U.S.-Japan Economic Partnership for Growth

United States-Japan
Investment Initiative
2006 Report

June 2006

United States-Japan Investment Initiative 2006 Report
Executive Summary
Foreign direct investment is essential for the vitalization of the Japanese
economy.

As of the end of 2005, foreign direct investment in Japan totaled ¥11.9

trillion ($100.9 billion).

This represents an increase of 80 percent when compared to

the value at the end of 2001.

The year 2001 was the base year for Prime Minister

Koizumi’s target of doubling the stock of foreign direct investment in Japan in five
years, an objective that Japan is steadily accomplishing.
One of the significant events this year was the entry into force of the newJapanese Corporate Code in May 2006.

Many investments made among advanced

countries take the form of merger and acquisition. Thus, the entry into force of thisCorporate Code is expected to have a positive effect on increasing foreign direct
investment in Japan, especially the provisions relating to “flexibility of merger
consideration” (although such provisions will not come into effect until May 2007).
The U.S.-Japan Investment Initiative was established in June 2001 between
the leaders of the two countries within the framework of the U.S.-Japan Economic
Partnership for Growth.

This Initiative provides important, mutually-beneficial

opportunities to exchange opinions on improving the investment environment andremoving any obstacles for the respective countries.

Issues discussed in the past for

improving the investment climate in Japan include: (i) facilitation of cross-bordermergers and acquisitions, (ii) deregulation to create new business opportunities in thefields of education and medical services, (iii) labor-related laws and systems, and (iv)translation of Japanese laws and regulations into foreign languages.

Issues on the

U.S. side which were raised by Japan and led to opinion exchanges between bothgovernments on the improvement of the U.S. investment climate include: (i) visa andother consular issues, (ii) cargo security, and (iii) the Exon-Florio provision.
Publicoutreach

under

this

Initiativehas

included

Invest-in-Japansymposiums held in November 2005 in New York and San Jose, and Investment
Seminars are planned to be held in Sendai and Yokohama, Japan in October 2006.

Both the Japanese and U.S. governments welcome foreign direct investments.
Under the U.S.-Japan Investment Initiative, the two governments intend to continue
constructive discussions to improve the investment climate in our countries and to
implement various activities to facilitate foreign direct investment.

Table of Contents
I.

Introduction---------------------------------------------------------------------------------page 1

II.

Current Situation of Foreign Direct Investment in Japan and the United States

1. FDI in Japan(1) FDI Trends in Japan-------------------------------------------------------------------------page 2(2) Recent Topics
A. Entry into Force of the Japanese Corporate Code-----------------------------page 3
B. Local Government Forum for Promotion of Foreign Direct Investment-page4
C. Program for Acceleration of Foreign Direct Investment in Japan--------page 4
D. Project to Assist Local Efforts to Attract Foreign Capital-------------------page 5(3) Japan’s Strengths-----------------------------------------------------------------------------page 5
2. FDI in the United States(1) FDI Trends in the United States---------------------------------------------------------page 6(2) Recent Topics-----------------------------------------------------------------------------------page 7(3) U.S. Strengths---------------------------------------------------------------------------------page 8
III.

Discussions in the U.S.-Japan Investment Initiative 2005-2006--------------page 9

1. U.S. Concerns(1) Cross-border Mergers and Acquisitions (M&A)-------------------------------------page 9(2) Demographic Issues and Investment-------------------------------------------------page 10
A. Education---------------------------------------------------------------------------------page 10
B. Medical Services------------------------------------------------------------------------page 11(3) Labor-related Laws and Systems------------------------------------------------------page 12(4) Translation of Japanese Laws and Regulations into Foreign Languages--page14
2. Japan’s Concerns(1) Visas---------------------------------------------------------------------------------------------page 14(2) Cargo Security-------------------------------------------------------------------------------page 15(3) Exon-Florio Provision----------------------------------------------------------------------page 16
IV.

Conclusion-------------------------------------------------------------------------------------page 17

Appendix 1: Invest-in-Japan Symposium------------------------------------------------------page 19
Appendix 2: Examples of Recent Entries of the U.S. Companies-----------------------page 20
Appendix 3: Accomplishments over the Past Five Years----------------------------------page 22

I.

Introduction
The U.S.-Japan Investment Initiative was established in June 2001 by U.S.

President Bush and Japanese Prime Minister Koizumi as a forum to exchange opinions
for the improvement of the foreign direct investment climate in Japan and the UnitedStates within the framework of the U.S.-Japan Economic Partnership for Growth.
This Initiative is chaired jointly by the Japanese Ministry of Economy, Trade andIndustry (METI) and the U.S. State Department, and two working group meetings
have been held this year, on December 2, 2005 and June 5, 2006, to discuss possible
measures for the improvement of the climate for foreign direct investment in therespective countries.
As part of the public outreach program, Invest-in-Japan Symposiums were held
in November 2005 in New York and San Jose. Following the seminars held in Nagoya
and Chiba last May, investment seminars are also planned for Sendai and Yokohama,in the autumn of 2006.
Recent developments in the global economy have led to an increase in the
cross-border activities of private companies, and the importance of foreign direct
investment

has

been

rising.

Foreign

directinvestment(FDI)

allowsaninvestment-receiving country to acquire new technological or managerial know-how
and to improve management efficiency and competitiveness.

FDI is also recognized as

effective for increasing employment opportunities, creating consumer demand,
expanding consumer options and improving convenience for consumers.
Recognizing this, the Initiative plays an important role in allowing the U.S. andJapanese governments to share views on improving the FDI environment in theirrespective countries, and in contributing to the economic growth of both countries.

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II.

Current Situation of Foreign Direct Investment in Japan and theUnited States

1. FDI in Japan(1) FDI Trends in Japan
In Japan, FDI has been significantly increasing since the latter half of the
1990s.

Factors contributing to this growth include the expansion of business fields

open to foreign companies as a result of deregulation, a decrease in cross-shareholdings
by Japanese companies, improved conditions for mergers and acquisitions as a result of
the world-wide trend of industrial restructuring, and improved attractiveness of theJapanese market as a result of reforms to bankruptcy-related laws and corporate
accounting systems.

In recent years, the Government of Japan, in an initiative led byPrime Minister Koizumi, has successfully increased FDI in Japan, resulting in FDI
stocks of ¥11.9 trillion at the end of 2005 (or $100.9 billion at the end-of-2005 exchange
rate of 117.97 yen/dollar, the official exchange rate of the IMF International Financial

Statistics of April 2006). At the end of 2005, FDI in Japan was 1.8 times larger than in
the year 2001 when Prime Minister Koizumi declared his target of doubling the stockof foreign direct investment in Japan in five years.

Cumulative Stock of Foreign Direct Investment in Japan(trillion yen)
14
11.9

12
9.4

9.6

2002

2003

10
8
6

5.8

10.1

6.6

4.7

4
2
0
1999

2000

2001

2004

2005

Source: Statistics on the balance of foreign assets and liabilities, Ministry of Finance/Bank of Japan
Note: The definition of statistics was changed in 2005. The end-2005 number includes capital reserves,which were not included in previous year figures.

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Of this ¥11.9 trillion, direct investment from the United States accounts for¥5.2 trillion.

Investment from the EU accounts for ¥4.2 trillion, and that fromASEAN accounts for ¥2.6 billion.
Although FDI in Japan has been increasing rapidly in recent years, its shareof GDP is still extremely small when compared to that of other major advanced
countries.

Currently, the share is 2.0% in Japan, while it is 22.9% in the UnitedStates, 33.0% in England, 22.4% in Germany and 41.5% in France. According to theWorld Investment Report 2005 issued by the United Nations Conference on Trade andDevelopment (UNCTAD), Japan is ranked as low as 134th among 140 countries interms of the ratio of FDI to GDP, although Japan’s Inward FDI Potential Index isranked 16th.

Inward Foreign Direct Investment Levels in Major Countries(stock basis, as of Dec. 31, 2005, percent of nominal GDP)
45.0

41.5

40.0
33.0

35.0
30.0
22.9

25.0

22.4

%
20.0
15.0
10.0
5.0

2.0

0.0
Japan

U.S.

U.K.

Germany

FranceSource: IMF International Financial Statistics(2) Recent Topics
A. Entry into Force of the Japanese Corporate Code
The Corporate Code was approved on June 29, 2005 during the 162nd Diet
session and entered into force on May 1, 2006.

Before this new code, consideration

given to shareholders of merged companies was generally limited to stock of the-3-

surviving company. This restriction served as a disincentive to otherwise advantageous
mergers. The new Corporate Code has eased the restriction to allow the surviving
company to provide cash or stock of its parent company instead of or in addition to its
own stock.

However, this provision will come into effect one year after the entry into

force of the Corporate Code in order to allow firms time to determine whether theyshould adopt defensive measures against hostile takeover attempts and to prepare forsuch defensive measures that might be justifiable and acceptable to stockholders.
B. Local Government Forum for Promoting Foreign Direct Investment
Recognizing the increasing significance of FDI as a measure for revitalizing
the local economy, the Governor of Osaka, Mayor of Fukuoka, and other local
government officials took the initiative in organizing the “Forum of Local Authorities
for the Promotion of Foreign Direct Investment in Japan.”

The forum consists ofmembers of 44 prefectural governments and 14 cities. The first forum was held inMarch 2006, adopting a proposal to the central government with the following three
requests:(i) the government should strengthen its assistance to local governments inpromoting activities to attract foreign capital and foreign-owned companies; (ii) the
government should improve systems for facilitating the activities of foreign individuals,
foreign-owned companies and foreign capital; and (iii) the government should
strengthen national measures for promoting foreign direct investment.

This proposal

has been discussed by the Japan Investment Council Expert Committee Meeting andwas reflected in the Program for Acceleration of Foreign Direct Investment in Japan
designed by the government for expansion of foreign direct investment.
C. Program for Acceleration of Foreign Direct Investment in Japan
In January 2003, Prime Minister Koizumi declared his target of “doubling the
cumulative amount of FDI in Japan in five years.”

In March of the same year, theJapan Investment Council (JIC) headed by the Prime Minister issued the “Program for
the Promotion of Foreign Direct Investment in Japan.”Since then, government-wide

efforts have been made to improve the business environment and review
administrative procedures in relation to this Program.

During the JIC’s meeting inMarch 2006, and with the goal of doubling FDI in sight, the government decided totake further steps to promote FDI and announced a new goal “to increase the balanceof FDI into Japan to 5% of the country’s GDP, double the present percentage by 2010.”
In response to this, the Program for Acceleration of Foreign Direct Investment in Japanwas established during the JIC meeting held in June 2006.

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D. Project to Assist Local Efforts to Attract Foreign Capital
Recognizing that independent efforts by local organizations to attract foreign
capital are essential to promote FDI, METI has been assisting local governments,
through the Japan External Trade Organization (JETRO), in promoting activities toattract foreign companies by utilizing their regional strengths.

This initiative follows

implementation of a project for “Most Active Areas in Japan in Attracting Foreign
Direct Investment” that took place in fiscal years 2003 and 2004.

This project“adopted” 12 regions and assisted local organizations there in carrying out activities toattract foreign capital, and also assisted foreign companies in preparing to start abusiness in those areas.
(3) Japan’s Strengths
Japan’s GDP grew by 2.7% in real terms in 2005, the largest growth since theInitiative was established in 2001.

The current recovery has been underway for 52

consecutive months through May 2006, which is the second longest economic growth
period after World War II.
According to the report issued by the Ministry of Finance on April 26, 2006,
Japan’s economic recovery is not limited only to urban areas but is gaining momentum
in all regions around the country.

The expansion is being sustained by strong

business investment, increasing personal consumption and an improved job and wage
outlook. The unemployment rate in fiscal 2005 registered a favorably low figure forthe first time in seven years.
Japan are increasing.

This trend indicates that new business opportunities inMore than anything else, the fact that the Prime Minister ofJapan has taken the initiative in promoting countrywide efforts to increase FDI bywelcoming foreign companies to start business in Japan sends a strong “welcome”
message to business-seeking foreign companies.
In addition, various structural reforms taking place in Japan have resulted in
the remarkable correction of the “high-cost structure” which used to hamper foreigncompanies wanting to invest in Japan.

In particular, deregulation introduced in thefields of electricity, communication and energy have helped reduce costs for business.
According to UNCTAD’s World Investment Report 2005, Japan is ranked 16th
among 140 countries in terms of the Inward FDI Potential Index as an indicator of
attractiveness.

UNCTAD explains that this high evaluation for Japan is because

Japan has an enormous market accounting for about 11% of world GDP; rich human-5-resources with valuable expertise; a well-organized infrastructure in the fields of
distribution, information and communication; and a good business environment withimproved laws and systems poised to catch up with the trend of economic globalization.
2. FDI in the United States(1) FDI Trends in the United States
The United States attracts significant FDI inflows from countries around theworld due to its open economy, strong growth, and high rate of return.

Deregulationand technological change have made the United States particularly attractive toinvestors. FDI inflows into the United States, which peaked at over 3% of GDP in
2000, declined over 2001-2003, largely due to the global economic slowdown, increased
economic uncertainty, and the worldwide decline in mergers and acquisitions. FDI
inflows recovered in 2004, resulting in 8.2% year-on-year growth in the foreign direct
investment position in the United States. FDI has capitalized on opportunities andhelped reinforce economic successes during economic growth.

During periods of

economic weakness, it has played a key role in diversifying and stabilizing the economy.
For example, in the 1980s FDI from Japan and other countries provided a criticalcatalyst for change, which increased U.S. competitiveness, employment andproductivity.
Foreign Direct Investment Position in the United States
on a Historical Cost Basis, 1999-2004
Year end

Billions of Dollars

1999
2000
2001
2002

955.7
1,256.9
1,344.0
1,344.7

Percent Change from
Preceding Year
22.8
31.5
6.9
0.05

2003
2004

1,410.7
1,526.3

4.9
8.2

Source: Survey of Current Business (Feb 2006), Bureau of Economic Analysis,
Department of Commerce

In 2004, the most recent year for which data is available, foreign direct
investment stock in the United States was up from the previous peak in 2003; FDI-6-

measured at historical costs totaled more than $1.5 trillion (see chart above).

Thelargest investment positions are held by the United Kingdom (16%), Japan (12%),Netherlands (11%), Germany (11%), and France (10%).
Foreign Investment Outlays in the United Statesby Type of Investment, 1999-2004(millions of dollars)

Total
OutlaysBy type ofinvestment:
U.S.
businessacquiredU.S.
business
established1999
274,956

2000
335,629

2001
147,1092002
54, 519

2003
63,591

2004
86,219265,127

322,703

138,091

43,44250,21272,738

9,829

12,926

9,017

11,077

13,37913,481

Source: Foreign Direct Investment in the United States (June 2006),
Bureau of Economic Analysis, Department of Commerce

Foreign capital makes an important contribution to the U.S. economy. U.S.
affiliates of foreign companies account for 5.3 million jobs and 6% of private sector GDP,
while investment by Japanese companies accounts for 600,000 jobs and almost 1% of
U.S private-sector GDP (BEA, 2003).

For example, in 2005 Honda employed 12,500

persons in Ohio and 19,000 persons nationwide.

Toyota estimated it had created over

32,000 direct positions and 386,000 total jobs in the United States, including direct,
dealer and supplier employees and jobs created through their spending, with direct
investment totaling $13.9 billion dollars in 2005.
(2) Recent Topics
A. State Efforts
Most American states have international affairs offices that promote
investment by offering a wide variety of services and information for companies
interested in investing in their state.

Many states even maintain offices in cities

abroad to encourage trade and investment.

For example, the South Carolina

Department of Commerce provides assistance for international investors on its web site-7-

(www.sccommerce.com).

Its Global Business Development Team provides assistancefor foreign investors through three international offices in Tokyo, Munich andShanghai.

According to the Department’s 2005 Capital Investment Report, foreign

direct investment accounts for some 127,500 jobs in South Carolina, or 8.4 percent ofprivate industry employment, and $1.26 billion in new investment in 2005 brought
more than 3,000 new jobs.

Ten Japanese companies have invested in the state. The

Department produces a guide book, ”Opportunities for Japanese Manufactures inSouth

Carolina”(http://www.sccommerce.com/teamscpdfs/JapanManufacturing.pdf),

which provides information on South Carolina’s business tax structure and financial
incentives, promotes the state’s friendly environment, and surveys the history ofJapanese business in South Carolina.

Information on the web site of the State ofColorado’s International Trade Office (http://www.state.co.us/oed/ito/invest/invest.html)
provides information in Japanese, Spanish, German, and French, and the State has adetailed on-line guide for interested investors at http://www.state.co.us/oed/guide/.
Foreign affiliates in Colorado employ over 90,000 people, own over $13 billion inproperty, plant and equipment and pay wages 13% higher than the national average.
Anotherexample

is

the

State

of

Ohio’sInternational

Trade

Division(http://www.odod.ohio.gov/itd/), which works to identify prospects for foreign direct
investment in Ohio and helps interested businesses.

Ohio has over 208,600 people

employed at foreign-owned companies; in 2004 alone, new and expanded investment byforeign-owned companies in Ohio exceeded $1.5 billion.
Many states and localities in the United States offer incentives including tax
exemptions and targeted investment in infrastructure.

However, incentives are just asmall part of the success of the United States in attracting foreign investment.

It is

the investment climate in the United States, based on strong legal institutions, an open
economy, an educated and productive workforce, and an attitude that welcomes foreign
investment that has made possible the United States’ success in attracting FDI.
(3) U.S. Strengths
The market size and openness of the U.S. economy continue to make theUnited States an attractive investment destination.

In response to corporate scandals

in 2001-02, the Government of the United States acted swiftly to improve andstrengthen its corporate regulatory systems to restore confidence in capital markets.
Since the attacks of September 11, 2001, the United States has been identifying ways
to enhance security protection for the country. As it does so, the United States is-8-striving to ensure that such measures do not hinder trade and investment flows.

The

Government of the United States is taking this as an opportunity to identify new ways
to speed the flow of legitimate business and to increase logistical integration between
domestic and foreign businesses.

Through the use of IT and other technologies, theUnited States hopes that legitimate trade and investment can flow in a seamless,secure fashion even faster than before.

In designing these new systems, theGovernment of the United States continues to listen to the views of the private sectors
and governments of other countries to ensure that the new measures meet the desired
goals without impeding legitimate trade and investment flows.

III.

Discussions in the U.S.-Japan Investment Initiative 2005-2006

1. U.S. Concerns(1) Cross-border Mergers and Acquisitions (M&A)
The Government of the United States called attention to the importance of
substantially equal treatment for Japanese and foreign stocks when they are used as“consideration” in triangular mergers under the new Corporate Code. The provisions of
the Corporate Code relating to “flexibility of merger consideration” -- which will permit
the use of triangular mergers, cash mergers, and other types of mergers using
properties other than shares of surviving companies as consideration, including using
foreign shares -- will come into effect as of May 1, 2007.
The Government of the United States pointed out that tax treatment would
also be an important factor in triangular mergers, and expected taxation measuresrelating to triangular mergers to be secured before the entry into force of provisions
permitting triangular mergers on May 1, 2007.

The Government of Japan is studying

tax treatment relating to “flexibility of merger consideration” available under the
Corporate Code, taking into consideration the appropriateness and equity of taxationand the prevention of tax avoidance, and will reach a conclusion before the related
provisions of the Corporate Code come into effect.
The Government of the United States appreciates that the Government ofJapan has clarified the interpretation of Article 821 of the Japanese Corporate Codeand that the House of Councilors has adopted a supplementary resolution, when thiscode was passed, which reaffirms that this Article is not intended to disadvantage
existing foreign companies in Japan.

The Government of the United States also

-9-

welcomes the release of a Japanese Ministry of Justice notification “Regarding thetreatment of commercial registration procedures attendant on the execution of the
Corporate Code” that further clarified the purpose and interpretation of Article 821.
However, the Government of the United States continues to request that Japan
promptly amend Article 821 to ensure that new restrictions and liabilities are notplaced on legitimate businesses.
The Government of the United States has also said that the objective ofdefensive measures against takeover should be to raise corporate value and not todefend management’s own interests.

In response to this, the Government of Japan

explained the concept of reasonable defensive measures against hostile takeover
attempts as concluded by the study group on corporate value established under METI.
In addition, the Government of Japan released indicative guidelines that provide rules
for reasonable defensive measures, including a principle that the objective of defensive
measures against takeover should be to secure and increase corporate value and thecommon interests of all stockholders.
(2) Demographic Issues and Investment
The Government of the United States has requested that Japan improve its
investment climate especially in the fields of education and medical services, where theUnited States is confident its companies could provide high-quality services to satisfy
the needs of Japanese society as it faces a declining birth rate and aging population.
A. Education
As a result of the reform introduced in December 2004, students who havefinished courses at foreign university branches in Japan can be considered foradmission into Japanese universities/colleges in appropriate programs, on condition
that those branches are officially designated by the Ministry of Education, Culture,
Sports, Science and Technology (MEXT) of Japan as meeting certain prerequisites.
This has led to eased student access to discount rail passes and clarified the residence
status of foreign students in designated foreign university branches in Japan.

The

Government of the United States welcomes this reform, and at the same time requests
that Japan act more promptly in processing foreign universities’ applications for thisdesignation.
In addition, the Government of the United States has asked that the taxationof foreign university branches in Japan should be the same as for Japanese educational- 10 -

institutions, and further requested that the Government of Japan should implement anationwide measure or alternatives.
The Government of Japan has been making efforts to provide prompt official
designation of those foreign university branches who applied under MEXT’s procedure.
To date, three U.S. universities’ Japan branch campuses have been so designated, anda fourth U.S. university’s application is under consideration by MEXT. Regarding tax
treatment, the Government of Japan explained that it would work within theframework of existing systems so that foreign university branches in Japan could takepractical and reasonable steps to address the issues they have raised.
The Government of the United States appreciated the efforts by theGovernment of Japan and also requested that discussion continue.
B. Medical Services
The Government of the United States expressed its active support for
healthcare reform in Japan, noting that American businesses including pharmaceuticalcompanies and medical equipment companies have already established themselves as
leading players in the Japanese market, and particularly mentioned the following
three points:
First, the Government of the United States requested Japan to allow
commercial firms to enter the medical services business, in order to increase the pool ofcapital available to medical institutions and improve productivity.

The Government of

the United States said that, while the special deregulation zone program in Japanese
structural reform had in principle made it possible for commercial firms to enter
hospital operations, actual approval of such zones had been quite limited and wasineffective in facilitating the entry of commercial firms into hospital operation. The
Government of the United States suggested that Japan should ease the requirements
for establishing special zones to provide treatment using advanced medical technology.
The Government of Japan is planning to introduce a scheme that allows medical
institutions meeting certain prerequisites to issue publicly-offered bonds as a means ofraising funds.

At the same time, the Government of Japan disagreed on the need toease requirements for medical special zones, noting that one application for a special
zone submitted by one local government had been approved in July 2005, and that
officials had received some further inquiries about the possibility of starting hospital
operations in the designated special zones.
Secondly, the Government of the United States noted that outsourcing of
diagnostic blood testing in Japan had yielded significant efficiency gains and requested- 11 -

that outsourcing to commercial firms of other low-risk, repetitive medical treatments
and examinations such as MRI, PET and CT imaging, be allowed with greater
flexibility.

The Government of Japan responded that non-doctors should not beallowed to perform medical procedures because they were not low-risk for patients andreiterated that commercial firms, which cannot operate medical institutes, are notpermitted to provide medical services even if they employ doctors to do so.
Thirdly, the Government of the United States expressed interest in the
introduction of “mixed medical services” (that is, services including both treatments
reimbursed under Japan’s public health system and other treatments not approved forreimbursement).

In its view, such services could reduce medical expenses, promote

efficiency and mitigate financial pressure on the medical insurance system.

The

Government of the United States also believes that the current scheme is extremely
restrictive.

The Government of Japan maintains the principle that the public healthinsurance system should basically ensure all necessary medical treatment for the
insured, and thus the Government of Japan does not share such views. According tothis principle, and taking into consideration patients’ welfare, the Government ofJapan has decided to implement reform in accordance with the fundamental agreement
made in December 2004 on the issue of “mixed medical services” between the Ministerof Health, Labour and Welfare and the Minister of State for Regulatory Reform. So far
six new treatments, which are not necessarily advanced, have been approved.
(3) Labor-related Laws and Systems
The Government of the United States suggested that improving labor mobility
would be a key to maximize the value of organizations, highlighting the following four
requests:-

Raise tax-deductible contribution limits for defined contribution pensions; allow
employees to make contributions, instead of having them deducted from theirsalary; and allow investment advice to be made available as an optional service, toassist participants in determining optimal investment strategies and ensuring thatproper actions such as portfolio rebalancing are performed in a timely manner.
The U.S. Government suggested that these changes would make such plans more
attractive, which would be beneficial to employees as well as employers.

-

For disputed dismissals, introduce monetary settlements as an alternative toreinstatement in the former position.

-

Introduce a white collar exemption that would replace the current working hours- 12 -

scheme for supervisory and managerial employees under the Labor Standards Act,in order to better foster workers’ abilities.
-

Ease regulations under the Worker Dispatch Law to provide workers withincreased employment opportunities, including for those who prefer to work limited
hours or enjoy greater workplace freedom.
In response to the above suggestions, the Government of Japan explained asfollows.
Non-taxable contribution limits on defined contribution pension plans wereraised in October 1, 2004, following review of the benefit levels for public pension plans.
The Government of Japan believes that it is necessary, at the current moment, toobserve utilization of these plans following implementation of the increased limits. The
Government of Japan expressed its view that contributions by employees have thesame characteristics as personal savings, since employee contributions are optionaland each employee chooses the way to manage the reserved funds. Therefore, theGovernment of Japan currently does not intend to introduce a scheme to allow
employee contributions. Based on the legal provision, the Government of Japan willconsider the necessity of the revision of the Defined Contribution Pension Law when
five years will have passed since its implementation, in October 2006, taking into
account input from interested parties.
Concerning the rules of dismissal, Article 18-2 of the Labor Standards Law is
aimed at avoiding conflicts and settling a dispute by clarifying the rules of dismissal inadvance.
The Government of Japan is planning to promote discussions for clarificationof the rules concerning labor contracts, taking into consideration current circumstancesin which individual labor-related disputes are increasing over the issue of dismissal.
The Labour Standards Law provides for extra pay for those workers who are
asked by their employer to work overtime under a labor-management agreement.

Italso provides an exception for persons in supervisory or managerial positions.
Because of diverse work patterns, even certain workers in non-managerial positions
are regarded as included in this exception. The Government of Japan is planning todiscuss the system that enables workers to work autonomously under light supervision
and what the scope of exception should be in this case.
The Government of Japan further explained that the 2003 amendment of theWorker Dispatch Law is based on the basic philosophy that dispatched workers should
be positioned as a temporary workforce within the context of traditional Japanese- 13 -

employment customs to respect long-term employment.

The Government of Japan

also explained that they do not see any grounds at this moment to abolish restrictions
on dispatch duration.
(4) Translation of Japanese Laws and Regulations into Foreign Languages
The Government of the United States welcomed the Government of Japan’s
project to prepare translations of Japanese laws and regulations into foreign languages,
noting that this would contribute to increased transparency for foreign investors, andrequested that close consultation with the foreign business community be continued as
this project is implemented and that sufficient funding be allocated to ensure its
success.
On March 23, 2006, the Government of Japan decided to take necessary
measures so that English translations of approximately 200 laws and regulations
would be produced under the Translation Development Program for FY2006-2008.
This decision was based on the final report made by the “Study Council for Promoting
Translation of Japanese Laws and Regulations into Foreign Languages,” composed ofexperts as well as relevant ministries and agencies.

In April 2006, the Government ofJapan started providing information on this project at the Cabinet Secretariat’s
website (http://www.cas .go.jp/jp/seisaku/hourei/data1.html). The Government of Japan
will make efforts to ensure the successful implementation of this Program.
2. Japan’s Concerns(1) Visas
The Government of Japan has expressed its desire that measures taken by theUnited States to improve border security are implemented in a way that minimizes
negative impact on Japanese visa applicants.

In Investment Initiative meetings, theGovernment of Japan expressed its concern about the high travel cost, delays, andinconvenience of applying for a visa since U.S. missions accepting visa applications arelimited to Tokyo, Osaka and Naha.
The Government of Japan pointed out that current visa revalidation
procedures, which requires applicants to apply outside the United States for interview
and collection of biometric data, imposes significant burdens on legitimate Japanesebusinesspeople and their families staying in the United States. The Government of- 14 -

Japan also requested that the Government of the United States resume visa
revalidation within the United States.
U.S. consular experts at Investment Initiative meetings pointed out several
measures taken by the Department of State to improve visa issuance, including
adoption of a web-based appointment system that allows applicants to apply at theconsulate of their choice and augmentation of visa positions at U.S. missions in Tokyo
and Osaka.

In particular, in April 2006 the United States introduced a pilot program

to conduct non-immigrant visa interviews in Sapporo on a monthly basis and will
evaluate this program to consider whether it warrants expansion to other posts inJapan.
U.S. consular experts explained that collecting biometric data during therevalidation process is a legal requirement and that it is technically impossible tocollect such data within the United States. As a result, Japanese businesspeople must
renew visas at U.S. missions overseas that issue visas, which include Tokyo, Osaka,
Naha and Sapporo in Japan.

The system allowing appointments to be made up to

three months in advance at U.S. missions in Japan eases the difficulties of schedulingtrips to Japan to revalidate these visas.
following

websites:

http://travel.state.gov/visa_services.html.

More detailed information is available at the
http://tokyo.usembassy.gov

andJapanese businesspeople may also apply forrenewals at U.S. embassies and consulates in Canada or Mexico. These embassies
and consulates offer an appointment system through their websites, accessible at
http://www.nvars.com. While some posts do not currently offer visa revalidation for
third country nationals, the Department of State is exploring improved information
sharing that will make it easier for some applicants to apply for renewals outside theirhome countries. The Department of State and the Department of Homeland Security
are working cooperatively toward improving visa revalidation procedures worldwide.
(2) Cargo Security
The governments of the United States and Japan share the view that it isimportant to take into account the need to facilitate international trade while
improving transport security.
The Government of Japan expressed concern that U.S. requirements toprovide cargo manifests twenty-four hours in advance of lading for maritime shipments,
under the Trade Act of 2002, would cause delays and additional expense for shippers.
Moreover, the Government of Japan requested that greater flexibility be used in- 15 -

applying the manifest rule to C-TPAT (Customs-Trade Partnership Against Terrorism)
members, which represent a lower risk from a security viewpoint.

Noting that most of

the security measures applied to trading companies and their supply chain after
September 11 attack have had a costly impact on their operations, the Government ofJapan recommended the United States to evaluate the reasonableness of security
measures which have already been introduced. The Government of the United States
advised that the cargo manifest requirement is an essential element of its
counter-terrorism efforts which would continue, but it also explained that the 24-hour
period could begin as soon as the container was sealed, even at the point of production.
Since the attacks of September 11, 2001, the overall inspection rates for cargo entering
the United States have doubled; however, inspection rates for C-TPAT participants are
only 1/6th that of non-C-TPAT companies. The Government of the United States
welcomes discussions with the Government of Japan and is exploring how to extend
further the advantages of C-TPAT membership to maritime shippers.

The

Government of the United States will ensure transparency in the process of
implementation and further revision of C-TPAT.

Both Governments desire tofacilitate legitimate trade while recognizing the need to continue to improve transport
security and make every effort toward enhancement of compatibility between tradefacilitation and security.
(3) Exon-Florio Provision
In the United States, Section 721 of the Defense Production Act of 1950 (the“Exon-Florio provision”) provides authority to the President to suspend or prohibit any
foreign acquisition, merger or takeover of a U.S. corporation that is determined tothreaten the national security of the United States.

While the Government of Japan

understands the necessity of regulations for national security reasons, it is concernedthat the mechanism lacks predictability and transparency and thereby inhibits
investment.

Japan has also expressed concerns about pending legislation to amend

Exon-Florio.
In response to Japan’s concerns, the United States has noted that the
Exon-Florio provision is implemented by the Committee on Foreign Investment in the
United States (CFIUS), which seeks to serve U.S. investment policy through thoroughreviews that protect national security while maintaining the credibility of the
traditionally open investment policy of the United States.
have established a voluntary system of notification.

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Implementing regulations

CFIUS encourages parties totransactions that may be particularly complex to pre-notify CFIUS of their intent tofile a voluntary notification.
basis.

Reviews are conducted on a transaction-by-transaction

Because the process deals with national security and business proprietary

information, the Exon-Florio provision provides that information supplied by thecompanies contemplating a transaction is held confidential and is not made public,
except in the case of an administrative or judicial action or proceeding. The President
retains the authority to review concluded transactions only when the transactions were
not notified to CFIUS, or in cases where parties have omitted material information or
submitted false or misleading material information during CFIUS review.
The Executive Branch of the U.S. Government supports improvements to the
CFIUS process to reflect the post-September 11 security environment. While not yet
taking a formal position on any pending legislative proposals, the Executive Branch
has stated to Congress that such improvements should be guided by the following
principles•

To update the CFIUS process to further integrate national and homeland security
interests for a post-September 11 environment;•

To continue to welcome investments in the United States; and•To preserve what works about CFIUS, and improve and update where needed,while maintaining the integrity of the decision-making process.
In implementing these principles, the Executive Branch has indicated it will

work to update the scope of national and homeland security considerations; preserve
the professionalism and independence of CFIUS security reviews, and protect sensitive
proprietary information provided by companies; strengthen scrutiny of CFIUS cases
involving state-controlled companies; and improve the transparency of decisions toCongress so that it can fulfill its important oversight responsibilities.

IV.

Conclusion
Five years have passed since the June 2001 establishment of the Investment

Initiative under the framework of the U.S.-Japan Economic Partnership for Growth,and the two governments’ activities to further improve the investment climate in theirrespective countries and raise people’s understanding of the role of inward direct
investment have taken root.

Moreover, the public programs under this Investment

Initiative are effectively working not only to publicize the benefits of inward FDI but
also to provide opportunities for companies of both countries to meet and discuss- 17 -

concrete business opportunities that have facilitated investment, job creation andgrowth.
In Japan, recent movements to promote reform and the combined efforts ofcentral and local governments to promote FDI have brought about a steady increase ininward investment toward the target set by Prime Minister Koizumi of doubling thestock of FDI.

At the same time, during the Japan Investment Council meeting held inMarch 2006, a new target was set to further increase FDI into Japan to the equivalentof 5% of the country’s GDP by 2010.

This new target requires the implementation of

additional measures, and accordingly the Government of Japan needs to work towardfurther improvement of the business environment through continued efforts toaddress issues identified in the Initiative.
In the United States, FDI from Japan continues to grow, registering a 10%
increase from the previous year in 2004.

Japan is ranked second among all countries

in terms of the amount of investment in the United States.

While there has beensome concern that national security measures triggered after the September 11
terrorist attack could make trade and investment procedures more complicated,creating a bottleneck either for investment from Japan and elsewhere or for corporate
activities within the United States, efforts to maintain the openness of the economy
have allowed U.S. investment growth to recover from the global slowdown after
September 11.

The Government of the United States carefully considers opinions andsuggestions from Japan and will continue to take these views into account in its efforts
to ensure that measures which strengthen national security at the same time
contribute to the growth of trade and investment.
The U.S.-Japan Investment Initiative will continue its activities under the
direction of the leaders of the two countries.

Both governments will continue efforts topromote measures for the improvement of the investment climate in their respective
countries with an understanding of the significance of this Investment Initiative and
FDI for further growth of both economies and their important role in the global
economy.

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Appendix 1: Invest-in-Japan Symposiums
Every year, the U.S.-Japan Investment Initiative holds symposiums in the
United States to give publicity to the Japanese investment environment, as well as
seminars in local cities in Japan to lecture on the mutual benefits obtainable fromforeign direct investment.
In November 2005, when the Initiative entered its fifth year, Invest-in-Japansymposiums were held in New York and San Jose.
The symposiums pay close attention to regional characteristics so that useful
information about the Japanese investment environment can be directed to the needsof participants.

The symposium in New York targeted retailers and the service

industry, and the San Jose symposium targeted information technology business.
Both symposiums included panel discussions by entrepreneurs and experts
from both countries that fostered active debates and information exchanges to provide
insight into the Japanese investment environment and successful examples of direct
investment in Japan.

The exchange of opinions gave the 200 participants in the two

symposiums a good opportunity to learn about the Japanese investment environment,
contributing to mutual understanding between the two countries.
While investment seminars in Japan were held in the spring of every year in
the past, this year the two governments decided that the seminars would benefit from
integration into an international event in order to attract more corporate participantsfrom the United States.

The next seminars are planned for Sendai and Yokohama in

October 2006, in conjunction with the CEATEC (Combined Exhibition of Advanced
Technologies) exhibition to be held in Chiba at that time.

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Appendix 2: Examples of Recent Entries of the U.S. Companies
Many U.S. companies invested in Japan with the support of JETRO’s Invest
Japan Business Support Centers (IBSCs).

The following five companies all entered

the Japanese market in 2005.
○ Proofpoint Japan KKThis company develops software for computer protection against spam emails.
The Japan branch was established in Tokyo in May 2005, aiming to expand its
customer base and promote customer support services in the Japanese market.
Proofpoint’s entry into Japan took advantage of a new business opportunity generated
by the entry into force of the Japanese Law on the Protection of Privacy Regarding theProcessing of Personal Data.

The company is planning to expand its business in the

Asian market after first consolidating its position in Japan first.

JETRO assisted thecompany in collecting information on the tax systems and labor-related laws and in
conducting publicity activities.
○ Tetra Tech Japan
Tetra Tech is a major American company that provides consultation services
concerning the environment and technological services.

The company is especiallywell known for its high-level technology and rich experience in water purification
projects and gas/oil-related projects.

The Japan office was established in May 2005 asa base for expanding environmental business projects in the Asia Pacific region.

In

addition to supporting the company start-up, including free office space andconsultation on legal matters, JETRO assisted the company in collecting information
on traditional bidding procedures for public works in Japan as well as on water
quality-related projects.
○ Rimage Japan Co., Ltd.
This company manufactures and markets DVD and CD vending machines (foron-site writing of DVD and CD contents).

The Japan branch was established in Tokyo

in May 2005 as the first step in entering the Asian market.

JETRO provided thecompany with consultations on legal procedures and also helped them to arrange
appointments with lawyers and accountants.

- 20 -

○ GEOVECTOR K.K.
This company develops applications for cellular phones. The Japan branch
was established in June 2005, aiming to launch a new service based on geographicallocation information technology.

JETRO provided the company with consultations on

corporate registration and also assisted them in finding an office and collecting market
information.
○ eRide Asia Pacific Limited
This company develops and markets IC chips and supersensitive low-power
Global Positioning Systems (GPS).

The Japan branch was established in Tokyo in

September 2005 following a decision by the Ministry of Internal Affairs andCommunications to promote the use of cellular phones with a built-in GPS function
beginning in 2007.

JETRO assisted the company with company establishment

procedures and in seeking human resources in the fields of legal affairs, real estate,
distribution, accounting, etc.

- 21 -

Appendix 3: Accomplishments over the Past Five Years
During the five years since the U.S.-Japan Investment Initiative wasestablished in June 2001 by the U.S. and Japanese leaders under the framework of the
U.S.-Japan Economic Partnership for Growth, Japan and the United States haveexchanged various opinions regarding the improvement of the investment climate of
their respective countries.

Through the exchanges, many improvements have been

made to the investment environment by the two countries, and we take this opportunity on the fifth anniversary to review those improvements with the aim offurther advancing such measures in the future.
1.

Accomplishments of Japan

Corporate Governance
The amendment of the Commercial Code in May 2002 made it easier forJapanese corporations (kabushiki-kaisha) to adopt an American-type corporate
governance structure.

The corporate governance structure introduced by theamendment is more familiar to foreign investors and thus it promotes theirinvestments.

The amendment made it possible to choose a corporate governancestructure with three board committees -- the appointment, audit and remunerationcommittees, each of which must consist of at least three directors with a majority ofoutside directors -- as well as one or more statutory officers (shikkou-yaku) responsible
for conducting business operations without a traditional statutory auditor. Under thisstructure, a statutory officer may decide important matters (including issuance of new
stocks and corporate bonds) which would require resolutions by the board of directors
under the traditional-type governance structure.
The Corporate Code, which came into force in May 2006, requires all large
corporations and corporations with committees to adopt a basic policy with respect tothe establishment of internal control systems to ensure appropriate operations of suchcorporations, including a system to ensure that all actions by directors or statutory
officers (as the case may be) conform with applicable laws and regulations and thearticles of incorporation.
Increase in Labor Mobility
The defined contribution pension plan was introduced in 2001 to provide a
new pension option to supplement benefits under the public pension plan. It is a

- 22 -

portable pension plan so it plays an important role in promoting labor mobility whichfacilitates FDI. As of March 31, 2006, there were 1866 officially approved statutes forcorporate pensions with 1,733,000 enrollees.
Services in Specialized Fields
Investors need access to lawyers and certified public accountants with special
knowledge to help them navigate Japanese laws and systems while pursuing FDI inJapan.

The Cabinet decided in March 2002 to launch a plan for promoting judicial

system reforms , including setting a target to increase the yearly number of examinees
who pass the National Bar Examination of Japan to about 3000 persons around 2010.
In addition, a bill was submitted to the Diet in 2003 to amend the Court
Organization Law for Justice System Reform, including an amendment of the Special
Measures Law concerning the Handling of Legal Business by Foreign Lawyers (the“Gaiben Law”).

The purpose of this amendment to the Gaiben Law was to promote

cooperation and collaboration between Japanese lawyers and foreign lawyers
registered in Japan.

The overall amendment took effect on April 1, 2004, with theprincipal part of the Gaiben Law amendment taking effect on April 1, 2005.
The government has also promoted reform of overall systems related to certified
public accountants, including the examination system.
Cross-border Mergers and Acquisitions (M&A)
The amended Special Measures Law for Industrial Revitalization, designed topromote cross-border mergers and acquisitions (M&A), entered force in April 2003.

It

introduced special measures as exceptions to the Commercial Code that permit
mergers using stocks of a parent company as a consideration (triangular mergers) ormergers using cash as consideration (cash-out mergers), subject to appropriate
permission from a minister in charge.

Under the amended law, it is possible to use

stocks of a foreign parent company or cash as consideration in mergers or other similartransactions.

This means that a foreign company may, with its own stocks or cash as

consideration, use mergers and other similar transactions when it acquires a Japanesecompany through its Japanese subsidiary.
In addition, under the new Corporate Code, it is possible for mergers to use
cash or other properties (stocks of a parent company, in the case of a triangular merger),instead of stocks of a surviving company as a consideration (this new rule will go into
effect on May 1. 2007).

- 23 -

Revision of Accounting and Auditing Systems
Accounting and auditing, which are basic infrastructural services for capital
markets, play an important role in improving the investment environment.
As for accounting, the Government of Japan has developed a number of new
and revised accounting rules related to principles of consolidated financial statements,
fair value accounting for financial instruments, accounting for income taxes,
retirement benefits and impairment of assets. On auditing, in May 2003 the Certified
Public Accountant Law was revised (effective April 2004). Based on the revised law,measures for prohibiting accountants from providing their clients with non-auditing
services such as consulting were introduced to strengthen auditor independence, andthe Certified Public Accountants and Auditing Oversight Board (CPAAOB) wasestablished.
These developments continuously improved the quality of accounting andauditing, and enabled investors to access more useful accounting information,
including accurate financial information needed in M&A transactions. They were inline with international developments and contributed to improvement of theinvestment climate.
Education
The Government of Japan established a study group on the issue of university
quality assurance to respond to the internationalization of higher education.

This

study group concluded that the following two options should be available to foreign
university branches in Japan: (i) foreign university branches in Japan that seek astatus equal to that of Japanese counterparts should apply through the official
certification process based upon the standards for establishment of universities, which
are applied equally to Japanese counterparts, and (ii) foreign university branches inJapan recognized in their home country as legitimate universities are to be given thestatus of “foreign university” in Japan. As a result, a reform was introduced in
December 2004 which paved the way for foreign university branches in Japan to obtaina status in the Japanese education systems.
As a result of this reform, students who have finished courses at foreign
university branches in Japan are entitled to admission into Japanese universities andcolleges based on the types of the courses taken, on condition that those branches are
officially designated by MEXT to meet certain prerequisites. This reform also resulted
in improvement of the situation concerning the issues of student discount rail passes
and the residence status of foreign students in foreign university branches in Japan.

- 24 -

Up to the present, three U.S. university branches in Japan have been officiallydesignated by MEXT.
Medical Treatment
The Government of Japan determined in February 27, 2003 that commercial
firms should be permitted to enter the business of hospital operation in Japan.

Thisdecision allowed firms to practice advanced medical technology not covered by the
public medical insurance system in such fields as reproductive medicine, genetic
treatment, and cosmetic surgery using

the exemption measure available for special

zones for structural reform under the management of the Headquarters for the
Promotion of Special Zones for Structural Reform. To implement this decision, a billon relevant matters was brought to the Diet and approved in May 2004, and has beenin effect since October of that year.

In May 2005, one local government submitted

applications for the official designation of specific regions as special zones under thissystem, and this application was approved in July 2005.
Regarding “mixed medical services,” the Government of Japan has decided to
implement a reform in accordance with the fundamental agreement made in December
2004 on the issue of “mixed medical services” between the Minister of Health, Laborand Welfare and the Minister of State for Regulatory Reform. So far, six newtreatments, all under the category of “not necessarily advanced,” have been approved.
Translation of Japanese Laws and Regulations into Foreign Languages
The government’s project is underway to translate Japanese laws andregulations into foreign languages (English translations to be produced first) with thegoal of increasing transparency for foreign investors.

Under this project, theGovernment of Japan will take necessary measures to produce English translations ofapproximately 200 laws and regulations in accordance with the Translation
Development Program for FY2006-2008.
2. Accomplishments of the United States
Visa Issuance and Revalidation
The United States has undertaken a number of measures designed to improvesecurity while making it easier for legitimate travelers to obtain visas and renew them,including for investors from Japan.

Since October 26, 2004, biometric visas must be

issued to all travelers who require a visa, which requires a personal appearance by- 25 -

most applicants.

The Department of State has adopted a web-based appointment

system, which allows applicants to apply up to three months in advance at theconsulate of their choice, and added new visa officers at U.S. missions in Tokyo andOsaka.

These measures have significantly reduced the visa processing backlog in

those posts.

To reduce the cost of travel from northern Japan for visa interviews, theDepartment of State initiated a pilot program to conduct in-person non-immigrant visa
interviews at the U.S. Consulate in Sapporo on April 19, 2006.

The Department ofState is evaluating this pilot to determine whether this program warrants further
expansion.

Visa holders can now use the web-based appointment system to facilitate

renewal during travel. While some posts do not currently offer visa revalidation for
third country nationals, the Department of State is exploring improved information
sharing that will make it easier for some applicants to renew their visas outside theirhome countries.
Cargo Security
The United States strengthened rules and programs addressing cargo security
in the wake of the September 11 attacks and continues to look for ways to improve boththe security and efficiency of trade.

The U.S. Bureau of Customs and Border

Protection (CBP) and Japanese Customs’ authorities have worked closely in
implementing these changes.

Under the Container Security Initiative (CSI), Japanese

Customs teams have been stationed at the ports of Long Beach. Yokohama became a
CSI port in 2003, Tokyo became operational in May 2004, and Nagoya and Kobe werebrought into the program in August 2004. CBP published final rules on the advancecollection of cargo manifest information on December 5, 2003. An essential element of
U.S. counter-terrorism efforts, these rules were necessary to improve security and toensure the smooth flow of trade and are applied to all shippers, domestic and foreign.
Under the Customs-Trade Partnership Against Terrorism (C-TPAT), certified shippers
receive reduced container inspections by U.S. Customs based on their commitment andactive participation in the program.

Since the attacks of September 11, the overall

inspection rates for cargo entering the United States have doubled; however, inspection
rates for C-TPAT participants are only 1/6th that of non-C-TPAT companies.
Sarbanes-Oxley Act of 2002
Reforms to U.S. securities law contained in the Sarbanes-Oxley Act haveraised concerns that conflicts may exist between U.S. and foreign requirements forinternal oversight standards.

The Securities and Exchange Commission (SEC) made- 26 -

a concerted effort, including holding public roundtables and soliciting public comments,
to gain a better understanding of these concerns and, as a result, has made many
accommodations for Japanese and other foreign market participants.

For example,

the SEC adopted a rule that provides a limited exemption from Sarbanes-Oxley
requirements for jurisdictions such as Japan with boards of auditors or statutory
auditors. The SEC remains willing to receive further information regarding the effecton individual firms of a provision requiring independent auditors when an auditing
committee system is used.

The Public Company Accounting Oversight Board(PCAOB) and the SEC have issued a rule allowing foreign public audit firms to provide
less information in registering than originally proposed, and a mechanism has been
included to permit foreign firms to document non-disclosure of certain information thatis confidential under home country rules.

The PCAOB has proposed rules regarding

how it would cooperate with foreign audit oversight bodies in the inspection of foreign
registered firms and continues to discuss with foreign governmental bodies the scope of
its oversight authority with respect to accounting firms located outside the UnitedStates.

With regard to internal control over financial reporting, the compliance date

for foreign private issuers including Japanese firms has been extended one year totheir first fiscal year ending on or after July 15, 2006.
Exon-Florio Provision
Section 721 of the Defense Production Act of 1950 (the “Exon-Florio” provision)
provides authority to the President to suspend or prohibit any foreign acquisition,
merger or takeover of a U.S. corporation that is determined to threaten the national
security of the United States.

In response to Japan’s concerns that the mechanism

lacks predictability and transparency and thereby inhibits investment, the UnitedStates has provided extensive information about the process.

While not yet taking aformal position on any pending legislative proposals to amend Exon-Florio in light ofthe post-September 11 security context, the Executive Branch has indicated it will
work to update the scope of national and homeland security considerations; continue towelcome investments in the United States; preserve the professionalism andindependence of CFIUS security reviews, and protect sensitive proprietary information
provided by companies; strengthen scrutiny of CFIUS cases involving state-controlled
companies; and improve the transparency of decisions to Congress so that it can fulfill
its important oversight responsibilities.

- 27 -

Requirements for Drivers’ Licenses
The Social Security Administration (SSA) ended the assignment of non-work
Social Security Numbers (SSNs) for the purpose of driver's licensing on October 27,
2003, after publication of the proposed rule in March 2003.

In response to a requestfrom the Government of Japan during the public comment period, the SSA, with theassistance of the American Association of Motor Vehicle Administrators and the
support of the Department of Transportation, assisted several states that required
SSNs for driver's licensing to develop alternative identifier systems. All states but
Illinois had taken steps to resume issuing driver's licenses in this situation by
November 2003.

Following passage of a bill by the Illinois General Assembly in May

2004 and approval by the Governor of Illinois, foreign citizens temporarily residing inthat state were allowed to obtain driver’s licenses without a SSN on January 1, 2005.
International Investment and Trade in Services Survey Act (IITSSA)
In response to a request from Japan to ease the reporting burden under the
IITSSA, the United States undertook to minimize the amount of information required.
A new electronic filing system further eased collection of this data.
Investment in Areas Outside of Tokyo
To assist Japan in revitalizing local economies and encouraging investment inlocal areas, the United States agreed to work closely with Japan to assist local areas inunderstanding what business environment best attracts investment. As part of thiseffort, the United States has participated in a series of seminars in various Japaneseand U.S. cities and sponsored the first official U.S. investment missions to some ofthese areas.

These investment seminars have continued to be an important avenue topromote U.S. direct investment in Japan and to raise local understanding of the rolethat policy plays in promoting investment.

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