Japan WT/TPR/S/175/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) MAIN ECONOMIC DEVELOPMENTS  
1. Japan's economy has been recove ring moderately since its previous Trade Policy Review in 
2005 (Table I.1), when real GDP grew by 2.7 %.  The economy continued to grow in the first half of 
2006.  Real growth rates in the first and second quarters in 2006 were 3.3%  and 1.0% quarter on 
quarter, on an annualized basis.  Growth in 2 005 was led by domestic demand, notably private 
consumption and private non-residential investment, and, to a lesser extent, by external demand.1  The 
recent recovery has helped Japan to move towa rd solving its structural problems, including non-
performing loans.  Seasonally adjusted unemploym ent in Japan has been on a declining trend, 
reaching 4.0% in May 2006.2  Downward pressure on prices also appears to be easing, as the year-on-
year changes in the core consumer price index (C PI, excluding fresh food) have turned positive since 
June 2006.3  
2. The Bank of Japan (BOJ) ended its "quantitativ e easing monetary policy" on 9 March 2006, 
having observed that year-on-year changes in th e core CPI (2000-base) turned positive and were 
expected to remain above zero per cent.4  Subsequently, on 14 July 2006, the BOJ decided to 
"encourage" (e.g. by means of open market operations ) the short-term call rate to remain at around 
0.25%, compared with the previous target of "effectively zero per cent" since March 2001.  The 
Government estimates that the fiscal deficit amounted  to around 6.2% of GDP  in FY 2005 and 5.8% 
in FY 2006, compared with 7.2% in FY 2004;  public debt continued to increase, reaching about 
172% of GDP in 2005.  The Government's mid-term target for fiscal consolidation, as announced in 
July 2006, is, inter alia,  to achieve a surplus in the primar y balance of the central and local 
governments combined by FY 2011 and ensure gradua l reduction of the ratio of public debt to GDP 
between the early and mid 2010s.5 
3. The Government has continued to place emphasis on structural reforms.  In this connection, 
progress has been made, inter alia , in the financial and corporate sectors (notably disposal of non-
performing loans (NPLs) and the adoption of legisla tion to privatize Japan Post), and deregulation 
(particularly in energy and services);  some deregul ation applied in the Special Structural Reform 
Zones has been applied nationwide.  Against this backdrop, Japan's export competitiveness has 
apparently increased, as shown in a c ontinuing decline in unit labour costs.6 
                                                      
1 Domestic demand's contribution to growth was 2.5 percentage points;  external demand's contribution 
was 0.2 percentage points. 
2 The unemployment rate (seasonally adjusted) reached a record high of 5.5% in June and August 2002, 
and January and April 2003. 
3 The year-on-year changes in the GDP deflator declined:  1.6% in the fourth quarter of 2005;  1.2% in 
the first quarter of 2006;  and 0.8% in the second quarter of 2006.  Japan's CPI data in  2006 were recalculated to 
reflect the base revision in the CPI (from the 2000-base to 2005-base) in August 2006.  The year-on-year 
changes under the 2005-base CPI are lowe r than those under the 2000-base CPI. 
4 The year-on-year change in the monthly core CPI (excluding fresh food, 2000-base) had turned 
positive since October 2005. 
5 In FY 2006, the primary balance of central and local governments combined was estimated to be in 
deficit of 2.8% of GDP (data viewed at:  http://www.mof.go.jp/jouhou/syukei/sy014/sy014k.htm). In 2006, the primary balance of the General Government, excluding social security, was estimated to be in deficit of 2.4% of 
GDP.  The General Government comprises the Central Government, local governments, and social security.  
The primary balance of the Central Government is national debt service less government bond issues. 
6 Unit labour cost declined by 3.4% in 2004 and 1.4% in 2005 (OECD, 2006, No. 79).  WT/TPR/S/175/Rev.1 Trade Policy Review 
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Table I.1 
Selected macroeconom ic indicators, 2001-06 
(¥ trillion and per cent)  
 2001 2002 2003 2004 2005 2006 
National accounts (% change, unless otherwise indicated)       
Real GDP 0.4 0.1 1.8 2.3 2.7 2.7a 
Real domestic demand 1.2 -0.6 1.2 1.5 2.5 1.7a 
Private consumption 1.4 1.1 0.6 1.9 2.3 0.3a 
Government consumption 3.0 2.4 2.3 2.0 1.7 0.4a 
Gross fixed investment -0.9 -5.0 0.3 1.1 3.2  3.5a 
Real exports of goods and services -6.7 7.6 9.0 13.9 7.0 10.1a 
Real imports of goods and services 0.9 0.9 3.9 8.5 6.2 2.7a 
Exports of goods and services (% of GDP) 10.2 11.0 11.8 13.1 13.7 .. 
Imports of goods and services (% of GDP) 9.6 9.7 9.9 10.5 10.8 .. 
Employmentb -0.5 -1.3 -0.2 0.2 0.4 0.1c 
Unemployment rate (annual average)b 5.0 5.4 5.3 4.7 4.4 4.1c 
Household disposable income (% change)   -3.0 -0.3 -1.2 0.4 .. .. 
Prices and interest rates        
Consumer prices (CPI)  (% change)  -0.7 -0.9 -0.3 0.0 -0.3 0.6c 
GDP deflator (% change)  -1.2 -1.6 -1.6 -1.2 -1.4 -0.8a 
Basic discount rate and basic loan rate (%) 0.1 0.1 0.1 0.1 0.1  0.4d 
Money stocke (average amount outstanding, % change)       
M2 + CDs 2.8 3.3 1.7 1.9 1.9 0.7f 
Exchange rate (central rate average, ¥ per US$) 121.5 125.3 115.9 108.2 110.2 118.7g 
 (per cent of GDP, unless otherwise indicated)  
Fiscal balanceh       
Revenue  32.3 30.9 30.5 31.0 31.7 31.5i 
Expenditure  38.7 39.0 38.5 37.3 36.9 36.7i 
Balance -6.4 -8.2 -8.0 -6.3 -5.2 -5.2i 
Balance excluding social security -6.5 -7.9 -8.1 -6.6 -5.3 -4.9i 
Government debtj 145.2 154.0 160.2 168.1 172.1 175.2i 
Saving and investment        
National saving (gross) 25.6 24.5 24.4 24.0 .. .. 
Domestic investment (gross) 24.5 22.4 22.0 21.4 .. .. 
 (¥ trillion, unless otherwise indicated)  
Current account balance       
Current account 10.7 14.1 15.8 18.6 18.3 14.8k 
Current account (% of GDP)b 2.2 2.9 3.2 3.7 3.6 4.3i 
Goods balance 8.4 11.6 12.0 13.9 10.3 6.5k 
Services balance -5.2 -5.1 -3.6 -3.7 -2.6 -1.5k 
Income balance 8.4 8.3 8.3 9.3 11.4 10.8k 
Net transfer balance -1.0 -0.6 -0.9 -0.9 -0.8 -1.0k 
Capital and financial account balance -6.2 -8.5 7.7 1.7 -14.0 -10.4k 
Financial account -5.8 -8.1 8.2 2.3 -13.5 -9.9k 
Capital account -0.3 -0.4 -0.5 -0.5 -0.5 -0.5k 
Changes in reserve assets -4.9 -5.8 -21.5 -17.3 -2.5 -2.7k 
Statistical discrepancy 0.5 0.1 -2.0 -3.1 -1.8 -1.7k 
.. Not available. 
a 3rd Quarter 2006, % changes from the previous year. 
b Information from OECD (2006). c Figures for July-September 2006. 
d As of end of November 2006. 
e Money stock here is measured by M2 + CDs, which include cash currency in circulation, de posit money (demand deposits), 
 quasi-money (time deposits, etc.), an d certificate of deposit accounts (CDs). 
f October 2006, % changes from the same month of the previous year. 
g October 2006, period average. h General Government basis.  Information from OECD (2006).  The General Government  comprises the central government, local 
governments, and social security. 
i Estimated figures from OECD Economic Outlook 79 . 
j Gross financial liabilities, including the debt of the Japan Railway Settlement Co rporation and the National Forest Special 
Account from 1998 onwards. 
k January to September, 2006. 
Source:  Information provided by the Japanese authorities. Japan WT/TPR/S/175/Rev.1 
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4. As regards the external sector, Japan's current  account surplus decreased in 2005;  the 
decreasing surplus reflects a narrowing of the gap between gross national saving and gross domestic 
investment.  The current account surplus was a bout ¥18.3 trillion (or 3.6% of GDP) in 2005 down 
from ¥18.6 trillion (3.8% of GDP) in 2004, reflecti ng a decrease in the merc handise trade surplus, 
which was ¥10.3 trillion in 2005 ( ¥13.9 trillion in 2004).  On the other hand, the services account 
deficit declined from ¥3.7 trillion in 2004 to ¥2.6 tr illion in 2005.  By the end of September 2006, 
Japan's foreign exchange reserves had risen to about US$881 billion (up from US$831 billion in 
September 2004).  Japan's capital and financial acc ount balance has declined substantially from a 
surplus of ¥1.7 trillion in 2004 to a deficit of ¥14.0 trillion in 2005, mainly reflecting a deficit in the 
financial account;  this may be due partly to a "yen  carry trade" (i.e. investors borrowing in yen with 
low interest and investing in a foreign market, where higher yields are expected).7   
5. Trade plays an important role in the economy.   Although the shares of exports and imports 
amount to around 13% and 11% of GDP, respectively,  external demand has contributed positively to 
Japan's economic growth since 2004.  The Unite d States and the European Communities (EC25) 
remain Japan's main export destinations;  China and the United States were the main origins of 
imports in 2005.  China's share in Japan's exports and imports has continued to rise.  Japan's FDI 
inflows decreased while its FDI outflows increased in 2005;  the level of inward FDI remains low 
compared with other developed economies.   
6. The share of services in GDP decreased slight ly in 2004 to 69.6% (from 70.2% in 2003), 
reflecting mainly decreases in the shares of constr uction services, financial services, and insurance 
(Table I.2).  By contrast, services' share of em ployment increased from 69.2% in 2003 to 69.8% in 
2004.  Agriculture accounts for a small share of GD P and employment;  OECD estimates suggest that 
total government assistance was about equal to agricu lture's contribution to GDP (Chapter IV(2)(ii)). 
Table I.2 
Shares of GDP and employment by sector, 2001-04 
  2001 2002 2003 2004 
Share of GDP (per cent)      
Agriculture, forestry and fishing 1.7 1.7 1.7 1.7 
Mining 0.1 0.1 0.1 0.1 
Manufacturing 21.0 20.7 20.9 21.0 
Services 70.0 70.6 70.2 69.6 
Construction 7.1 6.8 6.7 6.4 
Electricity, gas and water 2.8 2.7 2.6 2.6 
Wholesale and retail trade 14.0 13.8 13.4 13.5 
Financial services and insurance 6.4 6.9 7.0 6.7 
Real estate 11.8 12.1 12.2 12.1 
Transport and communications 7.0 7.1 7.0 7.0 
Other services 20.9 21.2 21.3 21.3 
Government 9.3 9.6 9.5 9.4 
Non-profit services for households 1.8 1.9 1.9 1.9 
Import tax and other 0.8 0.8 0.8 0.9 
Statistical discrepancy 1.0 0.6 0.6 0.9 
Total (¥ trillion) 496.8 489.6 490.5 496.1 
Table I.2 (cont'd) 
                                                      
7 See, for example, Financial Times, "BoJ holds rates as fear of yen flowback grows", 
17 November 2006.  Viewed a t:  http://www.ft.com/cms /s/b4bf9602-75c8 -11db-aea1-00007 79e2340.html. WT/TPR/S/175/Rev.1 Trade Policy Review 
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  2001 2002 2003 2004 
Share of employment (per cent)      
Agriculture, forestry, and fishing 5.7 5.4 5.4 5.3 
Mining 0.1 0.1 0.1 0.1 
Manufacturing 18.8 18.1 17.8 17.4 
Services 68.0 68.9 69.2 69.8 
Construction 9.5 9.5 9.3 9.0 
Electricity, gas, and water 0.7 0.7 0.7 0.7 
Wholesale and retail trade 17.4 17.3 17.2 17.0 
Financial services and insurance 2.8 2.9 2.8 2.7 
Real estate 1.6 1.6 1.5 1.5 
Transport and communications 5.8 5.7 5.8 5.8 
Other services 30.1 31.2 31.9 33.1 
Government 5.6 5.6 5.6 5.5 
Producers of private non-profit services to households 1.8 1.9 1.9 1.9 
Total (million) 64.8 63.7 63.5 63.7 
Note: Data on total and shares of employment are base d on SNA statistics on "Employed Persons".  Viewed at:  
 http://www.esri.cao.go.jp/e n/sna/h16-kaku/96s3_en.xls 
Source:  Information provided by the Japanese authorities.  
(2) MACROECONOMIC POLICIES  
(i) Monetary and exchange rate policy 
7. Against the background of a recent rise in th e CPI, the Bank of Japan (BOJ) ended the 
"quantitative easing policy" (QEP) 8 on 9 March 2006, thus starting to remove liquidity gradually;  the 
BOJ also decided to conduct monetary policy b ased on the "examination" of price stability from 
medium- and long-term perspectives wi th a view to increasing transparency9, and announced that the 
understanding among policy board members of price stability in the medium to long term involved 
inflation between zero and 2%.  The BOJ intends to  review the range annually;   it does not consider 
the setting of such a range as "inflation targeting".  Subsequently, on 14 July 2006, the BOJ decided to 
stop keeping the uncollateralized overnight call ra te at "effectively zero per cent" and instead 
"encourage" (e.g. by means of open market ope rations) the rate to remain at around 0.25%.10  The  
"basic discount rate and basic loan rate" (previousl y referred to as the "official discount rate") was 
also raised on 14 July 2006 from 0.1% to 0.4%.11  Since March 2006, the balance of current accounts 
                                                      
8 The quantitative easing policy, adopted by the BO J between March 2001 and March 2006, shifted the 
BOJ's main operating target from the uncollateralized overnight call rate to the current account balances of 
financial institutions held at the BOJ.  Under the QEP,  the uncollateralized overnight call rate was effectively 
kept at around zero per cent.  The BOJ intended to maintain the policy until the core CPI (excluding fresh food) 
"stably" registered zero change or an increase year-on- year.  The BOJ is of the vi ew that the commitment was 
fulfilled. 
9 The BOJ decided to "examine" economic activity and prices from two perspectives:  one to two years 
in the future and over the longer term.    The result of such analysis is to be disclosed on a regular basis. 
10 With regard to the effects of the QEP, Ugai (2 006) noted that the policy secured market confidence 
and generated an accommodative financial environment;  however, the effects of expanding the monetary base were small in terms of raising aggregate demand and prices. 
11 The interest rate that has been called the "official discount rate" is the rate at which the BOJ 
rediscounts commercial bills or extends loans secured by what the BOJ regards as "eligible collaterals", such as government bonds to financial institutions.  The rate is officially referred to as "the basic discount rate" and "the Japan WT/TPR/S/175/Rev.1 
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of financial institutions held at the BOJ has declin ed rapidly, to about ¥9 trillion as of the end of 
August 2006.12   
8. The nominal exchange rate of the yen against the U.S. dollar had continued to appreciate in 
the period between 2002 and the end of 2004 (from ¥125/US $ to ¥108/US$).  However, by the end of 
March 2006, it had depreciated to ¥116.9/US$ perh aps owing partly to "yen carry trade".  
(ii) Fiscal policy 
9. During the period under review, Japan main tained a budget deficit;  the General 
Government's fiscal deficit as a percentage of GDP was 6.3% in 2004, and is estimated to be around 
5.2% of GDP in 2006.13  Japan's public debt to GDP ratio increased slightly to 172.1% in 2005 
(compared with 168.1% in 2004).  The Government 's current medium-term fiscal consolidation 
programme, announced in July 2006, requires it to ach ieve a surplus in the primary balance of the 
central and local governments combined by FY 2011;  the amount of surplus targeted is unspecified.  
The Government wishes to achieve the target by  reducing expenditures by approximately ¥11.4 to 
¥14.3 trillion, with a view to eliminating an estimated  deficit in the primary balance (if no measure is 
taken) of about ¥16.5 trillion in FY 2011, while th e remainder is to be financed mainly by tax 
increases as part of broader tax reform.   The Government's policy is also to streamline the "special 
accounts" by FY 2010 in accordance with the Administrative Reform Promotion Law, adopted by the Diet on 26 May 2006;  the Government plans to  submit to the Diet a bill with a view to, inter alia,  
stipulating reforms of individual special accounts, by 2007.
14  The FY 2006 budget amounts to 
¥79.7 trillion (¥82.1 trillion in FY 2005 (the initial budget)), of whic h expenditure on public works 
accounts for 9.0% (¥7.2 trillion), down slightly from  the FY 2005 budget, while the national debt 
service amounts to ¥18.8 trillion (23.6% of the budget), up 1.7% from the FY 2005 budget.  The Government has been publishing Government financia l statements, including those of ministries, to 
increase fiscal transparency.  The latest version,  concerning the FY 2004 statements, was published in 
August 2006.  In FY 2005 and FY 2006, the ratios of tax revenues to total expenditures were 53.5% 
and 57.6%, respectively.  Recent tax reforms have been aimed at broadening the tax base (section (3) 
below), with a view to ach ieving fiscal consolidation. 
10. The Government's plan for fiscal reforms in local governments (adopted in 2003) aimed to 
increase the autonomy of local governments regarding fiscal decisions by:  reducing subsidies from the central to local government by over ¥4 trillion by FY 2006;  reducing the "local allocation tax" 
(from the central to local government);  and increasing local tax revenues by ¥3 trillion by 
                                                                                                                                                                    
 
basic loan rate" in the Bank of Japan Law.  The BOJ cons iders that the linkage between the official discount rate 
and deposit rates is weak, as interest rates are determined by arbitrage in the market;  the rate currently serves as 
the interest rate applied to the Bank's complementary le nding facility introduced in 2001.  Thus, the rate should 
no longer be regarded as representing the Bank's policy st ance because the only role it plays is as the upper limit 
of the uncollateralized overnight call rate, which is currently the Bank's operating target for money market 
operations or the policy interest rate.  Before 1994, when interest rates were deregulated, the official discount 
rate represented the BOJ's basic stance on monetary po licy because a wide range of interest rates, including 
those on deposits, were determined based on this rate. 
12 Before the termination of the QEP, the BOJ's target for the balance of current accounts was 
¥30-35 trillion.  The requir ed level of current account deposits held  at the BOJ is around ¥6 trillion.   
13 OECD (2006), No. 79. 
14 Central Government special accounts are intended to carry out specific pr ojects, administer and 
manage specific funds, or administer revenues and expe nditures separately from the general account.  Currently, 
there are 31 such accounts.  In FY 2006, the annual b udget for special accounts amount ed to about ¥460 trillion, 
compared with ¥80 trillion for the general account.  WT/TPR/S/175/Rev.1 Trade Policy Review 
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reallocating part of national individual income tax to the local inhabitant tax (temporary measures to 
be taken in FY 2006 until the new structure of th e national income tax is  applied in FY 2007).15 
(3) STRUCTURAL POLICIES  
11. Since the previous Review of Japan, the Gove rnment has continued to emphasize structural 
reform.  Its main policy direction for structural re form is described in the Basic Policies for Economic 
and Fiscal Management and Structural Reform form ulated annually by the Council on Economic and 
Fiscal Policy.16  The Government evaluates the implementati on of structural reform every year;  the 
fourth evaluation report, issued in June 2005, stated  that the target for non-performing loans had been 
reached (section (3)(ii) below).17  The objectives of the latest Basi c Policies, announced in July 2006, 
include:  further market-oriented reforms;  rais ing productivity through IT and innovations in the 
services sector;  establishment of  an efficient government through privatization of government-
affiliated financial institutions (e.g. Japan Post);  and reform of special accounts and the social 
security system. 
(i) Tax reform 
12. In order to promote fiscal consolidation and,  at the same time, raise productivity, Japan's 
recent tax reform is aimed mainly at broadeni ng the tax base and rationa lizing corporate tax and 
international taxation.  In its FY 2006 tax reform ,  the Government abolished the across-the-board 
income tax credit and reformed various tax incentiv es, for example by abolishing tax incentives to 
promote IT-related investment.18  The FY 2006 tax reform also included the corporate tax system, 
such as allowing corporations either special deprec iation of 50% of the standard acquisition value of 
selected equipment (e.g. those considered to improv e competitiveness) or a tax credit of 10% of that 
value, as a temporary measure applicable for two y ears.  However, the statutory corporate tax rate 
remains high relative to other countries in the region.19  The reform of international taxation included 
measures to remove tax impediments to inward FDI, prevent international tax avoidance, and 
strengthen the authority of the Ministry of Fina nce to investigate under the "information exchange 
provisions" of tax treaties.20   
                                                      
15 The new rate structure, applicable from FY 2 007, will have six income tax brackets with rates 
between 5% and 40%, compared with the previous four brackets with rates between 10% and 37%.  At the same 
time, the new structure will reform local inhabitants tax to a 10% across-the-board rate;  previously, there were 
brackets with rates between 5% and 13%. 
16 The Basic Policies for FY 2005 addressed issues including: the creation of  a small and efficient 
government;  strengthening of regional autonomy;  improving labour productivity;  and increasing per capita 
real GDP.  
17 Cabinet Office (2005). 
18 The across-the-board income tax credit was introduc ed in 1999.  The rate of tax credit was reduced 
from 20% to 10% and the ceiling reduced from ¥250,000 to ¥125,000 in the tax reform of FY 2005.  The tax 
incentive to promote IT-related investment was in troduced in 2003 (Ministry of Finance, 2005). 
19 Japan's effective corporate tax rate (including local  taxes) is 39.54%, compared with 40.75% in the 
United States, 39.9% in Germany, 30% in the United Ki ngdom, 33.33% in France, 33% in China (Shanghai), 
and 27.5% in South Korea. 
20 These measures included reform of the tax system for non-permanent residents and of the transfer 
pricing tax system.  Under the "information exchange" provisions, the officials of the National Tax Agency, an 
external organ of the MOF, may ex ercise information-gathering authority to obtain information regarding 
criminal cases if requested by trading partners with bilate ral tax treaties with Japan in force;  these officials can 
investigate taxpayers and non-taxp ayers in accordance with the Na tional Tax Violations Law.   Japan WT/TPR/S/175/Rev.1 
 Page 7 
 
 
(ii) Financial system and corporate reform 
13. Maintaining the stability of the financial system  has continued to be among the Government's 
main policy objectives.  Accordingly, the Governme nt has taken a number of measures to tackle the 
issue of NPLs.  The Programme for Financial Re vival (PFR), formulated in October 2002 by the 
Financial Services Agency, had the primary aim of halving the NPL ratio to total loans by major 
banks at the end of March 2002 (8.4 %).  The support measures to financ ial institutions as stipulated in 
the programme included provision of special loans by the BOJ, the injection of public funds based on 
the Deposit Insurance Law, and enhanced mon itoring of a business plan of a Special Support 
Financial Institution, to wh ich public support is provided.21  The authorities are of the view that the 
issue surrounding NPLs has been mostly normalized because the target set (4.2%) in the PFR has 
been met;  profits of financial institutions have im proved substantially, and the ratio of NPLs to total 
credit of all banks decreased to 2.9% (¥13.4 trilli on) in March 2006 (from 5.8% in March 2004);  for 
major banks, the ratio of NPLs to their total le nding decreased to 1.8% compared with 5.2% in 
March 2004. 
14. Since 1 April 2005, only deposits for payment and settlement purposes, bearing no interest 
and redeemable on demand, have been fully protect ed by the Deposit Insurance Corporation of Japan, 
a semi-governmental organization established in acco rdance with the Deposit Insurance Law.  Other 
bank deposits up to ¥10 million (and interest there from) per depositor per financial institution are also 
fully protected. 
15. The large share of Japan Post in savings and insurance, together with certain privileges it 
enjoys (e.g. exemption from corporate tax), may deter competition from the private sector.22  T h e  
Government has been preparing for the privatization of  Japan Post with the adoption of laws related to 
privatization of the postal services (PPS) in Octobe r 2005 (Box I.1).  The Gove rnment also announced 
plans to consolidate government-affiliated financial institutions in November 2005 
(Chapter IV(5)(ii)). 
16. A growing awareness that ineffective corporate governance has contributed to the inefficient 
use of capital and labour in the corporate sector h as prompted the Government to implement a number 
of policy measures since the previous Trade Policy Review of Japan.  A new Corporate Code, which 
entered into force on 1 May 2006, provides, inter alia , for stricter requirements on large companies to 
reinforce internal controls (Chapter III(4)(vii)). 
                                                      
21 The authorities state that most of the special measures taken by the Government ended as of 
April 2005.  The Financial Service Agency (FSA) formulated plans to revitalize the financial sector in a Programme for Further Financial Reform  (PFFR), announced in December 2004. 
22 On the other hand, Japan Post also faces constrai nts such as universal service obligation, insurance 
and deposit ceiling regulations, limitations on the scope of products and services, and restrictions on asset management. WT/TPR/S/175/Rev.1 Trade Policy Review 
Page 8 
 
 
Box I.1:  The privatization of Japan Post  
Privatization of Japan Post was one of the pillars of the Governments' structural reform initiatives. 
Japan Post, a state-run public corporation that holds 30 % of all households' financial assets, was established 
in April 2003.  It took over mail delivery, postal savings, and kampo  life insurance services, previously 
provided by the Postal Services Agency. 
The Law on the Privatization of the Postal Services (LPPS) was adopted by the Diet on 14 October 2005.  
Other related laws are:  Japan Postal Services Holdin g Company Law;  Postal Service Company Law;  Post 
Office Company Law;  the Law Concerning the In corporated Administrative Agency Management 
Organization for Postal Savings and Postal Life In surance;  and the Law Concerning the Abolition and 
Amendment of Related Laws.  In accordance with th e LPPS, the Government es tablished the Headquarters 
for the Promotion of the Privatization of the Po stal Services, chaired by the Prime Minister, on 
10 November 2005 and a Postal Services Privatization Committee under the Headquarters on 1 April 2006.  
The Headquarters is responsible for over all coordination and reports to the Diet. 
The Japan Postal Services Holding Company was established by the Government on 23 January 2006 to 
take charge of the preparation and planning of the pr ivatization.  The Company set up the special planning 
board for the succession of business from Japan Post.  The Government holds that the Headquarters may 
decide to delay the implementation of the laws until the end of March 2007 in accordance with a cabinet 
decision in case significant problems related to the development of an information system arise.  It is set to 
start the privatization process in October 2007 and complete by 1 October 2017.  During the transition 
period, the Government is to disinv est government shares in the holdi ng company to a level exceeding one 
third of the total shares.  Under the laws, the privatized companies are, as a rule, to be subject to the same 
obligation to pay taxes as the private sector from the beginning of the transition period;  nonetheless, the 
law also prescribes tax measures aimed at a smooth transition of the business and the functions of Japan 
Post to the new companies.  According to the author ities, the Government will ensure transparency through 
the necessary use of procedures in  accordance with the Administrative Pr ocedures Act, and through other 
means, such as provision of "meaningful opportunities" in a "timely manner", upon request, for interested 
parties to exchange views with relevant officials of the Government.    
Under the LPPS, the Japan Post has greater freedom to  invest its assets;  it is vested with a greater 
discretion to limit the provision of funds to government corporations. 
According to the LPPS, the postal savings and postal life insurance functions of Japan Post are to be 
transferred to the Postal Savings Bank and the Postal  Insurance Company, the subsidiaries of the Japan 
Postal Services Holding Company, in October 2007.  At the end of FY 2005, total assets of the Postal Life 
Insurance were ¥119.9 trillion (total assets of private life insurers were ¥209.8  trillion) and the outstanding 
amount of postal savings was ¥200.0 trillion (13.3% of  total household financial assets in Japan).  When 
the two new companies take over the postal savings ( yucho ) and postal insurance businesses ( kampo ),  they 
are to be subject to the same regulatory requirements as the private sector.  However, during the transition 
period, special regulations are to apply, inter alia,  on financial products and ceiling amounts.  The laws 
related to privatization of the postal services stipulate that:  the initial scope of business of the new 
companies is to be the same as that of Japan Post;  future expansion of the scope of business, as well as 
conditions for competition are to be decided by the Prime Minister and the Minister for Internal Affairs and 
Communications.   
As details of the scope of business allowed and restrictions applied to the new companies during the 
transition period are yet to be decided, it remains to be seen how level the playing field will be in banking 
and insurance. 
Source:  Information provided by the Japanese authorities . 
 Japan WT/TPR/S/175/Rev.1 
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(iii) Pension reform 
17. The Government runs the public pension schem e in accordance with the law concerning  
public pension reform, adopted by the Diet in June 2004.23  The Government has been discussing the 
possibility of unifying the employees' pension plan (covering workers of private companies) and the 
mutual aid pension plans (covering civil servants), and it has made this a priority.24  It would appear 
that the Government is to launch a basic plan to reform the Social Insurance Agency (SIA), which 
currently manages the public pension scheme and its fund.25   
(iv) Regulatory reform 
18. Sustained efforts have been made to gradua lly reduce regulatory intervention in various 
sectors, including energy, financial services, telecommunications, transport, and legal services.  In 
March 2006, the Government issued a revised "Three-Year Plan for the Promotion of Regulatory Reform";  the original programme was adopted in March 2004, followed by a first revision in 
March 2005.  The 2005 revision included the introduction of a market testing system;  competitive 
tendering involving the public and private sector is being introduced for various "public services" 
currently provided by national and local governments.
26  Moreover, under the Special Zone for 
Structural Reform Act, which entered into force in April 2003, about 500 special zones have been 
established.27  The Act allows relaxation or elimination of specific regulations within a particular 
zone;  these included extending the period that forei gn researchers may stay in Japan to five years 
(from three), and permission for "general corpora tions" (e.g. stock companies) to engage in 
agriculture and to lease farmland.  In September 2006, the Headquarters for the Promotion of Special 
Zones for Structural Reform decided to apply on  a nationwide basis, special regulatory measures 
(including exemptions) concerning 69 regulations  have been expanded nationwide;  these include 
enabling customs clearance outside the regular work ing hours, and reducing the charges for the extra 
operations with a view to promoting trade.28 
                                                      
23 Reforms include annual increases in the contribution rates until 2017, gradual reduction of the 
benefits and increase in the government contribution, together with tax reform measures.  It also introduced 
macroeconomic indexation, in which the growth of benefits  is automatically adjusted according to the growth of 
average life expectancy and the decr ease in the number of persons covered by the public pension.   
24 Policy Speech by Prime Minister Sh inzo Abe to the 165th Session of  the Diet, 29 September 2006.  
Viewed at:  http://w ww.kantei.go.jp/foreign/abes peech/2006/09/29 speech_e.html. 
25 The SIA is the insurer of two major Japanese Public Pension systems (i.e. the Employees' Pension 
Insurance and the National Pension) and a public health insurance system (the Government-managed Health 
Insurance).  A bill to reform the SIA was submitted to th e Diet in March 2006;  it was not adopted and has been 
withdrawn.  
26 The 2005 revision also included measures rela ted to the creation of a "small and efficient 
government", as well as the reform of major sectors, in particular agriculture, medical care, and education. 
27 Among the 878 plans approved, 573 zones were operational as of September 2006.  Since 2003, 
several amendments have been made to the Act to add special regulatory measures, such as allowing 
outsourcing of some prison se rvices to the private sector. 
28 There are two types of special zones for custom clearance:  one has extended hours of operation and 
the other reduced clearance fees.  In many special zones,  working hours have been extended to 21:00, and in 
some cases they were extended on w eekends and holidays (regular working hours are from 8:30 to 17:00, from 
Monday to Friday).  In some zones,  customs clearance has been made ava ilable 24 hours per day, except on the 
New Year's Day.  There are additiona l clearance fees for after-hours operation, but in a special zone, Custom 
halves those fees.  According to the authorities, almost a ll major ports and airports in Japan are covered by these 
zones.  Since 2005, the special treatment has been made available nationwide, provided that there is sufficient 
demand. WT/TPR/S/175/Rev.1 Trade Policy Review 
Page 10 
 
 
19. The Regional Revitalization Law entered into fo rce in April 2005.  The Law provides for, 
inter alia,  tax incentives and subsidies for approved projects aimed at "revitalizing" regional 
economies.  As of September 2006, 773 projects had been approved.  The Government intends to 
coordinate special zones and regional revitaliza tion programmes through cooperation between the 
Headquarters for the Promotion of Special Zones for Structural Reform (in charge of special zones) 
and the Headquarters for the Promotion of Regulatory Reform (in charge of regional revitalization);  
the two secretariats share the same officials.   
20. The Administrative Procedure Law was amended to include the legislation on public 
comment procedure on 29 June 2005;  the amendment entered into force on 1 April 2006.  According 
to the legislation, ministries and agencies are required to publish draft orders and seek public comments (allowing at least 30 days for comment);  submitted comments as well as the results of the consideration by ministries and agencies, with their reasoning, must be published. 
(4) D
EVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT  
21. In 2004, the share of exports of goods and ser vices in GDP was 13.2% (11.8% in 2003) and 
the share of imports 10.6% (10.2% in 2003).29  In 2005, Japan was the world's fourth largest exporter 
(counting the European Communities as one) and importer of goods. 
(i) Composition of merchandise trade 
22. Manufactures accounted for 91.8% of Japan's to tal exports in 2005, a slight decrease from 
2003 (Chart I.1).  During the period 2003-05, machin ery and transport equipment remained Japan's 
most important merchandise export, accounting fo r 64.1% of total expor ts of goods in 2005 
(Table AI.1);  a fall in exports in 2005 was due to  the decrease in exports of machinery and transport 
equipment.   
23. The share of primary imports continued to in crease slightly and accounted for 44.6% in 2005 
(up from 41.3% in 2003), and that of manufactured im ports continued to decline slightly.  Machinery 
and transport equipment continue to be Japan's mo st important merchandise imports, with a share of 
25.7% in 2005 (down from 27.6% in 2003) (Table AI.2).  
(ii) Direction of merchandise trade 
24. The United States remains the main destinati on for Japanese exports, attracting 22.9% of the 
total in 2005, although the share declined by two pe rcentage points compared with 2003 (Chart I.2).  
By contrast, the share of Asia, particularly China, continued to increase.  During 2003-05, the share of 
the EC25 in Japan's exports decreased to 14.7%  (from 16% in 2003) and APEC's share increased 
slightly to 76.3% (from 75.7%) (Table AI.3). 
25. China's share in Japan's merchandise imports continued to increase, accounting for 21% in 
2005 (up from 19.7% in 2003).  The share of the United States declined from 15.6% to 12.7% during the period, and APEC's share declined from 68.2% to 66.1% (Table AI.4).  
 
                                                     
 
29 Based on the most recent data available. Japan WT/TPR/S/175/Rev.1 
 Page 11 
 
 
Chart I.1
Product composition of merchandise trade, 2003 and 2005
2003 2005
(a)    Exports (f.o.b.)
Other consumer goods
 8.4
Manufactures
93.0
Total:   US$472.0 billion Total:  US$594.9 billion
(b)    Imports (c.i.f.)
Chemicals
7.7Transport
  equip.
4.7
Manufactures
57.0Office machines &
 telecommunication 
equip.    14.2Other electrical
machines  4.1  
Non-electrical 
machinery    4.6Textiles & 
clothing
6.4
Other
 mining
 4.9Fuels
21.2Non-electrical
machinery  4.7Other  1.8Other electrical 
machines  3.9Office machines & 
telecommunication equip.
16.5
Other semi-manuf.   
5.5Transport 
equip.
4.1
Chemicals
7.3Manufactures
53.6Office machines &
telecommunication
equipment   13.0
Total:   US$383.5 billion Total:   US$515.9 billion Per cent
Manufactures
91.8Other transport 
equip.
  5.6
Other electrical
 machines
6.5Iron & steel  
4.6Other electrical 
machines
6.6
Other consumer
 goods   9.6
Other  1.7Mining  2.5
Office machines & 
telecommunication equip.
19.1Automotive products
21.8
Other 4.4
Other semi-manuf.  
4.3
Non-electrical 
machinery
14.8Agriculture 1.0
Iron & steel  3.8
Source :  UNSD, Comtrade database (SITC Rev.3).Other  consumer
 goods  10.2
Mining
31.8Other consumer goods
8.7Automotive 
products
20.7Textiles & clothing
1.2
Other semi-manuf.
4.3
Non-electrical
machinery
13.8
Other semi-manuf.
5.2Mining  1.7Agriculture  1.0
Agriculture
12.8Agriculture
15.2
Mining
26.1Textiles &  clothing
        1.5
Chemicals 
8.3Chemicals 
8.8Other  4.3
Textiles &
 clothing 
5.5
Other mining
6.0
Fuels
25.8Other transport 
equip. 
5.6
 WT/TPR/S/175/Rev.1 Trade Policy Review 
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Chart I.2
Direction of merchandise trade, 2003 and 2005
2003 2005
(a)    Exports (f.o.b.)
Other Asia  
5.5Asia
49.0
Total:   US$472.0 billion Total:  US$594.9 billion
(b)    Imports (c.i.f.)
Other
4.4Indonesia
4.3
EC25
13.1United Arab 
Emirates  3.7
United States
15.6EC25
11.4United Arab
Emirates 4.9Thailand  3.0
Other Asia
5.9
United States
12.7
Total:   US$383.5 billion Total:   US$515.9 billionPer cent
Asia
51.0
Other Asia  
5.3Middle East
2.8China
12.2
Other Middle East
6.5Korea, Rep. of
4.7Korea, Rep. of
4.7United States
24.9Chinese Taipei
7.3
Indonesia
4.0United States
22.9
Source :  UNSD, Comtrade database (SITC Rev.3).China
21.0EC25
14.7Middle East   
2.7
Asia
49.8Asia
49.1China
19.7
Other
4.6Hong Kong, China
6.0
EC25
16.0Hong Kong, China
6.3China
13.5
Other America
5.4
Malaysia  2.8Chinese Taipei
3.5Chinese Taipei
3.7
Australia  3.9Other America
4.8Korea, Rep. of
7.8Korea, Rep. of   
7.4
Other America
4.4Other America
4.6Thailand  3.1
Australia  4.8
Other Asia
6.4Thailand  3.4
Singapore  3.1Chinese Taipei
6.6
Singapore  3.1 Thailand  3.8
Saudi Arabia  
3.8Saudi Arabia 
5.6  Other Middle East
5.8Malaysia  3.3
Middle East
13.4Middle East
17.0Malaysia 2.1 Malaysia  2.4
Other
3.2Other
2.6Australia  2.1 Australia  2.1
 Japan WT/TPR/S/175/Rev.1 
 Page 13 
 
 
(iii) Composition of trade in services 
26. Japan's cross-border sales (exports) and purchases (imports) of services increased in 2005 
(Table AI.5).  The services deficit decreased from ¥3.7 trillion in 2004 to ¥2.6 trillion (by 28.7%) in 
2005.  Deficits in transport and travel both decreased  in 2005, reflecting an increase in the number of 
Japanese overseas travellers and cross-border cargo movement.  
(iv) Foreign direct investment (FDI) 
27. Inward FDI into Japan remains s ubstantially lower than outward FDI, and the level of Japan's 
inward FDI remains low compared with other developed economies.30 According to Japan's balance 
of payments statistics, FDI inflows decreased s ubstantially to ¥0.3 trillion in 2005 (¥0.8 trillion in 
2004).31  This decrease was due in particular to a substantial fall in investment from the Western 
Europe.  Japan's outward FDI increased to ¥5.0 tr illion in 2005 (from ¥3.3 trillion in 2004), reflecting, 
inter alia,  a large increase of Japan's FDI into the North America and Asia (Table AI.6).  Transport, 
wholesale and retail services, and communications acc ounted for the main inflows of FDI in 2005, 
while finance and insurance, transport equipmen t, wholesale and retail, and electric machinery 
accounted for more than half of outward FDI (Table AI.7).32  
(5) PROSPECTS  
28. The Government's official projections, announced  in January 2006, forecast that the economy 
would grow by 1.9% in FY 2006, with the CPI incr easing by 0.5%, and unemployment at about 4.1%.  
The latest quarterly estimates of GDP indicate that in the third quarter of 2006, real GDP grew by 2.7% year on year, led mainly by domestic demand.   Compared with 2005 and the first two quarters 
of 2006, GDP growth in the third quarter relied more on external demand.
33 
29. In view of strong domestic (compared with ex ternal) demand, owing to better performance by 
domestic fixed investment, rising wages and c onsequent growth in consumer demand, the 
Government is optimistic about the sustainability of the current recovery.  Nonetheless, the strength of 
the recovery in the more immediate term depends to  some extent on external factors, such as the pace 
of growth in the world economy (including the Unite d States, EC25, and China, Japan's main export 
markets) and prices of crude oil, as well as on domestic factors, notably interest rates.  Japan's 
medium- and long-term growth prospects will de pend on its continued efforts to implement an 
accommodative mix of monetary and fiscal policies t ogether with structural reforms.  The latter 
include reforms in the financial, corporate, and public sectors, strengthening of competition policy, 
further trade liberalization (particularly in agricu lture), measures to increase Japan's attractiveness to 
inward FDI, and policies to deal with the downside risks arising from its rapidly aging population and 
the associated decline in the labour force.  The G overnment believes in the need to intensify such 
reforms, which would contribute to reducing, if not  removing, distortions to competition that impair 
economic efficiency. 
                                                      
30 According to UNCTAD (2006), FDI inflows into Japan in 2005 amounted to US$2.8 billion, while 
those into the United States and the European Communities were US$99.4 billion and US$421.9 billion, 
respectively.  FDI inflows into Ch ina and the Republic of Korea in 2005 amounted to US$72.4 billion and 
US$7.2 billion, respectively. 
31 The statistics on outward and inward foreign direct investment, which were based on notification of 
FDI projects, have been abolished (the final year for data was FY 2004).  From FY 2005, FDI data are provided in the balance of payment statistics. 
32 Japan's pre-2005 FDI statistics by industry are not comparable with the 2005 data. 
33 The contribution of domestic demand to growth (2.7%) was 1.6 percentage points, and the 
contribution of external demand was 1.1 percentage points.