FIFTH REPORT TO THE LEADERS ON THE
U.S.-JAPAN REGULATORY REFORM AND COMPETITION POLICY INITIATIVE
June 29, 2006

The U.S.-Japan Regulatory Reform and Competition Policy Initiative, now completing its fifth
year, was launched in June 2001 by President George W. Bush and Prime Minister Junichiro
Koizumi. The Initiative was established as a bilateral forum to promote economic growththrough regulatory reform. Each year, the Initiative addresses a broad range of sectoral andcross-sectoral issues, and outcomes are reported on an annual basis through the Initiative’s
Report to the Leaders.
The Initiative is based on the principle of a two-way dialogue between the Governments of theUnited States and Japan.
Following the exchange of recommendations between both Governments in December 2005,
Working Groups established under this Initiative met to discuss reform in key sectors and areas
such as intellectual property, distribution, privatization of public entities, information technology,
competition policy, trade and investment-related measures, commercial law, telecommunications,consular affairs, and medical devices and pharmaceuticals. A High-Level Officials Group met in
March 2006 to advance progress on a range of issues raised under this Initiative. Input was also
received from representatives of the private sector to augment discussions on issues being
addressed through the Initiative’s Government-to-Government discussions. Following theWorking Group and High-Level meetings, this Report to the Leaders was prepared to record
progress as well as clarify measures to be taken in the future that respond to the two
Governments’ recommendations.
This Fifth Report to the Leaders demonstrates progress made across a wide array of issues,
including reforms that will help speed regulatory decisions, enhance transparency, improve
market access, strengthen the competitive environment, lower barriers to business, and protect
personal information. The Report also reflects joint measures to combat the problem ofcounterfeiting and pirated goods as well as to promote the implementation of transparency
standards throughout the Asia-Pacific region. The two Governments affirm their determination
to continue to increase cooperation in bilateral, regional, and multilateral fora.
Both Governments reaffirm their determination to further promote regulatory reform and, upon
the request of either Government, will meet at mutually convenient times to address themeasures contained in this Report.

REGULATORY REFORM AND OTHER MEASURES BY
THE GOVERNMENT OF JAPANI.

TELECOMMUNICATIONSA.

Promotion of Competition
1.

The Government of Japan has implemented a competition policy in thetelecommunications field in line with rapid advances of technology, and has
thereby facilitated the development of telecommunications markets where
broadband services rank among the fastest, most affordable, and mosttechnologically advanced in the world. In Japan, FTTH service as a proportion ofbroadband Internet subscriptions has been increasing, as has the averagetransmission speed of such services. Moreover, the number of subscribers to third
generation mobile phones and that of subscribed IP telephony exceeded 48
million and 11 million respectively as of the end of March 2006.

2.

The Ministry of Internal Affairs and Communications (MIC) set up the “Study
Group on a Framework for Competition Rules to Address Progress in the Move to
IP” in October 2005, which has been discussing future competition policies in
response to the progress in the transition to IP. Specific issues under discussion
include examining how current interconnection and other rules should be revised
to promote competition in an environment where the telecommunications network
is moving from the Public Switched Telephone Network (PSTN) to IP-based
networks including frameworks for calculating PSTN interconnection charges
during this transition.

3.

In November 2005, MIC assigned spectrum in the 1.7GHz and 2GHz bands forthree new mobile communications carriers.

4.

In December 2005 and April 2006, MIC solicited public comments on “Changing
Environment Surrounding Cellular Telephone Business and Future Policy in
Response to Such Changes.” MIC will deliberate upon policy measures within
FY 2006 including amendments to the “Guideline Concerning Application of theTelecommunications Business Law and the Radio Law Pertaining to MVNOs(Mobile Virtual Network Operators)” adopted in June 2002.

5.

In January 2006, MIC Minister Heizo Takenaka established an experts panel on
the future direction of Japan’s telecommunications and broadcasting. The panel
released its final report in June 2006. This issue is being discussed in the Council
on Economic and Fiscal Policy towards the establishment of “Basic Policies for
Economic and Fiscal Management and Structural Reform 2006.”

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6.

B.

C.

The Government of Japan explained the rationale for the requirements that the
government hold a specified percentage of NTT shares, and the limit on foreign
holdings of such shares.

Fixed Interconnection
1.

After a public comment procedure and receipt of a report from the Information
and Communications Council, MIC revised the Rules for Interconnection Charges
in February 2006. Based on these new rules, interconnection rates from April
2006 were established as follows: GC interconnection was set at 5.05 yen per 3
minutes, a decrease of 5.1 percent compared to the last fiscal year; and ICinterconnection was set at 6.84 yen per 3 minutes, a decrease of 3.5 percent
compared to the last fiscal year.

2.

In March 2006, MIC revised ministerial ordinances relating to universal service,
after conducting a public comment procedure and considering a report from theInformation and Communications Council. In the same month, NTT East andWest were designated as Eligible Telecommunications Carriers under this system.
Based on the new ordinances, this system (including scope of eligible carriers)
will be reviewed within 3 years.

3.

The Governments of Japan and the United States reaffirmed their continued
intention to maintain any universal service mechanism consistent with WTO
Reference Paper commitments.

Mobile Interconnection
1.

The interconnection rate of NTT DoCoMo has been reduced over the last 9 years,
and as a result, this rate has fallen to the low end of rates among developed
countries using the Calling Party Pays system. MIC was notified in March 2006
that the rate would be revised downward by 2.6% compared to the last fiscal year
for interconnection within the same NTT DoCoMo service area, and by 5.6%
compared to the last fiscal year for interconnection with a subscriber located in a
distant NTT DoCoMo service area.

2.

Telecommunications carriers that have installed Category II designatedtelecommunications facilities (e.g., NTT DoCoMo and KDDI) continue to be
obliged to notify MIC of and publicize interconnection tariffs in accordance with
the Telecommunications Business Law.

3.

If payment for interconnection which is received by telecommunications carriers
that have installed Category II designated telecommunications facilities surpass
the sum of reasonable costs and reasonable profit under efficient management, theMinister for Internal Affairs and Communications may order a change to be madein these interconnection tariffs, and any carrier and others may submit complaints
or other views to the Minister under the Telecommunications Business Law.
Additionally, when a consultation between carriers fails to come to an agreement,3

any carrier can make use of the existing legal framework such as petitions for an
order (meirei) or an award (saitei) to the Minister, or applications for mediation(assen) or arbitration (chusai) to the Telecommunications Business Dispute
Settlement Commission.
D.

E.

Promotion of Advanced Technologies and Services
1.

The Telecommunications Working Group of the Regulatory Reform Initiative
held a meeting of government officials and private sector experts and exchanged
opinions on resolving interference issues in commercial deployment of highspeed Power Line Communications (PLC) in Japan and Broadband OverPowerline (BPL) in the United States. MIC began holding the “Study Group on
High-Speed Power Line Communications” in January 2005 and published thefinal report of the Study Group in December 2005 after a public comment
procedure. The Information and Communications Council is currently
deliberating on the limits and the methods of measurement concerning facilities
for high-speed PLC.

2

MIC held the “Study Group for Wireless Broadband Promotion” from November
2004 to December 2005. In December 2005, MIC published the final report of
the Study Group, including the future prospects for wireless broadband services,and development of specific systems based on those prospects, as well as
necessary frequency reallocation and promotion strategies after a public comment
procedure. On the basis of this report, MIC consulted with the Information andCommunications Council, which began considering technical requirements forbroadband mobile wireless access systems using the 2.5GHz band in February
2006. In addition, the Information and Communications Council started
deliberations on technical requirements for High-Throughput wireless LAN in
March 2006.

Promotion of Trade in Telecommunications Equipment
1.

The Governments of Japan and the United States will continue formal
negotiations with a view to an early conclusion of a Mutual Recognition
Agreement (MRA) relating to conformity assessment of telecommunications
equipment.

2.

Regarding electromagnetic compatibility (EMC), the Governments of Japan andthe United States will continue to work together to develop an arrangement thatwould permit acceptance of results of conformity assessment for information
technology (IT) equipment and industrial, scientific and medical (ISM) equipment
conducted by accredited Japanese conformity assessment bodies.

3.

The Governments of Japan and the United States discussed “Family Approval” ofwireless LAN antennas as a request from the Government of the United States.
The Governments of Japan and the United States will continue a dialogue on this4

issue, taking into consideration policies Japan has established for compliance withtechnical regulations and the need to address the growing problem in the Japanesemarket of non-compliant equipment.
F.

Network Channel Terminating Equipment (NCTE): Procedures established in the1990 Letters on Network Channel Terminating Equipment (NCTE), and revised as per
the Third Report to the Leaders, ceased to be applied in and after FY2006, after a publiccomment procedure. Under Article 23 of the Telecommunications Business Law,
carriers providing designated telecommunications services are obligated to disclose thetechnical requirements of NCTE.

II.

INFORMATION TECHNOLOGIESA.

IT and E-Commerce Policymaking: The various e-Japan Strategies and Programs haveeffectively promoted the use of IT and e-commerce throughout Japan’s economy tobenefit individuals, create more efficient e-government, and foster high value-added
business activities. Japan will continue to strive to foster a regulatory environment thatfurther promotes the utilization of IT, including e-commerce, and provide, as appropriate,
meaningful opportunities for interested parties to contribute to IT policy formulation
processes.
1.

New IT Reform Strategy: The New IT Reform Strategy (Strategy) was adopted by
the IT Strategy Headquarters (ITSH) on January 19, 2006, after soliciting publiccomments and giving due consideration to comments it received. The
Government of Japan intends to implement the Strategy in a manner that
promotes private sector leadership and innovation in IT and e-commerce. In
addition, the Government of Japan considers it important not to unduly constrain
private sector innovation or market entry, and will continue its efforts to apply
this perspective in implementing the Strategy.

2.

Private Sector Input: The Government of Japan acknowledges the importance of
seeking private sector input in the development and implementation of IT and ecommerce policies. To help achieve this goal, the Government of Japan will
provide appropriate opportunities for interested parties to give input at an earlystage in the formulation of IT and e-commerce policies.

3.

Technology Neutrality: In the 2005 Report to the Leaders, the Government ofJapan shared the view with the Government of the United States that it isgenerally important to implement laws, regulations, and guidelines related to IT ina manner that strives not to unduly promote, mandate, or favor specifictechnologies (technology neutrality), in order to provide maximum flexibility andencourage innovation in the private sector. The Government of Japan willcontinue to apply this perspective. In addition, the Government of Japan will
cooperate closely with the private sector in international standards development
activities and give consideration to established international standards in theimplementation of its IT policies.

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B.

4.

International Compatibility: The Government of Japan considers it important tofoster an environment that further promotes cross-border e-commerce. The
Government of Japan will continue to seek to harmonize policies and legal
frameworks for e-commerce and related Internet technologies with international
practice.

5.

Public Comment Procedures: The Government of Japan recognizes the need toensure that the Revised Administrative Procedure Act effectively provides
meaningful opportunities for input into the administrative rulemaking process,including for the IT and e-commerce sectors. This Act contains reform measures,
including setting the minimum public comment procedure period at 30 days inprinciple, and requiring Ministries and Agencies to fully consider all submitted
public comments.

Strengthening the Protection of Intellectual Property Rights
1.

Copyright Term Extension: The Government of Japan will continue its
deliberations on extending the terms of protection for copyrighted works, inconsideration of relevant factors including global trends and the balance between
right holders’ and users’ benefits, and will reach a conclusion of its review of theterms of copyright by the end of FY2007. The Government of Japan recognizes
the Government of the United States’ concern that the term of protection forsound recordings and all copyrighted works be extended, which the Governmentof the United States recognizes as a global trend.

2.

Statutory Damages: The Government of Japan will continue to consider further
measures to strengthen protection of copyright and decrease the burden on rightholders, including availability of statutory damages for infringement, and willreach a conclusion of its review in this regard by the end of FY2007.

3.

Protection of Digital Content:a.

The Government of Japan will continue to make public measures it has
taken to forbid copyright infringement in their governmental operations
including through the misuse of file-sharing technologies and protect
intellectual property, including software and other digital content assets
used by the government, such as internal regulations and decrees of theagencies which explicitly state any violations of the Copyright Law orother laws and regulations are subject to disciplinary sanction. The
Government of Japan will continue to exchange information on this issue
with the Government of the United States.

b.

In addition to other copyright remedies, the Law concerning the Liabilityof Internet Service Provider has had some positive results with related
guidelines since its enforcement in May 2002. Under the Law and the6guidelines, right-infringing information on the Internet, including digitalcontent piracy, can be deleted upon request through a Credibility
Confirmation Organization. There are two ways to deal with right
infringement on the Internet, which are: 1) prompt deletion based on the
Law concerning the Liability of Internet Service Provider, and 2) deletion
based on the contractual relation between the Internet service provider andthe sender (alleged infringer of copyright). These measures ensure that
deletion of right-infringing information on the Internet is properly
conducted. The Government of Japan continues to observe the status of
implementation of the Law and to take measures against copyright
infringement.
c.

The Governments of Japan and the United States will continue to discuss
issues related to online piracy, including examining ways to clarify thescope and application of doctrines of secondary liability for copyright
infringement, as well as share judicial decisions and related informationfrom respective territories.

d.

The Government of Japan has ensured the right of making available toaddress the infringement of copyrights and neighboring rights in works
and phonograms that are uploaded onto peer-to-peer networks. The
Government of Japan has ensured that this is in compliance with the WCT
and WPPT. In addition, the Government of Japan will continue to makeefforts to clarify its interpretation of the scope of the private reproduction
exception considering provisions of related international agreements andtechnological developments.

e.

The Government of Japan will make efforts to clarify its interpretation of
the scope of “temporary copy” protection through appropriate measuresand a transparent system.

f.

The Governments of Japan and the United States will continue to discuss
issues related to improving protection for technological protection
measures. The Government of Japan is studying “access controls” andwill continue to update the Government of the United States in this area.

g.

The Government of Japan and the United States will continue to discuss
issues related to end-user piracy.

4.

Book Piracy: The Government of Japan will continue to discuss the issue related
to reproduction of books, especially on university campuses, with the Governmentof the United States, and will also discuss the impact of proposed exceptions tocopyright protection on scientific, technical and medical publishing.

5.

Appropriate Scope for Education Exception in Copyright Law: The Governmentof Japan has issued guidelines and presented examples of the “educational

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exceptions” of the Copyright Law for educational institutions, teachers, andstudents to clarify the limitations of the exception under the amended Copyright
Law. The Governments of Japan and United States will continue to discuss
limitations to the exceptions on this issue.
6.

C.

IP Strategic Program and Intellectual Property Policies: The Intellectual Property
Strategy Headquarters (IPSH) discussed various policies to realize an IP-based
nation and created the Intellectual Property Strategic Program (IPSP) in July
2003. The law provides that the IPSP should be reviewed and revised at least
once a year. Consistent with this, IPSH finalized and published the IP Strategic
Program 2006 on June 8, 2006.
a.

When reviewing the IPSP, IPSH will provide an adequate period for thesolicitation of public comments, in accordance with the general rules on
public comment procedure. In doing so, IPSH will ensure that commentsfrom the Government of the United States and other stakeholders areseriously considered and, as necessary, reflected in the final measures andactions.

b.

The Government of Japan will also ensure that the Basic Law onIntellectual Property and implementing measures for the IPSP are incompliance with international obligations, standards, and norms, and that
IPSH and relevant ministries and agencies will be provided with thenecessary support and resources to implement the Basic Law andmeasures for the IPSP.

c.

By Cabinet Order, the IPSH provides that when developing IP policies the
IPSH Task Forces may call experts or persons concerned, including rightholders, to their meetings to hear the opinions when the IPSH deems it
necessary.

Cooperation in Efforts against Counterfeits and Pirated Goods1.

To combat the serious and growing problem of piracy and counterfeiting, both theGovernments of the United States and Japan have implemented new initiatives
under their respective domestic IPR programs -- the Strategy Targeting Organized
Piracy (STOP) in the United States and the “Intellectual Property Strategic
Program 2005” in Japan. Notable new initiatives realized in 2006 include:a.

Strategy Targeting Organized Piracy: Passage of the “Stop Counterfeiting
In Manufactured Goods Act,” establishment of a Global IPR Academy,
and expansion of IPR experts abroad.

b.

Intellectual Property Strategic Program 2006: Aiming for an early
realization of an international legal framework on preventing proliferationof counterfeits and pirated goods, strengthening the regulations of private

8import, etc.; and preventing the sale of counterfeits and pirated goods via
internet auctions.
2.

D.

In addition to establishing their own initiatives in this area, the Governments ofJapan and the United States have been and will continue to closely cooperate on
strengthening IPR protection and enforcement. Along with cooperating
multilaterally, the two Governments, for example:a.

Held bilateral meetings regularly to promote IPR protection andenforcement in Asia Pacific and around the world, andb.

Co-sponsored under the APEC Anti-Counterfeiting and Piracy Initiative,model guidelines to reduce trade in counterfeit and pirated goods, toprevent against unauthorized copies, and to prevent the sale of counterfeit
and pirated goods over the Internet, which was endorsed at the meeting of
APEC Leaders and Ministers for Trade in November 2005 in the Republicof Korea.

3.

The Governments of Japan and the United States will continue to cooperate inbilateral, regional, and multilateral fora to promote greater protection for IPR
world wide by undertaking further actions on a wide range of initiatives, such as
the APEC Anti-Counterfeiting and Piracy Initiative and WTO TRIPS
transparency request, among others. The Governments of Japan and the UnitedStates will expand cooperation to address IPR problems in China using
appropriate tools. In addition, the Governments of Japan and the United States
will continue to discuss the idea introduced by Prime Minister Koizumi at the G8Gleneagles Summit in July 2005 regarding a possible international agreement toaddress the proliferation of counterfeit and pirated goods.

4.

The Governments of Japan and the United States have discussed under the
Regulatory Reform Initiative ways to cooperate to combat piracy of digitalcontent.

5.

The Governments of Japan and the United States will continue to seek andexplore possibilities to cooperate with companies and industry associations toarrange joint conferences or seminars to discuss IPR protection strategies. This
would include sharing information on IPR enforcement activities.

Promoting Online Security
1.

Privacy: The Act on the Protection of Personal Information (Act) went into effectin April 2005. Based on the Act, which outlines the minimum acceptableparameters for all industrial sectors, the new or revised implementation guidelines
are industry-specific. Relevant Ministries and Agencies drafted these guidelines
after discussion with respective councils and solicitation of public comments.
The Government of Japan is making efforts to ensure the transparent, consistent,

9and effective implementation of the Act. In implementing the Act and theguidelines, relevant Ministries and Agencies will maintain close liaison andcooperate with each other. The Government of Japan regards it as essential toensure transparency, respect voluntary efforts by the private sector, and promotebetter understanding of the implementation of the Act.

2.

a.

On June 8, 2006, the Cabinet Office, the Financial Services Agency(FSA), the Ministry of Internal Affairs and Communications (MIC), theMinistry of Economy, Trade and Industry (METI), and the Ministry of
Health, Labour and Welfare (MHLW) sent their experts to participate in aseminar for U.S. and Japanese enterprises on the Act, which provided
participants with a valuable opportunity to better understand its
implementation.

b.

The Government of Japan will make efforts to raise awareness andunderstanding regarding the Act by utilizing the Internet, holding briefing
sessions and other methods. Recognizing the usefulness of information on
violations and corrective actions for compliance practices of companies,
each relevant Ministry and Agency will, as appropriate, publicly provide
such information. The Cabinet Office will compile reports each fiscal
year from relevant ministers about the enforcement status of the Act
including their exercise of authority, such as collecting reports andproviding advice, and publicly announce its summary.

c.

Each relevant Ministry and Agency will clarify, when necessary, whether
the provisions of guidelines are mandatory or voluntary and that voluntary
guideline non-compliance will not result in penalties to firms. In this area,
METI has included language in its “Guidelines Targeting Economic andIndustrial Sectors with Regard to the Law Concerning the Protection of
Personal Information” that clarifies mandatory or voluntary provisions.

d.

As noted in the Basic Policy, the Cabinet Office will examine theimplementation status of the Act approximately three years after it fully
went into effect and will take necessary measures based on the results.
Each relevant Ministry and Agency will review its guidelines based on thecurrent circumstances of each business sector.

Online Nuisance, Deceptive Practices, and Fraud: The Governments of the UnitedStates and Japan are concerned with spam, phishing, and other forms of online
fraud that negatively impact businesses and customers, and interfere with the
adoption and smooth functioning of IT and E-Commerce. The Government ofJapan has been working on multifaceted anti-spam, anti-phishing, and otherrelated measures in close cooperation with private businesses, which include
Internet service providers and mobile operators. The Government of Japan willfurther promote activities aimed at addressing online nuisance and fraudulent
practices. As online nuisance and fraudulent practices including spam and10phishing are global in nature, the Government of Japan will strengthen
cooperation with the Government of the United States through continued
exchange of information, taking advantage of the frameworks of internationalorganizations such as OECD and APEC as well as bilateral consultations.

3.

a.

The Government of Japan promotes measures that include industry-led
technological solutions and consumer education to address spam, phishing,and other online fraud in close cooperation with the private sector. MIC,
together with private businesses that include telecommunications carriers,
has periodically convened the Anti-Phishing Working Group since
January 2005 in order to share available information. The Council of
Anti-Phishing Japan was established by the private sector under the
proposal of METI in April 2005 to promote activities such as thecollection and provision of information as well as an awareness campaign.

b.

The Government of Japan is vigorously enforcing its Law on Regulationof Transmission of Specified Electronic Mail (the Anti-Spam Law), which
it has amended to prohibit transmissions disguising information such as
senders’ addresses, and to include direct penalties for violations of suchprohibited acts.

c.

MIC is promoting understanding of technological measures against spam,through such activities as delivering lectures at seminars hosted by theprivate sector. MIC is also helping increase private sector understandingof how the Constitutional Secrecy of Communications provisions and theTelecommunications Business Law impact the way technological firms
and Internet service providers can develop and use new technologies tofilter and block spam in Japan.

d.

The Governments of the United States and Japan cooperated to hold aU.S.-Japan Financial Technology Seminar in April 2006 to raiseawareness, highlight best practices, and promote public-private
partnerships to counter online hazards. The seminar was attended bymany interested parties, including U.S. and Japanese companies.

e.

The Governments of the United States and Japan will continue to share
information and experiences to improve best practices regarding spam,phishing, and online fraud.

Government Information Security: The Government of Japan is continuing its
efforts to raise the level of information security in Japan, both in the government
and private sector. The National Information Security Center (NISC), establishedin April 2005, has a lead role in providing guidance, encouraging collaboration
among government bodies, and working in partnership with the private sector toaddress this task.

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E.

a.

The Information Security Policy Council (ISPC) decided and released thefirst overall version of “The Standards for Information Security Measures
for the Central Government Computer Systems (‘Standards for
Measures’)” on December 13, 2005, after NISC solicited public commentson its draft for 30 days and carefully assessed the feedback received. In
addition, NISC publicized the comments received and its view on thosecomments on its website (www.nisc.go.jp).

b.

The Government of Japan believes it is important to obtain public input as
widely as possible when the Standards for Measures are changed in
substance. All ministries are required to implement minimum information
security requirements in accordance with the Standards for Measures.
NISC plans to assess the implementation by each ministry through a cycleof “Plan Do Check Act,” which includes the introduction, evaluation, andreview of the Standards for Measures.

c.

In December 2005, ISPC conducted a 30-day public comment period forthe draft of its First National Strategy on Information Security. ISPC
decided and released the final version of the document in February 2006.

d.

The Ministry of Internal Affairs and Communications (MIC) will revise“The Guideline for Information Security Policy for Local Governments”
by September 2006, reflecting the characteristics of each local government
in the guideline.

e.

The Governments of Japan and the United States will exchange
information and experiences, as appropriate, to improve both countries’
efforts to secure their government information systems.

IT-Related Financial Reforms, e-Medicine, and e-Accessibility
1.

IT-Related Financial Reforms: In the Program for Further Financial Reform,
which was established and published by the Financial Services Agency (FSA) atthe end of 2004, the FSA is seeking to promote the strategic use of IT tostrengthen the competitiveness of Japan’s financial institutions and further
develop financial infrastructure. The Program for Further Financial Reformpresents “consideration towards establishing legislation for electronic settlements
and electronic financial transactions” as one of the measures to create anenvironment which enables financial services providers to provide diversified
financial services with good quality in response to needs of users.
a.

The FSA affirms the private sector’s lead role in promoting IT
investments in financial services through the development and deployment
of innovative technologies.

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2.

3.

b.

The FSA intends to support the financial sector in undertaking IT
investments by collecting and publicly announcing information andstatistics on the status of the sector’s IT utilization. As part of thisprocess, the FSA surveyed the status of IT utilization by all deposithandling financial institutions, securities firms, and insurance companies
in Japan in summer 2005 and issued survey results in September 2005.
The FSA will conduct the “IT Caravan” in FY2006 to provide financial
services firms opportunities to share such information.

c.

The FSA established the Working Group concerning IT Renovation andthe Financial System under the Financial System Council last April. In
this working group, experts from various fields, including legal experts in
the Civil and Commercial Laws, financial experts in the academic field,
financial business players and IT experts, deliberate on electronic
receivables and new electronic settlement services such as e-cash andpublish their discussion points after each deliberation.

d.

The FSA is working closely with the IT Strategic Headquarters, theMinistry of Economy, Trade and Industry (METI), Ministry of Justice(MOJ) and other relevant ministries to exchange information and promoteconsistency among Japan’s IT-related financial reforms and Japan’s other
IT and e-commerce regulations and policies, so as to provide predictability
to the private sector.

e-Medicine: The Government of Japan is promoting the use of IT to enhance thequality, safety, and efficiency of Japan’s medical care system. It is also working
to formulate and implement measures designed to help Japan rapidly introduce IT
solutions for items such as personal medical records and processing of receipts.
a.

MHLW proposed in the May 2005 Final Report of the Consultation
Committee on a Standard Electronic Medical Record System, that HL7, aninternational standard for medical information exchange, should be
implemented as a message exchange standard. While it is sometimes
inevitable to employ specific technologies under limited circumstances,
the Government of Japan will continue its efforts to maintain technology
neutrality to the extent appropriate and practicable in the field of emedicine.

b.

Through its amendment on April 10, 2006, of the Ministerial Order
Regarding the Demands for Payment for Medical Treatment Benefits,
Medical Care for the Elderly and Government-subsidized Medical
Services, MHLW has directed that all medical receipts, in principle, be
submitted online from the beginning of FY2011.

e-Accessibility: The Governments of Japan and the United States will continue toexchange information on their respective work and priorities in the area of e-13

accessibility, as appropriate, in an effort to better coordinate and enhance
understanding of approaches to e-accessibility in both countries.
F.

Promoting Procurement Reforms for Information Systems
1.

Promoting Implementation of Reforms: In January 2006, the Inter-Ministerial
Task Force for Information Systems Procurement (Task Force) posted on theInternet the results of a “follow-up survey” (Survey) of progress made by
Ministries in FY2004 in implementing the reforms outlined in the Task Forcememorandum of agreement. These results indicated that progress has been madein a number of areas, although some areas remain where work to implement
reforms continues. The Task Force will continue to monitor the Ministries’
efforts to implement the memorandum’s reforms and urge them to complete thisprocess without delay.
a.

The Survey showed that the Cabinet Office has adopted measures that
increase the flexibility of qualifications for entry into competitive biddingon IT procurement projects, and that nine Ministries have taken steps topromote IT procurements from small and medium-sized enterprises. The
Task Force will instruct Ministries that have not yet implemented reforms
in these areas to accelerate their efforts to do so.

b.

The Survey also showed that in FY2004, five Ministries took steps tomore clearly define and limit liability in 13 of their IT procurement
contracts. In accordance with the Task Force memorandum, these and allother Ministries will steadily take similar steps to clearly define and set
appropriate limits on responsibilities for liability between the government
and vendors in all future IT procurement contracts.

c.

As stated in its Intellectual Property Strategic Program 2006, theGovernment of Japan is preparing to submit legislation to the Diet in
FY2007. This legislation will expand the scope of Japan’s Bayh-Dolesystem by making it possible for contractors to possess ownership rights tointellectual property created through government-sponsored developmentof information systems, including software.

d.

MIC will continue to provide, and explore ways to enhance, training forprocurement officers of all ministries on IP issues related to government
procurement in order to improve their expertise in this area. This will
include efforts to encourage procurement officers to allow vendors to takesteps to protect their preexisting IPR or that of third parties.

e.

All Ministries have finished setting rules for investigations of extremely
low-priced bids, which will enhance their efforts to promote open and faircompetition in IT procurements.

14

f.

2.

The Government of Japan will continue to work to ensure that its online
database for information systems procurement (http://cyoutatujirei.egov.go.jp) is an effective tool to enhance transparency and fairness in IT
procurement. To help accomplish this, the Task Force will:(1)

Enhance its outreach efforts to the Ministries to ensure they are
fully aware of the database’s purpose and functions, and urge all
Ministries to contribute all necessary information about theirprocurement cases to the database without delay; and(2)Analyze information in the database and publish results to help
identify trends in information systems procurement, such aschanges in the ratio of competitive versus negotiated contracts, useof multi-year contracts, and adoption of bid evaluation methods
such as life-cycle cost and Overall Greatest Value Method(OGVM).

Improving Procurement Processes: To further improve procurement processes forgovernment information systems, Ministries acknowledge that contracts should besigned as soon as possible after winning bidders are chosen.

III.

MEDICAL DEVICES AND PHARMACEUTICALSA.

Changes in Japan’s Healthcare System: As the Ministry of Health, Labour andWelfare (MHLW) considers and implements changes in its healthcare system, industry,including U.S. industry, may express its views to MHLW and the Central Social
Insurance Medical Council (Chuikyo) if the subjects are related to the reimbursement
system of pharmaceuticals and medical devices.

B.

Medical Device and Pharmaceutical Pricing Reform and Related Issues
1.

Reimbursement Pricing System Changes: MHLW will consider the value ofinnovation, the important role of the market, and the need for timely provision ofadvanced devices and pharmaceuticals to patients when changes to its
reimbursement pricing systems for medical devices and pharmaceuticals are
implemented.
MHLW will continue to ensure the transparency of the reimbursement pricesetting process for medical devices and pharmaceuticals. MHLW will continue toprovide industry, including U.S. industry, with opportunities to submit opinions
and engage in consultations prior to changes in pricing rules, and with
opportunities to express its views at Chuikyo. In addition, MHLW will continue
to provide industry, including U.S. industry, with opportunities to submit opinions
regarding new proposals related to the pricing system of pharmaceuticals.

15

MHLW will ensure that if Chuikyo discusses the issue of the frequency ofreimbursement price revisions, it will provide industry, including U.S. industry,
with opportunities to provide input to MHLW and Chuikyo. MHLW notes that
the U.S. Government expressed its strong opposition to any system by which thereimbursement prices of pharmaceuticals and medical devices can be changed
every year.
MHLW will take the following steps, recognizing the value of innovative medical
devices, pharmaceuticals, and blood products in FY2006:a.

Pharmaceuticals:(1)

Premiums: To ensure that innovative new pharmaceuticals are
priced appropriately, MHLW relaxed the requirements for
Usefulness Premium (I) so that a pharmaceutical that has aclinically useful and novel mode of action and improves thetherapeutic method for the target illness or injury also can qualify
for this premium. MHLW raised the premium rates of theInnovation Premium, Usefulness Premium (I), and Usefulness
Premium (II) on April 1, 2006, as follows: from 40%-100% to
50%-100% for the Innovation Premium, from 15%-30% to 25%40% for the Usefulness Premium (I), and from 5%-10% to 5%20% for the Usefulness Premium (II). On April 1, 2006, MHLW
raised the standard amounts in the priority allocation of adjustment
premiums as follows: from 300 yen to 500 yen for oral
pharmaceuticals, from 1,500 yen to 4,000 yen for injectedpharmaceuticals, and from 300 yen to 500 yen for external
pharmaceuticals. On April 1, 2006, MHLW also introduced a newpremium for pediatric pharmaceuticals with a premium range of
3%-10%. MHLW will apply premiums to innovative
pharmaceuticals when such products are introduced and satisfy therequirements of premiums, and will consider using the range ofpremiums available.

(2)

Foreign Price Adjustment (FPA) Rule for Pharmaceuticals: In
FY2006, MHLW changed the way it applies the FPA rule forpharmaceuticals. When implementing the rule, MHLW will ask
for Chuikyo’s consent as appropriate. MHLW exchanged views
with industry in FY2005 on implementation of pricing rulechanges for pharmaceuticals such as the FPA rule and willcontinue to exchange views on these issues.

(3)

Drug Pricing Organization (DPO) Meetings: On April 1, 2006,
MHLW began to officially provide those pharmaceutical pricing
applicants who seek an adjustment premium or a price computedby the cost calculation method with opportunities to directly

16express their views at initial Drug Pricing Organization (DPO)
meetings based on documents they submit before thereimbursement prices of new pharmaceuticals are decided by the
DPO. These meetings will increase transparency by enabling the
DPO to seek clarification from manufacturers directly and at an
early stage in the reimbursement price-setting process.
b.

Medical Devices:(1)

Medical Device Pricing: During the process of the FY2006
changes in the reimbursement pricing system for medical devices,
MHLW consulted fully with industry, including U.S. industry,
regarding the method used to collect foreign prices of medical
devices. MHLW provided industry, including U.S. industry, with
opportunities to express views at Chuikyo, and Chuikyo discussed
these views. MHLW used only data supplied by industry,including U.S. industry, in recalculating the prices of medical
devices and retained the maximum percentage in the range ofpossible reductions. MHLW will continue to consult with industry
regarding adjustments to the reimbursement system for medical
devices. MHLW will follow Chuikyo’s recommendation to study
the impact of Japan’s regulatory and distribution systems on thecost of medical devices in Japan. MHLW also will review industry
studies, including the U.S. industry’s study, on the cost of doing
business in Japan’s medical device sector.

(2)

Foreign Average Price Rule for Medical Devices: According to
Chuikyo’s basic policy, MHLW will consider measures related to
the Foreign Average Price (FAP) rule for devices. MHLW notesthat the U.S. Government requested that MHLW eliminate the
FAP rule for medical devices before the next price revision and use
a new reimbursement mechanism based on market factors in Japan.
While the FAP rule remains in effect, MHLW will continue toconsult with industry, including U.S. industry, on price datacollection.

(3)

C1 and C2 Pricing: With regard to medical devices classified as C2,
in FY2006 MHLW increased the frequency of health insurance
listings to four times a year and already decided to list one device
as C2 in April 2006. MHLW will continue to provide C1classifications and premiums properly and expeditiously. MHLW
will continue to respond to questions from industry, including U.S.
industry, to clarify the criteria for C1 eligibility and premiums.
MHLW will continue to provide information to industry on the
products that were awarded a C1 designation.

17

C.

2.

Diagnostics: MHLW will continue to recognize the clinical value of diagnostics(including in-vitro diagnostic reagents [IVDs] and imaging equipment). MHLW
is ready to have a dialogue with industry, including U.S. industry, on the
categories of individual product tests that are considered to have added clinicalvalue. In the April 1, 2006, reimbursement price revisions for diagnostic imaging
equipment, MHLW recognized the differences in quality between conventional
and innovative products by granting premiums to innovative products. MHLW
will continue to provide reimbursement to advanced in-vitro diagnostic reagentsproperly and expeditiously.

3.

Data Exclusivity: As part of the “Intellectual Property Strategic Program”
determined by the Intellectual Property Policy Headquarters, the Government ofJapan is examining the idea of an eight-year protection period for test data on
pharmaceuticals. To offer greater incentives for the development of newpharmaceuticals, MHLW will continue to study the matter while continuously
exchanging opinions with industry, including U.S. industry.

4.

Blood Products: On April 1, 2006, MHLW did not reduce prices for most blood
products to recognize the costs of implementation of the amended Pharmaceutical
Affairs Law (PAL). MHLW will continue to consult with the blood products
industry, including U.S. industry, regarding the pricing system.

Medical Device and Pharmaceutical Regulatory Reform and Related Issues
1.

PMDA Resources: In FY2006, MHLW and the Pharmaceuticals and Medical
Devices Agency (PMDA) will increase efforts to speed the introduction of safe,
effective, and innovative medical devices and pharmaceuticals, and MHLW will
ensure PMDA has the necessary resources to meet its performance goals. MHLW
will ensure that PMDA has greater resources and expertise by, among otherthings, employing appropriate personnel to promote the organization’s ability to
conduct pharmaceutical and device reviews and provide safety assurance.
MHLW will ensure that PMDA accomplishes its goal of expanding its staff size
to 346 by March 31, 2009. MHLW will ensure that PMDA provides its
examiners with training opportunities and helps its examiners to gain deeper
knowledge in their specialized areas through its personnel policies. In FY2005,
PMDA provided examiners with several appropriate training opportunities.

2.

Pharmaceutical Performance Metrics: PMDA announces at appropriate times
statistics on the amount of time the agency takes to complete each step of reviewsof New Drug Applications (NDAs) and the number of applications processed.
MHLW will ensure PMDA uses performance metrics to facilitate its reviews.
PMDA’s report for April-December 2005 included metrics on time from NDA
submission to initial interview, time from initial interview to expert review, timefrom expert review to notification of review results, and time from notification ofreview results to approval. PMDA will publish these metrics every six months interms of “administrative time” -- the time PMDA takes to review an NDA. In
2006, PMDA provided industry with additional metrics including those that18

differentiate review times for standard NDAs and priority review applications.
MHLW will encourage PMDA to continue its dialogue with industry on metrics.
3.

Pharmaceutical Application Backlog: MHLW will encourage PMDA to eliminate
the backlog of pharmaceutical applications by September 2006.

4.

Enhancement of Reviewers’ Expertise: In FY2006, MHLW will encourage
PMDA to consider ways to enhance its ability to hire qualified pharmaceuticalreviewers.

5.

Pharmaceutical Clinical Trials: MHLW and PMDA will facilitate conducting
pharmaceutical clinical trials in Japan to help attain simultaneous global
development. MHLW and PMDA will continue discussion with industry about
ways to facilitate simultaneous global development. MHLW will provide U.S.
industry with meaningful opportunities to discuss clinical trials, particularly in
MHLW’s Subcommittee on Clinical Trials.

6.

Pharmaceutical Consultations: In addition to face-to-face consultations onpharmaceutical clinical trials, PMDA began conducting paper consultations on a
trial basis in April 2006, according to its March 7 Notification. PMDA also beganproviding concise minutes of the consultations in April 2006. PMDA will review
and further improve pharmaceutical consultation practices and strive to reduce
waiting times between consultation requests and consultations.

7.

Improvements of Medical Device Reviews: In FY2006, MHLW and PMDA will
work with industry to improve medical device applications and reviews and willcontinue to participate in workshops with domestic and foreign industry to help
achieve that goal. MHLW and PMDA will take the following steps in FY2006:a.

Partial Changes: MHLW will require manufacturers to seek PMDA
approval of partial changes in medical devices only when such changes
are not minor. MHLW and PMDA will inform manufacturers ofadditional concrete examples to help applicants to understand when theyneed to seek approval for partial changes. MHLW and PMDA will
investigate a number of concrete examples in cooperation with theindustry to establish a system whereby applications for partial change
approval may be submitted while previous partial change applications
already are under review.

b.

Medical Device Reviewers: MHLW will ensure PMDA attains its
midterm goals of increasing medical device reviewers and ensuring they
are experts in their areas of responsibility. PMDA hired four additional
medical device reviewers on April 1, 2006.

c.

Backlog of Device Applications: MHLW will ensure that PMDA
eliminates the backlog accumulated prior to the establishment of PMDA,

19

and brings the volume of new medical device applications waiting forreview to a normal level by the end of September 2006.
8.

Clinical Trials for Medical Devices: On March 31, 2006, MHLW issued anotification explaining that Japan accepts studies performed according to Good
Clinical Practices (GCPs) that are equivalent or superior to Japan’s GCPs.
PMDA will continue to refrain from requiring that clinical trials be conducted inJapan when relevant evidence gathered outside Japan is available. MHLW andPMDA will inform U.S. and European medical device manufacturers that foreign
clinical data is actively used and accepted in Japan. PMDA will continue toprovide a scientific and statistical rationale to applicants explaining a decision torequire supplemental Japanese clinical data. In the first half of FY2005, Japan
approved 20 medical device applications based only on foreign clinical data
among 28 medical devices in total. MHLW and PMDA will clarify the criteria of
the clinical data required and will accept the minimum necessary clinical data toprove a device’s safety and effectiveness.

9.

Quality Systems for Medical Devices: MHLW and PMDA will clarify to industry,including U.S. industry, the applicability of quality system audits to suppliers andsterilizers. When conducting quality system audits, PMDA will make efforts tominimize the burden on suppliers and sterilizers.

10.

Raw Material Data for Medical Devices: MHLW ensures that PMDA will require
manufacturers to provide information on raw materials only when information on
the biological safety of a finished product is not adequate to determine theproduct’s safety. In 2003, MHLW issued a notice announcing it would evaluatebiocompatibility based on ISO 10993, the international standard forbiocompatibility testing. MHLW ensures that PMDA will not request data on
biocompatibility testing other than those covered by the ISO 10993 series if theapplicant provides PMDA with the scientific rationale for its selection of aparticular test method.

11.

Accelerated Aging Testing for Medical Devices: MHLW and PMDA willcontinue to accept accelerated aging testing at the time a medical device
manufacturer applies for product approval and not require real-time data until thelast stage of the review. MHLW and PMDA will discuss this issue with industry,including U.S. industry, in FY2006.

12.

Updating Medical Device Shonin: To lessen the burden on manufacturers andimporters of medical devices approved before April 1, 2005, MHLW adopted
interim measures after the amended PAL took effect. Taking into consideration
views of the parties concerned, MHLW will continue its efforts to ensure asmooth transition into the new regulatory environment under the amended law.
MHLW will minimize additional burdens on manufacturers and PMDA resources
arising from the reclassification of certain devices under the PAL revision.

20

D.

Blood Products: MHLW will treat U.S. blood products companies fairly andtransparently by allowing them fair access to marketing and manufacturing opportunities
for their entire range of products. MHLW will continue to ensure that implementation of
the Supply and Demand Plan for blood products is non-discriminatory against foreign
products, transparent, and in full conformity with Japan’s international trade obligations.
In 2006, MHLW created a working group on manufacturing and supply of albumin andglobulin. U.S. industry will continue to have opportunities to take part in the working
group as an equal partner with Japanese industry.

E.

Nutritional Supplements

F.

1.

Transparency: MHLW regulates nutritional supplements as one of the categories
of foods and will continue to publish regulatory information on foods including
nutritional supplements. MHLW will continue to improve the nutritional
supplement section of its website and place this information in an easily
accessible location.

2.

Educational and Informational Statements: With regard to internationalguidelines and standards for labeling of nutritional supplements, the Governmentof Japan will continue to play an active role in the development of these
documents at the Codex Alimentarius Commission where regulations on healthclaims are under discussion. In FY2006, MHLW will work with industry toestablish a system to provide information from the National Institute of Healthand Nutrition (NIHN)’s database to consumers, as recommended by the Office ofTrade and Investment Ombudsman (OTO).

3.

Import Duties: The Government of Japan will continue to address the issue oftariff levels including on nutritional supplements containing the same ingredientsas pharmaceuticals in WTO negotiations comprehensively.

Cosmetics and Quasi-Drugs
1.

Efficacy Claims: MHLW will exchange views with industry, including U.S.
industry, on advertising and labeling regulations for cosmetics and quasi-drugs.

2.

Transparency: MHLW will continue to improve transparency regarding
cosmetics and quasi-drugs regulations.
a.

MHLW has been providing on its website detailed information on
regulatory requirements including new and revised notifications (tsuchi),office memos (jimu renraku), and registration procedures in a timely
manner, in order to give businesses enough time to fully understand them
before the regulations go into effect. MHLW will seriously consider ways
to make information more easily accessible.

21

b.

3.

MHLW published its guidelines on advertising for cosmetics and quasidrugs. MHLW periodically holds meetings with prefectural inspection
officials to ensure advertising regulations are consistently enforced.
MHLW will exchange views with industry on the advertising regulations
stipulated in the PAL and relevant policies.

Regulatory Requirements: MHLW has been improving its regulatory
requirements with close cooperation with the parties involved including theindustry, especially through updating the relevant guidelines and policies in linewith scientific advancement. MHLW will exchange views with industry,including U.S. industry, on regulatory issues.
a.

MHLW will work with industry, including U.S. industry, to ensure that
product standards are both safe and practical. In fall 2005, MHLW asked
the Japan Hygiene Products Industry Association (JHPIA) to review thestandard for sanitary pads, and JHPIA will provide its final proposal to
MHLW in June 2006. MHLW will review industry's proposal, including
deemphasizing the product standard from the Ministerial Ordinance levelof regulation to a lower level.

b.

MHLW will exchange views with industry, including U. S. industry, on
ways to facilitate the review process through mutual efforts. WhenMHLW delegates authority to the prefectures, it is expected thatenforcement of regulations, including filing requirements, is consistentacross prefectures. MHLW will make efforts to avoid inconsistencies.

c.

MHLW has been actively participating in the discussions on the
Cosmetics Harmonization and International Cooperation (CHIC) program
and will continue to do so.

IV.

FINANCIAL SERVICES

A.

Specific Measures
1.

Reviewing the Legal Framework of the Money Lending Business: The Financial
Services Agency (FSA) Round Table Conference on the Money Lending Businesshas been reviewing the legal framework of the money lending business since
March of 2005 and its chairman’s Interim Report (Chairman’s Interim Report)
was released on April 21, 2006. In considering reviewing the legal framework of
the money lending business, the FSA recognizes that it should take into accountopinions and proposals mentioned in this report.
a.

By taking account of the ruling parties’ discussions of issues on the legal
framework of the money lending business, including regulations on
lending interest rates, and the recent judgments of the Supreme Court, the
FSA will deepen further examination on the appropriate path to be taken
to prevent multiple debts of consumers.
22

b.

The Round Table Conference has reached a general agreement that the“Gray Zone” should be abolished.

c.

Based on the discussions and the Chairman’s Interim Report, theGovernment of Japan will continue to consider methods of providing
money lenders’ documents to borrowers under the Money Lending
Business Law including e-notification, while paying due regard to thenecessity of the protection of borrowers.

2.

Lenders Exchanges and Credit Information: The Chairman’s Interim Report, fromthe FSA’s Round Table Conference on the Money Lending Business of April 21,
2006, mentions “From the perspective of preventing money lenders’ excess
lending to consumers, members of the Round Table Conference generally agreed
that there was need for promoting money lenders’ utilization of lenders’exchanges to raise the accuracy of their credit examination.” The FSA will take
into account the opinions and proposals mentioned in the Interim Report anddeepen examination on several issues in the money lending business as well as
taking the ruling parties’ opinions into account.

3.

Unifying Regulations on Investment Advisors and Investment Trusts andMeasures for Mergers of Investment Trusts: After the amendment of the
Securities and Exchange Law and its related laws, which was enacted by the Diet
in June of 2006, comes into effect, investment advisors, investment trust
management companies and securities companies will be supervised as financial
instrument firms under a unified, cross-sectoral regulation, “the Financial
Instruments and Exchange Law.” The time of enforcement of this amended law
will be designated by the relevant cabinet ordinances. In addition, respecting
investor protection, a measure that will enable investment trust managers to merge
investment trusts will be introduced if the Law Concerning Investment Trusts andInvestment Corporations is amended by the authorization of the “Amendment Billof Relevant Laws with Enforcement of the Trust Law,” which was submitted to
the Diet in March 2006. (Note: This amendment bill was carried over to the nextDiet session.)

4.

Defined Contribution Pensions:a.

The Government of Japan recognizes the value of its Defined Contribution(DC) pension system in terms of retirement income security, labormobility, and investor education.

b.

The early withdrawal of a small amount of assets became possible in
October 2005, in amounts equal to or less than 500,000 yen from personal
pension schemes and equal to or less than 15,000 yen from corporate
pension schemes.

23

B.

c.

The Ministry of Health, Labour and Welfare (MHLW) understands theimportance of investment advisory services through corporations that run
defined contribution pension schemes to their members.

d.

Based on the legal provision, the Government of Japan will consider thenecessity of the revision of the Defined Contribution Pension Law, when
five years will have passed since its implementation, in October 2006,
taking into account input from interested parties. Taking into
consideration the implementation of the system to date, MHLW willcontinuously endeavor to improve the DC pension system.

Transparency
1.

No Action Letters and General Inquiries Regarding Interpretation of Laws andRegulations: In order to improve further financial administrative transparency andpredictability, in 2005, the FSA improved the No-Action Letter (NAL) system toensure its further convenience and efficiency, and to promote its effective
utilization as well as enhancing its supplementary systems. Specifically, thefollowing measures were taken:a.

The FSA amended the regulations of the NAL system in response to asurvey, covering the general public, on the NAL system conducted in Juneof 2005. (Survey results were published in October of 2005, and may befound on the FSA website.) The amended regulations reflect thefollowing points:(1)

After receiving inquiries, the FSA has to make efforts to respondas soon as possible.

(2)

Laws and regulations, which the FSA is going to amend in the near
future, will be included in the objects of inquiries.

b.

The FSA published “the List of Reference Cases of Interpretation of Laws
and Regulations”, which presented the FSA’s interpretation of its relevantlaws and regulations, on its website as one of the supplements of the NAL
system. In addition, in April 2005 the FSA also published on its website aprocedure for issuing written answers to the general inquiries ofinterpretation of laws and regulations from financial service providers andrelevant associations to which the FSA’s relevant laws and regulations are
directly applied.

c.

The FSA published “the List of Cases of Administrative Orders” on its
website in July of 2005. This list shows concrete cases, in which the FSA
issued administrative orders, and enables the public to browse their
overviews. By being studied by financial institutions and relevant

24

associations, this list will contribute to prevention of the reoccurrence ofthe same kind of law violations.
2.

3.

V.

Ensuring Transparency of the Legislative Process of “The Financial Instruments
and Exchange Law”: To ensure transparency of the legislative process of “TheFinancial Instruments and Exchange Law,” the FSA undertook the following
measures:a.

The FSA published the Interim Report of the Financial System Council in
July 2005 and solicited public comments. The FSA received more than
one hundred opinions on this report from domestic and foreign interested
parties, including the American Chamber of Commerce in Japan (ACCJ).

b.

In addition, in December 2005, the Financial System Council published its
report, “The Legislation for the Investment Services Law (provisional
title),” based on deliberation of its members, market participants andexperts.

c.

Besides such deliberation, the FSA made maximum efforts for ensuringtransparency of the legislating process of the Financial Instruments andExchange Law by having unofficial opportunities for exchanging opinionswith representatives of associations related to foreign financial
institutions, including the International Bankers Association (IBA), in
order to ensure opportunities to receive opinions from both domestic andforeign interested parties.

d.

The amended Securities and Exchange Law and its related laws, whichwere drafted based on the report of the council, were enacted in June of
2006. After being enacted, in the process of establishing draft
amendments of the relevant cabinet and ministerial ordinances, the FSA
will ensure the transparency of this process by publishing drafts of theseordinances through the public comment procedure.

Utilization of the Public Comment Procedure: During the process of amendmentof various cabinet and ministerial ordinances, the FSA undertakes the publiccomment procedure to ensure opportunities, in which any person and entity isable to present opinions on the amendment, and publishes its policy as a responseto these opinions. In addition, the Amended Administrative Procedure Law,
which came into effect in April of 2006, established the public comment process
as a statutory procedure by setting its minimum period at 30 days in principle.
Based on this amended law, the FSA is making further efforts to ensure financial
regulatory transparency by appropriately operating the public comment process.

COMPETITION POLICY

25

A.

Enhancing the Effectiveness of the Amended Antimonopoly Act (AMA): The
Government of Japan is committed to fostering competitive markets through strong andeffective enforcement of the Antimonopoly Act (AMA). In this regard, on March 31,
Prime Minister Koizumi announced a new three-year regulatory reform program that
includes reviewing and strengthening the Japan Fair Trade Commission’s (JFTC)
enforcement authority and organization, stepping up enforcement of the AMA andtransferring public-sector facilities and services to the private sector. In addition, Japan
has taken, or intends to take, the following measures to strengthen its competition policy:
1.

2.

Maximizing the Effectiveness of JFTC’s Leniency Program: JFTC’s new
Antimonopoly Leniency Program, which eliminates or reduces the surcharge forthe first three enterprises that report the existence of a cartel or bid rigging
conspiracy to the JFTC, came into effect on January 4, 2006. In order tomaximize the effectiveness of the Leniency Program and to promote active
applications to the program, JFTC:a.

Published “Rules on Reporting and Submission of Materials Regarding
Immunity from or Reduction of Surcharges,” together with relevant
application forms and instructions for completing those forms;b.

Clarified the requirements for leniency applications in “The Fair Trade
Commission’s View on New Rules of the Amended Antimonopoly Act:
Comments Addressed to the Commission Regarding the Draft of its Rules
and the Point of View of the Commission,” which was published on
JFTC’s English website on April 11, 2006. In that document, JFTC madeclear that in order to ensure that requirements to translate foreign language
materials into Japanese do not cause potential leniency applicants to delay
submitting their applications, JFTC will allow applicants to submit
abridged translations of required materials that evidence a violation of theAMA, and to submit the entire translation at a later date, if requested by
JFTC; andc.

Took steps to ensure the confidentiality of leniency applications byclarifying that:(1)

JFTC’s policy is not to disclose to a court or others the contents ofa report submitted by leniency applicants, and;

(2)

Leniency applicants will be permitted to submit an oral, rather thanwritten, report on the details of a violation, etc.

Strengthening Deterrence of AMA Violations and Enhanced Compliance with the
AMA: In order to strengthen the deterrent effect of the AMA and to promote
corporate compliance with the AMA, JFTC:

26

a.

b.

3.

B.

Published “The Fair Trade Commission’s Policy on Criminal Accusation
and Compulsory Investigation of Criminal Cases Regarding
Antimonopoly Violations” in October 2005 based on the introduction of
criminal investigation powers for JFTC;(1)

JFTC will make good use of these new powers against vicious andserious violations, etc., of the AMA, and will actively bring cases
and file criminal accusations against companies and individuals
engaging in such violations.

(2)

In this regard, JFTC used its new criminal investigation powers in
its investigation of bid rigging on human waste disposal facilities
construction projects and filed criminal accusations against 11
companies and 11 persons in May and June 2006.

Intends to revise its “Guidelines for Patent and Know-how Licensing
Agreements under the Antimonopoly Act.” JFTC will publish the draft by
mid-summer and finalize the guidelines after seeking comments fromvarious parties, including the foreign business community and the U.S.
Government.

Strengthening the Economic Analysis Capabilities of JFTC Staff and Resources:
JFTC is steadily increasing its staff and budget. The total number of its staff is
expected to reach 737 as of March 31, 2007. Since 2001, JFTC has employed
five economists educated in graduate school and has been making good use of
their expertise in JFTC’s work. JFTC will continuously improve the analyticalcapabilities of its staff through training and the accumulation of practicalexperience, and will strengthen the organization as appropriate.

Ensuring the Fairness of JFTC Investigatory and Administrative Procedures
1.

Prior Procedures for Cease and Desist Orders and Surcharge Payment Orders:
JFTC has introduced the prior procedure system under which JFTC will make anadvance notification of a draft cease-and-desist order or surcharge payment orderto the proposed recipient of these orders. JFTC will be prepared at that time to
explain to the proposed recipient the facts found by JFTC and the basis of
calculation of the surcharge amount, and to disclose to the proposed recipient theevidence it obtained that is necessary to prove the violation that would be thebasis of the proposed order, upon a request from the proposed recipient. The
proposed recipient of such an order will be provided the opportunity to present its
views and submit evidence to JFTC before the order is issued. The proposed
recipient of the order will, in principle, have approximately two weeks after theadvance notification to submit its views and evidence to JFTC. However, in acase where JFTC recognizes that additional time is necessary to provide theexplanation to the proposed recipients, it will set a longer period for the proposed27

recipient to submit its views and evidence, taking such circumstances into
consideration.
2.

3.

C.

Prior Procedure in Warning Cases:a.

With the enactment of the amended AMA in January 2006, JFTC
introduced the prior procedure system for the issuance of warnings against
suspected violations of the AMA. Specifically, JFTC will deliver a draft ofa warning to the proposed recipient and provide the opportunity to submit
its views and evidence to JFTC prior to issuance of the warning.

b.

Regarding suspected violation of the Premiums and Representations Act,JFTC has implemented the same prior procedure system as for proposed
warnings for suspected violation of the AMA.

AMA Basic Issues Study Group:a.

The office of AMA Basic Issues Study Group continues to disclose theconference materials and the minutes of its meetings on its website.

b.

The Study Group expects to publish an interim report of its work in thesummer 2006, and will provide an opportunity for public comment on theinterim report, including from interested foreign parties and organizations.

Addressing Bid Rigging Effectively
1.

Administrative Leniency: In light of the AMA amendments establishing the
JFTC leniency program, in February 2006, the Ministry of Land, Infrastructure
and Transport (MLIT) implemented an administrative leniency policy underwhich MLIT will reduce by half the period of suspension from bidding forcompanies that were admitted to JFTC’s leniency program with regard to aparticular bid rigging conspiracy, provided that MLIT becomes aware of suchcompany’s participation in JFTC’s leniency program through disclosure by JFTC.
The implementation of such an administrative leniency program by othergovernment agencies and public corporations will be decided by each such entity.

2.

Administrative Penalties:a.

In September 2005, MLIT announced a policy of doubling the minimum
period of suspension from bidding for companies that commit a second
violation of bid rigging within ten years. For example, the minimum
period of suspension from bidding for a second serious violation of the
AMA was increased from six months to 12 months. This measure was put
into force on January 4, 2006, simultaneously with the effective date of theamended AMA.

28

b.

3.

4.

To prevent recurrence of bid rigging, MLIT implemented a policy in July
2005 to recover damages from companies that participated in bid rigging
on construction services contracts in which the JFTC and/or the judicial
authorities find bid rigging violations even if the contracts were madebefore the introduction of the pre-established claim clause in June 2003.

Competitive Bidding:a.

For the purposes of promoting fair competition and eliminating improper
conduct, on May 23, 2006, a Cabinet Decision was issued that revised the
Guiding Principles concerning Measures to Promote Proper Tendering andContracting for Public Works. The revisions, which will help prevent bid
rigging, include an expansion of the open and competitive bidding
procedure, strengthening supervision of bidding, strict implementation ofsuspension from bidding in cases of improper conduct, and ensured efforts
to eliminate and prevent government-led bid rigging.

b.

MLIT confirms that the location of a company’s headquarters or branch
offices is not used as a qualification requirement for participation in the
open and competitive tendering procedures for public works whose value
is more than the threshold of the WTO Agreement on Government
Procurement.

Conflicts of Interest – Amakudari: In order to secure public trust in public works
projects, MLIT has taken the following measures. As part of its July 29, 2005,
countermeasures to prevent the recurrence of bid rigging, MLIT requested that:a.

All MLIT officials refrain from finding reemployment with the companies
that participated in the bid rigging on the steel bridge construction projects
last year; andb.

Senior MLIT officials refrain from finding reemployment for five years
after their retirement with any company that had contracts for MLIT
construction projects.

VI.

TRANSPARENCY AND OTHER GOVERNMENT PRACTICESA.

Public Comment Procedure
1.

The Government of Japan continues to work to improve the Public Comment
Procedure (PCP) to increase transparency and ensure fairness in theadministrative rule making process. The Revised Administrative Procedure Act
which codifies the legislation of the PCP was enacted on April 1, 2006. This Act
contains numerous reform measures to strengthen the PCP, including:

29

a.

Requiring Ministries and Agencies to make public the draft
orders/regulations and related documents by using the Internet and othermeans as necessary;b.

Setting the minimum PCP period at 30 days in principle. In exceptional
cases where less than 30 days are provided, Ministries and Agencies must
make public the reason for this determination to shorten the period when
they make public the draft orders/regulations;c.

Requiring Ministries and Agencies to fully consider all submitted publiccomments; andd.

Requiring Ministries and Agencies to make public the complete text
and/or summary of the submitted comments, and also indicate howcomments were incorporated or not incorporated and the reasons for thedecisions.

2.

The Government of Japan recognizes the need to ensure that the amended
Administrative Procedure Act effectively provides meaningful opportunities for
input into the administrative rulemaking process. MIC will continue to conduct
and publish comprehensive annual surveys on the Ministries’ and Agencies’
implementation of the PCP, and will maintain close communications with
relevant Ministries and Agencies in this regard.

3.

In addition, the Government of Japan will consider taking necessary measures toensure the Administrative Procedure Act effectively provides such meaningful
opportunities for input.

B.

Foreign Translations of Japanese Laws: On March 23, 2006, the Government of Japandecided to take necessary measures so that English translations of approximately 200
laws and regulations would be produced in accordance with the Translation Development
Program for FY2006-2008, based on the final report made by the “Study Council for
Promoting Translation of Japanese Laws and Regulations into Foreign Languages,”
composed of experts as well as relevant ministries and agencies. And in April 2006, theGovernment of Japan started providing information on this project on the Cabinet
Secretariat’s Website. The Government of Japan will make efforts to ensure the secure
implementation of the Program and will continue to hear outside opinions and requests inconsidering revising the Program.

C.

APEC Transparency Standards: Japan and the United States will continue their joint
efforts to encourage APEC member economies to fully implement the APEC
Transparency Standards in their domestic legal regimes.

D.

Special Zones for Structural Reform

30

E.

1.

Prime Minister Koizumi and his Administration continue to make the Special
Zones for Structural Reform a priority component of Japan’s economic
revitalization plan. Since the approval of the first 57 Special Zones in April 2003,
the total number of zones has grown to 630 as of March 31, 2006.

2.

In order for the positive economic impact of the successful zones to be spreadthrough the greater Japanese economy, the Government of Japan applies
successful regulatory exemptions in the Special Zones on a national basis as
expeditiously as possible and will operate the entire application and regulatory
exemption process for the Special Zones in a transparent manner. The
Government of Japan has applied a total of 64 zone measures nationwide as ofMarch 31, 2006. The Government of Japan will continue to nationalize
successful regulatory reforms adopted in the zones.

3.

The Government of Japan also responds as fully as possible to inquiries made byforeign companies for information on Special Zones. The Government of Japan
will continue to ensure the transparency and effectiveness of the zones.

Public Input into Policy Development – Advisory Groups
1.

Advisory groups are administered by Ministries and Agencies in accordance with
their respective establishment laws and regulations, the Cabinet Decision of April
1999 regarding "Basic Plan for the Rationalization of Councils, etc." and otherguidelines and regulations, according to which these groups, for example, publish
meeting minutes and endeavor to provide opportunities to hear the opinions ofinterested parties. Meanwhile, the Government of Japan recognizes the view of
the Government of the United States that the transparency of and access to such
advisory groups should be enhanced through the establishment of stronger
transparency standards governing these groups.

2.

Lists of some of the advisory groups and their membership are electronicallyaccessible at e-Gov, a government portal website (http://www.e-gov.go.jp).

3.

The Government of Japan will continue to promote the above-mentioned
measures regarding transparency of and access to advisory groups.

F.

Public Input into the Development of Legislation: Some Ministries and Agencies, attheir discretion, have been opting for public input into draft legislation during its
development, before it is submitted to the Diet.

G.

Policyholder Protection Corporation (PPC)1.

The amended Insurance Business Law, which came into effect on April 1, 2006,
extended the period of existence of the scheme of the Insurance Policyholder
Protection Corporation (PPC), including a government guarantee of financial
resources as financial assistance in case of an insurance company bankruptcy.

31

This amended law also stipulates that the system regarding PPC’s financial
resources will be reviewed within three years after April 1, 2006.
2.

H.

I.

In implementing this review, the Financial Services Agency and related advisorygroups convened by the Government of Japan will provide, upon request, private
sector interested parties (including foreign insurance companies) information on
the review as well as meaningful opportunities to express and exchange views.

Bank Sales of Insurance
1.

The Ministerial Ordinance of the Insurance Business Law was amended on July 8,
2005, based on the report of the Second Sub-Committee of the Financial Council,
issued on March 31, 2004.

2.

This amendment partly lifted the ban on selling insurance products at bankbranches on December 22, 2005, and introduced consumer protection safeguards
with respect to sales of insurance through banks. After monitoring theeffectiveness of these safeguards until December 2007, the Financial Services
Agency (FSA) plans to lift the ban on selling any insurance product at banks andwill implement related technical preparations prior to full liberalization.

3.

In the process of changing the regulation, FSA took into consideration opinions ofvarious interested parties, including domestic and foreign insurance companies
and banks, and solicited public comments on the draft amendments of the Cabinet
and Ministerial Ordinances of Insurance Business Law.

4.

During the process of monitoring insurance solicitation by banks, the FSA willhold regular hearings with insurance companies, banks, and other various
interested parties as necessary.

5.

The Government of Japan deems it important that the rules governing bank sales
ensure consumer protection and are implemented fairly, including in a mannerthat does not favor one product or one services supplier over another.

Insurance Cooperatives
1.

With regard to unregulated kyosai, an amendment to the Insurance Business Law,
which came into effect on April 1, 2006, expanded its scope to include
unregulated kyosai and introduced the Small Amount and Short-Term Insurance
Providers (SASTIP) system.

2.

During the process of the consideration of this reform, the Financial Services
Agency (FSA) consulted with the Financial System Council, exchanged opinionswith foreign insurance companies, and published a draft amendment of therelevant ministerial ordinance for public comments.

32

J.

3.

The Amended Insurance Business Law stipulates that FSA will review the
SASTIP system within five years from the date of its enforcement. To conduct thereview, the FSA will, as necessary, provide information on the review andmeaningful opportunities for input from insurance companies, including foreign
insurance companies, and other parties concerned.

4.

With regard to regulated kyosai, the Government of Japan and the Government of
the United States have discussed the view of the Government of the United Statesthat a review should be undertaken in the near-term to evaluate the consistency ofregulation and supervision among kyosai that are regulated by ministries otherthan the FSA, and that such a review should be undertaken in a transparent
manner with opportunities for interested parties to express their views.

Government Practices Relating to Agriculture
1.

The Government of Japan took meaningful steps in 2005 to adopt a moreinternationally accepted plant quarantine system based on the International Plant
Protection Convention (IPPC) standards for official control and risk analysis.

2.

The Government of Japan made significant progress in revising quarantine status
and/or inspection practices for four pests identified by the Government of theUnited States. The Government of Japan will continue to conduct pest risk
analyses (PRA) to determine whether the remaining four pests should be subject
to quarantine measures.

VII.

PRIVATIZATIONA.

Privatization of Public Corporations
1.

On December 19, 2001, the Cabinet adopted the “Reorganization andRationalization Plan for Public Corporations.” In implementing this Program, by
the end of March 2006, the Government of Japan conducted necessary measures(amendments of relevant laws, etc.) to organizationally reform 136 of the 163
public corporations subject to the Program.

2.

The Government of Japan remains committed to the continued restructuring andprivatization of Japan’s public corporations and will continue to undertake thisprocess in a transparent manner, including through active use of Public Comment
Procedures and, where appropriate, other measures that will contribute to ensuringtransparency.

3.

Established by the Government of Japan, an advisory committee consisting ofwell-informed experts from the private sector to monitor and evaluate theimplementation of the Program has met 49 times since its launch in July 2002.
The summaries of the minutes of those meetings and discussion papers have been
made public.

33

B.

Japan Post
1.

Level Playing Field for Postal Savings and Insurance:a.

The financial information of the Japan Postal Services Holding Company,
Postal Service Company, Post Office Company, Postal Savings Bank, andPostal Insurance Company will be disclosed under the same regulations asother private sector companies, including those under the Corporate Code,Banking Law, Insurance Business Law, other related laws and ordinances,
and, when engaging in public capital market transactions, the Financial
Instruments and Exchange Law (Securities and Exchange Law). The
relationships and transactions among the Postal Savings Bank, Postal
Insurance Company, Japan Postal Services Holding Company, and Post
Office Company will be required to meet the obligations under the
Banking Law and Insurance Business Law, including with respect to thearms-length rule. For purposes of accounting regulation under the Banking
Law and Insurance Business Law, these four companies will beconsidered to meet the ‘special relationship’ criteria under therequirements of these laws.

b.

The laws on postal services privatization stipulate no scheme that will
make possible ex-post cross-subsidization among the newly establishedfinancial companies and non-financial entities in order to ensure thatprofits and losses are clarified and to eliminate risk of being affected byother businesses. According to these laws, the objective of theIncorporated Administrative Agency Management Organization for Postal
Savings and Postal Life Insurance shall be to appropriately and in a soundmanner manage postal savings and postal life insurance contracts inheritedfrom Japan Post. Japan Post will prepare and disclose its financial
statements as of September 30, 2007, after being audited by anindependent auditor. The Valuation Committee will value assets andliabilities succeeded to the Incorporated Administrative Agency
Management Organization for Postal Savings and Postal Life Insurance,
and this valuation will be completed in accordance with Japanese GAAP.
The Government of Japan takes note of the view of the Government of theUnited States that the timely public disclosure of this valuation isimportant. Under the Law Concerning the General Rules of Incorporated
Administrative Agencies, the Incorporated Administrative Agency
Management Organization for Postal Savings and Postal Life Insurance isto prepare and disclose annual financial statements audited by anindependent auditor in accordance with Japanese GAAP. The laws
stipulate that, from October 2007, the asset management arisen frominherited pre-privatized contracts will be delegated to the Postal Savings
Bank and Postal Insurance Company by way of deposit and reinsurance
contracts. As of October 2007, these deposit and reinsurance contracts

34

shall be subject to the Banking Law and Insurance Business Law as wellas to Financial Services Agency (FSA) oversight and supervision and thus
will be on a commercial basis. The laws further provide that the original
deposit and reinsurance contracts will be stipulated in the BusinessSuccession Plan, which will be reviewed by the Postal Services
Privatization Committee (PSPC) (a third-party organization comprised ofintellectuals) prior to government approval (to take place before October2007), taking into consideration competitive conditions of the newfinancial companies with other private financial institutions.
c.

The existing laws governing the privatization of Japan Post allow the Post
Office Company to make insurance soliciting contracts with private
insurance companies other than the Postal Insurance Company, and to
make agency contracts with private banks other than the Postal Savings
Bank. In terms of access to the Post Office Company’s network, a levelplaying field is secured between the Postal Saving Bank and other privatebanks and financial institutions, and between the Postal Insurance
Company and other insurance companies respectively.

d.

Beginning October 1, 2007, deposits received by the Postal Savings Bankand the life insurance products sold by the Postal Insurance Company will
not be guaranteed by the Government. Efforts are being made to make thepublic aware that these products will be covered by the Deposit Insurance
Corporation of Japan or by the Life Insurance Policyholders Protection
Corporation of Japan, and not be guaranteed by the Government from
October 1, 2007. Sales of such products after this time that are
misrepresented as being guaranteed by the Government are prohibited by
the Banking Law and Insurance Business Law.

e.

The Antimonopoly Act and other laws will be applied to the privatizedcompanies on the same basis and according to the same standards as they
are applied to any other private company.

f.

The Regional-Social Contribution Fund will finance only such services
that are truly necessary for the society or local regions but that are difficultfor private companies to provide, and the Fund will not give undue
advantages to the Post Office Company, Postal Service Company, Postal
Savings Bank, or Postal Insurance Company. To implement the Regional
Contribution Activity, the Post Office Company is obliged to make animplementation plan which is to be approved by the Minister of Internal
Affairs and Communications, and to publish the plan without delay after
its approval. The company is also obliged to publish a report on how the
Activity was implemented within 3 months after the end of the plan’seffective period. The Government of Japan will take steps to ensure
proper implementation of the Regional Contribution Activity and thetransparency of the establishment and operation of the Fund.

35

g.

From the beginning of the privatization transition period, the Postal
Savings Bank and the Postal Insurance Company will be supervised by the
FSA under the Banking Law and Insurance Business Law according to thesame standards as those applied to other banks and insurance companies.
Accordingly, measures shall be implemented to ensure that the privatizedpostal financial institutions, in practice, objectively meet the same
licensing, disclosure, and supervisory requirements as private sector
financial institutions, including requisite risk management and full FSA
supervision. The Post Office Company will be subject to FSA supervisionaccording to the standards applied to private companies when engaging insales and distribution of financial services or insurance products.

2.

Conditions of Competition and the Introduction of Products: The laws on postal
services privatization impose business restrictions on the Postal Savings Bank andPostal Insurance Company during the transitional period as special provisions to
the Banking Law and Insurance Business Law. The initial scope of business ofthe new financial companies will be the same as that of Japan Post. Future
expansion of business scope must go through a transparent and fair procedure
whereby the Prime Minister (whose power is delegated to the Commissioner of
the FSA) and the Minister of Internal Affairs and Communications, upon hearing
an opinion from the PSPC, will decide on such expansions. Equivalent conditionsof competition and management freedom shall be considered in implementing therecommendations of the Postal Services Privatization Committee when theministers in charge make decisions on business expansions of the new companies.
The introduction of new or altered insurance products by the Postal Insurance
Company or new non-principal-guaranteed investment products or new lending
services by the Postal Savings Bank will be reviewed through the processdescribed above. The Government of Japan is aware of the view of theGovernment of the United States with respect to the introduction of new productsby the postal financial institutions.

3.

Level Playing Field for Express Carrier Services:a.

Japan Post, like other private companies, should be subject to thesupervision of the Minister of Land Infrastructure and Transport under
freight transportation laws and ordinances when providing international
physical distribution services by using trucks and similar vehicles as wellas employing air, sea, or land transportation provided by other carriers.
The Postal Service Company, like other private companies, should be
subject to the supervision of the Minister of Land Infrastructure andTransport under freight transportation laws and ordinances whenproviding domestic and international physical distribution services byusing trucks and similar vehicles as well as employing air, sea, or landtransportation provided by other carriers.

36

4.

b.

When providing postal services, the Postal Service Company will continue
to be subject to the supervision of the Minister of Internal Affairs andCommunications under postal laws and ordinances, and newly should
become subject to the supervision the Minister of Land Infrastructure andTransport under freight transportation laws and ordinances in case of using
trucks and similar vehicles as well as employing air, sea, or, landtransportation provided by other carriers.

c.

The same “duty declaration” system should be applied to customs
clearance procedures for international physical distribution services
provided by Japan Post or the Postal Service Company as those applied tothose for other private companies.

d.

The Government of Japan will continue to consider the matter of customs
clearance procedures for postal items including EMS.

e.

Japan Post should disclose the status of profit and loss according to thecategories of postal services and international physical distribution
services. Also, the Postal Service Company should disclose the status ofprofit and loss according to the categories of postal services and otherservices. These disclosures, a measure taken by the Government of Japan,
are to be made in a manner that will allow for an objective evaluation ofwhether cross-subsidization is occurring.

f.

The same taxation system should be applied to the Postal Service
Company as applied to other private companies, except for the minimum
necessary measures for the smooth transition and succession of businessand functions of Japan Post.

g.

Japan Post and, from October 2007, the Postal Service Company shall be
subject to the same aviation safety and security laws and regulations asother private companies.

Inclusiveness and Transparency:a.

The Government of Japan recognizes the importance of transparency in
the Japan Post reform process, including informing the general public of
any laws, regulations, guidelines, and other substantive aspects of postal
services privatization through appropriate methods. The PSPC canappropriately make the opportunities to hear views of interested parties if
the Committee considers it necessary. The Office for the Promotion ofPrivatization of Postal Services, Ministry of Internal Affairs andCommunications, and FSA will continue to provide opportunities forprivate sector interested parties, upon request, to exchange views with
relevant officials. While recognizing the independence of the PSPC, the37Government of Japan also recognizes the importance of the transparencyof the PSPC.
b.

As is stipulated in the Law of Privatization of Postal Services, the Prime
Minister appointed the PSPC Members, and the PSPC was established on
April 1, 2006. Under the Standing Order of the PSPC, the PSPC is to inprinciple make publicly available summaries of meeting minutes as well
as detailed meeting minutes in a timely manner. For each of its meetings
to date, the PSPC has held post-meeting press briefings and has madepublicly available such summary and detailed meeting minutes. The
Secretariat of PSPC will make advance notice of the PSPC’s agenda
publicly available (including on the relevant website) prior to each PSPC
meeting.

c.

The Government of Japan will also ensure transparency through thenecessary use of Public Comment Procedures in accordance with the
Administrative Procedures Act, and through other measures, with respect
to the preparation and implementation of administrative rules,
administrative official decisions, administrative guidelines, and otherrelevant measures. The Japan Postal Services Holding Company willsubmit the framework of its implementation plan to the Prime Minister
and Minister of Internal Affairs and Communications by July 31, 2006,
and will also make this framework publicly available. The Government ofJapan recognizes that its publication increases transparency in the Japan
Post reform process. The Government of Japan takes note of the view of
the Government of the United States that transparency should be further
enhanced by opening the implementation plan to a meaningful publiccomment process before it is finalized.

d.

Issues arising from the implementation of the laws on postal services
privatization will also be further addressed in a manner described in thelast paragraph of the preface of this Report.

VIII. LEGAL SYSTEMS REFORM
A.

Ensuring Freedom of Association of Foreign Lawyers: The amended Special
Measures Law Concerning the Handling of Legal Business by Foreign Lawyers (GaibenLaw), which lifts the ban on employment of Japanese lawyers (bengoshi) by registeredforeign lawyers (gaiben) and introduces the system of joint enterprises between bengoshi
and gaiben (gaikokuho kyodo jigyo or “GKJ”), came into force on April 1, 2005, and has
been implemented appropriately so far. The Ministry of Justice (MOJ) will, as
necessary, continue to discuss appropriate implementation of the Gaiben Law with theJapan Federation of Bar Associations (Nicibenren) and with gaiben so that the rules andregulations of Nichibenren and the local bar associations in that regard are consistent
with the views of MOJ.

38

B.

Permitting Professional Corporations and Branches: MOJ has been studying whether(i) gaiben should be permitted to form legal professional corporations on the same basis
and with the same benefits as bengoshi professional corporations, and (ii) foreign law
firms and the gaiben partners in Japan should be allowed to establish multiple offices
staffed in accordance with Japanese law without forming a separate Japanese legal
professional corporation, from the standpoint of trends in international legal services andprinciples of non-discrimination. Since last year MOJ has had several meetings with
Nichibenren and gaiben in order to discuss these issues. MOJ will continue to study theseissues in light of the actual operation of GKJ and bengoshi professional corporations andconsistency with other laws and regulations in Japan. By April 2007 MOJ will informthe Government of the United States of its findings and any conclusions it has reached onthese matters.

C.

Permitting Foreign Lawyers to Participate in Alternative Dispute Resolution
Proceedings: The Government of Japan confirms that gaiben can represent parties in
ADR proceedings taking place in Japan in which one of the parties is foreign or foreign
law is applicable, at least to the extent such representation is not inconsistent with theGaiben Law. The Government of Japan takes note of the views of the Government of
the United States that gaiben should be permitted to act as neutrals in all forms of ADR
proceedings that take place in Japan and will give further study to whether any measures
can appropriately be taken to provide greater legal certainty in this area.

IX.

COMMERCIAL LAW

A．

Implement Modern Merger Techniques
1.

The provisions of the Corporate Code relating to “flexibility of merger
consideration” -- which will permit the use of triangular mergers, cash mergers,
and other types of mergers using properties other than shares of surviving
companies as consideration, including using foreign shares -- will come into
effect as of May 1, 2007. The provisions of the Corporate Code permitting shortform (squeeze out) mergers came into effect as of May 1, 2006.

2.

If the Ministry of Justice (MOJ) should determine in the future that the ministerial
ordinance regarding the above provisions should be amended, it will publish any
proposed amendments, and solicit and consider public comments, including fromthe foreign legal and business communities, before finalizing such amendments.

3.

The Government of Japan, noting that the Government of the United States
pointed out that tax considerations are crucial for companies in determining
whether to participate in an M&A transaction, is studying tax treatment relating to“flexibility of merger consideration” available under the Corporate Code, taking
into consideration the appropriateness and equity of taxation and the prevention of
tax avoidance. The Government of Japan will reach a conclusion on theappropriate tax treatment of M&A transactions using these new Corporate Code39

provisions, to be reflected in the Tax Code, before the related provisions of the
Corporate Code come into effect on May 1, 2007.
B.

Facilitate Efficient Tender Offer Bids
1.

2.

3.

On June 7, 2006, the Diet enacted the Amendment Bill of the Securities andExchange Law (SEL). The amended SEL enables persons making tender offers
to:a.

Withdraw the tender offer when the target company (i) splits its stock or
allocates stock to other shareholders in a manner or at a price that dilutes
the offeror’s stock holdings in the target, or issues new stock or
subscription rights to other shareholders, or (ii) fails to lift a poison pill orother anti-takeover measures; andb.

Modify the tender offer by reducing the offer price to compensate for astock split, or for an allocation of new shares in a manner or at a price that
dilutes the offeror’s stock holdings by the target company.

The amended SEL also requires target companies to submit to the Commissionerof the Financial Services Agency (FSA) within the period designated by the
Cabinet ordinance a public statement of the position of the Board of Directors
regarding the tender offer, including the basis for the position and the procedureused to arrive at that position.
a.

Target companies that submit a public statement with fraudulent
information are subject to a maximum fine of five million yen. The
executives of such companies are also subject to maximum imprisonmentof five years and/or a maximum fine of five million yen.

b.

Target companies that fail to submit a public statement are subject to a
maximum fine of one million yen. The executives of such companies arealso subject to maximum imprisonment of one year and/or a maximum
fine of one million yen.

c.

The amended SEL also requires offerors to answer questions posed by thetarget company within the period specified by Cabinet ordinance.

In February 2006 MOJ promulgated implementing regulations for the new
Corporate Code amendments. Article 127 of those regulations requires acompany to specify in the company’s business report (which must be preparedannually and disclosed to its shareholders under the Corporate Code) any antitakeover measures that it has adopted, as well as an explanation of why suchmeasures do not undermine the interests of the company and its shareholders as awhole and are not motivated by the self-interests of senior officers.

40

C．

D.

Protect Foreign Firms Legitimately Doing Business in Japan
1.

The Government of Japan will ensure that Article 821 of the Corporate Code(which deals with quasi-foreign companies) does not adversely affect theoperation of foreign companies that are duly registered in Japan and conduct theiroperations in a lawful manner. The intent of the Diet in this regard was clarified
during the deliberation on the Corporate Code bill in the Diet.

2.

In furtherance of this goal, in March 2006 MOJ -- after soliciting the views of theforeign business community -- issued an internal notification (tsutatsu), whichclarifies the interpretation of Article 821 in order to address concerns among
foreign companies operating in Japan.

3.

At the House of Councilors, an ancillary resolution to the Corporate Code bill was
adopted which stipulates that Article 821 will be reviewed, if necessary, taking
into consideration any effect on foreign companies caused by Article 821 after the
Corporate Code comes into effect. Thus, the Government of Japan will watch
closely such effect and positively consider amendment of Article 821 if necessary
to prevent adverse effects on the legitimate operation of foreign companies inJapan.

Strengthen Good Corporate Governance1.

Promoting Shareholder Value through Active Proxy Voting by Institutional
Investors:a.

The Government Pension Investment Fund (GPIF) was newly established
as an independent administrative organization in April 2006. In
recognition of the importance of corporate governance, the Minister of
Health, Labour and Welfare issued a medium-term objective to GPIF on
April 1, 2006. In accordance with those objectives, GPIF issued its
medium-term plan, which stipulates that the exercise of proxy voting
rights by fund managers should be undertaken with the aim of maximizing
long-term stockholders’ interest. The plan also states that GPIF will
request reports from its fund managers on their proxy voting policy and on
their exercise of proxy voting rights. The summary of the results of proxyvoting by all fund managers, based on the policy established by suchmanagers, will be announced publicly in the annual report of GPIF.

b.

The Government of Japan supports the promotion of proxy voting by
mutual fund and investment trust managers as a mechanism for increasing
corporate value. FSA is currently encouraging the Investment Trust
Association of Japan (ITAJ) to amend its rules on proxy voting to publicly
disclose the summary results of its members’ actual proxy voting records.
ITAJ expects to decide the outline of the amendment to its rules in thisregard this summer.

41

c.

2.

3.

The Government of Japan recognizes that it is desirable that private
pension fund managers exercise proxy voting rights appropriately for the
benefit of their beneficiaries. The Government of Japan will continue tostudy whether the adoption of a specific fiduciary duty regarding theexercise of proxy voting rights is appropriate, and will continue to monitor
the trends and situations of proxy voting by pension funds.

Enhancing Corporate Governance and Facilitating Proxy Voting:a.

The Government of Japan recognizes the importance of enhancing
corporate governance of listed companies and will engage in dialogues, as
appropriate, with stock exchanges regarding their roles in realizing that
goal.

b.

As reference, the Tokyo Stock Exchange (TSE) adopted a rule, effective
March 2006, that requires its listed companies to publish reports on the
TSE website describing their corporate governance structure, including
information on the reasons for adopting an in-house auditor or committeestyle governance structure, whether they have outside directors and any
measures against takeovers. The TSE amended its listing rules in 2006 to
include, as a ground for delisting, the introduction of anti-takeovermeasures that seriously impinge on rights of shareholders, and now
requires listed companies to promptly disclose details of any anti-takeovermeasures. Listed companies may consult with TSE as to whether
measures to be introduced are consistent with the amended listing rules.

Court Review of Special Shareholder Resolutions: The Government of Japan
confirmed that no statute of limitations is applicable to shareholder lawsuits
challenging the legality of special shareholder resolutions on the grounds that thecontent of the resolution is in violation of the principle of equality of shareholder
rights.

X. DISTRIBUTION
A.

Airport Landing and User Fees
1.

Airport fees are determined through discussion between the airport companies andthe airlines. With regard to the Narita International Airport, the landing charges
were reduced in 2005, and were accepted by the IATA.

2.

The Government of Japan shares the view with the Government of the UnitedStates that airport user fees should be determined in accordance with ICAO
Principles including transparency.

3.

The Government of Japan noted that the Government of the United States42

congratulated the Government of Japan on the re-opening of the impressive,modernized South Wing of Narita Terminal 1. The Government of Japan notedthat the Government of the United States expressed the hope that the new facility
would increase profit for NAA which may be reflected in moderation in airline
user fees.
B.

Airline Sales Distribution: The Government of Japan expressed its views on theconcerns of the Government of the United States regarding Airline Sales Distribution.

C.

Airport Construction and Operation

D.

E.

1.

Narita International Airport Corporation (NAA), which was privatized in April
2004, has a strong incentive for profits. NAA's profit for the year ending March
2006 was 14 billion yen. NAA will carry out its B runway expansion in an
effective and cost-conscious way.

2.

This project will increase the capacity of the airport and enhance utilization bylarger aircrafts with the B runway. For this reason, this project is supported byairlines and other countries, which have strong demands for more service to
Narita, and will increase NAA's profit.

Customs Prior Reporting Requirements
1.

In March 2006, the Customs Law was partly amended to require foreign tradevessels and aircraft to submit reports on information of cargo and passengers prior
to arrival at open ports and Customs airports in Japan.

2.

In drafting the bill, the comments submitted by relevant parties through publiccomment procedure in November 2005, and the report of the Council on Customs,
Tariff, Foreign Exchange and Other Transactions in December 2005 were taken
into consideration.

Facilitation of Credit/Debit Card and ATM Services and Acceptance1.

The Government of Japan recognizes the importance of maintaining the security
level equivalent to internationally accepted security standards in ATM networks
for banks in Japan. The Government of Japan also notes that hosts of banks’ATMs decide encryption standards for their networks, including complying withinternational PIN security and encryption standards.

2.

The National Police Agency (NPA) is continuing to tighten regulations related tocredit/debit card fraud in Japan. NPA is reinforcing cooperation with customs
and immigration authorities and credit and debit card issuers and merchants toprevent smuggling and use of “raw” cards into Japan, which do not carry any
personal information and could be used as materials for false cards, as well as
illegal entry of criminal groups.

43

3.

The Government of Japan took note of the request from the Government of theUnited States to promote the use of credit and debit cards as means of payment
for government services. In addition, a study group established by the Ministry ofInternal Affairs and Communications (MIC) is considering several aspects,
including legal and technical, of introducing card payment for local government
services. Based on these considerations, MIC submitted to the Diet theamendment of the Local Autonomy Law, which would enable the use of credit
cards as means of payment for local government services. The amended Law was
passed on May 31. The latest version of the Government's Three-year Plan of
deregulation also calls for drawing a conclusion by the end of fiscal year 2006
whether to allow consumers to use credit cards to pay national taxes by
examining various issues such as charges for cards. Also, some hospitals andparking lots operated by the Tokyo Metropolitan Government began accepting
credit card payments in April 2005.

F. Revision of the Road Transportation Vehicle Law
1.

After having discussed measures to lighten the burden on procedures ofalternation registration and transfer registration for auto leasing companies andother owners of a large number of vehicles since June 2005, the experts compiled
an interim report in December 2005.

2.

The report recommended that vehicle registration procedures and the procedures
for modifying vehicle inspection certificates be made independent by eliminatingowner information from the vehicle inspection certificate in a case where theowner of a vehicle differs from the user. The report also proposed that from thestandpoint of safe and smooth trade of vehicles, an online browsing system beestablished on vehicle registration information to ensure convenient and reliable
procedures to check owner’s information in vehicle distribution. In accordancewith this report, the Ministry of Land, Infrastructure and Transport (MLIT)
submitted the amendment of the Road Transportation Vehicle Law concerning thenecessary revision to the Diet, which approved the bill on May 12, 2006. The bill
will come into effect in 2008, but in order to ease the registration burden in theinterim, MLIT has substituted a procedure whereby a new certificate of vehicle
inspection is issued at the time of alternation or transfer of registration, and theoriginal certificate of vehicle inspection can be returned to the relevant local
transportation bureau after registration in a case where owners of a large numberof vehicles apply for alternation or transfer of registration for their fleet whose
users differ from the owner.

3.

In December 2005, the Government of Japan started the partial operation of“One-Stop Service” for Motor Vehicle Registration that provides online
application services for registering new vehicles in certain locations. “One-Stop
Service” will be expanded to all procedures related to vehicle registration in all
locations on an on-line basis by 2008.

44

G.

Laws Affecting Large Scale Retail Stores
1.

With respect to the concern of the Government of the United States on the laws
affecting large-scale retail stores, the Government of Japan has explained that it
submitted bills amending the Central City Invigoration Law and the City Planning
Law to the Diet on February 8, 2006. The Government of Japan has further
explained that the purpose of the amendment of the Central City Invigoration Law
is to overhaul and strengthen the current support measures on revitalizing thecentral urban areas.

2.

The Government of Japan affirms that the purpose of the amendment of the City
Planning Law is not to restrict the opening of large-scale retail stores but to ensurethat large-scale facilities that attract a large number of people are located properly
through the due procedures of city planning decisions. In areas where large-scale
facilities would be restricted, those facilities may be located through due processof reviewing zoning amendment. In order to facilitate implementation of theprocedure, the amended law will allow private developers to propose changes to acity’s zoning plan.

3.

The Government of Japan also affirms that the amended laws do not intend torestore the commercial adjustment system based on the consideration of economic
demand and supply, and do not intend to restrict the business model of large-scaleretail stores as such or the choice of consumers.

4.

The Government of Japan affirms that the amended laws' implementing
guidelines will be drafted in a transparent and fair manner that includes
opportunities for the private sector as well as other interested parties to express
views.

5.

The Government of Japan notes the request of the Government of the UnitedStates that the Government of Japan review the impact of the City Planning Law
in a timely manner after it comes into effect and in a manner that includes
opportunities for the private sector as well as other interested parties to express
views.

45

REGULATORY REFORM AND OTHER MEASURES BY
THE GOVERNMENT OF THE UNITED STATESI.

CROSS-SECTORAL ISSUES CONCERNING REGULATORY REFORM AND
COMPETITION POLICYA.

Trade/Investment Related Issues
1.

2.

Anti-Dumping Measures and Safeguard Measures: The Government of the UnitedStates will ensure that its anti-dumping laws, regulations and other measuresconform to its WTO obligations.
a.

The Deficit Reduction Act of 2005, which provides for the repeal of theContinued Dumping and Subsidy Offset Act (Byrd Amendment), cameinto force on February 8, 2006. For entries before October 1, 2007, duties
will be disbursed as if the Byrd Amendment had not been repealed. For
entries on or after October 1, 2007, duties ultimately assessed will not be
disbursed to affected U.S. producers.

b.

Section 801 of the U.S. Revenue Act of 1916 (Anti-dumping Act of 1916)
was repealed on December 3, 2004.

c.

With respect to the Hot-Rolled Steel WTO dispute, legislation was
introduced in this Congress that would implement the Dispute Settlement
Body’s recommendations and rulings. The Government of the UnitedStates will continue to work closely with Congress on legislation to
implement the WTO recommendations and rulings in the Hot-Rolled Steeldispute.

d.

The Government of the United States explained that the Steel Import
Monitoring and Analysis (SIMA) System remains an automatic web-based
import licensing system that is fully consistent with the WTO Agreement.
The SIMA revision was open to public comment, and Japan’s comments
were fully considered.

e.

The Government of the United States has explained its views with respect
to the Government of Japan’s concerns on certain other U.S. anti-dumping
issues.

The Federal Buy American Act and Other Related Rules: The Government of theUnited States takes note of the concern of the Government of Japan with regard to
the Federal Buy American Act and Other Related Rules.

46

3.

4.

5.

a.

The Department of Defense opposes legislative provisions that would
undermine the longstanding U.S. policy to open U.S. procurement markets
to suppliers from allied and friendly countries that open their procurement
markets to U.S. suppliers.

b.

The Government of the United States explained the implementing
regulations under the Inter-modal Surface Transportation Efficiency Act
of 1991 and takes note of the request by the Government of Japan for nondiscriminatory treatment of goods with respect to implementation.

Re-Export Controls:a.

The Government of the United States acknowledges Japan's effective
export control system by granting authorization without a license forcertain re-exports from Japan that would normally require a license (i.e.,under a License Exception). In response to the Government of Japan's
concerns regarding United States re-export controls, the Department ofCommerce has posted re-export guidance, translated into Japanese, on its
website, http://www.bis.doc.gov, and has placed specifically trained
personnel in Tokyo to assist with re-export control regulation inquiries.

b.

The Government of the United States may consult with U.S. exporters on
the issue of Export Control Classification Numbers to address the concern
raised by the Government of Japan.

c.

To address re-export control and other issues, the Government of theUnited States will have a continuing dialogue with members of Japan's
Ministry of Economy Trade and Industry (METI).

Exon-Florio Amendment:a.

The Government of the United States recognizes the Government ofJapan’s concerns on the “Exon-Florio” amendment regarding, inter alia,
predictability of regulations, legal stability of completed transactions, andensuring due process. In implementing Exon-Florio, the Government of
the United States is mindful of the Government of Japan’s concerns.

b.

The Government of the United States takes note of the concerns raised by
the Government of Japan with regard to the recent debate in the UnitedStates on the CFIUS review process, and its concern that this could lead tohindering foreign investment in the United States. The Government of theUnited States is committed to an open economic system and will continue
to welcome foreign investment, which contributes to economic growth.

Metric System:

47

6.

a.

The National Institute of Standards and Technology (NIST) continues topromote the use of the metric system throughout the economy. Over 90
percent of U.S. states now permit the use of metric-only units on packages
that are subject to their exclusive jurisdiction, including automotive
accessories, clothing, and household furnishings. NIST is working withthe remaining states to encourage those jurisdictions to amend their laws
and regulations to permit voluntary metric-only labeling.

b.

With respect to measures at the Federal Government level, NIST also
continues to undertake efforts to develop industry and public support for
an update to the Fair Packaging and Labeling Act (FPLA) that would
permit metric-only labeling. A NIST working group, in late 2005, updated
a report titled Permissible Metric-Only Labeling, aimed at raisingawareness on this issue.

The Patent System of the United States: The Government of the United States
and the Government of Japan reaffirm mutual support for effective andsubstantive patent law harmonization efforts. The Government of the UnitedStates is pleased to continue discussions with the Government of Japan and willtake into account Japan’s recommendations in this area. As appropriate, theAdministration will continue to work with the U.S. Congress on patent issues.
a.

First-to-invent System: The United States acknowledges that its first-toinvent system is unique and the first-to-file system is used in mostcountries although it remains controversial in the United States.
Legislation to adopt the first-to-file approach is currently pending in the
U.S. Congress (H.R. 2795 and proposed amendments thereto). In addition
to this proposed legislation, the United States will also continue to pursue
and participate in discussions with Japan and other WIPO Group B
member countries on patent law harmonization, which includes discussionof draft provisions written from a first-to-file perspective.

b.

Early Publication System: The United States is evaluating whether
exceptions may be unwarranted in the early publication system. This issue
is also addressed in the above-referenced legislation pending before theU.S. Congress, as well as in proposed legislation (H.R. 5096) introducedin the U.S. House of Representatives in April 2006.

c.

Reexamination System: Changes to the U.S. reexamination system
continue to be widely discussed, including new provisions to implement
post-grant opposition proceedings, which are also addressed in proposed
legislation (H.R. 2795 and H.R. 5096).

d.

Unity of Invention: The Government of the United States recognizes thatits standard of decision for unity of invention is more stringent than that of48

the Patent Cooperation Treaty and is currently studying adoption of eased
requirements for a unity of invention standard.

7.

e.

Hilmer Doctrine and Article 102(e) of the Patent Act: The Government of
the United States acknowledges that the Government of Japan has
concerns regarding the Hilmer Doctrine and Article 102 (e) of the PatentAct. The Government of the United States notes that these issues arebeing discussed in the ongoing substantive patent law harmonization talks
between the United States, Japan, and other WIPO Group B members.
The United States will continue to pursue and participate in these
discussions. These issues are also addressed in proposed legislation (H.R.
2795).

f.

Information Disclosure Requirement of Prior Art: The Government of theUnited States recognizes Japan’s concern with respect to the information
disclosure requirement of Prior Art. As to Japan’s concerns regardingtranslations, the Government of the United States notes that English
translations are only required to be submitted if the translation is readily
available. As to the Government of Japan’s request to shorten the periodof the information disclosure requirement, in the current view of theGovernment of the United States, applicants must timely disclose
information that is known to be material to patentability at all times during
patent prosecution and before the issuance of a patent. The Governmentof the United States notes the views of the Government of Japan and will
evaluate the appropriateness of its measures with a view to ensuring thatthey do not impose undue burden on patent applicants.

g.

Plant Patent: The Government of the United States notes the concern
expressed by the Government of Japan regarding the difference in thenovelty requirements in the patent laws and in Article 6 of the UPOV
Convention. The Government of the United States would like to discusswith the Government of Japan what, in their view, are the important
aspects of the novelty test according to the UPOV Convention, and how toaddress concern raised by the Government of Japan.

Harmonization and Unification of the State-based Licenses for Construction
Business: Based on the U.S. federal system, the federal government does nothave jurisdiction over the issuance of construction licenses for operations withinstate borders. In order to facilitate further understanding of each state’s practices,
the U.S. Government has provided the Government of Japan with acomprehensive guide of state licensing information prepared by the National
Association of State Contractors Licensing Agencies (NASCLA), a non-profit
organization. The guide contains information on the various types of state
licenses issued, laws, rules, policies, and reciprocal agreements. The U.S.
Government noted the efforts of NASCLA to develop a national commercial
contractor licensing examination by the end of this year. The U.S. Government

49

will provide the Government of Japan with relevant information on this issue, as
appropriate.
8.

Insurance Business Regulations:a.

b.

The National Association of Insurance Commissioners (NAIC) recognizes
the benefits of harmonization of licensing and regulatory process. Efforts
by the NAIC to harmonize state practices and streamline regulatory
standards and processes for insurance products continue to advance underits 2003 Regulatory Modernization Action Plan. The following highlights
are among the Plan’s achievements to date:(1)

In addition to the adoption of standardized filing requirements anduniform standards for licensing among all U.S. states, the NAIC
continues to implement its Financial Regulation Standards andAccreditation Program (the standards of which are in place in all
U.S. jurisdictions) and to refine model laws in a number of areas,
including with respect to annuities, reinsurance, long-term care,and health insurance.

(2)

As of June 2006, 27 state legislatures have adopted the Interstate
Insurance Product Regulation Compact, exceeding the thresholdnecessary for the Compact to take effect. An interstatecommission will develop uniform national product standards and acentral filing register to strengthen the speed and efficiency ofregulatory decisions among member states in the areas of life
insurance, annuities, disability, and long-term care insurance. The
NAIC will continue to work with the states to encourage greater
adoption of the Compact. Legislation to adopt the Compact ispending in the legislatures of an additional 10 U.S. states.

(3)

A total of 52 insurance jurisdictions are utilizing the System forElectronic Rate and Form Filing, the electronic based system forenhancing speed and efficiency for insurance provider
applications. As of the end of 2005, the system had logged
approximately 185,000 electronic filings under this system.

Following approval of a white paper in December 2005, the NAIC
directed its Reinsurance Task Force in March 2006 to prepare proposals,
by the end of 2006, for alternative treatment to provide reinsurance tounauthorized reinsurers. Task Force meetings and other related meetings
are open to foreign interested parties, and input is solicited regularly froma group of interested parties, which includes representatives of Japan’s
insurance industry.

50

9.

c.

The Government of the United States notes that the Government of Japanwelcomes efforts to modernize the insurance regulatory system in the
United States. The Government of the United States is aware that theGovernment of Japan has highlighted its interest in initiatives relating tofederal-level oversight.

d.

The Government of the United States will continue to facilitatecommunications, as appropriate, between the Government of Japan and
the NAIC on issues relating to state-based regulations. The NAIC has also
provided a direct point of contact for issues raised by the Government ofJapan, which will be directed within the NAIC to appropriate parties.

Protection of Credit Card Information:a.

The Government of the United States recognizes the importance ofprotecting credit card information, and has enacted a combination of laws,
regulations, and guidelines for this purpose. These measures, coupledwith industry standards, strive to ensure the confidentiality of sensitive
customer data and credit card information by both banks and credit card
processing companies. A group of Federal Departments and Agencies
share responsibility for enforcing federal information security laws andassociated regulations and guidelines.

b.

U.S. Government regulators supervise and examine banks and otherfinancial institutions for their compliance with, among other things, data
security laws and regulations. These regulations require a financial
institution to contractually oblige its third party data processors to
implement appropriate data security measures. Financial institutions alsomust, when appropriate, monitor the third party’s implementation of suchmeasures. In some cases, a U.S. Government examination may include
directly examining the data security practices of a financial institution’s
third party data processor. In addition, U.S. Government regulators haveissued guidance, and industry groups have developed standards to assist
financial institutions in protecting consumer information and complying
with applicable laws and regulations.

c.

The FTC Act and the Gramm-Leach-Bliley Act are two examples oflegislation used to bring enforcement actions against companies found tohave inappropriate safeguards to protect sensitive customer information,or that engage in unfair or deceptive acts or practices in collecting or
handling consumer information. The FTC has prosecuted thirteen data
security cases based on these Acts, including a case against a third party
processor.

d.

The Government of the United States will continue its efforts to prevent
recurrence of unauthorized disclosures of credit card information.

51

e.

B.

The Governments of the United States and Japan will continue toexchange information on these issues. To facilitate discussion between
experts, the Government of the United States prepared a contact list of U.S.
Government experts who are prepared to discuss issues of credit card
protection with the Government of Japan.

Consular Affairs
1.

Visa Process:a.

Efficiency in Visa Revalidation Procedures: The Government of theUnited States is interested in exploring ways to facilitate visa processing,using technology where possible to improve security while making iteasier for legitimate travelers to obtain visas and renew them, as noted in
the Rice-Chertoff Initiative announced in January 2006.
(1)

The Government of the United States understands the serious
concerns raised by the Government of Japan about the difficulties
the Japanese business community in the United States is facingwith regard to domestic visa re-validation and will continue toevaluate the feasibility of re-opening revalidation within the UnitedStates.

(2)

The Department of State is exploring ways to streamline E visa
applications and make it possible for more posts to accept renewal
applications from third country nationals. The Government of theUnited States and the Government of Japan will continue to engage
in regular dialogue on visa issues.

b.

Introduction of Visa Services into the Other Consulates in Japan: The
Government of the United States responded to the request by theGovernment of Japan to expand visa services in Japan by starting monthly
non-immigrant visa processing on a pilot basis in the United States
Consulate in Sapporo from April 19, 2006. If successful and cost effective,
the Government of the United States will continue this program andconsider expanding within Japan and in other parts of the world.

c.

Visa Issuance and Terms of Validity:(1)

The Government of the United States notes the concern raised by
the Government of Japan from the reciprocal point of view that L
visas are valid only for two or three years while intra-company
transferees to Japan are provided with five-year visas.

52

(2)

2.

3.

The Government of the United States acknowledges the request by
the Government of Japan concerning E-visa qualification
requirements.

Driver’s License:a.

The Department of Homeland Security (DHS) is in the process ofdeveloping regulations that will establish the minimum standards for State
governments to follow when issuing driver’s licenses or other forms ofState-issued identification, pursuant to the Real ID Act, signed into law by
President Bush on May 11, 2005, and scheduled to take effect in 2008.

b.

All States have entered into a Memorandum of Understanding (MOU)
with DHS to verify the legal presence of all non-citizen drivers' license
applicants using the Systematic Alien Verification for Entitlements(SAVE) to verify a driver’s license applicant’s lawful status. For all noncitizens authorized to be in the United States for a temporary period, theReal ID Act states that the validity period of a driver’s license or
identification card issued by the State may not exceed the period of
authorized stay.

c.

How States will implement the new law’s provisions remains unclear at
this point. The Act accords the Secretary of Homeland Security, in
consultation with the Secretary of Transportation and the States, theauthority to issue regulations, certify compliance, and issue grants
pursuant to the Act. DHS expects to publish a Notice of Proposed RuleMaking in the Federal Register this calendar year. The proposed rule will
be open for public comment. The Government of the United States
understands the concerns raised by the Government of Japan. DHS willcontinue to seek input from stakeholders as regulations are developed, andacknowledges the request of the Government of Japan that, in the courseof the implementation of the Act, States should also consider the issues
currently affecting Japanese and other foreign nationals as a result ofStates’ driver’s license regulations. DHS welcomes the participation of
the Government of Japan in the public comment period of the rule-making
process.

d.

The Government of the United States recognizes that the Government ofJapan is concerned about some State regulations regarding driver’s
license, including international driver’s permits, State of Michigan
identification requirements, State of Massachusetts sponsor requirements,
States of Tennessee and Utah driver’s certificates, and State of Rhode
Island driving test location requirements.

Immigration Control by Use of Biometric Identifiers:

53

a.

US-VISIT – a top priority of the U.S. Department of Homeland Security –enhances security for U.S. citizens and visitors while facilitating
legitimate travel and trade across U.S. borders.

b.

DHS deployed US-VISIT biometric entry capabilities to 115 airports, 15seaports and in the secondary inspection areas of 154 land border ports ofentry before the congressionally mandated deadlines of December 31,
2004 and 2005. US-VISIT biometric exit procedures are in place at 12
U.S. airports and 2 seaports throughout the country.

c.

As US-VISIT moves toward fulfilling its vision for an automated entryexit system at the land border ports of entry into the United States,
US-VISIT is continuing to improve border management testing radio
frequency identification (RFID) technology at 5 U.S. land border ports ofentry. As of May 2006, over 56 million foreign visitors have beenenrolled in US-VISIT, with no significant increase in wait times. Morethan 1,100 individuals with criminal backgrounds or histories ofimmigration violations have been denied entry by U.S. Customs andBorder Protection Officers based on the biometric information provided
by US-VISIT.

d.

US-VISIT meets regularly with the Government of Japan through its
Embassy in Washington, D.C. These discussions address public
education, privacy, and operational issues. US-VISIT has an extensive
outreach program to inform the Government of Japan, the travel industry
and the public about the US-VISIT requirements of the US-VISIT
program and what to expect when entering or exiting the United States.

e.

Information on the US-VISIT program is available in Japanese on the
Embassy Tokyo website. The U.S. Government continues to welcome
suggestions by the Government of Japan for further dissemination of thisinformation.

f.

The Government of the United States fully understands and shares theGovernment of Japan’s concerns about protecting its citizens' personal
information. That information will be stored in databases maintained by
DHS and the State Department as part of an individual’s travel record.
The system will be available to U.S. Customs and Border Protection
Officers at ports of entry, special agents in U.S. Immigration and Customs
Enforcement, adjudications staff at U.S. Citizens Immigration Services
offices, and United States consular offices - and appropriate federal, state,
and local law enforcement personnel on a need to know basis. The
program will be implemented in compliance with US-VISIT establishedprivacy policies and the privacy impact assessment. US-VISIT is staffedby a privacy officer who specializes in this program and works in close
cooperation with other DHS privacy officers to ensure adherence to54

government-wide privacy principles. The DHS privacy officer reviews
pertinent aspects of the US-VISIT program to ensure that proper
safeguards are in place. The United States protects the biometricidentifiers of foreign nationals collected by US-VISIT under the samelevel of privacy standards as they would to United States citizens’
personal information. Safeguards have also been implemented to ensurethat the data is not used or accessed improperly.
4.

5.

Suspension of Visa Waiver Program for Holders of Non-Machine-Readable
Passports:a.

The Assistant Commissioner of Field Operations for U.S. Customs andBorder Protection (CBP) sent a letter September 12, 2005, to the Japanese
Embassy in the United States indicating the conditions under which CBP
would grant a parole to nationals of Visa Waiver Program (VWP)
countries with non-machine-readable emergency or temporary passports.
Such VWP travelers must meet the following conditions: 1) must have hada passport lost, stolen or expired while outside the home country; 2) must
present an emergency or temporary passport or other emergency travel
document issued by a government authority to replace a lost or stolen
passport; 3) must be in direct and continuous transit through the UnitedStates for the purpose of returning home; 4) must have confirmed airline
tickets (or electronic ticket record) for return to the home country; 5) must
be otherwise admissible to the United States; and 6) will be required to
pay the $65 parole fee if granted a parole.

b.

Other than the above, all passports used for VWP travel must be machinereadable. In addition, regular passports issued on or after 10/26/05 must
contain a digital photo; regular passports issued on or after 10/26/06 must
contain an integrated circuit chip. Official, diplomatic, emergency, andtemporary passports, however, are only required to be machine-readable
for VWP travel. Except as noted above, travelers whose passports do notmeet the machine-readable and, as appropriate, digital photo and chip
specifications are required to obtain visas to visit the United States. The
Government of the United States is reviewing how travelers with the
Return to Japan Travel Document would be handled per VWP
documentary requirements and procedures. Outreach efforts have been
made to inform VWP countries of the October 26, 2005, digital photo
requirement; such efforts have helped reduce the number of VWP visitors
arriving in the United States without proper passport. The Governmentsof the United States and Japan will exert further efforts to make sure thatthe public, travel industry and airlines are informed of the VWP passport
requirements, including the requirement that the passports issued on orafter October 26, 2006, must include an integrated circuit chip.

Social Security Number (SSN):

55

a.

Shorter Period for SSN Assignment Process: The Social Security
Administration (SSA) must verify the immigration status of all noncitizens before assigning an SSN or issuing a Social Security card. Within
the last year, the SSA and the Department of Homeland Security (DHS)
have continued efforts to improve timeliness in verifying immigration
status. They are currently working to implement a WEB based
verification system, which will further reduce delays in verification andresult in fewer SSA referrals to DHS for manual (paper) verification of
documents. The Government of the United States will continue these
efforts, taking into consideration the request by the Government of Japanin this regard. The Government of the United States is currently studying
the feasibility of expanding the Enumeration at Entry Program to othercategories of non-citizens.

b.

Issuance of Social Security Numbers to the Dependents of Employment
Visa Holders: The Government of the United States fully understands theconcerns of the Government of Japan regarding the assignment of SSNs
for dependents of employment visa holders. The Government of theUnited States recognizes an individual as eligible for an SSN if they have
DHS work authorization or if they have a valid non-work reason for an
SSN.

6.

Individual Taxpayer Identification Number: The Internal Revenue Service (IRS)
notes the concern raised by the Government of Japan with regard to Individual
Taxpayer Identification Number (ITIN), and appreciates that an undue delay inthe issuance of an ITIN can create an inconvenience, and will consider how to
improve customer service in this regard.

7.

Permission to Stay (I-94): The Government of the United States notes the request
by the Government of Japan that the term of validity of Permission to Stay (I-94)
be extended.
a.

U.S. Citizenship and Immigration Services (USCIS) has prioritizedbacklog elimination in its FY2006 budget, submitted in February
2005, requesting an overall 4 percent increase over the FY2005
budget, and earmarking a total of $100 million specifically forbacklog elimination efforts. To date, USCIS has made significant
strides towards accomplishing its backlog elimination goals.

b.

USCIS has set the agency’s priorities as (1) ensuring national
security, (2) reducing the backlog, and (3) improving customer
service. Since it was established in 2003, USCIS has, among otherthings, expanded electronic filing of applications and benefits to
support 50 percent of the total volume; and expanded the ability

56

for customers to access case status information via the USCIS
website. USCIS will continue these efforts.
C.

Distribution
1.

Maritime Transport Security: The Government of the United States shares with
the Government of Japan an understanding of the importance of balancing
security considerations with the need to facilitate international trade. The security
and efficiency of the international supply chain and the maritime transportation
system that supports it are critical to global prosperity. From this point of view,
the Government of the United States notes Japan’s request regarding this issue
and is committed to balancing its initiatives for counter-terrorism with rapid,
smooth and effective distribution. The Government of the United States is also
committed to working with the international community to develop common
procedures and standards that will complement modern business practices while
improving public safety. The International Ship and Port Facility (ISPS) Codewhich has set a common standard for assessing ship and port facility security is an
example of the success that can be achieved through international partnership.
The Government of the United States continues to work with the World Customs
Organization (WCO) to implement the Framework of Standards to Secure andFacilitate Global Trade which will secure trade in such a way that facilitates the
secure movement of commerce and economic prosperity. We appreciate theefforts of Japan to support capacity building to implement the Framework, andthe support we have received for the Container Security Initiative (CSI). The
Department of Homeland Security Secretary Michael Chertoff’s March 2006 visit
to Japan confirmed the commitment of the United States to deepening cooperation
the Government of Japan on a wide range of issues.
a.

Advance Electronic Presentation of Cargo Information: Advance
information and strategic intelligence allow the identification of cargo
shipments that pose a potential risk to safety and security before the cargo
is loaded on vessels. This risk management approach to cargo processing
is becoming a recognized international best practice. The advancement ofmodern business information systems increasingly creates opportunities
for risk analysis earlier in the supply chain, providing multiple
opportunities to resolve potential threats. The Government of the UnitedStates worked closely with the trade community in developing theregulations to implement the advance electronic information requirementsof the Trade Act. The requirements were gradually implemented
recognizing the adjustment necessary in business processes. These
requirements mandate a reasonable timeframe to allow the analysis of theinformation so that only safe cargo will enter the maritime transportation
system. The Government of the United States notes Japan's concern that,as the private sector adapts to the new requirements, this approach canaffect efforts by importers to shorten lead times within their supply chains.
The Government of the United States welcomes the internal efforts of the57

Government of Japan’s Promotion Council to shorten the lead time ofexports to the United States. Taking note of the request of theGovernment of Japan with regard to deregulation of the advancepresentation of electric cargo information, the Government of the UnitedStates will continue to work to enhance the compatibility between
thorough security measures and efficient distribution, and continue
working with the international community through organizations such as
the International Maritime Organization and the World Customs
Organization to achieve greater international uniformity in requirements
for the international transportation of cargo.
b.

2.

C-TPAT: The Customs-Trade Partnership Against Terrorism (C-TPAT) isa voluntary government-business initiative to build cooperative
relationships that strengthen and improve international supply chain
security. The Government of the United States screens 100% of cargo
based on advance electronic commercial information and law enforcement
information systems. Although the participants enjoyed the benefits ofmoderated analysis of the threat and of reduced probability of inspection
and C-TPAT has been elaborated with the introduction of the tiered
benefit system to provide expanded benefits to the members who haveenhanced their security measures, the Government of the United States
fully understands Japan’s request that more tangible benefits should begiven to C-TPAT participants. The Government of the United States willtake appropriate measures to expand tangible benefits to C-TPAT
participants and will continue to facilitate private sector engagement in aneffort to enhance the transparency in the process of implementation andfurther revision of C-TPAT rules.

The Bioterrorism Act and Related Regulations:a.

The Public Health Security and Bioterrorism Preparedness and Response
Act of 2002 (the Bioterrorism Act or the Act) (PL 107-188), authorized the
U.S. Food and Drug Administration (FDA) to develop regulations to
implement four provisions in the Act, including section 307 (Prior Noticeof Imported Food Shipments). FDA and U.S. Customs and Border
Protection jointly issued the Prior Notice Interim Final Rule in October
2003, which allowed affected parties an additional opportunity tocomment on the interim final rule’s provisions while the rule took effecton December 12, 2003, as required by the Bioterrorism Act. FDA and
CBP issued a Compliance Policy Guide in December 2003 (most recently
revised in November 2005) regarding the exercise of enforcement
discretion. FDA now is carefully considering all comments it received
during an open comment period on the interim final rule, including those
filed by the Government of Japan, and the areas addressed by theCompliance Policy Guide, as it develops the final rule, with the objectiveof developing provisions that are consistent with the Bioterrorism Act and58

its legislative history, and that achieve the Act’s objectives, while
minimizing the impact on trade to the extent feasible.

3.

b.

The United States notes that FDA’s “Compliance Policy Guide” initiallypublished in December 2003 (and most recently revised in November2005) provides that “FDA and CBP should typically consider not taking
any regulatory action when an article of food is imported or offered forimport for non-commercial purposes with a non-commercial shipper” andsuch article is not typically refused by FDA and CBP even without priornotice, regardless of whether the food is sent by international mail orhome-delivery services. See http://www.cfsan.fda.gov/~pn/cpgpn6.html

c.

The United States Embassy in Tokyo recognizes and appreciates the highlevel of interest in compliance with the Bioterrorism Act by Japanese foodprocessors, Japan Post, commercial express delivery service providers,
and the general public in Japan. The Embassy will endeavor to provide
relevant information on its website in Japanese regarding any significant
developments under the Bioterrorism Act that may give impact on foodprocessors and senders in Japan. The Government of the United States
will also, in close consultation with the Government of Japan, develop
user-friendly materials that are easily available through its Embassies andConsulates to assist Japanese and other foreign nationals, individual foodsenders and small and medium-sized food processors in particular, incomplying with the Bioterrorism Act. The Embassy welcomes further
discussion with the Government of Japan and interested parties on how toefficiently and effectively improve outreach regarding the Act.

Interstate Weight Limits:a.

The Government of the United States notes the concerns of theGovernment of Japan that the Interstate weight limits set by the federal
law could affect transport costs. The Department of State has consulted
with the Office of Freight Management and Operations (FMO) of the
Department of Transportation’s Federal Highway Administration (FHWA)
regarding the recommendations of the Government of Japan concerning
Interstate weight limits.

b.

States have the option to consider, as “non-divisible loads,” cargoes thatare carried in containers moving in international commerce (i.e., either
originating in another country or destined thereto). Various, but not all,States have chosen to exercise this option. Thus, if State policy allows
containers moving in international commerce to be issued permits as nondivisible loads, a State can issue an overweight permit allowing the loads
on the Interstate. As each State is responsible for operating andmaintaining their highway transportation infrastructure and has the mostcomplete knowledge of what routes within that infrastructure can support

59

or accommodate overweight movements, they are currently and should
continue to be the permitting authority for overweight movements. The
FHWA has consolidated on its own website the various State websites andcontact information for obtaining overweight permits.
c.

4.

The Government of the United States and the Government of Japan willcontinue to exchange views and information on this issue. FHWA/FMO’s
Commercial Vehicle Size and Weight Team has offered to brief theGovernment of Japan on the federal weight limits, and to discuss any
additional concerns.

Maritime Transport Legislation:a.

Merchant Marine Act of 1920 and the Reporting Requirement on the
Situation of Japanese Ports: The Government of the United States and theGovernment of Japan exchanged views regarding the Merchant Marine
Act of 1920. The executive agencies of the United States will continue toconsult and exchange information with the Government of Japan and willkeep the Federal Maritime Commission (FMC) informed of the situationof Japanese ports.

b.

Ocean Shipping Reform Act of 1998: The Government of the UnitedStates and the Government of Japan exchanged views on the Ocean
Shipping Reform Act of 1998. The Government of the United States took
note of the concern of the Government of Japan.

5.

Abolition of Maritime Security Program: The Government of the United Statesexchanged views with the Government of Japan and will continue to ensure that
the Government of Japan is kept informed of the list of the dedicated vessels andany changes in this important national security measure.

6.

Cargo Preference Measures: The Government of the United States and theGovernment of Japan exchanged views on Cargo Preference Measures, including
the law requiring that the transport of Alaskan North Slope crude oil be done on
U.S.-flag ships. The Government of the United States took note of the opinion of
the Government of Japan that measures such as cargo preferences may distortconditions for free and fair competition in the international maritime market.
With respect to these issues, the Government of the United States explained thefollowing:a.

United States Government-owned cargoes covered by cargo preference
laws, including the transport of U.S. military cargo, represent less than one
percent of the United States’ total ocean borne foreign trades; and

60

b.

7.

The last Alaskan crude oil to be exported was in April 2000. Since thattime all Alaskan crude oil production has moved to the U.S. West Coast
market for refining and domestic consumption.

Regulation Regarding Alcohol:a.

On-sale License in State of California: The Government of the UnitedStates notes the concerns of the Government of Japan regarding the sale ofshochu in the State of California and will convey the Japanese request to
the State of California. In addition, the Government of the United States
notes that the Government of Japan is free to petition the State ofCalifornia for an exemption from State regulation, or request that therelevant State law or regulation be amended to allow for the sale of shochu
for consumption on the premises where sold.

b.

Certificate of Label Approval on Alcoholic Beverages: The Government of
the United States notes the views of the Government of Japan regarding
the labeling of alcoholic beverages, and notes that Federal law requires
such labeling (Federal Alcohol Administration (FAA) Act at 27 U.S.C.§
205(e)). The Government of the United States also notes that theregulations of the Alcohol and Tobacco Tax and Trade Bureau of theTreasury Department (TTB) (27 C.F.R. § 27.74) exempt some commercial
samples used to solicit orders from foreign countries from these Federal
requirements, as well as some display samples used for trade fairs
approved by the U.S. Department of Commerce pursuant to the Trade Fair
Act of 1959. In order to take advantage of this limited exemption from theCertificate of Label Approval (COLA) used for soliciting orders, theimporter must meet the requirements of 27 C.F.R. § 27.49 which are as
follows:(1)

The exemption applies to one sample of each alcohol beverageadmitted during a calendar quarter for each person. That is, each
importer may bring in one sample of an alcohol beverage without a
COLA.

(2)

No sample of beer shall contain more than 8 ounces, for wine nomore than 4 ounces, and for distilled spirits no more than 2 ounces.

(3)

The health warning statement must be affixed to the sample. See
27 U.S.C. § 215(a).

(4)

It is possible to obtain an exemption from COLA requirements andFederal excise taxes for larger amounts of alcohol beverages usedin trade fairs “designated” by the U.S. Department of Commerce
pursuant to the Trade Fair Act of 1959. The exemption only
applies to alcohol beverage products used for “display purposes” at61

the trade fair and such products must be labeled accordingly. Oncethe fair is “designated”, the importer must apply to TTB for COLA
exemption. Importers may contact TTB at the following address:
Director, International Trade Division, Suite 400W; Alcohol andTobacco Tax and Trade Bureau; 1310 G St., NW; Washington,
D.C. 20220.
D.

Sanctions Acts
1.

2.

Iran and Libya Sanctions Act:a.

The Government of the United States appreciates having the views of all
its trading partners on this matter, including those of the Government ofJapan. In response to the issues raised by the Government of Japan, theGovernment of the United States explained that by its terms, the Iran and
Libya Sanctions Act (ILSA) applies to those who engage in activities
covered by the statute, without distinction by nationality. It was explainedthat the legislative history of the Act indicates a concern by Congress thatthe law be applied in a manner consistent with the international
obligations of the United States. The Government of the United States
will continue to have a dialogue with the Government of Japan on theseissues. The Government of the United States notes that legislation has
been introduced in Congress that would amend ILSA in significant ways.

b.

The United States again notes that the scope of ILSA was significantly
changed in April 2004, when its application to Libya was terminated in
response to Libya’s progress in dismantling its weapons of mass
destruction and longer-range missiles.

Cuban Liberty and Solidarity Act of 1996:
a.

The Government of the United States understands the concerns of theGovernment of Japan regarding the Cuban Liberty and Democratic
Solidarity (LIBERTAD) Act of 1996 (Public Law 104-114). Since theenactment of the Act, the President has, every six months, suspended theright to bring an action under Title III (which provides for civil suits
against persons who traffic in expropriated property), based on findingsthat such suspension is necessary to the national interests of the UnitedStates and will expedite a transition to democracy in Cuba. The durationof the suspension is fixed by statute and cannot exceed six months at atime. P.L. 104-114, Sec. 306.

b.

Most recently, on January 17, 2006, the President sent a letter to Congressconsistent with the Act to suspend for six months beyond February 1,
2006, the right to bring an action under Title III of the Act.

62

3.

E.

Sanctions Acts Instituted by Local Governments: The Government of the UnitedStates has made considerable efforts over the years to reach out to state and local
authorities to help ensure that initiatives at the state or local level support U.S.
foreign policy. The Government of the United States will continue those efforts
when needed, mindful of any relevant international obligations.

Competition Policy
1.

Antitrust Exemptions:a.

The federal antitrust agencies of the United States continue to look foropportunities to express their views on the appropriate scope and reach oflimitations on and exemptions to the application of the federal antitrust
laws from the standpoint of promoting competition for the benefit ofconsumers in the United States. In this regard, in January 2006 the UnitedStates filed a brief with the U.S. Supreme Court in Gosselin World Wide
Moving N.V. v. U.S., urging the Court to decline to review a decision by
the U.S. Court of Appeals for the Fourth Circuit that there was no antitrust
immunity provided by the Shipping Act of 1984 for an agreement to rig
the bids on the through rates submitted by U.S. freight forwarders to the
Department of Defense to transport military and civilian household goods
to the United States.

b.

The United States Department of Justice (DOJ) and the Federal Trade
Commission (FTC) have been actively submitting comments to state
governments and related entities encouraging them to minimize or
eliminate impediments to competition. For example, on October 18, 2005,
DOJ and FTC submitted joint comments to the Michigan Senate andMichigan Department of Labor & Economic Growth urging the Michigan
legislature not to adopt legislation that would require all real estate brokers
to provide a minimum package of real estate services, thereby preventing
consumers from saving money by purchasing only the services that theywant. In November 2005, DOJ wrote a similar letter to the New Mexico
Real Estate Commission urging it not to adopt proposed regulations thatwould have had the same effects as the Michigan bill.

c.

In September 2005, staff of the FTC testified before the Antitrust
Modernization Commission, a body charged by statute to examine
whether the federal antitrust laws require modernization and to issue
recommendations for specific changes. In the testimony, FTC staff
recommended that the state action doctrine be clarified to, among otherthings, reaffirm the requirement for immunity from the federal antitrust
laws that the intent to displace competition be clearly articulated by thestate sovereign and strengthen the requirement that the state sovereign
actively supervise the conduct that supplants competition.

63

d.

2.

F.

Postal reform legislation that contains provisions designed to subject
certain activities of the U.S. Postal Service to the antitrust laws has passed
both houses of Congress. The legislation has been referred to Conference
Committee for deliberation.

Release of Documents and Materials on Antitrust Enforcement Activities:a.

FTC, in January 2006, revised its Internet homepage to provide access to
three different competition enforcement activities reports that are preparedannually. Two of those reports include annual statistics and briefsummaries of merger and nonmerger enforcement actions taken by the
FTC, including consent orders, administrative complaints and decisions,and federal court decisions. The third report – the annual report to the
U.S. Congress pursuant to the Hart-Scott-Rodino Antitrust Improvements
Act (”HSR Act”) jointly prepared by FTC and DOJ -- provides asummary of merger enforcement-related activities by both agencies,
including statistics on administrative and federal court complaints anddecisions, and consent orders.

b.

DOJ issues press releases announcing the filing of all of its antitrust
criminal prosecutions and civil enforcement actions. The vast majority ofthe press releases related to criminal prosecutions involve the filing of acriminal. Information that is accompanied by a plea agreement which
includes a summary of the violation and the recommended sentence.
Similarly, the vast majority of DOJ’s civil enforcement actions are settled
by consent decree, which DOJ publishes on its website along with aCompetitive Impact Statement that includes a summary of the violationand the terms of the proposed remedy. The Final Judgment entered by the
Court is also published on the DOJ website.

c.

The Department of Justice will provide the Japan Fair Trade Commission,
upon request, with information concerning the results of particular
antitrust criminal prosecutions and civil enforcement actions.

Legal Services and Other Legal Affairs
1.

Acceptance of Foreign Lawyers as Foreign Legal Consultants:a.

The American Bar Association (ABA) continues to engage in an active
dialogue with the state bar associations and state supreme courts with thegoal of encouraging all states to adopt foreign legal consultant systems
based on the ABA’s Model Rule.

b.

The ABA GATS Task Force plans to issue a report this summer
recommending that the ABA liberalize its Model Rule at the ABA’s
Annual Meeting in August 2006. The suggested liberalizations will64

include shortening the recommended period of prior legal experience andlowering (or even eliminating) the minimum age for foreign lawyers
seeking to be licensed as a foreign legal consultant.

2.

c.

At the Annual Meeting, to be held this year in Honolulu, Hawaii, the ABAGATS Task Force will be hosting on August 5 a "summit" of bar leadersfrom states of the greatest interest to foreign lawyers and from bar
regulatory entities and bar associations from countries in the Pacificregion. Prior "summits" with European bar leaders proved to be useful
opportunities for frank exchanges of views among the participants that
focused on reciprocal opportunities for access to the markets for legal
services of all involved.

d.

In December 2005, the state of Texas liberalized its Foreign Legal
Consultant Rules. Among the changes to those Rules, foreign lawyers
now must only have practiced the law of their home country in three of theprevious five years to be certified as a foreign legal consultant, and thatlegal experience may be acquired in any jurisdiction, including in third
countries.

e.

The Government of the United States will continue to consider therecommendations of the Government of Japan regarding foreign legal
consultant systems in the United States and will inform the Government ofJapan of any results.

Product Liability Law:a.

The Government of the United States is strongly committed to alleviating
the undue burden on the business community from inappropriate productliability litigation and unreasonable awards for damages, and has
supported a number of bills to that end.

b.

In January 2006 the Food and Drug Administration (FDA) issued a final
rule on Requirements on Content and Format of Labeling for Human
Prescription Drug and Biological Products. That rule introduces new
requirements regarding the format of drug labeling and regarding theemphasis placed on safety information (such as warnings). The rulefurther states that product liability lawsuits in state courts based on claims
that the content or formatting of prescription drug labeling is notconsistent with state law requirements will be preempted in various
circumstances, including where state law (i) would require safety
information different from or in addition to safety information on the
FDA-approved label or under consideration by FDA, or (ii) would requirea different emphasis on warnings or contraindications than that set forth in
the FDA-approved label.

65

3.

c.

In March 2006 the Consumer Products Safety Commission (CPSC)
promulgated a final rule on the Standard for the Flammability (Open
Flame) of Mattress Sets. In the preamble to that rule, the CPSC states thatit expects that the new mattress flammability standard “will preempt
inconsistent state standards and requirements, whether in the form of
positive enactments or court created requirements.” The CPSC ruleshould effectively preclude product liability lawsuits under state law basedon claims that the manufacturer was liable for failing to comply with any
standard or other regulation that addresses the same risk of occurrence offire which is not identical to the federal requirement.

d.

The Government of the United States strongly supports enactment of
medical liability reform and asbestos litigation reform legislation to
expedite resolution, and curb the cost, of lawsuits. To that end, theAdministration will continue to work with the Congress to passmeaningful reform legislation.

Punitive Damages: The Government of the United States takes note of theconcerns of the Government of Japan regarding punitive damages, and willcontinue to discuss this issue with the Government of Japan.

II.

TELECOMMUNICATIONSA.

Participation in the U.S. Wireless Market: The Government of the United States willcontinue to provide information to the Government of Japan on the classification between
common carriers and non-common-carriers and the distinction between tariffed and nontariffed services in the United States.

B.

Certification and Licensing Criteria Deregulation and Reporting Requirements for
Foreign Operators

C.

1.

In discussing licensing criteria for foreign carrier entry into the U.S.
telecommunications market, the Government of the United States explained thattelecommunications licensing conditions are administered with a view to avoiding
any unreasonable restrictions on foreign participation in the United States market.

2.

The Telecommunications Act of 1996 requires the Federal Communications
Commission (FCC) to review the rules issued under the Telecommunications Act
that apply to telecommunications service providers to determine whether any
regulations are no longer necessary in the public interest due to meaningful
economic competition and whether such regulations should be repealed or
modified. The Government of the United States welcomes the Government ofJapan’s participation in biennial reviews and will seriously consider any
recommendation on its merits.

State-Level Regulations

66

D.

1.

The Government of the United States continues to provide the Government ofJapan relevant information on any NARUC work to harmonize state-level
regulations.

2.

The Government of the United States will continue a dialogue with theGovernment of Japan regarding state-level regulations, including licensing
procedures, the Government of Japan’s interest in regulatory harmonization
among states, and adoption of unified reporting requirements.

Regulatory Reform in the Broadband Era
1.

Dichotomous Classification of Telecommunications Service and Information
Service: The Government of the United States will continue to provide
information to the Government of Japan on relevant developments relating to any
possible review of the regulatory dichotomy between Information Service andTelecommunications Service.

2.

IP-Enabled Services: The Government of the United States will continue a
dialogue with the Government of Japan on how the FCC implements its June
2005 decision to require that certain providers of voice over Internet protocol(VoIP) phone service supply enhanced 911 (E911) emergency calling capabilities
to their customers as a mandatory feature of the service.

E.

Universal Service: The Governments of the United States and Japan reaffirmed theircontinued intention to maintain any universal service mechanism consistent with WTO
Reference Paper commitments.

F.

Access Charges: The Government of the United States recognizes the complexity
inherent in maintaining different kinds of access charges: reciprocal compensation, intrastate access charge and inter-state access charges, and is working towards a unified
intercarrier compensation regime, with a view to rationalizing multiple charging
mechanisms.

G.

Procedures for Processing Export Licenses, TAA Approval and Other Measures
Concerning Commercial Satellites
1.

The Government of the United States will continue its efforts to minimize delays
and maximize transparency of procedures in export licensing and Technical
Assistance Agreements (TAA) approval for commercial communications
satellites in accordance with U.S. laws, regulations, and policies.

2.

The Governments of the United States and Japan have conducted an earnest
dialogue on export licensing for commercial satellites. Recognizing theimportance of U.S.-Japan relations, the Governments of the United States andJapan will continue this dialogue on this issue.

67

H.

Competition in the Navigation Devices Market in the Process of Transition to
Digital Television: The Government of the United States will continue a dialogue with
the Government of Japan on how the FCC enforces Section 629 of theTelecommunications Act with a view to ensuring choice in the market for navigation
devices (set top boxes).

I.

Consumer Access to Internet Applications, Content, Devices and Services: In
September 2005, the FCC adopted a policy statement intended to ensure that broadband
networks are widely deployed, open, affordable, and accessible to all consumers.

J.

Promotion of New Telecommunications Technologies

K.

L.

1.

The Telecommunications Working Group of the Regulatory Reform Initiative helda meeting of government officials and private sector experts and exchanged
opinions on resolving interference issues in commercial deployment of highspeed Power Line Communications (PLC) in Japan and Broadband OverPowerline (BPL) in the United States. In October 2004, the Government of theUnited States introduced rules that have facilitated the commercial deployment of
BPL.

2.

By the end of 2006, the FCC intends to auction 90 Megahertz of spectrum foradvanced wireless services (in the 1710-1755 MHz and 2110-2155 MHz bands),
which will be made available to commercial mobile radio service operators on atechnologically-neutral basis.

Promotion of Trade in Telecommunications Equipment
1.

The Governments of the United States and Japan will continue formal
negotiations with a view to an early conclusion of a Mutual Recognition
Agreement (MRA) relating to conformity assessment of telecommunications
equipment.

2.

Regarding electromagnetic compatibility (EMC), the Governments of the UnitedStates and Japan will continue to work together to develop an arrangement thatwould permit acceptance of results of conformity assessment for information
technology (IT) equipment and industrial, scientific and medical (ISM) equipment
conducted by accredited Japanese conformity assessment bodies.

Network Channel Terminating Equipment (NCTE): Procedures established in the1990 Letters on Network Channel Terminating Equipment (NCTE), and revised as per
the Third Report to the Leaders, ceased to be applied in and after FY2006, after a publiccomment procedure. Under Article 23 of the Telecommunications Business Law, carriers
providing designated telecommunications services are obligated to disclose the technicalrequirements of NCTE.

68

III.

INFORMATION TECHNOLOGYA.

Cooperation in Efforts against Counterfeits and Pirated Goods
1.

2.

3.

To combat the serious and growing problem of piracy and counterfeiting, both theGovernments of the United States and Japan have implemented new initiatives
under their respective domestic IPR programs -- the Strategy Targeting Organized
Piracy (STOP) in the United States and the “Intellectual Property Strategic
Program 2005” in Japan. Notable new initiatives realized in 2006 include:a.

Strategy Targeting Organized Piracy: Passage of the “Stop Counterfeitingin Manufactured Goods Act”, establishment of a Global IPR Academy,
and expansion of IPR experts abroad.

b.

Intellectual Property Strategic Program 2006: Aiming for an early
realization of an international legal framework on preventing proliferationof counterfeits and pirated goods, strengthening the regulations of private
import, etc.; and preventing the sale of counterfeits and pirated goods via
internet auctions.

In addition to establishing their own initiatives in this area, the Governments ofJapan and the United States have been and will continue to closely cooperate on
strengthening IPR protection and enforcement. Along with cooperating
multilaterally, the two Governments, for example:a.

Held bilateral meetings regularly to promote IPR protection andenforcement in Asia Pacific and around the world, andb.

Co-sponsored under the APEC Anti-Counterfeiting and Piracy Initiative,model guidelines to reduce trade in counterfeit and pirated goods, toprevent against unauthorized copies, and to prevent the sale of counterfeit
and pirated goods over the Internet, which was endorsed at the meeting of
APEC Leaders and Ministers for Trade in November 2005 in the Republicof Korea.

The Governments of Japan and the United States will continue to cooperate inbilateral, regional, and multilateral fora to promote greater protection for IPR
world wide by undertaking further actions on a wide range of initiatives, such as
the APEC Anti-Counterfeiting and Piracy Initiative and WTO TRIPS
transparency request, among others. The Governments of Japan and the UnitedStates will expand cooperation to address IPR problems in China using
appropriate tools. In addition, the Governments of Japan and the United States
will continue to discuss the idea introduced by Prime Minister Koizumi at the G8Gleneagles Summit in July 2005 regarding a possible international agreement toaddress the proliferation of counterfeit and pirated goods.

69

B.

4.

The Governments of Japan and the United States have discussed under the
Regulatory Reform Initiative ways to cooperate to combat piracy of digitalcontent.

5.

The Governments of Japan and the United States will continue to seek andexplore possibilities to cooperate with companies and industry associations toarrange joint conferences or seminars to discuss IPR protection strategies. This
would include sharing information on IPR enforcement activities.

Protection of Copyright and Related Rights
1.

Protection for and enforcement of copyrighted works in the digital age isimportant to the Governments of the United States and the Government of Japan.

2.

The Government of the United States recognizes the importance of ensuring theprotection of the rights concerning live performances and moral rights. The
Government of the United States recognizes the importance the Government ofJapan places on the protection of the rights concerning unfixed works.
a.

Protection of these rights is provided in the United States through a
combination of rights under the Copyright Act, state common law, andother Federal and state laws. The Government of the United States willcontinue to take adequate measures to ensure transparency regarding theprotection of these rights.

b.

The Government of the United States recognizes that protection of rights
concerning the fixation, broadcasting by wireless means and thecommunication to the public of live performances are required under
TRIPS article 14 and WPPT article 6. The Government of the UnitedStates recognizes that the Government of Japan considers this right toinclude rights concerning non-musical performances.

3.

The Government of the United States recognizes the importance of the right ofmaking available, as required by the WIPO Internet treaties, as well as theimportance the Government of Japan places on this right. The Government of theUnited States recognizes that the smooth exploitation online of copyrighted works
is important. The Government of the United States will continue to consider
appropriate measures to facilitate the online exploitation of copyrighted works
while ensuring adequate protection of their copyright, including throughlegislative measures.

4.

The Government of the United States will continue discussions with theGovernment of Japan on the protection of the right of rental for computer
programs with special emphasis on video game programs.

70

C.

Adequate Protection of Rights under the Digital Millennium Copyright Act(DMCA): The Governments of the United States and Japan recognize the importance of
striking an appropriate balance between the copyright owner’s rights and the alleged
infringer’s rights of privacy and freedom of expression relating to online infringement
and the use of subpoena’s pursuant to section 512(h) of the U.S. Copyright Act to obtain
identifying information about a subscriber suspected of copyright infringement. In thisconnection, the Governments of the United States and Japan will observe future
developments, and continue to discuss issues in this area.

D.

Response to Digital Networking

E.

1.

The Government of the United States will continue to exchange information with
the Government of Japan on "access controls" under section 1201 of the U.S.
Copyright Act, which was added by the Digital Millennium Copyright Act(DMCA).

2.

The Government of the United States will take appropriate measures to ensurethat the protection of “access controls” will not adversely affect non-infringing
uses of copyright protected works, such as fair use of copyrighted works, so that
their protection will be supported by all relevant stakeholders.

3.

The Government of the United States recognizes that WCT Article 11 and WPPT
Article 18 requires adequate legal protection and effective legal remedies against
the circumvention of effective technological measures that are used in connection
with the exercise of copyright and related rights.

Spam
1.

The Governments of Japan and the United States share concern about spam,
which has become a worldwide problem for businesses and consumers, as well as
in the Information and Communications Technology sector.

2.

The United States Government will continue to pursue a multifaceted approach tocombating spam, including vigorous enforcement of the CAN-SPAM Act, public
private partnerships, promoting industry-led technical solutions, international
collaboration (including enforcement cooperation), and consumer education.

3.

The Federal Trade Commission (FTC) recently submitted a report to Congressevaluating the effectiveness of the CAN-SPAM Act. As of the date of the report,
which was submitted in December 2005, the FTC, the Department of Justice, state
Attorneys General, and ISPs had brought more than 50 cases under the CANSPAM Act since it went into effect on January 1, 2004. In addition to alleging
violations of the CAN-SPAM Act, the FTC can also employ the FTC Act, which
prohibits unfair or deceptive acts or practices in or affecting commerce, in its
cases against spammers.

71

4.

The FTC report to Congress, Effectiveness and Enforcement of the CAN-SPAM
Act, is available at http://www.ftc.gov/reports/canspam05/051220canspamrpt.pdf.

5.

The Government of the United States will continue to explore and consider
measures to combat spam with the Government of Japan.

IV.

MEDICAL DEVICES AND PHARMACEUTICALSA.

Regular Meetings with Japanese Companies Operating in the United States: The
U.S. Food and Drug Administration, Department of Health and Human Services(FDA/HHS), will continue to provide opportunities for meetings with Japanesecompanies operating in the United States. Japan led the world in visits to FDA/HHS in
USFY2004 through the international visitor program (22 delegations) and was second in
USFY2005 with 19 delegations. In the first half of USFY2006, FDA/HHS hosted 12
delegations from Japan.

B.

Facilitation of Worldwide Simultaneous Development: The Department of Commerce
will continue to encourage U.S. industry to work with Japanese regulatory authorities tofacilitate worldwide simultaneous development of pharmaceuticals, including in Japan.

C.

Clarification of FDA’s Inspection Policy: FDA/HHS has provided explanations ofdetails concerning its inspection policy and procedures through its website atwww.fda.gov/ora/inspect_ref/. FDA/HHS inspections in Japan are concerned only withproducts destined for the United States, and not for products destined for the Japanesemarket. The Japanese company decides which products it wishes to market in the UnitedStates, thus choosing the focus of the inspection.

D.

Observance of Time Period of Consultation on Clinical Trials for Investigational
Device Exemption: Regarding the Government of Japan’s request to the Government of
the United States that the time period of consultation on clinical trials stipulated in the
Guidance on Investigational Device Exemption should be observed, both governments
will continue to discuss this issue in the ongoing bilateral discussions between MHLW
and FDA/HHS.

E.

Clear Criteria on Medical Device Classification: Regarding the Government ofJapan’s request to the Government of the United States to clarify the criteria onclassification of attachments for medical devices and to enable manufacturers to maketheir own judgments on classification, both governments will continue to discuss thisissue in the ongoing bilateral discussions between MHLW and FDA/HHS.

F.

Acceleration of Third-Party Review of Pre-market Notifications: Regarding theGovernment of Japan’s request to the Government of the United States to stipulate theevaluation period of third-party reviews of pre-market notifications of medical devices,
both governments will continue to discuss this issue in the ongoing bilateral discussions
between MHLW and FDA/HHS.

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G.

Ultrasound Data for 510 (k) Submission of Endoscopic Ultrasonography: Regarding
the Government of Japan’s request to the Government of the United States to revise theguidance and to confine the data attached to 510(k) submissions of endoscopic
ultrasonographies only to typical data for the purpose of reducing the burden of
applicants, both governments will continue to discuss this issue in the ongoing bilateral
discussions between MHLW and FDA/HHS.

H.

Clear Criteria for Application Categories: Regarding the Government of Japan’srequest to the Government of the United States to clarify the criteria for application
categories for post approval changes of medical devices after Pre-Market Approval forthe purpose of enabling applicants to estimate the necessary time and cost beforehand,both governments will continue to discuss this issue in the ongoing bilateral discussions
between MHLW and FDA/HHS.

V.

FINANCIAL SERVICES

A.

Registration Requirements for Foreign Issuers in Case of Business Reorganization:
Under Rule 145 of the Securities Act of 1933 (1933 Act), an offer or exchange of
securities as part of a business combination – merger, consolidation, reclassification of
securities or a transfer of corporate assets – is considered an offer and sale of securities.
If the number of security holders involved precludes reliance upon other exemptions fromregistration, the securities exchanged as part of the transaction are required to beregistered with the SEC under the 1933 Act. In 1999, the U.S. Securities and Exchange
Commission (SEC) adopted Rules 800 and 802 under the 1933 Act, which exempts fromregistration requirements offers of securities as part of a business combination where theacquiring company and the target company are both foreign companies, and where U.S.
residents hold less than 10 percent of the shares of the target company.
1.

SEC staff believe that there is a sound basis for the SEC registration requirement.
A decision to acquire securities in exchange for securities already owned is as
much an investment decision as a decision to acquire securities by paying cash.
Respect for investor protection concerns and a national treatment regime would
not warrant a registration exemption for transactions covered by this rule (Rule
145).

2.

When the SEC adopted Rules 800 and 802 under the 1933 Act, as well as asimilar Rule 801 exemption for foreign companies’ rights offerings, the SEC
carefully considered the level of U.S. ownership that was desirable andappropriate for purposes of these exemptions and in the interest of investor
protection. SEC staff believe that, at or below the 10 percent level, U.S. holders’interests are best served by being able to participate in, rather than be excluded
from, the securities transaction, even though they do not receive the full
protections of the U.S. federal securities laws.

3.

Finally, Rules 800 and 802 are non-exclusive safe harbor exemptions. Even
above the 10 percent level of U.S. ownership, more tailored relief has been73

adopted that addresses conflicting regulatory mandates and offering practices.
Accordingly, Japanese companies engaged in transactions that fail to meet, or
have difficulty in determining compliance with, the 10 percent test (which is a
threshold required in connection with the specific transaction, not an ongoing
requirement) are encouraged to raise specific concerns with SEC staff todetermine if tailored relief is warranted.
B.

Regulations on Sales and Offers of Foreign Investment Trusts: Although, by its
terms, Rule 7d-1 promulgated under the Investment Company Act of 1940 (Company
Act) applies only to Canadian investment companies, the SEC historically also has issued
7(d) orders permitting registration under the 40 Act to non-Canadian foreign investmentcompanies if they met the conditions of Rule 7d-1. For example, between 1954 and1973, the SEC issued section 7(d) orders to investment companies from Canada,
Australia, Bermuda, South Africa, and the United Kingdom. In each of these orders, theapplicant agreed to comply with the conditions of Rule 7d-1 as a prerequisite to receiving
its section 7(d) order. In some instances, the SEC has granted limited exemptive relief
from Rule 7d-1. For example, in 1979, the SEC permitted a Canadian investmentcompany to maintain its Japanese portfolio securities in the custody of a Japanese branchof a United States bank, which otherwise would have violated Rule 7d-1 (see Templeton
Growth Fund, Ltd., Investment Company Act Release Nos. 10628 (March 13, 1979) and
10657 (April 11, 1979)).
1.

Given the other avenues available, SEC staff believes that it is neither useful nor
realistic to seek extension of Rule 7d-1 to Japanese funds or to propose changes inthe substantive requirements of this rule. Under Section 7(d), the SEC is required
to make a rigorous affirmative finding that investors in the foreign fund haveenforceable protections equivalent to a U.S. fund. In actuality, there are very few
funds that have met the requirements of Rule 7d-1 and the SEC has not issued any
Section 7(d) orders for at least a quarter century. The SEC staff has no plans torecommend modification or extension of Rule 7d-1

2.

Section 7(d) does not operate on an exclusive basis to bar access to the U.S.
market. It is possible for foreign sponsors to organize and register a U.S. mirror
fund or a U.S. “feeder” fund that invests in a foreign “master” fund. Moreover,when Congress amended the 1940 Act in 1996, it adopted Section 3(c)(7), which
permits domestic and foreign funds to operate on an exempt basis in the UnitedStates if they restrict offers and sales of their securities to “qualified purchasers.”3.

In so far as the Government of Japan’s concerns are based upon the related issueof rules applicable to exchange-traded funds (ETFs), it should be noted that if aforeign sponsor were to organize and register a U.S. ETF under the 1940 Act,
such an ETF would be eligible to apply for the same types of exemptive relief that
SEC staff has provided for U.S. ETFs in order to facilitate their operation. In thisrespect, the criteria that the SEC staff must consider in granting exemptions forfunds registered under the Act are not the same as the rigorous finding that is74

required of the SEC under Section 7(d) in order to permit registration of a foreign
fund.
C.

Qualification of Financial Holding Companies: Until recently, the United States, like
Japan, restricted affiliations between commercial and investment banks. In the GrammLeach-Bliley Act, the Congress determined to lift these restrictions but only for thoseorganizations whose U.S. depository institution subsidiaries meet very high prudential
standards with respect to capital and management. Organizations that qualify for theliberalization are known as financial holding companies (FHCs). A foreign bank may
become an FHC if the bank meets prudential criteria that are comparable to the prudential
standards applicable to the U.S. bank subsidiaries of U.S. bank holding companies thatare FHCs, giving due regard to the principle of national treatment and equality ofcompetitive opportunity. The standards are applied to all foreign banks on a
nondiscriminatory basis. Factors that may be taken into account in determining
comparability of capital include the foreign bank’s composition of capital, accounting
standards, long-term debt ratings, reliance on government funding, and other factors that
may affect analysis of capital. As has been previously noted, no one factor isdeterminative. More than 30 foreign banks are FHCs. The Government of the UnitedStates recognizes that many Japanese major banks have made progress in reducing thelevel of non-performing loans. The Government of the United States welcomesapplications for FHC status by any foreign financial institutions that meet theseprudential criteria.

D.

Deregulation of Investment into Initial Equity Public Offering by Foreign
Investment Trusts: The National Association of Securities Dealers (NASD) Rule 2790
generally prohibits an NASD member from selling IPO shares to any account in which a“restricted person” has a beneficial interest (“restricted person” means, NASD members
or other broker-dealers, broker-dealer personnel (including officers, directors, employees
or agents of the broker-dealer), finders and fiduciaries (including attorneys, accountants
or financial consultants to the managing underwriter and their family members), portfolio
managers, certain persons owning a broker-dealer, and, in the case of each of the above
persons, their immediate family members). U.S. registered investment companies are
exempt from this prohibition. The Rule also includes a limited exemption for foreign
investment companies, whereby such funds may participate in IPOs if no person owning
more than 5 percent of the shares of the investment company is a restricted person.
Foreign funds must also provide a written representation that all purchases of new issues
are in compliance with the Rule. The purpose of the Rule is to ensure that the benefits of
IPOs flow to the public and not to securities insiders who might use their position to
obtain shares in new issues to the disadvantage of the general investing public.
1.

The 5 percent limitation for foreign funds is prudentially based and is intended toprevent the circumvention of Rule 2790 by restricted persons who might seek to
use a foreign investment fund to purchase IPO securities. Similar conditions are
not imposed on domestic investment companies because such funds are subject tothe U.S. regulatory regime, which includes, certain prohibitions on related party
transactions.

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2.

Because of the inherent difficulties in assessing the comparability of a foreign
jurisdiction’s regulatory regime and to discourage U.S. investment companies
from circumventing applicable rules by interposing a foreign fund, NASD
determined that it was necessary to impose the additional conditions on foreign
funds.

3.

SEC staff understand that NASD intends to continue to consider the concerns
raised regarding the 5 percent limitation on foreign funds and intends to havefurther discussions with industry regarding the rule and as to whether
amendments are appropriate.

76