FACT SHEET

Third Report to the Leaders on the
U.S.-Japan Regulatory Reform and Competition Policy Initiative
June 8, 2004
OVERVIEWThe U.S. Government welcomes Prime Minister Koizumi’s continuing commitment to bold regulatory
and structural reform, an essential prerequisite for Japan’s return to long-term growth. The United States
also welcomes the recent improvement in the Japanese economy, which demonstrates that Japan’s
economic reform policies are beginning to show positive results.
The Third Report to the Leaders on the U.S.-Japan Regulatory Reform and Competition Policy Initiative(Regulatory Reform Initiative) details important steps Japan is taking to further these reform policies,
which are not only helping the Japanese economy return to long-term growth but are also opening its
markets to U.S. companies. These measures address reforms in key areas such as telecommunications,information technologies, energy, medical devices and pharmaceuticals, financial services, competition
policy, transparency, legal reform, commercial law revision, and distribution.
The measures specified in this 67-page report represent significant progress in Japan’s continuing efforts
to create a regulatory environment conducive to smoothly functioning markets and the efficient
allocation of resources. By implementing these measures, Japan will help to increase consumer choice,lower prices, and encourage the introduction of more innovative goods and services. In addition, theRegulatory Reform Initiative serves as an important mechanism to increase access to Japanese markets
for U.S. businesses by reducing regulatory barriers and streamlining governmental practices.
The Regulatory Reform Initiative was launched by President Bush and Prime Minister Koizumi at CampDavid in June 2001 as a key component of the U.S.-Japan Economic Partnership for Growth.

TELECOMMUNICATIONS
Background: Evident by the spreading popularity of advanced telecommunications technologies such as
Digital Subscriber Line (DSL) and Fiber-to-the-Home (FTTH), the Japanese Government’s policies topromote regulatory reform in this sector have begun to yield tangible results. Under a more flexible
regulatory regime, Japan is moving towards a telecommunications market where new products andservices are unhindered by excessive regulation and anticompetitive behavior by the dominant carrier.
The United States urges the Japanese Government to demonstrate its continuing commitment to ongoingreform in this sector by taking vigorous steps to reduce interconnection rates and other impediments inthe wireline and mobile markets. The United States will also seek further improvement in transparency,
due process, and regulatory independence, particularly in regard to decisions related to spectrum use.
Progress: The United States welcomes the significant steps the Japanese Government is taking to spur
growth and encourage competition in the telecommunications sector, including:•Creating a mechanism for consumer choice in rate-setting for calls connecting to mobile networks
from fixed line phones, thereby facilitating competition and resulting in retail rate reductions of up to
55 percent.

•Working to revise Japan’s interconnection rate-setting methodology (to be implemented from 2005)
so that rates are more comparable to those of other competitive markets. This would include
eliminating the fixed costs that NTT charges competitors and other fundamental flaws in Japan’s
implementation of the current methodology, known as Long Run Incremental Costs (LRIC).

•

Easing the burden on competitive carriers for advance disclosure of technical information, andencouraging the use of international standards while retaining safeguards on NTT by agreeing tostreamline the requirements for the deployment of Network Channel Terminating Equipment(NCTE), which is largely Internet equipment such as modems. The revised requirements will help
ensure continued access to Japan’s NCTE market, estimated to be worth around $1.2 billion in 2003.

•

Reducing red tape by eliminating tariff and interconnection filing requirements for competitive
carriers through revisions to the Telecommunications Business Law and related regulations.

•

Initiating an annual competition review process for selected markets – beginning with Internet access(DSL and FTTH) – and ensuring transparency and private sector input for this review.

•

Facilitating testing in the UHF spectrum band of radio frequency identification (RFID, also known ase-tags), the first step in gaining approval and cross-border interoperability for innovative U.S.
technology to track global shipments.

INFORMATION TECHNOLOGIES
Background: The primary objective of the United States’ work with Japan in this sector is to help
unleash the tremendous growth potential of Japan’s e-commerce market and IT sector, key tostrengthening the Japanese economy and creating new commercial opportunities for U.S. firms. The
United States commends and supports Japan’s goals of removing legal and other barriers that hinder ecommerce, strengthening protection of intellectual property in the digital age, promoting public andprivate sector use of e-commerce, and reforming IT procurement. As Japan moves forward on thesefronts, the United States urges it to expand opportunities for private-sector input for the development of
IT policy, an essential element to the creation of a thriving IT sector.
Progress: The United States welcomes the significant steps the Japanese Government is taking to spur
growth in the IT sector and promote the use of e-commerce, including:•

Ensuring consistent, government-wide implementation of reforms for the procurement of information
systems, improving transparency and fairness in such procurement, and working with the UnitedStates to improve private sector input into this reform process.

•Convening a public-private sector roundtable in May 2004 with the United States that provided U.S.
and Japanese industry a timely opportunity to offer valuable input on Japan’s forthcoming
implementation of its new Privacy Law.

•

Taking steps to ensure that IT policy is developed in a coordinated manner and implemented
consistently across ministries, such as through establishment in February 2004 of a inter-ministerial
task force to facilitate strong communication across the bureaucracy on IT policy.

•

Deliberating the extension of the term of copyright protection for sound recordings and all othersubject matter protected under the Copyright Law, which would build on Japan’s recent extension of
the term of copyright protection for cinematographic works from 50 to 70 years.

•

Considering establishment of a statutory damages system that would act as an effective deterrent
against infringing activities, ensure that right holders are fairly compensated for losses suffered byinfringement, and enhance judicial efficiency by eliminating the costly and difficult burden of having
to establish damages and profits.

•

Agreeing to examine the inclusion of measures in upcoming Alternative Dispute Resolution (ADR)
legislation that would promote the use of online dispute resolution in the cross-border context,
including whether non-lawyers should be allowed to act as neutrals in ADR proceedings. This would
be an important step to promote e-commerce.

•

Improving the security and reliability of information systems used by local and central government
entities through developing network security guidelines and standards, and affirming the importanceof obtaining private sector input in this process.

•Endorsing key principles in developing IT policy such as revising and developing regulations in amanner that promotes technology neutrality and creating an environment where the private sector can
maximize its leadership potential in this sector.

ENERGY
Background: Japan is in the midst of significant reform of its energy market that will expand
liberalization from 26 to 63 percent in the retail electricity market by 2005, and from 40 to 50 percent in
the natural gas market by 2007. These reforms, rooted in sweeping legislation enacted by the JapaneseDiet in June 2003, will help spur domestic economic growth and increase opportunities for U.S.
companies to produce, sell, and trade energy products and services in Japan’s electricity and gas markets.
The changes will also expand opportunities for U.S. exports of electrical generation equipment. In
addition, the Japanese Government is taking important steps to foster investor confidence by providing
opportunities for public comment on new or revised ordinances to implement the legislative reforms.
Progress: The Japanese Government has taken the initial steps toward implementation of the energy
sector reform legislation, including:
Fostering reliability and transparency in the electricity sector by:•

Establishing in an open manner a Neutral System Organization (NSO) designed to create fair andnon-discriminatory rules for the transmission/distribution sector, as well as committing to actively
supervise the NSO and take necessary actions to correct any inadequacies;•

Working to revise the Guidelines for Fair Power Trades to help ensure effective information
firewalls and to prohibit discriminatory wheeling;•

Developing ordinances to effectively implement separation of transmission/distribution accounts
from other accounts;•

Streamlining rate setting, clarifying standards for and ensuring enforcement of fair network
regulation, and relaxing balancing rules for wheeling service that will aid new entrants; and•Reviewing the efficiency of the electricity market and whether additional steps are necessary toensure the reformed regulatory environment is generating greater competition.

Ensuring transparency and fairness in the natural gas sector by:•

Establishing ordinances for setting and enforcing Third-Party Access (TPA) tariffs and providing
incentives to build and operate new pipelines;•

Issuing in June 2004 ministerial ordinances setting out rules for accounting separation in andpublication of pipeline financial statements;•

Working to revise the Guidelines for Fair Gas Trades to help ensure effective information firewalls
and prohibit discriminatory treatment against TPA users; and•Promoting Third-Party Access to liquefied natural gas (LNG) facilities by developing guidelines toestablish a framework for negotiating third-party use of LNG terminals.

MEDICAL DEVICES AND PHARMACEUTICALSBackground: Japan is striving to improve the international competitiveness of its medical device andpharmaceutical industries while meeting the challenges of an aging population. Accordingly, theJapanese Government is undertaking comprehensive healthcare reform that includes significant changes
in its regulatory and pricing systems for medical devices and pharmaceuticals. Discussions between the
U.S. and Japanese Governments this year have focused on ensuring these changes are implemented in atransparent manner, leading to expanded consumer choice and to a more competitive landscape in this
sector. World leaders in developing and marketing innovative devices and medicines, U.S. companies
have a nearly 20 percent share of Japan’s approximately $60 billion drug market and about a 25 percent
share of Japan’s approximately $20 billion medical device market.
Progress: Significant new steps Japan has taken or will take in these sectors include:•

Taking steps to ensure Japan’s newly created Pharmaceuticals and Medical Devices Agency (PMDA)
provides a speedier and more transparent regulatory process that helps bring products to market
faster, increases consumer choice, and expands access for U.S. companies to Japan’s healthcare
market.

•Establishing a user fee system on April 1, 2004 to fund an increase in PMDA staff and otherresources dedicated to improving reviews and speeding approvals of new medical devices and drugs.

•

Setting targets for faster product approvals (for example, concluding by 2009 approvals for 90
percent of new medical device applications and 80 percent of new drug applications within one yearof administrative time) and agreeing to publish annual progress reports.

•

Implementing pricing reforms and premiums that more effectively recognize the value of innovative
medical devices and drugs, including:•••increasing the frequency of granting reimbursement prices to innovative medical devices, a step
intended to raise the number of premiums granted that will both reward makers of innovative
products and speed the introduction of state-of-the-art devices into Japan; andintroducing two important new premium pricing rules (Inter-Specification Adjustment andUsefulness II) for particularly effective drugs.

Ensuring greater transparency of the medical device and drug regulatory and reimbursement pricing
processes by, for example:••

providing manufacturers with opportunities for involvement in addressing “adverse events;” andincluding diagnostic industry representatives in meetings on pricing issues.

•

Accelerating implementation of action plans in policy papers, known as the “Visions,” which outline
major reforms to promote innovation in the medical device and drug markets.

•

Agreeing to convene a meeting with all interested parties by the end of 2004 on patient care,declining demand, and other issues related to blood products.

•

Studying whether to increase the number of approved food additives for sale in Japan.

FINANCIAL SERVICES
Background: Over the past year, Japan has made further progress in opening and liberalizing its
financial services market. This process started with the 1995 U.S.-Japan Financial Services Agreement
and accelerated under Japan’s “Big Bang” financial liberalization initiative, which committed Japan tofundamental deregulation of the financial sector. Those reforms deregulated brokerage commissions,eliminated many of the artificial distinctions among financial services firms, allowed the introduction of
new financial products and services, and opened the market to new financial service providers.
Those and subsequent financial market reforms have provided new opportunities for innovation by firms
offering financial services to Japanese corporations. They have also increased transparency,
strengthened accounting standards and enhanced the transparency of corporate financial reporting, andallowed for better evaluation of investment performance in selecting asset managers or other investments.
Those changes will, over time, provide important benefits for Japanese savers and investors and allow forhigher returns on Japan’s pool of individual savings, the largest outside the United States at more than
$10 trillion.
Bilateral financial services discussions under the Financial Dialogue of the Economic Partnership for
Growth have contributed to continued progress in the opening of Japan’s financial markets andincreasing the transparency of the financial regulatory process over the past year.
Progress: Notable regulatory reform steps the Japanese Government has taken over the past year
include:•Raising the contribution limits on defined contribution pensions, a move with great potential toexpand Japan's investment trust market, encourage individual investment, and promote labormobility.

•

Enhancing the transparency of Japan’s financial regulatory regime by making more active use of the
No Action Letter System and introducing measures intended to increase the volume of No Action
Letter requests from the financial services industry.

•Moving toward global best practices by Investment Trust Association adherence to new guidelines
for disclosure of investment performance.

•Continuing to carefully consider proposals to allow consumer lenders to utilize electronic
notification for clients who chose to receive notices electronically.

COMPETITION POLICY
Background: Active promotion and protection of competition will spur Japan’s economic recovery bycreating a climate that encourages new entry and innovation and fosters efficient, internationallycompetitive companies. Of utmost importance is the elimination and deterrence of Antimonopoly Act(AMA) violations through strengthened Japan Fair Trade Commission (JFTC) enforcement powers andresources and stiffened AMA penalties. It is also necessary for the Japanese Government to augment its
efforts to eliminate the bid rigging (dango) system, which saps public funds from needed revitalization
programs and undermines the restructuring of the economy. Finally, Japan would benefit from ensuringthat the effectiveness of its regulatory reform measures maximized by incorporating market-based
competition principles in its deregulation programs.
Progress: Significant new measures Japan has taken or will take to address these problems include:•

Undertaking to submit a bill to the next Diet session to amend the AMA to increase deterrence of
AMA violations and strengthen JFTC enforcement powers by:•roughly doubling administrative fines (surcharges) on violating firms, increasing the surcharge
rate even more for recidivists, extending the cap on surcharges from three years to four years ofsales, and enlarging the scope of conduct subject to surcharges;•

introducing a corporate leniency program for the first and second firms that report their
participation in a price-fixing or bid rigging conspiracy;•

giving the JFTC strengthened powers for criminal investigations; and•raising the criminal fine 100-fold for violating JFTC orders to approximately $3 million.

•

Increasing from nine months to one year the maximum period in which companies found to haveengaged in bid rigging are prohibited from bidding on local or central government projects, andexpanding nationwide the geographic scope of the prohibition where executives or members of theboard of directors were complicit in bid rigging activities.

•

Including in all Ministry of Land, Infrastructure and Transport (MLIT) construction anddesign/consultation services contracts a clause specifying pre-established damages of 10 percent of
the contract price that must be paid to the government by contractors that commit bid rigging.

•

Introducing a mechanism for close cooperation between the JFTC and the Council for Promotion ofRegulatory Reform (CPRR), including a system under which:•

the JFTC will convey to the CPRR its reports and recommendations to relevant ministries
concerning the promotion of competition in regulated sectors; and•CPRR will follow-up on the status of implementation of those recommendations.

TRANSPARENCY AND OTHER GOVERNMENT PRACTICES
Background: Japan’s plans to privatize Japan Post and other public corporations create many
challenges and opportunities for the private sector. To ensure this process is open and fair, it is vital for
Japan to make more transparent and accountable its regulatory system so that all players have equal
access to government information and the policymaking process. To this end, the United States
welcomes efforts by the Japanese Government to reform its public comment procedure in ways thatwould provide more meaningful opportunities for public input. While this would be a significant step
forward, more needs to be done to increase the transparency of the regulatory process, make thebureaucracy more accountable, curb onerous discretionary powers of the ministries and agencies, andshift power to the public. Further reforms would help level the playing field for foreign firms and reduce
the special advantages traditionally enjoyed by Japan’s domestic firms.
Progress: The Japanese Government has taken and will take a number of steps to improve transparency
in its regulatory system, including:•

Agreeing to new and meaningful opportunities for U.S. companies to provide input into the Japan
Post privatization process.

•Confirming that Japan Post has no plans now to introduce new or altered Kampo insurance products
in response to strong concern that a level playing field must first be established between Kampo
postal insurance and private sector insurers.

•

Actively pursuing proposals endorsed by the Cabinet to improve the Public Comment Procedure(PCP) in FY2004 so the private sector can more meaningfully input into the development andrevision of regulations. The numerous reform proposals are part of Japan’s Three-Year Program for
the Promotion of Regulatory Reform and include steps to:
•

•
•
•
•

•
•

bolster the principle of making public comment periods 30 days in length by, for example,
requiring that all ministries make public the reason for not adhering to this principle when they
provide shorter comment periods;
require the ministries to provide detailed explanations in cases where public comments are notincorporated into final regulations;require that regulatory proposals subject to the PCP should include Regulatory Impact Analyses
as often as possible;
require ministries to make public on their websites the entire texts of comments and information
submitted as comment by the public;
conduct improved reviews of the implementation and effectiveness of the PCP to help ensurecomments are fully taken into account, and as appropriate, incorporated into final regulations;andstrengthen the PCP by incorporating it into Japan’s Administrative Procedure Law.

Improving the Japanese Government web portal (www.e-gov.go.jp/) to allow the public to moreeasily find PCP solicitations for draft rules and regulations.

SPECIAL ZONES FOR STRUCTURAL REFORM(DEREGULATION ZONES)
Background: In April 2003, Prime Minister Koizumi launched an effort to accelerate the pace ofstructural and regulatory reform in Japan with the establishment of the first 57 Special Zones for
Structural Reform (Special Zones). This initiative has been empowering local governments to take thelead on deregulation by establishing zones where business can operate unencumbered by burdensome
regulations. Prime Minister Koizumi has made this initiative a central pillar of his regulatory reform
agenda and has thus far approved 324 zones, including zones in which U.S. companies are operating.
Express carriers, for instance, have been enjoying significantly lower customs processing fees at theInternational Distribution and Logistic zone at Narita International Airport.
The U.S. Government welcomes the expansion of the Special Zones and the opportunity through theRegulatory Reform Initiative to cooperate in helping ensure the success of this innovative new approachto promoting growth through deregulation at the local level. The U.S. Government looks forward thefirst nationwide expansion of the Special Zones in the fall of this year.
Progress: In implementing the Special Zones initiative, the Japanese Government is:•

Encouraging U.S. and other foreign companies to develop and submit zone ideas to the Headquarters
for Special Zones for Structural Reform and actively participate in zones.

•

Planning to expand successful measures used in the Special Zones nationwide later this summer sothat the rest of the country can reap the benefits of greater regulatory and structural reform.

•

Continuing to ensure transparency in development of the Special Zones initiative, including in thezone application process, and in establishing procedures to implement the zones.

•

Ensuring that domestic and foreign companies alike have equal opportunity to submit zone proposals,
to have proposals approved, and to operate in the zones, including producing materials in English to
assist interested companies.

•

Ensuring that the deliberations and actions of the evaluation committee that determines which zones
are deemed successes and which zones will be terminated are open and transparent.

•

Increasing the number of regulations to be suspended under the Special Zones initiative so thatderegulatory benefits can have the maximum positive and widespread impact on the economy.

LEGAL SYSTEM AND INFRASTRUCTURE
Background: The creation of a legal environment in Japan that supports regulatory and structuralreform and meets the needs of international business is a critical element for Japan’s economic recovery
and restructuring. The Japanese legal system must be able to respond to the market’s need for theefficient provision of international legal services and provide a sound and effective foundation for the
conduct of business transactions in an increasingly deregulated environment. The United Statescommends Japan for its recent enactment of amendments to the Foreign Lawyers Law that will
substantially eliminate restrictions on the freedom of association between foreign lawyers (gaiben) andJapanese lawyers (bengoshi). Further liberalization measures are still necessary to ensure that consumersof legal services in Japan are able to enjoy the maximum benefits of these recent amendments. In thatsame spirit, the United States commends the progress Japan is making in the area of judicial system
reform, and looks forward to continued efforts in this area, particularly with respect to increasing theeffectiveness of judicial oversight of the actions taken by administrative agencies.
Progress: Significant new measures Japan has taken or will take to address these problems include:
C

Enacting amendments to the Foreign Lawyers Law that, when made effective in 2005, will
substantially allow freedom of association between gaiben and bengoshi, including by allowing
partnerships between gaiben and bengoshi and allowing gaiben to employ bengoshi.

C

Working with the Japanese Federation of Bar Associations so that it promulgates implementing rules
and regulations consistent with the letter and spirit of the new amendments to the Foreign Lawyers
Law.

C

Conducting a study of whether gaiben should be permitted to establish professional corporations thatcan open multiple offices in Japan, as bengoshi are already permitted to do.

CSubmitting legislation to the Diet in March 2004 that substantially expands the standing of third
parties to challenge in court administrative actions adversely affecting them, thereby providing
improved judicial oversight of Japan’s administrative agencies.

COMMERCIAL LAW
Background: Aggressive corporate restructuring and improved corporate management is helping torevitalize the Japanese economy and return it to a path of sustainable growth. To promote thisrestructuring, modern merger techniques must be more readily available in Japan. Japan has recently
taken a useful first step by permitting use of triangular mergers and cash mergers under the Revised
Special Measures Law for Industrial Revitalization. Impediments to the use of these techniques remain,
however. They are not, for example, yet available to companies seeking to merge outside the parametersof the Industrial Revitalization Law. The introduction of good corporate governance mechanisms will
also improve the performance of Japanese companies by ensuring that management strives to maximize
shareholder value through increased productivity and economically sound business decisions. Good
corporate governance requires active shareholder participation, including by large institutional
shareholders such as pension funds and mutual funds. In addition, good corporate governance ispromoted by encouraging and protecting whistleblowers who report non-compliance with laws andregulations aimed at ensuring that shareholders and regulators can exercise appropriate oversight overmanagement. Finally, Japan would benefit from creating an environment conducive to Alternative
Dispute Resolution (ADR), which will help businesses resolve disputes in an efficient and economicalmanner.
Progress: Significant new measures Japan has taken or will take to address these problems include:•

Preparing to submit legislation to the Diet in early 2005 that would introduce into Japan’s corporate
law modern merger techniques, such as triangular mergers, cash mergers and short form (squeezeout) mergers.

•

Actively studying ways to facilitate corporate restructuring and investment in Japan, including tax
treatment of modern merger techniques.

•

Promoting proxy voting by pension fund and mutual fund managers as a mechanism forstrengthening corporate governance and shareholder value to the benefit of fund beneficiaries,
including through:•issuance of guidelines requiring outside managers of the Government Pension Insurance Fund(GPIF) to exercise their proxy voting rights;•

study of whether to make public the proxy voting policies of those managers; and•issuance of detailed proxy voting guidelines by the Pension Fund Association, other governmentrelated pension funds, and the Investment Trust Association (an association of nearly all mutualfund companies in Japan).

•

Submitting whistleblower protection legislation to the Diet in March 2004 that would promote more
effective corporate governance by protecting employees who report violations of Japan’s securities
laws.

•

Actively examining ways to strengthen and revitalize ADR mechanisms in Japan, with the goal of
creating a flexible and open legal environment that facilitates the development of ADR services inJapan.

DISTRIBUTION
Background: Global demand for the express delivery of goods and information is growing at a rapid
pace. Many dynamic and relatively young industries, including the express carrier industry, are now avital component of global trade and an integral part of the smooth development of international logistics.
Efficient global trade requires that regulatory and other impediments to distribution are minimized, that
customs procedures are seamless, and that costs inhibiting the free exchange of goods and information
through the express carrier industry are kept to a minimum. Although more remains to be done to create
a truly seamless distribution system, the Japanese Government has implemented a number of measuresthat will enhance the ability of U.S. express carriers to more efficiently and quickly deliver goods andinformation to the benefit the Japanese economy through reduced costs.
Progress: Significant measures Japan has taken or will take in these sector include:•

Reducing by another 50 percent certain customs processing fees in the spring of 2004 at seven majorinternational ports (in addition to a 50 percent cut last year), and a 50 percent reduction of these same
fees at all other ports throughout Japan.

•

Acknowledging that the Narita Airport Corporation has included in its mid-term management plan agoal of reducing landing fees at Narita International Airport as soon as possible once it can assess its
business conditions. A reduction in landing fees at Narita and Kansai International Airports would
annually save passenger and cargo airlines millions of dollars, decrease the cost of doing business inJapan, and benefit consumers through cheaper international and domestic air-fares.

•

Working in a transparent manner to improve the user fee system for clearance of air cargo at Japan’s
airports, including:•permitting participation by both domestic and foreign interests on the panel conducting a reviewof the system, which is scheduled to release a report in June or July 2004; and•opening for public comment user fee reform proposals deriving from that report.

•

Discussing airline pricing issues with the U.S. Government for the first time in the Regulatory
Reform Initiative. The issues specifically relate to sales distribution and double disapproval pricing.

•

Reaffirming the importance of maintaining a sufficient level of security standards in ATM networks
for banks to protect credit and debit card transactions, strengthening regulations related tocredit/debit card fraud, and discussing with the U.S. Government promotion of the use of credit anddebit cards to pay for government services in Japan.