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
December 7, 2005

Launched by President George Bush and Prime Minister Junichiro Koizumi in 2001 under the
U.S.-Japan Economic Partnership for Growth, the Regulatory Reform and Competition Policy
Initiative (Regulatory Reform Initiative) promotes economic growth and open markets byfocusing on sectoral and cross-sectoral issues related to regulatory reform and competition
policy. Now in its fifth year, the Initiative continues to play a central role to further strengthen
trade and economic relations between the United States and Japan.
The United States welcomes Prime Minister Koizumi’s continued efforts to reform the Japanese
economy, which have helped put Japan on a growth trajectory and created greater opportunities
for trade and investment. The United States also welcomes the good work of both the Council
for the Promotion of Regulatory Reform and the Headquarters for Promotion of Special Zones
for Structural Reform, which have been strong and effective advocates of regulatory andstructural reform.
The recommendations included in this year’s submission place an emphasis on reform measuresin key sectors and cross-cutting areas and are intended to support economic growth and further
open markets in Japan. In addition, the United States continues to make a special effort to focus
on issues Prime Minister Koizumi and his Administration have identified as important areas forreform, such as telecommunications, information technologies, intellectual property rights,
medical, agriculture, privatization, and competition policy.
The United States is providing the proposals included in the Summary of Recommendations andthe Annex to the Government of Japan to serve as the basis for discussions over the coming
months in the High-Level Officials Group and the Working Groups established under the
Regulatory Reform Initiative. These Groups will in turn develop a fifth annual report to the
President and Prime Minister specifying the progress made under this Initiative, including reform
measures to be taken by each Government.
During the first four years of this Initiative, private-sector representatives periodically joined theWorking 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 months tocontinue to integrate the private sector in this Initiative.
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 RECOMMENDATIONS ........................................................1
TELECOMMUNICATIONS....................................................................................2
INFORMATION TECHNOLOGIES.......................................................................3
MEDICAL DEVICES AND PHARMACEUTICALS ...................................................4
FINANCIAL SERVICES............................................................................................5
COMPETITION POLICY........................................................................................6
TRANSPARENCY AND OTHER GOVERNMENT PRACTICES..............................7
PRIVATIZATION .....................................................................................................8
LEGAL SYSTEMS REFORM.....................................................................................9
COMMERCIAL LAW.............................................................................................10
DISTRIBUTION .....................................................................................................11
ANNEX ........................................................................................ ANNEX -1
TELECOMMUNICATIONS......................................................................ANNEX -2
INFORMATION TECHNOLOGIES.........................................................ANNEX -7
MEDICAL DEVICES AND PHARMACEUTICALS .................................... ANNEX-16
FINANCIAL SERVICES............................................................................. ANNEX-22
COMPETITON POLICY.......................................................................... ANNEX-25
TRANSPARENCY AND OTHER GOVERNMENT PRACTICES............... ANNEX-28
PRIVATIZATION ...................................................................................... ANNEX-33
LEGAL SYSTEMS REFORM...................................................................... ANNEX-37
COMMERCIAL LAW................................................................................ ANNEX-38
DISTRIBUTION ........................................................................................ ANNEX-41

SUMMARY OF RECOMMENDATIONS

1TELECOMMUNICATIONSJapanese consumers continue to adopt advanced telecommunications technologies and services at a rapid
pace. In 2005, Japan had over 20 million subscribers for broadband Internet access by the end of Juneand 37 million third-generation (3G) mobile phone subscribers by the end of August. In addition, theMinistry of Internal Affairs and Communications (MIC) registered 10 million Voice Over Internet
Protocol (VOIP) subscribers by the end of September this year. In particular, the United Statescommends Japan for stimulating competition in the oligopolistic mobile phone market by providing
spectrum licenses to three new market entrants, who are expected to begin services in 2006. The newlicenses bring opportunities for U.S. investment and equipment in Japan’s growing telecom market, andnew market entrants promise to ease the high mobile per-minute charges for Japanese consumers.
The United States, however, cautions Japan to ensure a competitive environment for the new market
entrants as they deploy the necessary mobile network infrastructure. Furthermore, competition policy inthe wireline voice market, which is shifting from analog-based communications to Internet Protocol, must
continue to encourage innovation while balancing the market dynamics between the dominant carriers
owned by NTT and the competitive carriers. Though recognizing the enormous progress made byregulatory reform over the past five years, the United States urges MIC not to allow NTT to undermine
the safeguards that established intra-company competition in 1999.
Building on the progress achieved in the previous year, the United States also suggests that the
Telecommunications Working Group continue to invite experts from government and the private sector toprovide their perspectives on new and mutually important technology issues.
SUMMARY OF RECOMMENDATIONS•Regulatory Independence: Take steps totransfer regulatory functions to anindependent agency not under ministerial
authority, and eliminate legal requirements forthe government to own shares of NTT.

•

Mobile Termination Rates: Investigate if
rates for termination to dominant mobile
carrier networks are set at reasonable,
competitive levels, and ensure competitive
neutrality in retail rate setting.

•Transparency and Technology Choice:
Increase public participation in MIC’s
regulatory and policy decisions, and institute a
clear policy of technology-neutral spectrum
licensing.

••

Maintaining Competition Safeguards:
Prevent abuses by carriers with market poweras technologies and services move towards“convergence.”

Spectrum Policy: Ensure that Japan’s
spectrum management policies and practices(such as licensing, allocation, testing, andfees) are more transparently administered,promote greater innovation, competition, andefficient spectrum use (in both the licensed
and license-exempt areas), and adhere totechnology-neutral principles.

•

Equipment Certification: Conclude a
Mutual Recognition Agreement between the
United States and Japan that would facilitate
more efficient trade in telecommunications
products, and streamline Suppliers’
Declaration of Conformity procedures.

•

Wireline Interconnection: Require separate
cost-oriented rates for NTT East and West,eliminate the cross-subsidy of interconnection
revenue, and ensure competitive neutrality inthe use of the universal service fund.

2

INFORMATION TECHNOLOGIES
Since 2001, the various e-Japan Strategies and Programs have effectively promoted the use of IT and ecommerce throughout Japan’s economy by removing regulatory barriers and placing increased emphasis
on private-sector input and leadership in the development and implementation of IT and e-commerce
policies. Japan’s forthcoming New IT Strategy will set goals for both the government and private sectors
to facilitate the creation of advanced IT infrastructures and greater use of IT and e-commerce. The First
Information Security Basic Plan, scheduled for release in early 2006, will emphasize a growing need for
information security policy. Japan will also conclude an extensive review of its Copyright Law by
FY2007. These and other efforts will have many significant repercussions on businesses and otherorganizations operating in Japan, on Japanese consumers, and on cross-border online transactions. This
year’s recommendations are designed to support Japan’s goals to promote greater IT and e-commerce use.
SUMMARY OF RECOMMENDATIONS•••Business Law in order to allow ISPs to use
new technologies to filter and block spam;and continue to openly seek private-sector
input on government information security
requirements.

IT and E-Commerce Policymaking: Ensure
the development and implementation of the
New IT Strategy promotes private sector
leadership and self-regulation; reaffirm theimportance of technology neutrality in IT
standards-setting as well as in Japan’s IT
policies in Asia; and ensure Japan’s IT and ecommerce policies are compatible withinternational practice.
IPR Protection: Strengthen protection of
intellectual property rights by extending theterm of protection for sound recordings andother works; implement stronger measures tostop online piracy of digital content; andincrease cooperation with the United States topromote greater protection and enforcementof IPR worldwide, especially in Asia.
Online Security: Implement Japan’s Privacy
Act transparently and consistently, review andcorrect inconsistencies between guidelines,
clarify guidelines’ mandatory or voluntary
nature, and publish information about
violations and corrective actions; work closelywith the private sector and other governments
to combat online nuisances; vigorously
enforce the Anti-Spam Law; remove legal
barriers related to the Telecommunications

3•

E-Commerce and Online Services: Permit
e-notification; ensure the private sector playsa central role in developing online-related
financial legislation, ensure such legislation iscompatible with international practice, andcoordinate IT-related financial reforms acrossgovernment; and promote technology
neutrality and private-sector input in efforts toincrease the use of e-medicine.

•

Government IT Procurement: Implement
reforms for government IT procurement,
focusing on ways to foster transparency andcompetition in bidding; set clear limits on
liability in contracts; promote wider
dissemination of the benefits of new IP
created through government-sponsored
projects; protect rights to IP incorporated into
procurement deliverables; and increase IP
training for procurement officers.

MEDICAL DEVICES AND PHARMACEUTICALSJapan is considering major changes to its healthcare system as it confronts the financial challenge offunding medical care for a rapidly aging society with a shrinking tax base. Japan spends about one-thirdof its healthcare funds on people aged 70 and over. The increased burden of caring for the elderly willcontribute significantly to an expected doubling of medical spending in Japan between 2006 and 2025.
Given the significant benefits Japan derives from the vast array of cutting-edge products manufactured by
U.S. medical device and pharmaceutical companies, it is important for the Japanese Government toprovide these companies with ample and meaningful opportunities to offer public input into thedevelopment of healthcare reform as it unfolds.
The United States also urges Japan to reform its reimbursement pricing and regulatory systems for
medical devices and pharmaceuticals to sustain the long-term fiscal viability of the healthcare system,
provide patients with rapid access to innovative products, and foster the development of even moreadvanced products. The Japanese Government should ensure its reimbursement pricing system promotes
the introduction of products that provide long-run cost savings by reducing the need for surgeries andlong hospital stays. Japan also should ensure its reimbursement system fosters clinical trials and R&D.
In addition, its regulatory system should facilitate faster introduction of new products. Of the leading 100
global medicines, only 73 are available in Japan. For medical devices, slow approvals leave Japan with
devices that are less advanced than those available in other countries. The United States urges theJapanese Government to take steps to ensure the Pharmaceuticals and Medical Devices Agency (PMDA)
achieves its goal of increasing the efficiency of medical device and pharmaceutical reviews. The
increased user fees that manufacturers are paying to fund PMDA operations should be disbursed toincrease the staffing and expertise of the agency, which should lead to faster reviews and approvals.
SUMMARY OF RECOMMENDATIONS••

in Japan; and improve the system for ensuring
the quality of manufacturing processes.

Pricing Reform: Ensure that any changes tothe reimbursement pricing system for medical
devices and pharmaceuticals recognize thevalue of innovation and the important role ofthe market; and use premium-pricing rules tofoster the development and introduction ofadvanced products that enhance and save
lives.
Regulatory Reform: Speed reviews andapprovals of medical devices andpharmaceuticals by using performance
metrics to improve the efficiency of Japan’s
regulatory system; help enable PMDA toincrease its expertise; take steps to increase
the attractiveness of conducting clinical trials

4•

Blood Products: Develop a reimbursement
pricing system that accounts for the special
characteristics of that industry and that is notbased on the pharmaceutical model; and allow
U.S. companies fair access to marketing andmanufacturing opportunities.

•

Nutritional Supplements: Increase thetransparency of the regulatory system for andderegulate the sale of nutritional supplements.

•

Cosmetics: Deregulate the sale of cosmetics
and quasi-drugs.

FINANCIAL SERVICESThe U.S. Government welcomes Japan’s continued progress in improving regulatory transparency andremoving barriers to foreign and domestic competition. Regulatory reform and improved accounting
standards, together with steady improvements in the professionalism and expertise of the Financial
Services Agency since its establishment in 1998 have contributed to notable changes in Japan’s financial
sector. U.S. and other foreign-owned firms have increased their presence in Japan’s financial markets,
which have in turn become increasingly global in terms of standards and diversity of participation.
We encourage Japan to continue its progress in establishing clear and consistent regulation andsupervision of financial institutions, in line with international standards and best practice. It is also
important that Japan use the forthcoming Investment Services Law and other vehicles to continue toeliminate unnecessary regulatory barriers to competition, consistent with the objectives of ensuring safety
and soundness as well as consumer protection. A more efficient and competitive financial sector can playa crucial role in strengthening Japan’s long-term economic growth potential.
SUMMARY OF RECOMMENDATIONS•••

Financial Regulatory Transparency: Buildon recent progress in expanding the body of
written interpretation of financial law by
expanding the scope of regulatory issues
eligible for clarification through the no-action
letter process, steadily increasing the numberof “reference cases” published on the FSA
web site to provide examples of FSA
interpretations, and establish other vehicles toprovide written interpretations of Japan’s
financial laws; and continue active use of the
public comment procedures and other efforts
to seek input on financial laws and regulations
from foreign and other private firms andbusiness associations.
Non-Bank Finance: Modernize the legal
framework for non-bank consumer andcommercial finance to provide a clear basis
for the enforceability of loan receivables, inorder to increase the supply of credit available
to consumers and small businesses.
Credit Bureaus: Create a legal andregulatory framework for a credit bureausystem that will foster greater sharing of
personal credit information among bona fide
lenders by providing for fair, open access tofull-file credit information.

5•

Trust Bank Law: Allow foreign bankbranches to engage in trust and banking
businesses concurrently, on equal footing withdomestic banks under the Concurrent
Operation Law.

•

Financial Conglomerate Regulation:
Eliminate ambiguity of the FSA Guidelines
for Financial Conglomerate Supervision by
establishing materiality thresholds todetermine the entities potentially subject tothe guidelines.

•

Defined Contribution Pensions: Foster
expanded use of corporate DefinedContribution (DC) pension programs throughmeasures including: increasing the tax
deductible contribution limit allowing
employee contributions, and providing for
limited early access to funds.

•

Investment Trusts: Harmonize theregulatory framework governing investment
advisory and investment trust management
activities; allow mergers and reduce obstacles
to the early termination of investment trusts.

COMPETITION POLICY
A well-structured competition policy – supported by a strong and effective Antimonopoly Act (AMA)
and enforcement policy – will provide great benefits to Japanese consumers and the business community,
and will promote the health and dynamism of the Japanese economy. The United States welcomes thesignificant improvements to Japan’s competition policy regime by the 2005 amendments to the AMA andlooks forward the effective implementation of those amendments. One key to effective implementation is
ensuring that the business community and the public have confidence that Japan Fair Trade Commission(JFTC) enforcement actions are applied in a fair and transparent manner. Further, despite improvements
to the AMA, recent events have demonstrated that bid rigging – often aided by government officials –continues to be a significant problem in Japan that needs to be addressed more aggressively. Bid rigging
injures Japanese taxpayers and the economy by raising costs for government projects, preventing needed
restructuring in important sectors, harming efficient bidders, and undermining confidence in thegovernment and in the benefits of competition.
To improve further Japan’s competition regime, the United States recommends that Japan take thefollowing measures:
SUMMARY OF RECOMMENDATIONS••

proposed recipients of warnings to submit
evidence and arguments in their defense prior
to issuance of the warning; and provide
opportunities for foreign firms andorganizations to submit views to the AMA
Basic Issues Study Group.

Strengthening the Effectiveness of
Antimonopoly Enforcement: Maximize theeffectiveness of JFTC’s leniency program by
ensuring application requirements do not
encourage firms to delay their applications
and by clarifying JFTC’s policy on
confidentiality of such applications; heighten
AMA compliance by encouraging tougher
sentencing of AMA violators, using JFTC’s
new investigating powers to strengthen
criminal enforcement, and adopting orrevising JFTC enforcement guidelines topromote AMA compliance; and strengthen
JFTC’s staff capabilities and resources byimproving economic analysis capabilities of
JFTC personnel.

•

Improving Reliability and Fairness of
JFTC Procedures: Establish clear criteria forstaying the execution of JFTC cease-anddesist and surcharge orders; provide proposed
recipients of such orders with effective
opportunities to make arguments in theirdefense, including by providing access to theevidence on which the order is based; allow

6

Addressing Bid Rigging: Adopt anadministrative leniency program within the
Ministry of Land, Infrastructure and Transport(MLIT) that will encourage companies toreport bid rigging; effectively implement themeasures announced by MLIT in July 2005 toprevent recurrence of bid rigging, including
by lengthening the minimum suspension ofdesignation period for repeat offenders andestablishing within the Ministry of Justiceprocedures for government lawsuits to recoverdamages suffered from bid-rigging practices;maximize the number of projects in which
competitive bidding is used; and strengthen
measures to address conflicts of interest
created by the Amakudari system.

TRANSPARENCY AND OTHER GOVERNMENT PRACTICESThe United States continues to address a broad range of issues under Transparency and Other
Government Practices with the aim of proposing to Japan ways to create a more transparent, fair, andaccountable regulatory system. Japan took welcome steps this year to revise its Public Comment
Procedures (PCP). As the effectiveness of these revisions remains to be seen, the United States continues
to make recommendations to improve PCP implementation.
Two notable additions to this chapter this year include recommendations related to public input into
policy development and foreign translations of Japanese laws. Given the often significant role ofadvisory councils (shingikai) and other government-commissioned study groups in Japanese policy
development, the United States recommends measures to increase their transparency and provide greater
opportunities for public input into deliberations of these groups. In addition, the United States welcomesJapan’s initiative to translate laws into foreign languages and proposes measures to help ensure this useful
initiative is as effective as possible. This year’s submission to Japan also includes proposals to promote
full implementation of the APEC Transparency Standards in the Asia-Pacific region, recommendations in
support of the innovative Special Zones program to promote deregulation, and steps to facilitate theremoval of regulatory barriers to the import of agricultural goods.
SUMMARY OF RECOMMENDATIONS••

Foreign Translations of Japanese Laws:
Continue consulting with the foreign business
community in Japan in both the planning
process for and the translations of Japaneselaws; and ensure allocation of sufficient
resources for timely translations.

•

APEC Transparency Standards: Work
jointly with the United States to achieve full
implementation of the APEC Transparency
Standards in the Asia-Pacific region.

•

Special Zones for Structural Reform:
Continue to emphasize transparency, market
entry and expeditious nationwide applicationof successful deregulation measures;
encourage foreign participation by publishingimportant zones information in English.

•

provide meaningful opportunities for input
from all interested parties.

Public Comment Procedures (PCP):
Ensure and evaluate the effectiveness ofrecent changes to the PCP, making further
revisions if recent reforms still provide
insufficient opportunities for meaningful
public input into the policymaking process.

Public Input into Policy Development –Advisory Groups: Increase the transparencyof government-sponsored advisory groups and7•

Public Input into the Development ofLegislation: Accelerate opportunities for
public input into draft legislation during thedevelopmental stage and prior to submission
to the Diet.

•

Bank Sales of Insurance: Ensure the banksales channel for insurance products is fully
liberalized no later than the end of 2007.

•

Insurance Cooperatives: Secure a levelplaying field between private companies andall cooperatives (kyosai) that offer insurance;
and initiate a review of regulated kyosai todevelop level-playing field reforms.

•

No Action Letters: Enhance theeffectiveness and increase the usage ofJapan’s no-action letter system.

•

Government Practices Relating toAgriculture: Remove regulatory barriers that
impede the import of agricultural goods.

PRIVATIZATION
Prime Minister Koizumi’s efforts to restructure and privatize Japan’s public corporations continue to beof considerable interest to the United States. If implemented vigorously, these reforms can have a major
impact on the Japanese economy, stimulating competition, and leading to a more productive use ofresources.
In this regard, the United States particularly welcomes Japan’s initiative to reform and privatize Japan
Post. The United States has long called for the elimination of tax and other advantages Japan Post hasover U.S., Japanese, and other private companies in Japan’s banking, insurance, and express delivery
markets. Japan has established a framework to make important progress in this direction with passage oflegislation by the Japanese Diet in October 2005. As Japan makes preparations to implement thesereforms, it is key that all necessary measures are taken to fully realize the legislation’s principle ofestablishing equivalent conditions of competition between Japan Post and the private sector. It is also
important that the preparatory process and implementation of these reforms be fully transparent to allinterested parties.
Highlights of this year’s recommendations on privatization are:
SUMMARY OF RECOMMENDATIONS•

Level Playing Field for Postal Savings andInsurance: Ensure Japan Post is required tomeet all tax, regulatory, and legal obligations
that are applied to private sector companies,
and that Japan Post is also subject to the same
supervisory standards and treatment.

•

Adequate Disclosure: Require Japan Post
entities to implement full disclosure andaccounting requirements on a level sufficient
to demonstrate that unfair cross-subsidization
does not occur among the new Japan Post
businesses as well as between thesebusinesses and the new public successor
corporation for postal savings and postal life
insurance.

•

Conditions of Competition and New
Products: Ensure a level playing field is infact created in Japan’s banking and insurance
sectors before the postal financial institutions
are permitted to introduce new lending
services, underwrite new or altered postal
insurance products, and originate nonprincipal-guaranteed investment products.

•

Level Playing Field for Express Delivery:
Ensure that Japan Post and its affiliatedinternational distribution services be clearly
separated from the universal mailing service;apply the same tax obligations to the Postal
Service Company and to private companies;
apply the same customs clearance procedures
for mail and packages handled by Japan Post
as those applied to private express carriers;
and ensure effective disclosure of the Postal
Service Company.
•

8

Full Transparency and Inclusiveness: Take
steps to make the preparatory process for theJapan Post reforms fully transparent,
including providing meaningful opportunities
for interested private-sector parties toexchange views in a timely way with related
government officials as well as members ofrelated Government-commissioned advisorycommittees and study groups. In addition,
ensure Public Comment Procedures are fully
utilized with respect to implementing
regulations, guidelines, Cabinet and otherorders, and other measures.

LEGAL SYSTEMS REFORM
A legal environment that is conducive to providing efficient international legal services to domestic andforeign companies and individuals will contribute significantly to the health of Japan’s economy. One of
the key factors in ensuring that companies and consumers in Japan have access to cost-effective, timely,and integrated legal services is the assurance of freedom of association between foreign lawyers andJapanese lawyers (bengoshi). The 2003 amendments to the Foreign Lawyers Law were a welcome andimportant step in that direction, but they will have a beneficial impact on the Japanese economy only ifthey are implemented by both the Ministry of Justice (MOJ) and the Japan Federation of Bar Associations(Nichibenren) with the liberalizing spirit that imbued the 2003 legislation. In addition, other impediments
to the provision of efficient international legal services remain to be addressed. For example, restrictions
on the ability of foreign law firms to establish multiple branch offices in Japan impede the ability to meetthe legal service needs of Japanese consumers. Moreover, current rules discourage those foreign lawyers
with a long-term interest in providing international legal services in Japan from becoming registeredforeign lawyers (gaiben).
To improve the legal environment for the provision of international legal services, the United Statesrecommends that Japan take the following measures:
SUMMARY OF RECOMMENDATIONS••

same benefits as bengoshi professional
corporations; and submit legislation to allow
foreign law firms and their gaiben partners inJapan to establish multiple branch offices inJapan without being required to form aseparate Japanese legal professional
corporation.

Ensuring Freedom of Association for
Foreign Lawyers: Take action, including
through continued discussions between the
Ministry of Justice and the Japan Federationof Bar Associations (Nichibenren) and othernecessary measures, to ensure that the rules
and regulations of Nichibenren and the local
bar associations are consistent with the letterand liberalizing spirit of the Foreign Lawyers
Law with regard to freedom of association
between foreign and Japanese lawyers, and do
not discriminate against foreign lawyers.

•

Permitting Professional Corporations and
Branches: Submit legislation to permit
foreign lawyers to form professional
corporations on the same basis and with the9Easing Minimum Qualification Criteria for
Foreign Lawyers: Amend the Foreign
Lawyers Law to permit all of the time that
foreign lawyers spend practicing the law of
their home jurisdiction in Japan to be counted
toward the three-year experience requirementfor qualification as a gaiben.

COMMERCIAL LAW
A modern commercial law regime that facilitates domestic and cross-border merger and acquisitiontransactions will promote efficient restructuring across the economy and maximize shareholder value tothe benefit of investors. An important component of a modern commercial law regime is rules that permit
and facilitate the use of modern merger techniques and tender offers. Another important component isstrong corporate governance mechanisms, since they have been shown to have a positive impact on
business performance, leading to more efficient operations and corporate structures, higher returns toshareholders and, ultimately, to a healthier economy. One of the most important preconditions for a good
corporate governance system are mechanisms that encourage and facilitate the active exercise ofshareholder rights, including active participation by both institutional and small shareholders in proxyvoting and accessible legal mechanisms to provide oversight of management and shareholder decisions.
The United States welcomes the measures already taken by Japan to modernize its Commercial Law andto encourage active proxy voting by institutional investors. However, more efforts are required if Japan’scommercial law system is to encourage increased investment in Japan, more efficient operations bycorporate managers, and higher returns to shareholders.
For these reasons, the United States urges Japan to take the following measures:
SUMMARY OF RECOMMENDATIONS•

Promoting Efficient Restructuring andShareholder Value: Implement rules
allowing triangular merger techniques in amanner that permits the use of shares listed on
major international exchanges and that
includes clear and predictable rules for tax
deferral; facilitate efficient tender offer bids
by allowing offers to be made conditional on
reasonable requirements and by requiring
corporate boards to state their views, based onfair and impartial analysis, on whether
stockholders should accept or reject tender
offers; facilitate corporate conversions toconsolidated companies (godo kaisha); andsimplify assertion of appraisal rights bydissenting shareholders.

•Protecting Foreign Firms Legitimately
Doing Business in Japan: Amend Company
Law to ensure that foreign firms doing
business legitimately through branch offices
are not subject to the prohibitions andliabilities set out in Article 821.

•

10

Promoting Good Corporate Governance:
Promote active proxy voting by institutional
investors by requiring government pension
fund managers to disclose their proxy voting
policies, adopting a fiduciary duty on private
pension fund managers to exercise proxyvoting rights for the benefit of fundbeneficiaries, and taking action so thatinvestment trust managers are obliged todisclose publicly their actual proxy voting
records; eliminate disincentives to proxyfights by allowing corporate boards toreimburse shareholders for the expenses ofsuccessful proxy solicitations; facilitate proxyvoting by encouraging stock exchanges inJapan to revise their rules to ensure effective
and efficient exercise of proxies, including
through use of electronic voting; and extend
the statute of limitations for court challenges
of unlawful special shareholder resolutions.

DISTRIBUTION
Lowering costs and increasing efficiency throughout the distribution system can contribute significantly
to strengthening Japan’s economy, benefits consumers, and creates a more competitive businessenvironment in this sector. While the United States welcomes recent reductions in landing fees at Narita
Airport, some new fees were introduced and others increased. (Narita landing fees remain among thehighest in the world.) There are many additional concerns about airport fees, including the lack of accessto information regarding large expansion projects at Japan’s airports, which has raised questions about
efficiency and how these projects will be financed. Transparency is also a concern with changing
operating rules at Haneda Airport.
The United States is also placing a focus this year on several other areas under Distribution. First, while
the United States notes steps taken by Japan in recent years to improve customs clearance procedures, iturges Japan to co-locate Customs officials with express carrier customers and allow Nippon AutomatedCargo Clearance System (NACCS) users to declare express items at any convenient Customs office.
Second, the United States is urging Japan to relax regulations in regard to the number of trucks private
express companies must have in local areas to start package delivery service to those localities. Third, theuse of credit, debit, and ATM cards is expanding at a rapid rate worldwide, but continued low card
acceptance at both traditional merchants and ATMs in Japan inconveniences Japanese residents anddiscourages tourism. The United States continues to urge Japan to further promote the use of credit anddebit cards by businesses and as payment for government services. Fourth, Japan’s current Road
Transport Vehicle Law (RTVL) procedures cannot reasonably accommodate auto leasing companies andother owners of large numbers of vehicles. The United States continues to urge Japan to consider changes
to the RTVL to facilitate registration and title transfer procedures.
SUMMARY OF RECOMMENDATIONS•

Airport Landing Fee Reform: Assuretransparency in the setting of fees, and reduce
fees.

•

Airline Sales Distribution: End the practiceof enforcing a 70 percent low pricing band on
tickets sold by airlines.

•

Airport Construction and Operations:
Establish a mechanism to ensure Narita
Airport’s project to extend runway B andother capital improvements at airports move
forward in a transparent way, and that theconcerns of U.S. and other carriers are taken
into account; and establish a mechanism bywhich carriers and other interested private-sector parties can be informed of andcomment on proposed rule changes at Haneda
Airport.

11•

Customs Procedures: Take additional steps
to streamline customs procedures.

•

Credit/Debit Cards: Further increase
acceptance of credit and debit cards as
payment for goods and services, and mandate
compliance with international standards forretail banking and ATM security.

•

Road Transport: Streamline changing fleet
vehicle registrations and registering title
transfers.

ANNEX

Annex - 1

TELECOMMUNICATIONS
I.

Promoting Regulatory Independence, Transparency, and Technology
Neutrality/Choice. The Ministry of Internal Affairs and Communications (MIC), which
combines regulatory oversight and policy promotion for the telecom sector, has long had
difficulty shielding the regulatory decision-making process from partisan influences. By
developing and implementing polices in a more transparent manner and adhering to theprinciple of technological neutrality in this regard, MIC will lessen the perception that its
decisions provide disproportionate benefits to larger companies with historical ties to thegovernment – at the expense of new entrants.
A.

To foster regulatory independence, the United States urges Japan to:
1. Develop a plan for moving regulatory functions from the purview of aministerial agency subject to direct political control to a fully independent
governmental organization; and2. Eliminate any requirements that the Japanese Government own a specified
amount of NTT shares and that foreign shareholding or a management role in
NTT be restricted.

B.

To foster greater transparency in policymaking and revision of
telecommunications regulations, the United States urges MIC to:
1. Open the selection process for Government-sponsored study groups such that
any interested stakeholder, foreign or domestic, is given the opportunity toparticipate;
2. Ensure that all public comment periods are a minimum of 30 days; and3. Provide interested parties with opportunities to comment on or reply to the
public comments that have been submitted before the policies or regulations
are finalized.

C.

To ensure that service providers can introduce innovative technologies, the UnitedStates urges Japan to:
1. Institute a clear policy of technology neutral licensing, separating, to the
maximum extent possible, operator choice of technology from the spectrum
assignment and service license process; and2. Ensure that it will not unduly promote, mandate, or favor specifictechnologies such as those developed through cooperative agreements withother countries.

Annex - 2

II.

Strengthening Competitive Safeguards on Dominant Carriers. In 2001, Japanestablished a framework for “asymmetrical regulation,” with stricter requirements ondesignated dominant carriers that control bottleneck facilities. In 2004, MIC further
deregulated competitive carriers by abolishing the Type I/II classification system.
However, as telecom services migrate to IP (Internet Protocol)-based networks and“convergence” becomes a reality, MIC should resist attempts to rollback the requirementson dominant carriers. The United States recommends that Japan continue to secure acompetitive environment for the telecom sector that does not hinder new market entrants,
competitive carriers, and foreign equipment suppliers.
A.

Dominant Carrier Regulation and Competition Safeguards. As part of thecompetition policy review that MIC began in October 2005, the United Statesurges Japan to respond to changing market conditions by:
1. Maintaining structural separation in the NTT Group company, to ensure that
the NTT group does not exploit wireline/wireless convergence to undermine
competition;
2. Ensuring that proposals to relax dominant carrier requirements adhere toobjective benchmarks for evaluating the state of competition in the telecom
sector;
3. Developing policies that promote cross-platform competition fortelecom/broadcasting convergence on IP-based networks; and4. Conducting an open forum on NTT’s reorganization plan, taking into due
consideration the principle of promoting intra-company competition asenshrined in the 1999 revision to the NTT Law.

B.

Procurement. The United States urges Japan to continue ensuring fairprocurement by dominant carriers such as the NTT regional companies by:
1. Providing a period for public comment on the appropriateness of renewing
obligations under the U.S.-Japan Network Channel Terminating Equipment(NCTE) Agreement as modified in the Third Report to the Leaders;
2. Examining NTT’s current system of limiting participation at earlier stages ofdevelopment and commercial trials of new technologies, if large-scale
deployment of standardized technologies is expected;
3. Ensuring that any MIC policy recommendations for technical requirements fornext-generation infrastructure are subject to an open and transparent process;andAnnex - 3

4. Opening procurement by the Japanese Government of telecommunications
services, including VOIP, to any supplier, including foreign operators, on a
non-discriminatory basis.
C.

Wireline Interconnection. Keeping in mind that the current LRIC model will
expire in 2008, and to ensure a competitive playing field under changing market
conditions, the United States urges Japan to:
1. Require NTT East and West to each set a cost-oriented interconnection rate,consistent with Japan’s WTO obligations, taking into account differing costsof the respective regions; and, as necessary, permit differential
interconnection rates between the regional carriers, taking into accountdangers of (and methods to prevent) anti-competitive price squeezes;
2. Consider transitioning to a bill-and-keep cost-recovery mechanism for thebroadest possible range of network access functions offered by NTT; and3. Eliminate the use of interconnection revenue as a source of crosssubsidization between NTT East and West, based on the activation of therevised universal service fund mechanism.

D.

III.

Universal Service. The United States urges Japan to ensure that the universal
service program is implemented in a competitively-neutral manner that gives all
eligible operators meaningful opportunities to access funding, and does not
simply result in further strengthening NTT’s dominance of local service.

Promoting Competition in the Mobile Sector and the Efficient Use of Spectrum.
Consistent with Japan’s vision of a “ubiquitous network society,” the United Statesrecommends that Japan increase flexibility and transparency in its spectrum policy, andapply principles of network and competition policy to the mobile sector.
A.

Mobile Termination Rates. Keeping in mind that Japan has committed, in its
Telecommunications Business Law as well as in the 2002 Regulatory Reform
Initiative’s Report to the Leaders, to ensuring competitive interconnection rates
for dominant wireless networks, the United States urges Japan to:
1. Institute an objective and transparent means for evaluating whether mobile
wireless termination rates are set at levels that reflect the principle of costorientation under efficient management, and to provide a clear basis forarbitration if commercial negotiations fail;
2. Institute competitive neutrality for wireline carriers seeking to interconnect
with mobile operators by eliminating the default right of mobile carriers
setting the retail rate; andAnnex - 4

3. Analyze NTT DoCoMo’s dominant position in the mobile sector and thedegree to which existing mobile carriers exert oligopolistic market power inthe sub market for call termination.
B.

New Market Entrants. With Japan’s licensing of three new market entrants for the
1.7GHz and 2GHz bands, as well as additional opportunities through leasing, theUnited States urges Japan to take strong significant steps to ensure a level playing
field for the new companies, including addressing such issues as:
1. Facilitating roaming on incumbent networks for reasonable rates;
2. Ensuring sufficient access to towers and tower sites;
3. Analyzing incumbents’ unused spectrum, determining criteria to identify“warehousing” (hoarding), and taking steps to eliminate it; and4. Facilitating the ability of licensed operators to lease, sub-lease, and exchange
spectrum with other service providers, by creating a secondary market.

C.

Spectrum Allocation For New Technology. The United States urges Japan to:
1. Begin a public process of identifying, allocating, and setting proposed
assignment dates, as soon as possible, for spectrum that can be used forinnovative wireless LAN (Local Area Network) technologies, fixed andmobile MAN (Metropolitan Area Network) services and other nonstandardized technologies;
2. Consider, where feasible, making spectrum available for such technologies onan unlicensed consumer usage or “license-exempt” basis;
3. Refrain from instituting privileged spectrum rights exclusively for preferredusers (e.g., home-entertainment equipment makers) when shared use would bepossible; and4. Review procedures for obtaining test licenses with a view to streamlining theprocess, making it more transparent, and establish procedural safeguards thatprevent incumbent companies from hindering the testing of competing
technologies.

C.

IV.

VOIP Over Mobile. The United States recommends that Japan take immediate
steps to create a flexible regulatory framework for Internet Protocol-based mobile
communications that allows both new and incumbent operators technology choiceand ensures that the licensing process is timely, objective, and transparent.

Promoting Trade in Telecommunications Equipment. The United States and Japan
have already taken positive steps towards facilitating more efficient trade in

Annex - 5

telecommunications products through mutual recognition of testing and certification
requirements. Technology is evolving at a rapid pace, and it has become essential toreduce the “time-to-market” as much as possible to keep up with demand for advanced
technologies and services. The United States recommends that Japan work towards
streamlining its certification process for telecom equipment, to benefit both domestic andforeign equipment makers.
A.

MRA. The United States proposes that the Governments of the United States andJapan conclude a Mutual Recognition Agreement (MRA) for requirements
relating to conformity assessment of telecommunications equipment so that theagreement will take effect by the end of CY2006.

B.

Review of Japan’s Conformity Assessment Requirements. With a view towards
removing burdensome requirements that do not reflect the technological realitiesof the global marketplace, the United States recommends that Japan seek industry
feedback in a transparent manner on its conformity assessment system, including:
1. Updating the Suppliers’ Declaration of Conformity (SDoC) system, which
was established in 2003, with particular attention to industry’s experience, tomake SDoC an efficient and attractive alternative to third-party certification;
and
2. Adopting a “family approval” approach for radio type approval proceduresthat allows modifications to radio equipment certifications without requiring a
new type approval registration.

V.

Removing Regulatory Impediments to Advanced Technologies and Services. The
United States looks forward to enhancing the Telecommunications Working Group
dialogue by inviting experts from government and the private sector as guest speakers toshare their views on timely topics mutually agreed upon by both governments. In
particular, the United States welcomes the opportunity to continue the regulatory
challenges in both countries of introducing new technologies and services, such as
Software Defined Radio (SDR) or Broadband Over Power Lines (BPL, also known asPower Line Communication or PLC).

Annex - 6

INFORMATION TECHNOLOGIESI.

IT and E-Commerce Policymaking. The various e-Japan Strategies and Programs haveeffectively promoted the use of IT and e-commerce throughout Japan’s economy tobenefit individuals, create more efficient e-government, and foster high value-added
business activities. In particular, Japan has made significant progress in promoting theuse of the Internet for electronic transactions. To ensure that its policies continue tofoster a vibrant IT sector, the United States urges Japan not to over-regulate or hinder ecommerce and related activities.
A.

New IT Strategy. The IT Strategic Headquarters (ITSH) is currently drafting
Japan’s New IT Strategy, which is scheduled for release in winter 2005-2006.
The New IT Strategy will set goals for 2010, for both the government and private
sectors, to facilitate the development of advanced IT infrastructures and greateruse of IT and e-commerce in Japan. This far-reaching strategy will likely have
many repercussions on businesses and other organizations operating in Japan aswell as Japanese consumers. The United States urges Japan to develop andimplement the New IT Strategy in a manner that promotes private-sector
leadership and self-regulation in IT and e-commerce by:
1.

Soliciting public comments on the New IT Strategy before its final
release;2.

Ensuring any Cabinet orders, ministerial ordinances, guidelines, or othermeasures prepared to implement the Strategy or its policy goals also are
open to public comments, that a minimum period of 30 days is provided
for comments, and that comments received are seriously considered andreflected as appropriate in the final measures and actions that are
implemented; and3.

Ensuring any implementation of the recommendation by the e-Japan
Evaluation Expert Committee that the New IT Strategy “select andconcentrate sectors” does not stifle private sector innovation or market
entry.

B.

Private-Sector Input. Japan has confirmed on several occasions the importance ofprivate-sector input in the development and implementation of IT and ecommerce policies. Given the complexities and emerging nature of these sectors,
it is critically important that a diverse range of views is sought out in any relevant
study groups.

C.

Technology Neutrality. In the 2005 Report to the Leaders, Japan stated theimportance of implementing laws, regulations, and guidelines related to IT in amanner that strives not to unduly promote, mandate, or favor specifictechnologies (technology neutrality), in order to provide maximum flexibility andencourage innovation in the private sector. The United States urges Japan to:

Annex - 7

D.

II.

1.

Strengthen its resolve in this regard by reaffirming the importance ofprivate-sector leadership in IT-related standards setting; and2.

Ensure adherence to technology neutrality as it pursues implementation of
proposals and policies laid out in the ITSH’s September 2004 “Basic
Concept on IT International Policy Centered on Asia” and related sectionsof the IT Policy Package 2005.

International Compatibility. The speed, convenience, and low cost of the Internet
have made cross border e-commerce an integral part of international trade. This
makes it essential for trading partners to have compatible e-commerce policies
and regulations. The United States therefore urges Japan to ensure that its IT ande-commerce policies and regulations are compatible with international practice.

Strengthening the Protection of Intellectual Property Rights. Japan is currently
undertaking an extensive review of its Copyright Law that is set to conclude by FY2007.
Consistent with the goals contained in Japan’s IP Policy Promotion Plan and the mutualinterest of both our countries, the United States urges the Government of Japan to adopt
the following recommendations:A.

Copyright Term Extension. Extend Japan’s terms of copyright protection forsound recordings and all other subject matter protected under the Copyright Law
in alignment with the current global trend to life of the author plus seventy years
for works generally, and to 95 years from publication for works for which theterm is not based on a human life.

B.

Statutory Damages. Strengthen the enforcement system against copyright
infringement by adopting a statutory damages system that will act as a deterrent
against infringing activities, ensure that right holders are fairly compensated forthe losses suffered by infringement, and enhance judicial efficiency byeliminating the costly and difficult burden of having to establish and calculate
actual damages or profits.

C.

Protection of Digital Content. Build on the progress the Japanese Government
has achieved in strengthening the protection of digital content and preventing
online piracy by:1.

Effective Government Oversight. Implementing measures to ensure thatall government agencies and public institutions effectively prevent andpunish the unauthorized reproduction, making available, or transmissionof pirated copies of works or any other infringing activities on
government-supported IT resources;

2.

ISP Liability. Comprehensively monitoring and strengthening current
measures to prevent digital content piracy (especially improving theAnnex - 8

Internet Service Provider Liability Rules), as these rules do not provide
sufficient means for all right holders to effectively combat infringement;
3.

Online Piracy. Adopting and implementing standards for secondary
liability for copyright infringement that will provide necessary protectionof digital content on the Internet;

4.

Private-Use Exception. Narrowing the scope of the private-use exception
so that activities with implications beyond the home, such as downloading
copyrighted works from peer-to-peer networks, are not permitted without
the authorization of the right holder;5.

Temporary Copies. Further clarifying the scope of protection for a
temporary copy and refraining from adopting exceptions to thereproduction right as it applies to temporary copies until the clarification isdefinitive;

6.

Technological Protection Measures (TPMs). To help stem the dramaticincrease in digital piracy, enhancing the scope of protection for TPMs andimproving remedies for violations of those protections; and7.

End-User Piracy. Clarifying the knowledge requirement in Article 113(2)of Japan’s Copyright Law to ensure that all forms of end-user piracy areprohibited.

D.

Book Piracy. Effectively enforce Japan’s Copyright Law to prevent illegal
reproduction of books, especially on university campuses.

E.

Education Exception to Copyright Law. Ensure the education exception in
Article 35 of Japan’s Copyright Law does not conflict with normal exploitation of
copyrighted works and does not unreasonably prejudice the legitimate interests ofright holders.

F.

IP Strategic Program and Intellectual Property Policies. In implementing its IP
Strategic Programs and other IP policies, the United States urges the IP Strategy
Headquarters (IPSH) and the Japanese Government to ensure that:1.

Any Cabinet orders, ministerial ordinances, notifications, guidelines, orother IP-related measures 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 as appropriate
in the final measures and actions that are implemented; and2.

The implementation of the measures and policy goals is in compliancewith international obligations, standards, and norms.

Annex - 9

G.

III.

Improving U.S.-Japan Cooperation on Intellectual Property Rights Protection and
Enforcement. The United States and Japan have been cooperating with greater
frequency to promote increased protection and enforcement of intellectual
property rights around the world, and especially in Asia. This cooperation should
continue and be expanded bilaterally and regionally, and in multilateral fora.

Promoting Online Security. Fraudulent and malicious activities are a growing threat to
e-commerce, e-government, and online transactions across the globe. The increasing
number of cyber attacks and the interdependence of global information networks place
responsibility on all nations to respond to the challenge of promoting online security.
Japan is taking strong and proactive steps in this regard, and its forthcoming New IT
Strategy and First Information Security Basic Plan, both due out in winter 2005-2006,
will include an even greater focus on these areas. Public and private-sector policies that
protect personal privacy, address online fraud, and promote secure government
information systems can contribute to greater online security and expand IT and egovernment use within Japan, and foster domestic and international e-commerce. These
policies should emphasize private-sector leadership and technology neutrality, stresspublic/private cooperation in addressing problems, and be compatible with international
practice. They should also include cooperation with other governments whereappropriate.
A.

Privacy. The Act on the Protection of Personal Information (Privacy Act) went
into effect in April 2005. Ministries have released implementation guidelines tohelp companies comply with the Privacy Act. The United States urges Japan to:1.

Continue to implement the Privacy Act in a transparent manner bycollaborating with relevant parties to hold a third privacy seminar for all
interested individuals in Tokyo in 2006 to raise awareness, answer
stakeholders’ questions, and encourage compliance with the Act and its
implementing guidelines;

2.

Clarify whether guidelines are mandatory or voluntary to help businesses
understand and meet their legal obligations. Ideally, guidelines would
include only those provisions that are intended to be mandatory for allcompanies subject to their jurisdiction. If voluntary guidelines arenecessary, Japan should also clarify that failure to adhere to voluntary
guidelines will not result in penalties to firms. Guidelines should state
explicitly at the outset the mandatory or voluntary nature of the provisions
contained within;

3.

Ensure all Ministries review the effectiveness of their implementation
guidelines on an annual basis and make any necessary changes to ensure
their effectiveness and consistency throughout government;

4.

Ensure that any revised guidelines are developed in a transparent manner,
including at least a 30-day public comment period and an appropriate

Annex - 10

amount of time for Ministries to consider those comments received before
finalizing the guidelines. The revision of guidelines should also becoordinated among all relevant Ministries;

B.

C.

5.

Establish a system to publish information about violations and corrective
actions, to clarify and educate companies how to comply with the Privacy
Act; and6.

Ensure each Ministry that has released privacy implementation guidelines
establishes procedures to enforce those guidelines consistently and fairly.

Online Nuisance, Deceptive Practices, and Fraud. A rising tide of malicious
activity has developed and diversified, including phishing, pharming, zombies,
trojans, botnets and other malware, posing an increasing threat to online behavior.
While generating unwanted costs, these forms of online malfeasance also diluteconsumer confidence in online transactions, requisite for the successful growth of
e-commerce. The United States commends the Japanese Government foramending the Law on Regulation of Transmission of Specified Electronic Mail
(Anti-Spam Law) to include direct penalties, for studying issues such as spam andphishing, and for the Information Security Policy Council (ISPC)’s calls to
address new online threats. The United States urges Japan to:
1.

Work closely with the private sector in a transparent manner to encourage
a balanced approach to combating spam, phishing, and other online fraudfeaturing the use of industry-appropriate technology, best process
practices, and consumer education;

2.

Vigorously enforce the amended Anti-Spam Law;

3.

Remove legal barriers related to the Telecommunications Business Law
that inhibit Internet Service Providers’ use of new technologies to filterand block spam;

4.

Implement any online fraud-related laws, regulations, and guidelines in amanner that strives not to unduly promote, mandate, or favor specifictechnologies; and5.

Work closely with the Government of the United States to share
information and collaborate to best address rising issues of online fraud.
This includes cooperating with the United States to ensure a successful
anti-phishing, spam, and online fraud conference with relevant
stakeholders in April 2006 to raise awareness, highlight best practices, andpromote public-private partnerships to counter online hazards.

Government Information Security. The United States continues to welcome
Japan’s efforts to improve and ensure the security and reliability of government

Annex - 11

information systems. In 2005, Japan took significant steps to strengthen its ability
to meet these goals by establishing the National Information Security Center(NISC) and giving it a key role in creating government-wide information security
standards and guidelines.
1.

2.

NISC released for public comment documents related to its draft “Uniform
Standards for Information Security Measures of Government
Organizations (First Overall Version for December 2005)” on October 17,
2005. The United States recommends that NISC:
a.

Carefully assess feedback received, consult with those who submit
comments for further clarification, if necessary, and take adequate
time before releasing the final documents to incorporate
suggestions as appropriate when these result would in improved
standards or processes; andb.

Make available to those interested a summary of the main issues
raised in the comments received, as well as an indication of
NISC’s response or actions taken.

The United States commends NISC for planning to assess its government
information security requirements over the next several years through acycle of “Plan Do Check Act” which includes the introduction, evaluation,and review of standards and guidelines. The United States recommends
that NISC:a.

Use Public Comment Procedures and other methods of soliciting
input from the public on all government computer security
requirements it issues, whenever possible;b.

Promote consistent implementation of minimum information
security requirements by all Ministries; andc.

Ensure that procurement of IT products or services to meet Japan’s
government information security requirements is fair andtransparent for all domestic and foreign vendors.

3.

The United States understands that the Information Security Policy
Council (ISPC) has stated the need to strengthen the security of local
government computer systems, and that MIC and the Cabinet Secretariat
would review these governments’ “safety standards and guidelines.” IfJapan decides to provide guidance to local governments, the United Statesurges Japan to encourage them to use those security requirements issued
by NISC for the central government, to promote consistency.

4.

The United States recommends that Japan and the United States seek ways

Annex - 12

to continue to exchange information and experiences to improve bothcountries’ efforts to secure their government information systems.
IV.

Promoting E-Commerce and Online Services. The IT Policy Package 2005 placed
increased emphasis on promoting the use of IT and e-commerce in areas closely related
to the welfare of individual citizens. These areas included medical services and IT for
Japan’s aging society. The forthcoming New IT Strategy will likely place a focus on
these areas as well. Japan also is continuing to promote the greater use of IT in sectors
such as financial and government services. To promote and facilitate online services inJapan, the United States urges the Japanese Government to take the following steps.
A.

e-Notification. Permit e-notification under the Money Lending Business Law.

B.

IT-Related Financial Reforms. The Financial Services Agency (FSA)’s
December 2004 Program for Further Financial Reform stated that the relative
importance of Internet transactions has increased while, compared to othercountries, Japan’s financial institutions have fallen behind in IT investments andIT costs remain high. As part of its reform program, the FSA is seeking topromote the strategic use of IT to strengthen the competitiveness of Japan’s
financial institutions and further develop financial infrastructure. To achievethese goals, the United States urges Japan to:C.

1.

Reaffirm the private sector’s central role in expanding the usage of IT in
financial transactions through the development and deployment ofinnovative technologies and that the government should work closely withthe private sector when developing any related legislation. Specifically,
Japan should ensure that any legislation concerning e-banking, electronic
fund settlements and payments, online financial transactions, or other
online-related financial legislation is developed in a transparent mannerwith input from all interested parties, including technology providers;2.

Ensure that any such legislation is compatible with international practice,so as to facilitate and promote cross-border online financial transactions;3.

Study and implement appropriate measures to ensure the transparency offinancial institutions’ IT investments; and4.

Ensure that the FSA works closely with the ITSH and relevant Ministries
so that Japan’s IT-related financial reforms are consistent with Japan’s
other IT and e-commerce regulations and policies, so as to provide
predictability to the private sector.

e-Medicine. The Government of Japan has stressed the need to promote the useof IT in healthcare services to enhance quality and efficiency. The IT Policy
Package 2005 highlighted the plans of various Ministries to formulate andimplement measures designed to help Japan rapidly introduce IT solutions forAnnex - 13

items such as personal medical records, processing systems for receipts, orders,and claims, and remote medical care. The United States welcomes Japan’scommitment to e-medicine and urges it to:

D.

V.

1.

Ensure that all relevant laws, ordinances, guidelines, and standards are, tothe extent practicable, technology neutral; and2.

Provide all interested parties with opportunities to present their views on
proposed policies and rules related to e-medicine through transparent,
open, and inclusive processes.

e-Accessibility. Demand is rapidly growing for technologies that make IT moreaccessible to the elderly and individuals with disabilities. Millions of people
around the world have disabilities and their numbers are expected to increase as
the populations of many countries age. The United States encourages Japan under
this Initiative to engage in bilateral discussions aimed at facilitating a better
understanding of our respective work and priorities in the area of e-accessibility.

Promoting Procurement Reforms for Information Systems. Since 2001, theGovernment of Japan has taken steps to reform procedures for central government
procurement of information systems. These measures have been recognized as necessary
to accomplish goals such as discouraging anticompetitive behavior, procuring highquality information systems at reasonable costs, stimulating innovation and competition
among vendors, and promoting transparency and fairness in government procurement.
The U.S. Government supports these goals, which the Government of Japan’s InterMinisterial Task Force for Information Systems Procurement (Task Force) outlined in thememorandum of agreement on government procurement for information systems(memorandum) it issued in March 2002, and revised most recently in March 2004.
A.

The results of a survey carried out by the Task Force in December 2004 indicatedthat many reforms contained in the memorandum have not yet been fully
implemented by all Ministries. The United States urges the Task Force tocontinue to monitor the Ministries’ efforts to implement the memorandum’sreforms and direct them to complete this process as soon as possible. In
particular, the United States recommends the Task Force urge all Ministries to:1.

Complete reviews of rules for participation in bidding and adopt changes
that increase flexibility and promote competition;2.

Develop and introduce contracts for information systems procurementsthat clearly define and set appropriate limits on responsibilities for liability
between the government and vendors;

3.

Devise measures to promote the wider dissemination of the benefits ofintellectual property (IP) created through government-sponsoreddevelopment of information systems;

Annex - 14

B.

4.

Increase training for government procurement officers in IP issues related
to government procurement through use of Procurement Skill Standards orother measures to improve expertise;

5.

Finish setting rules for investigations of extremely low-priced bids; and6.

Ensure that the online database for information systems procurement theGovernment of Japan created in 2004 (http://cyoutatujirei.e-gov.go.jp) isan effective tool to enhance transparency and fairness. To accomplish
this, Ministries should:a.

Regularly contribute all necessary information about individual
procurement cases to the database; andb.

Analyze this information and publish results to help identify trends
in information systems procurement, such as changes in the ratioof competitive versus negotiated contracts, use of multi-year
contracts, and adoption of bid evaluation methods such as lifecycle cost and Overall Greatest Value Method (OGVM).

To further improve the government procurement process for information systems,
the United States urges the Government of Japan to:
1.

Work to shorten, to the extent practicable, time lags between the date awinning bidder is chosen and the date the contract is actually signed; and2.

Encourage government procurement officers to be as flexible as possible
in allowing vendors to take steps to protect their rights or the rights ofthird parties to preexisting IP that is incorporated into procurement
deliverables.

Annex - 15

MEDICAL DEVICES AND PHARMACEUTICALSI.

Changes in Japan’s Healthcare System. The Japanese Government is consideringmajor changes to its healthcare system. The U.S. Government urges Japan to provide
industry, including U.S. industry, with ample and meaningful opportunities to express its
views regarding changes in the healthcare system to the Council on Economic and Fiscal
Policy and other Japanese Government and advisory bodies working on this issue.

II.

Medical Device and Pharmaceutical Pricing Reform and Related Issues. The
Japanese Government is considering revisions to its reimbursement pricing system for
medical devices and pharmaceuticals. The U.S. Government encourages Japan to ensurethat any changes to its reimbursement pricing system recognize the value of innovation, a
key goal of the Japanese Government’s policy papers known as the Visions. The U.S.
Government urges Japan to:A.

Provide industry, including U.S. industry, with ample and meaningful
opportunities to express its views on revisions to the reimbursement pricing
system to the Council on Economic and Fiscal Policy (CEFP) and other Japanese
Government and advisory bodies working on this issue. Ensure proposals andimplementation measures are consistent with Japan’s policy to recognize thevalue of innovation and the important role of the market.

B.

Take the following steps to increase recognition of the value of innovative
medical devices and pharmaceuticals:
1.

Pharmaceuticals.
a.

Implement on a trial basis from April 2006 to April 2008 a flexible
pricing method for new drugs that ensures that the full scope of
their value can be evaluated and rewarded based upon data fromapplicants. Ensure that this trial method does not replace thecurrent system for setting prices for new drugs. Base this trial
method on transparent interaction between applicants and pricing
officials and create an independent appeals mechanism;b.

Raise the minimum premiums to the following levels: 80 percent
for “innovative,” 30 percent for “usefulness 1,” and 10 percent for“usefulness 2.” Eliminate the monetary limits for oral andinjectable drug premiums;c.

Ensure that the Foreign Price Adjustment (FPA) rule forpharmaceuticals will not be altered in a way that would harm U.S.
industry. Eliminate the cap of twice the comparator price. Assign
to each of the four prices used in the FPA calculations a weightbased on sales in the respective country and establish a price floorof 100 percent of the weighted four-country average;

Annex - 16

2.

d.

Abolish the re-pricing criteria for market expansion based on thesales of a product or its comparator for both a product’s initial
indication and for additional indications; ande.

Assess the effectiveness of the system implemented on a trial basis
in FY2005 under which applicants have been allowed to makepresentations at certain Drug Pricing Organization meetings.

Medical Devices.
a.

Eliminate the Foreign Average Price (FAP) rule for medical
devices before the biennial price revision scheduled for April 1,
2008. Use a reimbursement mechanism based on market factors inJapan. Consult with companies affected by the reimbursement
mechanism to determine how it operates. While the FAP rule
remains in effect, take the following steps: apply it only tocategories covered by the 2004 FAP price revisions; adopt aweighted average system; maintain the rules regarding maximum
price reductions; change the multiplication factors to reflect thecharacteristics that result in differences in cost structures in othermarkets; consult fully with U.S. industry on price data collection;and use only industry-supplied data for price recalculations; andb.

Take the following steps to improve the C1 and C2 pricing
systems:i.

Form a task force with industry, including U.S. industry, todevelop clear criteria for C1 eligibility and premiums.
Provide a provisional C1 price immediately after regulatory
approval when C1 designation is requested. Award C1
prices to products that significantly improve aspects such astreatment, diagnosis or management of disease; andcompliance; ease of use; recovery times; long-term
outcomes; and cost effectiveness;ii.

Form a task force with industry, including U.S. industry, todevelop a value-based methodology for C2 products basedon individual assessment of products, economic outcomes,
quality of life, safety, efficacy, and other factors. Establish
periodic listing of C2 products at least four times a year;
and

iii.

Develop performance goals for C1 and C2 approvals thatwill facilitate an increase in the number and percentage ofsuch approvals and that will ensure the fastest possible

Annex - 17

processing of such applications.

III.

C.

Take steps to improve the evaluation of the clinical value of diagnostics(including in vitro-diagnostic reagents and imaging equipment), and reimburse
such products at levels that fully reflect their clinical value. Consult withindustry, including U.S. industry, regarding the categories of test that areconsidered to have added clinical value. Establish an IVD subcommittee in
Chuikyo.

D.

Take measures to ensure the adoption of innovative medical devices andpharmaceuticals under the Diagnosis Procedure Combination (DPC) system.

E.

Implement a system for restoring to the patent term additional time to compensate
for a New Drug Application to be approved.

F.

Consult closely with the pharmaceutical industry, including non-Japanese local
firms, on the Intellectual Property Strategy Headquarters’ consideration of
proposals on strengthening intellectual property protection for pharmaceuticals.

G.

In the short term, set reimbursement price levels for blood products thatcompensate manufacturers for the costs incurred in implementing revisions to thePharmaceutical Affairs Law in 2003. In the longer term, develop a
reimbursement pricing system for blood products that accounts for the uniquecharacteristics of that industry and that is not based on the pharmaceutical model.

Medical Device and Pharmaceutical Regulatory Reform and Related Issues. The
establishment of the Pharmaceuticals and Medical Devices Agency (PMDA) in 2004 andthe implementation of major Pharmaceutical Affairs Law (PAL) changes were designed
in part to improve Japan’s review times of drugs and medical technology. PMDA,
however, has encountered difficulties in achieving faster reviews and making otherimprovements to Japan’s regulatory system. Improvement of Japan’s regulatory system
will allow Japanese patients to gain greater access to new, innovative products. The U.S.
Government urges Japan to take the following steps to improve PMDA and Japan’s
regulatory system:A.

Use the performance metrics agreed upon by PMDA and the U.S. drug industry tofacilitate faster drug reviews and discussions with industry on improving thereview system.

B.

Enhance PMDA’s ability to hire qualified reviewers from the private sector bychanging PMDA’s restrictions on hiring reviewers who formerly worked in thepharmaceutical industry.

C.

Provide the U.S. drug industry with meaningful opportunities to discuss its ideas
in the MHLW subcommittee and PMDA study group on clinical trials. Ensure
PMDA schedules consultations with companies within 90 days of a request byAnnex - 18

taking steps such as using “paper consultations” when face-to-face meetings are
not needed and providing consultation points to sponsors before face-to-faceconsultations.
D.

E.

F.

Take the following steps to improve medical device reviews:
1.

Streamline reviews of approved products that have undergone partialchanges in design, materials, manufacturing, or other areas by developing
in consultation with industry, including U.S. industry, a decision tree toclarify when approval or notification is required. Establish a mechanism
whereby applications for partial change approval may be submitted while
previous partial change applications are already under review;

2.

Ensure PMDA attains its goals for increasing the number of medical
device reviewers, and ensure all reviewers are experts in their areas of
responsibility;

3.

Include in PMDA’s annual reports goals for improvement and details on
how PMDA is using revenues from user fees to improve the review
process in the next fiscal year; and4.

Eliminate the backlog of unprocessed applications by July 1, 2006.

Take the following steps concerning foreign clinical trials for medical devices:1.

Accept evidence of the manufacturer’s or applicant’s evaluation of clinicalsafety and performance and conformity with Japan’s regulatory
requirements conducted outside of Japan. Refrain from requiring clinical
trials to be conducted in Japan when relevant evidence gathered outside
Japan is available. Inform applicants when supplemental clinical evidence
from studies in Japan is required and provide applicants with a scientificand statistical rationale; and2.

Refrain from requiring applicants to provide Japanese regulators with datasubmitted to foreign regulators that have not been gathered in accordancewith Japanese requirements unless those data bear directly on device
safety or efficacy.

Take the following steps regarding Quality Systems:
1.

Recognize that medical device manufacturers’ quality systems aredesigned to ensure the safety and efficacy of the final product and that
quality system audits of factories provide all necessary information.
Refrain from seeking information from third parties;

2.

Recognize there is no link between the level of quality assurance and theAnnex - 19

risk level of a device; and3.

Accept GMP audit certification that has been granted by FDA or a notified
body if evidence of the certification is received within 12 months of thesubmission of an application in Japan.

G.

Develop criteria based on international standards to determine when medical
device manufacturers will be required to provide information on raw materials
and what information will be required.

H.

Accelerate adoption of medical device standards, based on international
standards, to ensure lack of such standards does not delay reviews.

I.

Establish extended shelf life for new medical devices based on the widely
acceptable justification of accelerated age testing, and refrain from requiring realtime data as a condition of submission.

J.

Modify requirements for biocompatibility test data and other test data to bringthem in harmony with globally accepted standards and practices.

K.

Review the policy on updating of medical device Shonin granted before April 1,
2005, with a view toward eliminating any unnecessary burdens on manufacturers
and on PMDA’s review resources.

L.

Permit manufacturers to establish protocols that guarantee provision of“instructions for use” to every professional customer by means other than paper.

M.

Consult with industry, including U.S. industry, on the conditions under which
patient self-monitoring devices, such as self-monitoring blood glucose products,
may be sold over the counter.

IV.

Blood Products. The U.S. Government urges Japan to treat U.S. companies fairly andtransparently by allowing them fair access to marketing and manufacturing opportunities.

V.

Nutritional Supplements. The U.S. Government urges Japan to:

VI.

A.

Increase transparency of the regulatory system by publishing and making
available lists of acceptable solvents, residues, and manufacturing processes;
publishing testing methodologies; and establishing appropriate quantity limits.

B.

Allow educational and informational statements on labels and in advertising.

C.

Reduce duties for nutritional supplements to the same level as duties forpharmaceuticals containing the same ingredient.

Cosmetics and Quasi-Drugs. Cosmetics and quasi-drugs are also regulated under the

Annex - 20

Pharmaceutical Affairs Law (PAL). The U.S. Government urges Japan to:
A.

Allow companies to differentiate their products and make efficacy claims forcosmetics and quasi-drugs based upon verifiable data. Eliminate current
advertising restrictions on efficacy claims and replace such restrictions with ageneral prohibition on false or misleading claims as determined from theviewpoint of a reasonable consumer.

B.

Work closely with industry, including U.S. industry, to identify and eliminate
regulatory requirements for cosmetic ingredients and quasi-drugs that impose
excessive administrative burdens, are inconsistent with regulatory regimes inother developed countries, and do not enhance product safety, efficacy, or quality.
Reduce standard lead-times for regulatory processing.

C.

Improve the transparency of the regulatory process by publicly disclosing
administrative guidance provided by MHLW to local authorities responsible for
enforcing PAL provisions and by allowing industry, including U.S. industry, toparticipate in advertising review meetings. Provide detailed information about
specific regulatory requirements and registration procedures in a timely manner.

Annex - 21

FINANCIAL SERVICES
I.

Specific Measures. The Government of the United States commends the Government ofJapan on its progress on financial services regulatory reform and calls on Japan tocontinue such reforms, including the following measures:A.

Modernize the legal framework for non-bank consumer and commercial financeto provide a clear basis for the enforceability of loan receivables, in order toincrease the supply of credit available to consumers and small businesses.
1.

Revise Article 17 and 18 of the Money Lending Business Law (MLBL) to
provide for disclosure requirements that can be practically and simply met
by money lending companies, including those offering open-end revolving
credit and transactions on third party ATMs or the Internet;

2.

Recognize customer privacy preferences by allowing, at the customer’s
option, MLBL disclosure requirements to be satisfied by electronic notice;and3.

Promote regulatory transparency and stability in the lending sector by
eliminating “grey zone” interest liability and adopting internationallyaccepted principles for balancing the protection of debtor and creditor
interests in personal bankruptcy proceedings.

B.

Create a legal and regulatory framework for a credit bureau system that will foster
greater sharing of personal credit information among bona fide lenders. Fair,
open access to full-file credit information not only facilitates sound credit
underwriting and provides safeguards against excessive lending, it also increases
the supply of credit available to consumers and small businesses.

C.

Put foreign bank branches on an equal footing with domestic banks by allowing
them to engage in trust and banking businesses concurrently, pursuant to Article
1, Paragraph 1 of the Concurrent Operation Law.

D.

Eliminate ambiguity of the FSA Guidelines for (private sector) Financial
Conglomerate Supervision by:E.

1.

Establishing a materiality threshold of size or activities of regulated
entities that would subject a group to the Guidelines; and2.

Establishing a clear materiality threshold or other objective test for intragroup transactions and transactions involving unregulated entities that may
potentially be subject to reporting obligations and administrative actions
under the Guidelines.

Foster expanded use of corporate Defined Contribution (DC) pension programs

Annex - 22

by:

II.

1.

Increasing the tax deductible contribution limit;

2.

Allowing employee contributions (for example, employee matching of
employer contributions);

3.

Allowing early access to funds before age 60 in specified circumstances;and4.

Allowing investment advice to be made available to participants.

F.

Harmonize the regulatory framework governing investment advisory andinvestment trust management activities and eliminating inconsistencies or
duplication.

G.

Allow mergers and reduce obstacles to the early termination of investment trusts,
in order to permit investment managers to combine and diversify investments,
which would result in a reduction of both risk and cost to investors.

H.

Create a plan to adopt ISO standards for retail banking security and align ATM
security standards with global triple DES security mandate by July 2007.

Transparency. The U.S. Government encourages the FSA to maintain the recent
progress in enhancing financial sector regulatory transparency through continued active
use of the no-action letter system and the public comment process, and by continuing tosolicit input from private firms in drafting financial sector laws and regulations. In thatspirit, the United States suggests the following additional measures to enhance thetransparency of financial regulation and supervision:A.

The United States welcomes the recent FSA efforts to enhance the effectivenessof the no-action letter system, including the active solicitation of input from U.S.
and other foreign firms, on how best to improve the system. In addition tocontinuing those efforts, the FSA should consider the following measures tofurther improve the no-action letter system.
1. Draw upon the United States’ recommendations for enhancing thegovernment-wide no-action letter system as laid out in sub-section VIII of the“Transparency and Other Government Practices” chapter of theserecommendations.
2. Expand the scope of eligible issues upon which interested parties may submit
no-action letter requests beyond plans for “new products or services” toinclude requests for clarification of the laws and regulations governing
existing products or services.

Annex - 23

B.

The U.S. Government recommends that the FSA adopt new programs tocomplement the no-action letter system as vehicles for expanding the body of
written interpretations of Japanese financial laws and regulations. Suchinterpretations reduce uncertainty as to what financial products and services areprohibited under Japanese law, and thereby increase the scope for innovation by
financial services providers. To that end, the U.S. Government recommends that
the FSA take the following steps:
1.

Build on the progress made with the recent publication on the FSA web
site of ten “reference cases” providing examples of FSA interpretations ofJapan’s financial laws and regulations by steadily increasing the numberof such cases published.

2.

Establish other vehicles to provide written interpretations of Japan’s
financial laws even when an interpretation has not been formallyrequested. Possible models for providing such interpretations include the
SEC’s “Telephone Interpretations” web page or its “Staff Legal Bulletin”
and “Staff Accounting Bulletin” systems.

C.

The FSA’s active solicitation of input from private, including foreign, firms in theprocess of drafting the Investment Services Law has been a major step in theprocess of enhancing regulatory transparency in Japan’s financial sector. Seeking
such input also reduces the risk of adverse unintended consequences of financial
laws and regulations. The United States welcomes those efforts and looks
forward in the coming months to continued dialogue among the FSA, theFinancial System Council, foreign and domestic financial firms, and interested
governments and industry associations.

D.

The U.S. Government also welcomes the FSA’s continued active use of the publiccomment process and other steps to enhance the transparency of FSA Rulemaking
Procedures and the implementation of new or revised FSA regulations andordinances, and other efforts to solicit input from affected parties.

E.

The United States also welcomes the Japanese financial authorities’ close working
relationship with private sector financial industry associations, such as theAmerican Chamber of Commerce in Japan and the International Bankers
Association, that fully represent the views and the expertise of their members.

Annex - 24

COMPETITION POLICYI.

Strengthening the Effectiveness of Antimonopoly Enforcement. A properly
structured competition policy – supported by a strong and effective antimonopoly law
and enforcement policy – will provide great benefits to Japanese consumers and thebusiness community, and will promote the health and dynamism of the Japanese
economy. In this regard, the United States welcomes the significant improvements toJapan’s competition policy represented by the 2005 amendments to the Antimonopoly
Act (AMA). In order to ensure these improvements are implemented and supported in
the most effective manner, the United States urges Japan to:
A.

B.

C.

Maximize the Effectiveness of JFTC’s Leniency Program.
1.

Clarify the requirements for perfecting leniency applications to ensure that
deadlines for submitting necessary information, including translation
requirements for foreign language materials, do not encourage potential
applicants to delay their applications.

2.

Clarify the policy of the Japan Fair Trade Commission (JFTC) on theconfidentiality of leniency applications and the disclosure of informationand documents submitted in support of leniency applications, so as toassure potential applicants that their identity will be kept confidential andthat information they submit to the JFTC will not be used against them inother legal proceedings.

Heighten AMA Deterrence and Compliance.
1.

Signal its expectation and desire for tougher sentencing of individuals
convicted of AMA violations by submitting legislation to the Diet thatwould lengthen the maximum criminal sentence for individuals thatengage in unlawful cartel activities to five years imprisonment.

2.

Implement JFTC’s new investigation powers for cases likely to result incriminal accusations in a manner that strengthens overall criminal
enforcement of the AMA.

3.

In order to promote AMA compliance, review the desirability of adopting
new AMA enforcement guidelines, or amending existing guidelines, toensure that JFTC enforcement policies reflect the best economic and legal
understanding of appropriate competition law enforcement.

Strengthen Staff Capabilities and Resources.
1.

Continue to strengthen the economic analysis capabilities of JFTC staff
and employ those capabilities in all aspects of the JFTC’s work.

Annex - 25

2.

I.

II.

Continue to increase the staff and budget of JFTC substantially andsteadily.

Improving Reliability and Fairness of JFTC Investigatory and Administrative
Procedures. AMA enforcement will be most effective where the business community
and Japanese consumers have confidence that JFTC enforcement actions are applied in afair and transparent manner. In order to ensure the utmost confidence in JFTC
investigative and administrative procedures, the United States recommends that Japan:
A.

Stay of Execution of Elimination Orders. Establish clear criteria for JFTC
granting a request to stay the execution of a cease and desist order pending reviewof the order by JFTC hearing examiners or by a court, to ensure that such orders
do not cause irreparable harm to the subjects of the order.

B.

Review of Evidence and Opportunity to Rebut. Ensure that the proposed
recipient of a cease and desist order or surcharge payment order will be given
access to all of the evidence on which the proposed order is based, and that such
recipient will have sufficient time to rebut such evidence and to make arguments
in its defense prior to the issuance of such an order.

C.

Opportunity to Present Defense in Proposed Warning Cases. Introduce a systemthat will allow proposed recipients of warnings (and similar measures) against
suspected infringement of the AMA, Act Against Unjustifiable Premiums andMisleading Representations, or Act Against Delay in Payment of Subcontract
Proceeds, etc. to Subcontractors to submit evidence and arguments in theirdefense prior to the issuance of such warnings.

D.

AMA Basic Issues Study Group.
1.

Ensure the agenda and discussions of the AMA Basic Issues Study Group
under the Cabinet Office examining JFTC procedures continue to be
publicly disclosed, and provide an opportunity for interested foreign
parties and organizations to submit their views to the study group.

2.

Publish an interim report on the work of the Study Group, invite publiccomment on that interim report, and publish all comments submitted on
the website of the Study Group.

Addressing Bid Rigging. Recent events have demonstrated that bid rigging, often aided
by government officials, continues to be a significant problem in Japan. Bid rigging
injures Japanese consumers, taxpayers and the economy by raising costs for government
projects, preventing needed restructuring, harming efficient bidders and undermining
confidence in the government and support for a culture of competition in Japan. In order
to effectively address bid rigging, the United States urges Japan to:

Annex - 26

A.

Administrative Leniency. Adopt a Ministry of Land, Infrastructure andTransport (MLIT) administrative leniency program to encourage companies tocease their participation in bid-rigging conspiracies and to report the bid rigging
to the proper authorities, such as a program that would reduce or eliminate
suspension of designation, and possibly other administrative sanctions, for the
first company that comes forward to report its participation in a bid-rigging
conspiracy.

B.

Administrative Penalties. Implement measures announced in the July 2005 reportof the MLIT Bid Rigging Recurrence Prevention Countermeasure Study
Committee to prevent bid rigging. Specifically:
1.

Lengthen significantly the minimum period of suspension of designation
for companies that have twice been found to have engaged in bid rigging
within a 10 year period.

2.

Implement the decision to claim damages against firms that engage in bid
rigging, even when the contract does not contain the special liquidated
damages clause, by establishing with the Ministry of Justice a procedure
for claiming in court the damages suffered by the Government of Japan
from such bid-rigging practices.

C.

Competitive Bidding. Maximize the number of projects in which competitive
bidding is used, and ensure that firms, whether Japanese or foreign, are notdisqualified from bidding based on the location of their head office or branch
offices.

D.

Conflicts of Interest — Amakudari. Strengthen the measures recently taken by
MLIT to address conflicts of interest created by the Amakurdari system –including prohibiting senior officials from accepting job offers at firms receiving
contracts from the ministry for five years after retirement – by prohibiting all
officials of MLIT and their related organizations, regardless of their position,from accepting jobs within an appropriate period after retirement from any
companies receiving contracts from the ministry.

Annex - 27

TRANSPARENCY AND OTHER GOVERNMENT PRACTICES
I.

Public Comment Procedures (PCP). The annual survey of PCP implementation
released by the Ministry of Internal Affairs and Communications (MIC) in September
2005 demonstrates the shortcomings of Japan’s PCP implementation prior to its
incorporation earlier this year into the Administrative Procedure Law. In more than half
the cases, Japan’s Ministries and Agencies were still soliciting public comments forperiods shorter than 30 days, a practice that has seriously limited the ability of interested
parties to submit comprehensive and thoughtful input. While welcoming the recent
amendment of the Administrative Procedure Law to improve the PCP, the United Statesurges Japan to seek ways to make this important mechanism more effective. Specifically,
the United States urges Japan to:A.

II.

Take concrete steps to ensure the spirit of the revised PCP is adhered to, including
compelling Ministries and Agencies to:1.

Provide minimum 30-day public comment periods unless there is agenuinely urgent need to do otherwise;2.

Seriously consider public views submitted and incorporate them into final
regulations where appropriate;

3.

Require the publication of draft regulations at the earliest possible time toallow interested parties sufficient time to analyze issues and prepare
meaningful public comments; and4.

Provide sufficient time between the closing of a comment period and thefinalizing of regulations so that comments can in fact be incorporated.

B.

Thoroughly evaluate the effectiveness of the recent changes in the Administrative
Procedure Law intended to improve the PCP, publicly report the findings of that
evaluation, and provide opportunities for the public to comment on any such
results.

C.

Actively and expeditiously seek further changes to PCP implementation
requirements if the recent revisions provide insufficient opportunities for the
public to input into the policymaking process in a meaningful way.

Foreign Translations of Japanese Laws. The United States welcomes Japan’s initiative
to translate laws into foreign languages, which will help improve the business climate forforeign companies, and could serve as a model for developing countries pursuing legal
reform. To ensure transparency and effectiveness of this initiative, the United Statesurges Japan to:A.

Continue close consultation with the foreign business community in Japan(including with regard to any relevant committees overseeing the process), notAnnex - 28

only in the planning phase but also as the Ministries and Agencies follow throughwith the translations they plan to undertake; andB.

Ensure allocation of sufficient resources to complete the translations in a timely
manner.

III.

APEC Transparency Standards. APEC leaders have agreed to a package oftransparency standards for a range of trade and investment areas. The United States andJapan have worked closely to create these standards. Accordingly, the United States andJapan should work jointly to achieve full implementation of the APEC Transparency
Standards in the domestic legal regimes of countries in the Asia-Pacific region.

IV.

Special Zones for Structural Reform. The U.S. Government continues to support
regulatory reform in Japan through the establishment of the Special Zones for Structural
Reform. The United States is pleased to note that since the approval of the first 57 zones
in 2003, the total number has grown roughly 10 fold. The United States urges Japan tocontinue to administer this initiative transparently while placing a focus on expanding
market entry opportunities and expeditiously applying zone measures nationwide. The
United States also urges Japan to encourage foreign participation in the zones initiativeby publishing in English on the Internet a comprehensive list of current zones, progresson zone applications, and updated zone information.

V.

Public Input into Policy Development – Advisory Groups. Advisory councils(shingikai) and other government-commissioned study groups are often accorded asignificant role in Japanese policy development. While membership lists and meeting
minutes may be publicly available, the process of creating these councils and study
groups remains opaque, and non-members are not uniformly offered meaningful
opportunities to provide input into these groups’ decision-making processes. The UnitedStates therefore urges Japan to increase the transparency of advisory councils and othergovernment-sponsored working groups by:A.

Providing published, publicly accessible notice of the intent to form such councils
and groups prior to their creation, as well as the process for developing them;B.

Creating a centralized, publicly accessible electronic list of all advisorycommittees and their members;C.

Seeking open nominations for council and group membership whenever possible
and permitting all interested parties to participate in such councils and groups tothe greatest extent possible;

D.

Providing ample and meaningful opportunities for all interested parties to provide
input into policy formulation throughout the deliberations by such councils andgroups; andE.

Providing ample advance public notice prior to council and group meetings toenable interested parties to attend.

Annex - 29

VI.

VII.

Public Input into the Development of LegislationA.

The United States recommends that Japan’s ministries and agencies accelerate thepractice of providing greater opportunities for interested parties to be aware ofand comment on draft legislation in the early stages of its formation.

B.

With specific regard to future legislative renewals of the Life and Non-Life
Policyholder Protection Corporations, the United States urges that these efforts
are undertaken in a transparent manner, including providing meaningful
opportunities for input by interested parties, and that establish a more efficient,sustainable safety net system before the current system expires.

Bank Sales of InsuranceA.

The United States urges Japan to ensure that the postponement of the next phaseof liberalization of the bank sales channel for insurance products to December
2005 does not affect the timetable to achieve full liberalization by December
2007.

B.

The United States urges Japan to take measures to ensure that rules preventing
inappropriate sales tactics to enhance consumer protection are developed andimplemented in a transparent manner, with timely opportunities for input frominterested parties, and in a manner that is fair by not favoring one product orservices supplier over another.

C.

The United States also welcomes the Financial Services Agency’s plan to review,prior to December 2007, the 10 million yen ceiling on third sector insurance
products that smaller banks may sell to certain related companies. The UnitedStates urges Japan to eliminate this ceiling as it unfairly disadvantages third sector
insurance service suppliers.

VIII. Insurance Cooperatives. Insurance cooperatives (kyosai) provide a range of insurance
products that compete directly with the private sector and occupy substantial market
share in the Japanese insurance market. Some kyosai are regulated by government
agencies other than the insurance regulator, the Financial Services Agency. Some kyosaihave not been regulated at all. The lack of a uniform regulatory regime for kyosai
undermines the ability of the Government of Japan to provide companies andpolicyholders with a sound, transparent regulatory environment, and affords the kyosai
significant business, regulatory and tax advantages over their private sector competitors.
A number of these kyosai continue to take advantage of this advantageous situation to
expand their market presence and product offerings. The United States therefore urges
Japan to take the following steps:A.

Create a level playing field between kyosai and their private sector competitors by
subjecting all kyosai to the same laws, level of taxation, safety net contribution

Annex - 30

requirements, reserve requirements, standards and regulatory oversight as theirprivate sector counterparts.

IX.

B.

With specific regard to “regulated kyosai,” conduct a government-wide study by
mid-2006 that reviews their current situation and that examines, among otherissues, the sales practices of kyosai that effectively target the unspecified public.
The review should also examine the differences in regulatory treatment andsupervision among these regulated kyosai as well as between them and private
sector insurance providers.

C.

With respect to “unregulated kyosai,” the United States welcomes the initial
measures taken by Japan, through amendment of the Insurance Business Law, torequire these kyosai in principle to be made subject to regulation and supervisionof the Financial Services Agency. The United States also requests that a thoroughand rigorous review of this new system be undertaken in an open and transparent
manner, and that this process lead to consistent treatment between kyosai andprivate sector insurance suppliers within a five-year period.

No Action Letters. The United States recommends that Japan take further steps toenhance the effectiveness and increase the usage of Japan’s no-action letter system,
which provides regulated firms with an opportunity to seek clarification of an
administrative agency’s interpretation of laws and regulations. Measures that would
contribute to a more effective no-action letter system include:A.

Giving Japan’s no-action letter system, which was established under a Cabinet
Decision, the force of law by incorporating its requirements into the
Administrative Procedures Law (APL).

B.

As an interim step, providing by Cabinet Decision more detailed governmentwide guidelines to administrative agencies as to the requirements governing theagencies’ individual no-action letter systems, and setting a timetable for thoseagencies to set up their no-action letter systems. Specific steps should include:
1.

Establishing a single “window” at each agency to receive no-action letter
requests.

2.

Adopting measures to promote more active use of the no-action lettersystem, including:a.

Outreach efforts by administrative agencies to inform firms inregulated industries that they can seek clarification of Japan’s laws
and regulations via the agency’s no-action letter system;b.

Announcing that groups of firms and/or industry associations can
submit NAL requests on behalf of specific firms; andAnnex - 31

c.

C.

X.

Establishing internal systems to encourage agency staff to actively
solicit no-action letters from individual firms and other interested
parties that seek informal oral interpretations of laws andregulations on issues that are matters of settled policy.

Establishing both government-wide and agency-specific fora for seeking private
sector input as to how to improve the no-action letter systems of the various
government administrative agencies.

Government Practices Relating to Agriculture. As detailed in the October 2005
Report to Leaders, Japan took meaningful steps in 2005 to adopt a more internationallyaccepted plant quarantine system based on the International Plant Protection Convention(IPPC) standards for official control and risk analysis. The results of these steps,
however, remain to be seen.
A.

To demonstrate that Japan is seriously implementing the IPPC standards on
official control and risk analysis on a regular and routine basis, the United Statesurges Japan to expeditiously finalize its review of the status of eight pests,
particularly lettuce (the United States has already provided the Ministry ofAgriculture, Forestry, and Fisheries, or MAFF a list of these pests).

B.

The United States also urges Japan to cooperate to undertake a joint pest risk
assessment on other pests/commodities of priority interest to the United States.

Annex - 32

PRIVATIZATIONI.

II.

Privatization of Public Corporations. The United States continues to take interest in
Prime Minister Koizumi’s efforts to restructure and privatize Japan’s public corporations.
As reform of the public corporations advances, the United States continues to urge Japan
to:A.

Conduct restructuring and privatization in a transparent manner; andB.

Ensure that domestic and foreign private sector entities that will or may beaffected by the reforms have meaningful opportunities to provide input, such as
through use of the Public Comment Procedures and through meaningful
opportunities to participate in advisory councils that deliberate and makerecommendations on the reforms.

Japan Post. The United States welcomes Japan’s initiative to reform and privatize Japan
Post. The United States recognizes that, if implemented vigorously, this reform effort
can have a major impact on the Japanese economy, stimulating competition and leading
to a more productive use of resources. The implementation of a fully market-oriented
reform is also necessary to eliminate the long-standing advantages that Japan Post has
been accorded over U.S., Japanese, and other private companies. The Japan Post
legislation passed by the Diet in October 2005 establishes a framework for progress inthese directions. As preparations are made to implement these reforms, it is importantthat all necessary measures are taken to fully realize the legislation’s principle ofestablishing equivalent conditions of competition between Japan Post and the private
sector. It is also important that the preparatory process and implementation of thesereforms be fully transparent to all interested parties.
A.

Level Playing Field for Postal Savings and Insurance. The United States
welcomes confirmation by Japan that the new postal savings bank and postal
insurance corporations, from the outset of the privatization process in October
2007, will no longer be allowed to offer products that carry special government
guarantees and that they will be required to meet the same tax, legal, andregulatory obligations and, along with the Post Office Corporation, be subject tothe same supervision as private sector companies. In addition to ensuring thatthese above-mentioned measures are fully implemented, the United States urges
Japan to take the following additional steps to clearly and fully achieve a levelplaying field between Japan Post and private sector companies:
1.

Implement adequate measures to ensure that business relationships,
finances, management, and ownership among the four privatized postal
service suppliers and with the holding company are fully separated anddisclosed (including the clarification of profits and losses), and, in addition,
ensure full independent supervision of these businesses is conducted by therelevant governmental agencies to ensure these relationships andtransactions are truly arms-length.

Annex - 33

B.

2.

Ensure the Incorporated Administrative Agency Management Organization
for Postal Savings and Postal Life Insurance (Public Successor
Corporation) regularly and fully reports transactions and financial
relationships with the new postal businesses, observes rigorous corporate
accounting rules, and, prior to the beginning of the transition period, ismade subject to a valuation of its assets, liabilities, and reserves by
independent auditors.

3.

Ensure that private sector firms are given equal access to compete for Japan
Post distribution of financial products, and that the selection of thesecompanies is conducted in a non-discriminatory and transparent manner.

4.

Take appropriate action sufficient to dispel public perceptions of implicit
government guarantees on new postal savings and postal insurance
products, with particular care taken prior to the full divestiture ofgovernment shares in the postal insurance and savings businesses.

5.

Take appropriate measures, including rigorous enforcement of the
Antimonopoly Act, to ensure that the Post Office Company, Postal Savings
Bank, and Postal Insurance Company do not use their market power torestrict competition.

6.

Take necessary steps to ensure the Regional-Social Contribution Fund will
be administered transparently, including sufficient and periodic public
disclosure of the cost allocation methodology, cost and revenue data used
to make these calculations, and the distribution of funds. In addition, takeany other necessary steps to prohibit any benefits from accruing unfairly tothe privatized postal service suppliers but not to other domestic and foreign
service suppliers.

7.

Ensure that supervision of Japan Post by the Financial Services Agency(FSA) is conducted from the beginning of the transition period on the same
basis and according to the same laws, regulations, procedures and standards
as other domestic and foreign private financial companies and distributorsof FSA-regulated financial products.

Conditions of Competition and the Introduction of Products. The United States
welcomes mention in the Government of Japan’s outline for legislation in April
2005 that equal footing (with the private sector) will be a factor in GOJ decisions
about permitting expansions in the scope of Japan Post’s business. In that regard,
the United States urges Japan to ensure a level playing field is actually createdbetween the postal financial institutions (both existing institutions and, from
October 2007, the new institutions) and private financial institutions before thepostal financial institutions are permitted to introduce new lending services, newor altered insurance products underwritten by the postal insurance business, andAnnex - 34

the origination of non-principal-guaranteed investment products by the postal
savings business. Achieving a level playing field includes having taken the steps
identified in Section A above.
C.

D.

Level Playing Field for Express Carrier Services. The United States urges Japanto promote fair and free competition in the express carrier sector as privatization
unfolds by ensuring establishment of a level playing field. The United Statesurges Japan to ensure that Japan Post and its affiliated international distribution
services be clearly separated from the universal mailing service and that both
services are conducted in a transparent manner. Specifically, a level playing fieldneeds to be achieved in Japan’s express delivery services market – including for
mail delivered under both Japan Post’s universal mailing service and Express
Mail Service (EMS) – by ensuring:1.

Effective supervision of the Postal Service Company by the Ministry ofLand Infrastructure and Transport under freight transportation laws andordinances and by the Ministry of Internal Affairs and Communications
under postal laws and ordinances, depending on the business activity;

2.

Application of the same tax obligations to the Postal Service Company as
those applied to private companies;

3.

Application of the same customs clearance procedures for mail andpackages handled by Japan Post as those applied to private express
carriers. Specifically, the United States urges Japan to ensure that maildelivered under EMS follows the “duty declaration” system and not the“duty assessment” system that Japanese regulations currently apply to
EMS mail. In addition, Japan Post should be required to pay equal costs
for customs clearance, including NACCS charges and the costs forapplication document preparation. Furthermore, Japan should ensure it
applies all safety and security laws and regulations to Japan Post letters inthe same manner as to documents carried by private express carriers; and4.

Maintenance of present measures regarding public disclosure of the statusof profit and loss according to current categories; and requiring the Postal
Service Company to disclose the status of profit and loss according to thecategories of postal services business and other, newly privatized businessareas – including domestic and international logistics businesses – to thesame standards of Generally Accepted Accounting Principles required ofother private companies.

Inclusiveness and Transparency. The United States welcomes confirmation by
Japan that the preparatory process and implementation of the reforms of Japan
Post will be undertaken in a transparent manner. In addition to providing timely
and meaningful opportunities for private sector interested parties to exchange
views with relevant officials on matters pertaining to these reforms as well as toAnnex - 35

the existing postal financial institutions, the United States urges Japan to take thefollowing steps to ensure that the preparation and implementation of thesereforms is fully transparent and inclusive of the views of various interested
parties:1.

Ensure meaningful opportunities are provided to interested private sector
parties, including U.S. and other foreign companies, to participate in andactively contribute to deliberations by committees or components of suchcommittees convened by the Government of Japan, including the Postal
Services Privatization Committee (PSPC), on issues relating to the
preparatory and transitional phases of Japan Post privatization that may
impact the private sector.

2.

Ensure balanced representation for the PSPC, including appointing
representatives of private sector financial service suppliers, including
foreign service suppliers, operating in Japan.

3.

Fully utilize meaningful Public Comment Procedures with respect toimplementing regulations, guidelines, Cabinet and other orders, and othermeasures established for matters pertaining to Japan Post, and furthermore
ensure that all public comments are fully considered and, whereappropriate, incorporated into draft measures before they are finalized.

Annex - 36

LEGAL SYSTEMS REFORM
I.

Ensuring Freedom of Association of Foreign Lawyers. Freedom of association
between foreign lawyers (gaiben) and domestic lawyers (bengoshi) is a key factor inensuring that Japanese consumers of legal services have access to cost-effective, timely
and integrated legal services. The 2003 amendments to the Foreign Lawyers Law, whichbecame effective in April 2005, are an important step in this direction. In order to buildon that progress, the United States urges that Japan take action, including throughcontinued discussions between the Ministry of Justice (MOJ) and the Japan Federation of
Bar Associations (Nichibenren) and other necessary measures, to ensure that the rules
and regulations of Nichibenren and the local bar associations are consistent with the letterand liberalizing spirit of the Foreign Lawyers Law and do not discriminate against
foreign lawyers.

II.

Permitting Professional Corporations and Branches. The United States welcomes thefact that MOJ is diligently studying whether to permit gaiben to form professional
corporations and is also evaluating the practical considerations that must be addressed if
foreign lawyers were to be permitted to establish branch offices of their law firms without
forming a separate Japanese legal professional corporation. The United States urges
Japan to complete these studies by the end of FY 2005 with a view to submitting
legislation to the Diet that would:

III.

A.

Permit gaiben to form professional corporations on the same basis and with thesame benefits as bengoshi professional corporations; andB.

Allow foreign law firms and their gaiben partners in Japan to establish multiple
branch offices in Japan of such law firms without being required to form aseparate Japanese legal professional corporation.

Easing Minimum Qualification Criteria for Foreign Lawyers. In order to encourage
foreign lawyers with a long-term interest in Japan to seek qualification as a gaiben, theUnited States urges Japan to amend the Foreign Lawyers Law so that all of the time
foreign lawyers spend practicing the law of their home jurisdiction in Japan – whether ina joint enterprise, domestic law firm or other legal environment – will be counted toward
the three-year experience requirement.

Annex - 37

COMMERCIAL LAW
I.

Promoting Efficient Restructuring and Shareholder Value. A modern company law
regime that facilitates, rather than impedes, domestic and cross-border merger andacquisition transactions will promote efficient restructuring across the economy andmaximize shareholder value to the benefit of investors both large and small. Importantcomponents of such a modern regime include rules permitting and facilitating the use ofmodern merger techniques, tender offers and corporate reorganization, as well as themaintenance of appropriate mechanisms to safeguard the rights of minority shareholders.
The United States welcomes Japan’s efforts to modernize its commercial law regime byamending its Company Law in 2005, which included provisions that will introduce
modern merger techniques and permit important corporate reorganization. To ensure
these measures are implemented and supported in a manner that brings Japan closer tointernational trends in this area, the United States urges Japan to:II.

Implement Modern Merger Techniques

III.

A.

Promulgate Ministry of Justice regulations implementing the Company Law thatwould have the effect of permitting without significant restriction or procedural
hurdles (such as listing on a stock exchange in Japan) the use of shares listed on
the major international exchanges as consideration in triangular merger
transactions with Japanese public companies.

B.

Ensure that such proposed regulations are published for public comment, in
accordance with the Public Comment Procedure, and that foreign governments
and interested parties are afforded ample and meaningful opportunities to provide
comments on the draft regulations before they are finalized.

C.

Implement, well in advance of the effective date of the relevant provisions of theCompany Law, regulations on the tax treatment of triangular mergers that provide
clear and predictable rules regarding the availability of tax deferral benefits withrespect to these mergers and that facilitate these tax deferral benefits inappropriate cases.

Facilitate Efficient Tender Offer Bids
A.

Amend the Securities Exchange Law, or take other necessary action, to allow
tender offer bids to be made conditional on certain reasonable requirements, suchas no material changes in the financial situation of the target company, stock
splits, withdrawal of anti-takeover defenses, etc. or to allow tender offer bids to bemodified in response to such changes.

B.

Adopt a regulation of the Financial Services Agency (FSA) establishing arequirement or fiduciary duty on board members of publicly traded target
companies to state the Board’s views, based on a fair and impartial analysis, onwhether the stockholders should accept or reject tender offers or to state that theAnnex - 38

Board has decided to remain neutral or otherwise is unable to take a position onsuch offers.
C.

Facilitate Conversions to New Corporate Forms. Provide in the Cabinet
Ordinance or Ministerial Ordinance of the Company Law a mechanism by which
companies may convert their corporate form from a limited liability company(yugen kaisha) or joint stock company (kabushiki kaisha) into a consolidated
company (godo kaisha) by the effective date of the law.

D.

Make Appraisal Rights More Effective. Simplify procedures and valuation
methods to facilitate the assertion of appraisal rights by dissenting shareholders in
all relevant types of M&A transactions.

IV.

Protecting Foreign Firms Legitimately Doing Business in Japan. Recent amendments
to the Company Law have created tremendous uncertainties as to the potential liabilities
of foreign companies legitimately operating in Japan through branch offices. To avoid
having such foreign companies incur high costs in changing their business structures toavoid the risks of liability created by such amendments, the United States strongly urges
Japan to amend the Company Law, before it comes into effect in May 2006, to makeclear that foreign firms doing business in Japan through branch offices that are duly
registered under the Company Law and are complying with applicable regulatory and tax
laws are not subject to the prohibition of engaging in business in Japan and the liabilitiesof their directors and officers set out in Article 821.

V.

Strengthen Good Corporate Governance. The strengthening of corporate governancemechanisms has been shown to have a positive impact on business performance, leading
to more efficient operations and corporate structures, higher returns to shareholders and,ultimately, to a healthier economy. One of the most important preconditions for good
corporate governance systems are mechanisms that encourage and facilitate the active
exercise of shareholder rights, including active participation by both institutional andsmall shareholders in proxy voting and accessible legal mechanisms to provide oversightof decisions that are not consistent with law. The United States welcomes the measuresalready taken by Japan to encourage active proxy voting by pension funds and investment
trusts. In order to further improve corporate governance systems in Japan, the UnitedStates recommends that Japan:A.

Promote Shareholder Value through Active Proxy Voting by Institutional
Investors.
1.

Revise the Government Pension Investment Fund’s (GPIF’s) Investment
Management Policy to require disclosure of fund manager proxy voting
policies.

2.

Announce by Spring 2006 the conclusions of the Ministry of Health,
Labor and Welfare’s study of whether it should adopt a specific fiduciary
duty on private pension fund managers to actively evaluate whether toAnnex - 39exercise proxy voting rights of the pension fund, based on the best interestof fund beneficiaries.
3.

Report on the specific steps taken by FSA to encourage the Investment
Trust Association to require members to publicly disclose their actual
proxy voting records, and the response of that Association.

B.

Eliminate Disincentives to Proxy Fights. Ensure that corporate boards have theauthority, without the board members being subject to legal liability, to decide to
reimburse shareholders for the solicitation expenses incurred in the course of
pursuing successful proxy initiatives that had previously been opposed by the
Board.

C.

Facilitate Proxy Voting. Encourage the Tokyo Stock Exchange (and other stock
exchanges in Japan) to enhance corporate governance of its listed companies byreviewing, and where appropriate, revising its rules to ensure the effective andefficient exercise of proxies by shareholders of its listed companies, including
through the use of electronic voting wherever possible, taking particular accountof the growth in the number of foreign shareholders in companies listed on suchexchanges, the need to promote the exercise of proxies by such shareholders, andthe conclusions of the Corporate Value Study Group.

D.

Strengthening Court Review of Special Shareholder Resolutions. Amend theCompany Law to lengthen the current three-month statute of limitations for filingshareholder lawsuits challenging the legality of special shareholder resolutions,particularly with respect to those that will affect the principle of equality ofshareholder rights.

Annex - 40

DISTRIBUTION
I.

Airport Landing and User Fees. The United States urges Japan to improve the businessand tourism climate in Japan and help boost the economy by:A.

Immediately reducing landing and user fees at Kansai International Airport,
which would benefit both Japanese consumers and industry;

B.

Opening the formula used to calculate landing fees at Japan’s international
airports to public comment; andC.

Ensuring the landing fee calculation at all airports is transparent both for domestic
and international flights, and includes only those costs associated with the use of
airport runways and facilities, as prescribed by IATA.

II.

Airline Sales Distribution. Japan is one of very few countries that enforces the IATA
Minimus 70-percent low pricing band on tickets sold by airlines, preventing them fromoffering competitive discount fares. Ending this practice would stimulate travel bygiving the public access to a wider array of fares with greater control of their travel
choices and help reach Japan’s goal of increasing inbound tourism. It would also create acompetitive market for Internet and other published airline ticket sales. The UnitedStates urges Japan to end this practice and proposes that further discussion to this end be
held in air services negotiations between the appropriate authorities.

III.

Airport Construction and Operation. Narita Airport recently started an ambitious setof construction projects to extend its runway B to allow for use by larger aircraft. The
process for planning and financing this has not been fully transparent, and a detailed
breakdown of the budget has not been made available. As a result, many carriers, notonly from the U.S., are concerned this project has increased in scope and may beinefficient and unprofitable. While the United States applauds NAA’s recent reduction oflanding fees (although this was offset somewhat by other fee changes), there is
widespread concern that fees will be raised again in the future to fund this expansion andthat the expansion may not be carried out in the most economical way. There are similar
concerns with construction at other airports.

IV.

Haneda Airport Operations. The project to construct a fourth runway at Haneda
Airport, to be completed by 2009, will provide needed new slots to the Tokyo area. The
planned internationalization of Haneda, however, has moved forward without adequatetransparency. The United States urges Japan to create a mechanism by which carriers
and other interested private-sector parties can be informed of proposed rule changes,
expansion plans, curfews, and other changes at Haneda, and provide such information ina timely manner to allow for comment on any proposal before it has been finalized. In
particular, the lack of transparency has created concern over two issues: (1) A perimeter
for allowable international flights has been proposed, but it is unclear how wide thisperimeter would be and carriers from what countries it would include; and (2) Any
proposed changes in operating hours that may affect U.S. carriers in the future should be

Annex - 41

handled in a transparent manner, with a full explanation of their justification, and withadequate time to comment upon them during the decision-making process.
V.

Customs Prior Reporting Requirements. On November 9, 2005, the Ministry of
Finance (MOF) announced it would introduce a bill that would revise the Customs Law
to require all aircraft and ships to submit detailed information on passengers and cargoprior to arrival in Japan. The current Customs Law only requires the submission of thesame information at the time of border entry. MOF’s plan would require aircraft andvessel captains or their airlines and shipping companies to submit the prior reports. The
Government of the United States urges the Government of Japan to provide adequate
time for carriers to comment on the plans as they are developed; broaden reporting
authority to allow prior notification on cargo from all relevant parties, including freight
forwarders; and ensure any such requirement cover all carriers and categories of cargo,
including any postal carrier and mail delivered under the EMS (Express Mail Service)
Cooperative.

VI.

Customs Declaration. The United States urges Japan to allow Nippon Automated Cargo
Clearance System (NACCS) users to declare express items at any convenient Customs
office, rather than limiting them to the office where the cargo is physically stored.
Because customs clearance is already performed on-line though NACCS, allowing
declarations to be processed at a customs office separate from the cargo location would
improve the efficiency of express carrier operations and move shipments more quickly totheir destinations in Japan.

VII.

Co-location of Customs Officials. We urge the Government of Japan to allow Japanesecustoms officials to work in the bonded areas of express carriers. Article 35 of Customs
Law allows Customs officers to work in express carriers’ bonded facilities, and doing sowould improve processing efficiency at a time when the number of express items
entering Japan is rapidly increasing. It would also help prevent illegal imports andexports.

VIII. De Minimis. The United States urges Japan to increase the Customs Law de minimis
limit from its currently low 10,000 yen level to a more reasonable 30,000 yen in
anticipation of a rise in the MOF consumption tax. This change would reduce workloads
for both Customs and express carriers alike and reduce customs clearance time.
IX.

Express Carrier Vehicle Requirements. Japanese law requires private express
companies to have at least five trucks in one local area in order to start package delivery
service to that locale. The regulation is not only a disincentive for private companies but
also exempts Japan Post, whose vehicles can travel anywhere in Japan without restriction
under the banner of providing universal mail service. The United States urges Japan torelax this requirement.

X.

Facilitation of Credit/Debit Card and ATM Services and Acceptance. The use ofcredit, debit, and ATM cards is expanding at a rapid rate worldwide, and in the UnitedStates, Europe and Canada, 90 percent of all merchants accept credit or debit cards andAnnex - 42

over one-third of all purchases are made with these cards. Low card acceptance at bothtraditional merchants and ATMs in Japan inconveniences Japanese residents and is also acommon complaint of foreign visitors to Japan. In the spirit of the e-Japan II initiativeand Prime Minister Koizumi’s goal of doubling Japan’s inbound tourists from overseas
by 2010, the United States urges Japan to:

XI.

XII.

A.

Further promote the use of credit and debit cards by businesses and as payment
for national and local government services;

B.

Work to open Japanese bank ATMs to international ATM networks; andC.

Continue to strictly enforce laws and regulations relating to credit card fraud.

Revision of the Road Transportation Vehicle Law. To facilitate registration and title
transfer procedures, the Office of the Trade and Investment Ombudsman (OTO)
recommended in March 2005 a review of the Road Transportation Vehicle Law (RTVL)
and its implementation. Current procedures are aimed at individual owners of single
vehicles and cannot reasonably accommodate the large number of changes in registrationand title transfers made by auto leasing companies and other owners of large numbers ofvehicles, such as would occur as the result of a corporate name change or when vehicles
are transferred as part of a corporate merger. The United States therefore urges the Japan
to consider changes to the RTVL that would:
A.

Allow registered owners of fleet vehicles to change fleet vehicle registrations andregister title transfers independently of the registered user’s application for changeof the description in the certificate of vehicle inspection;

B.

Eliminate the need for the owner to present the original certificates of vehicle
inspection at the time of application; andC.

Allow these changes to be made in a more reasonable time frame using acomputerized online system.

Laws Affecting Large Scale Retail Stores. The United States welcomed Japan’s
passage of legislation in 1998 repealing the Large Scale Retail Store Law as a significant
improvement to the establishment, operation, and expansion of large retail stores inJapan. Steps are currently under consideration within Japanese ministries, however, that
may tighten or place new restrictions on the ability of retailers to open larger stores thatmeet consumer needs. The United States urges Japan to ensure that its initiatives torevitalize urban areas do not result in new regulations or other measures that limit theability of retailers to open large scale stores in urban, suburban, and rural areas.

Annex - 43