RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/107
9 October 2002
(02-5353)
Trade Policy Review Body
TRADE POLICY REVIEW
JAPAN
Report by the Secretariat
This report, prepared for the sixth Trade Policy Review of Japan, has been drawn
up by the WTO Secretariat on its own responsibility.  The Secretariat has, as
required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from  the Government of Japan on its trade
policies and practices.
Any technical questions arising from this report may be addressed to
Mr. M. Hayafuji (tel. 022-739 5873) or Mr. M. Daly (tel. 022-739 5077).
Document WT/TPR/G/107 contains the policy statement submitted by the
Government of Japan.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Japan.Japan WT/TPR/S/107
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) E CONOMIC ENVIRONMENT vii
(2) T RADE POLICY REGIME :  FRAMEWORK AND OBJECTIVES vii
(3) T RADE POLICIES AND PRACTICES BY MEASURE viii
(4) T RADE POLICIES BY SECTOR ix
(5) O UTLOOK x
I. ECONOMIC ENVIRONMENT 1
(1) M AIN ECONOMIC DEVELOPMENTS 1
(2) M ACROECONOMIC POLICIES 3
(i) Monetary and exchange rate policy 3
(ii) Fiscal policy 5(iii) Structural Policies 7
(3) D
EVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT 8
(i) Composition of merchandise trade 9(ii) Direction of merchandise trade 9
(iii) Composition of trade in services 9
(iv) Foreign direct investment (FDI) 9(v) Prospects 12
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 13
(1) T
RADE POLICY OBJECTIVES 13
(2) T RADE POLICY FORMULATION AND EVALUATION 13
(i) Trade policy formulation and administration 13
(ii) Evaluation of trade-related  policies 14
(3) T RADE AGREEMENTS AND ARRANGEMENTS 17
(i) WTO 17(ii) Regional agreements 20
(iii) Bilateral agreements 22
(iv) Preferential treatments 24
III. TRADE POLICIES AND PRACTICES BY MEASURE 26
(1) I
NTRODUCTION 26
(2) M EASURES DIRECTLY AFFECTING IMPORTS 27
(i) Customs clearance 27
(ii) Rules of origin 27
(iii) Tariffs 28(iv) Non-tariff border measures 33(v) Contingency measures 35(vi) Government procurement 35(vii) State trading 38
(viii) Standards, sanitary and phytosanitary measures 38WT/TPR/S/107 Trade Policy Review
Page iv
Page
(3) I MPORT AND INWARD INVESTMENT PROMOTION MEASURES 42
(i) Import promotion 42(ii) Investment regulation and promotion measures 42(iii) Foreign access zones (FAZs) 43
(4) M
EASURES DIRECTLY AFFECTING EXPORTS 43
(i) Export taxes. charges and levies 43
(ii) Export prohibitions, restrictions, and licensing 43(iii) Export promotion schemes 44
(5) M
EASURES AFFECTING PRODUCTION AND TRADE 45
(i) Taxation and tax-related assistance 45
(ii) Subsidies and other financial assistance 45
(iii) State-owned companies and privatization 45(iv) Trade-related investment measures 46(v) Trade-related intellectual property rights 46(vi) Regulatory reform 48(vii) Competition policy 48
(viii) Corporate governance 52
IV. TRADE POLICIES BY SECTOR 54
(1)
INTRODUCTION 54
(2) AGRICULTURE 54
(i) Overview 54(ii) Border measures 55
(iii) Domestic measures and support programmes 58
(3) M
ANUFACTURING 59
(4) SERVICES 60
(i) Financial services 60(ii) Telecommunications 63
(iii) Transport 65
(iv) Other services 67
REFERENCES 69
APPENDIX TABLES 71
CHARTS
I. ECONOMIC ENVIRONMENT
I.1 Formulation process of the FY2002 Budget 6
I.2 Merchandise trade by product, 1999 and 2001 10I.3 Merchandise trade by country, 1999 and 2001 11
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Development of policy evaluation system in Japan 16III. TRADE POLICIES AND PRACTICES BY MEASUREIII.1 Share of non- ad valorem , by HS section, FY2002 30
III.2 Simple average applied MFN tariff rates, by HS section 32
III.3 Applied MFN tariff distribution, FY2002 33Japan WT/TPR/S/107
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Page
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Selected macroeconomic indicators, 1995-01 2
I.2 Shares of GDP and employment by sector, 1995-00 3I.3 Current and capital accounts, 1997-01 4
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Status of notifications to the WTO, July 2002 18III. TRADE POLICIES AND PRACTICES BY MEASUREIII.1 Structure of applied MFN tariffs in Japan 29
III.2 Procurement composition by product and by origin, 2000 37
III.3 Major standards and technical regulations in Japan, May 2002 39
III.4 Suspension of imports likely to infringe intellectual property rights, 1995-01 47III.5 Enforcement statistics related to competition policy, 1997-01 51
IV. TRADE POLICIES BY SECTORIV.1 Applied MFN tariff protection in agriculture sectors, FY2002 56
IV.2 Special safeguard (SSG) actions in agriculture by Japan, FY2000-02 58
IV.3 Procurement prices for all major crops subject to pricing an/or marketing
arrangements/price controls 59
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Composition of trade in services, 1995-01 73
AI.2 Inward and outward FDI flows by source and destination, FY1999-01 74AI.3 Inward and outward FDI flows by activity, FY1999-01 76
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVESAII.1 disputes to which Japan has been a party, 2000-July 2002 77
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Tariff escalation and tariff ranges in Japan, FY2002 79
AIII.2 Allocation of import quota by item, FY2001 82AIII.3 Import quotas on fisheries products, FY1996-01 83AIII.4 Subsidies notified under WTO provisions, FY1998-01 84AIII.5 Industries monitored by the JFTC with respect to a "monopolistic situation", 1999 and 2001 89Japan WT/TPR/S/107
Page vii
SUMMARY OBSERVATIONS
(1) ECONOMIC ENVIRONMENT
1. Since Japan's previous Trade Policy
Review, in 2000, its economic situation has
hardly improved.  After a slight recovery in
1999 and 2000, following a decade ofstagnation, real GDP shrank by 0.6% in 2001
and is expected to decline slightly again in
2002, notwithstanding a monetary policy of
virtually zero interest rate and recurring fiscal
deficits that have raised government debt tounprecedented levels.  The economy also
continues to be beset by persistent downward
pressure on prices, which have been mildly
declining since 1998, unusually high levels of
unemployment, and uncertainty.  One of themain structural problems is a fragile banking
system, with non-performing loans amounting
to 7% of GDP at the end of September 2001.
2. During the period under review
(2000-02), Japan's scope for using
expansionary monetary and/or fiscal policies
to extricate itself from this downward spiralwas greatly constrained by the fact that
interest rates were close to zero, while public
debt was approaching 140% of GDP.  The
Bank of Japan has further relaxed monetary
policy by reducing the official discount rate,down to 0.1%;  it has also lowered the short-
term call rates and provided more liquidity to
the market.  However, with mildly negative
rates of inflation in recent years, real interest
rates have tended to be somewhat higher thannominal rates.  This seeming "liquidity trap"
in combination with a fragile banking system
has thwarted monetary policy.  In
September 2002, the Bank of Japan indicated
its intention to spend trillions of yen on thepurchase of shares owned by commercial
banks in an effort to facilitate resolution of the
non-performing loan problem and to secure
financial system stability.  At the same time,
the Bank announced that it would conduct its
own comprehensive review of the banks' non-
performing loan problem and publish theresults.3. Trade has played an important role in
the economy.  Although the shares of exports
and imports are each around 10% of GDP,
with domestic demand sluggish, external
demand has been the main source of growth
during the past few years, due in part to theopenness of the multilateral trading system.
4. A sustained recovery would appear to
hinge on structural reforms;  indeed, the
Government has begun to place greater
emphasis on structural reforms than onexpansionary monetary and fiscal policies.  A
key element in structural reform is regulatory
reform, particularly to reduce economic
intervention in several sectors.  Another
element of structural reform entails thedisposal of non-performing loans in order to
strengthen the banking system, and the
promotion of corporate restructuring.  These
elements are in addition to the stimulus to
competition generated by Japan's further
liberalization of its trade and investment
regime, partly in accordance with WTOcommitments.
(2) T
RADE POLICY REGIME :
FRAMEWORK AND OBJECTIVES
5. The overall aim of Japan's trade
policy has remained unchanged since itsprevious Trade Policy Review:  its priorities
include strengthening the multilateral trading
system while, at the same time, linking and
integrating with other countries and regions.
6. Japan grants at least MFN treatment
to all WTO Members.  During the period
under review, it has been an active participant
in WTO activities.  Japan has used extensively
the WTO dispute settlement mechanism,
having been a party to four disputes, one asrespondent and three as complainant.  It
participates in the WTO's Working Groups on
Trade and Investment, Trade and Competition
Policy, and Transparency in Government
Procurement, and has submitted a number of
proposals and discussion papers to these
bodies and to the Council for Trade in Goodson the subject of trade facilitation.WT/TPR/S/107 Trade Policy Review
Page viii
7. Japan has traditionally eschewed
regional and bilateral preferential trade
agreements.  Although Japan supported the
"open regionalism" approach of the
Asia-Pacific Economic Cooperation (APEC)
Forum, and participates in other regionalfora, such as the Asia-Europe meeting (ASEM)
and the ASEAN+3, it was not party to any
preferential trading agreement until the
signing of a bilateral free-trade agreement
with Singapore in January 2002.  Japan hasalso proposed an "initiative for a Japan-
ASEAN Comprehensive Economic
Partnership", which would encompass
broader issues than conventional free-trade
agreements, such as science and technology,human resource development, and tourism.
Japan is clear that although regional
arrangements are being pursued, it has by no
means abandoned multilateralism, and that
regional and bilateral trade agreements are
useful tools for market liberalization and
structural reform, complementing multilateralefforts as long as they are consistent with
WTO rules.  In this context, the authorities
maintain that Japan's bilateral agreement with
Singapore will be fully consistent with WTO
rules.
8. During the period under review,
Japan expanded the scope of unilateral
preferential market access granted to products
from certain developing and least developed
countries under its Generalized System ofPreference (GSP) scheme.
(3) T
RADE POLICIES AND PRACTICES BY
MEASURE
9. Since its previous Trade Policy
Review, Japan has continued to liberalizegradually its trade and investment regimes.
Although progress has been made in
improving the competitive environment,
potentially important distortions to
competition are still evident in some sectors,
especially agriculture.  Recognizing the
continued need to promote competition, theauthorities seemingly attach high priority to
further regulatory reform and sound
competition policy.10. The tariff remains Japan's main trade
policy instrument;  most imports enter Japan
duty free or are subject to low tariff rates.  In
fiscal year 2002, the simple average applied
MFN tariff was 6.9%.  Nearly 99% of tariff
lines are bound and most applied tariff ratescoincide with bound rates, thereby imparting a
high degree of predictability to Japan's tariff
schedule.  At the same time, non-ad valorem
duties are an important feature of the tariff,
particularly in agriculture.  Such duties, whichaccount for 7% of all lines, are indicated
clearly in Japan's tariff schedule;  they tend to
involve relatively high ad valorem equivalents
(AVEs).  Moreover, bound tariff rates that
exceed applied rates pertain mainly tonon-ad valorem duties.  The Japanese
authorities have provided the Secretariat with
AVE estimates for the non-ad valorem duties;
these estimates show that 95 of the top
100 tariffs entailed non-ad valorem duties with
AVEs ranging from 47.2% to 1,739% and that
the simple average of all specific rates forwhich AVEs were available was roughly ten
times the simple average of purely ad valorem
tariff rates.  The allocation of tariff quotas
varies by product and can be intricate.
11. Japan has few non-tariff border
measures.  Those currently applied involve
some import prohibitions, import licensing,
and quantitative import restrictions, for
example, on certain fish and silk.  Imports of
certain goods are subject to licensingrequirements in order to ensure national
security, safeguard consumer health and
well-being, or preserve domestic plant and
animal life and the environment.  Like tariff
quotas, certain aspects of the import quotasystem can be intricate.
12. Japan implemented its first safeguard
measures in April 2001, imposing provisional
emergency tariffs on three agricultural
products;  these expired in November 2001.
One anti-dumping measure is currently in
force.  Japan has never taken countervailingactions.
13. Certain export controls are
maintained on the grounds of national securityJapan WT/TPR/S/107
Page ix
and public safety, and to ensure adequate
domestic supplies of certain agricultural and
other primary products.  Japan has not
notified any export subsidies to the WTO,
thereby indicating their absence.  Export
finance, insurance, guarantees, and drawbackschemes are available.
14. Various forms of assistance are
provided by central and local governments,
particularly to agriculture.  The total value of
assistance to agriculture exceeds the sector'scontribution to GDP;  most of the assistance
seems to consist of measures that distort
production and trade.
15. No preferences are granted to
domestic suppliers in respect of governmentprocurement covered by the Agreement on
Government Procurement.  The share of
foreign suppliers in the total value of
government procurement was 6.9% in 2000
(up from 5.7% in 1998).
16. Standards continue to be brought into
line with international standards;  about 90%of Japan Industrial Standards (JIS) were
aligned to their international counterparts as
of 31 March 2001, compared with about half
in FY 1997.  Japan has also taken further
steps to ensure acceptance of foreign test dataand conformity assessments.
17. Japan has continued to participate in
multilateral and regional discussions for
agreements to promote international
harmonization of regimes protectingintellectual property rights (IPRs).
18. A growing awareness that ineffective
corporate governance has contributed to
excessive use of capital and labour in the
corporate sector (and the associated non-performing loans) has prompted the
government to implement a number of policy
measures to reduce excess capacity, including
facilitating debt-equity swaps and tax
incentives.  There have also been some
significant changes in the regulatory
framework and business practices that areconducive to the establishment of moreeffective corporate governance; these changes
include easing and extending the use of stock
options, revision of the Commercial Code to
provide a greater role for external directors,
and significant revisions to Japan's accounting
standards to assure greater transparency.
19. The Three-Year Program for
Promoting Regulatory Reform (TPPRR), first
adopted in March 2001 and revised in
March 2002, is aimed, inter alia, at creating
"a free and fair socio-economic system fullyopen to the international community".  The
TPPRR also contains measures to increase
competition.  Nonetheless, it remains unclear
whether the existing enforcement measures
available to Japan's antitrust enforcementagency, the Japan Fair Trade Commission
(JFTC), are sufficient to constitute an effective
deterrent to violations of Japan's competition
law, which is commonly referred to as the
Anti-Monopoly Act (AMA).  The Government
has made efforts to increase the JFTC's budget
and staff, however, thereby facilitatinginvestigation of AMA violations.
(4) T
RADE POLICIES BY SECTOR
20. Since Japan's previous Trade Policy
Review, the Government has continued to
implement structural reforms;  progress hasbeen made especially in the services sector,
including financial services and
telecommunications.
21. In agriculture, there have been few
policy changes since the previous Review.  In2001, the Government announced a Priority
Plan for a Stable Food Supply and Aesthetic
Land Development, which calls for directing
measures and resources towards productive
sectors, and at the same time providing safetymeasures to address risks associated with
structural reform.  Since March 2001, certain
stock companies (effectively limited to
companies formed by farmers) have been
allowed to participate in farming.  The
average applied MFN tariff for agriculture
(WTO definition) decreased slightly from18.9% in FY2000 to 18.6% in FY2002.  Total
transfers to agriculture exceed the sector'sWT/TPR/S/107 Trade Policy Review
Page x
small contribution to GDP.  Japan's food self-
sufficiency ratio has remained stable at
around 40% since the previous Review;  it
remains the world's largest net importer of
food.
22. Japanese manufacturing has
traditionally been much more exposed to
international competition than agriculture and
certain services.  Tariffs on manufactured
goods are usually low;  moreover, non-tariff
barriers are few and the sector receivesrelatively little financial or other support from
the Government.  As in most other
industrialized countries, manufacturing's
contribution to GDP has been declining
steadily;  it accounted for 21.6% of Japan'sGDP in 2000, compared with 23.0% in 1995.
23. By contrast, the share of services in
Japan's GDP has been growing steadily;  it
accounted for 70.1% in 2000, up from 68.8%
in 1995.  Reforms have continued, especially
in financial and telecommunications services.
24. Against the background of a heavy
debt overhang, financial sector reforms have
been concentrated on strengthening prudential
norms and eliminating non-performing loans
(NPLs).  Over-the-counter sale of some
insurance products by banks has beenpermitted since 1 April 2001, and the "third
sector" (e.g. personal accident and liability)
was liberalized in July 2001.
25. Recent postal reforms were focused on
the liberalization of mail delivery, allowingcompetitors to enter the market provided they
set up a minimum of 100,000 post boxes.
Absent from the legislation, however, were
significant measures to reform the postalsavings system, which enjoys a privileged
position (including its ability to secure for its
savers full protection of their entire deposits).
With ¥240 trillion (US$2 trillion) in assets, the
system deters competition from the private
sector and constitutes an important source ofoff-budget financing for various public
projects, thereby possibly undermining the
efficient allocation of savings to various
investments.
26. In the telecommunications industry,
the limit on foreign ownership restrictions of
NTT was relaxed from 20% to one third, and
an independent dispute-settlement commission
was established.
(5) O
UTLOOK
27. There are tentative signs of moderate
recovery in the Japanese economy, although
its strength is not altogether clear owing to
underlying structural problems, particularly
the resolution of the non-performing loans
matter;  if they are not resolved, these
problems could jeopardize a sustainablerecovery.  According to the latest official
figures, real GDP increased by 2.6% in the
second quarter of 2002 (on an annualized
basis), driven in large part by exports, which
began to recover in early 2002.  The presentunusually high level of unemployment has
contributed to Japanese consumers' reluctance
to spend and thus to the fragility of
consumption demand and persistent
downward pressure on prices.  There are signsthat structural reforms, supported by
macroeconomic measures, are under way;  the
Government has indicated the need to intensify
regulatory and other structural reforms aimed
at removing distortions to competition.