Japan WT/TPR/S/211 
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I. ECONOMIC ENVIRONMENT 
(1) MAIN ECONOMIC DEVELOPMENTS  
1. In line with the global economy, Japan's econom y has slowed down since its previous Trade 
Policy Review in 2007 (Table I.1), when real GDP  growth was 2.4%.  While the economy continued 
to grow in the first quarter of 2008, it shrank by an annual rate of 3.0% and 1.8% in the second and 
third quarters, respectively.  Trade plays an important role in the economy;  growth in 2007 was led by external demand for Japan's exports and, to a slightly lesser extent, domestic demand, notably 
household consumption and private non-residential investment.
1  Unemployment in Japan has been on 
a declining trend, reaching 3.9% in 2007;  on a monthly basis, the seasonally adjusted unemployment 
rate was 4.0% in September 2008, afte r reaching a low of 3.6% in July 2007.2  Downward pressure on 
prices remained in 2007 as the year-on-year rate of  change in the core consumer price index (CPI 
excluding fresh food) in the year was the same as in 2006  despite a marked rise in  energy prices;  this 
pressure appeared to have eased as monthly co re-CPI continued to increase between March and 
August 2008.  In October, however , core inflation slowed for the second straight month to 1.9%, 
largely due to falling energy prices.  Whether this heralds a return to deflation in the near future 
remains to be seen.  
Table I.1 
Selected macroeconom ic indicators, 2002-08 
(¥ trillion and per cent)  
 2002 2003 2004 2005 2006 2007 2008 
 (% change, unless otherwise indicated)  
National accounts        
Real GDP 0.3 1.4 2.7 1.9 2.0 2.4 -1.8a 
Real domestic demand -0.4 0.8 1.9 1.7 1.2 1.3 -1.0a 
Private consumption 1.1 0.4 1.6 1.3 1.5 1.3 1.2a 
Government consumption 2.4 2.3 1.9 1.6 0.4 2.0 -1.3a 
Gross fixed investment -4.9 -0.5 1.4 3.1 0.5 1.1 -3.3a 
Real exports of goods and services 7.5 9.2 13.9 7.0 9.7 8.4 3.4a 
Real imports of goods and services 0.9 3.9 8.1 5.8 4.2 1.5 9.6a 
Exports of goods and services (% of GDP) 10.9 11.8 13.1 13.7 14.7 15.6 .. 
Imports of goods and services (% of GDP) 9.6 9.9 10.4 10.8 11.0 10.9 .. 
Employment -1.3 -0.2 0.2 0.4 0.4 0.5 .. 
Unemployment rate (annual average) 5.4 5.3 4.7 4.4 4.1 3.9 .. 
Household disposable income (% change)   -0.2 -1.6 0.8 0.9 1.0 .. .. 
Prices and interest rates         
Consumer prices (CPI)  (% change)  -0.9 -0.3 0.0 -0.3 0.3 0.0 2.2b 
GDP deflator (% change)  -1.5 -1.6 -1.1 -1.2 -0.9 -0.7 -1.6c 
Basic discount rate and basic loan rate (%) 0.1 0.1 0.1 0.1  0.4 0.75 0.3d 
Money stocke (average amount 
outstanding, % change)        
M2 + CDs 3.3 1.7 1.9 1.9 1.1 1.6 1.7f 
Exchange rate (annual average, ¥ per 
US$) 125.3 115.9 108.2 110.2 116.3 117.8 97.0d 
Table I.1 (cont'd)  
                                                      
1 External demand accounted for 1.1 percentage points of growth and domestic demand for 
0.9 percentage points. 
2 The unemployment rate (seasonally adjusted) reached a record high of 5.5% in June and August 2002, 
and April 2003. WT/TPR/S/211 Trade Policy Review 
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 2002 2003 2004 2005 2006 2007 2008 
 (Per cent of GDP)  
Fiscal balanceg        
Revenue  30.8 30.5 30.9 31.7 34.6 33.4 35.0 
Expenditure  38.8 38.4 37.0 38.4 36.0 35.8 36.4 
Balance -8.0 -7.9 -6.2 -6.7 -1.4 -2.4 -1.4 
Balance excluding social security -7.9 -8.0 -6.6 -7.0 -1.4 -2.2 -1.2 
Government debth 152.3 158.0 165.5 175.3 171.9 170.6 173.0 
Saving and investment         
National saving (gross) 25.1  25.3  25.7  26.7  26.5  .. .. 
Domestic investment (gross) 23.1  22.8  23.0  23.6  24.0  .. .. 
 (¥ trillion, unless otherwise indicated) 
Current account balance        
Current account 14.1 15.8 18.6 18.3 19.8 24.8 10.4i 
Current account (% of GDP)j 2.9 3.2 3.7 3.7 3.9 4.8 4.1k 
Goods balance 11.6 12.0 13.9 10.3 9.5 12.3 3.7i 
Services balance -5.1 -3.6 -3.7 -2.6 -2.1 -2.5 -1.1i 
Income balance 8.3 8.3 9.3 11.4 13.7 16.3 8.5i 
Net transfer balance -0.6 -0.9 -0.9 -0.8 -1.2 -1.4 -0.7i 
Capital and financia l account balance -8.5 7.7 1.7 -14.0 -12.5 -22.5 -11.5i 
Financial account -8.1 8.2 2.3 -13.5 -11.9 -22.1 -11.3i 
Capital account -0.4 -0.5 -0.5 -0.5 -0.6 -0.5 -0.2i 
Changes in reserve assets -5.8 -21.5 -17.3 -2.5 -3.7 -4.3 -1.6i 
Statistical discrepancy 0.1 -2.0 -3.1 -1.8 -3.7 2.0 2.7i 
.. Not available. 
a Third quarter, annual rate. 
b Figures for July-September 2008. 
c Third quarter, % change from the previous year. d 19 December 2008. 
e Money stock here is measured by M2, which includes cash currency in circulation, de posit money (demand deposits), 
 quasi-money (time deposits, etc. ), plus CDs, which are certificate of deposit accounts. 
f November 2008, % change from November 2007. 
g General Government basis.  OECD (2008), Economic Outlook, Volume 1, No. 84, Paris.  The General Government comprises 
the central government, local governments, and social security. 
h Gross financial liabilities, including the debt of the Japan Railway Settlement Co rporation and the National Forest Special 
Account from 1998 onwards. 
i January to June 2008. j OECD (2008), Economic Outlook, Volume 1, No. 84, Paris. 
k January to June 2008.  Calculati ons by the Japanese authorities. 
Source:  Information provided by the Japanese authorities. 
2. Economy-wide labour productivity in Japan lags behind that of other major industrialized 
countries:  for example, it is about 30% lower than in the United States.3  Data provided by the 
authorities indicate that labour productivity in non-manufacturing is stagnant compared with 
manufacturing;  they attribute this to lowe r total factor productivity (TFP) growth in 
non-manufacturing.4  Agriculture accounts for a small share of GDP (1.5% in 2006) and employment 
                                                      
3 Labour productivity in terms of GDP per hour worked is US$50.4 in the United States;  US$38 in the 
OECD and US$35.6 in Japan.  Between 2000 and 2006, the economy-wide labour productivity in Japan grew, 
on average, by 1.7% per year, while labour productivity growth in the manufacturing and selected services sectors (excluding, inter alia,  construction, utilities, education and health and social work) was around 4% and 
3%, respectively, per year (OECD, 2008b). 
4 In early 2000s, labour productivity in manufacturing and non-manufacturing increased by about 4% 
and 1%, respectively, per annum.  In manufacturing th e growth in TFP accounted for about 2.5 percentage Japan WT/TPR/S/211 
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(5.1% in 2006) (Table I.2).  The share of services  in GDP decreased slightly in 2006 to 68.8% (from 
69.6% in 2005) reflecting mainly decreases in c onstruction, financial services, and wholesale and 
retail trade;  by contrast, services' share in tota l employment increased from 70.2% in 2005 to 70.3% 
in 2006.  The share of manufacturing in GDP declined slightly from 21.5% in 2005 to 21.3% in 2006, 
while it's share in total employment rose slightly from 17.2% in 2005 to 17.4% in 2006.  Despite 
lagging labour productivity, Japan's  export competitiveness has apparently improved, as reflected in a 
continuing decline in unit labour costs5, owing to sluggish wages.   
Table I.2 
Shares of GDP and employment by sector, 2003-06 
  2003 2004 2005 2006 
Share of GDP (per cent)     
Agriculture, forestry and fishing 1.7 1.6 1.5 1.5 
Mining 0.1 0.1 0.1 0.1 
Manufacturing 21 21.2 21.5 21.3 
Services 70.2 69.5 69.6 68.8 
Construction 6.6 6.6 6.4 6.3 
Electricity, gas and water 2.6 2.6 2.4 2.2 
Wholesale and retail trade 13.5 13.6 13.8 13.5 
Financial services and insurance 7.0 6.8 7.0 6.9 
Real estate 12.2 12.0 12 11.9 
Transport and communications 7.0 6.9 6.7 6.6 
Other services 21.3 21.1 21.5 21.4 
Government 9.5 9.4 9.4 9.3 
Non-profit services for households 1.9 2.0 2.0 2.1 
Import tax and other 0.8 0.9 1.0 1.1 
Statistical discrepancy 0.6 1.0 0.4 1.3 
Total (¥ trillion) 490.3 498.3 501.7 508.9 
Share of employment (per cent)      
Agriculture, forestry, and fishing 5.4 5.3 5.2 5.1 
Mining 0.1 0.1 0.1 0.1 
Manufacturing 17.8 17.4 17.2 17.4 
Services 69.2 69.8 70.2 70.3 
Construction 9.3 9.0 8.8 8.6 
Electricity, gas, and water 0.7 0.7 0.7 0.7 
Wholesale and retail trade 17.2 17.0 16.9 16.7 
Financial services and insurance 2.8 2.7 2.7 2.7 
Real estate 1.5 1.5 1.5 1.5 
Transport and communications 5.8 5.8 5.6 5.8 
Other services 31.9 33.1 34.0 34.3 
Government 5.6 5.6 5.5 5.4 
Producers of private non-profit services to households 1.9 1.9 1.9 1.9 
Total (¥ million) 63.5 63.7 63.9 64.2 
Source:  Cabinet Office statistics.  View ed at:  http://www.esri.cao.go.jp/e n/sna/h18-kaku/20annual-report-e.html.  
3. Trade and trade-related policies continue to be  integral to Japan's ongoing structural reform, 
particularly as trade plays an increasingly important role in the economy.  The shares of exports and 
                                                                                                                                                                     
points in the labour productivity growth, while in non-manufacturing it accounted for about 0.1 percentage point 
(Cabinet Office, 2007). 
5 Unit labour costs in Japan have been declining since 2002 (OECD, 2008c). WT/TPR/S/211 Trade Policy Review 
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imports of goods and services were around 16% and 11%  of GDP, respectively, in 2007 (15% and 
11%, respectively, in 2006).  The faster growth in exports than in imports in recent years reflects the 
positive contribution of external demand to Japan's  economic growth.  China overtook the European 
Communities (EC25) to become the second largest purchaser of Japanese products in 2007, after the 
United States.  China and the United States were the main sources of Japan's imports in 2007.  
Although Japan's FDI inflows increased significantly in 2007, the level of inward FDI remains low 
compared with other developed economies.  FDI outflows increased steadily between 2005-07. 
4. As regards the external sector, Japan's current  account surplus increased in 2007;  this reflects 
a widening of the gap between gross national saving and gross domestic investment.  The increasing 
current account surplus in 2007 was due to an incre ase in the income from foreign bonds (debt) as 
well as the rising trade surplus.  The services account deficit increased from ¥2.1 trillion in 2006 to 
¥2.5 trillion in 2007, against the background of in creased payments for transportation and other 
business services.  By the end of August 2008, Jap an's foreign exchange reserves had risen to 
US$997 billion (up from US$879 billion in August 2006), wh ich is equivalent to about 21 months of 
Japan's imports.  Japan's capital and financial account  deficit (outflows) has continued to increase, 
reaching ¥22.5 trillion in 2007 (up from ¥12.5 trilli on in FY2006).  Increased outward FDI and a 
decrease in transactions of Jap anese stocks are mainly responsible for the net outflows. 
5. Since March 2006, the Bank of Japan (BOJ) has c ontinued its policy to "encourage" (e.g. by 
means of open market operations) the short-term call rate to remain at around a specified rate;  the 
rate was lowered to 0.3% (from 0.5% prev iously) on 31 October 2008, and to 0.1% on 
19 December 2008.  The previous target was 0.25% (from July 2006).  The fiscal deficit amounted to 
around 3.4% of GDP in FY2007 (2.9% in FY2006);  and public debt continued to increase, reaching 
about 170% of GDP.  Furthermore, in the suppl ementary budget for FY2008, the Government 
allocated ¥1.81 trillion for "Comprehensive Immediate Policy Package".6  These measures included 
funding for, inter alia, vitalizing SME, supporting local governments, strengthening of agriculture, 
forestry and fisheries, and for housing and disaster measures;  in addition, a fixed-term tax reduction 
amounting to ¥2 trillion and tax deduction for mortga ges were also announced.  The Government's 
mid-term target for fiscal consolida tion, as announced in July 2006, is, inter alia,  to achieve a surplus 
in the central and local governments combined pr imary balance by FY2011, and thus to ensure 
gradual reduction of the ratio of public de bt to GDP between the early and mid 2010s.7  
6. The Government has continued to place emphasis on structural reforms, and is aware of the 
need to increase competition and thereby raise productivity, especially in non-manufacturing.  
However, the pace of reforms has apparently slow ed down, and has varied among sectors;  it would 
appear that the Government's recent priority ar eas include agriculture, medical and nursing services, 
and air transport.8 
                                                      
6 Prime Minister of Japan and his Cabinet online in formation.  Viewed at:  http://www.kantei.go.jp/ 
foreign/ hukudaphoto/2008/08/29keizaitaisaku_e.html. [31.10.2008]. 
7 In FY2007, the "primary government" (central and local governments) was estimated to be in deficit 
of 2.5% of GDP (OECD, 2008c). 
8 IMF (2008) and Council for the Promotion of Regulatory Reform online information.  Viewed at:  
http://www8.cao.go.jp/kisei-ka ikaku/publication/index.html#opinion4.  In  addition, the number of applications 
for regulatory reform for Special Zones for Structural Reform has been declining since October 2007 (400 cases 
in October 2007 and 206 cases in March 2008). Japan WT/TPR/S/211 
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(2) MACROECONOMIC POLICIES  
(i) Monetary and exchange rate policy 
7. The BOJ ended its "quantitative easing policy" (QEP)9 in March 2006, and instead started 
targeting the uncollateralized overn ight call rate.  On 14 July 2006 , the BOJ decided to stop keeping 
the uncollateralized overnight call rate at "effectiv ely zero per cent" and instead "encouraged" (e.g. by 
means of open market operations) the rate to  remain at around 0.25%.  Subsequently, on 
21 February 2007, it "encouraged" the rate to re main at around 0.5%;  on 31 October 2008, the BOJ 
lowered the encouraged rate to around 0.3% and on 19 December 2008 to around 0.1%.  The "basic 
discount rate and basic loan rate" (previously referre d to as the "official discount rate") was raised in 
July 2006 from 0.1% to 0.4%, and again in February  2007 to 0.75%;  the rate was lowered to 0.5% on 
31 October 2008 and to 0.3% on 19 December 2008.10  The authorities maintain that the reason for 
raising this rate was to restore the effective func tion of the money markets.  As the BOJ's monetary 
policy stopped targeting current account balances of financial institutions held at the BOJ, these 
declined significantly, from over ¥31 trillion in March 2006 to about ¥10.2 trillion at end June 2008.11 
8. The new monetary policy framework is also based on the "assessment" of prices and 
economic activity from medium-term ( one to three years) and long-term perspectives with a view to 
increasing transparency.12  Under the new monetary policy framework, BOJ board members consider 
medium- to long-term price stability to be in the regi on of zero and 2%.  However,  this range is not an 
inflation target or an inflation objective as it is not binding.  The BOJ reviews the range annually.   
9. The nominal exchange rate of the yen ag ainst the U.S. dollar depreciated between 
January 2006 and the end of June 2007 (from ¥115 per U.S. dollar to ¥122).  However, since 
June 2007, the yen has appreciated to about ¥97 per U.S. dollar (end October 2008) partly due to the unwinding of the yen "carry trade" (i.e. investors bo rrowing in yen with low interest and investing in a 
foreign market, where higher yields are expected).  
(ii) Fiscal policy 
10. During the period under review, Japan continue d to run a fiscal deficit;  the General 
Government's fiscal deficit as a percentage  of GDP was 6.7% in 2005 and 2.4% in 2007.
13  
Nonetheless, the ratio of Japan's public debt-t o-GDP declined to approximately 170% in 2007 
                                                      
9 The quantitative easing policy 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 0%.   
10 The "official discount rate" is the rate at whic h the BOJ rediscounts commercial bills or extends 
loans secured by what the BOJ regards as "eligible collateral", such as government bonds to financial 
institutions.  The rate is officially referred to as "the basic discount rate" and "the basic loan rate" in the Bank of Japan Law.  The BOJ considers that the linkage between th e 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 lending facility introduced in 2001. 
11 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 ¥7 trillion.   
12 The result of such analysis is to be disclosed on a regular basis.  On 15 July 2008, the BOJ 
announced that the forecast horizon published in the "Outlook for Economic Activity"  would be extended to 
three years.  Furthermore, a summary of the BOJ's views on the future conduct of monetary policy from both a medium- and long-term perspective is now published with the monetary policy statements. 
13 The fiscal deficit had declined to 2.9% of GDP in 2006;  the authorities consider that the decline is 
due mainly to one-off factors includin g the transfers of surplus funds of the Special Account for Fiscal Loan 
Program Funds to the Special Account for Government Debt Consolidation Fund.   WT/TPR/S/211 Trade Policy Review 
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(compared with 175.3% in 2005).  In January 20 07, the Government announced its "Direction and 
Strategy" and specified three fiscal goals:  to ach ieve a primary balance surplus of the combined 
central and local governments by FY201114;  to stabilize the government debt-to-GDP ratio before 
reducing it in the mid 2010s;  and to curb expansion of the civil service.   The need to improve the 
fiscal situation is particularly acute as Japan ha s a rapidly aging popula tion, which will require 
increased expenditure on healthcare and pensions in the future.   
11. The FY2008 budget is ¥83.1 trillion (¥82.9 trillio n in FY2007 (the initial budget)), of which 
expenditure on public works acc ounts for 8.1% (¥6.7 trillion), down slightly from the FY2007 budget, 
while the national debt service amounts to ¥20.2 trillion (24.3% of the budget);  the latter represents a 
decline of 1% from the FY2007 budget.  Expenditure  (as a percentage of GDP) as a whole declined 
from over 38.4% of GDP in 2005 to 35.8% in 2007.  During FY2007 and FY2008, the ratios of tax revenues to total expenditures remained at n early 64.5% compared with 57.6% in FY2006.
15  T h e  
improvement has been due mainly to increas es in personal income and corporate taxes.16  Recent tax 
reforms have been aimed at broadening the tax b ase (section (3) below), with a view to achieving 
fiscal consolidation.  Against the background of the recent slowing down in the world economy, the 
Government intends to intr oduce additional fiscal measures, such as tax reductions.17 
12. With respect to "special accounts"18, the Government's policy is to abolish or merge such 
accounts in accordance with the Ad ministrative Reform Promotion Law and the Act on Special 
Accounts.  The Government had decided to redu ce the 31 "special accounts" in FY2006 to 17 by 
FY2010.  In April 2007, there were 28 "speci al accounts" with expenditures of ¥362 trillion19, these 
were to be reduced to 21 during FY2008.20 
(3) STRUCTURAL POLICIES  
13. Since the previous Review of Japan, the Gove rnment has continued to implement various 
structural reforms.  Its main policy direction for these reforms is described in the Basic Policies for 
Economic and Fiscal Management and Structural Reform formulated annually by the Council on Economic and Fiscal Policy.  The Basic Polic ies for 2008, released on 27 June 2008, address 
four broad areas:  enhancing grow th potential;  establishing a low carbon society;  reforming public 
finance and administration;  and establishing a sustaina ble social security system.  Under the policies, 
the Government plans to enhance growth pot ential by pursuing greater openness, through, inter alia , 
                                                     
 
14 The target is unchanged from that announced under the medium-term fiscal consolidation 
programme in July 2006.  The amount of surplus targeted has not been specified.  The Government intends to 
achieve the surplus by reducing expenditures by approximately ¥11.4-14.3 trillion, with a view to eliminating an 
estimated deficit in the primary balance of about ¥16.5 tr illion in FY 2011, while the remainder is to be financed 
mainly by tax increases as part of tax reforms. 
15 Ministry of Finance (2008). 
16 The new rate structure, applicable from FY2007, has six income tax brackets with rates between 5% 
and 40%;  previously there were four brackets with rates between 10% and 37%.  At the same time, the new 
structure will reform local inhabitants' tax to a 10% acros s-the-board rate;  previously, there were various rates 
between 5% and 13%.  The combined tax rate on household income ranges from 10% to 50%;  the rates are 
identical to the FY2006 level for most income categories. 
17 Prime Minister's press conference.  Viewed at:   http://www.kantei.go.jp/foreign/asospeech/2008/10/ 
30kaiken_e.html [31.10.2008]. 
18 Separate from the Central Government's general account, "special accounts" are intended to, inter 
alia, finance specific projects or  admi nister and manage specific funds. 
19 In FY2006, the annual  budget for special accounts amounted to  about ¥460 trillion (Ministry of 
Finance, 2007). 
20 The Finance Minister announced the reduction in  his speech on fiscal policy delivered to the 
National Diet on 18 January 2008. Japan WT/TPR/S/211 
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increased bilateral trade with Japan's trading partne rs with which it concluded free-trade agreements, 
revising the Programme for Acceleration of FDI, a nd increasing the supply of skilled foreign workers. 
14. Improvement of productivity is envisaged th rough implementation of the sector-by-sector 
productivity improvement programme21, establishment of an emergency reserve budget for funding 
projects using innovative technology, and creati on of "super special zones" for developing 
cutting-edge medical care.  The authorities also intend to further enhance programmes for regional 
revitalization.  With regard to agriculture, cor porate management is to be increased, and land reforms 
undertaken.  The reforms entail separating the regula tions on ownership of land from usage of land;  
the latter are to be eased.  Efforts to alleviate the shortage of physicians and improve the emergency 
medical services will also be undertaken as part of the basic policies. 
(i) Tax reform 
15. In addition to promoting fiscal consolidation, Japan's recent tax reform is aimed mainly at 
broadening the tax base and rationaliz ing corporate tax, whose statutory rate is high compared with 
other countries in the region22, and reforming international taxation.   It would appear that debate on 
the fundamental reform of the taxation system, in cluding whether to raise the consumption tax rate, 
has been moving slowly.23 
16. Under the FY2008 tax reform, the statutory depreciable life for machinery and equipment was 
revised so as to make this more c onsistent with their useful economic  lives.  The reform also proposed 
increasing personal capital gains tax, inter alia , from 10% to 20% on 1 January 2009.  On the other 
hand, the Government introduced a new R&D tax credit system (Chapter III(4)(i)), while extending 
existing tax credits for IT for another two years. 
17. The reform of international ta xation included a change in th e tax treatment of interest 
received by non-residents (Chapter III(4)(i)).  Ad ditionally, new rules on cross-border triangular 
mergers were announced.  These require a foreign fi rm acquiring a publicly traded firm through a 
triangular merger to register its shares in Japan a nd, under certain circumstances, in a third country.  
In addition, capital gains tax de ferral is also permitted for ce rtain qualified triangular mergers 
(Chapter III(4)(i)). 
18. The FY2008 tax reform also addressed measures to improve tax administration and prevent 
avoidance;  for example, changes we re made to the "advance ruling process"24,  disclosure rules were 
strengthened25, and rules were revised to place a cap on the ability of "special purpose entities" to 
claim tax credits reflecting corporate taxes paid abroad. 
(ii) Financial system and corporate reform 
19. Strengthening the financial and capital mark ets has been among the Government's main 
policy objectives.  In this regard, the Financ ial Services Agency (FSA ) issued the Plan for 
Strengthening Financial and Cap ital Markets on 21 December 2007.  Salient features of the plan 
                                                      
21 Cabinet Office (2008). 
22 Japan's statutory corporate tax rate (including local taxes) is 39.54%, compared with 39.3% in the 
United States, 38.9% in Germany, 30% in the United Kingdom, 34.4% in Fr ance, 25% in China, and 27.5% in 
South Korea (OECD, 2008c). 
23 IMF (2008). 
24 The "advance ruling process" now includes future transactions for which documentation is available. 
25 Information that will identify the taxpayer will not be disclosed;  also the taxpayer is permitted to 
request a delay of 180 days (previously 120 days) in making public a requested ruling. WT/TPR/S/211 Trade Policy Review 
Page 8 
 
 
include:  diversification of available financial produc ts (e.g. exchange traded funds);  putting in place 
a taxation scheme that encourages changes in in vestment trends, for example from savings to 
investment;  encouraging greater interaction be tween banking and securities business through changes 
in regulation26;  increasing the scope of business that is pe rmissible for banking and insurance firms;  
making financial regulation and supervision more transparent a nd predictable through greater use of 
the "No Action Letter27" system;  and improving the quality of human resources employed in the 
financial sector.  The latter is to be accomp lished by supporting and encouraging professional 
graduate schools, changing the structure of the certified public accountant examination, as well as 
increasing the frequency of the examination (twice a year) so as to make the profession more 
accessible, and encouraging and facilitating the hiring of foreign financial experts.   
20. In June 2008, the Diet adopted an amendment to the Financial Instruments and Exchange Act.  
The amendment allows for the creation of new mark ets for professional investors, which are exempt 
from certain disclosure requirements, as well as the introduction of certain exchange traded funds 
(ETFs).  Under the amendment, the firewall re gulations between banks, securities firms, and 
insurance firms are to be change d to allow greater interaction among them.  The amendment also 
increases the scope of permissible business for banks and insurance firms to include, inter alia,  
emissions trading and commodity spot trading.  
21. Non-performing loans (NPLs) continue to decline.   The ratio of NPLs to total credit for all 
banks decreased to 2.5% (¥11.9 trillion) in Se ptember 2007 (from 2.9% in March 2006).  For major 
banks, the ratio of NPLs to their total credit (le nding) decreased to 1.5%, from 1.8% in March 2006.28  
However, banks' balance sheets are likely to be adve rsely affected by the recent rapid fall in share 
prices of other enterprises in so far as these are considered to be part of banks' capital. 
22. As prescribed under the Law of the Privati zation of Postal Services, Japan Post was 
corporatized in October 2007 into four companies, as well as a holding company that holds all the shares of the four companies;  the shares of th e holding company are held by the Government.  
However, as per the law, the two financial companie s (Japan Post Bank and Japan Post Insurance) are 
to be fully privatized by 2017.  More than one th ird of the shares of the holding company (which must 
retain complete ownership of Japan Post Service and Japan Post Network) must remain with the 
Government.  Preferential treatment that had b een accorded to Japan Po st (such as insurance 
payments and savings accounts being guaranteed by the Government and Japan Post being exempt 
from corporate income tax) and non-application of certain financial regulations to Japan Post
29 were 
abolished in October 2007.  The Japan Post Network is  requested by the Diet to pay special attention 
to maintaining the postal network in remote areas to "at least the level of the existing network".30  
Also, the two financial companies are treated as private financial companies and subject to FSA 
supervision.  Furthermore, Japan Post Bank and Japan Post Insurance must obtain approval from both 
the FSA and the Ministry of Internal Affairs and Communications to enter new business areas, such as 
                                                      
26 This is to be done by measures such as lifting the ban on being "interlocking officers" (for example, 
being a director in one firm and a company auditor in another), and easing restrictions on sharing corporate 
customer information. 
27 The "No Action Letter" system allows a business entity to seek clarification from the authorities 
regarding any concerns that the entity may have regarding regulations and the need for government approvals and/or licences. 
28 Financial Services Agency online information.  Viewed at:  http://www.fsa.go.jp/en/regulated/npl/ 
20080215/01.pdf. 
29 The Banking Act and Insurance Business Act were not applied to Japan Post, thereby making it 
exempt from certain prudential regulations, such as capital adequacy requirements. 
30 Decision by the Upper House Special Committee on the Privatization of Japan Post, 
14 October 2005. Japan WT/TPR/S/211 
 Page 9 
 
 
housing loans and health insurance.   The self-assessed taxation system31 is to be applicable from 16 
February 2009 to Japan Post;  this system is alr eady in operation for courier services offered by other 
private companies.  All Japan Post Group companies are subject to the Anti-Monopoly Act. 
23. Corporate governance pertaining to internal c ontrols in firms has also been enhanced 
(Chapter III(4)(vii)). 
(iii) Pension reform 
24. Japan's public pension system was reformed in 2004 in the face of a rapidly aging population.  
The contribution rate in relation to wages and sal aries is to be increased from 13.6% in FY2004 to 
18.3% by FY2017;  the contribution rate in FY2007 was 14.6%.  The Government's share of 
contributions is to be increased from a third to ha lf by FY2009.  However, in 2007, it was revealed 
that individual contributions had not been recorded accurately in Government's bookkeeping;  and in 
2008 it was reported that the pension fund had recorded a loss of ¥5.65 trillion in 2007.32  These 
two developments eroded confidence in the current system.  An advisory panel on pension reforms, 
which made recommendations to the Prime Minist er regarding the pension fund, called for:  
replacement of the managers of the pension fund w ith investment specialists;  diversification of 
investments so as to get higher returns without increased risks33;  and creation of smaller funds from 
the ¥150 trillion funds (each with a separate manageme nt committee), which are expected to compete 
with each other in terms of tran sparency, accountability, and performance.34 
(iv) Regulatory reform 
25. Sustained efforts have been made to gradua lly reduce regulatory intervention in various 
sectors, including energy, financial services, and air transport.  In July 2007, 984 of the 
1,434 measures stipulated in the revised Three-Y ear Plan for the Promotion of Regulatory Reform, 
issued in March 2006, had been implemented fully, and 384 measures had been implemented partially.  These included, inter alia :  increased use of market tes ting to transfer some government 
tasks to the private sector, and the implementation of the Challenge Again Action Plan to address 
income inequality and relative poverty.  With a vi ew to promoting new entrants and ensuring fair 
competition, an Anti-Monopoly Act guideline for agricu ltural cooperatives was issued in FY2007.  To 
encourage FDI, a programme for Acceleration of Fore ign Direct Investment in Japan was started and 
changes were made to the tax system;  the progr amme is intended to help open up the mergers and 
acquisitions market to foreign firms and providing them national treatment.  Customs procedures were 
also simplified through the introduction of the Au thorized Economic Oper ator Programme and the 
Advanced Reporting Rules (Chapter III(2)(i)). 
26. The latest revised "Three-Year Plan for the Pr omotion of Regulatory Reform" was issued in 
March 2008.  The March 2008 revi sion covers 750 measures on, inter alia :  healthcare, financial 
services, labour market, information technology, a nd education.  Furtherm ore on 31 March 2007, the 
special zone initiative was extended through 2012, with new incentives added to encourage local 
                                                     
 
31 The self-assessed taxation system is applicable to  international postal items valued in excess of 
¥200,000;  exception to this includes gifts from foreign countries. 
32 Economist, "Capital Thinking", 24 July 2008. 
33 Nearly 58% of the fund is invested in Japanese Government bonds and 18% in domestic stocks;  the 
return over the past five years has averaged 3.5% per annum. 
34 The panel was of the view that breaking up the fund would ensure increased independence from the 
Government and improve oversight. WT/TPR/S/211 Trade Policy Review 
Page 10 
 
 
governments to participate more actively.35  For example, local governme nts will retain exclusive use 
of the special zone reforms for a longer period before they are extended nationwide.36  
(4) DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT  
27. In 2007, the share of exports of goods and ser vices in GDP was 15.6% (14.7% in 2006) and 
the share of imports 10.9% (11.0% in 2006).37  Over the five years to 2007, the share of exports in 
GDP grew faster than that of imports.  The Jap anese economy has thus become more dependent on 
net exports.  In 2006, Japan was the world's fourth largest exporter (counting the European 
Communities as one) and importer of goods.  With regard to services, receipts (for services provided by Japan) grew at a much faster rate than paymen ts.  Consequently, the deficit in the services account 
declined considerably over the same period.  Tr ade in services as a proportion of GDP was nearly 
5.8% in 2006 (5.4% in 2005). 
(i) Composition of merchandise trade 
28. Manufactures continue to dominate Japan's e xports;  they accounted for 89.7% of total 
merchandise exports in 2007, compared with 91. 8% in 2005 (Chart I.1).  During 2005-07, machinery 
and transport equipment remained Japan's most important merchandise export, accounting for 63.3% 
of total exports of goods in 2007 (Table AI.1).  With in machinery and transport equipment, the shares 
of non-electrical machinery and automotive products  increased, but the share of office machines and 
telecommunications equipment showed a significant dec line.  The share of primary products in total 
merchandise exports also increased, presumably due to  higher international commodity prices.    
29. With regard to imports, the share of manufactur es in total merchandise imports declined from 
53.6% in 2005, to 50.5% in 2007.  Machinery a nd transport equipment were the most important 
component, accounting for 24.2% of total imports in  2007 (down from 25.7% in 2005).  In contrast, 
the share of primary imports rose steadily, to 47 .7% in 2007 (compared with 44.6% in 2005);  the 
increase is due largely to increased imports of fuel and other mined commodities, mainly on account of increasing international commodity prices (Table AI.2).  
(ii) Direction of merchandise trade 
30. Although the United States' share in Japan's expor ts declined by over two percentage points 
between 2005 and 2007 (Chart I.2), it remains the main destination for Japanese exports, attracting 
20.4% of the total in 2007.  By contrast, China's share continued to increase (recent data suggest that 
China has overtaken the United States  as Japan's largest export market)
38, as did the share of the 
Middle East.  During 2005-07, the share of the EC25 in Japan's exports remained static, at 14.7%, 
while APEC's share decreased to 74.3% (from 76.3%) (Table AI.3). 
 
                                                      
35 The special zone approach allows  geographically limited areas to act as a testing ground for reforms 
that can be later introduced nationwide.  At the same time it helps to revitalize regional economies through 
deregulation.  All interested parties, which include local governments, private firms, and citizens, are allowed to 
submit regulatory reform proposals, which are then review ed by a committee of cabinet  ministers chaired by the 
Prime Minister.  At end 2006, 581 reform measures had been accepted, of which 370 had been introduced 
nationally. 
36 OECD (2008c). 
37 Based on the most recent data available. 
38 More than 67% of Japan's exports to China are intermediate goods, while about 40% of Japan's 
imports from China are finished consumer goods;  this suggests that China functions as a manufacturing platform for the rest of the world. Japan WT/TPR/S/211 
 Page 11 
 
 
Chart I.1
Composition of merchandise trade, 2005 and 2007
2005 2007
(a)    Exports (f.o.b.)
Other consumer goods
8.7
Manufactures
91.8
Total:   US$594.9 billion Total:  US$714.3 billion
(b)    Imports (c.i.f.)
Chemicals
7.3Transport
  equip.
4.1
Manufactures
53.6Office machines &
 telecommunication 
equip.    13.0Other electrical
machines  3.9
Non-electrical 
machinery    4.7Textiles & 
clothing
5.5
Other mining
6.0
Fuels
25.8Non-electrical
machinery  5.7Other  1.8Other electrical 
machines  3.9Office machines & 
telecommunication equip.
12.3
Other semi-manuf.   
5.2Transport 
equip.
4.1
Chemicals
7.3Manufactures
50.5Office machines &
telecom. equip.  10.6
Total:   US$515.9 billion Total:   US$622.2 billion Per cent
Manufactures
89.7Other transport 
equip.
  5.4
Other electrical
 machines
6.2Iron & steel  
4.8Other electrical 
machines
6.5
Other consumer
 goods   8.9
Other  1.8Mining  3.7
Office machines & 
telecommunication equip.
16.5Automotive products
20.7
Other  5.5
Other semi-manuf.  
4.2
Non-electrical 
machinery
17.1Agriculture 1.1
Iron & steel
4.6
Source :  UNSD, Comtrade database (SITC Rev.3).Other  consumer
 goods  9.6
Mining
36.6Other consumer goods
7.2Automotive 
products
22.2Textiles & clothing
1.1
Other semi-manuf.
4.3
Non-electrical
machinery
14.8
Other semi-manuf.
5.5Mining  2.5Agriculture  1.0
Agriculture
11.1Agriculture
12.8
Mining
31.8Textiles &  clothing
        1.2
Chemicals 
8.8 Chemicals 
9.1Other  4.7
        Textiles & clothing 
4.9
Other mining
8.8
Fuels
27.8Other transport 
equip. 
5.6
 WT/TPR/S/211 Trade Policy Review 
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Chart I.2
Direction of merchandise trade, 2005 and 2007
2005 2007
(a)    Exports (f.o.b.)
Other Asia  
7.4Asia
51.0
Total:   US$594.9 billion Total:  US$714.3 billion
(b)    Imports (c.i.f.)
Other
2.7Indonesia
4.0
EC25
11.4United Arab 
Emirates  4.9
United States
12.7EC25
10.4United Arab
Emirates  5.2Thailand  2.9
Other Asia
5.7
United States
11.6
Total:   US$515.9 billion Total:   US$622.2 billionPer cent
Asia
50.6
Other Asia  
7.3Middle East
3.7China
13.5
Other Middle East
4.7Korea, Rep. of
4.4Korea, Rep. of
4.7United States
22.9Chinese Taipei
6.3
Indonesia
4.3United States
20.4
Source :  UNSD, Comtrade database (SITC Rev.3).China
20.6EC25
14.7Middle East   
2.8
Asia
48.9Asia
49.8China
21.0
Other
3.1Hong Kong, China
5.4
EC25
14.7Hong Kong, China
6.0China
15.3
Other America
6.1
Malaysia  2.8Chinese Taipei  3.2Chinese Taipei  3.5
Australia
4.8Other America
5.4Korea, Rep. of
7.6Korea, Rep. of   
7.8
Other
America
4.6Other
America
5.3Thailand  3.0
Australia  5.0
Other Asia
5.9Thailand  3.8
Singapore  3.1Chinese Taipei
7.3
Singapore  3.1 Thailand  3.6
Saudi Arabia  
5.6Saudi Arabia 
5.7  Other Middle East
4.4
Malaysia  2.8
Middle East
17.0Middle East
18.3Malaysia 2.1
Malaysia  2.1
Other
4.4Other
3.2
Qatar  2.7
Africa  2.4Qatar  2.1
Africa
1.9
 Japan WT/TPR/S/211 
 Page 13 
 
 
31. Although China's share in Japan's merchandise im ports declined slightly, it remained the 
largest provider of goods to Japan with a share of 20.6% in 2007 (21% in 2005).  Between 2005-07, the shares of the United States (11.6% in 2007), the EC25 (10.4%) and APEC (65%), all declined (Table AI.4), while the share of imports from the Middle East rose to 18.3%, seemingly due to higher 
international crude oil prices. 
(iii) Composition of trade in services 
32. Japan's cross-border sales (exports) and purchases (imports) of services increased in 2007 
(Table AI.5).  The services deficit increased from ¥2.1 trillion in 2006 to ¥2.5 trillion (by 17.9%) in 
2007, mainly on account of the increased deficit on transport services and other business services 
(which includes, inter alia , expenses on research and development).   
(iv) Foreign direct investment 
33. Inward FDI into Japan remains substantially lower than outward FDI, and low compared with 
other developed economies.
39  Nonetheless, in FY2007, FDI in flows increased substantially, to 
¥2.7 trillion (from -¥0.3 trillion in 2006), due in partic ular to a substantial increase in investment from 
the United States.  Japan's outward FDI rose to  ¥9.6 trillion in FY2007 (from ¥7.0 trillion in FY2006), 
reflecting, inter alia,  a large increase of Japan's FDI in North America and Central and South America 
(Table AI.6).  Finance and insurance and wholesale and retail services accounted for the main inflows 
of FDI in FY2007, while transportation equipment, food, and finance and insurance accounted for more than half of outward FDI (Table AI.7).
40 
(5) PROSPECTS  
34. The Government's official projections, announced in January 2008, show that the economy is 
forecast to grow by 2.0% in FY2008, with th e CPI expected to increase by 0.3%, and the 
unemployment to be about 3.8%.  However, the latest quarterly estimates of GDP indicate that in the third quarter of 2008, real GDP declined by 1. 8% quarter on quarter (on an annualized basis).
41  The 
Bank of Japan revised its growth forecasts for FY 2008 from 2.1% projected in October 2007 to 1.5% 
in April 2008, and then to 0.1% in October 2008, against the background of a slowdown in the world 
economy and downside risks.  The Bank's forecast for FY2009 has also been revised downward from 
1.7% projected in April 2008 to 0.6% forecast in October 2008.   
35. Whether the Japanese economy can  maintain its recovery in the more immediate term 
depends on external as well as internal factors.  Ex ternal factors include the pace of growth in the 
world economy (notably the United States, EC25, a nd China, Japan's main export markets) and the 
prices of energy and raw materials.  As Jap an's economic growth in recent years depended 
substantially on external demand, the recent globa l economic downturn is likely to reduce Japan's 
growth rate.  The adverse effects of the globa l slowdown on Japan's exports, and thus economic 
growth, is likely to be exacerbated by the recent appr eciation of the exchange rate of the Japanese yen 
partly due to the unwinding of yen carry trade.  On the other hand, the appreciation of the exchange 
                                                      
39 According to UNCTAD (2007), FDI inflows into Japan in 2006 amounted to -US$6.5 billion, while 
those into the United States and the European Communities were US$175.4 billion and US$530.9 billion, 
respectively.  Inflows into China a nd the Republic of Korea amounted to  US$69.5 billion and US$5.0 billion, 
respectively. 
40 Japan's pre-2005 FDI statistics by industry are not comparable with the 2005 data. 
41 The contribution of domestic demand to growth was 1.0 percentage points, and external demand 
contributed 1.1 percentage points. WT/TPR/S/211 Trade Policy Review 
Page 14 
 
 
rate would tend to mitigate the effects of any increases in the prices of energy and raw materials on 
the prices of inputs, including those used for exports.   
36. On the domestic front, Japan's medium- and long- term growth prospects will depend on its 
ability to strike a balance between monetary and fi scal policies in tandem with structural reforms.  
The latter include reforms geared towards reduci ng the cost of doing business and thereby increasing 
Japan's attractiveness to inward FDI, which should r esult in increased competition and, consequently, 
productivity.  Improving productivity is particularly  important due to the downside risks due to 
Japan's rapidly aging population an d the associated decline in the labour force.  The Government 
believes in the need to intensify such reforms, which would contribute to reducing, if not removing, 
distortions to competition that impair economic ef ficiency. There is a risk stemming from firms' 
misallocation of capital due to the comparatively low cost of capital in a low interest rate 
environment. 
37. At the time of completing this report, Japan 's economy appeared to be on the brink of a 
recession.  The IMF and the OECD, for example, expect Japan's economy to shrink by 0.2% and 0.1%, respectively, in 2009.  The depth and dura tion of this looming recession remain to be seen.