanding,theextremelyhighlabourproductivity
levels forJapanese utilities maybesomewhat overstated due,interalia,totheeffects ofgovernment regulations.
5EPA (1996b).
6EPA (1995b).
7EPA (1995b).WT/TPR/S/32 Trade Policy Review
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4. Trade policies, broadly defined, affect practically allsectors oftheJapanese economy.8The
differences intheabove-noted inter-sectoral productivity mayresult from theunderlying technical
characteristics, e.g.capital equipment ratios9,andfromgovernment policies, suchasregulations that
serve toprotect against competition.10Aspointed outinChapter III,thedistribution system alsoaffects
productivity invarious sectors.11TheJapan Productivity Centre forSocio-Economic Development
(JPC), hasnoted thatthere areprice regulations onrestrictions oncompetition inalltheindustries
where productivity islowest; itsuggests deregulation andcompetition toimprove thesituation.12
5. Services isJapan'slargest sector, generating about twothirds ofGDP. Thesector supplies,
according totheEPA, "asteadily increasing proportion ofintermediate input tothemanufacturing
sector (nearly 30percentatpresent), sohigher productivity inthenon-manufacturing sector willboost
overall production efficiency".13Trade policy iseffected mainly through regulations thatapply toboth
domestic andforeign suppliers, withthelattercompeting through cross-border supply andforeign direct
investment. Sectors inwhich theregulatory environment hasevolved particularly rapidly include
financial services andtelecommunications.
(2) Agriculture, Forestry andFisheries
(i) Overview
6. Agriculture inJapan continues tobefaced withmajor challenges, many ofwhich arenotdirectly
trade-related.14Although thesector accounts forasmall anddeclining share ofGDP, some 1.4percent
(Table IV.1), government agricultural policies maysubstantially affect other important sectors ofthe
economy, mostnotably thefoodprocessing industry.15Inabsolute terms Japan'sagricultural markets
8Non-traded sectors canbeaffected bypolicies regarding foreign investment. "Perhaps themost important
wayinwhich productivity canbeincreased, especially inanindustry where productivity islagging, isthrough
theentry oftransplants managed bycompanies thathave bestpractice methods." (McKinsey Institute (1993).
9EPA (1996c) page216notes that"increased labour productivity inthemajority ofthenon-manufacturing
sector inJapan hasoften beenachieved through higher capital equipment ratios rather thanhigher efficiency".
10MERI (1997).
11McKinsey Global Institute (1993), "Forexample, wholesalers often haveestablished relationships withone
ormore existing manufacturers. Anewentrant wishing toproduce andsellincompetition withthese companies
mayfindthatdistributors willnotcarry itsproducts forfearofbeing cutofffrom theestablished suppliers."
12JPC(1996).
13EPA (1995b).
14According toaJapanese editorial, forexample: "The government 'sfarm policy, which relies heavily on
subsidies, hasundermined theeconomic independence offarmers andencouraged younger generations toabandon
agriculture" (Nikkei Weekly, 21April, 1997, p.6).
15Both theMinistry ofAgriculture, Forestry andFisheries (MAFF) andJapan 'sagricultural cooperatives
aresignificantly involved insuchfinancial services activities asbanking andinsurance. TheMAFF alsohas
theauthority toinfluence certain rural development projects, anexample in1997 being ashopping mallproject
inIbaraki Prefecture.Japan WT/TPR/S/32
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7. Agriculture hastodatelargely been exempted from Japan'sderegulation efforts. The
Administrative Reform Committee (ARC), however, indicated inearly1997thatricepolicies andland
userestrictions would become areas forconsideration. TheARC hadearlier discussed suchissues
asthederegulation ofproduction, processing anddistribution ofrawmilkandrawsilk,aswellas
thepricing system andother measures forwheat andbarley, initsreport ofDecember 1996.18The
Management andCoordination Agency, stating thatcertain government-sponsored livestock projects
wereineffective andothers hadoutlive theirusefulness, inFebruary 1997proposed thattheprogrammes
berevised oreliminated.19Inaddition, intheinterest offiscal reform, thePrime Minister hasreportedly
requested areview andpossible scaling-back ofpublic works projects intheagricultural sector.20
(ii) Uruguay Round implementation
8. Japan'scommitments under theWTO Agreement onAgriculture entered intoforceinFY1995.
Themostimmediate effects werethebinding oftariffs onallagricultural products (except forrice),
andthereplacement ofquantitative restrictions bytariffs (i.e."tariffication"), alsoexcept forrice.
Japan isalsointheprocess ofimplementing themutually agreed tariff reduction of36percenton
average oversixyears, withaminimum reduction of15percent.21AsJapan chose "special treatment"
inlieuoftariffication forrice,itagreed toahigher minimum access levelataninitial levelof4percent
ofbase-period domestic consumption, rising instages to8percent(instead oftheannual 3rising to
5percentminimum access commitments), together with other commitments such aseffective
production-restrictingmeasures.Thequestionofwhethertherecanbeacontinuationofspecialtreatment
istobenegotiated in2000, attheendofthesix-year implementation period.22
9. TheJapanese Dietapproved theAgreement Establishing theWorld Trade Organization and
arelated package ofseven bills, inDecember 1994.23Accordingly, theformer Food Control Law
wasabolished andreplaced withtheLawforStabilization ofSupply-Demand andPrice ofStaple Food,
which wentintoeffect in1995. Inplace ofthepreviously strictly regulated system ofcontrols, the
newlaw,according totheMinistry ofAgriculture, Forestry andFisheries (MAFF), hastheobjectives
ofstabilizing thesupply, demand, andpricing ofstaple foods through adjustments based onaccurate
supply anddemand projections, aswellasofrationalizing thericedistribution process through
deregulation. Therequirement forriceproducers toselltheiroutput totheGovernment wasabolished,
18ARC, (1996), p.22.
19Nikkei Internet, 27February 1997. Infisheries, changes intheDeregulation Action Program for1997
reportedly include improving transparency oftheimport quota system; ITR, 19Mar97,p.502.
20Nikkei Internet, 22May 1997.
21Thenumber oflines Japan hasmade subject tospecial safeguard requirements is144(10percentof
agricultural tariff lines), spread over 27HSfour-digit categories. Fortropical products, Japan hadalready
implemented, asofApril 1989, reductions averaging 51percentfrom bound rates fortheapproximately
170HSnine-digit tariff lines concerned.
22Asnoted inthe1995 Secretariat Report onJapan, ricewastheonlymajor agricultural commodity tobe
substantially affected bytheminimum access requirement; forother products, Japan wasalready importing more
thantheminimum required level.
23Grier, (1996), p.620.WT/TPR/S/32 Trade Policy Review
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andreplaced byaprior notification report onsalequantities forproducers notwishing toselltheir
production through official distribution channels.24
10. Japan'simplementation oftariffication requirements under theWTO Agreement onAgriculture
resulted inasignificant increase inthenumber ofspecific rates, fromsome 1to6percentofalllines.
ForFY1995 (themostrecent yearforwhich dataareavailable), advalorem equivalents (AVEs) of
theratesactually applied, ascalculated bytheauthorities, ranged ashighas923percentforkonnyaku
tubers and782percentforgroundnuts. Insome cases, these ratesweremuch higher thanprevious
estimates (in1986-88) oftheinitial bound rates, (dueundoubtedly toyenappreciation). Forkonnyaku
andgroundnuts, forexample, these hadbeen estimated at485and516percent, respectively
(Table AIII.4).25Inother cases, suchasfordurum wheat, wheat ormeslin flour, mineral concentrated
whey andbutter andbutter oil,applied above-quota rateswerewellbelow bound rates. Nonetheless,
above-quota imports wereminimal fortheproducts/product categories subject totariff quotas under
theWTO Agricultural Agreement inFY1995(Table AIV.2), implying thatabove-quota ratesgenerally
remain prohibitive atcurrent world prices.
11. According totheauthorities, theapplicable product quotas areseteachyearatthecommitment
levelorhigher (Table AIV.1).26Quota allocations formany products arebased onprevious business
records andbusiness plans ofapplicants. TheMAFF stated that,formany products, there hadnot
beenahighlevelofcompetition forquota allocations todate. However, forcertain products, including
konnyakuandgroundnuts,theFY1995quotaswerevirtuallycompletelyallocated(i.e.over99percent);
forotherproducts suchasprepared edible fatanddriedleguminous vegetables, theapplications exceeded
theavailable quota levels. According totheauthorities, quotas werenotcompletely allocated because
ofalackofsufficient demand, forexample inthecaseofschool-lunch skimmed milkpowder andfor
feed. There isnosystem forreallocation ofunused quotas, andunused quotas cannot besold.
12. Imports ofriceandin-quota imports ofwheat, barley, skimmed milkpowder, butter andraw
silkarehandled inJapan bystate-trading entities.27ForFY1995, actual in-quota imports forsuch
products aswheat, meslin, andbarley anditsprocessed products, aswellasforcertain dairy products,
werewellovertheirrespective current access commitments. Among theremaining products subject
totariffication nothandled bystate-trading entities, in-quota imports insome cases, notably skimmed
milkpowder andgroundnuts, fellwellshortoftheircurrent access levels. Insufficient domestic demand,
according totheauthorities, wasthecause inseveral cases.28Somewhat puzzling isthefactthatfor
nearly alloftheproducts subject totariffication forwhich above-quota imports occurred, thein-quota
commitments remained unfilled (Table AIV.2). According totheMAFF, likely reasons fortheabove-
24OECD (1996b), p.54.Asaconsequence ofthenewmeasures, theOECD states: "Significant progress
hasthusbeen made towards deregulation ofthedomestic ricemarket".
25Tariff quotas forboththese product, however, were unfilled inFY1995.
26Adjustments inquota levels, viaaCabinet Order, arepossible whenever aCabinet Meeting isheld.
27According totheauthorities, above-quota imports ofthese products areunrestricted, provided therelevant
tariffs andcharges arepaid(markups areapplied onlytoin-quota imports).
28Some trading partners, however, tookissue withthisexplanation indiscussions oftheWTO Committee
onAgriculture. Seeforexample WTO document G/AG/R/7, 26November 1996. Inthecaseofgroundnuts
thesituation issomewhat surprising, considering thattheAVE forgroundnuts wasestimated atnearly eight times
theworld price, while thein-quota ratewasonly10percent.Japan WT/TPR/S/32
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quota imports include thepossibility ofmeasurement errors forin-quota shipments, withtheexcess
declared atabove-quota rates. Despite thefactthatmostoftheunderlying quotas werenotfilled, the
MAFF hasstated thatnorefunds oftheabove-quota tariffs would bemade.
13. Japan triggered Special Safeguards (SSGs) inFY1995 and1996 foranumber ofproducts
subject totariffication (Table IV.2). Bothprice-based andvolume-based SSGs, which areapplicable
onlytoabove-quota imports, havebeenimposed. Incases where noimports hadbeenrecorded in
recent years, suchasformilkandcream (with fatcontent ofbetween 1and6percent), thetrigger
levelfortheSSGwassetbytheGovernment atzero. SuchSSGactions indicate thatcertain products
subject totariffication continue tobeextremely sensitive politically, despite thetypical presence of
hightariff ratesforabove-quota imports. Incases where tariff quotas contain multiple tariff lines,
Japan hasalsosettrigger levels onaline-by-line basis foractivation oftheSSG. Thisoccurred, for
example, inFY1995 withregard toinulin imports.
Table IV.2
Special safeguard (SSG) actions inagriculture byJapan, FY1995-1996
Description Type ofaction Date orperiod ofapplication
FY1995
Other starches (excluding Sago starches) Price-based 18May1995
Milk powder, containing added sugar, offatcontent by
weight, notexceeding 1.5%Price-based 22June1995
Whey andmodified whey, offatcontent, byweight, not
exceeding 5%Price-based 26June1995
Rawsilk Volume-based 1March 1996 to31March 1996
FY1996
Inulin Volume-based 1June1996 to31March 1997
Milk andcream, notconcentrated norcontaining added
sugarVolume-based 1October 1996 to31March 1997
Buttermilk powder Volume-based 1November 1996 to31March 1997
Small red(Azuki) beans Price-based 2December 1996
Rawsilk Volume-based 1January 1997 to31March 1997
Liveswine, meat ofswine andother prepared orpreserved
meat ofswineVolume-based 1January 1997 to31March 1997
Evaporated milk Volume-based 1March 1997 to31March 1997
Source: Information provided bytheJapanese authorities.
14. Trading partners haveexpressed concern overapplication oftheSSGs, especially when the
underlying tariffquota isnotfilled. Thisoccurred forthreeitems inFY1995, namely other starches,
milkpowder,andwheyandmodifiedwhey,onwhichprice-basedSSGsweretriggered.Japan'sresponse
wasthatitconsidered theaction tobeinfullconformity withArticle 5oftheWTO Agreement on
Agriculture, astheSSGs werenotapplied toin-quota imports.29Inaddition totriggering thevolume-
based SSGforarange ofporkproducts inJanuary 1997, Japan hadearlier invoked separate emergency
measures, from1November 1995to31March 1996andfrom1July1996to31March 199730;these
29WTO document G/AG/R/9, 17January 1997.
30On15January 1997, theEuropean Union requested consultations withJapan onitsmeasures regarding
imports ofporkandprocessed porkproducts. Theissue concerned wasnottheinvocation perseoftheemergency
measures, butrather their administration (Chapter II,Annex II.2).WT/TPR/S/32 Trade Policy Review
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measures increased thestandard import price under thedifferential dutysystem by24percent. In
asimilar manner, thetariffrateforfrozen beefwasraised from48.1to50percentbetween August 1995
andMarch 1996. These emergency measures comprise previously established procedures forincreasing
theapplied tariff rate,withthebound rateasanupper limit, intheevent oflarge increases inimport
volume onacumulative quarterly basis(over thesame quarter oftheprevious yearforbeef,andover
thesame quarter ofthethree preceding years forpork).31
(iii) Structural developments
15. According totheMAFF: "Inrecent years, there havebeenmajor changes intheoverall
environment affecting food, agriculture andrural communities. These include theaging ofthe
population, asmaller number ofchildren perfamily andincreasing demands thatthedisparity between
domestic prices andthose overseas bereduced".32Other recent developments inJapanese agriculture,
inaddition totheimplementation oftheWTO Agreement onAgriculture, include arecord-yield rice
harvest inFY1994, followed byanother high-yield cropinFY1995; afurther decline inJapan's
agricultural self-sufficiency ratio; substantial budgetary outlays inconnection withthesix-year
programme toalleviate theeffects oftheUruguay Round onJapanese farmers; andalackofsignificant
progress infarmconsolidation.
16. Riceconsumption, afterfalling steeply inFY1994, largely returned toprevious levels in
FY1995beforedecliningagaininFY1996duringthehotsummer.33Japan'sagriculturalself-sufficiency
ratio(onacalorie basis) fellto42percentforFY1995, withdeclines inriceaswellasother major
categories, notably beefandpork(Tables IV.1andAIV.3).34Reflecting thecontinued rapid aging
oftheagricultural population, theaverage ageofagricultural workers reached 60and57.5years for
males andfemales, respectively, inFY1995.35Aspartofefforts tocounteract theeffects ofthis
phenomenon, public agricultural corporations arebeing established bylocalgovernments toprovide
essential services toolder farmers.36
17. According tothestatistics oftheManagement andCoordination Agency, Japan'sagricultural
work force (including forestry andfisheries) totalled 3.67million in1995, compared to3.53million
fortheUnited States and0.61million fortheUnited Kingdom, despite anagriculture landareaof
only5.1million hectares, compared to426.9 million hectares fortheUnited States and17.1million
fortheUnited Kingdom (Box IV.1). Theconsequence isanaverage farm sizeinJapan ofonly
31Theprocedures, asearlier notified byJapan within thecontext ofoverall agricultural market improvement
measures, aredescribed inGATT document L/7621, 16February 1995.
32MAFF (1996), p.2.
33MAFF (1996), p.20.
34According totheMAFF, changes indietary patterns have hadagreater effect onthefalling level of
self-sufficiency thanthedecrease indomestic production.
35MAFF (1996), p.29.
36MAFF (1995), p.10.Japan WT/TPR/S/32
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1.46hectares, afigure which hasincreased very little since 1990.37Asnoted bytheMAFF,
"theacceleration ofthemovement ofworkers away fromagriculture andtheaging oftheagricultural
population didnotleaddirectly toexpansion ofthescaleoffarmoperations. Asaresult, evennow,
inland-extensive types ofagriculture suchasgrowing rice,asubstantial share ofproduction iscarried
onbysmall-scale part-time farmers andagedmembers offarmhouseholds".38According totheMAFF,
thereluctance offarmers toselltheirfarmland isthemajor factor impeding growth infarming scale.
BoxIV.1: Definition offarm household inJapan 'sagricultural statistical terminology
Farming households whose areaofcultivated landis0.1hectare ormore inthe1990 census. Even ifa
farm'sareaofcultivated landislessthanthis,itisincluded ifitssales ofagricultural products amounted
toorexceeded ¥150,000 in1990 (¥20,000 in1960, ¥50,000 in1970, and¥100,000 in1980).
-Part-time farm household :farming household which hasoneormore household members
engaged injobsother thanfarming andwhere theyhave been employed for30days ormore, or
engaged intheir own non-farm business from which they earned ¥100,000 in1990 (¥70,000
in1980) ormore, during ayearbefore thesurvey year.
-Part-time farm household typeI:farm household where atleast 50percent ofincome was
earned infarming.
-Part-time farm household typeII:farm household where more than50percentofincome was
earned from non-farm jobs.
-Full-time farm household :farm household which hasnohousehold member engaged in
non-farm employment.
-Commercial farm household :farm household whose areaofcultivated land is0.3hectare or
more, orwhose annual sales ofagricultural products amounted to¥500,000 ormore. Thisnew
classification wasintroduced in1990.
-Non-commercial farm household :farm household other thancommercial farm household.
-Single farming household :farm household which earns 80percentormore oftotalagricultural
revenue from production ofasingle commodity.
-Core farm household :farm household withmale ofbetween 16-59 years ofagewhoisengaged
infarming formore than150days ayear.
Source: OECD (1995b).
37MAFF (1996), p.p.37-38. While thehigher population density ofJapan isasignificant factor, another
reason maybethedefinition ofanagricultural worker assomeone involved inagriculture foratleastonehour
peryear. Likewise, anagricultural household isdefined inJapan aspossessing 0.1hectare ormore ofland,
orofearning ¥150,000 ormore from thesaleofagricultural products. According totheOECD, thesmall size
ofJapanese farms canbetraced directly totheland-reform policies implemented byoccupation forces afterWorld
WarII;OECD (1995b), p.p.11and13.
38MAFF (1996), p.6.WT/TPR/S/32 Trade Policy Review
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18. MAFF dataindicate thatlabour productivity inagriculture improved by17percentbetween
FY1990 and1994, while theemployment level fellbynearly 15percent. Thiscompares very
favourably withthemanufacturing sector, which recorded alabour productivity fallofslightly over
6percent, withemployment down bynearly 2percent.39Inabsolute terms, however, agricultural
productivity remained farbehind, atalevellessthan34percentofthatinthemanufacturing sector.
Although there appears tohavebeenaslight increase infarmsizebytypeofactivity (Table IV.3),
indicating possible economies ofscale, productivity gains inagriculture haveprimarily beenachieved
through increased mechanization, withfurther suchgains expected inthefuture.40
Table IV.3
Changes inaverage farm sizebyfarm activity, FY1980-1995
Unit 1980a1990 1995
Rice(paddy) ha. 0.60 0.72 0.85
Greenhouse vegetablesbha. 0.24 0.27 ...
Pigs head 71 272 545
Laying hens head 550 10,261 20,059
Broilers head 12,700 27,200 31,100
Dairy cattle head 18 33 44
Beefcattle head 6 12 18
... Notavailable.
a Figures forlivestock products relate todatafor1979.
b Single-vegetable farming, excluding Hokkaido.
Source: Dataprovided bytheJapanese authorities; andOECD (1995b).
19. Lowagricultural productivity levels inJapan aredirectly related bothtotherapid aging of
theagricultural population andtotheextremely small sizeoffarms. According totheMAFF, nearly
allofthedecline inthenumber ofagricultural workers between FY1990-1995 wasduetotheretirement
offarmers aged 65orolder. Atthesame time, thenumber ofmale agricultural workers aged
60-65 years actually increased by30percent, duetotheentry ofworkers retiring from other
professions.41However, inrecent years thenumber ofyoung farmers hasactually shown aslight
increase, reversing along-term decline; nevertheless, many obstacles remain tosubstantially increasing
thisnumber. According totheMAFF, "Inparticular, those whowishtoenter from anon-farming
background faceaserious handicap inobtaining thenecessary land,duetothehighprices ofagricultural
land".42MAFF dataindicate thatfarmhousehold income exceeds theincome ofnon-farm employed
households by30percent; however, thelevelofincome peremployee islower infarmhouseholds
39Asnoted bytheMAFF: "The agricultural sector, faced withthedwindling andaging ofitslabour force,
wasforced toachieve productivity gains comparable withthose ofthemanufacturing industries, chiefly by
developing anddisseminating higher-yield varieties ofproduce andintroducing labour-saving technology tofarm
work" (MAFF, 1996, p.10).
40MAFF (1995), p.26.
41MAFF (1995), p.p.2and4.Asnoted bytheMAFF: "Asof1995, 74percentofthefarm households
hadsecured asuccessor. However, thesuccessors tendtobeintheirforties andearly fifties when theybecome
theheads ofthese households, anduntil their parents retire, theyusually arenotfully engaged infarming".
42MAFF (1995), p.p.4,6.Japan WT/TPR/S/32
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thannon-farm employed households bymore than10percent, duetoalarger number ofemployees
infarmhouseholds (seealsoTables AIV.4 andAIV.5).
20. Budgetary expenditures inFY1995-1996 under thesix-year, ¥6trillion programme toaid
Japanese farmers were¥1.45 trillion.43Total expenditures foragriculture haveincreased substantially
sinceFY1990, afterhaving beenonadeclining trend, from¥2.5trillion to¥3.4trillion inFY1995.44
Outlays forrice,wheat andbarley, which areadministered asagroup, arebyfarlarger thanthose
fortheother major commodities, totalling ¥190.9 billion inFY1994 and¥183.9 billion inFY1995
(themostrecent years forwhich dataareavailable). These andother major support programmes were
earlier notified totheWTO inthecontext ofJapan'ssubsidies notification (Chapter III(4)(ii)).45
21. Onchanges inofficial purchases ofmajor agricultural products, thepredominant feature was
theslight lowering forFY1997, forthefirsttimeinsixyears, ofthegovernment purchase price for
rice,by1.1percent(Table AIV.6).46Withthesignificant exception ofrawsilkprices, andtoasmaller
extent those forbeef,official purchase prices havegenerally shown littlechange.47Concerning direct
payments, which arearather small portion oftotalagricultural support, payments under aprogramme
toencourage production ofthetypes ofriceingreatest demand (i.e."voluntarily marketed" rice),
decreased from ¥101 billion inFY1995 to¥43billion inFY1996.
22. Thesupport received byfarmers, andthecosts paidbyconsumers foragricultural products,
remain wellabove theOECD average. Japan'snetpercentage producer subsidy andconsumer subsidy
equivalents (PSE andCSE) for1996havebeenprovisionally estimated at71and46percent,against
anOECD average of36percentand23percent, respectively, although there aregreat differences
between theratesforcrops andother products (Table AIV.7).48Thenominal assistance coefficient
(NAC), which compares domestic prices withthose attheborder, indicates thatJapanese producer
andconsumer prices areonaverage approximately twice and1.4times asmuch astheOECD average;
43Planned expenditures under theprogramme, asnoted inthe1995 Secretariat Report, were ¥3.5 trillion
forpublic works inagricultural areas, nearly ¥0.9 trillion forpromoting farm consolidation and¥0.6 trillion
forsubsidizedadjustmentloans.Theauthoritiesexpectedtheprogramme tofallwithintheUruguayRound"green
box" category ofpermitted subsidies foradjustment measures.
44MAFF (1996), p.37.
45Japan hasapparently already achieved itsdomestic support reduction commitments under theAgreement
onAgriculture (OECD, 1996c, p.41).
46Main factors behind thegovernment purchase price forrice, according totheMAFF, aretheprice of
"voluntarily marketed" riceandchanges inproduction costs. Under theLawforStabilization ofSupply-Demand
andPrice ofStaple Food, theadministered price forricewasapplicable onlytotheapproximately 1.5million
tonnes purchased bytheGovernment, amounting toabout 14percentofconsumption. Theremaining rice
production isprotected byJapan 'sborder measures onriceimports (OECD, 1996b, p.53).
47According totheARC: "The rawsilkbusiness issuffering from astructural decline inprices caused by
saggingdemandandanincreaseinimportsdrivenbyinternationalpricedifferentials"and"itisbecomingdifficult
tomaintain theprice stability zone forcocoons andrawsilk" (ARC, 1996, p.24).
48Asnoted inthe1995 Secretariat Report, caution isnecessary ininterpreting PSEs, CSEs, andNACs as
changes inexchange ratemayproduce significant fluctuations inthethree indicators andborder prices maybe
artificially reduced duetothepresence ofexport subsidies ininternational agricultural trade.WT/TPR/S/32 Trade Policy Review
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moreover, when compared against average world prices, Japan'sproducer andconsumer prices are
almost three and1.9times ashigh, respectively (Chart IV.2).
23. Some reduction intheprice gapbetween domestic andforeign retail foodprices hasoccurred
recently, primarily duetoyendepreciation. Overall, theMAFF ascribes thehighcostlevels ofdomestic
agriculture toavariety offactors, including material andequipment costs much higher thanthose of
major trading partners suchastheUnited States (Chart IV.3).49According toaMAFF survey of
manufacturers, distributors andretailers, other factors leading tohigher retail prices include consumer
preferences forfreshness, attractive packaging andconsumption patterns involving small quantities
ofmany types offood. Aspartofefforts toreduce theprice gap,"Action Plans" havebeencreated
toreduce thecostofagricultural materials andequipment, involving prefectural governments and
industrial associations.50
49MAFF (1995), p.18.
50MAFF (1996), p.18.Japan WT/TPR/S/32
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(iv) Policy orientation
24. TheHeadquarters forUrgent Measures forAgriculture andRural Areas, established in1993
atCabinet level, heldsixmeetings through October 1994, atwhich theFundamental Principles of
Measures Related totheUruguay Round Agreement onAgriculture weredecided (seebelow). The
Headquarters hasnotmetsince, buthasnotyetbeenformally disbanded. Within MAFF, aspecial
office wasestablished in1993 to"cope with" theeffects oftheUruguay Round. Meeting are
occasionally heldinorder toformulate budget requests, examine budgets formeasures related tothe
Uruguay Round, andwhether andhowtopromote suchmeasures. Among therecent activities ofthe
Agricultural Policy Council wasareport issued inAugust 1996 ontheDirections ofReform inthe
Business andOrganization ofAgricultural Cooperatives withaSpecial Focus onCredit Businesses.51
25. IntheAction Planforagricultural production under theDecember 1995Social andEconomic
PlanforStructural Reforms Towards aVital Economy andSecure Life(SEP), theGovernment
acknowledged thatJapan hasbeen slow toenlarge thescale ofland-use farming, andstated that
"agricultural production should beasefficient aspossible inorder tobeabletosupply foodatprices
thatconsumers accept".52Japan isalsointheprocess ofimplementing theFundamental Principles
ofMeasures Related totheUruguay Round Agreement onAgriculture, which werefirstannounced
inOctober 1994. Among thespecific measures within theFundamental Principles istheestablishment
ofasystem ofcertified farmers, namely, those whohavedrafted farmbusiness improvement plans
andhavebeenrecognized bytheirmunicipality aslocalleaders. AspartoftheSEP, theGovernment
hasbeenpromoting theconcentration offarmland tocertified farmers, ofwhich about 92,000 hadbeen
recognized byFebruary 1997.53Financial incentives include taxconcessions andlong-term, low-interest
loanfinancing.
26. AspartoftheSEP, theGovernment hasstated: "Thereliable supply ofquality, safeandfresh
foodstuff atreasonable prices isindispensable forstable living, andafoodsupply system isrequired
which ismore efficient andwhich provides consumers withawider range ofchoices."54According
totheMAFF 1996 Annual Report, "With regard toJapan'sfoodsecurity, efforts must bemade to
maintain andexpand domestic production tothemaximum possible extent inorder tohaltthedecline
51Based onthisreport, theLawConcerning Mergers ofNorinchukin Bank andtheFederation ofAgricultural
Credit Cooperatives, andtheLaw Concerning Preparations forReform oftheBusiness andOrganization of
Agricultural Cooperatives were established.
52EPA (1995a), p.112. TheSEPalsostates that"themajority offarmland should beconcentrated under
efficient andstable farm management through theactive implementation ofTheLawfortheImprovement of
theBasis ofFarm Management (EPA, 1995a, p.19).
53Goals under theSEPAction Planforagricultural production include anincrease intheconsolidation level
forlarge-scale farmland, from 3to30percent, bytheendofFY2002 (EPA, 1995a, p.113). This was
subsequently extended byfouryears, to2006, under the"Promotion Measures forFiscal Structural Reform".
54Inresponse tothese andother demands forchange, theMAFF inearly 1997 established aresearch council
withatwo-year mandate toexamine theissues involved increating areplacement fortheexisting Agricultural
Basic Law, inplace since 1961. According totheauthorities, efforts since 1994 towards increased market
orientation inJapanese agriculture include thetariffication ofquantitative restrictions andtheintroduction of
minimumaccesscommitmentsundertheUruguayRoundAgreemen tonAgriculture;abolitionoftheFoodControl
Lawanditsreplacement withtheLawforStabilization ofSupply-Demand andPrice ofStaple Food; andthe
management ofadministrative prices inaccordance withtrends insupply anddemand.Japan WT/TPR/S/32
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inthenation 'sfood-self sufficiency. Inaddition, thenation mustsecure adomestic food-supply capacity
thatcancopewithunforeseen circumstances".
27. Inresponse togrowing consumer concern, aswellaspartofefforts tomove tohigher
value-addedactivities,Japanesefarmershavebeenexpandingtheiroutputoforganicallygrownproducts.
Guidelines forlabelling andproduction management were revised inDecember 1996. TheMAFF
encourages organic farming aspartofitssupport forsustainable agriculture, defined byMAFF as
environmentally sound practices thatminimize theburden ontheenvironment. According toMAFF
statistics, sustainable agriculture andorganic farming account for19and8percent,respectively, of
output insmall-district rural areas.
(v) Sectoral issues
(a) Rice
28. Over-productionofrice,motivatedbyhighgovernmentsupportlevels,remainsachronicproblem
inJapan. Inrecent years, set-aside measures rather thanreductions intheofficial support price have
beentheprimary government response tothissensitive political issue. During the1990s theset-aside
levelpeaked at826,000 hectares inFY1991, equivalent tonearly one-third ofJapan'stotalrice-paddy
area; thisfellto588,000 hectares in1994, aslandwasreturned toriceproduction following the
extremely poorharvest oftheprevious year. Theproblem ofover-production wasfurther aggravated
bythebumper riceharvests of1994-1996 andbythestartofimports under Japan'sminimum access
commitments. Since 1994, totalsubsidy payments forset-aside landandpayment perhectare have
beenincreasing (Table IV.4).
Table IV.4
Set-aside andsubsidy levels forrice, FY1990-96
YearTotal paddy fieldarea
('000hectares)Production control area
(actual level) (a)
('000hectares)Total subsidy
payments (b)
(billion yen)Payment/hectare
(b)/(a) ('000yen)
1990 2,846 849 159.8 190
1991 2,825 852 156.7 180
1992 2,802 751 130.0 170
1993 2,782 713 90.2 130
1994 2,764 588 63.3 110
1995 2,745 663 77.4 120
1996 2,724 673 93.1 140
Note: Total subsidy payments from 1990 to1995 arecounted onasettlement ofaccounts basis andthose of1996 areonabudgetary
basis.
Source: Dataprovided bytheJapanese authorities.
29. According totheauthorities, abolition oftheFood Control Lawanditsreplacement bythe
LawforStabilization ofSupply-Demand andPrice ofStaple Food changed thericeproduction and
distribution system intoonethatismuch more market-oriented.55Under thenewLaw, mandatory
55While observing thatproduction ofhigher value-added rice,suchasorganically grown rice,aswellasdirect
sales from producers toconsumers areincreasing, theMAFF states that: "Overall, however, riceproduction
remains structurally weak, duetothehighproportion ofpart-timer growers andtheaging offarm households"
(MAFF, 1996, p.20).WT/TPR/S/32 Trade Policy Review
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salestotheGovernment werereplaced bytheoption ofparticipating ineither the"voluntarily marketed"
or"government-marketed" salesthrough specified distribution channels; subject topriornotification,
producers canselltheirproducts through other channels. For"voluntarily marketed" and"government
marketed" rice,thedesignation andpermit system previously required forriceshipments andsales
wasreplaced byasimplified registration requirement. Since June1996, when thefirstregistrations
ofnewmeasures were carried out,thenumber ofwholesalers hasincreased by24percentto339,
while thenumber ofretail shops registered hasincreased by88percentto175,609. According to
theMAFF, nostatistics areavailable regarding thenumber offoreign-affiliated traders, asnationality
isnotconsidered aspartoftheregistration process.56Actual riceimports inthecontext ofJapan's
minimum access commitments under theWTO Agreement onAgriculture totalled 377,996 tonnes in
FY1995rising to454,533 tonnes inFY1996. Details oftheseimports, bytypeofriceandbycountry,
arepresented inTable AIV.8.
30. Although Japan'sFood Agency, anaffiliate oftheMAFF, hasresponsibility forthepurchase
andsaleofthegreat majority ofthericeimported under theminimum access commitments, avery
small amount isallowed tobepurchased andmarketed directly under thesimultaneous buy-sell (SBS)
system.57InFY1995 atotalof10,694 tonnes were permitted under SBS, rising to22,000 tonnes
forFY1996. Actual bidsreceived, however, werefornearly fivetimes thisamount. Thepurpose
oftheSBSsystem, according totheMAFF, is"toobtain aproper market value forriceproduced in
foreign countries", bymeans ofinformation obtained ondomestic needs andusage forforeign rice.58
Under SBS,importers representing retailers andotherend-users make bidstotheFoodAgency toimport
specific amounts ofadesired typeofriceatadesignated price, indicating thelevelofmark-up offered
(uptothelimitof¥292/kg. asspecified inJapan'sUruguay Round commitments).59Winning bids
arethenselected onthebasisofthemark-up leveloffered totheFood Agency. Theriskinsignificantly
expanding theSBSsystem, according totheMAFF, isthattheGovernment might nolonger beable
toensure riceimports attheagreed quota levels intheevent ofalackofdomestic demand.
31. Japan'scurrent policies inregard toricestockpiling tookeffect inNovember 1995, aspart
oftheLawforStabilization ofSupply-Demand andPriceofStaple Food, withthemaingoaltomaintain
supplies ataflexible target levelofabout 1.5million tonnes.60Theactual amount stockpiled ismainly
56Inits1995 Review, oneofJapan 'strading partners stated that"criteria recently imposed forriceandother
food importers appears tobeexcessively strict" (GATT, 1995, Vol. II,p.72).
57Limits forparticipation are3,000 tonnes peryearforimporters and1,000 tonnes forretailers. SBSis
alsoapplied todesignated imports ofwhey andmodified whey (GATT document L/7621, 16February 1995).
Under theLawforStabilization ofSupply-Demand andPrice ofStaple Food, individuals arealsopermitted to
import upto100kg.ofriceannually fortheirownconsumption byinternational parcel service, inaddition to
imports byaccompanied orunaccompanied baggage. Thetotalamount ofindividual riceimports wasabout
500tonnes inFY1995 and300tonnes inFY1996.
58Requirements forbidders under theSBSarealsosaidbyMAFF tobeeasier thanthose forother riceimports.
59Actual mark-ups, applied toSBSimports forFY1995 were ¥292/kg. forthefirsttender and¥140/kg.
forthesecond. InFY1996, themark-ups were ¥157/kg., ¥171/kg. and¥180/kg. forthefirstthrough thethird
tenders. Forwheat, themark-ups applied were ¥26/kg. inFY1995 and¥20/kg. inFY1996.
60Other major agricultural products subject tostockpiling requirements include wheat forfood(about 1million
tonnesareheldatthedistributionstage),soybeansforfoodotherthanedibleoil(about50,000tonnesarestockpiled
bytheSoybean Supply Stabilization Association) andanimal feed(about 1.2million tonnes arestockpiled by
theGovernment andbytheOrganization forStable Supply ofCompound Feed).Japan WT/TPR/S/32
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determined bysupply anddemand trends (Chart IV.4). After falling toabout zeroin1994, thestockpile
grew rapidly toreach near2million tonnes attheendofthe1996 riceyear(i.e.end-October 1996).
Bothdomestic andimported riceareheld, withtheratioofimported ricecurrently about 5percent.
According totheMAFF, sales prices forgovernment-marketed foreign ricewere recently reduced
inparallel withdomestic riceprices. InFY1995, Japan alsoexported about 560,000 tonnes ofrice
asfoodaid.Theauthorities statethatthericeconcerned hadoriginally beenimported inFY1993
andFY1994following theextremely poordomestic harvest. ForFY1996, theGovernment decided
toexport about 100,000 tonnes from government stocks asfoodaid.
32. Current production controls, under theNewProduction Adjustment Promotion Programme
(NPAPP), which began inFY1996, aimtoinitially set-aside 670,000 hectares ofpaddy (Table IV.4).
While pastset-aside programmes werereportedly notadministered toencourage specialization bymore
efficient producers, thecurrent programme issaidbytheMAFF toprovide greater scope forproduction
decisions byindividual farmers. Under a"mutual compensation" system, producers notimplementing
production controls willgivefinancial assistance tothose thatdoimplement theset-asides.61With
regard toagricultural landwithin urban areas, thishasdeclined byabout 5to6percentannually
since 1990, to118,250 hectares byFY1995, with thelandgradually converted toother uses
61MAFF (1995), p.20.Some farmers have protested thenewset-aside levels. See,forexample, Nikkei
Weekly, 31March 1997.WT/TPR/S/32 Trade Policy Review
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(Chart IV.5). In1995thelevelofurban landconverted fromagricultural toother usewas6,554 ha.,
ofwhich 3,796 ha.wasusedforhousing. Dataonthepercentage ofallricefarms thatarelocated
within urban orsuburban areas arenotavailable, according totheMAFF.
(3) Energy andutilities
(i) Overview
33. Astable energy supply hasbeenthemajor objective ofJapan'senergy policy, reflecting the
factthatmore than90percentofJapan'sprimary fuels, e.g.crude oilandnatural gas,isimported.62
Theevolution ofthecomposition ofJapan'sprimary energy supply since FY1990 shows adecline
intheshare ofpetroleum (55.8 and57.4percentin1990 and1995, respectively), andincreases in
theshare ofnuclear energy (11.5 percentin1990and12.0 percentin1995) andnatural gas(9.4and
10.8percentin1990 and1995, respectively) (Table IV.5).
62According totheauthorities, themajor objectives ofJapan 'senergy policy arecalled "the3-Es", namely,
economic growth, energy security andenvironmental protection.Japan WT/TPR/S/32
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Table IV.5
Composition ofJapan 'sprimary energy supply, FY1990-95
(million kl.ofcrude oilequivalent)
1990 1991 1992 1993 1994 1995
Petroleum 307 301 315 310 331 328
Coal 87 90 87 88 95 97
Natural gas 53 56 57 59 62 64
Nuclear energy 49 52 54 61 65 71
Hydraulic energy 22 24 20 24 17 21
Geo-thermal energy 0.5 0.5 0.6 0.5 0.6 1
Newenergy, etc. 7 7 7 6 6 6
Source: Dataprovided bytheJapanese authorities.
34. While regional monopolies forelectric andgasutilities haveserved toensure bothstable supply
anduniversal service, energy regulations havereportedly tended tosuppress incentives forefficiency.63
Forexample, electric generation capacity istargeted toensure stable demand during summer peak
hours,whenextensiveuseofairconditionersraiseselectricitydemand,buttheannualcapacityutilization
rate,onaverage, ismerely 55percent. Against thisbackground, theprice ofenergy inJapan is
generally higher thaninother developed countries; according totheauthorities, asofApril 1997,
average electricity prices inJapan were15percentand27percenthigher, forexample, thanthose
intheUnited States andtheUnited Kingdom. Thus, recent deregulation measures incorporated
competition-enhancing revisions inthesector; inDecember 1995, theGovernment prepared, asapart
oftheSocial andEconomic PlanforStructural Reforms, theAction PlanforRectifying High-Cost
Structures andPromoting Dynamics for10sectors, including energy64;the1996Program forEconomic
Structural Reform aimsatsectoral deregulation soastoattain aninternationally comparable pricelevel
by2001.
(ii) Petroleum
35. Pre-tax prices ofgasoline arehighinJapan compared withotherdeveloped countries; according
totheauthorities, thisstems from various factors including highrefining costs, wholesale andretail
inefficiencies, anda"bias intherevenue structure" ofthese businesses towards gasoline.65Petroleum
product imports wereliberalized withtheexpiry inMarch 1996 oftheProvisional Measures Lawon
theImportation ofSpecific Petroleum Refined Products, which hadlimited import rights toowners
ofrefining facilities.66Presently, provided animporter hasauthorization from MITI andsubject to
astockpiling requirement ofatleast70daysoftheprevious 12months import level, imports maybe
freely effected. Asaresult, firms other thanpetroleum companies havebegun toimport petroleum
products since April 1996 andprices ofgasoline havereportedly come down sharply.
63Look Japan, Dec. 1996, p.26.
64Proposed measures included theabolition oftheProvisional Measures LawontheImportation ofSpecific
Petroleum Refined Products (implemented 1April 1996); abolition ofthedesignated areasystem imposed under
theGasoline Sales andDistribution Business Law (implemented April 1995); simplification ofprocedures
eliminating theneedtoapply forregistration ofchanges inthesizeoffilling stations required under theGasoline
Sales andDistribution Business Law; andallowing self-servicing infilling stations.
65EPA (1995a), p.82.
66Concurrently, thePetroleum Stockpiling LawandtheGasoline Retail Business Lawwere amended.WT/TPR/S/32 Trade Policy Review
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36. Onthesaleofgasoline, theestablishment ofnewfilling stations, aswellasexpansion ofexisting
unitshadbeenrestricted inareas with"excessive competition".67This"Designated AreaSystem" was
abolished, topromote distribution efficiency, withtheamendment oftheGasoline Retail Business Law
in1996.68
(iii) Electricity
37. Japan'selectricityismainlysuppliedbytenprivate,regional-monopolyelectricutilitycompanies;
theroleoftheGovernment istoimplement theregulatory structure.69Electric utilities areamong the
largest andmostprofitable companies inJapan; theirannual non-fuel procurement isestimated atabout
US$25 billion.70Theprice ofelectricity inJapan ishighcompared withother developed countries:
theaverage price isabout 30and20percenthigher thanintheUnited States andGermany,
respectively.71
38. In1995, 981billion KWh ofelectric power weregenerated inJapan. Foreign entities wishing
toinvest inelectric utilities must, under theprovisions oftheForeign Exchange andInvestment Control
Law, notify theirintention withthecompetent authorities, including MITI; permission forinvestment
isnotdenied, except ongrounds ofnational security.72According totheauthorities, there isno
differential treatment between domestic andforeign enterprises either under theElectricity Utilities
Industry Laworinpractice.
39. Aspartofthe1995 revisions totheElectricity Utilities Industry Law, thepermit system for
wholesale power generation wasabolished, andbidding became permitted forwholesale salesofelectric
power totheutility companies. Asaresult, sixutilities bidfor3.05million KWinFY1996. Prices
bybidders were generally low,forexample, twobidstotheKyushu Electric Company were about
35percentlowerthanpricesoftheutilitycompanyitself.73RevisionstotheLawalsoincludedimproved
pricing regulations, totakeintoaccount cost-efficiency, andrationalization ofsafety regulations, by
establishing the"self-responsibility" principle. Direct supply ofelectricity inbulktoanindustrial
concentration hasalsobeenallowed by"designated electric enterprises". Inconsequence ofthese
revisions, the1996 approved ratesamong thetenmajor electric companies averaged 4.21percent
67This restriction wasbased ontheBenzine Sales Law. According totheauthorities, nospecial definition
of"excessive competition" existed andMITI recognized theexistence ofexcessive competition onthebasis of
"comprehensive considerations ofconditions suchasprice andquantity according tothepurpose oftheparticular
rule".
68Theamendment wasimplemented on1April 1996; abolition ofthesystem, including theareas designated
in1993, waseffective from October 1996.
69GATT document C/RM/M/57/Add.1, p.29.
70USTR (1997a).
71Nihon Keizai Shimbun, 7February 1997.
72TheForeign Exchange andInvestment Control Lawstipulates aprior notification requirement ofatleast
30daysfortheforeignacquisitionofmorethan10percentofthestocksofaJapanesepowercompany.According
totheauthorities, there have been nosuch notifications.
73Nihon Keizai Shimbun, 4July1997.Japan WT/TPR/S/32
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lower thanin1995. TheGovernment plans tocontinue thesectoral reform process, toattain
internationally comparable price levels by2001.
40. Topromote competition, theAdministrative Reform Committee hasrecommended greater
transparency inbidding procedures forprocurement bytheutilities, including long-term plans for
procurement, anddisclosure ofdetailed information regarding costcalculation74
41. GenerationandtransmissionequipmenttobesuppliedtotheutilitiesmustmeetMITI'sTechnical
Standard (TS), which arepublished inMITI Ordinances. Japan'strading partners haveclaimed that
procurement byelectric utilities hasbeenmainly ofJapanese products.75Partly inresponse, MITI
revised theTSinMarch 1997, to"standardize andstreamline required technical specifications" of
electrical equipment.76
(iv) Gas
42. InMarch 1995, theAmended GasUtility Industrial Lawwasrevised torelax regulations on
entry andonprices forthesupply ofgastolarge-volume customers; thesupply of"city gas"had
beenregulated, inprinciple, within designated service areas, allowing regional monopolies.77According
totheauthorities, recent environmental restrictions andtechnological innovations haveledtoincreased
demand for"citygas"bylarge-volume customers. Aspartoftherevision, gassupplies forlarge-volume
customersarenowallowedtocrossthebordersofregionalmonopolies,andsuppliersotherthanprevious
regionalmonopoliescannowdeliver"citygas".Wellover600customershaveenteredintolarge-volume
gassupply contracts withgasutility companies. Amendments werelimited toindustrial gassupply.
43. According totheauthorities, thesupply ofliquid petroleum gas(LPG) isregulated "forthe
purpose ofsecuring safety andensuring proper transactions". Retail prices areconsiderably higher
thanimport prices. Theauthorities indicate thattheriseintheimport priceofLPGfromSaudi Arabia
in1996 hasconsiderably affected theretail price.
(4) Industry
(i) Overview
44. Themanufacturing sector accounts forabout onequarter ofJapan'sGDPandsome 22percent
ofemployment. Against abackground oflowgrowth, manufacturing output wasdown bysome
7percentintheperiod 1992to1995; overthesametimeframe nominal value added declined byover
3percent; however, gross output andvalue began torecover in1995, growing by2.3and4.3percent,
respectively (Table IV.6). In1996, manufacturing output wasupby2.2percentandvalue added
grew by1.7percent.
74ARC (1996).
75See, forexample, USTR (1997a).
76Accordingtotheauthorities,therevisionincludes;theeliminationofunnecessaryarticlesandtheintegration
ofsimilar ones; theintroduction of"function-oriented standards", which specify thelevel ofperformance of
facilities necessary toensure safety; andtheadoption ofcertain foreign codes orprivate codes developed by
specialist organizations.
77Annual contracts exceeding 2million cubic meters ofgaspercustomer.WT/TPR/S/32 Trade Policy Review
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Table IV.6
Manufacturing output andshare ofvalue added inJapan, 1990-95
(Percentand¥trillion)
JSIC and
DescriptionGross output
(trillion yen)Value added
(trillion yen)Output aspercentage of
total manufacturingValue added as
percentage oftotal
manufacturing
1990 1992 1994 1995 1990 1992 1994 1995 1990 1992 1994 1995 1990 1992 1994 1995
Total 323.4 329.5 299.0 306.0 119.0 121.1 112.4 117.2 100.0 100.0 100.0 100.0 100.0 100.0 100100.0
12 Food
manuf.22.7 24.8 24.0 24.1 8.0 9.1 9.0 9.3 7.0 7.5 8.0 7.9 6.7 7.5 8.0 7.9
13 Beverages
andtobacco10.3 10.8 10.7 10.6 2.7 2.9 3.0 3.1 3.2 3.3 3.6 3.5 2.3 2.4 2.7 2.6
14 Textiles 7.8 7.6 4.5 4.2 3.1 3.1 1.9 1.8 2.4 2.3 1.5 1.4 2.6 2.6 1.7 1.5
15 Clothing 4.5 4.8 5.4 5.2 2.2 2.3 2.5 2.4 1.4 1.5 1.8 1.7 1.8 1.9 2.3 2.1
16 Wood
products4.6 4.5 4.4 4.2 1.7 1.6 1.6 1.5 1.4 1.4 1.5 1.4 1.4 1.3 1.4 1.3
17 Furniture 4.0 4.0 3.6 3.6 1.8 1.7 1.6 1.6 1.3 1.2 1.2 1.2 1.5 1.4 1.4 1.3
18 Pulpand
paper8.8 8.8 8.1 8.5 3.1 3.1 3.1 3.2 2.7 2.7 2.7 2.8 2.6 2.6 2.7 2.8
19 Printing 12.6 13.1 12.5 13.1 6.4 6.7 6.5 6.7 3.9 4.0 4.2 4.3 5.3 5.5 5.8 5.8
20 Chemicals 23.5 24.2 22.5 23.4 11.3 11.8 11.4 12.0 7.3 7.3 7.5 7.6 9.5 9.8 10.1 10.2
21 Petroleum
andcoal
products8.3 8.5 7.8 7.6 0.7 1.4 1.7 1.3 2.6 2.6 2.6 2.5 0.6 1.1 1.5 1.1
22 Plastic
products10.5 11.2 10.4 10.5 4.0 4.3 4.1 4.2 3.2 3.4 3.5 3.4 3.3 3.6 3.7 3.6
23 Rubber
products3.7 3.7 3.1 3.3 1.6 1.7 1.5 1.5 1.1 1.1 1.0 1.1 1.4 1.4 1.3 1.3
24 Leather
products1.3 1.3 1.0 1.0 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.4 0.4 0.3 0.3
25 Pottery,
china, glass
andproducts10.7 10.8 10.3 10.2 5.1 5.2 5.0 5.0 3.3 3.3 3.5 3.3 4.3 4.3 4.5 4.2
26 Ironand
steel18.3 16.6 13.6 14.1 6.2 5.8 4.7 5.0 5.7 5.0 4.5 4.6 5.2 4.8 4.1 4.2
27 Non-ferrous
metals7.8 6.9 5.9 6.5 2.1 1.9 1.8 2.0 2.4 2.1 2.0 2.1 1.8 1.6 1.6 1.7
28 Fabricated
metal
products18.6 19.8 17.5 17.7 8.1 8.8 7.8 8.0 5.7 6.0 5.9 5.8 6.8 7.3 7.0 6.8
29 Non-elect.
machinery33.2 33.2 27.6 29.9 13.6 13.3 11.1 12.1 10.3 10.1 9.2 9.8 11.4 11.0 10.0 10.4
30 Electrical
machinery54.5 54.6 51.9 54.8 20.1 19.9 18.4 19.6 16.9 16.6 17.4 17.9 16.9 16.4 16.4 16.8
31 Transport
equipment46.9 49.4 44.7 44.2 12.6 12.4 11.6 12.5 14.5 15.0 14.9 14.5 10.6 10.2 10.4 10.7
32 Prof. and
scientific
equipment5.1 5.1 4.2 4.1 2.0 1.9 1.7 1.7 1.6 1.5 1.4 1.3 1.7 1.6 1.5 1.4
33 Arms and
weapons0.4 0.5 0.4 0.4 0.2 0.2 0.4 0.2 0.1 0.2 0.1 0.1 0.1 0.2 0.1 0.2
34 Other 5.1 5.5 5.0 5.0 2.2 2.4 2.2 2.1 1.6 1.7 1.7 1.6 1.8 2.0 1.9 1.8
Source: Information provided bytheJapanese authorities.Japan WT/TPR/S/32
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45. Electrical machinery remains thelargest industrial sector inJapan interms ofgross output
andvalue added, withtransport equipment andnon-electrical machinery thenextlargest sectors. The
highest levelofvalue added peremployee isinthepetroleum andcoalproducts sector, followed by
thechemicals sector (Table IV.7). Reflecting ashiftinJapan'sindustrial structure away from
manufacturing toservices, thenumber oftotalemployees inmanufacturing hascontinued todecline;
inindividual sectors, thenumber ofemployees slightly increased infoodmanufacturing andplastic
products sectors, butdecreased inother sectors including electrical machinery, transport equipment
andnon-electrical machinery.
Table IV.7
Employment inmanufacturing, value added peremployee andwages peremployee inJapan, 1990-95
JSIC DescriptionNumber ofemployees
('000)Value added peremployee
(million yen)Wages peremployee
(million yen)
1990 1992 1994 1995 1990 1992 1994 1995 1990 1992 1994 1995
Total 11,173 11,157 10,415 10,320 10.65 10.9 10.8 11.4 3.8 4.1 4.3 4.4
12 Food manuf. 1,090 1,117 1,115 1,136 7.3 8.1 8.1 8.2 2.7 2.9 3.0 3.0
13 Beverages
andtobacco132 127 122 123 20.5 22.9 24.6 25.1 4.2 4.4 4.6 4.7
14 Textiles 531 496 283 265 5.9 6.2 6.7 6.8 2.8 3.0 3.5 3.6
15 Clothing 578 567 634 594 3.8 4.1 4.0 4.1 2.0 2.2 2.2 2.3
16 Wood products 253 237 217 212 6.6 6.9 7.1 7.2 3.0 3.3 3.4 3.4
17 Furniture 231 221 209 204 7.6 7.8 7.4 7.6 3.2 3.5 3.6 3.6
18 Pulpandpaper 284 281 271 269 10.9 11.0 11.3 12.0 3.9 4.2 4.3 4.4
19 Printing 554 566 536 542 11.5 11.8 12.1 12.4 4.7 5.0 5.2 5.2
20 Chemicals 401 415 398 392 28.1 28.5 28.6 30.6 5.3 5.6 5.8 5.9
21 Petroleum andcoal
products33 34 34 34 22.5 39.6 49.9 39.3 6.0 6.6 7.0 7.0
22 Plastic
products436 447 443 449 9.1 9.7 9.3 9.4 3.4 3.8 4.0 4.0
23 Rubber products 172 171 148 152 9.5 10.0 10.0 10.1 3.9 4.2 4.5 4.5
24 Leather products 79 77 64 62 6.0 6.3 5.9 6.2 2.7 3.0 3.0 3.0
25 Pottery, china, glass
andproducts459 454 433 429 11.1 11.7 11.6 11.6 3.8 4.2 4.3 4.4
26 Ironandsteel 338 331 308 297 18.4 17.7 15.1 16.7 5.6 5.8 6.1 6.2
27 Non-ferrous metals 170 170 161 161 12.4 11.4 10.9 12.2 4.7 5.0 5.1 5.2
28 Fabricated metal
products847 850 813 817 9.5 10.3 9.5 9.8 3.8 4.7 4.3 4.3
29 Non-elect.
machinery1,192 1,197 1,074 1,087 11.4 11.1 10.3 11.2 4.6 4.9 5.0 5.1
30 Electrical machinery 1,942 1,927 1,773 1,750 10.4 10.3 10.4 11.2 3.7 4.0 4.3 4.4
31 Transport equipment 943 974 937 914 13.3 12.7 12.4 13.7 4.9 5.2 5.3 5.4
32 Prof. andscientific
equipment251 236 206 198 8.1 8.2 8.0 8.5 3.9 4.2 4.3 4.4
33 Arms andweapons 7 10 8 724.1 18.0 17.4 25.7 6.0 5.5 5.9 6.6
34 Other 253 251 232 228 8.6 9.5 9.3 9.3 3.2 3.6 3.7 3.7
Source: Dataprovided bytheJapanese authorities.WT/TPR/S/32 Trade Policy Review
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46. Manufactured products account forabout 99percentofJapan'stotalmerchandise exports
andsome 60percentofitstotalmerchandise imports.78Against abackground ofrapid growth of
imports, including reverse imports fromoffshore production byJapanese companies, theratioofforeign
todomestic production byJapanese companies forsome products, including colour televisions and
stereophonic equipment, hassubstantially increased, withdomestic production down (section (iii).
Theshare ofimported intermediate goods inJapan'smanufacturing isalsoincreasing (Table IV.8).
Table IV.8
Share ofimports ofintermediate goods imports inJapan 'sdomestic manufacturing
(Percent)
1988 1994
Office machinery 11.4 11.7
Transport machinery 2.8 6.7
Computers andperipheral devices 8.8 13.2
Telecommunication equipment 4.1 12.2
Consumer electric appliances 4.5 11.6
Heavy electric machinery 5 9.3
Trucks, buses 0.8 1.7
Passenger cars 1.1 1.4
Watches, clocks 10 21.9
Optical machinery 5 23.2
Source: Dataprovided bytheJapanese authorities.
47. Labourproductivitylevels,andtheirratesofchange,varywidelyamongJapanesemanufacturing
sectors (Chart IV.6). Sectors withhigher productivity levels, above thefairly moderate-growth
manufacturing average, include chemicals, electrical machinery, motor vehicles andinstruments; lower
productivity sectors include foods andclothing.
48. Thesimple average applied tariff formanufactured imports is4.9percent.79Simple average
tariffs arehigher thanthemanufacturing average notably infoodandleather products, textiles and
clothing andfootwear. Tariffs range from zeroto251percent, which istheadvalorem equivalent
ofspecific rates oncertain silk-worm items; other highrates areinrawsilkandfootwear, with
advalorem equivalents ofspecific ratesofover150and123percent,respectively. Tariff escalation
isevident inanumber ofsectors, including foodmanufacturing, where, forexample, thedifference
between theaverage tariffs forfullyandsemi-processed items is29percentage points, andinpetroleum
refining, where thedifference issome 7percent(Table AIII.1). There aretariff quotas oncertain
foodproducts, alcohol, leather andfootwear products sectors (Table AIII.5). Remaining non-tariff
border measures include themonitoring agreement withtheEuropean Union onpassenger carexports,
tobeeliminated in199980,annual government-to-government consultations withChina andKorea on
trade levels forsilkproducts, andanimport quota onsilkproduct imports from China bytheJapan
Textiles Import Association (Chapter III(3)(iii)(a)).
78MITI (1997).
79Anaverage ofsome 7,100 tariff linesinHSChapters 25-99. Using theISICclassification, Japan 'ssimple
average tariff ratesformanufacturing are5and9.5percentexcluding andincluding food, beverages andtobacco
industries, respectively.
80Under theUruguay Round, theEuropean Union (EU) has"grandfathered" thevoluntary export restraint
(VER) onJapan 'scarexports totheEU.Japan WT/TPR/S/32
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WT/TPR/S/32 Trade Policy Review
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49. Small andmedium-size enterprises (SMEs) account forabout 73percentofmanufacturing
employment. Against abackground oftheyenappreciation after1994andincreased Japanese offshore
production andimports, SMEs wentthrough a"period ofrootandbranch adjustment", withadecline
incorporate earnings andadelay intherecovery ofbusiness confidence.81Support policies forthese
enterprises include taxconcessions, andlow-interest loans fortechnical development, establishment
ofnewbusinesses andforcomputerization. Total support forSMEs in1997 isestimated at
¥186.5 billion.82
(ii) Motor vehicles andautomobile parts
(a) Motor vehicles
50. Japan'smotor vehicle industry isthethird largest intheworld, with20percentofworld
production byvolume. Thesector employed 869,000 people in1994.83Theindustry hasundergone
substantial restructuring inrecent years.84Domestic production wasjustabove 10million unitsin1995;
thisroseby1.5percentin1996, withoutput ofpassenger carsupby3.3percent. However, domestic
production hasshown arising trend inrecreational-type vehicles (RVs) andwagons: passenger cars
hadaproduction share of36percentin1995, down 11percentage points from1990, while theshare
ofRVsrose13percentage points, to26percent, overthesame period.85
51. Exports ofvehicles fromJapan havedeclined steadily, fromapeakof6.7million unitsin1985
tosome 3.8million unitsin1995and3.7million unitsin1996(Chart IV.7). Exports ofmotor vehicles
andrelated products were some 40percentofJapan'smerchandise exports (inyenterms) in1996,
and11percentofJapan'stotalimports. In1995, Japan'sexports accounted for22.0percentofworld
exports ofthese products anditsimports accounted for1.8percentofworld imports.86
52. Production byJapanese auto-companies abroad hasexpanded since Japan'slastTrade Policy
Review. Japanese automobile manufacturers haveinvested inabout 50countries andregions todate.
Amain objective ofthese investments hasreportedly included meeting thedemand forautomobiles
inthehostcountries.87In1996, Japanese automakers 'production inNorth American plants increased
by4percent, to2.4million units; inEurope, Japanese automakers produced 708,000 units, up
15percentfrom theprevious year(Chart IV.8). There hasbeennomajor inward foreign direct
investment inrecent years.
81Small andMedium Enterprise Agency (1996).
82Including support fororganizational guidance andbusiness promotion.
83Nikkan Jidosha Shimbunsha (1996). Itisestimated thatemployment stemming directly orindirectly from
automotive-related industries accounts forapproximately 7.1million, equivalent toabout 11percentofJapan 's
totallabour force.
84E.g. Nissan 'sZama factory closed inMarch 31,1995.
85Nippanren, Jidosha-hanbai 81996.
86Nikkan Jidosha Simbunsha (1996).
87MITI (1996a).Japan WT/TPR/S/32
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WT/TPR/S/32 Trade Policy Review
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53. Sales ofimported vehicles inJapan increased by8.6percentin1996, to393,000 units
(ChartIV.9).Importedmotorvehiclesaccountedforsome10.6percentoftheJapanesemarketin1996,
upfrom 10.2percentin1995. Dealers selling foreign-made motor vehicles numbered 5,100 at
end1996, up5.7percentfrom theprevious year. European carshaveashare ofapproximately
68percentoftheimport market, followed byU.S.-made vehicles, withabout 31percent.88European
andtheU.S.-made motor vehicles heldsome 99percentofJapan'simport market in1996.
54. Japan'sapplied tariffs onimports ofautomobiles andautopartsiszero(Chart III.3).89Japan
hasnotusedanti-dumping orcountervailing measures intheautomobile sector. Prior toimportation,
motor vehicles generally needtomeetatype-approval test. Vehicles approved forimportation into
Japan arelisted inTable IV.9. Insome instances approval authority forcertain testshasbeenassigned
toforeign testing institutes, including inFrance, Germany, Italy andtheUnited Kingdom
(Table IV.10 (a)).Inaddition, foreign liaison offices havebeenestablished bytheJapanese authorities
tofacilitate exports offoreign carstoJapan (Table IV.10 (b)).
88Thefigures include carsmade byforeign subsidiaries ineachcountry, e.g.Honda U.S., Ford-Germany.
89HSChapter 87,except foritems under HS87.10, ontanks andother armoured combat vehicles, etc.Japan WT/TPR/S/32
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Table IV.9
Type designation approvals forcarsimported intoJapan, 1987-96
Make ofvehicle Type Examination period
BMW
1987 2types Within 2months
1988 2types "
1990 8types "
1991 3types "
1992 8types "
1993 4types "
1994 4types "
1995 3types "
1996 12types "
Total 46types
VOLKSWAGEN/AUDI
1987 6types Within 2months
1988 4types "
1989 5types "
1990 2types "
1991 13types "
1992 19types "
1993 10types "
1994 10types "
1995 5types "
1996 10types "
Total 84types
MERCEDES BENZ
1987 2types Within 2months
1988 9types "
1990 11types "
1991 5types "
1992 11types "
1993 11types "
1994 3types "
1995 4types "
1996 6types "
Total 62types
OPEL
1989 1type Within 2months
1992 2types "
1993 1type "
1994 6types "
1995 10types "
Total 20types
GENERAL MOTORS
1992 1type Within 2months
1993 2types "
1994 4types "
1995 3types "
1996 2types "
Total 12types
CHRYSLER
1994 1type Within 2months
1995 1type "
1996 4types "
Total 6types
Source: Dataprovided bytheJapanese authorities.WT/TPR/S/32 Trade Policy Review
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Table IV.10
(a)Designated motor vehicle testing institutes, 1997
Nation Testing institute Comments
Germany Rheinisch-Westfälischer Technischer Überwachungs-Verein e.V. Certified for15of47required tests
Technischer Überwachungs-Verein Bayern e.V. Certified for21of47required tests
Technischer Überwachungs-Verein Hannover e.V. Certified for22of47required tests
Technischer Überwachungs-Verein Rheinland e.V. Certified for13of47required tests
Technischer Überwachungs-Verein Baden e.V. Certified for8of47required tests
Staatliche Technishe Überwachung Hessen Certified for16of47required tests
United
KingdomVehicle Engineering andType Approval Centre, Department of
TransportCertified for6of47required tests
France Union Technique del'Automobile duMotocycle etduCycle Certified for18of26required tests
Italy Centro Superiore Ricerche eProve Autoveicoli eDispositivi di
Roma, Ministero deiTransportiCertified for2of47required tests
Centro Prove Autoveicoli diTorino, Ministero deiTransporti Certified for4of47required tests
(b)Establishment offoreign liaison offices
Year Location
1978 Belgium, Brussels, Mission duJapon auprès desCommunautés Européennes
1979 United States, NewYork, Japan Trade Centre
1985 Germany, Bonn, Japanische Botschaft
1988 Switzerland, Geneva, Japan Automobile Standards Internationalization Centre Geneva Office
1994 United States, Detroit (MI), Japanese Consultate-General
Source: Information provided bytheJapanese authorities.
55. Voluntary export restrictions onpassenger carstotheUnited States were terminated in
March 1994 (exports totheUnited States decreased by25.3percentin1995 andbyafurther
10.6percentin1996). Under the"consensus" withtheEuropean Union regarding automobile exports,
Japan'sdirect exports fellby12.9percentin1995 andincreased 1.3percentin1996. For1997,
JapanandtheEUreachedagreementona1.3percentincreaseintheexpectedexportlevel,to1,092,000
units. Itshould benoted, however, thatJapan'sautoexports totheEUhaveremained below their
"agreement levels" overthepastthree years.
56. Regulatory changes, resulting primarily from theconclusion ofthe1995 Japan-U.S. Autos
andAutoPartsConsultations,includethereviewofdefinitionofDisassemblingRepair.90Anamendment
totheRoadVehiclesActalteredthemandatorymotorvehicleinspection(shaken)system.Majorchanges
inthesystem include extension oftheperiod forshaken totwoyears forvehicles older than11years
(from oneyearpreviously), elimination ofthesix-month check-up requirement, anddecrease inthe
90Among themeasures resulting fromtheconsultations, Japan committed to:provide information, exhibition
space andimport promoting finance toforeign vehicle manufactures; support Japanese vehicle manufacturers '
efforts toexpand research anddevelopment inforeign countries; increase suppliers 'sales opportunities without
adverse discrimination based oncapital affiliation; continue opendesign-in andprocurement processes toforeign
parts suppliers inJapan andtosuppliers inother countries; initiate deregulation oftheauto-parts after sales
market inJapan; andreview regulations upon request byforeign vehicle manufacturers andauto-parts suppliers,
toimprove market access; WTO (1996).Japan WT/TPR/S/32
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number ofitems forregular 12-and24-month check-ups. Japan participates innomutual recognition
agreement onmotor-vehicle testing.
(b) Automobile parts
57. In1995, Japanese domestic production ofautomobile partsincreased by2.5percent,following
twoyears ofdecline. Production continued toincrease in1996, by1.6percent. Exports totalled
¥1.79 trillion in1995, down 0.7percent, andimports were ¥136 billion, up17percentfrom the
previous year.91According totheauthorities, Japan'simports fromtheUnited States andtheEuropean
Union increased byabout 9and2.6percent, respectively, inFY1996.
58. Ontheregulation structure, components regarded asessential tovehicle safety, called "critical
parts", mustbereplaced either byacertified garage approved ascapable ofrepairing allcritical parts,
orthereplacement needs tobechecked byMinistry ofTransport (MOT) Land Office inspection
procedures. TheUnited States hasclaimed thatclose Japanese intercorporate relationships make it
difficult forforeign automotive partssuppliers tocompete withJapanese-owned suppliers fororiginal
equipment (OE) salestoJapanese automobile assemblers.92Thus, withaviewtoimproving market
access, Japan in1995removed fourparts(shock absorbers, struts, power steering equipment, andtrailer
hitches) fromthelistof"critical parts"; fourother parts(stabilizers, torque rods, torsion barsprings,
andclutchesoftwo-wheeledvehicles),werewithdrawninAugust1996.93Inaddition,inFebruary1997,
MOT announced special approval garages, "Specialized Certified Garages", which canperform repairs
ononeormore critical-parts assemblies.94
(iii) Electrical machinery andequipment
59. Arapid increase ofJapan'sforeign direct investment (FDI) intootherAsian countries isevident
inthesector. Between FY1993 andFY1995, suchflows increased by66percent, withabout
¥239 billion inFY1995. Reflecting thisoutward investment, theratioofforeign todomestic production
byJapanese companies hasbeenrising.95Against thisbackground, inaudio-visual appliances andother
electrical appliances sectors, exports ofpartshaveshown anincreasing trend, whereas those offinished
products hasgenerally decreased since 1993.96
60. Tariffs onimports ofmostelectrical machinery andequipment arezero, except forsome wires
andothermetal products, withasectoral average applied tariffof0.2percent(HS85.44 andHS85.45)
(Chart III.3).
91InU.S. dollar terms, exports increased by8percentandimports by28percent, reflecting inpartthe
yen'sappreciation against theU.S. dollar.
92USTR (1997a).
93USTR (1997a).
94USTR (1997a).
95Forexample, theratio forrefrigerators andVCR'seach roseby10percentage points to90.6 and
124.7 percent, respectively, in1995.
96MITI (1997a).WT/TPR/S/32 Trade Policy Review
Page 116
Semiconductors
61. Production ofsemiconductors in1995 amounted to¥4.6trillion, up19.2percentfrom the
previous year; domestic demand was¥2.9trillion, up21.1percent. In1996production anddomestic
demand weredown by1.1percentandup7.9percent,respectively. Employment inthesector has
beenonanincreasing trend; inDecember 1996about 137,000 people wereemployed, up0.4percent
from December 1995.
62. Imports amounted to¥1.3trillion in1995, anincrease ofalmost 26percentover1994; in1996
imports were¥1.3trillion, upafurther 26percent. According totheauthorities, microprocessor units
(MPUs)areamongmajorcomponentsoftheincreasedimportdemand.Exportsweredown0.2percent,
to¥2.8trillion in1995; in1996 theyalsoslightly decreased.
63. Reflecting rapid growth inthesalesofpersonal computers, semiconductor manufacturers have
builtupproduction capacity fordynamic random access memory (DRAM) chips, reportedly leading
toanoversupply afterthesecond halfof1995.97Against thisbackground, theaverage price ofa
4megabyte DRAM decreased rapidly from ¥650 inMay1996 to¥260 inMay1997; 16megabyte
DRAM prices alsodeclined overthesame period, from ¥2,600 to¥905.98
64. The1991Japan-U.S.SemiconductorArrangementexpiredon31July1996.On2August1996,
Japan andtheUnited States released aJointStatement concerning semiconductors, which according
totheJapanese authorities, forgoes statistical analysis ofmarket share heldbyforeign-affiliated
semiconductors intheJapanese market; such ananalysis hadbeen afeature oftheprevious
Arrangement.99
65. Japan andtheUnited States alsoagreed toestablish theGlobal Government Forum (GGF) at
thegovernmental level, todiscuss issues facing theworld semiconductor industry, andinvited
participation oftheEuropean Union andKorea. According totheJapanese authorities, theGGFallows
anopportunity foritsparticipants, inaWTO consistent manner, todiscuss:
- tradeandinvestmentliberalization,includingremovaloftariffsandothermarketbarriers;
- legalregimes thataffect thesemiconductor industry, e.g.regulation andtaxation;
- environment, workers 'health andsafety, andstandardization;
97Kokuseisha (1996).
98Theprices areforbulkpurchases.
99TheJapanese andU.S. Governments jointly calculated theshare offoreign-based semiconductors inthe
Japanese market during thefirstquarter andthesecond quarter of1996 tobe,inpercent,
1stQuarter of1996 2ndQuarter of1996
Formula 2 27.3 26.8
Formula 1 26.9 26.4
Formula1:Foreign-basedsemiconductorsidentifiedby"finalassembly";"captives"(semiconductorsmanufactured
andused internally byacompany thatdoes notsellsemiconductors inthemarket) arenotincluded.
Formula 2:Foreign-based semiconductors areidentified by"brand" and"captives" areincluded.Japan WT/TPR/S/32
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- protection ofintellectual property rights;
- present andfuture approaches tobasic scientific research; and
- promotion ofthe"information society", including market development.
On16December 1996, thefirstmeeting oftheGGF washeldinTokyo: according totheauthorities
themembers shared acommon understanding oftheimportance ofinternational trading rulesandagreed
onthepromotionofcooperativerelationships;otherissuesdiscussedatthemeetingincludedtheindustry
andmarket situations, policies related tothesector, andinternational cooperation between theindustries.
66. UnderanagreementbetweentheElectronicIndustriesAssociationofJapanandtheSemiconductor
Industry Association ofAmerica, theprivate sector established theWorld Semiconductor Council.
TheCouncil istopromote cooperation regarding newly emerging global issues andto"discuss and
engage inavariety ofactivities, including cooperative activities between users andsuppliers".100The
firstmeeting oftheCouncil washeldinHawaii on11April 1997; according totheauthorities, the
members recognized theimportance ofbothuser/supplier cooperation onaworld-wide basis, andthe
promotion ofcooperation between suppliers inareassuchasstandardization, environmental protection
andintellectual property protection.
67. MFN import tariffs arezeropercent. Japan ispartytotheInformation Technology Agreement,
which willeliminate mosttariffs intheareaofinformation technology. BytheendofMarch 1997,
40countries andregions including theUnited States andtheEuropean Union hadjoined theITA,which
coversseveralcategoriesofproductsincludingcomputers,telecommunicationproducts,semiconductors,
semiconductor manufacturing equipment, software andscientific instruments.101
(iv) Pharmaceuticals andcosmetics
(a) Pharmaceuticals
68. Japan istheworld 'ssecond largest market forpharmaceuticals, withtotalsalesof¥6.6trillion
in1996. Employment inthesector in1995 wasabout 240,000 persons. Exports in1995 were
¥184.5 billion andimports totalled ¥471.6 billion. In1996exports were¥228.1 billion representing
0.5percentofJapan's1996merchandise exports andimports amounted to¥499.5 billion, representing
1.3percentoftotalmerchandise imports. Europe isthelargest trading partner interms ofbothexports
andimports, followed bytheUnited States. Sales ofthetop20foreign subsidiaries inJapan were
¥1.23 billion in1995, a5.5percentincrease overtheprevious year.Itisestimated thatsalesbyforeign
companies amounted to25percentoftotalsalesinJapan. Foreign companies havebeenmoving away
from production under licence byJapanese companies andtowards establishing theirownnetworks
inJapan.102
69. Pharmaceuticals imports aredutyfree(Chart III.3).
100Joint Statement bytheGovernment ofJapan andtheGovernment oftheUnited States Concerning
Semiconductors, 2August 1996.
101WTO Focus, No.15,1997, Geneva.
102Yakuji Jihosha (1997).WT/TPR/S/32 Trade Policy Review
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70. AccordingtotheprovisionsofthePharmaceuticalAffairsLawof1960,businessesmanufacturing
orimporting pharmaceuticals require alicence from theMinister ofHealth andWelfare (MHW).103
Anexamination isconducted bytheauthority before approval isgranted. Itwould appear thatnotall
foreign clinical testdataareaccepted inthepermission procedures.104According totheauthorities,
thestandard processing forapprovals is18months forprescription drugs, tenmonths forproprietary
drugs, andsixmonths forin-vitro diagnostic reagents. Upon request, applicants areinformed ofand
provided reasons fordelay ifprocessing isnotcompleted within these periods.105TheCentral
Pharmaceutical Affairs Council investigates anddiscusses matters ondrugs andmedical devices, upon
request bytheMHW Minister.
71. Recent major changes inthereview system fornewdrugapplication include: entrustment
ofauthority forquality assurance review totheOrganization forDrug ADR Relief, R&DPromotion
andProductReview,whichisacooperationapprovedbyMHWundertherelevantlaw;andtheabolition
ofthePharmaceutical Affairs Bureau, which hasbeenreplaced bythePharmaceutical andMedical
Safety Bureau ofMHW.
72. In1994, over-the-counter pharmaceuticals represented 15percentofallpharmaceutical sales
inJapan, amarket share thathasbeenstable forsome fiveyears.106According totheauthorities, the
Government decided toreclassify main vitamines, certain herbs, andmain minerals asfoodproducts
inMarch 1997, March 1998, andMarch 1999, respectively.
73. Japan participates intheInternational Conference onHarmonization ofTechnical Requirements
forRegistration ofPharmaceuticals forHuman Use(ICH), which wasorganized in1991 among
Governments andindustry representatives oftheEuropean Union, Japan andtheUnited States to
harmonize quality, safety andefficacy requirements ofpharmaceuticals.107Initsfourth Conference,
heldinJuly1997, themembers agreed thatacommon technical document would beusedinthe
application procedure forapproval foranewpharmaceutical, andnewmultidisciplinary guidelines
were adopted.
74. Alarge number ofprescription drugs usedinmedical services areunder thePublic Health
Insurance Reimbursement System, where onofficial Drug Tariff (reimbursement price) isset.The
average priceintheDrug Tariff declined by4.4percentintheApril 1997revision. TheUnited States
hassuggested thattheDrug Tariff does"notadequately, orinatimely fashion, compensate firms for
thecostsinherent indeveloping andmarketing new,innovative equipment andpharmaceutical products
inJapan".108
103According totheauthorities, manufacturing andimportation ofcertain drugs arelicensed byprefectural
governors.
104According totheauthorities, thecriteria foraccepting foreign clinical testdataintheapproval procedures
aredefined inaMHW notification, which stipulates thatdomestic clinical testdataarenormally required for:
testsonabsorption, distribution, metabolism, andexcretion; dosefinding tests; andcomparative clinical tests.
105Pharmaceutical Affairs Bureau ofMHW (1996).
106Japan Pharmaceutical Manufacturers Association (1996).
107Pharmaceutical Affairs Bureau ofMHW (1996).
108USTR (1997a).Japan WT/TPR/S/32
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75. Governmentfinancialsupportforthesectortotalledsome¥2.3billionin1995includingresearch
promotion projects bytheOrganization forDrug ADR Relief, R&DPromotion andProduct Review.
(b) Cosmetics
76. Forgranting alicence tomanufacture orimport cosmetics, theMHW usesapositive list,such
thatonlyingredients withprior approval canbeused.109Each product tobeimported must havea
separate licence, andinprinciple meetlabelling requirements. Forparallel imports, submission by
themanufacturer ofdocuments specifying theproduct 'singredients hadbeenrequired; however, since
15March 1996, parallel imports havebeenallowed without suchdocuments, provided thelabelling
ofingredients isspecific enough.110InMarch 1997, MHW conducted areview oftheregulations on
manufacturing andimportation ofcosmetics inlinewithinternational standards.
77. Applied tariffs onimports ofcosmetics average about 2.3percent; theyaretobereduced
toabout 1.2percentinJanuary 1998 (Chart III.3).
78. Theeffects ofthe1992measure bytheJapanese FairTrade Commission (FTC) torevoke some
50percent oftheAntimonopoly Act(AMA) exemptions for14cosmetic products and
14over-the counter pharmaceuticals were positive, according totheauthorities; there hasbeenan
increase intheratioofretail stores selling theAMA non-exempt items atadiscount price aswellas
discounting ofAMA exempt products.
(v) Ironandsteel
79. Japan istheworld 'sthirdlargest steelproducer, withcrude steelproduction of98.8million
tonnes in1996down 2.8percentfrom 1995. Since Japan'slastTrade Policy Review, rationalization
ofmanagement andbusiness operations (including staffcutbacks) havecontinued. Among thetop
fiveblast-furnace steelproducers, thelabour force insteelproduction declined by27.2percentin
thefour-year period FY1992toFY1995, while totalemployment bythesecompanies fell23.5percent
during thesame period. Wages havebeenstable during thelastfouryears; in1996, average monthly
cashearnings foraregular employee ofironandsteelindustry rose0.8percent.111Oversupply, due
to"anexcessive buildup ofinventories since 1995inthemajor European Union countries andJapan",
wasofconcern inthelatter halfof1995.112According totheauthorities, effects ofrationalization
became visible in1995 when thebalance sheets ofthetopfiveproducers turned tosurplus.
80. Applied tariffs onimports currently average about 2.9percent; theyaretofalltoabout
0.2percentasaresult ofJapan'scommitments intheUruguay Round (Chart III.3).
109Safety inspections andseparate licences arerequired foreachproduct containing ingredientes notlisted
inthelist.
110MCA (1996).
111Thefigure iscalculated forestablishments withfiveormore regular employees. Cash earnings arethe
sumofcontract earnings andextra payments. Data arebased ontheMonthly Labour Survey; Statistics Bureau
ofMCA (1997).
112International Trade Reporter, 20November 1996.WT/TPR/S/32 Trade Policy Review
Page 120
81. Imports ofsteelfellsharply in1996 (to8.6million tonnes) afteralarge increase in1995
(11.7 million tonnes) based, according totheauthorities, ontheestimated reconstruction demand related
totheGreat Hanshin-Awaji Earthquake. Exports fellforthesecond consecutive yearin1996
(to20.7million tonnes), when Japan'sshare inworld steelexports wasabout 8.3percent.
82. InJune1996, theU.S. International Trade Commission (ITC) concluded anegative injury
determination foranti-dumping andcountervailing duties onimported flatsteelfromcertain Japanese
sources. InFebruary 1997, aU.S.wireproducer filedananti-dumping suitagainst imported wire
forneedle bearings from Japan; thematter iscurrently under investigation bytheITC. According
totheauthorities, theITCmade anegative determination initspreliminary anti-dumping investigation
inMarch 1997.
83. Ironandsteelproduction businesses canapply forgovernment assistance, suchaslowinterest
loans, loanguarantees andtaxbreaks, intheframework oftheLawonTemporary Measures toFacilitate
Business Innovation.113According totheauthorities, national treatment isguaranteed intheapplication
ofthelaw.
(5) Services
(i) Introduction
84. In1995, theservices sector accounted for64.3percentofJapan'sGDP, up2.9percentage
points since 1990, andfor67.9percentofemployment, up3percentage points (Table I.1).114The
major services sectors inJapan include realestate, wholesale andretail trade, construction, financial
services, andtelecommunications andtransportation.115Theverysizeofthesector, andthecontinued
growth ofitscontribution toGDP, suggests theimportance ofproductivity improvements inservices
tooverall Japanese growth. Interms ofemployment, itisnoteworthy thatthesector created some
2.5million jobsintheperiod 1990 to1995, while Japan'stotalemployment increased bysome
2.1million. Japan wastheworld 'sfifthexporter andthirdimporter ofservices in1995; thesector
113TheLawaimstofacilitatebusinessinnovationby"anindustryinthemanufacturingsectorwhereproduction
and/or employment levels havedeclined orareexpected todecline asaresult ofdiverse andstructural changes
inthedomestic andinternational economic environment oranindustry intheretail orwholesale sector which
isclosely linked totheabove industries" asprovided inparagraph 1ofArticle II.Theindustries areselected
according tothecriteria that: (1)foramanufacturing industry, (i)overthepastfiveyears, production of
theindustry hasdecreased by5percentormore andemployment oftheindustry hasdecreased, or(ii)over
thepastthree years, production oftheindustry hasdecreased by10percentormore, andemployment ofthe
industry hasdecreased; and(2)foraretail orwholesale industries, tobeclosely linked tothemanufacturing
industries selected bythecriteria above. Ironandsteelrelated sectors selected according tothecriteria include
ironindustries withblastfurnaces, steelmanufactured withelectric furnaces andwithrolling facilities, coldrolled
steel (excluding copper pipemanufacturing andsteel rolling), wire drawing, grya andductile ironcasting
manufacturing (excluding castironpipes andmalleable ironcasting manufacturing), malleable ironcasting
manufacturing, steel casting manufacturing, steel forging manufacturing from ingots; WTO document
G/SCM/Q2/JPN/12, 5May 1997.
114Theservices sector isdefined toinclude construction butexcludes public services andnon-profit services;
in1995 thelatter accounted for7.7and2.2percentofGDP, respectively.
115Indescending order ofvalue added, according tothenational accounts classification.Japan WT/TPR/S/32
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hasadeficit ofUS$50 billion, theworld 'slargest.116Transport andtourism contribute significantly
totheexternal services deficit. Cross-border imports ofservices accounted forsome 29percentof
allJapanese imports in1996, andexports for14percentofallJapanese exports. Specific foreign
ownership restrictions remain in,interalia,telecommunications andtransportation.
85. Japan wasanactive participant intheservices negotiations intheUruguay Round andinthe
resultant General Agreement onTrade inServices (GATS). Japan'sSchedule ofSpecific Commitments
under theGATS covers 99ofthe156subsectors.117Japan hasnottaken anyMFN exemptions. Its
GATScommitmentsaresubjecttosomegeneral(horizontal)limitations.118Formorethan20subsectors,
Japan hasassumed nobindings withregard tothecross-border supply ofservices, dueto,according
totheauthorities, alackoftechnical feasibility. Japan participated actively inthenegotiations in
maritime transport, basic telecommunications andfinancial services. According totheauthorities,
Japan willcontinue toliberalize itstrade inservices.
86. Major public equity participation inJapan'sservices includes theGovernment 's65.52 percent
holding ofNippon Telegraph andTelephone Corporation (NTT), aswellasownership inmajor
international airports andpublic financial institutions.
87. Theregulatory environment forservices isoftencomplex andopaque inJapan. Inmany cases,
reference totherelated lawsandordinances isnotsufficient tounderstand theexact scope ofthe
regulations; itmaybenecessary toconsult withrelevant sections ofcompetent ministries foraconsistent
interpretation oftheregulations. Major trading partners haveexpressed theviewthere isaneedto
simplify theadministrative procedures, andthenotification andreporting requirements, tobring
transparency totheregulatory environment, andtoclarify various regulatory measures.
88. Ithasoften been pointed outthatJapan'sservices sector haslower productivity thanthe
manufacturing sector.119Concerns havebeenraised onthecloselinksbetween complicated regulations
116IMF (1996). Balance-of-payments dataforJapan areavailable inyenterms for1996 from theBank of
Japan (BOJ). Japan 'sservices trade deficit in1996, according totheBOJ, was¥677.6 trillion. Inthissection,
figuresfortradeinservicesarebasedonbalance-of-paymentsconventions,reflectingtransactionsbetweenJapan's
residents andnon-residents. Thisdiffers from thewider concept underlying theGeneral Agreement onTrade
inServices, which distinguishes fourdifferent modes ofsupply: cross-border supply; consumption abroad;
commercial presence; andpresence ofnatural persons. Although notgenerally covered bytrade statistics, the
latter twocategories -including theoperation ofsubsidiaries abroad andcross-border movement ofstaff-are
important delivery channels inmany services areas, including banking andinsurance.
117Thetotal number ofsubsectors areaccording toGATT (1994). Subsectors inwhich Japan made no
commitments include postal andcourier services, about 20services inthetransport sector, medical anddental
services intheprofessional services sector, andradio andtelevision services intheaudiovisual sector.
118Itscommitment onmarket access, aswellasnational treatment forthenatural persons mode ofdelivery,
isunbound inallthesectors horizontally, except forsome categories ofnatural persons, e.g."intra-corporate
transfers" asadirector orasacertain professional service provider, withsome qualifications, foraperiod not
exceeding fiveyears, andsome short "business visits" notexceeding 90days. National treatment isunbound
forresearch anddevelopment subsidies forthenatural persons andcommercial presence modes ofdelivery.
GATS/SC/46, 15April 1994.
119Forexample, EPA (1996c).WT/TPR/S/32 Trade Policy Review
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andlowproductivity120,suggesting theneedforderegulation oftheservices sector. Reflecting such
concerns, theGovernment 'splans andmeasures forstructural reform, e.g.theDeregulation Action
Program andtheProgram forEconomic Structure Reform, haveincluded certain services among the
mainsectorsforreform.Structuralreformisexpectedtopromoteapro-competitivemarketenvironment
andhelpstreamline management, thusresulting inhigher productivity.121Thisisalsoexpected tohelp
other parts oftheeconomy, including themanufacturing sector, which hasaservices input ofsome
40percent.
89. Achange inpolicy focus isalsoexpected. Thus inareas suchastelecommunications, Japan
isgraduallyabandoningitstraditionalrelianceongovernmentinterventionandcontrol,includingthrough
administrative guidance; andthere isamove towards eliminating theso-called "demand-supply
adjustment" provisions, bywhich theauthorities control firms'entry intoandexitfrom themarket
inorder tomaintain "proper" competition levels.
(ii) Construction
Market Structure
90. TheshareofconstructioninJapan'sGDPhasbeenstableataround10percentthroughout1990s.
Domestic construction investment reached ¥79.8 trillion inFY1995, up0.7percentfromtheprevious
year. ForFY1997, spending onpublic construction projects isexpected toamount to¥34.8 trillion,
while totalspending under theBasic PlanforPublic Investment fortheyears FY1995-FY 2007 is
projected atabout ¥630 trillion. Employment inthesector issome 6.6million, which ismore than
10percentofthetotallabour force.122
91. Cross-border tradeinconstruction services isasmall fraction oftotalservices trade, duemostly
tothenature oftheservice; in1996, imports amounted to¥523billion, or3.7percentoftotalservices
imports, andexports were¥644 billion, equivalent to8.9percentoftotalservices exports. Foreign
companies established inJapan reportedly undertook construction work valued at¥127.4 billion, or
0.13percentofthetotalmarket, in1994.123Construction firms inJapan, totalling 557,000, aremostly
small andmedium-sized businesses. Thenumber oflicensed foreign affiliated firms hasremained
largely unchanged inthelastfiveyears; asof30September 1996, atotalof77foreign affiliated firms
operated inJapan.
Regulatory framework
92. Themainrequirement currently governing access totheconstruction market, according tothe
Construction Business Law, istoobtain permission from either theMinister ofConstruction ora
prefectural governor; forsuchpermission, commercial presence -either abranch orlocalsubsidiary -
120See, forexample, TheAdministrative Reform Committee (ARC, 1995 andMITI, 1997a).
121ARC (1995).
122MOC (1996).
123TheWall Street Journal, July2,1996Japan WT/TPR/S/32
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ismandatory.124Construction enterprises inprinciple musthaveasaboard member, atleastoneperson
withfiveyears ormore experience inmanaging thesame typeofconstruction business forwhich
permission hasbeenrequested, andeachbranch orlocalsubsidiary musthaveatleastoneemployee
withacertaineducationalbackground.125SpecialConstructionBusinessesthatsub-contractabovecertain
athreshold126,arerequired toobtain separate permission. Asound financial baseaswellasthe
employment ofacertain typeofengineer ineachoffice, isalsorequired.127
93. Market entry often necessitates complex registration andbidding procedures. There isno
standard public procurement notice forconstruction, architectural, andengineering services; project
procurement andbidding qualification information areprovided onacase-by-case basis. Thedecision
onawarding public works contracts isbased solely uponprice, withthecompany withthelowest offer
priceawarded thecontract.128According totheauthorities, acompany winning acontract fordesigning
apublic-works project (consultancy) maynotparticipate inthebidding foritsengineering and
construction. Asaresult ofthe1994 U.S.-Japan Public Works Agreement, there willreportedly be
reform inthebidding procedures forprojects above acertain value: ¥650million in1996-97 forcentral
government projects, and¥2.1billion forprefectural governments.129Certain foreign engineering
qualifications arerecognized, e.g.ministerial recognition asequivalent toKenchikushi (Japan 's
work/licence category foranarchitect withcertain engineering anddesigning qualifications) maybe
obtained forforeign architects, without requiring theperson totaketheKenchikushi examination.
94. Thearedetailed regulations forthe"movement ofnatural persons" mode ofsupply. The
immigration Control andRefugee Recognition Law, partly revised in1990, isapplied toconstruction
related labour. When certain detailed criteria aremet130,entry permits aregranted according tofour
categories ofwork, namely, skilled labour; architectural design andother technical employment;
124Construction companies requesting permission tooperate inmore thantwoprefectures need, inprinciple,
toobtain permission from theMinister ofConstruction.
125Theperson hastoeither havehadexperience forfiveyears ormore aftergraduating from aJapanese High
School, orthree years ormore aftergraduating from aJapanese University, and,while inschool have studied
some construction related subjects, asdefined byaMinistry ordinance. Equivalent foreign qualifications need
authorization bytheMinister ofConstruction.
126¥30million ingeneral, and¥45million forarchitectural construction, asdefined inArticle 2ofthe
Construction Business Law.
127Theengineerneedstohavepassedaministerialexaminationonseveralcategoriesofengineering,asstipulated
inArticle 27oftheConstruction Business Law, ortohave ministerial recognition asequivalent tothose who
have passed theexam. Anequivalent foreign licence maybeauthorized onacase-by-case basis. Conditions
foraforeign national totaketheexamination areindividually authorized bytheMinister ofConstruction.
128SeeGATT (1995), p.69fordetails ofbidding procedures inpublic works.
129TheWall Street Journal, July2,1996.
130Forexample, toqualify forskilled labour theapplicant mustengage inwork thatrequires skilled expertise
inaspecialized fieldoftheindustry, under acontract signed withapublic orprivate institution inJapan, including
foreign subsidiaries orbranch office; foreign technical employees withexpertise inconstruction orpublic works
must, ingeneral, havemore thantenyears ofpractical experience, andtheapplicant must receive remuneration
intheamount equivalent tothatofaJapanese national engaged inthesame typeofwork. Theperiod ofstay
isuptooneyearandisextendable upon application forrenewal oftheperson 'svisa.WT/TPR/S/32 Trade Policy Review
Page 124
transactions toimport construction materials from abroad; andarchitectural design ortransactions
inimported construction materials.
95. Under GATS, Japan hasscheduled commitments under thecategory "construction andrelated
engineering services", where fewlimitations tomarket access andnational treatment exist.131According
totheauthorities, Japan'sconstruction market hadbeenopenbefore theconclusion oftheUruguay
Round.
Recent deregulation initiatives
96. TheAction PlanonReform oftheBidding andContracting Procedures forPublic Works was
drawn upinJanuary 1994, based onthenegotiations forrevision oftheGovernment Procurement
Agreement (GPA) under theGATT. According totheauthorities, theprocurement system, asaresult,
hasbecome "sufficiently" openandnon-discriminatory toforeign construction firms.
(iii) Telecommunications services
Market Structure
97. Telecommunications isagrowing sector oftheJapanese economy; itnowaccounts forsome
1.8percentofGDP, compared toaround 1.6percentin1990. Nominal growth ofoutput inthesector
averaged 5.6percentayearduring 1990-1994. Nevertheless employment inpublic telecommunication
operations was219,000 in1995, down from311,000 in1985.132Public telecommunications revenue
iscurrently theequivalent ofover 2percentofGDP, up0.5percentage points from 1990.133
International telecommunication hasalsogrown rapidly; thetotalhours ofcallsabroad originating
inJapan, forexample, increased by7percentinFY1995. Industries usetelecommunications services
toasignificant extent; thus, forexample, theshare oftelecommunications services inthetotalinput
costforfinancial services sector was6percentin1994.134In1996, telecommunication exports were
¥144billion, or2percentofservices exports, andimports were¥196billion, equivalent to1.4percent
ofservices imports; these numbers compare with0.4percentofexports and0.9percentofimports
in1992.
98. Cellular telephony hasshown significant development inthelastfewyears; itexpanded from
62,000 subscribers inFY1985 to25.3million by31August 1997. Together withthenumber of
subscribers tothepersonal handy-phone system (PHS)135,which isintheorder of7million, thetotal
mobile phone market nowhaswellover 32million subscribers. According totheauthorities,
derestricting thesales ofmobile phone equipment inApril 1994 contributed totherapid growth of
thissector ofthemarket.136
131Asinmany other services sectors, cross-border supply isunbound duetoalackoftechnical feasibility.
132OECD (1997b).
133OECD (1997b).
134MITI (1996c).
135AJapanese digital mobile phone network withweaker per-antenna emission power.
136Management andCoordination Agency (MCA, 1996).Japan WT/TPR/S/32
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99. Communications charges havebeenlowered, especially inthelong-distance andinternational
communications sector. Forexample, thecharge forathree minute callbetween Tokyo andOsaka
(daytime) wasaround ¥110-180 inFebruary 1997 compared to¥400 in1985; between Japan andthe
United States itwasaround ¥450-440 in1996and¥1,530 in1985.137Local callcharges byNTTfor
athree minute callhavenotchanged since 1985; arecent entrant intothelocaltelecommunications
market inTokyo charges 15percentlessthanNTT. However, thepriceoftelecommunications services
remains significantly higher inJapan thanintheother major industrial countries, reflecting the
monopolization oflocalnetworks byNTT; thuscall-back services havebeengaining ground.138
100. NTT hasadefactomonopoly ofthelocalcommunications market.139Forlong-distance and
international communications, Japan doesnothaveamonopoly supplier, though NTT andKokusai
Denshin Denwa Corporation (KDD) maintain substantially higher shares thanother companies. As
ofearly 1997, there were 18Type-I carriers (with theirowninfrastructure) and27special Type-II
carriers withforeign equity participation, accounting for13and34.6percentofsuch carriers,
respectively.
Regulatory framework
101. TheMinistryofPostsandTelecommunications(MPT)formulatespolicyandregulateswire-and
radio-based services fordomestic andinternational communications. Itisalsoresponsible for
administeringtheTelecommunicationBusinessLaw,fortheregulationofalltelecommunicationsbusiness,
andfortheRadio Law, forwireless telecommunications.
102. Reformin1985topartiallyprivatizetheNTTandtoallowcompetitioninalltelecommunications
marked animportant stage intheprocess ofsectoral liberalization; thenewly established
TelecommunicationBusinessLawdistinguishedtheType-IandType-IIcarriers,withtheformerinstalling
andoperating theirowntelecommunications circuit facilities andthelatter providing services withthe
useofleased circuit facilities equipment fromType-I carriers.140Type-II carriers arefurther grouped
intotwosub-categories: Special Type-II aredefined ascarriers withlargenetwork capacity141providing
services tomany unspecified users, orthose thatprovide facilities forinternational communications;
andGeneral Type-II carriers forallother Type-II carriers.142MPT further defines various subsectors,
including local/long-distance, domestic/international, fixed/mobile, andcable orsatellite. According
totheauthorities, cross-entry between thesesectors isfree. Apart fromNTT, 35companies, including
subsidiariesoflocalelectricitycompanies,providedlocaltelecommunicationsservicesinSeptember1997.
137MPT (1997a).
138OECD (1996d).
139By1996 NTT stillmaintained dominance inthelocal telephone market with 98.6 percentofcalls
(OECD, 1997c).
140Asof31March 1997, there were 135Type-I carriers, 4,588 Type-II carriers.
141Inthecasewhere more than2,000 lines of64kbits/s equivalent areconnected.
142Asof31March 1997, there were 78Special Type-II carriers and4,510 General Type-II carriers.WT/TPR/S/32 Trade Policy Review
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103. Under theTelecommunication Business Law, ministerial permission isrequired forentry into
andexitfromType-I businesses. Theapproval criteria currently include thefirm'stechnical capability,
financial soundness, andlikely contribution tothesound development oftelecommunications services.
Under theAdministrative Procedures Law, thestandard processing period forasubmitted application
isonetotwomonths. Current restrictions tolimitforeign equity participation inType-I carriers will
bepartly eliminated (discussed below) on1January 1998. Registration isrequired upon entry for
Special Type-II businesses, andpriornotification forGeneral Type-II businesses. BothType-I businesses
andSpecial Type-II businesses must employ achief telecommunications engineer.
104. Foreign ownership iscurrently restricted toamaximum ofonethirdofvoting rights, formost
Type-I telecommunication businesses. ForNTT andKDD, nomore thanonefifthofvoting rights
maybeforeign owned andtheirboard members andauditors mustbeofJapanese nationality. According
totheauthorities, theserestrictions willbemaintained bothbecause thereisaneedtoexclude acertain
degree offoreign influence intheoperation ofthese companies, which areJapan'skeycarriers with
avitaltelecommunications network, andtoensure universal services asanessential partofthe
infrastructure fordomestic social andeconomic activities.
105. Charges (tariffs) andtheirmodification must beapproved forType-I businesses thathave
"substantial influence ontheeveryday lifeofcitizens andnational economy".143Forother Type-I
businesses, including most mobile services andservices limited tospecific business useandSpecial
Type-II carriers, priornotification isrequired.144Thesameruleapplies foranypricereduction schemes.
Japan maintains rate-of-return (cost-base) tariff regulation fortariff approvals. According tothe
authorities, therate-of-return regulation serves toprevent telecommunication carriers fromsetting tariffs
atlevels significantly above proper coststandards, inasituation inwhich competition isstill
inadequate.145Applications forsetting ormodifying tariffs require ministerial approval. Thecriteria
forapprovals arepublished andthestandard processing period isbetween oneandtwomonths.
106. Ministerial authorization isrequired foraninterconnection oftelecommunications facilities.146
Conditions forinterconnection havebeendetermined bycommercial negotiation between NTT and
newentrants. Inmany cases, negotiations havebeenlonganddifficult147,despite theenforcement
mechanism forinterconnection stipulated intheTelecommunication Business Law. NTT, forexample,
prohibits General Type-II carriers fromreselling NTT'svoice services, including forvolume discount
arrangements.148Theinterconnection ofdomestic leased circuits andpublic switched networks has
143OECD (1997c).
144Thefollowing telecommunications services byType-I carriers donotrequire approvals: services related
totheprovision ofauxiliary functions; services designed forcommunications inaspecified business use;services
thathaveonlyminimal impact ontheinterests ofusers because ofsubstitution byother services; services related
totheprovision ofterminal equipment; andmobile communications services.
145Thecriteria bywhich theauthorities judge thelevel ofcompetition include thenumber ofcarriers and
themarket share ofthemajor carrier.
146Criteria forauthorization include fairconditions, fairandreasonable consideration ofproper costs,
transparency ofresponsibilities, non-discrimination against third-parties, andthepublic interest.
147OECD (1996d).
148ACCJ (1997).Japan WT/TPR/S/32
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beencompletely liberalized since October 1996. Call-back companies areallowed inprinciple to
operate.149Calling cardservices bycarriers abroad canbeprovided toconsumers inJapan byconcluding
abusiness agreement withJapan'sinternational Type-I telecommunication carriers. Currently, number
portability isnotpossible.150
107. Japan hasfollowed afairly restrictive policy onbroadcasting services andcable TV.151Under
Article 5oftheRadio LawandArticle 5oftheCable Television Broadcast Law, non-Japanese nationals,
orforeign governments ortheirrepresentatives areprohibited fromholding anytypeofradio-station
orcable TVfacility. Foreign equity holding isrestricted tolessthanonefifthofvoting rights; more
thantwothirdsofthecompany'scorporaterepresentativesorboardmembersmustbeJapanesenationals.
TheRadio Law, theBroadcasting LawandtheCable Television Lawmandate thatministerial licence,
approval orpermission isrequired forentry intothemarket. Criteria forpermission include technical
andfinancial standards aswellasnational security andpublic interest considerations. These restrictions
exist, according totheauthorities, fornational security reasons. Standard contracts withcustomers,
including charges, needtobeapproved orfiledwiththeMPT minister.
108. Direct satellite broadcasting isgrowing inJapan. AsatendSeptember 1997, there were
400,000 Japanese households subscribing tocommunications satellite (CS)broadcasting. Toengage
insatellite digital broadcasting requires separate ministerial licences forbroadcasting andforthe
production ofbroadcast contents. Foreign ownership regulations exists foreachcategory.152TheMPT
allocates transponder bandwidths tobusinesses byissuing licences fortheuseofcertain frequencies.
109. Japan hasbilateral agreements onthesupply ofenhanced telecommunications services
(International Value Added Network (VAN) )with17countries, including theUnited States. Since
July1990, international VAN services maybeprovided without abilateral agreement between Japan
andaforeign country, provided thatthecountry doesnotrequest aseparate agreement.153
149Call-back services using apolling oranswer suppression technique havebeen prohibited inlinewiththe
October1996decisionoftheWorldTelecommunicationsStandardsCouncilintheInternationalTelecommunication
Union (ITU).
150OECD (1997a).
151See, forexample, Nambu etal.(1995).
152Forbroadcasting itself, theRadio Lawstipulates thatnoradio station licence shallbegranted to:aperson
whoisnotaJapanese citizen; aforeign government oritsrepresentative; aforeign juridical person or
organization; orjuridical person ororganization which isrepresented byanyperson orbody referred tointhe
preceding three items, oronethird ormore ofwhose officers aresuchpersons, oronethird ormore ofwhose
voting right isoccupied bytheaggregate ofvoting rights heldbysuchpersons orbodies. Asimilar provision
applies totheproduction ofbroadcast contents.
153Abilateral agreement isnotrequired under thefollowing conditions: (1)theinternational VAN services
tobeprovided fallwithin thescope oftheservices defined bytheJapan-U.S. Arrangement; (2)thelaws,
regulations andother legal measures governing telecommunications services atthepoint outside ofJapan donot
prohibit theoffering ofsuch services; and(3)thelaws, regulations andother legal measures governing
telecommunications services atthepoint outside ofJapan donotrequire apre-existing bilateral arrangement with
Japan before such services maybeoffered.
MPT istoconfirm, inwriting totheinternational Special Type-II business, within 30daysofarequest,
thattheabove three conditions have been fulfilled.WT/TPR/S/32 Trade Policy Review
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110. IntheWTO negotiations onBasic Telecommunications, Japan included initsGATS Schedule
alltelecommunications services sectors except telegraph services.154Voice telephony byType-II carriers
andsubsectors ofType-I carriers hadnotbeenlisted inJapan'sprevious Schedule.155Foreign equity
ownership, which hadbeenunbound forType-I carriers andradio stations, aretobeliberalized, except
forNTTandKDD.156Limitations onnational treatment incommercial presence remain forNTTand
KDD.157
Theroadtoreform
111. TheDietpassed alawtorestructure NTT on13June1997.158Major elements intheLaw
include abreak-up ofNTT, byFY1999, intoonelong-distance communications company andtwo
regional communications companies, under apureholding company thatwillnotbeinvolved in
operations.159Inaddition, NTT isallowed toprovide international communications services through
asubsidiary.160Thisrevision willbethemostsubstantial reform since the1985privatization ofNTT.
Thereare,however,someconcernsregardingthepost-revisionstateofcompetitioninregionalmarkets.161
112. Apro-competitiveregulatoryregimeissuggestedundertheDeregulationActionProgram(DAP).
Accordingly, there were legal amendments in1997 toabolish the"demand-supply adjustment" for
approval ofType-I carriers. With respect tothefuture liberalization oftariff regulations, theDAP
stated thattheapproval system forrates would berevised when "conditions forfairandeffective
competition" aresatisfied.
113. Withaviewtoachieving more transparent andcompetition-enhancing rulesofinterconnection,
MPT issued guidelines forinterconnection rules in1996.162Taking these intoaccount, the
Telecommunication Business Lawwasamended inJune1997. According totheauthorities, thenew
interconnectionregimewillensurefair,transparentandpromptinterconnectionwithNTTlocalnetworks
under thefollowing rules:
154GATS document GATS/SC/46/Suppl.2, 11April 1997.
155GATS document GATS/SC/46, 15April 1994.
156Aclause restricting foreign ownership istobeeliminated from theTelecommunications Business Law.
157Alldirectors andauditors must beofJapanese nationality.
158Thebreak-up ofNTT hadbeen under consideration since 1982 (OECD, 1996d).
159Thelong-distance company willbeaprivate company andthetworegional companies willbespecial
corporations withobligations toprovide universal services.
160KDD,whichusedtospecializeininternationaltelecommunication,isnowallowedtooperateinthedomestic
markets.
161Forexample, ARC (1996) expressed concern onwhether fairandeffective competition could besecured
under thisrevision. OECD (1996a) alsoexpressed concern that"just splitting" would notguarantee asufficient
boost tocompetition.
162MPT (1996).Japan WT/TPR/S/32
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- Type-I carriers areobliged tointerconnect;
- thecarriers withdesignated facilities towhich interconnection isessential forother
carriers, suchasNTT localnetworks, areobliged toprepare interconnection tariffs
andtodisclose theiraccounting concerning interconnection; and
- thecarriers withthedesignated facilities mustindicate intheirtariffs interconnection
charges foreachunbundled element, suchaslocalswitches andlocaltransport, based
onactual cost.
Theauthorities statethatinterconnection withdesignated facilities willbeenabled atsome technically
andeconomically feasible pointinthenetwork. MPT plans toliberalize interconnection between public
networks andprivate leased circuits forinternational telecommunications byend-1997.
114. Foreign ownership restrictions willbeeliminated inFY1997 forcable television operators
whoofferType-I carrier services. According totheauthorities, therevision willhelpaccelerate the
convergence ofcommunications andbroadcasting.
(iv) Financial Services
Market Structure
115. Theshareoffinancialservices(includinginsurance)inJapan'sGDPdecreasedfrom5.9percent
in1990 to4.8percentin1995, following thecollapse ofthe"bubble" economy. Employment in
thesector including realestate, hasbeenstable since 1990, ataround 2.6million persons. Trade in
financial services hasrecently expanded rapidly: in1996, imports totalled ¥526 billion (3.8percent
oftotalservices imports), up89percentfrom1995; exports were¥339 billion (4.7percentoftotal
services exports), up495percent. Imports offinancial services rosefrom1.2percentoftotalprivate
services imports in1992 to2.3percentin1996, andexports rosefrom 0.2to3.8percentoverthe
same period.
116. There were175domestic banks and92foreign banks inJapan in1997(Table IV.11).163The
largest tenbanks hadamarket share of50.3percent.164Theshare ofdirect, asopposed toindirect,
financing hasbeenlowinJapan'sfinancial market; theratiowas41.3percentasatend-1996.
117. Japan'sfinancial services sector hasbeen faced withaninternationalization trend. Inthe
period 1990 to1996, theassets offoreign banks 'offices inJapan increased by51percent,andtheir
share incommercial banking rosefrom 3.13to4.57percent. Over thesame period, theshare of
local offices offoreign banks inbusiness lending inJapan decreased from 2.5to1.8percent; the
share offoreign banks 'branches intaking deposits inJapan increased from0.4to1.3percent. The
activities offoreign banks areconcentrated inthemajor financial centres.
163Thedataareforbanks regulated under theBanking Law.
164Based onoutstanding loanbalance, according totheresults ofthe1992 market contracts survey conducted
bytheFairTrade Commission.WT/TPR/S/32 Trade Policy Review
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Table IV.11
Financial institutions inJapan, March 1997
1. Banks
CategoryNumber ofbanks and
aggregated amount offunds
(¥trillion) Related laws
CityBank 10banks, 247 Banking Law
Long-term credit bank 3banks, 58 Long-Term Credit Bank Law
Trust Bank 33banks, 159 Banking Law, Trust Business Law
Regional bank 64banks, 170 Banking Law
Second regional bank 65banks, 61 Banking Law
Foreign owned bank 92banks, 9 Banking Law
2. Cooperative financial institutions
CategoryNumber of
organizationsAggregated
amount of
funds
(¥trillion) Related laws
Zenshinren Bank ... 14 Shinkin Bank Law
Shinkin Bank 410 98 Shinkin Bank Law
Shinkumi Federation Bank ... 3 LawonFinancial Business byCooperatives
Mutual Federation ofLabor Credit
Association... 2 Labour Credit Association Law
Labour Credit Associations 47 10 Labourer 'sCooperative Law
Shoko-Chukin Bank ... 15 Shoko-Chuckin Bank Law
Norinchukin Bank ... 41 Norinchukin Bank Law
Credit Federation ofAgricultural Cooperatives 47 47 Agricultural Cooperative Law
Agricultural Cooperatives 2,226 68 Agricultural Cooperative Law
Credit Federation ofFishery Cooperatives 35 2 Fishery Cooperative Law
Fishery Cooperatives (including Processed
Marine Products Cooperatives1,228 2 Fishery Cooperative Law
Credit Guaranty Association ... ... Credit Guaranty Association Law
3.Insurance companies
CategoryNumber of
companiesTotal assets
(¥trillion) Related laws
Lifeinsurance Domestic 41
Foreign 3185
2.8Insurance Business Law
Non-life insurance Domestic 33
Foreign 3124
0.2Insurance Business Law
Mutual fireinsurance cooperative associations 43 0.05 LawforCooperatives ofSmall Business
Shipowner 'smutual insurance associations 2 0.03 ShipOwners 'Mutual Insurance Association Law
4.Nonbanks andother
CategoryNumber of
registered
companiesNumber of
reported
companies Related laws
Loan companies 31,668 ... Regulatory LawforLoan Business
Housing Loan Companies ... 1 OldInvestment Law
Money Market Brokers ... 14 OldInvestment Law
Mortgage companies 125 ... Actconcerning Regulation ofMortgage Backed
Securities Business
Table IV.11 (cont'd)Japan WT/TPR/S/32
Page 131
Prepaid voucher issuers 2,055 363 LawonRegulation ofPrepaid Voucher
Commodity investment brokers 111 ... LawonRegulation ofCommodity Investment
Business
Special credit brokers Brokers: 45
Denominated
credit brokers: 21TheBusiness Asset Securitization Law
Real-estate syndications 21 ... RealEstate Syndication Act
Financial futures brokers 199 ... LawonFinancial Futures Trade
5.Government 'sfinancial institutions
CategoryAggregated balance
ofloans
(¥trillion)Related laws
Japan Development Bank 15.5 Japan Development Bank Law
Export-Import Bank ofJapan 9.1 Export-import Bank ofJapan Law
People 'sFinance Institution 8.9 People 'sFinance Institution Law
Housing Loan Corporation 70.1 Housing Loan Corporation Law
Agriculture, Forestry andFisheries Finance
Corporation4.5 LawonAgriculture, Forestry andFisheries
Finance Corporation
Japan Finance Corporation forSmall Business 7.2 Small Business Finance Corporation Law
Small Business Credit Insurance Corporation ... Japan Finance Corporation forSmall Business
Law
Hokkaido Tohoku Development Corporation 1.4 Hokkaido Tohoku Development Corporation
Japan Finance Corporation forMunicipal
Enterprise18.9 Japan Finance Corporation forMunicipal
Enterprise Law
Environmental Sanitation Business Financial
Corporation1.0 Environmental Sanitation Business Financial
Corporation
Okinawa Development Finance Corporation 1.6 Okinawa Development Finance Corporation
6.Other financial institutions
Category Related laws
Bank ofJapan Total assets of¥61.9 trillion Bank ofJapan Law(asofDecember 1996)
Deposit Insurance System Policy reserve of¥386.5 billion Deposit Insurance System Law
... Notavailable.
Source: Information provided bytheJapanese authorities.
118. Japan'sinsurance market isinthreesubsectors, namely, non-life, lifeandthe"third" sectors.165
Japan'slifeinsurance market istheworld 'slargest, withacontract amount totalling ¥2,098 trillion
asofDecember 31,1994.166Thenon-life market isthesecond largest intheworld, withpremium
income amounting toabout ¥10.9 trillion inFY1996. The"third" sector represents lessthan5percent
ofthetotalinsurance market.167In1996 inthenon-life insurance sector, there were 33domestic
companies, ofwhich 6weresubsidiaries oflifeinsurance companies, and31foreign companies with
165Including insurance forpersonal accidents, liability, sickness, nursing careandhospitalisation.
166Kokuseisha (1996).
167ACCJ (1997).WT/TPR/S/32 Trade Policy Review
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direct branches; thelifeinsurance sector comprised 41domestic companies, ofwhich 11were
subsidiaries ofnon-life insurance companies, andthree foreign companies.
119. Foreign-owned non-life andlifeinsurers inJapan hadtotal assets of¥258 billion and
¥2.5trillion, respectively, asof31March, 1997. Itisestimated thatforeign-owned insurers from
15countries accounted forabout 3.4percentofJapan'spremium market in1995.
120. Licensed foreign securities firms numbered 58attheendofSeptember 1997 versus 49asat
31December 1992.168InFY1995, foreign securities firms hadsome 15percentoftotaldealing/agency
transactions inJapan'sstock exchanges.
Regulatory framework
121. TheMinistryofFinance(MOF)ismainlyresponsibleforthegeneralpolicyframeworkgoverning
banks, including branches andsubsidiaries offoreign banks. Regulatory control isvested intheBanking
Bureau oftheMinistry. TheBankofJapan hasresponsibility forthesmooth settlement offunds between
banks andother financial institutions withaviewtomaintaining andfostering thecredit system. Details
ofregulations areoften provided intheformofadministrative notifications byMOF officials, aswell
asbyadministrative guidance, including informal guidance.169Ithasoftenbeensuggested thatregulatory
practices inJapan arecomplicated andlacktransparency.170
122. Ahighdegree ofspecialization andsegmentation isbuiltintoJapan'sfinancial system; Japan
hasdeveloped aspecialized financial institution system thatdistinguishes, forexample, between banks
andsecurities houses aswellaslong- andshort-term finance.171Trust activities canbeconducted by
some authorized banks.172TheSecurities andExchange Lawgeneraly prohibits banks fromengaging
insecurities underwriting, dealing andbrokerage.173Banks arealsoprohibited fromselling insurance
products. TheLawonFinancial Reform, enacted inApril 1993, allows partial inter-sectoral entry
between banking, trust, andsecurities through subsidiaries; thus, forexample, banks canestablish
168Thefigures include branches offoreign securities firms andlocal subsidiaries offoreign firms.
169USTR (1997a).
170Forexample, OECD reported thatopaqueness andheavy-handedness exist intheregulatory practices in
Japanese financial markets (OECD, 1997c).
171Byconvention, banks areclassified ascitybanks, regional banks andsecond regional banks,which deal
withshort-term financing, andlong-term credit banks andtrustbanks, which dealwithlong-term financing. In
addition,therearecooperativefinancialinstitutions,Shinkinbanks(cooperativefinancialinstitutionsfortheneeds
ofsmall andmedium-sized companies andlocal communities), credit cooperatives aswellasspecialized banks,
including labour credit associations, Shoko-Chukin Bank (agovernment-affiliated financial institution toprovide
long- andshort-term financing tosmall andmedium-sized businesses), Norin-chukin Bank, Credit Federation
ofFisheries Cooperative andFisheries Cooperative.
172Banks can,withministerial approval, engage intrust business. Currently there areseven such banks
("trust banks"), aswellastheDaiwa Bank, which fallsunder thecategory of"city banks".
173Exceptions totherestriction include: thepurchase andsaleofsecurities forthebank'sowninvestment
purposes,withtheresultthatfinancialinstitutionsholdsubstantialamountsoftotaloutstandingstocks;anddealing
inandover-the-counter sales ofpublic bonds.Japan WT/TPR/S/32
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subsidiaries astrustbanks orsecurities firms, though thescope ofoperations arelimited.174Arevised
draftofrelevant lawstoallow currently prohibited bankholding companies hasbeensubmitted tothe
Diet. Currently seven banks, including long-term credit banks, areallowed toissuebankdebentures.175
According totheauthorities, theserestrictions apply equally tobranches andagencies inJapan offoreign
banks andtheiraffiliates.
123. Under theBanking Law, banks require aministerial licence tooperate inJapan. Licensing
criteria include asound "financial basis", appropriate business conduct interms ofmanagement staff,
anda"financial order" clause forprudential reasons. Theregulations thathadapplied todomestic
banks ontheopening andlocation ofbranches wasremoved in1997.
124. Theprudential requirements currently stipulated inJapan include theuseofcapital adequacy
ratios, liquid-assets andrealestate ratio'sanddisclosure requirements (BoxIV.2). Aceiling isalso
stipulated ontheamount ofcredit thatcanbegranted tooneperson. Capital requirements based on
theBank ofInternational Settlements rules oncapital adequacy areapplied toJapanese financial
institutions withoverseas branches and/or subsidiaries, butnottobranches andagencies offoreign
banks. According totheauthorities, therearenostatutory provisions onthemaximum allowable equity
holding ofindividuals inabankorother financial institutions. Regulations oncredit concentration
apply bothtodomestic andforeign banks.176Interest rateshavebeengradually deregulated since 1979
andcurrently nointerest rateregulations exist, except oncurrent accounts.
125. Apart fromcommercial banks, government andpublic financial institutions playanimportant
roleintheJapanese financial market. Asof31December 1996, Postal Savings, operated bytheMPT,
had¥222trillion indeposits, orabout 20percentoftotalindividual financial assets inJapan.177Postal
savings aresubject tosome restrictions, suchasa¥10million deposit-ceiling perperson andlimited
peripheral financial services.178Postal Insurance, alsooperated bytheMPT, hadtotalassets of
¥101 trillion atend-March 1997.179Other public financial institutions include theExport-Import Bank
ofJapan (EXIM), theJapan Development Bank(JDB), andthePeople 'sFinance Corporation (PFC).180
174Forexample,subsidiarysecurityfirmsofbankscandealinordinaryandconvertiblebondsbutnotinstocks.
175Issued bonds inthemarket amounted toabout ¥76trillion asatNovember 1996 (Nihon Keizai Shimbun,
5April 1997). According totheauthorities, Tokyo-Mitsubishi Bank, established byamerger oftheBank of
Tokyo, aspecialized foreign exchange bank, andMitsubishi Bank, hasbeen allowed toissue financial bonds
foraperiod ofsixyears following themerger inApril 1996.
176Forforeign banks, itisbased ontheforeign parent 'scapital, notonbranch capital.
177According totheauthorities, thePostal Savings system fulfils roles thatarenotmetbythemarket orby
private financial institutions, suchasproviding financial services throughout Japan, including inunprofitable,
remoteareas;italsoprovidesfundstopromotesocialcapitalimprovementssuchashousingandparksparticularly
asthelong-term supply offunds forimprovements inJapan 'sprivate market isunderdeveloped.
178OECD (1991).
179ACCJ (1997).
180Themain functions ofthethese banks arethefollowing: EXIM promotes economic exchange between
Japanandforeigncountries,mainlythroughexportcredits;JDBfundssocio-economicandindustrialdevelopment;
andPFC funds small-scale businesses.WT/TPR/S/32 Trade Policy Review
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These institutions aremainly financed bytheFiscal Investment andLoan Program (FILP) managed
byMOF; FILP financing ismainly bydeposits ofPostal Savings, andfunds ofthePostal Insurance
andtheNational Pension Fund.
BoxIV.2: Disclosure inJapan 'sbanking sector
Disclosure obligations forbanks arethesame asthose forjoint-stock corporations under Commercial
Law, andinthecaseoflisted companies, those under theSecurities andExchange Law. Inaddition,
under theBanking Law, banks arerequired toprepare areport ontheir annual business activities andto
make thisavailable forpublic reference. MOF conducts on-site inspections onaregular basis asdoesthe
Bank ofJapan. Unlike theMOF inspection, which ismandatory toallbanks, theBOJ examination
applies only tobanks with current accounts attheBOJ onacontractual basis. With aview to
strengthened supervision overbanks, subsequent toacaseoffraudulent dealing byaJapanese subsidiary
andabranch intheUnited States, areport wasreleased inDecember 1996 onMeasures toImprove
Banking Inspection andSupervision. Thereport points totheneed toreinforce riskmanagement of
financial institutions, based ontheprinciple ofself-responsibility. Guidelines tostrengthen systems for
management andinternal controls were accordingly made. Amarket value accounting system was
introduced inFY1997 forspecific products such asswaps, options andcommercial papers. However,
aswith allother companies, book-value accounting, which may notreflect thecurrent state ofan
institution 'sbalance-sheet, isbroadly employed, withtheexception oflisted securities, which arevalued
ateither costormarket, whichever islower. Thismethod isatthesource oflarge unrealized profits on
corporate stock heldbybanks.
Source: Information provided bytheJapanese authorities.
126. Foreign banks mayenter theJapanese market byestablishing (MOF-licensed) branches or
agencies/representative offices, orestablishing (MOF-licensed) subsidiaries. Noforeign ownership
restrictions existinthebanking sector. Foreign banks withJapanese branches oragencies aresubject
tonational regulation under theBanking Law. According totheauthorities, prudential requirements
donotbearmoreheavily onnationally-licensed branches andagencies offoreign banks thanondomestic
banks. Domestic banks require authorization forestablishing abranch andrestrictions existastothe
location ofbranches; forbranches offoreign banks, aseparate licence foreachbranch isrequired.
Thedeposit insurance system doesnotcover deposits inbranches offoreign banks. Forabank
completely orpartly owned byaforeign banktheBanking Lawstipulates thatJapanese banks inthe
foreign bank'shome country should receive treatment substantially equal todomestic banks. Itshould
benoted that,according totheauthorities, thereciprocity provisions donotapply toWTO Members,
given Japan'sWTO commitments.
127. On13February1995,JapanandtheUnitedStatesjointlyannouncedmeasuresregardingfinancial
services, asaresult ofconsultations under theJointStatement oftheJapan-U.S. Framework foraNew
Economic Partnership.181Measures tobeimplemented byJapan include: promoting access topublic
pension funds, including thePension Welfare Service Public Corporation (Nempuku );deregulation
ininvestment trusts, including improved disclosure ofperformance dataonacurrent market-value
basis; clarifying procedures todefine a"security" under theSecurities andExchange Lawandexpanding
thescope ofthesecurities business; andpartial deregulation incross-border capital transactions,
including acertain liberalization ofEuroyen bond issues bynon-residents. Inthestatement, the
181Theannounced measures arenotified inWTO document S/FIN/W/1, 14March 1995.Japan WT/TPR/S/32
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Government ofJapan alsoconfirmed theapplicability oftheAdministrative Procedures Lawtothe
financial services sector.182These measures areonanMFN basis, consistent withWTO rules.183
128. Japan made revisions toitsGATS Schedule forFinancial Services asaresult ofthe1995WTO
negotiations, including theelimination ofvarious limitations toforeign participation (Box IV.3).
Currently, various limitations onmarket access andnational treatment remain intheareaoffinancial
services. Forexample, thedeposit insurance system doesnotcover deposits taken bybranches of
foreign banks. Commercial presence, asajuridical person established inJapan, isrequired for
investment trustmanagement services. Theapproval requirement forresidents 'deposits abroad was
raised from ¥100 million to¥200 million inApril 1996 and,according totheauthorities, istobe
eliminated inApril 1998. Japan participated intheWTO negotiations onfinancial services concluded
on12December 1997.
BoxIV.3: Theresult oftheAgreement onFinancial Services -Japan
Reflecting theresults oftherecent insurance system reform andderegulation offoreign exchange
transactions, Japan:
-removed indications oflimitations ininsurance which hadalready been phased outasof
end-June 1996 intheexisting schedule, such asabanoncross-border transactions of
insurance onJapanese aircraft andships usedforinternational maritime transport, abanon
insurance brokers andarequirement toretain inyencurrency thetechnical andclaim
reserves foryen-denominated insurance policies;
-removed allremaining restrictions onoverseas deposits andtrust contracts aswell as
services associated withvarious capital transactions, suchastrading inforeign exchange, as
ofApril 1998, thusbinding arecent change intheForeign Exchange Law;
-undertook additional commitments binding allthemajor elements ofthebilateral measures
agreed withtheUnited States oninsurance andonbanking andother financial services.
129. Alicence from theMinister ofFinance isrequired toestablish anewinsurance company in
Japan. Thebasic organization ofacompany, theminimum assets required tobegin business, the
existence offavourable anticipated income andexpenditure, basichuman resources andsocial credibility
areincluded inthecriteria forthereview oflicence applications. Insurance policies, bothfornew
products andmodifications, aswellaspremium rates, require government approval. Thecriteria for
permitting newinsurance products include secure protection ofpolicyholders, andnon-discrimination.
Liability insurance forprivate andcommercial vehicles iscompulsory inJapan.184
182TheAdministrativeProceduresLawwasenactedon1October1994.TheLawseekstoenhancetransparency
andguarantee fairness inprocedures andadministrative guidance related totheadministrative handling ofthe
granting oflicences andapprovals.
183WTO document S/FIN/W/4, 21August 1995.
184Apolicy ofatleast¥30million incaseofdeath byaccident isrequired. Domestic andforeign registered
insurers canprovide thecompulsory insurance, with60percentmandatory government coverage forreinsurance;
WTO document GATS/SC/46/Suppl.1/Rev.1. Additional insurance isvoluntary.WT/TPR/S/32 Trade Policy Review
Page 136
130. Asaresult ofthe1996 revision oftheInsurance Business Law, lifeandnon-life insurance
companies mayenter eachother'smarkets bymeans ofsubsidiaries. Specifically, alifeinsurance
company maynowacquire more than50percentofthestock ofanon-life insurance company; and
vice-versa foranon-life insurance company. AsatApril 1997, sixnon-life insurance companies owned
bylifeinsurance companies and11lifeinsurance companies owned bynon-life insurance companies
hadbeenestablished. Inaddition, anotification system andsimplified approval procedures havebeen
introduced fornewinsurance products andtheirrates, where theprotection ofpolicyholders hasbeen
confirmed.185Anadvisory ratesystem regarding loading ratesandaninsurance brokerage system have
alsobeen introduced. Aninsurance broker must beregistered toenter themarket. Asatend
September 1997, 39insurance brokers wereregistered; 37hadlaunched operations, ofwhich four
areforeign firms.
131. Principal prudential requirements ininsurance include capital requirements andportfolio
restrictions.Substantialsupervisioniscarriedout,notonlyingeneralbutalsoforlicensingandproducts;
annual reports arealsorequired andcompanies aresubject tospotinspections. Toprotect policyholders,
theGovernment mayorder insurance companies tosubmit aplantoguarantee sound operation; and,
ifnecessary, theGovernment maysuspend operations byacompany.
132. Commercial presence, licensed bytheMinister ofFinance, isinprinciple required tooffer
insurance services inJapan186;intheabsence ofalicence, branches andsubsidiaries offoreign insurance
companies orinsurers abroad cannot provide insurance services inJapan. According totheauthorities,
there isnational treatment forforeign insurance companies. Aforeign insurance provider planning
toenter theJapanese insurance market bymeans ofabranch isrequired todeposit anamount of
¥200 million, while a¥1billion capital isrequired forforeign subsidiaries inJapan, atthestartof
company operations.187Thesame minimum capital requirements apply todomestic companies. The
criteria forgranting licences andtherequirement ofsolvency margins arethesame forbothJapanese
andforeign insurance providers.
133. Accordingtotheauthorities,therearenocartelsormonopoliesintheJapaneseinsurancemarket.
Rating associations, consisting ofinsurance companies, setthecomponents ofinsurance premia for
boththepureriskandloading rates(where overheads, commissions andprofits arecovered), based
onfigures furnished byinsurance companies; fixed rates areusedamong themembers ofrating
organizations inseveral major sectors ofnon-life products, e.g.fire,personal accident, earthquake
andautomobile insurance. Rating organizations areexempt fromtheAntimonopoly Act(AMA) and
themember companies havetheobligation tousetheratescalculated bytherating organizations.188
Twonon-life rating organizations existandarecomposed ofboth Japanese andforeign insurance
companies.
185Thirteen newitems, including indemnity insurance, hadbeen added tothescope ofthenewnotification
system asof1January 1997.
186Excluding such cross-border insurance contracts asreinsurance, commercial aviation insurance and
international marine hullinsurance.
187Firms incorporated inJapan withmore than50percentofforeign capital. Therequired deposit amount
isdetermined inaGovernment Ordinance, asstipulated intheInsurance Business LawArticle 190.
188According totheauthorities, theobligation istobeabolished byJuly1998.Japan WT/TPR/S/32
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134. TheJapan-U.S. Framework foraNewEconomic Partnership onmeasures intheinsurance
sector concluded inOctober 1994, following ayearofnegotiations. Thespecific contents ofthe
Measures bytheGovernment ofJapan andtheGovernment oftheU.S.Regarding Insurance ("the 1994
Measures") included deregulation, transparency andprocedural protection, andmeasures pertaining
toU.S.insurance.189Measures areapplied onanMFN basis, consistent withWTO rules.190Japan
andtheUnited States differed onthesequencing oftheliberalization oftheinsurance sector191,and
heldaseries oftalksin1996. Measures adopted asaresult ofthese talksinclude deregulation inthe
primary sector192;restriction ontheentry intothe"third" sector bysubsidiaries ofnon-life andlife
insurance companies inorder toavoid radical change inthe"third" sector forsmall andmedium-sized
andforeign insurance companies; andtermination ofthemeasures toavoid radical change inthe"third"
sector nolaterthan2001.
135. TheSecurities Bureau intheMinistry ofFinance andtheSecurities andExchange Surveillance
Commission arethemainauthorities regulating thesecurities sector. Under theSecurities andExchange
Law, aseparate licence fromtheMinister ofFinance isrequired toengage ineachsecurities business,
classified intofourcategories: dealing, brokerage, underwriting andselling. Theapproval criteria
aregenerally thesame asthose forbanks. Stock brokerage commissions havebeenliberalized for
trades equal toormore than¥1billion. According totheauthorities, brokerage commissions will
becompletely liberalized byend-1999. Subsidiaries offoreign securities firms canbelicensed inthe
same manner asdomestic securities firms.
136. Under theLawforForeign Securities Firms, direct branches offoreign securities firms require
aseparate licence foreachbranch fromtheMinistry ofFinance. Foreign securities firms without such
alicence arenotallowed totrade withresidents ofJapan.193Alicence isnotgranted toafirmthat
hasnotengaged inthesame typeofbusiness forthepastthree consecutive years.194Therequired
minimum amount ofpaid-in capital forsecurities companies varies inrelation tothetypeoflicence
andtheform ofbusiness.195Current investment trusts inJapan areofthecontractual type, under
theSecurities Investment Trust Law.
189Themeasures were notified inWTO document S/IGFS/W/1, 24October 1994.
190WTO document S/FIN/W/4, 21August 1995.
191OECD (1996d).
192Forexample, approval oftheapplication forautomobile insurance withdifferentiated rates according to
riskinvolved, expansion ofthescope oftheadvisory ratesystem regarding loading rates ofcommercial fire
insurance, expansion ofthescope ofinsurance products towhich thenotification system applies, andreform
oftherating organization system toachieve maximum liberalization ofthepremia.
193Cross-border internet securities trading, forexample, isthusnotpermitted between residents ofJapan
andunlicensed foreign securities firms.
194TheLawforForeign Securities Firms, Article 6.
195Therequired amount varies between ¥10billion and¥10million, according toArticle 32oftheSecurities
andExchange Lawforsubsidiaries andArticle 6oftheLawforForeign Securities Firms forbranches offoreign
securities firms.WT/TPR/S/32 Trade Policy Review
Page 138
Recent andpending reforms
137. TheBank ofJapan Lawwasrevised on11June1997 afteralongdebate concerning therole
ofthecentral bank. Therevised lawincludes provisions toclarify theaimsoftheBank, making it
responsible formonetary policy, andtostrengthen theauthority ofitsPolicy Board, aswellastoincrease
transparency initsmonetary policy decision-making process. Asaresult, theGovernment 'sbroad
power togiveorders to,andsupervise theBank willbeabolished. Ithasalsobeendecided toestablish
soontheSupervisoryAgencyforFinancialEntities,whichwillbeinchargeofinspectionandsupervision
ofprivate financial entities, under thePrime Minister 'sOffice. According totheauthorities, allthe
powers ofinspection andsupervision onprivate financial entities willbetransferred fromtheMinistry
ofFinance totheSupervisory Agency.
138. There isaperceived needamong theauthorities forreform ofJapan'sfinancial services sector.
Thus, inNovember 1996, Prime Minister Hashimoto issued directives totheFinance andJustice
Ministers andtotherelevant government committees tobegin discussions onsuchstructural reform
(theJapanese version ofthe"BigBang"), under thebasic principle ofestablishing a"free, fairand
global" financial market. Deliberations alsohaveinmindtheGovernment 'sgoaltomake theJapanese
financial market aninternational financial centre competitive withthose ofNewYork andLondon by
theyear2001. InJune1997, reports werepublished outlining proposed reform measures. Though
formal revisions oflaws, ordinances andother regulations willhave tobeundertaken, the
recommendations inthereports generally aimatremoving entryrestrictions between banking, securities
andinsurance business; liberalizing insurance premiums andstockbrokers commissions; deregulating
newfinancial products; andreforming thefinancial supervisory system, aswellasthelegal and
accountingsystems,forfinancialinstitutions.Considerationsisalsobeingmadetoallowtheformulation
offinancial holding companies.
139. Asaforerunner tothe"Big-Bang", theForeign Exchange andForeign Trade Control Law
wasamended inMay1997, totakeeffect on1April 1998. Therevisions include:
- liberalizationofcross-bordercapitaltransactions:namely,partialabolitionofpermission
andpriornotification requirements, freeing ofthesettlement ofexport-import payments
through overseas deposits andmulti-netting payments. Alsotransactions suchasthe
saleandpurchase offoreign currencies, currency futures contracts, currency swaps,
andoptions willbefreely allowed, whether ornotthetransactors areresidents; and
- liberalization offoreign exchange business andtheabolition oftheauthorized foreign
exchangebanksystem,thusallowingmarketparticipantstofreelyengageinsuchforeign
exchange dealings asthesaleandpurchase offoreign currencies andderivatives
transactions. Participants inforeign exchange business other thanbanks willneedto
adequately disclose theiroperations, under therelevant regulations.
Inaddition, theregulatory structure forinward andoutward foreign direct investment (FDI) istobe
revised, totakeeffect on1April 1998, asfollows:
- foroutward FDI,prior notification requirements aretobeabolished andreplaced by
anexpostfacto reporting system;196
196Excludingforcertainindustrialsectorsandforbusinessconductedincountriessubjecttoeconomicsanctions.Japan WT/TPR/S/32
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- inward FDI,under the1992revision oftheForeign Exchange Law,hasbeentransferred
inprinciple totheexpostfactoreporting system butpermission andpriornotification
requirements remain insome cases. Theproposed revision willpromote liberalization
inaccordance withtheDeregulation Action Program anddiscussions attheOECD.
140. Under 1997Deregulation Action Program, 60newitems related tofinance andinsurance have
beenincluded; themeasures havebeendecided for38items, andmeasures fortheremaining 22items
willbediscussed in1997. Major measures, some ofwhich arearesult ofbilateral talkswiththeUnited
States, include lifting theprohibition oninvestment inunlisted stocks bypension investment funds,
termination oftheobligation tousenon-life insurance premium rates calculated bytherating
organizations, andapproval ofdirect marketing ofautomobile insurance withdifferentiated rates.
(v) Transportation
(a) Airtransport
Market Structure
141. Thetransport sector overall accounts for6.5percentofGDP, withnofurther subsectoral
breakdown ofdataavailable. Airtransport employs some 52,000 people, equivalent to0.08percent
oftotalemployment.197Japan haseightnational scheduled airline companies, including Japan Airlines,
AllNippon Airways andJapan AirSystem.198
142. Intheperiod FY1992 toFY1995, Japan'saircarriers grew by121percentinterms of
passengers onscheduled international flights andby134percentforcargo onsuchflights; nearly
15million passengers and0.89million tonnes offreight weretransported onscheduled international
flights inFY1995 byJapanese Airlines. Imports ofairtransport services in1996 were2.4percent
lower thanin1995; theywere ¥1.3trillion, equal to9.2percentoftotalservices imports in1996.
Inthesame yearexports totalled ¥0.8trillion, upby4.3percentover1995; suchexports were
10.7percentoftotalservices exports. International passenger faresareindeficit butairfreight has
beeninslight surplus.
143. Inaddition tothedomestic carriers, over 60foreign airlines offerflights toandfromJapan.
Themarket share offoreign airlines was66percentforscheduled passenger flights inFY1995, up
3percentage points fromFY1985. Forfreight transport, theirmarket share hasbeenstable, ataround
39percentoverthelasttenyears.
144. Thecostsofandprices onJapanese airlines arerelatively highbyinternational standards, and
haverisen substantially overthepastdecades.199
197Prime Minister 'sOffice (1990).
198Theother fiveairlines aresubsidiaries ofthese three major companies.
199Yamauchi, etal.(1995) notes that: "Compared withtheunitfares between theU.S. andJapan, though
normal fares inJapan tended tobelower thantheU.S., discount fares were several times higher. IntheU.S.,
90percentofpassengers usediscount tickets. Even afterthe1994 amendment,the average rateperkilometre
ismuch higher thanintheU.S." According totheauthorities, Japan 'sfreight tariffs fordomestic airtransport
arelower thanU.S. tariffs forlikeservices.WT/TPR/S/32 Trade Policy Review
Page 140
Regulatory framework
145. TheCivilAviation Bureau oftheMinistry ofTransport administers theentry, pricing androute
approvals ofairlines, aswelltheassafety regulations. TheCivilAeronautics Lawisthemainregulatory
provision fortheaviation business. Aseparate licence fromtheMinister ofTransport isrequired for
eachroute ofscheduled airline service. Ademand-supply adjustment clause andappropriateness of
thecompany 'sannual business planareamong theapproval criteria foralicence. Thesuspension
ofscheduled flights requires ministerial permission. Airlines needgovernment approval inbothsetting
andchanging theirfares. Airplanes mustberegistered withtheMinister ofTransport toobtain Japanese
nationality. Anyinternational agreement between airline companies needs tobeauthorized bythe
Minister ofTransport. Anauthorized agreement, international ordomestic, hasAntimonopoly Act
exemption status.
146. ThereareforeignownershiprestrictionsundertheCivilAeronauticsLaw,whichalsohascriteria
forissuing licences fordomestic airline business. Alicence willnotbegranted iftheowner iseither
aforeign national, foreign government orpublic entity, ajuridical entity established under foreign
laws, ajuridical entity whose representatives areforeign nationals orwhose board iscomposed ofone
thirdormore offoreign nationals, oronethirdofwhose voting interests areowned bysuchanentity.
Cabotage isgenerally notpermitted.200
147. Between 1970and1972theJapanese airline industry wasrestructured asanoligopoly ofJapan
Airlines (JAL), AllNippon Airways (ANA) andToaDomestic Airlines (currently Japan AirSystem
(JAS)); onlyJALwaspermitted toserve international scheduled passenger routes fromandtoJapan,
asthenational flagcarrier. JAL'smonopoly continued until1987, when itwasprivatized andallspecial
privileges were withdrawn. Japan grants noexclusive rights, suchasanobligation ongovernment
officials tousespecified carriers forofficial duties. There arenorestrictions on,orincentives for,
domestic carriers topurchase fromparticular sources. According totheauthorities, Japanese airlines
receive nosubsidies orgovernment guarantees.201
148. Thetwomajorinternationalairports(NewTokyo(Narita),andKansai)aremainlyingovernment
ownership. NewTokyo airport isagovernment corporation, Kansai airport hasamajority government
shareholding, andother major airports areoperated bytheMinistry ofTransport through Special
Accounts forAirport Developments.202Landing feesatthese airports arehigher thanthose atmajor
international airports inother countries.203According totheauthorities, airport slotallocation for
international flights iscoordinated withIATA schedule coordination conferences andallocation isnot
subject togovernment regulations. Airport capacity constraints, mainly duetolandshortages, are
asevere barrier totheexpansion ofthesector. Japan'smajor airports areovercrowded, forexample
200Except withpermission from theMinister oftheMinistry ofTransport.
201Theairlines, however, often have close tieswiththeGovernment, particularly bytaking ex-officials as
board members. Asat1April 1997, thechairmen ofthethree airlines areallex-officials oftheMinistry of
Transport.
202According totheauthorities, apooled account system isemployed forthese airports, allowing
cross-subsidization inorder tocreate aneffective network ofairports.
203According totheMinistry ofTransport, thelanding feeforaB-747-400 aircraft, forexample, is¥948,000
forNarita, ¥908,500 forKansai, ¥312,800 forJ.F.K (New York) and¥418,000 forCharles deGaule (Paris)
airports.Japan WT/TPR/S/32
Page 141
thereisonlyonerunway ateither Narita orKansai airport, andtherehavebeennoincreases inlanding
slotsatNarita since 1991.204
149. Inthedomestic scheduled passenger market, thealleged existence of"grandfather rights" for
slotstoincumbentshadpromoteddiscussionsintheAdministrativeReformCommittee,withasuggested
needforeconomic instruments intheslotallocation process.205Accordingly, anewslotallocation
standard wasestablished andhasbeenimplemented sinceMarch 1997.206According totheauthorities,
licences fornewcompanies wereconsidered when theopening ofanewrunway increased thenumber
oftake-off andlanding slotsatHaneda airport, whose capacity isataceiling.207
150. International traffic rights forpassengers andfreight aregoverned bybilateral agreements.
Japan'sagreements aregenerally modelled onthe1946Bermuda Agreement between theUnited States
andtheUnited Kingdom.208Japan hadbilateral aviation agreements with50countries asatMarch 1997.
InApril 1996, Japan concluded anagreement withtheUnited States onall-cargo civilaviation services,
which liberalized existing cargo routes; thisfollowed adecision inJuly1995 topartially permit a
U.S.cargo carrier tooperate beyond Japan toother Asian destinations. Japan andtheUnited States
arediscussing theliberalization ofairpassenger services between thetwocountries.
151. InitsSchedule ofCommitments under GATS, Japan haslisted aircraft repair andmaintenance
services, theselling andmarketing ofairtransport services, andcomputer reservations system (CRS)
services. Thenumber oflicences fortheestablishment ofaircraft repair andmaintenance services
issubject tolimits, withaview, according totheauthorities, toensuring ahighquality ofservice.
Theroadtoreform
152. Japan'sunilateral reform measures intheair-transport sector havebeenmainly confined to
domestic aviation; international aviation issubject tobilateral treaties. Thus, thepromotion of
competition hasuntilrecently beenrather limited.209
153. Government policy ondomestic aviation sector haschanged. TheGovernment hasimplemented
aseries ofcompetition-promoting reform measures. Regulations onfareswererelaxed in1995toallow
airlines tosettheirfaresasmuch as25percentbelow thestandard setbytheGovernment, andapproval
isnolonger required forsomediscount fares, though priornotification isstillnecessary. InApril 1997,
204EU(1996).
205InitsSecond Opinion onFurther Promotion forDeregulation, ARC recommended thatopen bidding or
pro-competitive andtransparent procedure beemployed, andtheallocation criteria should betransparent and
objective, soastoavoid allocated slots from becoming "vested".
206Major items inthestandard include theallocation ofslotsfornewairlines andtheuseofunallocated slots.
207Recently, twonewdomestic firms have announced their plans forentry.
208Yamauchi etal.(1995).
209Yamauchi etal.(1995).WT/TPR/S/32 Trade Policy Review
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restrictions tolimitthesupply ofservices totwoorthree carriers onmostroutes wereeliminated.210
TheGovernment decided inDecember 1996 toremove the"supply-demand adjustment" clause for
thetransport sector inthree years.
(b) Maritime transport
Market Structure
154. Almost allofJapan'sinternational goods trade isshipped bymaritime transport. Inaddition,
coastal shipping accounts forabout 43percentofdomestic goods transport. According toasurvey
bytheMinistry ofTransport, Japan'sinternational shipping companies numbered 259inmid-1995;
theycarried inthatyearsome 13.8million tonnes andemployed about 105,000 persons. In1994,
theshare ofJapanese-flag carriers inJapan'socean-borne international trade was41.8percentfor
exports, adecrease of5.2percentage points over1990, and69.5percentforimports, adecrease of
2.3percentage points. Portservices wereprovided bysome 1,000 firms atend-March 1997, employing
around 60,000 persons.
155. Inmid-1996, ocean-going vessels owned oroperated byJapanese entities numbered
191Japanese-flag vessels and1,816 chartered foreign-flag vessels. TheJapanese-flag vessels hada
gross tonnage of12.7million tonnes andadeadweight tonnage of19.7million tonnes; thechartered
foreign-flag vessels hadagross tonnage of52.4million tonnes andadeadweight tonnage of78.7million
tonnes. In1996, imports ofmaritime transport services were¥2.3trillion, equivalent to16.6percent
oftheJapan'stotalservices imports, andexports were¥1.6trillion, some 21.6percentoftotalservices
exports. Foreign-flag vessels (excluding thoseunder Japanese operation) carried 58.2and30.5percent
ofexports andimports, respectively, in1994.
Regulatory framework
156. TheMaritime Transport Bureau oftheMinistry ofTransport isthemainauthority regulating
Japan'smaritime transport sector. Toqualify foranational flag,registration under theShipLawwith
theMinister ofTransport isrequired. Thevessel mustbeowned either bytheGovernment ofJapan
oraJapanese public office, aJapanese national, orajuridical person whose principal office islocated
inJapan andallofwhose representatives areJapanese nationals.211Under theLawforShipOfficers,
aJapanese-registered shipmustbeoperated byofficers holding Japanese certificates. According to
theauthorities, Japanese-flag carriers receive neither exclusive rights norsubsidies, andthere areno
lawsorregulations requiring thatgovernment-related cargo becarried onJapanese-flag vessels.
157. Under theMarine Transportation Law, aJapanese national intending tosupply scheduled
international linerservices, either cargo orpassenger, mustfilewiththeMinister ofTransport atleast
tendaysprior tothecommencement oftheservice. Forinternational tramp services, aprospective
supplier isrequired tofilewiththeMinister ofTransport within 30daysafterthecommencement of
theservice. Prior notification totheMinister ofTransport isrequired regarding fares andfeeson
passenger luggage andother conditions oftransportation forinternational passenger linerservices.
Foreign persons, firms ororganizations areexempt from these requirements.
210Thedecision onwhich routes should besubject tosuchrestriction hadbeenunder administrative discretion.
According totheauthorities, theregulation hadbeenimplemented tomaintain safeoperation, under consideration
oftheprogress made indevelopment ofJapan 'sairports.
211WTO document S/NGMTS/W/2/Add.3, 20January 1995.Japan WT/TPR/S/32
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158. CoastaltradebetweenJapaneseportsis,inprinciple,reservedtoJapanese-flagships,fornational
security reasons.212Withrespect tocoastal maritime transport, under boththeMarine Transportation
LawandtheCoastal Shipping Law, there areapproval criteria forentry, including "demand-supply
adjustment" provisions, mainly withaview tomaintaining andensuring scheduled routes.213The
authorities expect these provisions tobeeliminated bytheyear2001 atthelatest, although measures
willcontinue tobetaken toensure routes toremote areas. Apart fromaction toservice outlying areas214,
localandcentral governments arenotinvolved inowning oroperating maritime transport. There is
nomandatory useofJapanese-flag ships foranypurposes.
159. ThePortTransportation Business Lawistheregulatory basis forportservices, in94major
portsinJapan. Bothentry intoandexitfromtheport-service sector requires alicence fromtheMinister
ofTransport. The"demand-supply adjustment" clause ispartoftheapproval criteria. Nonewlicences
havebeenissued foratleasttenyears; andtherearenoforeign stevedores. Stevedore charges require
ministerial approval, based ontherate-of-return principle. Unified charges areapplied inthemajor
container terminals. Pilotage services aremandatory insome ports. Aperson supplying pilotservices
needs tobeofJapanese nationality andobtain alicence fromtheMinister ofTransport. Itiscommon
practice inJapan'sportsector thatcarriers notify theJapan Harbour Transport Association (JHTA)215
inadvance ofarequest for,orcharge in,stevedore works ("prior consultations"). According tothe
authorities, priorconsultations arenotimposed bylaworgovernmental ordinance, butarevoluntarily
agreedbetweenshipping-companyassociations,theJHTA,andportlabourunions,withaviewtosolving
potential labour problems. Ithasbeensuggested thattheJHTA doesnotallow carriers toschedule
Sunday portcallstoloadandunload cargo.216
160. There arenomonopolies intheJapanese maritime services sector, andnorarethere quotas
forsuppliers orarrangements forcargo allocation.217Agreements between operators onfreight rates
orother conditions oftransportation routes, sailing and/or loading areexempt fromtheAntimonopoly
Act(AMA). Capacity management andjointoperations carried outbycoastal maritime transport
operators aswellascertain authorized port-service agreements arealsoexempt from theAMA.
161. Therearenodiscriminatorymeasures,accordingtotheauthorities,affectingforeignparticipation
ininternational maritime orauxiliary services. There arenorestrictions onforeign suppliers engaging
inbusiness inJapan although, asnoted, there arelimitations onforeigners establishing tooperate
Japanese-flagvessels.Therearerestrictionsonforeignersenteringportoperations,basedontheprinciple
ofreciprocity.218
212Under theShipLaw, Article 3,theMinister ofTransport mayallow exemptions.
213TheGovernment alsostipulates anoverall capacity limit, suchthatrequests toregister anewshipmay
require thatequivalent capacity bedemolished.
214UndertheLawforImprovementofRemoteIslandRoutes,theGovernmentcanprovidesubsidiestoapproved
shipping companies.
215Thetrade association representing alllicensed stevedores.
216See, forexample, USTR (1997a).
217WTO document S/NGMTS/W/2/Add.3, 20January 1995.
218WTO document S/NGMTS/W/2/Add.3, 20January 1995.WT/TPR/S/32 Trade Policy Review
Page 144
162. Accordingtotheauthorities,Japan'sbilateralagreementsonpassengerorcargoshippingprovide
MFN ornational treatment topartners onareciprocal basis.219Bilateral talkshavetaken place on
seatransportation between Japan andtheUnited States, andbetween Japan andtheEuropean Union.220
Reciprocity provisions canalsobeinvoked under theterms oftheLawonSpecial Measure Against
Unfavourable Treatment toJapanese Oceangoing ShipOperators byForeign Governments andOthers.
IftheinterestsofJapaneseoperatorsarecontinuallyandsubstantiallydamagedasaresultofunfavourable
treatment byacountry, entry intoJapanese ports andhandling ofcargo canberestricted orprohibited
foraperiod forshipoperators from thatcountry. Under theFreight Forwarding Business Law, a
permit orgovernmental registration forinternational freight-forwarding services isgranted onlyto
firms fromcountries inwhich Japanese firms areeligible forsuchpermits orregistration. Conditions
fortheuseofportfacilities donotdiscriminate between foreign- andJapanese-owned vessels.
163. Japan'sGATS Schedule covers arange ofmaritime transport services, including maritime
auxiliarytransportservicesandinternalwaterwaystransportservicesbutexcludescabotage.International
maritime transport services, bothpassenger andfreight transportation, areunbound. Japan participated
actively intheWTO negotiations onMaritime Transport Services, which were suspended in1996.
Theroadtoreform
164. TheGovernment ofJapan announced its"Comprehensive Program ofLogistics Policies" in
April 1997. Under theProgram, Japan aimstoachieve by2001, alogistic service sector thatisthe
most convenient andefficient intheAsia-Pacific Region, while dealing withrelated energy and
environmental issues. TheProgram specifies reform measures, including theelimination of
"demand-supply adjustment" clauses forthegoods transport sector within three tofiveyears, andthe
review ofsafety regulations, taking intoaccount bothrecent technical progress andinternational
standards.
(vi) Other services
(a) Legal services
165. Thenumber oflawyers inJapan (Bengoshi )wassome 16,000 in1997. Among them, are
34Bengoshi withforeign nationality, from fivecountries.
166. TheMinistry ofJustice istheregulatory authority forlegalservices inJapan. ThePractising
Attorney LawandtheSpecial Measures LawConcerning theHandling ofLegal Business byForeign
Lawyers regulate foreign participation inthesector. Inorder tobeapractising attorney (Bengoshi )
inJapan, onehas,inprinciple, tocomplete theofficial programme foralegalapprentice. Passing
theJapanese barexamination isarequirement forentering intoapprenticeship, forbothJapanese and
foreign nationals.
219Japanhasbilateralagreemen tsrelatedtomaritimetransportwiththefollowingcountries:Argentina,Bulgaria,
China, Cuba, Denmark, ElSalvador, Finland, France, Germany, Greece, Haiti, Hungary, Italy, India, Malaysia,
theNetherlands, Norway, thePhilippines, Poland, Portugal, Romania, Russian Federation, Spain, SriLanka,
Sweden, Thailand, Turkey, theUnited Kingdom, andtheUnited States.
220According totheauthorities, there have been 22series oftalks withtheUnited States andsixwiththe
European Union.Japan WT/TPR/S/32
Page 145
167. Foreign lawyers, withtheapproval oftheMinister ofJustice andthenecessary registration,
areallowed toset-up alawfirmandhandle certain matters offoreign lawasGaikokuho-Jimu-Bengoshi
(attorney incharge offoreign lawrelated affairs) inJapan, without anyfurther qualification exams.
Itis,however, forbidden fortheseforeign lawyers toemploy Bengoshi .Among thecriteria forapproval
isatleastfiveyears ofpractising experience asalawyer.221Noreciprocity isrequired concerning
approval forGaikokuho-Jimu-Bengoshi fromcountries thatareWTO Members. InMarch 1997, the
number ofGaikokuho-Jimu-Bengoshi was81.They arerequired tostayinJapan fornotlessthan
180daysayear.
168. Recent regulatory changes inthesector include theelimination oftheprohibitions onforeign
lawyers (Gaikokuho-Jimu-Bengoshi )to:usethename oftheirhome firm; share offices byrunning
a"special jointenterprise" withJapanese lawyers; andtoprovide representation ininternational
arbitration procedures. Inaddition, some relaxation inthetypeoflegal experience required for
registration wasintroduced, witheffect fromJune1995.222However, restrictions remain onengaging
inpartnership andother fee-sharing arrangements withJapanese lawyers, aswellasontheability of
foreign lawyers toprovide advice onthird-country law.
169. Japan'sGATS Schedule listsvarious limitations onthesupply oflegal services. Thus, for
example, forforeign lawyers, association withaBengoshi isallowed buttheemployment ofaBengoshi
byaforeign lawyer isnotpermitted. Topractice inJapan, lawyers mustbenatural persons andhave
commercial presence inJapan.
(b) Accounting
170. Therewere10,424membersoftheJapaneseInstituteofCertifiedPublicAccountantsin1995.223
According totheauthorities, nostatistics areavailable forthenumber offoreign suppliers ofaccounting
services inJapan. TheMinistry ofFinance (MOF) ismainly responsible forthegeneral policy
framework governing theaccounting services sector. TheCertified Public Accountants Lawstipulates
detailedregulationsforaccountants.224ForeignnationalswithJapanesecertificationaspublicaccountants
receive national treatment.
171. Japan'sGATS Schedule specifies thataccounting services mustbesupplied byanatural person
orbyanAudit Corporation225andthatcommercial presence isrequired. There arenosector-specific
limitations onnational treatment.
172. Theharmonization ofaccounting regulations withinternational standards isoneoftheitems
intheannounced "Big-Bang" proposals forfinancial services (section (iv)above). Since October 1995,
221Fordetails, seeArticle 10oftheSpecial Measures LawConcerning theHandling ofLegal Business by
Foreign Lawyers (Law No.66of1986).
222OECD (1995b).
223WTO document S/WPPS/W/7/Add.16, 12September 1996.
224Japan 'sgeneral accounting framework isstipulated intheCommerce LawandSecurities andExchange
Law.
225Under Japanese law,anAudit Corporation hasfiveormore partners whoarequalified (Konikaikeishi )
andhave theright andobligation toactonbehalf oftheCorporation.WT/TPR/S/32 Trade Policy Review
Page 146
theBusiness Accounting Council, which setsJapan'saccounting standards, hasbeenreviewing the
relevant issues, including consolidated financial statements, financial instruments, corporate pension
funds, andresearch anddevelopment costs. Thereview isguided notonlybytheInternational
Accounting Standards butalsobytheaccounting standards ofsome developed countries.
(c) Tourism
173. Tourism isthelargest single iteminJapan'sservices imports, amounting to¥4trillion in1996;
exports inthesame yearwere ¥0.4trillion.226There areabout 11,000 travel agencies inJapan and
some 3,000 registered hotels andabout 284,000 guest rooms; according totheauthorities, norelevant
dataonforeign participation isavailable.
174. TheMinistry ofTransport isthemain regulator ofthetourism sector. Apotential entrant to
thetourism market mustregister, under theLawonTravel Agencies, withtheMinister ofTransport.
Deposit guarantees against bankruptcy, andtheemployment ofappropriate "tourism business managers"
arerequired forregistration. There arenosectoral restrictions onforeign-equity participation.
175. Thehotelsub-sectorisregulatedundertheHotel(Ryokan)Law.Permissionfromtheprefectural
governor isrequired toopen ahotel. Prices arenotregulated buttheymust benotified. Hotels
registeredundertheLawtoMaintainInternationalTouristHotelsmayreceivetaxpreferencestomaintain
theirfacilities. There arenorestrictions onforeign-equity participation.
176. Japan'sGATS Schedule listsnorestrictions ontheconsumption abroad oftourism andtravel
services; thecross-border supply ofhotelandrestaurant services andoftourguide services isunbound.
There arenorestrictions oncommercial presence.
226Data used inthisparagraph arefrom MOT (1996).Japan WT/TPR/S/32
Page 147
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