Annual Reform Recommendations from theGovernment of the United States to the Government of Japan under the
U.S.-Japan Regulatory Reform and Competition Policy Initiative
October 14, 2001

Launched by President Bush and Prime Minister Koizumi on June 30, 2001 under the U.S.-Japan
Economic Partnership for Growth (the Partnership), the Regulatory Reform and Competition Policy
Initiative (the Regulatory Reform Initiative) is designed to further deregulate the economy, bolster
competition, and open markets in Japan.
The United States is encouraged by Japan’s continuing commitment to reform and the recent strong
statements by Prime Minister Koizumi to “promptly and swiftly” carry out regulatory reform and toadhere to the principle of “No Growth Without Reform.” The United States also welcomes
establishment of the Three-Year Program for Promoting Regulatory Reform by the Cabinet on March
30, 2001, and the announcement of the Reform Work Schedule by the Koizumi Administration on
September 21, 2001.
Consistent with the overall objective of the Partnership, the recommendations set out herein include
reform measures pertaining to key sectors and cross-cutting areas expressly designed to facilitate areturn to sustainable growth in Japan. Further, in an effort to create a new, constructive tone in the
U.S.-Japan bilateral trade and economic relationship, the United States has made a concerted effort tofocus on issues that Prime Minister Koizumi and his Administration have identified as important areas
for reform, such as information technologies, telecommunications, medical, energy, and competition
policy.
The proposals included in the Summary of Recommendations and the Annex are being provided toserve as the basis for discussions over the coming year in the High-level Officials Group and theWorking Groups established under the Regulatory Reform Initiative. They are also being provided toserve as the basis for an annual report to the President and Prime Minister specifying the progress madeunder this Initiative, including reform measures to be taken by each Government.
An important feature of this Initiative, as described under the Partnership, is integration of the private
sector into the work of the two Governments. The United States looks forward to working with Japanover the coming weeks to identify issues addressed in this Initiative that could benefit from privatesector input. Areas of interest to the United States include privacy issues related to information
technologies, reduction of regulatory requirements for competitive telecommunications carriers, energy
liberalization and supply security, and cross-border share exchanges.
The U.S. Government is pleased to present these reform recommendations to the Japanese
Government and looks forward to receiving Japan’s reform proposals to the United States.

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

ANNEX
TELECOMMUNICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 1
INFORMATION TECHNOLOGIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 8
ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 11
MEDICAL DEVICES AND PHARMACEUTICALS . . . . . . . . . . . . . . . . . . . . . Annex - 16
FINANCIAL SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 19
COMPETITION POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 21
TRANSPARENCY AND OTHER GOVERNMENT PRACTICES . . . . . . . . . . Annex - 26
LEGAL SYSTEM AND INFRASTRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 30
COMMERCIAL LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 34
DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex - 37

SUMMARY OF RECOMMENDATIONSTELECOMMUNICATIONSJapan has set an ambitious goal of building one of the world's most advanced telecommunications network
infrastructures by the year 2005. Given the “multiplier effect” of this sector in stimulating growth,
investment, and efficiency throughout the economy, this is a laudable goal. Attempting to achieve thisgoal while at the same time maintaining and deepening competition, however, poses formidable policy
challenges, given the susceptibility of advanced services to monopolization.
With both the “eJapan Strategy” and the Koizumi Administration’s regulatory reform initiatives, Japan has
begun to implement policies that can significantly contribute to economic growth and increased investment
through the development of a more vibrant information technology sector. Parts of the current ThreeYear Program for Promoting Regulatory Reform – such as rationalizing regulatory methods, increasingtransparency of procedures, and ensuring increased competition in the IT sector – are of particularimportance to the telecommunications sector.
Recent telecommunications policy initiatives in Japan have aimed to put this sector on a pro-competitive
footing. This process has brought about improvements in the telecommunications and information
technology environment in Japan, but it is incomplete. While the current momentum for reform in these
sectors is encouraging, the United States urges Japan to complete the process of instituting andimplementing a pro-competitive regime, rather than settle for something less.
SUMMARY OF RECOMMENDATIONS•

infrastructure that competitors require toreach subscribers.

Deregulating Competitive Carriers:
Eliminate or reduce filing and reporting
requirements for competitive carriers,
especially for wholesale services.

•

Regulatory Independence: Establish astrong, independent telecommunications
regulatory authority and eliminate government
ownership of service providers.

•

Dominant Carrier Regulation andCompetition Safeguards : Strengthen andimplement dominant carrier regulations toprevent competitive abuses by Nippon
Telegraph and Telephone (NTT) and NTT
DoCoMo.

•Interconnection: Reduce highinterconnection rates and reform theinefficient rate structure that hinders thedevelopment of a competitive telecom market.

•

Rights of Way and Access to Incumbent
Facilities: Further facilitate access to

1•

Resale/Unbundling: Expand the scope ofservices subject to resale obligations andprovide transparency for setting wholesale
discounts. Broaden access to NTT network
elements for competitors, including certain
computer systems and require NTT to provide
to competitors access to emergency services,which NTT currently denies.

•

Universal Service: Fully evaluate whether auniversal service subsidy program isnecessary and ensure that any proposed
subsidies are competitively neutral.

•

International Internet Services Policy:
Analyze how growth of and access to Internet
services can be furthered not throughregulation of international links but throughenhanced competition in domestic bottlenecks.

INFORMATION TECHNOLOGIESInformation technologies are revolutionizing the way business, government, education and entertainment
are conducted. Despite the recent slowdown of IT-related industries and the shake-out among “dot.com”
companies, e-commerce has become an established and key component of our economies. Both theUnited States and Japan recognize the need for continued development of this sector, which has
tremendous growth potential that will ripple across the economy in numerous areas identified by the
Koizumi Administration as reform priorities, such as health care and education. The United States looks
forward to cooperating with Japan to create and promote a competitive and innovative IT sector which
can benefit both economies and societies, as well as provide global leadership for the use of information
technologies.
For the IT sector to thrive and flourish, a regulatory framework must be established that ensurescompetition, promotes innovation, allows private sector-led regulation, and protects intellectual property
rights in the digital age. Through the “e-Japan Strategy,” as well as the subsequent “e-Japan Priority
Policy Program” and “e-Japan 2002 Program,” Japan has recognized the importance of these principles inrelation to its goal of becoming the “world’s most advanced IT nation” in five years. Japan has
reaffirmed these principles as IT Sector Priority Items under the Three-Year Program for Promoting
Regulatory Reform, and Prime Minister Koizumi recently stated in his policy speech to the Diet on
September 27 that he is committed to accelerating IT reform. The United States welcomes these efforts
and urges the Japanese Government to continue its dialogue with a diverse range of domestic and foreign
parties to ensure flexibility and responsiveness to private sector needs and emerging technologies.
A primary focus on the IT sector under this Initiative is to establish a new framework that will promote
the development of IT-related businesses and innovative information technologies that can be utilized tospur growth in other key sectors of the economy. The United States submits the following
recommendations and proposals for working together to achieve this goal:
SUMMARY OF RECOMMENDATIONS•

Legal Framework: Establish and strengthen
a legal framework in Japan that is appropriate
for the digital age to ensure that use of theInternet and e-commerce can thrive.

•

E-government: Further promote an ITbased interface among government, citizens,and business.
PROPOSALS FOR COOPERATIVE EFFORTS:••

Privacy and Consumer Protection:
Ensure transparency in the implementation of
any new privacy laws, and promote a highlevel of consumer confidence in doing
business online through the development ofprivate sector self-regulatory initiatives.
E-commerce: Ensure that laws governing
electronic transactions are technology-neutral
and that U.S. and Japanese approaches forpayment systems via the Internet facilitate
online transactions.

2•

E-education: Work together on initiatives
which complement e-Japan plans to expand
PC-based Internet use throughout Japan’s
education system.

•

Private Sector Use of IT and Ecommerce: Jointly promote the use of IT
and e-commerce for all companies regardlessof their size.

•

Network Security: Coordinate on issues
concerning international cooperation toprotect the integrity of the Internet.

ENERGY
The U.S. Government welcomes the steps Japan already has taken toward liberalization of its electricity
and gas sectors. Genuine competition in the energy sector would enable Japan to meet its goals of
economic growth and increased efficiency by reducing electricity costs and encouraging innovation. A
competitive environment would also help Japan diversify its primary energy supply by supporting theJapanese Government’s planned increase in natural gas usage – thus promoting Japan’s goal of
maintaining energy supply stability. The steps Japan has taken to date, however, have proven insufficient
to meet these goals. The United States urges the Japanese Government to take bolder steps to promote acompetitive environment in both its wholesale and retail energy sectors, including fair, transparent andnon-discriminatory access to electricity transmission and distribution lines as well as to gas terminals andpipelines.
The reforms the U.S. Government proposes for the Japanese electricity and gas sectors complement
broader reforms already underway in Japan. By helping to lower electricity costs to internationallycompetitive levels and reduce costs for consumers and commercial users, liberalization of Japan’s energy
sector will contribute to one of Prime Minister Koizumi’s key areas for reform – urban renewal. These
reduced costs also stand to help Japan’s industries to gain a greater degree of competitiveness.
To foster economic growth and stability of energy supply in the context of the current global uncertainties,
the U.S. Government urges Japan to fully implement reforms that have already begun and promotefurther liberalization in the electricity and gas sectors as set out in the recommendations below.
SUMMARY OF RECOMMENDATIONS••Electricity Access and Transparency:
Promote equal access to transmission andretail services, as well as greater information
and accounting transparency, for all market
participants.

•

New Construction: Establish guidelines todetermine the need for transmission
construction and promote construction
between electricity service areas.

•

new entry and ensure that privatization andsale of any generating assets promotecompetition.

Regulatory Process and Competition
Policy: Articulate concrete measures topromote regulatory authority independence,
define policy goals for the energy sector
reform process, improve competition policy
safeguards, and expand access by all market
participants to the policy-making process inthis sector.

New Entry of Competitive Generators:
Expand electricity infrastructure to promote

3•

Gas Access and Transparency: Promote acompetitive gas and LNG market throughunbundling and transparency of usage charges
and information.

•

New Construction of Transportation
Infrastructure: Establish guidelines todetermine the need for pipeline and LNG
facility construction and promote constructionof pipelines between gas service areas and
LNG facilities within electricity service areas.

•

New Entry of Competitive Gas Suppliers:
Expand transmission infrastructure in the gas
sector to guarantee new entry by gas
suppliers and electricity suppliers.

MEDICAL DEVICES AND PHARMACEUTICALSThe U.S. Government generally welcomes Prime Minister Koizumi’s focus on medical sector reform as
Japan seeks “to achieve efficient, high quality medical care.” Innovation, harmonization, transparency,
predictability, and enhanced efficiency achieved through the introduction of market forces can help Japan
meet these goals and spur economic growth. Faster approval and broader availability of innovative drugs
and medical devices can dramatically reduce overall healthcare costs while improving the quality of care.
During the reform process, it is critical that innovative products are not falsely labeled as cost-drivers andtargeted for inappropriate price cuts. Addressing systemic inefficiencies in Japan that drive highhealthcare expenditures (including the longest average hospital stays in the world, over-capacity of
hospitals, lack of IT systems and limited hospital specialization, etc.) and removing regulatory and tradebarriers in this key sector can lead to the a more efficient allocation of resources and encourage the more
rapid introduction of life-enhancing and cost-effective products to Japanese patients. This, not short-term
expedients, is the key to true reform with long-lasting benefits for Japan. It is vital that all interested
parties, including the U.S. medical device and pharmaceutical industries, have “meaningful opportunities”
to participate in the reform debate and that their proposals are given “serious consideration.”
SUMMARY OF RECOMMENDATIONS•

Healthcare System Reform: Introduce
competitive market forces and pursue
structural reform in order to improve Japan’s,healthcare system, including increasing thelevel of medical information available to the
public and expanding the roles of privatecompanies in hospitals and nursing carefacilities.

•

Medical Device and PharmaceuticalPricing Reform: Ensure that the introductionof innovative medical devices andpharmaceuticals is encouraged and receives
timely and “appropriate valuations thatrecognize the role of the market.” Assurethat such products are not subject to arbitrary
price control measures that devalue innovative
products.

4•

Medical Device and Pharmaceutical
Regulatory Reform: Continue to introduce
steps to expedite regulatory approvals of
medical devices and pharmaceuticals,particularly for products that are available inother major markets, but have not yet been
introduced into Japan.

•

Acceptance of Foreign Clinical Data:
Continue to work within the International
Council on Harmonization process to promote
the broader use of foreign clinical data andfacilitate more efficient utilization of Japan’s
clinical trial system.

•

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

FINANCIAL SERVICESThe U.S. Government welcomes Japan's successful implementation of the measures under the 1995
U.S.-Japan Measures Regarding Financial Services, as well as Japan's actions taken to date under its Big
Bang financial deregulation initiative. A more efficient and competitive financial sector will play a crucialrole in returning Japan to its full growth potential. The introduction of private defined contribution pension
plans this year is a particularly welcome step in encouraging income security, better corporate
governance, and more flexible labor markets.
SUMMARY OF RECOMMENDATIONS•Defined Contribution Pensions:
Encourage the development and adoption ofdefined contribution pension plans by creating
a clear and unified regulatory regime for theindustry and by allowing plan providers to gain
regulatory approval for prototype plans.

•

Investment Trusts: Encourage greaterhousehold and pension fund investment insecurities by increasing the safety, flexibility,
and understandability of investment trusts andby lowering the costs of providing this key
investment vehicle.

•

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

5•

Postal Financial Institutions (Yucho andKampo): Allow greater flexibility for the
postal financial institutions to employ theservices of investment advisory companies
through direct onshore trust arrangements.
Increase transparency and promote private
sector provision of services by subjecting any
new financial service activities proposed for
the Postal Financial Institutions to full publiccomment and consideration before theirintroduction.

•

Financial Institution Reporting and
Notification: Work closely with the private
financial services community to review andstreamline current requirements for financial
institution reporting. Allow financial
institutions to maintain records in electronic
form, and where possible, to distribute reports,
filings and notifications by electronic means.

COMPETITION POLICYThe U.S. Government shares the Council for Regulatory Reforms’ view that the vigorous promotion andpreservation of competition in Japanese markets, including through the creation of a climate conducive to
new entry, is essential to Japan’s economic recovery. To meet these challenges, it is necessary that theJapanese Government ensure that the Japan Fair Trade Commission (JFTC) has the tools, resources, andadministrative independence necessary to enforce the Antimonopoly Act (AMA) effectively and topromote competition throughout the Japanese economy.
This will require strengthening of the JFTC’s structure and investigatory capabilities, as well as bolstering
the effectiveness of its enforcement actions. It will also require a government-wide program to seriously
address the bid rigging system or dango. Such a program, if successful, could reduce public-works
outlays by 30 percent and free resources for employment-creating initiatives, which is in line with Prime
Minister Koizumi’s key priority of expanding the social safety net. Achievement of this goal will also
require a Japanese Government commitment to rely on competition and market principles as it continues
down the road of economic restructuring and regulatory reform. The United States, therefore,
recommends that Japan take the measures set out below.
SUMMARY OF RECOMMENDATIONS•

Independence and Staffing of the JFTC:
Change the JFTC’s organizational status toensure its independence, and substantially
increase its staff and resources.

•

JFTC Investigatory Capabilities: Institutea corporate leniency program for AMA
violators, improve JFTC powers andprocedures for criminal accusations, ensure
severe punishment of those who impede JFTC
investigations, and provide adequate staffing
for AMA enforcement in the information
technologies and public utility sectors.

•

Effectiveness of AMA Enforcement
Actions: Improve the deterrent effect ofsurcharge orders, extend the scope of
elimination orders, and widen the scope of
permissible private injunction suits.

6•

Elimination of Bid Rigging: Implement a
series of measures to eliminate bid rigging,including the introduction of effective
legislation to prevent kansei dango(bureaucrat-led bid rigging).

•

Competition and Regulatory Reform:
Prevent re-regulation by private sector
restrictions (min-min kisei) or anticompetitive
administrative guidance, promote competition
in industries undergoing regulatory reform, andpursue privatization of public corporations in amanner that enhances competition.

TRANSPARENCY AND OTHER GOVERNMENT PRACTICESThe United States appreciates that the Japanese Government has made the need for greater transparencya crosscutting theme of its Three-Year Program for Promoting Regulatory Reform (Cabinet Decision ofMarch 30, 2001). It is essential for a vibrant economy that its regulatory system ensure transparency,
fairness, predictability, and accountability. It is important that domestic and foreign firms alike have fullaccess to information and opportunities to participate in the regulatory process.
The systemic measures set out in the Three-Year Program could contribute to needed improvements inthe transparency and accountability of the Japanese regulatory system. They include: the strict
enforcement and promotion of the use of the Administrative Procedure Law; increased transparency ofadministrative guidance; full and effective implementation of the Law Concerning the Disclosure ofInformation Retained by Administrative Agencies; wide and effective use of the Public Comment
Procedures for Formulating, Amending and Repealing Regulations; introduction of the “No Action Letter”
system; comprehensive and objective evaluation of the regulatory process; and examination of the need,effects, and costs of new proposed regulations.
Building on these measures, the United States recommends that the Japanese Government undertake thefollowing additional improvements in its regulatory system to support Japan’s reform efforts and ensurethat all players have the same access to government information and the policymaking process.
SUMMARY OF RECOMMENDATIONS•

Public Comment Procedures: Revise theProcedures to make them an effective
regulatory mechanism, including by
establishing a central registry for all
solicitations, requiring a minimum 30-day
comment period, authorizing an independent
review of use of the Procedures, andestablishing a study group to examine theProcedures.

•

Judicial Review of Administrative
Actions: Increase the authority of the courts
to review administrative actions ofgovernmental agencies.

•

Public Corporations: Ensure that theprocess of restructuring and privatizing public
corporations is transparent and private sector
entities have an opportunity to provide input.

•

Administrative Guidance: Reduce the useof administrative guidance and require alladministrative guidance to be issued in writing(except in special cases).

•Regulatory Impact Analysis: Introduce a
Regulatory Impact Analysis (RIA) systemthat would apply to significant regulatorychanges.

•Public Participation in Development ofLegislation: Develop a mechanism thatwould enable all interested domestic andforeign parties to review and comment ondraft legislation before governmental agencies
submit the draft legislation to the Diet.

•

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

7

LEGAL SYSTEM AND INFRASTRUCTURE
To facilitate Japan’s recovery and economic restructuring, it is critical that Japan create a legal
environment that is conducive to international business and investment and that supports regulatory andstructural reform. The Japanese legal system must be able to respond to the market’s needs forinternational legal services in Japan, as well as facilitate business transactions and provide for the
expeditious resolution of disputes. To meet these challenges, Japan needs to undertake significant reformof its legal system so that it is easily accessible and can function expeditiously and efficiently.
The United States recognizes that Japan has begun the process of addressing a number of critical legal
reform issues. The Judicial Reform Council (JRC) in its report (Recommendations of the Judicial
Reform Council – For a Judicial System to Support Japan in the 21st Century) has made a number ofsignificant recommendations for the improvement of the Japanese judicial system. It is now important for
the Japanese Government to take decisive action to implement the JRC’s recommendations – through thetimely preparation and enactment of effective legislation. To this end, the United States recognizes that
the Japanese Government has begun that process by establishing a Headquarters for Judicial System
Reform and making judicial reform one of the priorities of its reform programs.
SUMMARY OF RECOMMENDATIONS•

Unrestricted Freedom of Association:
Eliminate all prohibitions against freedom of
association between Japanese and foreign
lawyers and allow them to determine theirown forms of association.

•

Restrictions on Foreign Lawyers: Allow
foreign lawyers to hire Japanese lawyers andto provide advice on third-country law on thesame basis as Japanese lawyers; allow
foreign lawyers to establish professional
corporations, limited liability partnerships(LLPs), and limited liability corporations.

•Improvements of Foreign Lawyers
Regulatory System: Ensure that foreign
lawyers have opportunities to participate in thedevelopment and enforcement of rules that
affect them; reduce the time required forforeign lawyer registration.

8•

Implementation of Judicial Reform
Council’s Recommendations : Expeditiously
implement JRC’s recommendations toincrease the number of legal professionals,
reform the Arbitration Law, increase thespeed and efficiency of civil litigation,
strengthen judicial oversight of agencies, andreduce filing fees for civil litigation in Japan.

•

Improvements in the Japanese Judicial
System: Take additional measures to improve
the judicial system by improving evidencegathering methods, augmenting protection of
trade secrets during court hearings, clarifying
the attorney-client privilege, making judicial
remedies more effective, and increasing thetransparency of judicial proceedings.

COMMERCIAL LAW
The United States commends Japan for undertaking a major initiative to reform its Commercial Code andother commercial laws. Comprehensive revision of Japan’s commercial laws should have a profoundeffect on both domestic and foreign firms. The liberalization of restrictions on equity securities will
facilitate the acquisition of capital necessary for restructuring and new investment. By introducing
greater flexibility into the organization, management and capital structure of companies, particularly
through improvements in corporate governance, corporate management will become both moreaccountable and efficient, which in turn will lead to increased productivity and competitiveness. Reformof Japan’s commercial law also has significant implications for the ability of foreign firms to invest andoperate effectively in the Japanese market, bringing crucial technologies, know-how and employment toJapan’s economy. One key impediment to increased foreign investment in Japan is the inability ofdomestic and foreign companies to engage in cross-border share exchanges, which are permitted
between purely domestic companies.
For these reasons, the United States encourages Japan to build on the Commercial Coderecommendations of the Legislative Council by taking the following measures.
SUMMARY OF RECOMMENDATIONS•

Cross-Border Share Exchanges: Permit
and promote cross-border share exchanges.

•

Flexibility in Capital Structure: Permit
cash mergers; revise in-kind contribution court
supervision procedures; eliminate restrictions
on the quantity and recipients of stock options,on the transferability of new subscription
rights and on non-voting shares; and permit
classes of shareholders to elect a specified
portion of the board.

•

financial statements accurately represent thefinancial condition of a company.

Corporate Governance. Provide publicly
traded companies the option of adopting an
executive committee and outside director
system instead of continuing to use thestatutory auditor system; apply any mandatory
outside director system only to publicly traded
companies; ensure that outside directors are
truly independent; oppose changes to theshareholder derivative system that undermine
board accountability to shareholders; permit
companies to use electronic means forrequired shareholder meeting procedures;
reinforce the obligations of fiduciaries thatmanage pension funds; and ensure that

9•

Statutory Agents. Oppose any proposal torequire foreign corporations to appoint
statutory agents who would be jointly andseverally liable for all liabilities of thecorporation.

•

Public Input into Commercial Law
Revision Process. Provide the public,
including the international business and legal
communities, with meaningful opportunities toprovide input into the formulation ofrecommended revisions to the JapaneseCommercial Code and other commercial law.

DISTRIBUTION
Japan's Three-Year Program for Promoting Regulatory Reform states that "the distribution sector
functions as a nexus connecting producers and consumers, and plays a major role in....improving thequality of life of the citizenry." The U.S. Government applauds the Three-Year Plan's goal to "advance
regulatory reform of the distribution sector, including the abolition of regulations that impede free
corporate activities, to contribute to improving consumer convenience and expanding consumer choice,and to facilitate upgrading and improving the efficiency of the distribution sector as well as the
manifestation of ingenuity by distribution sector enterprises."
The ability to move goods quickly and inexpensively from producers to consumers is not only a key
measure of economic efficiency, but also of vital importance to economies seeking to benefit from theinformation technology revolution. In its introduction to the new Simplified Declaration Procedures, theMinistry of Finance acknowledges this important point. The Ministry notes that "as the employment of
information technology becomes increasingly advanced globally, distribution is becoming more
expeditious" and there is consequently "a growing interest in further simplifying and speeding up customs
procedures to facilitate trade."
The United States urges Japan to continue modernizing customs clearance procedures. The need for the
rapid delivery of goods and information has produced a number of new industries that are now seen asvital for the smooth development of the global economy. One of these industries is the express carrier
industry which has seen exponential growth in recent years and is now an essential tool for the conduct ofinternational business and for the timely distribution of goods and information. The United States believes
there is a need to modernize customs clearance procedures to take full advantage of the economic
benefits provided by these new industries.
SUMMARY OF RECOMMENDATIONS•

Simplified Declaration Procedures: Adapt
the regulations implementing the Simplified
Declaration Procedures to make them widely
available to integrators/agents handling air
cargo.

•

Nippon Automated Cargo Clearance
System (NACCS): Continue to consult withusers of Air NACCS to ensure that anequitable fee structure is installed after the
expiration of the current three-year
arrangement.

•

10

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

ANNEXTELECOMMUNICATIONS
I.

Deregulating Competitive Carriers. Although Japan has taken significant steps to improve
its regulation of dominant carriers, it has done little recently to relieve the regulatory burdens still
imposed on competitive carriers – burdens generally regarded as among the heaviest among
OECD economies. Japan’s recent Three-Year Program for Promoting Regulatory Reform,
however, focuses precisely on these kinds of issues (i.e. areas relating to rationality of regulation
and IT promotion). To address these issues, which contribute significantly to the cost of doing
business in Japan and act as a disincentive to investment, the United States recommends that forcompetitive carriers, the Ministry of Public Management, Home Affairs, Posts andTelecommunications (MPHPT) adopt the following measures:A.

Institute a policy, and obtain any necessary legal authority from the Diet, to forbear
from applying legacy regulations where competition in a market or market segment
permits user interests to be achieved without government intervention; and where risksof competitive abuses are minimal;B.

For competitive market segments, institute class licenses, which do not require any
application by providers, for both Type I and Type II services;C.

For services offered to the public generally, replace tariff filing requirements with
Internet-based public notifications, eliminating any ex-ante MPHPT procedures;D.

For contract-based services, eliminate all filing and notification requirements;

E.

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

F.

For initial licensing requirements, eliminate requirements to provide detailed costjustifications, financial assumptions, and network planning information beyond thegeneral scope of services and description of network;G.

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

For companies combining Type I and Type II operations, eliminate regulatory barriers
preventing such carriers from operating seamlessly as integrated entities (i.e. able toprovide customers Type I and Type II services as an integrated service offering); andI.

Permit carriers to operate both as Type I or Type II carriers using IRU’s, including
wavelength-based IRU’s.

Annex - 1

II.

Regulatory Independence. Most OECD countries have recognized that an independent
regulatory authority is the most effective means of providing a competitive framework fortelecommunications services and expanding user benefits. By placing its regulatory authority forthis sector within MPHPT, Japan has created an environment where the regulatory function canbe unduly exposed to political interference. This problem is exacerbated by potential conflictsof interest associated with the fact that MPHPT pursues large-scale industrial policy programs,
the implementation of which could have a significant competitive impact on this sector. While
creation of the Telecommunications Business Dispute-Settlement Commission is a positive step,
the United States is disappointed that creation of a truly independent regulator has been
removed from consideration under the current regulatory reform agenda. In this light, the U.S.
Government recommends that Japan implement the following measures to strengthen regulatory
independence:
A.

B.

Independent Regulator
1.

To minimize undue political involvement in regulatory decisions, which could
compromise the impartiality of such decisions, initiate the full separation of theregulatory function from other MPHPT functions, including industrial promotion,
as is done in other OECD countries;

2.

Eliminate potential conflicts of interest between the government’s role as owner
and regulator of dominant carriers by introducing legislation to permit the fulldivestiture of government ownership in NTT companies, and eliminate all directgovernment involvement in the operational decisions of these companies; and3.

Limit potential personal conflicts of interest by strengthening safeguards related
to private-sector secondments to MPHPT, and MPHPT facilitation of transition
from public to private sector employment (amakudari).

Telecommunications Business Dispute-Settlement Commission
1.

Empower the dispute-settlement commission with the authority and financial
means to order substantive, independent audits of companies engaged in
potentially infringing practices;2.

Empower the dispute-settlement commission with injunctive relief and authority
to enforce decisions with monetary penalties;

3.

Institute procedures (e.g. closed deliberations) to ensure that commission
members are able to make decisions free of MPHPT and NTT influence; and4.

Require commission decisions and the rationale for such decisions to be madepublic.
Annex - 2

C.

III.

IV.

Other Measures: Institute procedures to facilitate parties’ ability to appeal regulatory
decisions.

Dominant Carrier Regulation and Competition Safeguards. The United States welcomed
Japan’s adoption of enhanced asymmetric regulation in its June 2001 amendments to theTelecommunications Law, which provided for clearer rules on carriers with a dominant position
in its market and more specific obligations. The United States recommends that MPHPT
vigorously implement and enforce such regulations, particularly in regard to:A.

Unbundling advanced facilities, such as remote terminals and fiber optic cable;

B.

Non-discriminatory access to poles, ducts, conduits, and rights of way;C.

Non-discriminatory access to Operations and Support Systems (OSS) forinterconnection and access to unbundled network elements;

D.

Requirements for tariff filings and methods for evaluating pricing abuses by dominant
suppliers (e.g. imputation tests);

E.

Guidelines to eliminate discriminatory pricing of origination services (e.g. Telehodai);F.

Means to ensure that wireless termination rates are cost-based;

G.

Introduction of separate affiliation requirements to ensure that a dominant carrier does
not abuse its position in the provision of value-added services (e.g. if NTT East orWest were to enter the Internet services market);H.

Accounting and reporting requirements (i.e. separate affiliate transaction rules) toensure that a dominant supplier does not use revenues from a regulated service tosubsidize a non-regulated service; andI.

Competition-related performance metrics, including reporting requirements, andfinancial penalties for missing metrics. Such metrics should ensure that a dominant
carrier treats competitors no less favorably than it treats itself or its affiliates in matterssuch as provisioning, quality of service, and repair and maintenance of all network
services and facilities needed by competitors.

Interconnection. In FY2001, the United States looks forward to Japan’s putting in placeamended ordinances on interconnection that implement rate reductions in a manner consistent
with measures included in the Third Joint Status Report of the Enhanced Initiative on
Deregulation and Competition Policy that:

Annex - 3

V.

A.

Ensure that NTT eliminates the interconnection surcharge applied to calls originating or
terminating on ISDN lines;

B.

Eliminate non-traffic-sensitive costs from usage-based interconnection rates;

C.

Require the NTT regional companies to provide interconnection within six months ofapplication or face financial penalties, and refrain from assessing “premium charges”
unless there is a need for major network modification; and to require itemized charges
for modification, subject to independent review;

D.

Ensure competing carriers the right to set retail rates for their subscribers for calls
terminating on DoCoMo’s network; andE.

Require NTT regional companies to expand the list of functions available on aninterconnection basis to include all services currently available to NTT customers. In
particular, require NTT East and West to provide emergency services (110) tocompetitors at a tariffed rate. For services where NTT can prove to an independent
authority that a “value added” charge is valid, NTT should be obligated to provide suchservices to competing carriers at wholesale rates.

Rights of Way and Access to Incumbent Facilities. The U.S. Government recommends
that Japan develop unified regulations within CY 2001, to be implemented throughout theJapanese Government in FY2001, which will require NTT to provide transparent, nondiscriminatory, timely and cost-based access to all poles, ducts, conduits, inside wiring, andrights of way that it owns or controls. Such regulations would:A.

Require NTT to make available, on a timely basis, all necessary information about
facilities it controls to which competitors are entitled access, and allow other carriers to
inspect these facilities;

B.

Ensure that rates, terms and conditions for access and construction and use arereasonable, cost-based and non-discriminatory, vis-a-vis other carriers and NTT’s own
services. MPHPT should consider requiring disclosure of how charges were calculated
in order to ensure that contracts are fair;C.

Establish clear rules for costs and burden sharing associated with surveys and facility
modifications;D.

Require survey, construction and installation be made on a non-discriminatory basis
within a specified time frame;E.

Permit competitive carriers to install and maintain their own facilities – including theirown or leased fiber optic cable – located on NTT property;
Annex - 4

VI.

F.

Ensure these requirements are subject to an expeditious complaint settlement
procedure; andG.

As priority measures, by the end of CY 2001, the U.S. Government suggests that theJapanese Government:
1.

Extend the interconnection obligations that MPHPT has placed on certain partsof NTT’s networks (e.g. up to the manhole closest to the switch) to otherbottleneck facilities, including conduits and ducts linking fiber loops andcustomer premises;

2.

Eliminate the “30-centimeter” rule that prohibits efficient use of utility poles forcompetitive carriers’ cables;3.

Eliminate the winter/spring road digging moratorium set by the Ministry of Land,
Infrastructure, and Transport;

4.

Eliminate mandatory 5-7 year intervals between digging of certain roads;

5.

Explicitly permit trenching of cables, as opposed to installation of conduits andtunnels; and6.

Consider application of items A through F cited immediately above to electricity
companies, utilities, railroads, and highway operators.

Resale/Unbundling. The U.S. Government recommends that in FY2001, MPHPT:A.

For all wholesale service product lines where it is dominant (leased lines, directory
assistance, etc.), require NTT to provide tariffed, wholesale rates; andB.

Require NTT to provide LRIC-based access where competition has not developed to:1.

Local loops, including: high-capacity lines; sub-loops; dark fiber, and insidewiring owned by a designated carrier;

2.

Inter-office transmission facilities, or transport, including dark fiber;

3.

Enhanced extended link (EEL), including a combination of an unbundled loop,
multiplexing/concentrating equipment, and dedicated transport; and4.

Any mandatory service (e.g. emergency services, directory assistance services)where it may be economically infeasible for competitors to replicate.

Annex - 5

VII.

Co-Location. To promote the expansion of services such as DSL and other high-speed dataservices, the U.S. Government recommends that MPHPT ensure that NTT:A.

Charges competing carriers the same rate it charges an NTT group company;

B.

Justifies the basis for charges to the regulatory authority and any interested carrier;C.

Undertakes construction within a set period from the date of application;D.

Allows other carriers to carry out maintenance of their own facilities; andE.

Ensures that carriers have access to operation support systems (order, supply,
maintenance, recovery, billing, access) for services and facilities accessed through colocation arrangements.

VIII. Transparency. To promote greater transparency and accessibility relating to regulatory
measures, the United States recommends that MPHPT:

IX.

A.

Publish all regulatory decisions and an electronic version of the telecommunications
roppo online;

B.

Permit electronic filing of public comments and on-line access to all comments, tariffs,
licenses and other public information, including all carriers’ interconnection agreementswith NTT East and West; andC.

Provide a minimum of 30 days to comment on proposed rules, and a 60-day comment
period to the maximum extent possible.

Universal Service. The U.S. Government recommends that – based on further detailed
analysis of costs incurred and implicit benefits received by NTT – Japan more thoroughly
evaluate whether a universal service subsidy program for basic voice services is necessary. If auniversal service subsidy program for basic voice services can be fully justified, the U.S.
Government recommends that:A.

Funding only be made available where, on a prefecture-by-prefecture basis, costexceeds the LRIC of providing basic voice service by a substantial margin;

B.

Incumbents’ costs be offset by advantages conferred by its incumbent, universal
presence (e.g. marketing advantages, control of a platform for profitable, non-basic
optional services, etc.); andAnnex - 6

C.

X.

The 72,000 yen per-line subscriber line charge already assessed on NTT East andWest’s 60 million subscribers be deducted from network costs forming the basis of theanalysis.

ICAIS. The U.S. Government recommends that MPHPT, together with METI, take the leadin exploring how Internet charging arrangements internationally can be subject to greater
competition through identification of key bottlenecks, particularly in monopoly environments,
where domestic inputs such as leased lines, backhaul costs, and limited choice of local
telecommunications service providers result in inflated user costs.

Annex - 7

INFORMATION TECHNOLOGIESI.

II.

Legal Framework. To ensure that use of the Internet and e-commerce can thrive and spur
economic growth, a legal framework in Japan that is appropriate for the digital age needs to beestablished and strengthened. Specifically, the United States urges the Japanese Government
to:A.

Continue to review and amend existing laws and regulations that require face-to-face or
paper-based transactions, office locations in Japan, and similar measures that hinder ecommerce, in order to allow for electronic transactions in the consumer credit, healthcare and other sectors;

B.

Enact and implement clear-cut Internet Service Provider liability rules that will balance
the interests of service providers, web hosting firms, right holders and consumers.
These rules need to protect carriers from liability for actions outside their knowledge
and control. At the same time, the rules need to provide adequate protection for rightholders through incentives or requirements for service providers to promptly remove
illegal activity, such as infringement of copyrights, as well as provide adequate remedies
for any injuries suffered;C.

Strengthen the protection of intellectual property rights on the Internet by taking
necessary measures to ensure explicit protection of temporary copies under Japaneselaw, expeditiously ratifying the WIPO Performances and Phonograms Treaty, andexamining other intellectual property protection laws that may need to be revised tomeet the challenges of the digital age;

D.

Work in conjunction with the private sector, both domestic and foreign, to review andmake necessary adjustments to the legal and regulatory framework to ensure that new
IT-based business models can be established and operate successfully; andE.

Ensure that foreign and domestic interested parties have the opportunity to review andcomment on the Guidelines for Patenting and Know-how Licensing Agreements forsoftware licensing currently being considered by the Japan Fair Trade Commission.

Privacy and Consumer Protection
A.

Privacy. Recognizing that the Diet is currently considering legislation on privacy, theUnited States urges the Japanese Government to utilize the Public Comment Procedure,
providing a minimum 30-day comment period, and a 60-day comment period to the
maximum extent possible, in developing any implementing ordinances and othermeasures required by the new law. In addition, the United States proposes that Japan
take steps to support a self-regulatory framework for privacy and encourage the private

Annex - 8

sector’s development of authentication systems which do not unduly intrude on
individuals’ personal privacy.
B.

III.

Facilitating E-commerce
A.

B.

IV.

Consumer Protection. In order to promote a high level of consumer confidence indoing business online, the United States proposes that the Japanese Government takemeasures to promote the development of private sector self-regulatory initiatives for
consumer protection and the resolution of consumer disputes (for example, greater
utilization of Alternative Dispute Resolution).

Electronic Signatures. The United States recommends that the Japanese Government,
in its efforts to implement the Law Concerning Electronic Signatures and Certification,
take steps to ensure and clarify that the new law and its implementation are technologyneutral and do not require the licensing of certification entities by the Government. The
United States urges the Japanese Government to:1.

Ensure that parties to a transaction may use any form of electronic
authentication and may introduce that form as evidence in courts in Japan; and2.

Confirm that parties to a B2B (business-to-business) transaction have thefreedom to determine by private agreement the appropriate technological andbusiness methods of authentication and to give such an agreement legal effect.

Payment Systems via the Internet. The United States proposes that the Japanese
Government discusses with it issues related to payment systems via the Internet such as
standards, regulations, transparency, cross-border payments, cooperation against fraud
and other issues to ensure that the respective approaches facilitate rather than hinder
payments for online transactions.

E-Government. The United States welcomes Japan’s plan to create an IT-based interface
between government, citizens, and business, and recommends that Japan take steps to ensurethat e-government:
A.

Promotes open and transparent competition in IT procurement, not only at the central
government level, but also by prefectures and local governments, including IT-related
goods and services for educational purposes;

B.

Facilitates online interactivity between bidders and procuring entities in the procurement
process, including public works; andC.

Respects intellectual property rights and demonstrates leadership in APEC by creatinga software asset management system.
Annex - 9

PROPOSALS FOR COOPERATIVE EFFORTS
V.

E-Education. The United States proposes that the two governments discuss and formulate “elearning” initiatives that could complement e-Japan plans to introduce and expand PC-basedInternet use throughout Japan’s education system.

VI.

Promoting the Use of IT and E-Commerce in the Private Sector. The United States
proposes that the two governments jointly and fully support the use of IT and e-commerce forall companies regardless of their size, as a way of increasing their efficiency, profitability andparticipation in the global marketplace. The United States encourages Japan to work with theprivate sector to improve and increase the opportunities for businesses, particularly start-ups
and smaller firms, to secure the basic tools to do business online.

VII.

Network Security. The United States seeks to coordinate with Japan on issues concerninginternational cooperation to protect the integrity of the Internet, which is vitally important for thegrowth of e-commerce. For example, Japan and the United States can collaborate on thereview of the 1992 OECD Guidelines for the Security of Information Systems. The UnitedStates also urges Japan to support the Council of Europe Convention on Cybercrime, an
important tool for law enforcement and national security.

Annex - 10

ENERGY
I.

Independent Regulatory Authority. The U.S. Government has in the past recommended
specific regulatory provisions to strengthen the Ministry of Economy, Trade and Industry’s(METI’s) independent regulatory authority over Japan’s gas and electricity industries. To
support the Japanese Government’s determination to ensure through “relevant provisions” that
METI’s Electricity Market Division and Gas Market Division have independent authority overenergy regulation, (including adequate resources), the U.S. Government recommends that
METI clearly articulate and make public the regulatory provisions currently in place and those
METI plans to put in place to ensure and promote independence.

II.

Regulatory Process and Competition Policy
A.

B.

Clarification of Policy Goals. The U.S. Government recommends that the Japanese
Government define the goals for the regulatory reform process in the energy sector andclearly define the type of market structure that Japan will adopt in the electric powerand gas sectors (such as pool system, independent system operator, etc). The UnitedStates also recommends that the Japanese Government:
1.

Establish a clear timetable for implementation of further policies to achieve thesegoals and establish the planned market; and2.

Conduct reviews of the electricity and gas market liberalization processes asscheduled by the Japanese Government, accompanied by an articulation of aconcrete set of criteria and a timetable for monitoring progress leading up tothese reviews.

Competition Policy Safeguards. To ensure that energy sector liberalization proceeds ina manner that promotes competition, including vigorous application of the
Antimonopoly Act and its relevant guidelines, the U.S. Government recommends that:
1.

METI and the JFTC cooperate to clarify interpretations of the Guidelines on
Fair Electricity Transactions and the Guidelines on Fair Gas Transactions and toprovide clear regulatory information to all market participants.

2.

The JFTC ensure that its newly established IT and Public Interest Business
Task Force actively monitors and vigorously investigates business conduct inthe electricity and gas sectors and takes enforcement action against any suchconduct found to be anti-competitive.

3.

METI and the JFTC expeditiously make public any responses to requests foradvice pertaining to the application of the Antimonopoly Act (AMA), as well as
the incoming requests.
Annex - 11

III.

C.

Interaction with Advisory Councils. To promote market predictability and investment
security, the U.S. Government urges that METI ensure that all existing and potential
market participants have opportunities to provide input, either through formal
participation or informal means, into the deliberations of the various advisory groups
considering Japan’s energy liberalization process. Further, the U.S. Government
suggests that any draft recommendations proposed by these advisory bodies be
published and open to public comment.

D.

Rulemaking Process. To maximize the opportunities for participation by interested
parties in the development of regulations and other measures affecting the energy
sector, the United States urges the Government of Japan to:
1.

Publish all solicitations of public comments in a central location, such as the
Kanpo; and2.

Allow a minimum 30-day comment period, except in urgent cases for which a
14-day comment period could be used, and to use a 60-day comment period
to the maximum extent possible.

Electricity Sector. A competitive electricity market will promote Japan's goals of increased
efficiency and reduced electricity costs. Achieving these goals will require changes in Japan's
legal and regulatory framework to bolster open and non-discriminatory access to transmission
and distribution grids, increase transparency of pricing and information, expand electricity
infrastructure, and foster market entry.
A.

Access and Transparency. The initial steps METI has taken to promote fair andtransparent treatment of wheeling service requests from new entrants have been helpful
but not adequate in promoting transmission network access and information for new
entrants. The U.S. Government recommends that METI take the necessary next steps
toward creating the basic elements of a competitive electricity market, which include
implementing the following measures:
1.

Unbundle generation from transmission, distribution, and other activities bytaking additional steps to ensure that all competing generators have equal
access to transmission services – providing an economic incentive for Japan’sutilities to purchase generating services from the least-cost supplier;

2.

Unbundle retail services from transmission, distribution, and other activities bytaking further steps to ensure that all competing retail service providers haveequal access to necessary services – allowing Japan’s consumers to purchasegenerating services from the least-cost supplier;

Annex - 12

B.

C.

3.

Provide transparent interconnection charges to transmission facilities for all
market participants;

4.

Develop and implement guidelines to make information on real-time electricity
network usage publicly available;

5.

Develop and implement guidelines for pricing and provision of transmission
support network services (i.e., ancillary services), such as load balancing andload following;

6.

Clarify and promote greater flexibility in terms and conditions of wheelingservices to reflect real network usage (including revising supply contract
restrictions and distinguishing between monopoly and competitive services),
which will improve system reliability;

7.

Develop and implement guidelines to make information on the price andavailability of transmission services publicly available; and8.

Implement measures to promote greater accounting transparency (where it
does not adversely affect competition).

New Construction of Transmission Infrastructure. Expanded infrastructure is necessary
to make existing service areas more reliable and promote new entry. Accordingly, theU.S. Government recommends that METI:
1.

Establish guidelines for determining the need for new transmission line
construction, based on its commitment to monitor this need; and2.

Using these guidelines, develop incentives, within METI’s jurisdiction, to
promote new transmission line construction between electricity service areas.

New Entry of Competitive Generators. Given that METI’s efforts to promote market
entry to date have not yielded significant results, the U.S. Government recommends that
METI take the following further steps to promote market entry:1.

Supplement its representation to conduct a study of existing regulatory
requirements for siting of new generating units and transmission lines with apublicly available assessment of these requirements and potential for
streamlining of those siting requirements within METI’s jurisdiction by the endof JFY2001; and2.

Establish a concrete plan and timetable for the proposed JFY2002 privatizationand sale of the Electric Power Development Company (EPDC) in a manner
Annex - 13

that promotes competition in the electricity sector and provides a fair
opportunity for all market participants to purchase EPDC assets.
IV.

Natural Gas Sector. Based on environmental and energy security benefits, the Japanese
Government has announced plans to increase the share of natural gas in its energy supply forelectricity. METI has recognized that deregulation of the natural gas supply is crucial to therealization of these benefits, and to the successful deregulation of Japan’s electricity supply. In
light of recent international instability, Japan’s own energy security should naturally be linked totimely infrastructure improvements in gas transmission and LNG facilities. Accordingly, theU.S. Government recommends that Japan promote open and non-discriminatory access to
LNG terminal facilities and gas pipelines, transparent pricing of gas transport services, andincentives for construction of new pipelines and terminal facilities to meet growing demand.
Further, to ensure that Japan can meet its goal of increasing natural gas usage to promote fueldiversity and reap the accompanying efficiency and price reduction benefits, the U.S.
Government recommends that Japan take steps to ensure that deregulation of the natural gas
sector proceeds in tandem with and does not hinder the deregulation progress in the electricity
sector.
A.

B.

Access and Transparency. METI’s efforts to promote fair and transparent treatment intransmission pricing and access in the gas sector have been less effective than those in
the electricity sector. Therefore, the U.S. Government recommends that METI takethe following necessary steps toward promoting a competitive gas and LNG market:
1.

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

Direct the Gas Market Development Basic Issues Study Group – establishedby METI in January 2001 to assess Japan’s gas market and the liberalization
process – to provide a publicly available update of its findings by the end of
JFY2001, including issues covered, conclusions, and proposals for gas market
liberalization;

3.

Provide transparent usage charges for pipeline and LNG facilities for all market
participants; and4.

Develop and implement guidelines to make pipeline network and LNG terminal
usage information publicly available.

New Construction of Transportation Infrastructure. To meet the Government ofJapan’s planned expansion of natural gas use, the U.S. Government recommends that
METI:
Annex - 14

C.

1.

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

Based on these guidelines, develop incentives, within METI’s jurisdiction, to
promote construction of new pipelines between the service areas of Japan'smajor gas suppliers and new LNG facilities within Japan’s electricity service
areas.

New Entry of Competitive Gas Suppliers. Expanded transmission infrastructure isnecessary to guarantee new entry by gas suppliers and electricity suppliers. Following
publication of the list of major regulatory requirements for siting of new pipelines and
LNG facilities, the U.S. Government recommends that METI use the list to conduct apublicly available assessment of these requirements and potential for streamlining of
those siting requirements within METI’s jurisdiction by the end of JFY2001.

Annex - 15

MEDICAL DEVICES AND PHARMACEUTICALSI.

II.

Healthcare System Reform. The U.S. Government welcomes Japan’s focus on introducing
competitive forces and pursuing structural reform as mechanisms for improving its healthcare
system. Such approaches are critical to providing higher quality care and to encouraging thedevelopment of innovative and cost effective drugs and devices. Specifically the U.S.
Government supports the Council for Regulatory Reform’s (CRR) recommendations to:A.

Increase the level of medical information available to the public. We recommend thisbe expanded to include further liberalization of advertising by medical institutions anddirect-to-consumer advertising for medical devices and pharmaceuticals;

B.

Improve the efficiency of receipt examination and payment obligations, including the
expanded use of IT that would, for example, allow electronic transactions;C.

Modernize and improve the efficiency of medical institutions, including reform of therules governing hospital ownership; andD.

Promote the establishment and management of nursing care facilities by privatecompanies.

Medical Device and Pharmaceutical Pricing Reform. The special attention CRR has given
to “resolution of the medical device equipment price gap between Japan and overseas” raises
serious concerns. This approach suggests adoption of discriminatory measures (e.g., foreignreference pricing, that target foreign-made devices for arbitrary price cuts). Medical devices
and pharmaceuticals are not cost-drivers. Faster availability and wider use of innovative drugs
and medical devices can, in fact, dramatically reduce overall health care costs while improving
the quality and efficiency of care. To ensure that the introduction of such products is
encouraged and receives timely and “appropriate valuations,” the U.S. Government urges
Japan to:A.

Make needed progress to create transparent written rules that provide for prompt
review and establishment of reimbursement categories and payment levels for new
medical devices (C1 and C2) so as to make these products available to patients more
quickly than once every two years;

B.

Assure that medical devices are not subject to arbitrary price control measures (e.g.,
foreign reference price adjustments) to devalue innovative products;

C.

Ensure that pharmaceutical pricing rules (e.g., cost calculation, etc.) are not changed todevalue innovative products;

Annex - 16

III.

D.

Reform pharmaceutical pricing rules (e.g., comparator, Olympic, premium andrepricing) and initiate bold alternatives “that recognize the role of the market” to ensure
appropriate valuations of innovation;” andE.

Enhance the ability of U.S. medical device and pharmaceutical industries to be given“meaningful opportunities” to present their views to governmental entities anddeliberative bodies undertaking pricing reform in this sector, and that those views are
given “serious consideration.”

Medical Device and Pharmaceutical Regulatory Reform. In recent years, the Ministry of
Health Labor and Welfare (MHLW) has implemented, and continues to implement, importantreforms to expedite regulatory approvals of medical devices and pharmaceuticals.
Nonetheless, there are important products that have not yet been introduced into Japan.
Further progress in regulatory reform and global harmonization will allow Japanese patients togain greater access to new medical treatments. It will also help free resources in the Japaneseclinical trial system that would facilitate Japan’s participation in the development of innovative
treatments currently being developed in other major markets.
A.

B.

To continue improving the consistency and speed of approval processes for medical
devices and pharmaceuticals, the U.S. Government encourages Japan to:1.

Create special treatment within the existing new drug approval system toevaluate “legacy products,” (i.e., drugs that have a wide exposure in ageographically and ethnically diverse population and have not been previously
registered in Japan, but are available in other major markets);

2.

Better clarify the criteria of the priority review process and establish proceduresfor expedited development of pharmaceuticals;

3.

Allow Clinical Investigators to receive financial incentives for conducting clinical
trials; and4.

Clarify the categories for medical device applications (including the definition of“me-too” applications) while taking into consideration the concept of“substantially equivalent;”

Ensure that revisions to the Pharmaceutical Affairs Law, particularly those regarding
manufacturing process and Quality System documentation, contribute to concrete
improvements in regulation which neither create submission burdens on manufacturers
nor establish technical or non-technical barriers to trade. The U.S. Government urges
MHLW to ensure that such revisions are consistent with common international practices
and allow all interested parties “meaningful opportunities” to comment on proposed
revisions as well as to present alternatives that need to be given “serious consideration.”
Annex - 17

(For example, the current GMPI requirement could be dropped, if the manufacturingsite is in compliance with Quality System requirements as confirmed by an audit toassess compliance with ISO 13485 and not to a unique, local standard.)
IV.

Acceptance of Foreign Clinical Data. Broader use of foreign clinical data in the approval ofpharmaceuticals is key to expediting availability of innovative drugs for Japanese patients andhelping to unburden Japan’s clinical trial system, which would help free resources in theJapanese clinical trial system that would facilitate Japan’s participation in the development ofinnovative treatments currently being developed in other major markets.
A.

B.

V.

The U.S. Government urges the MHLW to continue its good faith efforts to workwithin the International Council on Harmonization (ICH) process to resolve the issues
regarding the implementation of the ICH E5 guideline, including:1.

Affirm that the three relevant ethic groups in the assessment of ethnic sensitivity
are Asian, Black and Caucasian, and eliminate unilateral ethnic distinctions;

2.

Ensure that the assessment of ethnic sensitivity is based on the clinical relevanceof the data; and3.

Consider the implementation of a bridging justification concept to ensuretransparency and consistency in requests for bridging studies.

The U.S. Government urges MHLW to:1.

Ensure that the Organization for Pharmaceutical Safety and Research (OPSR)
expands the use of global scientific norms in its consultations with industry; and2.

Ensure that there is complete coordination between OSPR and thePharmaceutical and Medical Device Evaluation Center with regard toagreements reached during consultations.

Nutritional Supplement Liberalization. The U.S. Government recommends that Japan tocontinue to deregulate the sale of nutritional supplements and to expand the range of products
for which relevant labeling information may be provided, including herbs.

Annex - 18

FINANCIAL SERVICES
I.

II.

Specific Measures. The United States welcomes deregulation in the following areas at theearliest possible date:A.

Permit the Postal financial institutions (Yucho and Kampo) to employ the services ofinvestment advisory companies through direct onshore trust arrangements (tokutei
shintaku) without the requirement to convert asset positions into cash before changing
asset managers;

B.

Allow defined contribution plan providers to submit for review and approval prototype
DC pension plans that could then be adopted by plan-sponsoring companies upon
notification of the authorities, without requiring further review and approval;

C.

Eliminate the requirement for physical certificates for privately placed fixed income
securities and investment trusts;

D.

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

E.

Require full mark-to-market accounting for all investment trusts in order to protect
investors;

F.

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

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

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

To encourage the successful development of the newly initiated defined contribution
pension industry, we request that:
1.

The Government of Japan create a unified regulatory regime with a clear
division of responsibility, based on function, between the Ministry of Health,
Labor and Welfare and the Financial Services Agency.
Annex - 19

B.

In line with the announced goal of carefully reviewing the activities of public sector
corporations and avoiding competition with the private sector, we request that any new
financial service activities proposed for the Postal Financial Institutions (Yucho andKampo) be the subject of full public notice and comment and consideration before theirintroduction.

C.

The operations and decision making of industry associations that have a self-regulatory,
investor protection, or other public policy role should be conducted in a transparent andopen fashion. Specifically, the United States recommends that:D.

1.

Proposed rulemaking by industry associations should be made available forpublic comment, and that comments received from the public should be taken
seriously in the formation of final rules governing association members;

2.

Written materials – including regulations, supervisory standards and otherguidance, operating rules and procedures, market studies, and other statisticalcompendia – should be made available to the public at reasonable costs ofproduction and duplication; andAs a complement to self-regulatory organizations, we request that the Japanese financial
authorities encourage and work with private sector financial industry associations that
represent the views and the expertise of their members.

Annex - 20

COMPETITION POLICYI.

II.

Independence and Staffing of the JFTC. In order for the Japan Fair Trade Commission(JFTC) to be an effective agency that is capable of fulfilling its basic mission, it must enjoy boththe fact and perception of true independence. It must also have sufficient resources both toenforce the Antimonopoly Act (AMA) and to promote competition across the economy. The
United States recommends that Japan:
A.

Change the organizational status of the JFTC from an organ under the Ministry for
Public Management, Home Affairs, Posts and Telecommunications (MPHPT) to anindependent agency under the Cabinet Office; andB.

Commit to a substantial and steady increase in the personnel levels of the JFTC overthe next five years, including approval of the JFTC’s request for a 69 person net
increase in FY2002.

JFTC Investigatory Capabilities. The JFTC’s investigatory tools need to be brought up tomodern international standards if it is be successful in uncovering unlawful activity that harms
Japan’s economy and Japanese consumers. Specifically, the United States urges that Japan:
A.

B.

Cooperation Leniency Program
1.

Announce the JFTC’s intention to adopt a cooperation leniency program, underwhich it will exclude from its recommendations, surcharge payment orders
and/or criminal accusations, enterprises that notify the JFTC of unlawful
practices and cooperate fully with the JFTC’s investigation; and2.

Empower the JFTC to exclude cooperating enterprises from surcharge
payment orders.

Criminal Procedures
1.

Provide the JFTC with search and investigative powers for criminal violations of
the AMA similar to those enjoyed by the National Tax Administration; and2.

Normalize the criminal accusation procedure for AMA violations to be thesame as agency accusation procedures for other crimes.

C.

Interference with Investigations. Increase substantially the penalties for interference or
non-compliance with JFTC investigations and announce a new policy that suchpractices will be actively prosecuted.

D.

Information Technology and Public Utilities Sectors
Annex - 21

III.

1.

Ensure that the JFTC’s newly established IT and Public Interest Business Task
Force has adequate staff and expertise to actively monitor and vigorously
investigate business conduct in the information technology and public utility
sectors and to take enforcement action against any such conduct found to be
anticompetitive; and2.

Give serious consideration to actively recruiting outside experts from businessor academia for fixed-term employment with the IT and Public Interest
Business Task Force.

Effectiveness of AMA Enforcement Actions. The elimination and prevention of
anticompetitive conduct requires the imposition of severe economic consequences oncompanies found to have violated the AMA. It also requires that both the JFTC and the courts
are given flexible and broad powers to order violators to take actions necessary to ensure thatsuch conduct not only is terminated but does not recur. To these ends, the United Statesrecommends that Japan:
A.

Surcharge Payment Orders
1.

2.

B.

Strengthen the deterrent effect of surcharge orders by:a.

Eliminating the three-year cap on the sales subject to surcharge orders;b.

Modifying the surcharge rate applicable to small- and medium-sizedenterprises to ensure that the surcharge fully disgorges the benefits such
firms receive from the anticompetitive practices; andc.

Allowing the JFTC to waive imposition of the full surcharge where
severe hardship would otherwise result (if deemed necessary in order
to effectuate the above changes).

Extend the scope of surcharge payment orders to cover buying cartels, privatemonopolization, and complementary bidding, where such activities affect theprice at which goods or services are purchased or sold.

Elimination of Anticompetitive Conduct. Increase the scope and effectiveness of ceaseand-desist orders and other elimination measures under the AMA so as to strengthen
the JFTC’s ability to eliminate anticompetitive conduct and ensure that it does notreappear. Specifically, the United States recommends that Japan:
1.

Lengthen significantly the one-year period after cessation of illegal conduct
within which JFTC must issue elimination measures; andAnnex - 22

2.

C.

IV.

Authorize cease-and-desist orders against all violations of the international
contract (AMA §6) or trade association (AMA §8) provisions of the AMA,
even where the unlawful conduct has already been terminated.

Private Remedies. Review the private AMA injunction system, with a view towardextending the system to cover all unreasonable restraints of trade (AMA §3) orviolations by trade associations (AMA §8).

Elimination of Bid Rigging. The prevalence of bid rigging in procurements by Japanese
Government entities wastes resources and undermines the public’s confidence that the Japanese
Government truly believes in competition principles, especially where bureaucrats actually assist
dango activities. In order to eliminate dango, the United States recommends that Japan:
A.

B.

Bureaucrat-led (kansei) Dango. Submit legislation to the Diet aimed at effectively
addressing the problem of the complicity of government procurement officials in bid
rigging activities, including such measures as:
1.

Empowering the JFTC to issue formal recommendations to central and local
government procuring entities to cease practices that are assisting bid rigging
activities and to take specific measures to prevent recurrence of such assistanceor complicity;2.

Requiring procuring entities to investigate alleged kansei dango activities and to
take strict disciplinary action against responsible officials found to be engaging
in activities to assist bid rigging;

3.

Assigning authority to appropriate officials, such as an inspector-general office,to independently investigate evidence of kansei dango and to recommend
disciplinary action; and4.

Subjecting all public corporations to JFTC recommendatory action, as well as
to the obligations for investigating and taking disciplinary action against officialsthat assist bid rigging.

Prevention and Deterrence of Dango1.

To realize the goals of the Act for Promoting Proper Tendering and Contracting
for Public Works (Act) and the Guiding Principle, implement measures to betaken by the Ministry of Land, Infrastructure and Transport (MLIT) (together
with the Ministry of Finance and MPHPT or on its own) to, inter alia, preventand deter dango activities, such as:

Annex - 23

a.

2.

Preparing and publishing by the end of FY2001 a model manual which
includes:i.

procedures for procurement officials to follow in reporting facts
that point to the likelihood of dango activity to the JFTC andlocal police or prosecutors, including the designation of one ormore appropriate procuring entity officials who are authorized
to receive pertinent information from procurement officers andto forward relevant facts on dango activity to the JFTC;

ii.

information on how to identify facts that may raise suspicion of
dango;

iii.

a clear statement of the policy of the procuring entity prohibiting
any assistance by its officials in dango activities and thedisciplinary measures that will be taken against officials found tohave engaged in such assistance;iv.

procedures for implementing “suspension of designation” offirms suspected of engaging in dango; andv.

procedures for seeking damage compensation for the procuring
entity from firms and individuals for overcharges resulting from
dango.

b.

Establishing regular education and training programs for procurement
officials on how to prevent unlawful dango activities and on theprocedures for reporting facts raising suspicion of dango to the JFTC
and local police or prosecutors; andc.

Ensuring that all central government agencies, quasi-governmental
entities, and prefectural governments prepare annual public reports thatdetail measures they have taken to comply with the Act and the Guiding
Principle, and that evaluate the effectiveness of those measures inaddressing dango.

Introduce an administrative anti-dango program under which all bidders on
central government, prefectural government or quasi-governmental entity
procurements would be required to submit written certifications that they havenot discussed their bid or exchanged bidding information with any other bidder.
Establishment of appropriate statutory or administrative sanctions (such assuspension of designation) for untruthful certifications would make this program
substantially more effective.
Annex - 24

V.

Competition and Regulatory Reform. If Japan’s efforts at achieving regulatory reform areto successfully revitalize its economy, Japan must place a priority on promoting real competition
that is not undermined by informal administrative guidance or private sector re-regulation. In
order to promote truly successful regulatory reform, the United States recommends that Japan:
A.

Prevention of Anticompetitive Administrative Guidance and Private Sector ReRegulation. Devote additional JFTC resources to monitor recently deregulated sectors
to ensure that government regulations are not replaced by anticompetitive administrative
guidance or re-regulation by private sector restrictions (min-min kisei).

B.

Promotion of Competition in Regulated Sectors
1.

Advance joint efforts by the JFTC and METI toward introducing andpreserving effective competition in the electricity and gas sectors;

2.

Encourage additional cooperation between the JFTC and MPHPT toward
introducing and preserving effective competition in the telecommunications
sector; and3.

Promote joint efforts between the JFTC and MLIT toward introducing andpreserving effective competition in the transportation sector.

C.

Regulatory Reform. Promote joint efforts between the JFTC and the Council for
Regulatory Reform to identify necessary measures to reduce regulations and promotecompetition in the Japanese market.

D.

Privatization of Public Corporations. Ensure that the restructuring and privatization of
public corporations is accomplished in a manner that does not impede, and in factenhances, competition, including by having the JFTC review and provide input from acompetition policy perspective on any such privatization or reorganization plans.

E.

Manufacturer/Distributor Equity Ties. Initiate a JFTC survey on “highly oligopolistic
industries” that focuses on the extent and form of financial inter-relationships linking
manufacturers and distributors, and covers equity ties, provision of loans or othercapital sources and the sharing of employees, facilities and equipment.

Annex - 25

TRANSPARENCY AND OTHER GOVERNMENT PRACTICES
I.

Public Comment Procedures. Japan’s adoption in 1999 of Public Comment Procedures(PCP) offered the potential of filling a significant gap in its regulatory system by allowing allinterested parties to review and submit comments on draft regulations before they are finalized
and implemented. However, after two years of implementation of the PCP, there are serious
concerns with the effectiveness of the Procedures. Surveys conducted by the Ministry of
Public Management, Home Affairs, Posts and Telecommunications and a predecessor entity(the Management and Coordination Agency) on the use of the PCP since their implementation
point to deficiencies in the Procedures. The majority of comment periods were less than 30
days. Also, the comments are having little, if any, impact on the final regulations. According to
the FY2000 survey, final regulations were revised to respond to public comments in less than
20 percent of the cases in which PCP use was required, and even in those cases, few of therevisions appear to be substantive. The survey results fuel a growing perception that the PCP
are serving little purpose, and that governmental agencies are working out draft regulations withspecial interests before they are published for public comment (as was the practice before the
PCP process was introduced). To address these concerns, and to make the PCP a useful andeffective regulatory mechanism, the United States urges the Japanese Government to take thefollowing measures:A.

Establish a central registry, such as publication in the Kanpo, for all solicitations ofpublic comments, whether or not they are covered by the PCP. Such a registry would
be in addition to the various means currently used by governmental agencies forsolicitations of comments, and would include solicitations of public comments byshingikai, kenkyukai, benkyokai and other study groups;

B.

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

C.

Prohibit governmental agencies from informally addressing concerns regarding draft
regulations with private sector entities (outside of the advisory council process) prior tosolicitation of public comments on the regulations, or as an alternative require
government agencies to disclose publicly all such contacts;

D.

Authorize the courts or an independent oversight body to review complaints regarding
the use (or non-use) of the PCP in particular cases and to direct governmental agencies
to take remedial action where necessary;E.

Expand the scope of measures for which public corporations are required to use thePCP ( Section 1, note 7 of the PCP) to include any regulatory measures that suchcorporations plan to adopt;

Annex - 26

II.

F.

Establish a study group that includes Japanese and foreign private sector
representatives to examine the effectiveness of the PCP and to make appropriate
recommendations; andG.

Require all industry associations and other self-regulatory organizations that are
established under the authority of a law to introduce public comment procedures.

Administrative Guidance. Despite the transparency provisions in the Administrative
Procedure Act, administrative guidance has been issued in writing in only a small number ofcases. In order to increase the transparency and predictability of the Japanese regulatory
system, the United States recommends that the Japanese Government, consistent with theStructural Impediments Initiative Reports, take necessary measures to:
A.

Reduce the use of administrative guidance; andB.

Require all administrative guidance to be issued in writing, with only narrow exceptions
allowed.

III.

Public Participation in Development of Legislation. Governmental agencies generally do
not provide an opportunity for interested parties, other than those represented on advisory
councils or with special access, to have input into the development of legislation. The UnitedStates recommends that the Japanese Government develop a mechanism that would enable allinterested foreign and domestic parties to review and comment on draft legislation before
governmental agencies submit the draft legislation to the Diet.

IV.

Judicial Review of Administrative Actions . The administrative actions that are reviewable
by Japanese courts are narrowly circumscribed. The United States recommends that theJapanese Government augment judicial oversight over governmental agencies by expanding thetypes of administrative actions that may be reviewed by the courts as well as by expanding theparties that are allowed to ask the courts to review agency actions.

V.

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

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

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

Annex - 27

VI.

VII.

Regulatory Impact Analysis. Building on Japan’s three-year regulatory reform program and
its Policy Evaluation System, the United States proposes that the Japanese Government
introduce a government-wide Regulatory Impact Analysis (RIA) system that would:
A.

Apply cost/benefit analysis (both quantifiable and non-quantifiable) to proposed
regulatory changes that are likely to have a significant economic impact;

B.

Use the best available scientific, technical, and economic data when reviewing
proposed regulations; andC.

Provide an opportunity for interested parties and the public in general to comment on
the cost/benefit analyses, as well as on the reasonableness of the assumptions andmethodologies used.

Postal Financial Institutions. The U.S. Government shares the concerns voiced by
Keidanren and others related to the effect of the postal financial institutions – postal savings(yucho) and postal insurance (kampo) – on the efficient operation of Japan’s financial markets.
The transfer of business of the three postal services (mail delivery, savings, and insurance) of
the Postal Services Agency to a public postal corporation in 2003 provides an important
opportunity for the Japanese Government to take concrete steps to address key transparency
and competition issues related to these organizations.
A.

B.

Transparency. The U.S. Government welcomes recent steps that the Ministry of Public
Management, Home Affairs, Posts and Telecommunications (MPHPT) has taken to
make the 2003 transfer of the postal services from the Postal Services Agency to a
public postal corporation more transparent, including the inclusion of two foreign private
sector representatives on its “Study Group on the Postal Services Public Corporation.”
However, the process for, and possible effects on, the private sector from the transfer
remain insufficiently clear. To remedy this, the U.S. Government urges the MPHPT totake steps to sufficiently inform and seek input from the public (including foreign
insurers) on all aspects of this transfer that may affect private sector operations in therelevant sectors. This includes affording the insurance industry and other private
financial service providers (both domestic and foreign) meaningful opportunities to be
informed of, comment on, and exchange views with MPHPT officials on:
1.

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

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

Curb Expansion. In transferring the postal services and establishing a public
corporation in 2003, the United States recommends that Japan prohibit the postal
Annex - 28

financial institutions (kampo and yucho) from underwriting any new insurance products
or originating any new non-principal-guaranteed investment products.
C.

Same Standards of Regulation. In transferring the postal services and establishing apublic corporation in 2003, the United States recommends that, in order to create alevel playing field between the postal financial institutions and their private sector
competitors, Japan subject the postal financial institutions to the same standards ofregulation as their private sector counterparts.

D.

Privatization. The U.S. Government notes that Prime Minister Koizumi has establisheda private panel to make recommendations on how to deal with postal services
organizations (including the postal financial institutions), including possible privatizationof these entities. As any modifications to the existing system could have a significant
impact on competition in, and the effective operation of, the broader insurance
marketplace in Japan, it is important that any decisions be made and implemented in an
open and transparent manner. This would include the same measures as outlined above
in VII A.

Annex - 29

LEGAL SYSTEM AND INFRASTRUCTURE
I.

Legal Services
A.

Unrestricted Freedom of Association between Bengoshi and Gaiben. The mostcritical structural deficiency in Japan's international legal services sector is the severe
limitations on the relationships permitted among Japanese lawyers (bengoshi) andregistered foreign lawyers (gaikokuho jimu bengoshi or gaiben). The United Statesurges the Japanese Government to eliminate all prohibitions against freedom of
association between bengoshi and gaiben, and to allow them, as equal legal
professionals, to determine their own forms of association. The principle underlying thereform should be unrestricted freedom of association between and among gaiben andbengoshi, as is permitted in other advanced countries. The United States further urges
the Japanese Government to undertake the deregulation recommended above rather
than experiment with additional changes to the tokutei kyodo jigyo (joint enterprise)system. That system has shown, after six years of experience, that it does not provide
the framework needed for effective teamwork between bengoshi and gaiben.

B.

Restrictions on Gaiben
1.

C.

The United States recommends that the Japanese Government remove
discriminatory restrictions on gaiben and accord gaiben and bengoshi equal
treatment. In particular, the United States recommends that the Japanese
Government:a.

Allow gaiben to employ bengoshi on the same basis that bengoshi areallowed to hire foreign lawyers; andb.

Discontinue the discriminatory treatment of gaiben with regard to theprovision of legal advice on third-country law (i.e., the law of a country
other than Japan or the jurisdiction in which the gaiben is registered).

2.

The United States urges the Japanese Government to allow foreign lawyers tocount all of the time in Japan spent practicing the law of the lawyer’s homejurisdiction toward meeting the experience required to register as a gaiben, notjust the one year allowed under current practice.

3.

The United States proposes that the Japanese Government allow gaiben, likebengoshi, to establish professional corporations, limited liability partnerships(LLPs), and limited liability corporations (LLCs), as long as they comply withother requirements of the Foreign Lawyers Law.

Improvements of Gaiben Regulatory System
Annex - 30

II.

1.

The United States proposes that the Japanese Government ensure that theJapan Federation of Bar Associations (Nichibenren) and the mandatory local
bar associations provide gaiben with effective opportunities to participate in thedevelopment and enforcement of all laws and rules that affect them.

2.

The United States proposes that the Japanese Government reduce the timerequired for gaiben applicants to register as gaiben, including any appeals, byexpediting and rationalizing the reporting process for gaiben.

Legal System Reform
A.

Implementation of the Judicial Reform Council’s Recommendations
1.

Increase in the Number of Legal Professionals. One of the most important
JRC recommendations relates to the need to increase significantly the numberof legal professionals in Japan. The United States urges the Japanese
Government to increase expeditiously the number of persons who pass the
Judicial Examination to a minimum of 1,500 per year, and to establish aschedule for increasing the number of persons who pass the Judicial
Examination to 3,000 per year.

2.

Reform of the Arbitration Law. The United States urges the Ministry ofJustice to establish an advisory council to make recommendations for thereform of Japan’s Arbitration Law, consistent with the JRC’s
recommendations.

3.

Increase the Speed and Efficiency of Civil Litigation. The United Statesurges the Japanese Government to expeditiously implement the following
recommendations of the JRC:a.

Reduce the length of trials by 50 percent;b.

Increase significantly the number of judges and court personnel, as wellas the number of bengoshi;c.

Facilitate pre-trial and pre-complaint evidence-gathering for litigation;
andd.

Improve litigation of intellectual property disputes, including throughbolstering specialized IPR departments at the Tokyo and Osaka
District Courts and through facilitating the involvement of experts as
witnesses, advocates and court personnel.

Annex - 31

B.

4.

Strengthen Judicial Oversight over Administrative Agencies. Greater legal
accountability of administrative agencies will increase fairness and confidence inadministrative activities. Consistent with the recommendations of the JRC, theUnited States recommends that the Japanese Government undertake a full
review of the means of promoting administrative agency accountability throughthe courts, including review of the Administrative Case Litigation Law.

5.

Reduce Filing Fees for Civil Litigation. The United States recommends that
the Japanese Government establish a fixed filing fee, or greatly compressed
sliding scale fee system, in order to ensure that the filing of meritorious lawsuits
is not discouraged.

Improvements in the Japanese Judicial System
1.

Improve Evidence-Gathering Methods. To improve evidence-gathering
methods, the United States recommends that Japan:a.

Impose sanctions for inadequate responses to inquiries pursuant to
Article 163 of Civil Procedure Code (CPC);b.

Narrow the self-use exception under CPC Article 220; andc.

Provide for inspection of facilities by litigants.

2.

Augment Protection of Trade Secrets during Court Hearings. The UnitedStates recommends that the Japanese Government develop a comprehensive
solution to address the problem of disclosure of trade secrets during the courseof open hearings. Appropriate measures could include allowing for in camera(restricted judicial) review of evidence that contains trade secrets.

3.

Clarify the Attorney-Client Privilege. The United States recommends thatJapan create an express and statutorily-based attorney-client privilege to ensure
full respect for this principle.

4.

Make Judicial Remedies More Effective. The United States proposes thatJapan improve the ability of courts to issue and enforce prompt and effective
orders through such measures as expanding the scope of civil lawsuits in which
injunctive remedies may be obtained and strengthening the power of courts todesign injunctive orders that are likely to be effective.

5.

Increase Transparency of Judicial Proceedings. The United Statesrecommends that the Japanese Government make the judicial system more

Annex - 32

accessible to the public and business community by providing greater and more
timely access by all persons to court records and decisions.

Annex - 33

COMMERCIAL LAW
I.

Cross-Border Share Exchanges. Cross-border share exchanges are an important and useful
tool for effecting a variety of transactions in international business, including cross-borderstock-for-stock mergers and acquisition transactions, corporate restructuring through shareexchanges and joint ventures between Japanese and foreign firms. The inability under current
Japanese law to utilize these share exchange techniques impedes foreign investment in Japan,
and with it the flow of needed technology and managerial know-how into Japan. As part of thecurrent “drastic overhaul” of the Commercial Code to be completed by Spring 2002, theUnited States recommends that Japan permit and promote cross-border share exchanges,
taking into account the provisions of Article 352, et seq. of the Commercial Code, which
permit and promote share exchanges between domestic firms.

II.

Flexibility in Capital Structure. Expansion of the tools that firms have to raise capital, obtain
services and provide incentives to both managers and employees is crucial to Japan’s efforts torestructure and reinvigorate its economy. Although Japan has taken some steps already in thisregard, further measures are needed if start-ups and existing companies are to maximize theirability to respond to changing capital and other market demands. To achieve this goal, theUnited States recommends that Japan take the following measures:
A.

Provide that cash may be used as an acceptable form of consideration in any merger
transaction so that companies can be taken completely private through compulsory
tender of shares by “holdout” minority shareholders after a successful takeover;B.

Revise the current court-supervised inspection procedure for valuation of in-kind capital
contributions to place responsibility for deciding such valuation with the board of
directors without any requirement that lawyers and accountants conduct such valuation,and refrain from subjecting lawyers and accountants conducting appraisals to strict
liability for erroneous valuations;C.

Eliminate limits on the quantity of stock options than can be issued and restrictions on
recipients of stock options, so that stock options can be distributed to, among others,
consultants, service providers, and employees of affiliates;

D.

Abolish the limit on the issuance of non-voting shares, at least upon approval ofshareholders;E.

Permit classes of shareholders of closely held corporations that have issued more than
one class of shares to elect a specified number or percentage of the board; andF.

Remove the prohibition against transfers of new subscription rights.

Annex - 34

III.

Corporate Governance. One of the key changes needed to improve the performance ofJapanese companies is the strengthening of corporate governance mechanisms, both to provide
greater flexibility in management structures and to increase accountability of management toshareholders. In this regard, the United States recommends that Japan take the following
measures:
A.

Provide publicly traded companies the option of adopting a corporate management
structure that includes an executive office system and a board committee system inwhich at least the audit, nomination and compensation committees include, at aminimum, a majority of outside directors, instead of continuing to use the traditional
kansayaku (statutory auditor) system;

B.

Ensure that, if Japan decides to require certain companies to appoint outside directors,
such an obligation applies only to publicly traded companies or, if that is not feasible,
only to companies whose articles of incorporation do not require that the transfer of
their common shares be approved by their board of directors;

C.

Modify the definition of “outside director” to ensure that such directors are truly“independent,” including by excluding employees and ex-employees of companies withsignificant cross-shareholders with, or in the same keiretsu as, the company;

D.

Allow resolutions of the board of directors to be taken by telephone conference or byunanimous written consent;

E.

Maintain the current unlimited liability of directors in shareholder derivative lawsuits forbreaches of the duty of loyalty, intentional misconduct, knowing violation of law or
receipt of personal benefit, and ensure that any changes to the shareholder derivative
system do not undermine the principle of board accountability to shareholders;F.

Permit companies to use the Internet and other electronic means (e.g. facsimile,
telephone) for notice of shareholders’ meetings, timely release of meeting materials,
exercise of shareholders’ rights to vote on resolutions, and other procedures whichcurrently must be completed by paper documents;

G.

Reinforce the obligations of fiduciaries that manage pension funds to exercise reasoned
judgment concerning the interests of trust beneficiaries with regard to voting the shares
under their management; andH.

Ensure that financial statements accurately represent the financial condition of acompany by supplementing progress in adopting internationally accepted accounting
standards with strict enforcement of the implementation of those standards throughoutside audits conducted in accordance with internationally acceptable auditing
standards.
Annex - 35

IV.

Statutory Agents. The imposition of joint and several liability on the statutory agents offoreign corporations would make it very difficult for foreign companies to find persons willing to
act as their statutory agent, and would therefore impose serious obstacles on the ability offoreign firms to operate in Japan. Accordingly, the United States urges Japan to reject any
proposal to require foreign corporations to appoint statutory agents that are jointly and severally
liability for the obligations of the corporation.

V.

Public Input into Commercial Law Revision Process. Since the international business andlegal communities, just as the Japanese business and legal communities, will be directly affectedby changes to Japan’s Commercial Code and other commercial laws, it would be both
equitable and reasonable to provide the international business and legal communities with
opportunities to provide input into the revision process. To this end, the United States urges
Japan to take the following measures:
A.

Provide the international business and legal communities with meaningful opportunities
to provide input into the formulation of recommended revisions to Japanese commercial
law, in the same manner as provided to domestic business and legal circles, including
for example granting a foreign representative observer status at the Company Law
Subcommittee of the Legislative Council’s Commercial Code Working Group; andB.

Ensure that the Legislative Council and any other advisory councils that prepare
recommendations on Commercial Code revision solicit public comments on their
proposals before they are finalized.

Annex - 36

DISTRIBUTION
I.

Nippon Automated Cargo Clearance System (NACCS). Japan's willingness earlier thisyear to take into account the concerns of companies faced with increased fees for the use of
NACCS for air cargo is a welcome acknowledgment of the importance of keeping in checkthe cost of moving goods into the distribution system. The U.S. Government urges Japan to:
A.

II.

III.

Continue its dialogue with companies to ensure that a fee structure equitable to all Air
NACCS users can be installed after the expiry of the current three-year arrangement.

Simplified Declaration Procedures. Japan’s adoption this year of Simplified Declaration
Procedures for the clearance of imported goods is welcomed by the United States. In its
explanation of the new procedures, the Ministry of Finance notes that similar systems are usedin the United States and Europe and that the adoption of simplified procedures in Japan will"contribute to promoting international harmonization in customs procedures which will facilitate
trade." While welcome, the implementing regulations for these new procedures are so
restrictive as to make them practically unusable for many air shipments. Thus, the simplified
declaration procedures as they are now implemented are not in harmony with U.S. andEuropean practice and do not accommodate the needs of those companies which facilitate theimport of a rapidly growing proportion of total shipments into Japan. The United States urges
Japan to amend the implementing regulations for the Simplified Declaration Procedures to bringthem into line with U.S. and European practice in the following manner:A.

Approve integrators/agents as "importers" for the purpose of implementing theprocedures. This would not necessarily require that agents/integrators be the Importerof Record; andB.

For the purposes of the procedures, include in the definition of approved goods those
goods designated for door-to-door transportation. This would avoid the need forspecificity when designating the goods to be imported.

De Minimis. In order to further facilitate the speedy import of small goods and packages into
Japan (and to reduce administrative costs), the United States urges Japan to:A.

Increase the de minimis value in the Customs Clearance Law from 10,000 yen to
30,000 yen. Such a move would also produce a significant reduction in personnel costs
to the Japanese Government.

Annex - 37