Annual Reform Recommendations from theGovernment of the United States to the Government of Japan under the
U.S.-Japan Regulatory Reform and Competition Policy Initiative
October 23, 2002

Now in its second year, the U.S.-Japan the Regulatory Reform and Competition Policy Initiative(Regulatory Reform Initiative) was established by President Bush and Prime Minister Koizumi topromote economic growth.
The United States welcomes Japan’s continuing efforts to achieve meaningful economic reform
and is encouraged by Prime Minister Koizumi’s recent pledge in the Diet to ceaselessly carry out“structural reforms without sanctuaries” and his commitment to “implement bold regulatory
reform across sectors.” The United States also welcomes Japan’s adoption on March 29, 2002 of
its revised three-year Regulatory Reform Promotion Program and is following with interest theGovernment of Japan’s plans to establish Special Zones for Structural Reform.
The recommendations included in this submission put an emphasis on reform measurespertaining to key sectors and cross-cutting areas and are designed to facilitate a return tosustainable growth and open markets in Japan. Furthermore, the United States has made aconcerted effort to focus on issues that Prime Minister Koizumi and his Administration haveidentified as important areas for reform, such as telecommunications, information technologies,
medical, energy, and competition policy.
The proposals included in the Summary of Recommendations and the Annex are being provided
to the Government of Japan to serve as the basis for discussions over the coming year in theHigh-level Officials Group and the Working Groups established under the Regulatory Reform
Initiative. These Groups will in turn develop a second annual report to the President and Prime
Minister specifying the progress made under this Initiative, including reform measures to betaken by each Government.
During the first year of this Initiative, private-sector representatives joined the Working Groups
to provide valuable expertise, observations, and recommendations on a wide range of issues.
The United States looks forward to working with Japan in the coming weeks to identify issues
addressed in this Initiative that could benefit from continuing private-sector input.
The Government of the United States is pleased to present these reform recommendations to theJapanese Government and looks forward to receiving Japan’s reform proposals to the UnitedStates.

TABLE OF CONTENTS
SUMMARY OF RECOMMENDATIONSTELECOMMUNICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INFORMATION TECHNOLOGIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MEDICAL DEVICES AND PHARMACEUTICALS . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
FINANCIAL SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
COMPETITION POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
TRANSPARENCY AND OTHER GOVERNMENT PRACTICES . . . . . . . . . . . . . . . . 7
LEGAL SERVICES AND JUDICIAL SYSTEM REFORM . . . . . . . . . . . . . . . . . . . . . . 8
COMMERCIAL LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ANNEX
TELECOMMUNICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 1
INFORMATION TECHNOLOGIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 7
ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 12
MEDICAL DEVICES AND PHARMACEUTICALS . . . . . . . . . . . . . . . . . . . Annex - 18
FINANCIAL SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 21
COMPETITION POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 23
TRANSPARENCY AND OTHER GOVERNMENT PRACTICES . . . . . . . . Annex - 27
LEGAL SERVICES AND JUDICIAL SYSTEM REFORM . . . . . . . . . . . . . . Annex - 31
COMMERCIAL LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 33
DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 34

SUMMARY OF RECOMMENDATIONSTELECOMMUNICATIONSJapan has made significant progress over the past several years promoting competition in thetelecommunications sector through regulatory reform. The benefits of continued reform extend beyond
the immediate goals of ensuring non-discriminatory treatment of foreign carriers and expanding
opportunities for foreign equipment suppliers. In a networked global economy, the availability of costeffective telecommunications services affects overall national competitiveness and an economy's ability
to respond to global markets and technology trends.
The United States commends Japan for taking significant measures to promote competition in this sector
in recent years. The United States also takes note of the recent progress Japan has made in the roll-out ofadvanced telecommunications technologies, including the deployment of broadband services. Like
Japan, the U.S. Government considers broadband an important potential source of economic and social
benefits. In furtherance of these goals, the United States urges Japan to consider even more far-reachingreforms that challenge the status quo, facilitating a transition to advanced networks and services, andallowing market forces to overtake obsolete regulations that hinder the development of a competitiveenvironment.
The U.S.-Japan Telecommunications Working Group under this Initiative provides a timely opportunity
to exchange views on emerging issues faced by both countries in the telecommunications sector. The
United States therefore suggests that the Working Group enhance its dialogue by inviting experts fromgovernment and the private sector to provide their perspectives. In addition, the United Statesrecommends that Japan implement the following reforms in CY2003:
SUMMARY OF RECOMMENDATIONSCDeregulate Competitive Carriers: Focus
regulatory obligations on carriers with market
power and eliminate or reduce filing andreporting requirements for carriers withoutmarket power.

C

Promote Transparent and Independent
Regulation: Take steps to transfer regulatory
functions to an independent agency not underministerial authority, and end MPHPT control
over NTT business decisions.

C

Dominant Carrier Regulation andCompetition Safeguards: Reinforce
dominant carrier safeguards to prevent abusesby carriers with market power.

1

C

Wireline Interconnection: Complete theimplementation of cost-oriented, transparent
and reasonable interconnection rates that arenecessary for a competitive local market andensure that interconnection will be available
to competitors on non-discriminatory terms.

C

Mobile Termination: Establish a means todetermine if rates for termination to the NTT
DoCoMo network are set at reasonable,
competitive levels and eliminate
discrimination in retail rate-setting.

C

Rights of Way: Continue to improve therights of way regime through annual reviewsof rights of way guidelines in order topromote competitors' installation of network
facilities.

INFORMATION TECHNOLOGIESBoth the United States and Japan recognize that a vibrant and growing IT sector is key to revitalizing
other sectors in our respective economies. Japan has taken significant steps towards and continues tomake progress in establishing an environment that will promote the use of the Internet and e-commerce,and spur growth in the IT sector. In addition, the United States commends the Japanese Government forrecognizing the economic importance of protecting intellectual property, including digital content, as afoundation for bolstering the Japanese economy.
Although Japan’s e-commerce market is one of the largest in the world, its tremendous potential for
growth remains unfulfilled because the IT sector is fettered by regulatory and other barriers. The
Japanese Government has recognized in its “2002 e-Japan Priority Policy Program” that legal and otherbarriers persist which hinder e-commerce and has identified key policies to reinvigorate Japan’s goal of
becoming the world’s most advanced IT nation by 2005. These priority policies include facilitation of ecommerce, digitization of Government administration and other public services, and ensuring security
and reliability of advanced information networks. In addition, as part of Japan’s goal to become a“Nation Built on Intellectual Property,” the Prime Minister’s Strategic Council on Intellectual Property
recognized in its “Intellectual Property Policy Outline” that the digital content industry cannot flourish
without providing adequate protection that effectively responds to the challenges of the digital age.
The United States welcomes and supports the measures Japan has begun to undertake to achieve thesegoals, and this year’s submission is designed to complement and support these priority policies andobjectives. In addition, creation of a thriving IT sector requires a fundamental reorientation of both thebusiness environment and private-sector/government relations that can only be facilitated through regularuse of an open and transparent public comment process. A key objective of the IT component of thisInitiative is to promote and expand private-sector input and the use of public comment opportunities in
the policy-making and regulatory processes.
SUMMARY OF RECOMMENDATIONSCCRegulatory and Other Barriers: Remove
existing barriers that impede B-to-B and B-toC e-commerce; allow non-attorneys toprovide mediation and arbitration services forprofit; ensure that Japanese Government ecommerce guidelines remain flexible andappropriate for evolving changes intechnology and the marketplace; increaseprivate sector input at all stages of the IT
policy-making process.
IPR Protection: Extend Japan’s terms of
copyright protection and strengthen theenforcement system against infringement;
provide security for commerce in the digitalage through strong anti-circumvention
measures; implement an effective
Government-wide software asset management
system.

2

C

Promotion of E-Commerce: Support private
sector self-regulatory mechanisms for privacy
and Alternative Dispute Resolution; ensuretransparency in the implementation of any
new privacy laws and network security
guidelines; and ensure that laws governing
electronic transactions are technology-neutral.

C

IT Procurement Opportunities: Support
fair and open procedures for e-government
and e-education procurement by ensuringtransparency, efficiency, security, and private
sector-led innovation.

ENERGY
The U.S. Government welcomes the work of the Japanese advisory groups examining liberalization ofJapan’s electricity and gas sectors. These groups have identified a number of key policy goals and next
steps toward achieving a Japanese energy market that promotes transparent and fair competition among
all market players. Energy market liberalization will facilitate lowering of electricity costs tointernationally competitive levels and reducing costs for consumers and commercial users, which canhelp Japan’s industries gain a greater degree of competitiveness and return the economy to sustainablegrowth. To achieve a genuinely competitive market, increase efficiency, and improve the environment
for investment, the United States urges Japan to expeditiously adopt measures to further liberalize thisimportant sector and ensure fair, transparent and non-discriminatory access to electricity transmission
and distribution lines as well as to gas terminals and pipelines.
The reforms the U.S. Government proposes for the Japanese electricity and gas sectors support those
proposed by the Japanese Government’s Three-Year Plan for Promoting Regulatory Reform. Identifying
energy as a key sector for regulatory reform in its April 2002 revision, the Plan recommended expansionof the scope of liberalization of electric power and gas retail sales.
The U.S. Government urges Japan to swiftly to promote further liberalization in the electricity and gas
sectors – based on clear policy goals and timetables – as set out in the recommendations below:
SUMMARY OF RECOMMENDATIONSCIndependent Regulatory Authority: Take
concrete measures to ensure that theElectricity and Gas Market Divisions of
METI are free from undue political andindustry influences.

C

Reform Timetable: Clarify the type ofmarket structure Japan will adopt in theelectricity and gas sectors, establish
timetables for the regulatory reform processneeded to achieve this market structure, andcomplete all reform initiatives required tolaunch the selected market design in the gas
and electricity sectors by the end of JFY2003.

C

Electricity Access and Transparency:
Promote fair competition by ensuring
neutrality and transparency of network andaccounting information in electricity
transmission and distribution for all market
participants.

3

C

Adequacy of Infrastructure in Electricity
and Gas Sectors: Take concrete steps toensure that Japan has adequate
interconnection and transfer capability tosupport a competitive national power market,
including sufficient networks for transmission
as well as gas pipelines and LNG terminals.

C

New Entry of Competitive Electricity
Suppliers: Promote new entry bystreamlining siting requirements anddeveloping a concrete plan and schedule for
expanded retail choice.

C

Gas Transportation Access andTransparency: Promote open access to thegas pipeline network and transparency on
pricing and availability of information for all
market participants.

C

New Entry of Competitive Gas Suppliers:
Expand gas transportation infrastructure andgas market liberalization to guarantee newentry by suppliers of gas, including electric
generators.

MEDICAL DEVICES AND PHARMACEUTICALSJapan has traditionally utilized a combination of price cuts and co-payment increases to meet the fiscal
demands of its healthcare system. Japan is now pursuing, however, a more comprehensive approach tohealthcare reform. The U.S. Government welcomes this approach which emphasizes the patient’s
perspective and the importance of efficiency, R&D, specialization, and innovation. This approach should
also consider how different cost structures in various parts of the healthcare system influence each other(such as length of hospital stays) and how faster access to innovative products can result in cost savings.
On the pharmaceutical front, special attention is being given to the viability of the Japanese drug
industry. The Ministry of Health, Labor and Welfare, for example, has released a major policy paper on
the structure of Japan’s pharmaceutical sector and how it can contribute to broader economic growth.
The United States views discussion of the proposals raised in this paper as an important opportunity for
all stakeholders to address the need for a pricing system that creates the resources and incentives
necessary to encourage future innovations.
In addition, the Pharmaceutical Affairs Law, which governs the entire regulatory system for medical
devices and pharmaceuticals, is being revised for the first time in more than 40 years. The regulatory
bodies that conduct product reviews and regulate clinical trials are also being restructured into one
agency that will oversee the regulation of medical devices and pharmaceuticals from development to
final market approval. The U.S. Government supports these efforts to develop a regulatory system thatembraces the ideas of efficiency, harmonization, and the latest global science. These efforts will alsoenable Japan’s regulatory system to adapt to the new challenges of the bio-genomic age. Medical devices
and pharmaceuticals, including blood products, derived in part or in whole from biologic sources (biomedicine) are important new areas that the Reform Initiative will begin addressing.
SUMMARY OF RECOMMENDATIONSCCComprehensive Healthcare Reform:
Establish a Prime Minister's council oncomprehensive healthcare reform that would
provide meaningful opportunities for all
stakeholders, including foreign industry, topresent and discuss ideas. Such a body
would consider ways to increase the system’s
overall efficacy to maintain quality care foran aging population while containing overall
costs.
Pricing Reform: Ensure that innovative
medical devices and pharmaceuticals are
introduced into the healthcare system in atimely manner, and that such products receive
appropriate evaluations in a transparent andpredictable pricing process. This pricing
process should also encourage future
development and innovation.

4

C

Regulatory Reform: Continue to reform theregulatory systems for medical devices andpharmaceuticals to ensure faster, more
efficient product approvals that give
maximum consideration to common
international practices.

C

Bio-Medicine: Ensure that the pricing
process for biological products (medical
devices and pharmaceuticals) reflects theinvestment costs of meeting the regulatory
requirements of such products, and thattreatment of such products takes place in a
nondiscriminatory, science-based manner.

C

Nutritional Supplement Liberalization:
Further deregulate the sale of nutritional
supplements.

FINANCIAL SERVICESThe U.S. Government welcomes the progress Japan has achieved in opening its financial system toforeign and domestic competition, including through the successful implementation of the 1995 U.S.Japan Measures Regarding Financial Services and the actions Japan has taken to date under its Big Bangfinancial deregulation initiative. A more efficient and competitive financial sector will play a crucial role
in returning Japan to its full growth potential.
SUMMARY OF RECOMMENDATIONSCCDefined Contribution Pensions: Encourage
the development and adoption of defined
contribution pension plans by increasing
contribution limits, by allowing employees tomatch the contributions of their employers
and by allowing plan providers to gain
regulatory approval for prototype plans thatcan be used cost effectively by small- andmedium-sized businesses.
Investment Trusts: Encourage greaterhousehold and pension fund investment insecurities by increasing the safety, flexibility,
and understandability of investment trusts andby lowering the costs of providing this key
investment vehicle.

5C

Self-Regulatory Associations: Increase thetransparency and openness of the operations
and decision-making of industry associations
that have a self-regulatory, investor
protection, or other public policy role.

C

Postal Financial Institutions (yucho andkampo): Allow the postal financial
institutions to employ the asset management
services of investment advisory companies
through direct onshore trust arrangements;
increase transparency and promote private
sector provision of services by subjecting any
new financial service activities proposed for
the Postal Financial Institutions to full publiccomment and consideration before theirintroduction.

COMPETITION POLICY
An economically sound competition policy, accompanied by vigorous enforcement of the Antimonopoly
Act (AMA) against anticompetitive behavior, is one of the keys to Japanese economic recovery. Active
promotion and preservation of competition in Japanese markets will create a climate that encourages new
entry and innovation, and fosters efficient companies that are competitive domestically andinternationally. The foremost challenge to the Japanese Government in this regard is to ensure that theJapan Fair Trade Commission has the tools, resources, government-wide support and administrative
independence necessary to enforce the AMA effectively and aggressively. It is also incumbent on theJapanese Government to implement a meaningful program aimed at eliminating the bid rigging system inJapan. An effective anti-dango program could reduce public-works expenditures by 30 percent and makeresources available for important government programs aimed at reinvigorating the economy. Finally,
Japan’s regulatory reform efforts need to be firmly grounded in a commitment to create competitivemarkets and to rely on market principles, rather than government direction, to determine the outcome of
the competitive process.
The United States therefore recommends that Japan take the measures set out below:
SUMMARY OF RECOMMENDATIONSCIndependence of JFTC: Introduce
legislation to make JFTC an independentagency under the Cabinet Office.

C

JFTC Resources: Increase the staff andbudget of JFTC substantially and steadily andestablish an office of trained economists
within JFTC to provide economic analysis
and expertise.

C

Effectiveness of JFTC Enforcement:
Strengthen JFTC’s investigative powers,
enhance AMA administrative sanctions,introduce per se illegality for cartels, andincrease criminal AMA enforcement.

6

C

Measures to Address Bid Rigging:
Implement the kansei dango act, introduce aneffective program to collect overcharges from
dango participants, and assist citizen suitsthat seek recovery of overcharges incurred by
local governments.

C

Competition and Regulatory Reform:
Create competitive markets in the energy
sector, prevent anticompetitive exclusionary
behavior by dominant telecommunications
carriers, ensure procompetitive privatizationof public corporations and other public
entities, and monitor competitive conditions
in structurally non-competitive sectors.

TRANSPARENCY AND OTHER GOVERNMENT PRACTICESJapan’s economic vitality depends on consumer, investor, and business confidence, which is closely
linked to a transparent regulatory system that guarantees fairness, predictability, and accountability. By
providing ways for both domestic and foreign firms to gain full access to information and opportunities
to participate in the regulatory process, Japan would create a more attractive investment environment andthereby spur growth. In addition, transparency is vital to a wide range of economic reform measures,
including the establishment of Special Zones for Structural Reform and the privatization of public
corporations.
Shortcomings in Japan’s regulatory system are, however, apparent in the implementation of the Public
Comment Procedures (PCP). If effectively used, the PCP could serve as a cornerstone for achieving atransparent regulatory system. While the Japanese Government has made some advances toward
implementing more effective and fair Procedures since their adoption in 1999, surveys by the Ministry of
Public Management, Home Affairs, Posts and Telecommunications have repeatedly shown deficiencies.
The Ministry’s third Report on the Implementation Status of Japan’s Public Comment Procedures for
FY2001 reinforces concerns that Japan’s rulemaking process remains opaque. Results of that survey
show that incorporation of comments into final regulations continues to be infrequent and largely nonsubstantive. According to the survey, the total number of public comment periods consisting of at least
30 days still comprises less than half of the total number of cases. Further, the percentage of cases inwhich government agencies incorporated comments into final regulations actually declined in 2001. The
United States therefore recommends that the Japanese Government undertake the following
improvements in its regulatory system to support Japan’s ongoing structural reform efforts and afford allparticipants adequate, effective and equal access to government information and the policymaking
process.
SUMMARY OF RECOMMENDATIONSCCPublic Comment Procedures (PCP):
Improve the effectiveness of this potentiallypotent regulatory mechanism by establishinga centralized system that would allow parties
to find solicitations of public comments in
one location, requiring a minimum 30-day
comment period, and strengthening the PCPfrom being mere guidelines to being a law.
Special Zones for Structural Reform:
Ensure that establishment of these zones isdone in a transparent, non-discriminatory
manner, with a focus being placed on
encouraging market entry and anunderstanding that successful measures usedin the zones should be applied on a national
basis as expeditiously as possible.

7

C

Public Input into the Development ofLegislation: Take steps to facilitate public
input into draft legislation while it is being
developed by the Government before it issubmitted to the Diet.

C

Privatization of Public Corporations:
Ensure that the process to restructure andprivatize public corporations is transparent
and that the private sector has opportunities toprovide input.

C

Postal Financial Institutions: Ensure thatthe transfer of postal services to a public
corporation is undertaken in a transparent
manner, curb expansion of product offeringsof postal financial institutions, and subject the
postal financial institutions to the same
standards as their private sector counterparts.

LEGAL SERVICES AND JUDICIAL SYSTEM REFORM
The creation of a legal environment in Japan that supports regulatory and structural reform and thatmeets the needs of international business is a critical element of a successful strategy for economic
recovery and restructuring. The Japanese legal system must be able to respond to the market’s need forthe efficient provision of international legal services, and provide a sound and effective foundation forthe conduct of business transactions in an increasingly deregulated environment.
The United States recognizes the important work Japan is doing in the area of judicial system reform, andurges that it be continued. One area that needs immediate and decisive reform, however, is the problemof outmoded restrictions on the delivery of international legal services in Japan. The current legal regime
imposes needless and unworkable restrictions on partnership and employment relationships between
Japanese lawyers (bengoshi) and foreign lawyers (gaiben) and on the ability of foreign lawyers topractice in an effective manner – creating an inhospitable environment for the provision of integrated
international legal services in Japan. This has had a detrimental impact on consumers of legal services inJapan who are unable to obtain necessary international legal expertise and advice in an efficient andtimely manner. For these reasons, the United States recommends that Japan take the following measures:
SUMMARY OF RECOMMENDATIONSC

Freedom of Association: Eliminate allprohibitions against freedom of association
between Japanese and foreign lawyers –including permitting partnerships between
Japanese lawyers and foreign lawyers, as wellas with their law firms – and allow foreign
lawyers and their law firms to employ
Japanese lawyers.

C

Professional Corporations and Limited
Liability Entities: Allow foreign lawyers
and law firms to choose freely the form ofbusiness used in establishing their offices inJapan, including recognizing limited liability
partnerships (LLPs) and limited liability
corporations (LLCs) of foreign law firms;
permit foreign lawyers to form professional
corporations just as bengoshi already can do;
and allow foreign lawyers and their law firms
to establish branch offices throughout Japanon an equal footing with Japanese
professional corporations.

8C

Eliminate Needless Restrictions on Foreign
Lawyers: Count all time that foreign lawyers
spend practicing in Japan towards theexperience requirement to qualify as agaiben; allow gaiben to provide advice on thelaw of third countries on the same basis asJapanese lawyers; and reduce documentary
requirements and the time required forprocessing applications to qualify as a gaiben.

C

Transparency and Fairness of Bar
Association Proceedings: Ensure that
Nichibenren and the mandatory local bar
associations provide gaiben with effective
opportunities to participate in thedevelopment and enforcement of rules
affecting them.

C

Legal Reform: Introduce legislation that will
improve the judicial system by increasing the
speed and efficiency of civil litigation andensuring effective judicial oversight ofadministrative agencies.

COMMERCIAL LAW
The United States commends Japan for its reform of the Commercial Code, which should introduce
needed flexibility into the organization, management and capital structure of Japanese companies.
Additional measures, however, are needed to facilitate merger and acquisition activities by both foreignand domestic firms, which will contribute to corporate restructuring in Japan and bring crucial
technologies, know-how, and employment to Japan’s economy. The Japanese economy will also benefit
from additional measures to improve corporate governance. Good corporate governance will improve theperformance of Japanese companies by ensuring that management strives to maximize shareholder value
through increased productivity and economically sound business decisions.
For these reasons, the United States encourages Japan to build on the actions it has already taken toreform the Commercial Code by taking the following measures:
SUMMARY OF RECOMMENDATIONSCRevise Industry Revitalization Law to
Facilitate M&As: Take concrete steps
towards introducing modern merger
techniques to facilitate merger and acquisition
activities in Japan through amendments to theIndustry Revitalization Law that would enablefirms seeking to restructure under the law to
use triangular merger and cash merger
approaches.

C

Flexibility in Merger Procedures: Publish
the agenda and time schedule of the Ministryof Justices’ study on introducing triangularmergers, cash mergers and short form(squeeze out) mergers into the Commercial
Code, with the goal of introducing legislation
in FY2004.

9C

Increase Information Available to
Shareholders for Proxy Voting: Make
publicly available on the Internet all securities
law reports and filings by publicly traded
companies; provide additional time forshareholders to review proxy materials before
shareholders meetings; and require disclosureof key information on the audit, competitionand nominating committees of companies that
adopt them.

C

Proxy Voting by Pension Funds: Requirepension fund managers to vote proxies for the
benefit of fund beneficiaries, to disclose theirvoting policies, and to maintain records oftheir actual proxy votes.

DISTRIBUTION
Japan's Three-Year Program for Promoting Regulatory Reform states that “the distribution sector
functions as a nexus connecting producers and consumers, and plays a major role in...improving thequality of life of the citizenry.” Te U.S. Government applauds the Three-Year Plan’s goal to “advance
regulatory reform of the distribution sector, including the abolition of regulations that impede free
corporate activities, to contribute to improving consumer convenience and expanding consumer choice,and to facilitate upgrading and improving the efficiency of the distribution sector as well as the
manifestation of ingenuity by distribution sector enterprises.”
The ability to move goods quickly and inexpensively from producers to consumers via air cargo is a key
measure of economic efficiency. In addition, a robust air cargo industry is essential for the proper
functioning of “just-in-time” supply systems for both retailers and manufacturers. The air cargo industry
has seen exponential growth in recent years and is now an essential tool for the conduct of international
business and for the timely distribution of goods and information. The United States notes the measures
the Japanese Government have taken to expedite customs clearance of air cargoes. More needs to bedone, however, in order to take full advantage of the economic benefits provided by the air cargoindustry. In addition to further modernizing customs clearance procedures, the United States urges Japanto rationalize the landing fees charged at its international airports.
SUMMARY OF RECOMMENDATIONSC

Airport Landing Fee Reform: Formulate
the level of landing fees in an open andtransparent manner, and based on the actual
cost of providing services.

C

Customs Clearance Availability: Provide
customs clearance availability 24 hours per
day and 365 days per year and apply overtime
charges only for after hours processing.

C

Expand U-clearance: Enable full preapproval clearance (U-clearance) regardlessof carrier used or if transiting multiple bonded
warehouses (OLT).

C

Expand Simplified Declaration
Procedures: Allow air carriers or authorizedcargo agents to serve as importers of record.

CC

De Minimis: Raise the de minimis value in
the Customs Clearance Law from 10,000 yen
to 30,000 yen.

Pre-clearance Declaration for Air Cargo:
Allow the processing of pre-clearance
declarations for air cargo prior to flightarrival.

10

ANNEXTELECOMMUNICATIONSI.

Eliminating Unnecessary Rules, Strengthening Regulatory Independence, andPromoting Greater Transparency. In 2002, the Japanese Government took a bold stepand called for a fundamental revision of the regulatory structure for telecommunicationsin Japan. Japan's Information and Communications Council recognized the importanceof reducing burdensome regulations where possible for telecommunications service
providers and overhauling outdated aspects of the regulatory regime such as the Type I/II
classification. Elimination of unnecessary regulation will reduce the cost of doing
business and allow carriers to provide more quickly the services that customers want.
The United States recommends that the Ministry of Public Management, Home Affairs,
Posts and Telecommunications (MPHPT) seek Diet approval in CY2003 of amendments
to the Telecommunications Business Law that links the regulatory requirements on
telecommunications service providers to the degree of market power they hold, thereby
deregulating competitive carriers and maintaining sound dominant carrier regulation.
Specifically:A.

Deregulating Competitive Carriers. The U.S. recommends that MPHPT seek Dietapproval in CY2003 for amendments to the Telecommunications Business Law
that would:
1.

Grant MPHPT explicit authority to forbear from applying legacy
regulations where competition in a market or market segment permits userinterests to be achieved without government intervention, and where risksof competitive abuses are minimal.

2.

Eliminate the Type I/II carrier distinction and classify carriers on atechnology-neutral system, distinguishing carriers by whether or not they
have market power, based on transparent criteria. Ensure that the
deregulated status currently accorded to Type II carriers is incorporated
into provisions affecting non-dominant carriers.

3.

For non-dominant carriers in competitive markets, provide authority to:a.

Institute class licenses, which do not require any application bytelecommunications service providers;b.

Replace tariff filing requirements with Internet-based public
notifications, eliminating ex-ante MPHPT procedures;c.

Eliminate all filing and notification requirements for contractbased services;d.

For interconnection, entrustment, and other business arrangements
between competitive carriers, eliminate all filing and notification
requirements;
Annex - 1

B.

e.

For initial licensing requirements, eliminate requirements toprovide detailed cost justifications, financial assumptions, andnetwork planning information beyond the general scope of services
and description of network;f.

For network expansion, eliminate approval processes, and limit any
notification requirements to brief general descriptions; andg.

Permit carriers to acquire and use wavelength-based IRU’s(indefeasible rights of use) for the provision of services.

Promoting Transparency and Strengthening Regulatory Independence. The UnitedStates observes that a number of cases have been brought to the newly established
Telecommunications Business Dispute Resolution Commission. While theCommission has the capacity to challenge MPHPT regulations and decisions, its
function is limited, particularly at the sensitive stage of early policy development.
The United States recommends that Japan revisit the question of an independent
regulator for the telecommunications sector to shield regulatory decision making
from political influence and undue influence of the companies it regulates. The
United States recommends that the Japanese Government take particular note ofsuggestions by Keidanren and other voices within Japan to:1.

Consider removing regulatory functions from the purview of a ministerial
agency and move them to a fully independent organization;

2.

Eliminate any requirement that the Japanese Government own a specified
amount of NTT shares;

3.

Eliminate ministerial interference in management operations of NTT,
including business plans and personnel decisions;4.

Establish meaningful sanction authority (imposition of fines, payments ofdamages, license restrictions) to punish anti-competitive behavior;

5.

In the area of equipment standards, work with telecommunicationsindustry organizations which have assumed quasi-regulatory functions toensure that those organizations adhere to the standards of transparency andnon-discrimination – including in access to information about
Telecommunications Technology Committee (TTC) processes and ability
to comment on TTC policy proposal – that MPHPT follows in its industry
study groups; andAnnex - 2

6.

II.

a.

Consider measures to strengthening the operation and effectivenessof Japan’s Dispute Resolution Commission, including steps tomaximize transparency in dispute settlement actions;b.

Draft laws and ordinances in a manner that clearly explains theapplication of provisions, so as to minimize the need for extensive
ministerial consultation; andc.

Refrain from applying public telecommunications rules to valueadded suppliers, including Internet access and transport providers.

Network Access and Promotion of Competition. Competitors’ access to bottleneck
facilities is essential to promote both facilities-based and service-based competition, key
Japanese Government goals. Relevant issues include:A.

.

As interim steps:

Dominant Carrier Regulation and Competition Safeguards. The United Statesrecommends that MPHPT ensure that a revised Telecommunications Business
Law retain obligations specific to carriers with a dominant position in Japan’s
market and give the Ministry the authority to enforce these obligations. In
particular, the United States recommends that MPHPT:
1.

Ensure in law and/or regulation non-discriminatory cost-based access topoles, ducts, conduits, and rights of way and provide transparent pricing
methodology for such access;2.

Establish methods for evaluating pricing abuses by dominant suppliers(e.g. imputation tests) for voice as well as data services;3.

Make the entry of NTT East and West into long-distance service
conditional on broader access to their Operation Support Systems (OSS);

4.

Institute transparent means for evaluating whether leased lines are offered
at reasonable, competitive rates;

5.

Consider rules (e.g. separate affiliate transaction rules) to ensure that adominant supplier does not use revenues from a regulated service tosubsidize a non-regulated service; and6.

Develop competition-related performance metrics, including reporting
requirements, and financial penalties for missing metrics. Such metrics
should ensure that a dominant carrier treats competitors no less favorably
than it treats itself or its affiliates in matters such as provisioning, qualityof service, and repair and maintenance of all network services andfacilities needed by competitors.
Annex - 3

B.

Wireline Interconnection. With the introduction in FY2000 of a long-run
incremental costing (LRIC) methodology to calculate interconnection costs, Japan
has taken an important step towards instituting greater accountability in the settingof interconnection rates and ensuring that competing carriers have access to the
NTT East and West networks at cost-oriented, transparent, and reasonable rates.
In continuing the reform of NTT’s interconnection regime, the United Statesrecommends that Japan:
1.

In the spirit of its 2000 pledge to review interconnection rates andstructure, remove non-traffic sensitive costs from metered interconnection
rates, starting in FY2003;

2.

To permit an objective evaluation of NTT East’s and West’s ability toabsorb non-traffic sensitive costs out of existing monthly rates, require
NTT East and West to document, in a transparent manner:a.

Precisely which costs are currently recovered from monthly
subscriber line charges;b.

How such costs are identified and allocated between different
services (e.g. ISDN, DSL, leased lines etc.); andc.

The assumptions behind such cost recovery, including inter alia
cost recovery already achieved through initial subscriber line
charges, depreciation rates used, and allowable profit margins.

3.

Introduce an open, impartial, and objective process for use of traffic data
for the LRIC model;

4.

If traffic data period chosen diverges from the period corresponding toother aspects of the model, provide an opportunity to change other inputs
as well, to reflect latest technology, equipment prices, and other costs;

5.

Consider differentiating interconnection rates between regional carriers(through slower reductions for a higher-cost company, but not rateincreases), taking into account dangers of (and methods to prevent) anticompetitive price squeezes;

6.

If a long-term transition to alternate costing methodologies is to beconsidered, ensure competitors’ continued participation in the process, andcontinued accountability and transparency both of NTT costs and MPHPT
decisions used as a basis for setting rates; and7.

Consider transitioning to a bill-and-keep cost-recovery mechanism for arange of network access functions.
Annex - 4

C.

Mobile Termination Rates. The United States recommends that Japan:
1.

In accordance with Japan’s Telecommunications Business Law and its
2002 commitment to ensure competitive interconnection rates fordominant wireless networks, institute an objective and transparent meansfor evaluating whether wireless termination rates are set at reasonable,
competitive levels; and2.

For wireline carriers seeking to interconnect with mobile operators, ensurethat the current practice of permitting discriminatory treatment in thesetting of retail rates is eliminated, consistent with Japan’s WTO
obligations.

D.

Non-Discrimination in Service Quality. For facilities where unbundling isrequired, the United States recommends that the Japanese Government require
NTT East and West to include among their interconnection terms and conditions aservice level agreements (SLA) similar to those offered to retail customers,
specifying the period within which NTT East and West must respond to a
disruption or deterioration of service.

E.

Multi-Party Interconnection. The United States recommends that the Japanese
Government require NTT to permit interconnection for traffic destined to a third
party terminating carrier regardless of whether interconnection agreements
between originating and terminating carriers have been concluded.

F.

Expanding Menu of Basic Service Interconnection. The United States urges theJapanese Government require NTT regional companies to expand the list offunctions available on an interconnection basis to include all services currently
available to NTT customers, consistent with Japan’s WTO Reference Paper
commitments. In particular, require NTT East and West to provide emergency
services (110) to competitors at cost-oriented, tariffed rates.

G.

Rights of Way. The United States urges Japan to continue to improve the rights
of way regime through annual reviews of rights of way guidelines. In particular,
the United States recommends that Japan:
1.

Extend the interconnection obligations that MPHPT has placed on certain
parts of NTT’s networks (e.g. up to the manhole closest to the switch) toother bottleneck facilities, including conduits and ducts linking fiber loops
and customer premises; and2.

Ensure that lessors adhere to fair standards for burden-sharing associatedwith facility modification.

Annex - 5

III.

Measures to Promote Advanced Technologies and Services. The United States andJapan share a common policy goal to expand the adoption of the Internet and information
technology in order to stimulate growth, increase productivity and raise the quality of life.
The U.S.-Japan Telecommunications Working Group under this initiative provides atimely opportunity to exchange views on the experience of both countries, identify
market-based approaches which contribute to expansion and use advanced
telecommunications technologies, and facilitate the mutual understanding of regulatory
processes in both countries. The United States proposes that, where possible, theWorking Group enhance its dialogue by inviting experts from government and the private
sector as guest speakers to share their views.

Annex - 6

INFORMATION TECHNOLOGIESI.

Removing Regulatory and Non-Regulatory Barriers. Japan continues to makeprogress in fostering an environment that will promote the use of the Internet and thegrowth of e-commerce. The Japanese Government recognizes that legal and otherbarriers remain which hinder e-commerce and has identified the “enhancement of ecommerce” and the “enhancement of consumer protection” as key priorities in the 2002
e-Japan Priority Policy Program. In line with the goals of these priorities, the UnitedStates urges the Japanese Government to:A.

Remove remaining barriers in existing laws and regulations that hinder ecommerce, such as requirements for face-to-face or paper-based transactions andother hindrances to business-to-business (B-to-B) and business-to-consumer (Bto-C) e-commerce; and amend laws and regulations as necessary to allow
electronic notifications and transactions in sectors in which they are currently
barred.

B.

Establish a flexible Alternative Dispute Resolution (ADR) system for e-commercethat would allow persons (including non-attorneys) to provide mediation andarbitration services for profit.

C.

Ensure that new laws, ordinances, and guidelines enacted to regulate legitimate
online businesses and e-commerce follow the U.S.-Japan mutually recognizedprinciple of private sector self-regulation, and do not over-regulate or hinder ecommerce.

D.

Ensure that e-commerce guidelines remain flexible and appropriate for evolving
changes in technology and the marketplace by providing ongoing opportunities forreview and comment by interested parties and requiring that all new guidelines
and revisions are subject to the Public Comment Procedure.

E.

Implement measures to increase private sector input at all stages of the policymaking process, from conceptualization to implementation, including:1.

Utilizing information technology to make public/private-sector dialogue
interactive and transparent;

2.

Ensuring meaningful public comment periods that provide a minimum of
30 days, and that comments received are seriously considered and reflectedin the final measures and actions that are implemented; and3.

Increasing the number and diversity of private sector members of the IT
Strategic Headquarters.

Annex - 7

II.

Strengthening the Protection of Intellectual Property Rights. The United Statescommends the Japanese Government for raising awareness of key intellectual property
issues that need to be addressed in the “Intellectual Property Policy Outline” issued by thePrime Minister’s Strategic Council on Intellectual Property on July 3, 2002. In line with
the Strategic Council’s recognition of the economic and cultural importance ofintellectual property and its objectives to promote the creation and strengthen theprotection of intellectual property, the United States urges the Japanese Government toadopt the following recommendations to address the challenges of the digital age:A.

Copyright Term Extension. Extend Japan’s terms of copyright protection inalignment with the current global trend toward extending terms to life of theauthor plus seventy years for works generally, and to 95 years from publication forworks for which the term is not based on a human life.

B.

Statutory Damages. Strengthen the enforcement system against intellectual
property infringement by adopting a statutory damage system that will act as adeterrent against infringing activities, ensure that right holders are fairly
compensated for the losses suffered by infringement, and free judicial resourcesfrom the costly and difficult burden of having to establish and calculate actual
damages.

C.

Software Asset Management. Affirm that Japan’s current system for managementof software assets is effective in ensuring that software procured by the Japanese
Government is appropriately licensed and legitimately used.

D.

Temporary Copy Protection. The Japanese Government took a significant step
forward by recognizing that “temporary storage” implicates the reproduction right.
However, this recognition of temporary copies has not been widely disseminatedand the scope of protection remains vague. Given the importance of this newinterpretation, the United States urges Japan to provide certainty and clear
guidance to right holders by issuing an official statement on its interpretation thatclarifies the scope of protection for temporary copies.

E.

Internet Service Provider Liability Rules. Monitor compliance with theimplementing guidelines for ISP liability rules and their effectiveness for ensuringthat infringing materials are taken down quickly and adequate remedies areprovided for any injuries suffered. The United States also urges the Japanese
Government to support any revisions of the guidelines and/or the law for ISP
Liability Rules that may be necessary to ensure an effective notice and take down
system and the appropriate balance of the rights and interests of all parties.

F.

Technological Protection Measures. Clarify the scope of anti-circumvention rules
to provide a sufficient level of security for digital content.

Annex - 8

G.

III.

Intellectual Property Policies. Ensure that any Cabinet orders, ministerial
ordinances, notifications, guidelines or other measures prepared for the purpose of
implementing the Basic Measures in the “Proposed Intellectual Property Basic
Law,” the policy goals of the “Intellectual Property Policy Outline,” and any
related subsequent measures and goals are subject to the Public Comment
Procedures; that a minimum period of 30 days is provided for comments, and thatcomments received are seriously considered and reflected in the final measuresand actions that are implemented. In addition, ensure that the implementation of
the “Intellectual Property Basic Law” measures and policy goals are in compliancewith international obligations, standards, and norms.

Promoting and Facilitating Public and Private Sector Use of E-Commerce. The
evolution of the Internet as a way to conduct commerce has highlighted the borderlessnature of the global economy. To promote confidence in the online environment,
governments continue to modify or implement new legal frameworks, where appropriate,
for issues such as protection of personal data and security of transactions. In some cases,
governments are looking to the private sector to provide the best solutions. The UnitedStates urges the Japanese Government to play a positive but minimal role in promoting
the growth of electronic commerce, with emphasis on private sector self-regulatory
mechanisms and technology-neutral solutions driven by innovation and market forces.
A.

Privacy. Recognizing that the Diet will consider legislation on privacy, the UnitedStates urges the Japanese Government to utilize the Public Comment Procedures,providing a minimum 30-day comment period to the maximum extent possible, indeveloping any implementing ordinances and other measures required by the newlaw. In addition, the United States proposes that Japan take steps to support aself-regulatory framework for privacy and encourage the private sector’s
development of authentication systems which do not unduly intrude on
individuals’ personal privacy.

B.

Promote ADR. The 2002 e-Japan Priority Policy Program recognizes the need toenhance consumer protection through establishment of an Alternative Dispute
Resolution (ADR) framework for B-to-C e-commerce. The United Statesrecommends that the Japanese Government establish an ADR Framework that
promotes private-sector led ADR mechanisms to resolve both B-to-C and also Bto-B e-commerce disputes, which enhance protection for small- and medium-size
enterprises wishing to engage in e-commerce.

C.

Electronic Signatures. To ensure that the technology-neutral approach of Japan’s
Law Concerning Electronic Signatures and Certification is apparent in the law’s
implementing regulations as well as in future laws, the United States recommends
that the Japanese Government:
1.

Affirm that electronic records, with or without electronic signaturesattached, may be submitted as proof in court, and such records will not bedenied legal effect merely because they are in electronic form;
Annex - 9

D.

IV.

2.

Ensure that the revisions to the law’s implementing regulations, expectedin fall 2002, reflect its technology neutrality; and3.

Emphasize in the proposed “Law Concerning Digital Signature
Administration by Local Governments” and its implementation that local
governments should utilize all authentication technologies appropriate forthe transactions, including digital signatures/Public Key Infrastructure.

Network Security. The United States welcomes Japan’s efforts to ensure thesecurity and reliability of advanced computer and communications networks,
including those used by government entities and private enterprises. The UnitedStates understands that the Japanese Government plans to devise guidelines forthe inspection of computer systems, as well as introduce a registration system for
network security inspectors. The United States urges Japan to:1.

Develop the guidelines in a transparent manner, ensuring that foreign anddomestic interested parties have the opportunity to review and commenton the draft guidelines.

2.

Confirm that inspections will not be mandatory for all private-sector firms
and work in conjunction with the private sector to develop and disseminate
best practices for network security.

3.

Ensure that a registration system for network security inspectors is
implemented in a transparent and consistent manner and allows forregistration by both domestic and foreign network security inspection
service providers.

Expanding Procurement Opportunities for IT-related Goods and Services. Japan’s
2002 e-Japan Priority Policy Program strives to digitize administrative procedures at alllevels of government, building the foundation of electronic government online services.
As a result, public institutions will dramatically increase their purchases of hardware,
software, and network infrastructure. The Japanese Government can play an importantrole in promoting the principles of open competition, transparency, and private sector-led
innovation in IT-related procurement.
A.

IT Procurement Rules. As the Japanese Government adopts new procurement
policies for information systems, the United States recommends that Japan takesteps to ensure that the new rules are:1.

Implemented in a transparent and consistent manner throughout all
ministries;

Annex - 10

B.

C.

2.

Effective in facilitating fair and open procurement procedures; and,3.

Adopted by local and prefectural governments as they continue to develop
e-government systems.

Online Bidding. As the Japanese Government prepares to launch online bidding
for non-public works by the end of FY2003, the United States urges the Japanese
Government to ensure that the online procurement systems:
1.

Promote fair and open tendering procedures; and2.

Support the concepts of transparency, efficiency, security, and private
sector leadership, as recognized in the “Advancing E-Government”
statement under the US-Japan E-Initiatives.

E-Education. Recognizing that the Japanese Government – through the 2002 eJapan Priority Policy Program – aims to improve IT literacy and utilization of PCbased Internet in public schools, the United States proposes that the two
Governments plan to cooperate in 2003 on an event that promotes private sector
technological solutions for e-education objectives of local school districts.

Annex - 11

ENERGY
I.

II.

Independent Regulatory Authority. The U.S. Government has consistently stressed theimportance of the independence of the regulatory authorities for the electricity and gas
sectors. The United States welcomed the establishment in 2001 of the Electricity Market
Division and the Gas Market Division within the Ministry of Economy, Trade andIndustry (METI). If Japan is to attract new investment in new infrastructure, however,these Divisions must be – and must be seen to be – free from undue political and industry
influences. To this end, the United States recommends that the Japanese Government:
A.

Continue reviewing the adequacy of expert staffing assigned to the Electricity
Market Division and the Gas Market Division to ensure that staffing is consistent
with the sizable monitoring and enforcement responsibilities required by therevised Gas and Electric Utility Industry Laws;

B.

Provide these Divisions with an independently funded budget sufficient to ensure
adequate enforcement and monitoring;C.

Refrain from accepting detailees from any energy or energy service provider andrequire their staff to disclose any financial interest in energy or energy service
providers, and recuse themselves from any decision in which they have a financial
interest; andD.

Clearly define the scope and division of regulatory powers and responsibilities
between the Electricity Market and Gas Market Divisions on the one hand, andthe policy making divisions within METI on the other.

Reform Process – Setting Policy Goals. To promote investment that will foster a stableenergy market and infrastructure, as well as new entry, the U.S. Government recommends
that the Japanese Government take the following measures:
A.

Expeditiously clarify and define the type of market structure that Japan will adopt
in the electricity and gas sectors.

B.

Establish timetables for the energy sector regulatory reform process needed toachieve the market structure it has defined.

C.

Complete all necessary reform initiatives in order to launch the selected market
design in the gas and electricity sectors by the end of JFY2003. The U.S.
Government also urges the Japanese Government to provide opportunities for
public comment throughout the regulatory reform process in this sector.

Annex - 12

III.

Electricity Sector. The Electricity Industry Committee has articulated that Japan needs aclearly delineated electricity sector reform policy that provides a stable and fair electricity
supply system. To achieve this goal, Japan must develop and implement measures thatwill provide the access and transparency necessary to enable market participants andpotential entrants to make sound business and investment decisions. Such measures
include development of a system that will provide transparent prices for electricity sold inwholesale markets, accurate and timely information to all market participants regarding
the availability and prices of transmission services, strengthened provisions for nondiscriminatory access to transmission and distribution services, assurance of adequate
interconnection between electricity service areas to support efficient use of electricity
generation as well as Japan’s goal of a competitive national power exchange, andelimination of legal and regulatory barriers to entry by new market participants.
A.

Access and Transparency. The Electricity Industry Committee has articulated theneed to ensure that Japan’s electricity network serves as a common infrastructure
for power providers and enables transparent and fair competition among all
market players. The United States welcomes the Committee’s examination of theneutrality and transparency of Japan’s transmission and distribution systems. To
promote neutrality and transparency, the U.S. Government recommends that
METI take important next steps toward creating the framework for a competitiveelectricity market, including:1.

Develop and implement a system to provide timely and accurate
information about available transmission capacity to all market
participants (similar to OASIS).

2.

Implement operational unbundling of generation and retail services fromtransmission, distribution, and other activities to ensure transparent andunbiased calculation of available transmission capacity, and to ensure theprovision of nondiscriminatory transmission and distribution services toall market participants. (The U.S. Government’s view is that structural or
operational unbundling are the only effective means of achieving thesegoals. If the Japanese Government elects not to implement even
operational unbundling, the U.S. Government recommends that METI
clarify how the alternative means it selects is as effective.)

3.

In keeping with the Electricity Industry Committee’s stated objective,
establish a system to enable economically efficient electricity transactions
over wider geographic areas and timely construction of grid-related
facilities if needed to support such transactions. (The U.S. Government
notes that provision and maintenance of an adequate transmission systemis essential to sustaining fair competition in a market over the long term.)

4.

Implement measures to mandate greater accounting transparency for
power providers in order to ensure fairness in cost allocation, including
eliminating pancaking of transmission tariffs.
Annex - 13

B.

5.

Develop measures to allow industrial users to respond to price signals
through time-of-use metering and real-time price information.

6.

Take concrete measures to allow retail price responses when establishing anationwide, competitive wholesale electricity market. (The U.S.
Government notes that while establishment of a nationwide electricity
market without operational unbundling and without creation of
independent entities to administer calculation of available transmission
capacity may offer some economic benefits, it would be difficult toestimate their magnitude ex ante, because discrimination in the provisionof transmission services would likely continue to persist to a significant
degree and potential buyers might still have reason to rely on their own
generation rather than buy at a lower price on the exchange. Transmission
constraints also may preclude economically desirable transactions. The
U.S. Government further notes that “behavioral” remedies fordiscrimination in the transmission sector (e.g., monitoring for prohibited
abusive practices) have not proved adequate in the United States and othercountries, leading to reliance on “structural” measures such as
unbundling.)

7.

Given the questionable effectiveness of the existing network rules(including ex post monitoring and transmission tariff examination) andinformation firewalls, take further concrete steps to ensure that theelectricity network secures fairness and transparency for all market
players, including:a.

Providing transparent interconnection charges to transmission
facilities for all market participants; andb.

Developing and implementing guidelines for pricing and provisionof transmission support network services (i.e., ancillary services),such as load balancing and load following.

Ensuring Adequacy of Transmission Infrastructure. A reliable, competitive
national power market requires an adequate transmission infrastructure.
Accordingly, it is desirable to assess the adequacy of the existing transmission
system to support the pattern of generation and trade that a competitive national
market would tend to induce. The U.S. Government recommends that theJapanese Government undertake the following measures by the end of CY2003:
1.

Undertake a study to determine the pattern of generation that would result
if the nation’s existing generation capacity were always used optimally tomeet fluctuations in demand (i.e., regional economic dispatch) and if
transmission capacity were always available at reasonable cost;Annex - 14

C.

2.

Undertake a power flow study to demonstrate that Japan has adequate
interconnection capability to operate its generation infrastructure in suchan economically optimal manner, as would occur if a national power
market were established; and3.

If such a study reveals inadequacies in interconnection capability needed
to support a competitive national power market, develop concretemeasures to remedy such inadequacies where economical.

New Entry of Competitive Electricity Suppliers. The U.S. Government welcomesthe Electricity Industry Committee’s stated objective of establishing a retailmarket in which consumers can choose from diverse services and prices offeredby multiple suppliers through competition. Based on our experience, the U.S.
Government believes that opportunities for new entry into the electricity supply
market comprise one of the steps necessary to achieve this goal. As such, the U.S.
Government recommends that METI take the following additional steps topromote new market entry:
1.

Complete a publicly available assessment of existing regulatory
requirements for siting of new generating units and transmission lines andthe potential for streamlining of measures within METI’s jurisdiction by
the end of JFY2002.

2.

Develop and make public within JFY2003 a concrete plan and schedule
for expanded retail choice, including the necessary technical and practicalmeasures, which will provide market participants and potential new
entrants with a clear understanding of the market environment, fostering
investment and ensuring adequate supply.

3.

Privatize the Electric Power Development Company (EPDC) in JFY2003
in a manner that promotes competition in the electricity sector andprovides a fair opportunity for all market participants to purchase EPDC
assets.

Annex - 15

IV.

Natural Gas Sector. The Gas Market Reform Study Group set out numerous importantreform principles in its April 2002 report, including the need for creation of an efficient,transparent, fair, and competitive gas market. In addition, the newly established Urban
Heat Energy Subcommittee (of the Advisory Committee for Natural Resources andEnergy) has reiterated the necessity of ensuring fair competition in the energy market as awhole, recognizing the link between gas and electricity market liberalization. The
Subcommittee has also targeted the need for predictability of the gas market to foster
investment necessary to promote a stable gas supply. To achieve these commendable
goals, the U.S. Government recommends that the Japanese Government undertake thefollowing crucial steps to promote open and non-discriminatory access to LNG terminal
facilities and gas pipelines, guarantee transparent pricing of gas transport services, ensure
adequacy of pipelines and terminal facilities to meet growing demand, encourage newentry into the gas market, and expand liberalization to more gas customers.
A.

Access and Transparency. To promote effective use of the gas pipeline network
and a competitive gas and LNG market, the U.S. Government recommends that
METI take the following necessary steps:
1.

Unbundle transportation activities from marketing and other activities byimplementing measures beyond firewalls and separation of accounts toguarantee that all competing suppliers have equal access to information on
the price and availability of pipeline and LNG terminal services;2.

Direct the recently established Gas Policy Small Committee and Gas
Safety Small Committee to conduct their discussions in a transparent
manner and open for public comment, and direct the Urban Heat Energy
Subcommittee to publish any recommendations emerging fromdiscussions by these advisory bodies;

3.

Provide transparent usage charges for pipeline and LNG facilities for all
market participants;

4.

Carry out the following measures proposed by the Gas Market Reform
Study Group in its April 2002 report:a.

Develop and implement guidelines for public disclosure of pipeline
network and LNG terminal usage information;b.

Require that LNG terminal owners create and make available to allapplicants documents clearly detailing conditions and proceduresfor terminal use; andc.

Require that LNG terminal owners provide written explanations toparties denied use of these terminals.

Annex - 16

5.

B.

C.

Expand drafting and filing requirements for natural gas transportation
contracts to ensure that all gas suppliers can compete in a fair manner innatural gas wholesale and retail markets.

Ensuring Adequacy of Transportation Infrastructure. The Japanese Government’splanned expansion of natural gas use requires sufficient gas transportation
infrastructure. The U.S. Government welcomes the gas pipeline construction andinterconnection proposals set forth by the Study Group on Gas Market Reform in
JFY2001. In keeping with these proposals and the Urban Heat Energy
Subcommittee’s interest in promoting establishment of an effective pipeline
network, the U.S. Government recommends that METI:
1.

Establish guidelines for determining the need for construction of new
pipelines and LNG facilities; and2.

Based on these guidelines, improve incentives to promote construction of
new pipelines between the service areas of Japan's major gas suppliers andnew LNG facilities within Japan’s electricity service areas.

New Entry of Competitive Gas Suppliers. To expand consumer choice, theJapanese Government needs to promote competition among current gas suppliers
and facilitate new entry by competitive suppliers. New entry by gas suppliers andelectricity suppliers requires sufficient transmission infrastructure. A larger poolof customers (including new electricity generators) would also attract new market
entry. The U.S. Government therefore recommends that the Japanese
Government:
1.

Conduct a publicly available assessment of major regulatory requirements
for siting of new pipelines and LNG facilities and the potential for
streamlining of those siting requirements; and2.

Expand gas market liberalization to promote gas supplier choice andimproved benefits for a greater number of consumers.

Annex - 17

MEDICAL DEVICES AND PHARMACEUTICALSI.

Medical Device and Pharmaceutical Pricing Reform and Related Issues. To date,Japan has utilized a combination of price cuts and co-payment increases to meet the fiscal
demands of its healthcare system. However, Japan is now pursuing a morecomprehensive approach to reform. The U.S. Government welcomes this approach
which emphasizes the patient’s perspective and the importance of efficiency, R&D,
specialization, and innovation. This approach should also consider how different cost
structures in various parts of the healthcare system influence each other (such as length of
hospital stays) and how faster access to innovative products can result in cost savings. As
this occurs, the U.S. Government urges Japan to:A.

Establish a Prime Minister's council on comprehensive healthcare reform thatwould provide meaningful access for all stakeholders, including foreignindustries, to present and discuss ideas;

B.

Continue to provide foreign industry with meaningful access to discussions the
Ministry of Health, Labor and Welfare’s major policy paper titled, “Toward
Reinforcing the Global Competitiveness of the Pharmaceutical Industry, Mainstayof the Century of Life: An Outline of a Vision of the Industry.” These
discussions provide important opportunities to address the links between initial
pricing, re-pricing and development. Steps should also be taken to ensure that
implementation of the paper occurs in a nondiscriminatory manner.

C.

Ensure that the medical device and pharmaceutical pricing processes provide
adequate direct access, including pre-filing consultations, for applicants to discuss
product characterizations with decision makers. Such access would include:
1.

Direct consultation with the Health Insurance Bureau (HIB) officials who
draft pricing recommendations for the Drug Pricing Organization (DPO)
and the Special Organization for Insurance-covered Medical Materials(SOIMM) regarding applicants’ pricing requests as well as therecommendations HIB makes to DPO and SOIMM; and2.

Allow applicants to present opinions to and hear explanations from the
DPO or SOIMM at its first meeting.

D.

Increase the transparency of the medical device and pharmaceutical pricing
processes by clarifying what data (type and source) are used to characterize
medical devices and pharmaceuticals for pricing.

E.

Periodically review the new and expanded premium pricing systems for medical
devices and pharmaceuticals to ensure that premiums are being used to fullyrecognize and encourage innovation as intended.

Annex - 18

II.

F.

Ensure that the special characteristics and regulatory requirements of biologic
products are reflected in the pricing and repricing of such products.

G.

Provide all stakeholders, including foreign industries, meaningful access to any
discussions regarding the possible utilization of a prospective payment system ordiagnostic related groups to ensure continued access to advanced medical devices
and pharmaceuticals.

H.

Introduce a reimbursement procedure that recognizes the innovativeness of more
effective diagnostic equipment, e.g., imaging devices and in-vitro diagnostics.

Medical Device and Pharmaceutical Regulatory Reform and Related Issues. The
reform of the Pharmaceutical Affairs Law and the establishment of a new review agency
to conduct medical device and pharmaceutical approvals are important opportunities toimprove the speed and efficiency of Japan’s regulatory systems as well as to adapt to the
new challenges of the bio-genomic age. The U.S. Government supports Japan's efforts todevelop a regulatory system that embraces the ideas of efficiency, harmonization and thelatest globally accepted science. We welcome the continued involvement of ourindustries in this process. As this process continues, the U.S. Government encourages
Japan to:A.

In the development and adoption of any user-fee systems used by the new review
agency, Japan should:
1.

Consult actively with all industry stakeholders through a cooperative
process regarding appropriate fee-for-service structures and levels toensues that they are transparent, predictable and equitable as well as
methods of assessing the efficiency of the new agency; and2.

Ensure that all user-fees are used to supplement the new agency’s budget
for the purpose of increasing resources dedicated to faster approvals of
new products and indications.

B.

Improve the transparency and predictability of Japan’s Post Marketing Systems
for medical devices and pharmaceuticals. The U. S. Government recommends
that MHLW should ensure that manufacturers have direct access to MHLW’ssafety officials (internal and outside experts) as well as have the ability to present
global safety data that will be given balanced consideration in evaluating adverse
reactions.

C.

Continue science-based discussions with all stakeholders, including foreignindustries, that take into full consideration common international practices
regarding the definitions and labeling requirements of biological products.

Annex - 19

III.

D.

Develop and implement the proposal regarding the “Megatrial Center” while
ensuring that MHLW provides all industry stakeholders with meaningful andimpartial access to the process, and assure that manufacturers retain control of
their products as well as studies conducted with their products and all associatedintellectual property.

E.

Ensure that continuing medical device regulatory harmonization efforts in areas
such as classifications, data requirements, testing standards and Quality Systemregulations, proceed while giving maximum consideration to common
international practices.

Nutritional Supplements. Japan’s market for nutritional supplements is undergoingliberalization. As these efforts continue, the U.S. Government encourages Japan tocontinue to ensure that the data requirements of the regulatory system should bereasonable and appropriate, and limited to that which is necessary to ensure safety andefficacy.

Annex - 20

FINANCIAL SERVICES
I.

Specific Measures. The United States welcomes regulatory reform in the following
areas at the earliest possible date:A.

Permit the Postal Financial Institutions (yucho and kampo) to employ the asset
management services of investment advisory companies through direct onshore
trust arrangements (tokutei shintaku) without the requirement to convert asset
positions into cash before changing asset managers;

B.

Increase the DC pension plan contribution limits to a level that makes DC pension
plans a viable retirement savings option for employees. Permit employees tomatch the contributions of their employers as one mechanism to increase
contribution limits. Assure that contribution limits for defined contribution plans
make them a competitive alternative to defined benefit plans in corporations thatoffer their employees a choice between DC and DB plans;

C.

Allow defined contribution plan providers to submit for review and approval abasic prototype “safe harbor” DC pension plan that, once approved, could then be
adopted cost effectively by small- and medium-sized companies after notificationof the authorities and a waiting period, without requiring further review andapproval of the basic plan structure;D.

Permit multiple classes of shares for investment trusts to provide more flexibility
and efficiency in structuring products;

E.

Further improve rules governing Money Management Funds (MMFs) with respect
to mark-to-market accounting, maturity, credit quality, and diversification;

F.

Revise the E-Notification Law to include lenders subject to the money lending
business law to allow customers who have consented to electronic notification toreceive notification by electronic means; andG.

Work closely with the private financial services community to review current
requirements for financial institution reporting and record keeping, and revise or
remove overlapping or duplicative disclosure and reporting requirements. Allowfinancial institutions to maintain records in electronic form, and where possible, to
distribute reports and filings by electronic means.

Annex - 21

II.

Transparency. To improve transparency in financial sector regulatory and supervisory
practice, the United States would welcome measures in the following areas at the earliest
possible date:A.

In line with the announced goal of carefully reviewing the activities of public
sector corporations and avoiding competition with the private sector, we requestthat any proposed report or legislative action relating to the financial service
activities proposed for the Postal Financial Institutions (yucho and kampo) be thesubject of full public notice and comment and consideration before theirintroduction.

B.

The operations and decision making of industry associations that have a selfregulatory, investor-protection, or other public policy role should be conducted ina transparent and open fashion. Specifically, the United States recommends that:C.

1.

All proposed rulemaking by industry associations should be madeavailable for public comment, and that comments received from the publicshould be seriously considered in the formation of final rules governingassociation members; and2.

Written materials – including regulations, supervisory standards and otherguidance, operating rules and procedures, market studies, and otherstatistical compendia – should be made available to the public
electronically and in paper form at reasonable costs of production andduplication.

As a complement to self-regulatory organizations, we request that the Japanesefinancial authorities encourage and work with private sector financial industry
associations established to represent the views and the expertise of their members.

Annex - 22

COMPETITION POLICYI.

Independence of JFTC. The Japan Fair Trade Commission (JFTC) must have both theappearance and the reality of independence if it is to be effective in promoting andsafeguarding competition in the Japanese market. To this end, the United Statesrecommends that Japan introduce legislation in the next ordinary session of the Diet thatwould change JFTC’s organizational status to that of an independent agency under the
Cabinet Office as early in JFY2003 as is practicable.

II.

JFTC Resources. JFTC continues to lack sufficient resources for accomplishing its
missions of investigating and redressing anticompetitive activities and promoting
competition throughout the Japanese economy. The United States recommends thatJapan:

III.

A.

Continue to increase the staff and budget of JFTC substantially and steadily, withat least a 50 person increase in JFY2003 in the personnel levels of divisions
responsible for investigations, mergers and acquisitions, and related activities; andB.

Establish an office within JFTC composed of graduate-level economists who, by
providing economic analysis and expertise, can help ensure the economicallysound application of competition principles to JFTC investigations andcompetition advocacy activities.

Effectiveness of JFTC Enforcement. JFTC must have effective enforcement tools at its
disposal if it is to be able to keep ahead of increasing sophistication of firms engaging in
anticompetitive practices. In particular, JFTC’s investigatory and enforcement powers
should be at levels commensurate with those of the antitrust enforcement authorities inother major countries. The United States urges that Japan:
A.

Strengthen JFTC Investigation Powers. Undertake a comprehensive review of
JFTC’s investigatory, remedial and sanction powers, with the goal of submittingby early 2004 legislation to amend the Antimonopoly Act (AMA) that would
ensure that JFTC’s powers are equivalent to those of other major antitrust
enforcement authorities in OECD countries. This review should include such
issues as:
1.

Providing JFTC with authority to reduce or eliminate surcharges forwhistle-blowers and for enterprises with serious financial hardship;

2.

Strengthening JFTC search and investigative powers for purposes ofcriminal accusations;

3.

Revising AMA criminal accusation procedures to be consistent withprocedures used in other crimes;

Annex - 23

IV.

4.

Increasing penalties for interference or non-compliance with JFTC
investigations;

5.

Extending the statute of limitations period (sochi kigen) for issuance of
cease-and-desist orders by JFTC to three years; and6.

Increasing the maximum term of imprisonment for criminal violations of
the AMA to 5 years, thereby extending the statute of limitations(prescription) period to 5 years as well.

B.

Enhance AMA Administrative Sanctions. Introduce legislation to increase
surcharge levels significantly, including for small- and medium-sized enterprises,
so that they will have a substantial deterrent effect, and expand the scope ofviolations to which surcharge payment orders can be applied.

C.

Make Cartel Activity Per Se Illegal. Strengthen JFTC’s ability to takeenforcement action against hardcore cartels and bid rigging conspiracies byintroducing legislation that would eliminate the requirement to prove that suchconduct resulted in a substantial restraint of competition.

D.

Increase Criminal AMA Enforcement. Encourage the Ministry of Justice (MOJ),
the Tokyo High Prosecutors Office and JFTC to increase the number of cases inwhich AMA violations are prosecuted criminally, and institute a mechanism forcloser coordination between the Tokyo High Prosecutors Office and JFTC during
the course of JFTC investigations that are likely to lead to the filing of a criminal
accusation.

E.

Provide AMA Seminar Program for the Judiciary. Encourage the Supreme Court
and JFTC to work together to develop a series of seminars for Tokyo High Court(and other) judges aimed at providing a solid understanding of the legal andeconomic underpinnings for JFTC and private sector actions brought pursuant to
the AMA.

Measures to Address Bid Rigging. Bid rigging harms both the competitive process andJapanese taxpayers, and undermines respect for competition principles and for the
Antimonopoly Act. Most damaging is government official support and assistance in bid
rigging conspiracies. In order to significantly reduce bid rigging, the United States urgesthat Japan:
A.

Implement the Kansei Dango Act. Take measures to implement fully the recentlyenacted law addressing assistance given by government officials to bid rigging
conspiracies (kansei dango). Such measures should include:
1.

Adoption by JFTC of procedures for determining the participation of
government officials in bid rigging conspiracies;

Annex - 24

V.

2.

Implementation of procedures by JFTC for providing materials and othernecessary assistance to the heads of ministries and agencies for conducting
investigations that are required by those entities; and3.

Appointment by each covered ministry and agency of a “designatedofficial” who will be responsible for conducting the investigations
required by the Act.

B.

Collect Overcharges from Dango Participants. Initiate a government-wide study,
led by the Ministry of Land, Infrastructure and Transport (MLIT) with theparticipation of JFTC and other appropriate ministries and agencies, on
methodologies for the calculation of overcharges resulting from bid rigging
activities and on necessary administrative procedures for ensuring the collectionof such overcharges from bid rigging participants, with the goal of instituting
effective procedures for collecting overcharges by May 2003.

C.

Assist Citizen Suits Filed Pursuant to Local Autonomy Act. In light of thebenefits to Japanese taxpayers and society that result from citizen suits that are
filed pursuant to section 242 of the Local Autonomy Act and that seek recovery by
local governments of overcharges suffered as a result of bid rigging, provide
reasonable assistance to the courts in those cases, including:1.

Provision by JFTC of information and materials in its possession relevantto the case; and2.

Offering the expertise of the JFTC and other relevant ministries andagencies in the calculation of overcharges.

Competition and Regulatory Reform. Regulatory reform in Japan, if it is to be
successful, must be based on market principles, and must have as its goal the creation ofcompetitive markets. To this end, the United States urges that Japan:A.

Create Competitive Markets in the Energy Sector. Solicit active JFTC input into
Japan’s plans for deregulation of the electricity and gas sectors, including withrespect to the creation of a sound and competitive power exchange market.

B.

Prevent Anticompetitive Exclusionary Behavior by Dominant
Telecommunications Carriers. Ensure that JFTC is empowered and encouraged toapply the AMA fully and actively to exclusionary conduct by dominant carriers in
the telecommunications sector and that JFTC’s advice is obtained and fully
considered before any proposed reforms of the Telecommunications Business
Law are submitted to the Diet.

Annex - 25

C.

Ensure Procompetitive Privatization of Public Corporations and other Public
Entities. Ensure that the restructuring and privatization of public corporations andother public entities is accomplished in a manner that does not impede, and in factenhances, competition, including by requesting JFTC to review and provide input
on any privatization or reorganization plans.

D.

Monitor Competitive Conditions in Structurally Non-Competitive Markets. Takeproactive measures to promote and safeguard competition in sectors characterized
by non-competitive market structures.

Annex - 26

TRANSPARENCY AND OTHER GOVERNMENT PRACTICESI.

II.

Public Comment Procedures. Japan’s adoption in 1999 of Public Comment Procedures(PCP) offered the potential of significantly improving Japan’s regulatory system byallowing all interested parties to review and submit comments on draft regulations before
they are finalized and implemented. After three years of implementation of the PCP,
however, there are still serious concerns with its effectiveness. A survey on August 22,
2002 issued by the Ministry of Public Management, Home Affairs, Posts andTelecommunications (MPHPT) on the use of the PCP revealed serious and persistent
deficiencies in the use of the PCP. As in past years, a majority of comment periods wereless than 30 days. Moreover, the percentage of cases in which government agencies
incorporated comments into final regulations fell to only 14 percent of the 354 rules andregulations open for comment in FY2001. To address these concerns, and to make the
PCP a useful and effective regulatory mechanism, the United States urges the Japanese
Government to take the following measures:A.

Establish a centralized system that would allow parties to find solicitations ofpublic comments of interest to them in one location, preferably on the Internet.
This system would be for all solicitations of public comments, whether or not they
are covered by the PCP. The central location would be in addition to the various
means currently used by governmental agencies for solicitations of comments, andshould include solicitations of public comments by shingikai, kenkyukai,
benkyokai and other study groups;

B.

Require use of a minimum 30-day comment period, except in urgent cases forwhich a 14-day comment period could be used, and recommend use of a 60-day
comment period to the maximum extent possible; andC.

Undertake the legal steps necessary to incorporate the PCP into the Administrative
Procedure Act, a move that would strengthen it from a mere guideline to a law.

Special Zones for Structural Reform. The U.S. Government follows with interest theJapanese Government's proposal to establish Special Zones for Structural Reform. This
new approach to deregulation and structural reform, if effectively implemented, could
provide important opportunities for Japan to return to sustainable growth. As Japanmoves forward with this proposal, the United States recommends that:A.

The zones be selected and established in a transparent manner;

B.

A focus be placed on expanding market-entry opportunities, which is key toincreasing competitiveness;C.

Domestic and foreign companies alike have non-discriminatory access to operate
in the zones;

Annex - 27

III.

D.

The Headquarters for Special Zones for Structural Reform
establish a transparent review mechanism to determine the effectiveness of thezones;E.

The zones be established with the understanding that there be no limitation on theapproval of zones that cover similar sectors in other parts of Japan; andF.

Successful measures used in the zones be applied on a national basis as
expeditiously as possible.

Public Input into the Development of Legislation. Governmental agencies in Japangenerally do not provide opportunities for interested parties – other than those represented
on advisory councils or with special access – to have input into the development oflegislation before it is submitted to the Diet. The United States highly commends the
Cabinet Secretariat for taking the initiative to provide the public with a rare and important
opportunity to review the “Summary of the Proposed Intellectual Property Basic Law”
before it was finalized and submitted to the Diet. The U.S. Government therefore urges
other Japanese Government ministries and agencies to follow this example andimplement the practice of facilitating public input into draft legislation while it is being
developed by the Government before it is submitted to the Diet. While other legislationof interest to the United States is cited in various parts of the this document in regard to
this issue, two specific examples of the need for public input into legislation are:A.

Life Insurance Policyholder Protection Corporation. The Japanese Government’s
current pledge to enact fiscal measures to fund the Life Insurance Policyholder
Protection Corporation (Life PPC) will expire in March 2003. Legislation toaddress future funding of the Life PPC will be drafted prior to March 2003 andholds the potential to impact the financial health and operations of both domestic
and foreign life insurance companies and consequently, public confidence in theindustry. The United States urges the Japanese Government to fully utilize andimplement the Public Comment Procedures and afford the insurance industry(both domestic and foreign) and all interested parties meaningful opportunities tobe informed of, comment on, and exchange views with officials on proposedplans, draft legislation, amendments to existing regulations and other regulatory
measures related to the Life PPC prior to their implementation and or submission
to the Diet.

B.

Non-Life PPC. In the event legislation is considered to address funding of the
Non-Life PPC, the U.S. Government urges the Japanese Government to follow asimilar approach as recommended above in Section III A.

Annex - 28

IV.

V.

Privatization of Public Corporations. The United States notes with interest Prime
Minister Koizumi’s drive to restructure and privatize Japan’s public corporations. The
United States also recognizes that, if implemented vigorously, this reform effort could
have a major impact on the Japanese economy, stimulating competition, increasing
efficiency, and leading to a more productive use of resources. As reform of the public
corporations advances, the United States urges Japan to:A.

Conduct the restructuring and privatization in a transparent manner; andB.

Ensure that domestic and foreign private sector entities that will or may beaffected by the reform have an opportunity to provide input into reform plans,such as through use of the Public Comment Procedures.

Postal Financial Institutions. The U.S. Government continues to share concerns voiced
by Keidanren and others related to the effect of the postal financial institutions – postal
savings (yucho) and postal insurance (kampo) – on the efficient operation of Japan’s
financial markets. The drafting of implementing rules and regulations, which will guidethe creation of the Public Postal Corporation in 2003 and establish operational guidelinesof the three postal services (mail delivery, savings, and insurance), provides an important
opportunity for the Japanese Government to take concrete steps to address key
transparency and competition issues related to these organizations.
A.

B.

Transparency. The process for the transfer of the postal services from the Postal
Services Agency to a public postal corporation and its possible effects on theprivate sector remain unclear. To remedy this, the U.S. Government urges
MPHPT to take steps to sufficiently inform and seek input from the public(including foreign insurers) on all aspects of the transfer that may affect private
sector operations in the relevant sectors. This includes affording the insurance
industry and other interested parties (both domestic and foreign) meaningful
opportunities to be informed of, comment on, and exchange views with MPHPT
officials on:
1.

MPHPT-proposed plans and draft legislation prior to their submission to
the Diet; and2.

Draft guidelines and other regulatory measures prior to theirimplementation, with full utilization and implementation of the Public
Comment Procedures.

Curb Expansion. In transferring the postal services and establishing a public
corporation in 2003, the United States recommends that Japan prohibit the postal
financial institutions (kampo and yucho) from underwriting any new insurance
products or originating any new non-principal-guaranteed investment products.

Annex - 29

C.

Same Standards. In transferring the postal services and establishing a public
corporation in 2003, the United States recommends that, in order to create a levelplaying field between the postal financial institutions and their private sector
competitors, Japan subject the postal financial institutions to the same laws, levelof taxation, safety net contribution requirements, and standards of regulation as
their private sector counterparts.

D.

Privatization. The U.S. Government notes that Prime Minister Koizumi has
received recommendations from the private panel he tasked with studying thepossible privatization of the postal services organizations (including the postal
financial institutions). As any modifications to the existing system could have asignificant impact on competition in, and the effective operation of, the broader
insurance market in Japan, it is important that any decisions on privatization bemade and implemented in an open and transparent manner. This would include
the same measures as outlined above in Section V A.

Annex - 30

LEGAL SERVICES AND JUDICIAL SYSTEM REFORM
I.

Legal Services
A.

B.

Freedom of Association. The United States urges that Japan eliminate allprohibitions against freedom of association between Japanese lawyers (bengoshi)
and registered foreign lawyers (gaiben), as well as between bengoshi and foreign
lawyers (or their law firms) practicing outside of Japan, and to allow them, aslegal professionals of equal status but with differing scopes of practice, todetermine their own forms of association. In this regard, the United Statesrecommends that Japan:
1.

Permit gaiben to enter into partnership relationships with bengoshi or
bengoshi professional corporations that allow them to form a single
unified law firm with a name of their choice, and for the law firm toprovide integrated legal advice and services on any and all matters within
the competence of its members;

2.

Allow law firms, whether composed solely of gaiben or of gaiben andbengoshi partners, to employ bengoshi; and3.

Ensure that neither the Japanese Federation of Bar Associations(Nichibenren) nor the local bar associations restrict bengoshi fromentering into partnership or other forms of association with foreign
lawyers outside of Japan or with international law firms headquarteredoutside of Japan.

Professional Corporations and Limited Liability Entities. Gaiben and foreign law
firms should be able to choose freely the business entity they use in establishing
their offices in Japan. In this regard, the United States urges that Japan:
1.

Ensure that its legal system provides full legal recognition to limited
liability partnerships and limited liability corporations of foreign law firms
operating in Japan, so that the offices of foreign law firms in Japan may beregistered as branches of the respective home country entities;

2.

Permit gaiben to form professional corporations as an alternative toestablishing branches of home country entities; and3.

Allow law firms composed of gaiben or of gaiben and bengoshi, whateverbusiness form they may use in Japan, to establish branch offices
throughout Japan on an equal footing with Japanese professional
corporations.

Annex - 31

C.

D.

II.

Eliminate Needless Restrictions on Gaiben. Legal practice in Japan by registeredforeign lawyers can provide important expertise and other benefits to Japanese
consumers of legal services, leading to more efficient business transactions. For
these reasons, it is important to minimize barriers to practice by gaiben. To thisend, the United States urges that Japan:
1.

Ensure that the Ministry of Justice (MOJ) take necessary measures so that
all of the time in Japan spent practicing the law of a foreign lawyer’s homejurisdiction is counted toward meeting the experience requirement toqualify as a gaiben;

2.

Ensure that gaiben are permitted to provide advice on third country law on
the same basis as such advice may be provided by bengoshi; and3.

Take steps to reduce the documentary requirements and time required forprocessing applications for qualification as a gaiben.

Transparency and Fairness in Bar Association Proceedings. The United Statesrecommends that Japan take necessary measures to ensure that Nichibenren andthe mandatory local bar associations provide gaiben with effective opportunities
to participate in the development and enforcement of all laws and rules that affectthem, including the receipt of reasonable notice and an opportunity to be heard,
and including participation on disciplinary committees that review alleged
misconduct of gaiben.

Legal Reform
A.

Improvements in the Civil Litigation System. The United States urges that Japan
expeditiously implement the Program for Promoting Justice System Reform. In
particular, the United States recommends that Japan, in order to meet its goals of
increasing the speed and efficiency of civil litigation and reducing by 50 percent
the length of trials, submit legislation in the next ordinary session of the Diet thatwould provide for measures to promote efficient scheduling of hearings and to
facilitate litigants’ collection of evidence at early stages of litigation.

B.

Strengthen Judicial Oversight over Administrative Agencies. The United Statesurges that Japan intensify the Office for Promotion of Justice System Reform’s
comprehensive study of necessary measures to ensure effective judicial oversightof administrative agencies, and make available opportunities for the public toprovide timely input into that process, so as to meet Japan’s stated goal of taking
necessary measures to ensure such effective judicial oversight by November 2004.

Annex - 32

COMMERCIAL LAW
I.

II.

Flexibility in Merger Procedures. Modern merger techniques, such as triangularmergers and cash mergers, are important in effecting a variety of transactions ininternational business, and in facilitating corporate restructuring in Japan. The inability
under current Japanese law to utilize these merger techniques impedes foreign investment
in Japan, denying the Japanese economy the benefits of an in-flow of capital, technology
and managerial know-how. To fill this hole in the Japanese legal system, the UnitedStates recommends that Japan:
A.

Introduce legislation in the next ordinary session of the Diet to amend the Industry
Revitalization Law to enable foreign partners to use triangular merger and cash
merger techniques when acquiring Japanese firms pursuant to restructuring plansapproved under that law; andB.

Make public by the end of JFY2002 the participants and work plan (agenda andtime schedule) of the Ministry of Justice’s (MOJ’s) study regarding introduction
into the Commercial Code of triangular mergers and cash mergers (including shortform (squeeze out) mergers, and MOJ’s plans for soliciting input from theinternational business and legal communities, with the goal of submitting
legislation by FY2004 to address these issues.

Improved Corporate Governance. Good corporate governance will lead to
improvements in the performance of companies, as management strives to maximize
shareholder value through increased productivity and sound commercial decisions.
Ensuring that management is accountable to shareholders, through disclosure of
information necessary for intelligent voting of proxies and encouragement of active
shareholder voting, is one of the fundamental aspects of a good corporate governancesystem. To these ends, the United States urges that Japan:A.

Require that pension fund managers vote their proxies for the benefit of fundbeneficiaries, maintain accurate records of their proxy voting and disclose theirpolicy or guidelines on the voting of proxies;

B.

Ensure that securities law reports and filings of all publicly traded companies are
made electronically, collected in one or more centralized web sites, and madepublicly available on a timely basis;

C.

Require that proxy materials be made available to shareholders at least 30 days
prior to the relevant shareholders meeting; andD.

Require disclosure of the names of each member of the audit, compensation andnominating committees of a company, to the extent such committees exist,
whether each such member is independent and if not independent, the nature of
the relationship that makes the member not independent.

Annex - 33

DISTRIBUTION
I.

Airport Landing Fee Reform. Landing fees at Narita and Kansai international airports
are the world's highest. Lower landing fees will promote a financially healthy airline
industry that could in turn help stimulate growth in ancillary industries and the wider
economy. The U.S. Government urges Japan to:A.

Formulate the level of landing fees in an open and transparent manner, using
internationally accepted accounting standards, and based on the actual cost ofproviding services as per International Civil Aviation Organization (ICAO)
recommendations; andB.

Negotiate with all airlines in established multilateral fora with the goal being amutually satisfactory agreement on a meaningful reduction in landing fees.

II.

Increase De Minimis Customs Limit. The volume of express shipments in Japan
continues to increase. The current low de minimis level slows the clearance process andresults in higher administrative costs. In order to meet the high expectations of Japanese
consumers and to facilitate the timely import of small goods and packages into Japan, theUnited States urges Japan to increase the de minimis value in the Customs Clearance Law
from 10,000 yen to 30,000 yen (except for designated cargo).

III.

Expand U-clearance. Expanding U-clearance capability from Narita (Baraki Terminal)
to other bonded warehouses outside airports and abolishing Z-status clearance forOverland Transfer (OLT) material inside airports would lower costs and increase
efficiency without compromising the customs clearance process. As long as the integrityof the shipment is maintained, then multiple bonded warehouses should not be necessary.
This is costly to carriers (13.9 yen per kilo) and time consuming – burdens that are passed
on to the consumer in the form of higher shipping costs. The U.S. Government urges
Japan to enable full pre-approval clearance (U-clearance) regardless of carrier used or if
transiting multiple bonded warehouses (OLT).

IV.

Customs Clearance Availability. Currently, no customs processing takes place after
normal working hours. Nonetheless, packages remaining in customs after normal
working hours are assessed overtime charges resulting in excessively high user fees. The
U.S. Government urges Japan to provide customs clearance availability 24 hours per day
and 365 days per year at certain high-volume entry points and to levy overtime charges
only if packages are processed after normal working hours.

Annex - 34

V.

Expand Simplified Declaration Procedures. The United States welcomes Japan’s
continued efforts to simplify its clearance procedures for imported goods. Simplified
customs clearance procedures hold the potential to allow Customs officials to focus onother important areas such as inspections and post-clearance investigations. The UnitedStates believes further efficiency gains can be made if the simplified customs clearance
process is made available to a wider selection of businesses. The U.S. Government urges
Japan to allow air carriers or authorized cargo agents to serve as importers of record.
Besides yielding additional efficiency gains, this would also reduce concern over the nonpayment of duties and taxes, as the carriers and agents would make such payments onbehalf of the true importers.

VI.

Pre-clearance Declaration for Air Cargo. Current procedures mandate that customs
declarations for air cargo be made after flights have landed, which results in duplicationof work and unnecessary delays. The U.S. Government urges Japan to allow for theprocessing of pre-clearance declarations for air cargo prior to flight arrival as soon as therequired cargo information is filed. Such a policy would speed up cargo shipments,
prevent backlogs in customs processing and reduce overflow situations in warehouses.

Annex - 35