Document: WT/DS44/R Page 97 B. LARGE STORES LAW
Document codes: WT/DS44/R
Complainant: U.S.
Respondent: Japan
Third parties: EU, Mexico
Dispute stage: Panel
Agreements cited: Art. III:1, III:4, X:1, X:3, XXIII:1(b)  GATT 1994

B. LARGE STORES LAW
1. INTRODUCTION
5.219 The United States submits that the second element of the Government of Japan's liberalization
countermeasures was the promulgation, implementation, and application of measures limiting the entry
and operation of large scale retail stores. Restricting the presence and operations of large retail stores
was necessary in order to support Japan's systemization policy, to limit market access for imports,
and to limit competition in the distribution sector. This policy was strongly supported by photographic
film and paper manufacturers, distributors, and retailers. Underlying their support was the recognition
that large stores are more likely to carry imported products than small stores, to price more
competitively, and to buy directly from manufacturers, with which they had greater bargaining power.
5.220 For the United States, the principal measure used by the Government of Japan to restrict large
stores is the Law Concerning Adjustment of Retail Business Activities by Large Scale Retail Stores
(Large Stores Law), which became effective on 1 March 1974.241 This Law regulates the opening
or expansion of retail stores with a total retail floor space in excess of 500 square meters. In the view
of the United States, the Law sets out a complicated notification and explanation process which requires
builders and operators of proposed large retail stores to notify the Government of their plans to build
or expand a large retail store, and to explain the plans to local retailers in the vicinity of the new store,
with a view to obtaining their agreement. If the Government determines that the proposed store poses
a risk of adversely affecting nearby small and medium retailers, it can require the proposed store to
reduce its floor space, delay the opening of the store, or reduce the days and hours of its operation.
5.221 According to the United States, the formal procedures established by the Large Stores Law,
and the Government's implementation of the law have led to an informal process in which large stores
often are forced to negotiate informal adjustments with local small and medium retailers in order to
ensure that the local retailers will not oppose the store in the formal process. In addition, several local
governments have implemented measures to restrict the entry of large retail stores into their areas.
5.222 Taken together, the adjustments that flow from these measures decrease revenues and delay
return on investment for store operators and may even discourage or block outright the opening or
expansion of new retail stores. This results in restricting the growth of large stores in Japan, the
one viable alternative distribution channel for imported film and paper.
5.223 For the United States, revisions to the Law from 1973 through 1990 in most cases served to
strengthen the Law's regulation of large stores. Although since 1990, Japan has modified some of
the Law's requirements, under pressure from foreign governments, the Law continues to operate to
effectively limit large scale retail stores. In most important respects, the law today remains more
restrictive than when originally enacted.242
5.224 For Japan, the US claim depends on a theory that imported film and paper products are denied
accesstoprimarywholesalers,andultimately,smallretailers;thatlargeretailstoresmakedirect-to-retail
sales efficient; and that the greater amount of shelf space in large stores increases the likelihood that
imports will be displayed.
5.225 In Japan's opinion, before addressing the US factual claims, two fundamental points must be
noted that go to the legal relevance of the US allegations. In the first place, the provisions of the Large
Stores Law have nothing to do with specific products at all; rather, they establish an adjustment process
241Large Stores Law, Law No. 109 of 1973, US Ex. 74-4 and Japan C-1.
242The United States argues that when the Large Stores Law was originally enacted, it only regulated stores with floor
space in excess of 1,500 square meters. Now, however, it covers all retail stores above 500 square meters.

for the opening and expansion of large retail stores. The law does not regulate which products large
retailers can carry nor does it - with one exception that is actually favourable to imports - take into
account what products, much less the origin of the products, that a retailer sells when determining
whether and what adjustments are necessary. There is absolutely no connection between the provisions
of the law and decisions by retailers, whether large stores themselves, or small and medium-sized stores
within the vicinity, to carry imported products. Accordingly, the Large Stores Law is incapable of
establishing unfavourable conditions of competition with respect to imported products. Moreover, the
Large Stores Law has in fact been liberalized significantly in recent years. Thus, even assuming that
the liberalization of the law were favourable for imports, the conditions of competition under the law
are more favourable now than at the time of any tariff concessions on photographic film. It is therefore
impossibletoconclude that the law todayisupsettingcompetitiveconditionsrelativetothosethatexisted
at the time of those tariff concessions.
5.226 In Japan's view, putting aside these threshold issues of relevance, the US theory must overcome
two factual hurdles. First, the United States must prove that the current operation of the Large Stores
Law in fact severely restricts the growth of large stores. The United States fails to meet this burden.
The Panel must evaluate current Japanese measures in the light of relevant GATT provisions, i.e.,
it should evaluate only the present nature and operation of the law in comparison with those of the
past. For Japan the evidence is quite clear that there is no current meaningful limitation at all on the
growth of large scale stores.
5.227 Second, Japan points out that the United States must prove both conceptually and empirically
that large stores are more likely to carry foreign brands of film than small and medium-sized stores.
In Japan's view, the United States also fails to meet this burden. Retailers, whether large or small,
choose the brands they carry to maximize profit. For Japan, there is no reason to believe that the size
of stores in any way changes the profitability of a particular product. Therefore, the United States
fails to prove that large stores are more likely to carry foreign brands of film than small and medium-
sized stores. Empirical data also confirms that there is in fact no correlation at all between the size
of a store and its propensity to carry foreign brands of film.
5.228 Japan notes that the United States also argues that the Large Stores Law is used to protect small
retailers that have joined the alleged exclusive distribution network of domestic manufacturers from
competition with large retail stores. In Japan's view, this US argument fails for the following reasons.
The law does not take into account anything about the alleged exclusive distribution networks, about
thebrandssmall retailerscarry, oraboutthe businessrelationshipsbetween retailersand a manufacturer.
If the Large Stores Law had been enacted to protect the affiliation between small retailers and
manufacturers, it would have been designed in a way to block convenience store chains, which are
outside the alleged exclusive distribution network of domestic manufacturers, and which are competing
with small retailers that may have a particular affiliation with domestic manufacturers.
5.229 Finally,Japan points outthatit isimportanttonoteat the outsetthat the US allegations regarding
the Large Stores Law apply only to film. Photographic paper is not a consumer product and is not
sold at retail, whether at large or small stores. Accordingly, the Panel should evaluate this law only
in relation to its alleged effect on imports of film.
5.230 The United States responds that the restriction on the presence and operation of the large retail
stores has been an important policy objective for Japan in maintaining an exclusionary distribution
structure based on the domestic film manufacturers’ control of primary wholesalers, and in limiting
an important alternative channel for imports. In response to Japan’ s contention that there is no connection
between the Large Stores Law and the retailers’ decision to carry imports, the United States argues
that numerous studies conducted by the Japanese Government recognized that large stores are more
likely to carry imported products than small stores. Indeed an analysis of the Japanese survey conducted
for this case showed that larger stores are more likely to carry imported film than small stores. The

United States further argues that despite recent changes to the law, Japanese Government studies by
the JFTC and the Management Coordination Agency demonstrate thatthe current operation of the Large
Stores Law continues to severely restrict the growth of large stores.
5.231 With respect to the application of the Large Stores Law to photographic paper, the United States
submitscontractsnegotiatedbetween largephotospecialtystoresand local retailerspursuanttotheLarge
Stores Law thatcontain commitments, among otherthings, to the effect that "we will not install mini-lab
machines" and that "[i]n the spirit of co-existence and co-prosperity with area stores, we will match
our prices for developing, colour printing, etc., to area prices."243 The limitation of price competition
relating to photo development and colour printing and the use of mini-labs at retail outlets directly
affects sales of photographic paper and chemicals.
2. LARGE STORES AND IMPORTS
(a) Import-friendliness of large stores
5.232 The United States cites Japanese Government reports which have recognized that large stores
are more likely tocarry importedproducts than small stores. A study by the Economic Planning Agency
in 1989 found, "it is the large retail stores which handle imported products at a high ratio"244, and,
to promote increased import competition, it called for relaxation of regulations affecting large-scale
stores.245 MITI's Small and Medium Enterprise Agency also found a clear correlation between store
size and imports in a survey of 4,600 stores that it conducted in December 1995: "Examined by annual
sales, the ratio of stores 'handling [imported products]' gets larger as the sales increase".246 In addition,
the United States submits a survey demonstrating that large stores are more likely to carry foreign
film. According to this survey, foreign film is available in 40 percent of stores under 500 square meters,
49 percent of stores between 500 and 2,999 square meters, and 63 percent of stores 3,000 square meters
and greater.
5.233 According to the United States, one reason that large stores carry more imports, is that the
greater amount of shelf space in large stores allows them to carry more diverse brands, and this product
diversity increases opportunities for imports. The Economic Planning Agency study concluded that
increased shelf space meant greater opportunities for imports.247 Similarly, a study by the Government
Regulation and Competition Policy Research Council of the JFTC in June, 1995 noted that restrictions
on large stores limited product diversity.248
5.234 Japan responds, however, that retailers, whether large or small, choose the brands they carry
to maximize profit; there is no reason to believe that the size of stores in any way changes the
profitability of a particular product. Therefore, the United States fails to prove that large stores are
more likely to carry foreign brands of film than small and medium-sized stores.
243Agreement and Memorandum between Tokyo Zenren, Branch Office No. 9 and Yodobashi Camera K.K., 31 January
1990, US Ex. 90-3.
244Research Related to Imports and Prices, Economic Planning Agency, 1989, p. 5, US Ex. 89-1.
245Ibid. p. 10.
246Small and Medium-Sized Retailer Data Book, Small and Medium Enterprise Agency, Ministry of International Trade
and Industry, December 1, 1995, p. 9, US Ex. 95-19. The United States also refers to a study commissioned by the Economic
Planning Agency in 1994, Present Condition and Clarification of Price Destruction, Price Destruction Problem Research
Council, August 1994, p. 7, US Ex. 94-12. See also: Economic Planning Agency, Planning Bureau, Research Related to
Imports and Prices, 1989, US Ex. 89-1; JFTC Government Regulation and CompetitionPolicy Research Council, Concerning
the Reevaluation of Government Regulations in the Distribution Sector, June 1995, US Ex. 95-11; JFTC, Research on Domestic
and Import Products Sold at Low Price, June 1995, pp. 29-30, US Ex. 95-10.
247Research Related to Imports and Prices, Economic Planning Agency, 1989, p. 11, US Ex. 89-1.
248See Concerning the Reevaluation of Government Regulations in the Distribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p. 7, US Ex. 95-11.

5.235 In Japan's view, further general propositions that"large storesare more likelyto carry imported
products" are not particularly relevant to this proceeding, since this Panel is not reviewing the Large
Stores Law in general. The only relevant issue before this Panel is the effect the law has on a specific
product: consumer photographic film.
5.236 Japan further argues that if one considers the incentives facing individual retailers, it becomes
clear that overall retail space has no effect on the decision to carry multiple brands of film. Japan
underscores that film is just too small a product for space to be a material consideration in the retailer's
decision.
5.237 Even in stores that sell large volumes of film, the space used to sell film is quite limited: often
only a single square meter and rarely reaching above 3 square meters. With retail space devoted to
film ranging from 0.04 to 9.92 square meters and averaging only 1.44 square meters as indicated by
a survey249, the range of possible variation is far too small for total store area to be a meaningful
constraint on purchasing decisions.
5.238 Accordingly, Japan argues that the various studies cited by the United States asserting the general
"import friendliness" of large stores, which were all macro level reviews of import trends for different
retail segments, do not take into account the specific business realities for film. Furthermore, none
of those studies makes any attempt to supply any statistical data in support of the contention that large
stores generally are more likely to carry imported products than smaller stores. For Japan, the Panel
has an obligation to focus on the specific products at issue in this proceeding, and need not resolve
or even address the macro level question of whether large stores buy more imported products in general.
5.239 The United States responds that Japan does not, as it cannot, refute the evidence in many
Japanese Government reports that large stores are more likely to carry imports. Instead, according
to the US, Japan attempts to argue that film is somehow different from all the many products in its
previous surveys finding this correlation between store size and imports.
5.240 The United States further argues that the fact that film is a small product is irrelevant to the
correlation between store size and imports. Retail stores are filled with many different types of small
products, and while a single roll of film might not take up much room, carrying different types and
speeds of film from several manufacturers takes up considerable retail space.250 It is not the size of
the product that matters, but the size of the display for the product in all its variations and competing
brands that is the issue. The United States cites an example concerning Japan's largest photospecialty
retailer to show that a downward revision of floorspace plans for a new store affected the retailer's
ability to market foreign film as it had planned.251
249MITI surveyed the 10 department stores and the 10 chain stores with the largest total sales in Japan. This survey indicates
that even large stores usually devote the same amount of small retail space to film as do small stores (Japan Ex. C-19).
Another MITI phone survey covering 60 large stores showed an average of only 1.44 square meters of retail space devoted
to film (Japan Ex. C-20).
250The United States argues that a full display of Kodak film would include, at a minimum, 100, 200, 400, and 1000
ASA colour film, in rolls of 12, 24 and 36 exposures, for slides and for prints, as well as black and white film and "multipacks"
combining rolls of different speeds, and single-use cameras. In the colour film product line alone, Kodak offers the following
items: super Gold in 100, 200, 400, and 1600 - in single rolls (12, 24, 35 and 36 exposures), and 2,3, or 5 roll packs; Royal
Gold in 25, 100, and 400 - in single rolls (24 and 36 exposures), and 2,3, or 5 roll packs, Ectochrome Dyna in 50, 100,
200, and 400 - in single rolls (24 and 36 exposures), and 5 and 20 packs; Chrome in 25, 64 and 200 in single rolls (24 and
36 exposures), and 3 and 10 packs; single use cameras in five different varieties including a new APS version.
251Letter from Akikazu Fujizawa, President, Yodobashi Camera K.K. to Director General Tohoku Region Trade and
Industry Bureau, MITI, Members of the Tohoku Committee and Large Retail Store Deliberation Council, Report from Yodobashi
Camera to MITI concerning the opening of their new Retail Store in Sendai, 6 December, 1996, US Ex. 102.

5.241 Japan responds that retailers do not necessarily display a full-line of one brand. They may
sella partial lineof several different brands based upontheirownbusiness decisionsas towhichproducts
and which brandswillmaximize profit. Thus,even small convenience storesmay carry multiplebrands,
while large stores do not necessarily have a large area devoted to film.
5.242 Further, Japan points out that although the United States presents a letter from the President
of Yodobashi Camera in support of its claim, in the letter, the President notes that the real reason for
cutting back on the shelf space for imported film is the poor sales record of imported film, not its foreign
origin; moreover, in fact, Yodobashi Camera is actually selling imported film currently.
5.243 The United States further argues that Japan’ s own data affirmatively supports a connection
between store size and propensity to carry imports. In response to a question from the United States
at the first Panel hearing, Japan provided the United States and the Panel with the raw data from its
survey, which Japan claims show a correlation between sales volume and import availability. Each
of the stores in the Japanese survey were classified under the Large Stores Law as Class I stores, Class II
stores, or smaller than 500 square meters. The United States performed two analyses using the survey
data that Japan had not performed. The first analysis examined the relationship between store size
and foreign film availability;252 the second examined the relationship between store size and volume
of film sold.253 The results of the first analysis confirmed the US contention that larger stores are more
likely to carry foreign film than smaller stores.254 In the second analysis, the data showed a correlation
between store size and the volume of film sold. Thus, Japan’ s argument that larger volume stores
tend to sell more imports supports the US argument that larger size stores tend to sell more imports.
(b) Large stores and direct sales from manufacturers
5.244 The United States argues that the Government of Japan also has found that large retail stores
are more likely than small stores to deal directly with manufacturers, and that cutting out the wholesaler
lowers prices for consumers. The United States refers to a study by the Japan Fair Trade Commission
in April, 1995 which noted this greater likelihood of chain stores and discount stores to deal directly
with manufacturers in high volume transactions.255 The United States also quotes the 1989 Economic
Planning Agency report which concluded that the traditional wholesaler-to-small-scale-retailer route
impeded imports and kept prices high.256 Furthermore, a Report by the Small and Medium Enterprise
Agency of December 1995 indicatedthat the larger the store,the more likely itwas toprocure itsimports
directly from suppliers abroad, rather than dealing through the regular wholesale channels.257
5.245 The United States further notes that the restriction on the presence and operation of large retail
stores has been an important policy objective for Japan in maintaining an exclusionary distribution
structure based on the domestic film manufacturers’ control of primary wholesalers, and in limiting
an important alternative channel for imports. The United States recalls that the 1969 survey of transaction
terms sponsored byMITI noted that the photo film industry "has establisheda distribution system where
oligopolistic manufacturers lead," and cited two threats to this system: "As future problems, we can
cite first the growth of retail routes (especially regular chains and supermarkets) other than the photo
retail route and changes in transaction terms due to this leadership, and secondly the effects of full
participation by Eastman Kodak. ... When this share [the share of film sales by supermarkets] becomes
252Second Panel Meeting, US Opening Statement, Exhibit 8.
253Second Panel Meeting, US Opening Statement, Exhibit 9.
254In the US view, the results of the survey submitted by the United States and the Japanese survey are nearly identical.
(US First US Submission, Figure 12 and Second Panel Meeting, US Opening Statement at Exhibit 8).
255Research on Domestic and Import Products Sold at Low Prices," JFTC, June 1995 p. 1, US Ex. 95-10.
256Research Related to Imports and Prices, Economic Planning Agency, 1989, US Ex. 89-1.
257Small & Medium-Sized Retailer Data Book, Small and Medium Enterprise Agency, Ministry of International Trade
and Industry, December 1, 1995, p. 10, US Ex. 95-19.

larger, influence over manufacturers will grow, and the market system controlled by the manufacturers
will be shaken. This must be monitored carefully, and the industry itself must develop competitive
activities."258 The United States further notes that the 1969 Survey stated that although the "All-Japan
Federation of Photo Dealers, known as Zenren," which is a trade association consisting of mostly small
photospeciality retailers, "has imposed pressure on others in order to maintain its position", the rise
of "general merchandise store -- for example a regular chain supermarket" can pose a serious challenge
"as a new distribution route."259
5.246 In Japan's view, the US argument presupposes that the relationship between retailers and their
suppliers (either wholesalers or manufacturers) differs depending on the retail space of the retailer.
This assumption, however, does not reflect the market reality of Japan. To maximize profit, every
retailer, whether large or small, procures those goods it chooses to carry either directly or through
wholesalers from manufacturers. In this sense, it is not more difficult for imported film products to
be sold to small and medium-sized retailers than to large-scale retail stores. First, small retail stores
do not necessarily procure goods through wholesalers. For example, convenience stores have grown
significantly.260 For all of these convenience store chains, which are outside the scope of the Large
Scale Retail Stores Law, manufacturers can deal directly with one decision-maker and immediately
reach thousands of outlets. In addition, foreign film products can easily find wholesalers in the Japanese
market toreach small and medium-sized retailers. Also, nothingprevents new wholesalersfrom dealing
in imported film products.
(c) Large stores and imported film
5.247 The United States claims that foreign suppliers' experience in the Japanese film and paper
market bears out that large stores are more likely to carry imported products and to price them more
competitively than small stores. A survey commissioned in 1995 by Kodak of over 2,000 outlets for
film in144citiesrevealedthatforeignfilm (includingKodak, Agfa,and otherforeignfilm) was available
in 40 percent of small stores (those less than 500 square meters) as compared to 63 percent of large
stores (those over 3,000 square meters). This relationship between higher availability of imports and
size of store has been consistent over time. According to figures compiled by a major industry journal,
in every year that the figures were published (i.e., 1979, 1980, 1982, 1983 and 1984), Kodak's market
share by store size was highest in the large size stores.261
5.248 The United States further submits that the Kodak survey also showed that prices for film, both
foreign and domestic, were lower in the large stores. In stores with floor space over 500 square meters,
the price of Kodak film was lower for all three film types surveyed: ASA 100, ASA 400, and ASA
100 multipacks. This pattern of lower prices for imported film was repeated for domestic film. The
average prices of single-roll Fuji 100 ASA, single-roll Fuji 400 ASA, and multipack Fuji 100 ASA
were lower in large stores than the comparable prices in stores not subject to such measures. Agfa's
experience also suggests that large stores offer greater market access for foreign products. Agfa sells
almost half of its film in Japan to a single customer: Daiei, Japan's largest supermarket chain.
5.249 In Japan’ s view, what a market survey shows is not the competitive relationship between
products, but the results of market competition, which is generated from the complex interaction of
258Institute of Distribution Research, Fact-Finding Survey Report Pertaining to Transaction Terms: Actual Conditions
of Transaction Practices in the Wholesale Industry, March 1969, p 62-63, US Ex. 15.
259Ibid.
260Japan explains that it has more than 48,400 convenience stores, and more than 80 franchise chains of convenience
stores (Census of Commerce, Store Type: Retailers, 1994, p. 8). The leading convenience store chain has more than 6,300
outlets and almost 1,500 billion yen in annual sales, which is almost equivalent to that of the second largest general market
store (Nikkei Ryutsu Shimbun, September 16, 1996, p. 1, Japan Ex. C-21).
261Camera Times, May 15, 1979, p. 49, US Ex. 79-5; Ibid., April 29, 1980, p. 50; April 27, 1982, p. 61, US Ex. 82-4;
3 May 1983, p. 45 and May 1, 1984, p. 45, US Ex. 84-2. This series does not appear to have been continued after 1984.

various factors, among which the competitive relationship is no more than one factor. Thus, the
competitive relationship cannot be deduced from market survey results. Further, Agfa’ s success with
Daiei, alleged by the United States, may have resulted from Agfa’ s concentration of its business effort
on Daiei, and has no logical connection to the large retail space of some of Daiei’ s stores. Also, in
addition to large stores, Daiei operates a number of small and medium-sized stores.
5.250 Japan further rebutsthat it ishard to know exactly how the results showing a positive correlation
between store size and the frequency of carrying foreign film were reached, since the United States
never explains how the survey segmented stores of different retail space.262 It also appears that the
Kodak survey in no way controlled for either the volume of film being sold through the specific outlets
surveyed or the type of outlet. In other words, the category "under 500 square meters" appears to
be heavily populated with very small volume kiosks and other low-volume outlets that might have little
motivation to carry more than a single brand film to maximize profit from the sales of film. The
categories "500-3,000 square meters" and "over 3,000 square meters" reflect very different types of
retail outlets.263
5.251 The United States explains that it categorized stores by size; each store was checked against
published listings of class I and class II stores under the Large Stores Law in the two leading
directories.264 Based on these directories, each store was categorized as class I, class II, or neither
(i.e., under 500 square meters). The survey therefore checked film availability in stores in each of
these three size categories. The results show a clear correlation between store size and the availability
of foreign film.
5.252 In response to the Japanese Government claim that the Kodak survey did not control for the
volume of film being sold through specific outlets or the type of outlets surveyed, the United States
performed another run of its data using store type as a proxy for sales volume. Specifically, the United
States sorted its data on the assumption that: (1) kiosks, small convenience stores, pharmacies, and
cleaners were likely to deal in small volumes of film; (2) large convenience stores, convenience stores
at tourist sites, and grocery stores were likely to deal in intermediate volumes of film; and
(3) photospecialty stores, supermarkets, and discount stores were likely to deal in the largest volumes
of film. These data show that the correlation between store size and imports holds even when controlling
for sales volume (i.e., these store types).
5.253 According to Japan, these oversights by the United States are not minor; they fundamentally
undermine the reliability of the US analysis. The volume of film being sold by the outlet depends
on whether the outlet is actually marketing film or just offering film as a convenience. The more the
outlet is marketing film as a particular product line, the more likely the profit maximizing outlet might
be motivated to offer consumers the maximum choice, and thus carry multiple brands. In every market
in the world, when the retail outlet is just offering film as a convenience, the outlet might be unlikely
to carry more than the leading brand of film. Now in the United States, that leading brand is Kodak;
in Japan, that leading brand is Fujifilm.
262For Japan, nothing in the Affidavit of Susan Hester, US Ex. 97-9, that explains how the United States disaggregated
the data by store size. In particular, the Hester Affidavit only describes how Kodak constructed its original availability survey.
It provides no explanation at all how the data was disaggregated into store types. Since the questionnaire provided in the
affidavit does not ask for any data on the store size, it appears Kodak may have simply used some unstated assumption to
classify stores, rather than actually surveying retail outlets on the basis of retail space.
263Japan also notes that the age of some data, which the United States admits are taken from magazine articles, makes
them irrelevant for assessing the current operation of the Large Stores Law. Moreover, the authors of the articles themselves
note that "it should be noted that this questionnaire survey might not reflect the total objective figures because of the stock
volume and the number of samples at the time of the inquiry" (Camera Times, 3 May 1983, p. 45, US Ex. 83-10).
264Toyo Keizai’ s 1996 Comprehensive List for the National Large Scale Retail Stores (Zenkoku Ogata Kouriten Soran
1996) and Sangyo Times Comprehensive List of Large Scale Store Plans (Ogataten Keikaku Soran 1996).

5.254 Japan submits that MITI conducted its own analysis and found the following:
Percentage of Retail Outlets by Store Size
Carrying Foreign Brands
Volume Sold Under 500 m2 Over 500 m2
under 300 rolls 16.3 % 26.1 %
301 to 1,400 rolls 35.0 % 29.8 %
over 1,400 rolls 71.8 % 72.6 %
5.255 In the view of Japan, these results provide no support at all for the US theory, but do in
fact confirm what common sense would predict. The more film sold by the outlet, the more likely
the outlet is to carry foreign brands. In high-volume outlets, whether they are covered by the Large
Stores Law or not, the outlets might be very likely to carry foreign brands265. Conversely, in low-volume
outlets, whether they are covered by the Large Stores Law or not, the outlet might be much less likely
to carry foreign brands.
5.256 Japan further argues that a closer examination of the subset of data including only large scale
stores - 164 outlets out of the universe of 1,966 outlets - reveals other interesting patterns. Logically,
the United States argument that the more retail space in a store, the more likely the outlet is to carry
foreign brands, is not plausible. A store's decision own whether or not to stock imported film is based
on whether or not a particular product will sell and make a profit for the store, and has nothing to
do with the Large Stores Law. It is not credible to argue that in a smaller store a retailer could not
find a few square meters (or less) on a shelf to stock imported film if the retailer believed doing so
to be in its commercial interest.
5.257 Japan submits a figure which plots the retail space of the large scale stores from the Nippon
Research Survey against the total volume of film sales. One can see that there is no correlation at
all between the total volume of film sold and floor space. Large stores do not necessarily sell more
film. The figure then plots the percentage of foreign brand availability at each large store. Once again,
one sees no particular pattern - either in the likelihood of carrying foreign brands (i.e. having a data
point greater than zero) or in the success of foreign brands (having a larger share of the film sales
at the outlet).
5.258 Based on these facts, it is clear for Japan that the Large Stores Law in no way disadvantages
imported consumer photographic film.
5.259 The United States rebuts that the correlation between a store's volume of film sales and its
likelihoodof carryingforeignfilmand thecorrelationbetween astore'ssize anditslikelihoodofcarrying
foreign film are not mutually exclusive, if a store's volume of sales correlates with its size. A larger
store is also more likely to have a larger volume of film sales and to carry foreign film. The United
States submits that the Japanese claim that its study led to different results from the US study is false.
Japan never analyzed its data correlating store size and the availability of imports. Such an analysis
of the Japanese data by the United States reveals that stores subject to the Large Stores Law were
significantly more likely to carry foreign film than small stores, and stores subject to the Large Stores
Law sell significantly higher volumes of film than stores not subject to the Law. The United States
therefore argues that Japan’ s data showing a correlation between import availability and overall sales
volume also directly support a correlation between import availability and store size.266
265Within this sample, the high-volume range represented 92.8 percent of the total volume of film in this sample. Foreign
availability is thus greatest where it matters most.
266Second Panel Meeting, US Closing Statement, 3 June 1997, US Ex. 8 and 9.

5.260 The United States further argues that as a general matter, large stores have larger volume sales,
and that Japan has submitted no credible data to show that this logical correlation does not apply in
the case of photographic film. Instead, in the view of the United States in the figure referred to above,
Japan presents an unusable diagram, with an unusable scale, based on indefensible methodology, from
which no conclusion can be drawn.267
5.261 The United States concludes that Japan has refuted neither the general studies nor the film-specific
study showing a clear correlation between store size and likelihood to deal in imports.
5.262 Japan responds that both of the two surveys themselves indicate no meaningful difference in
the imported film availability at photospecialty stores, supermarket stores, and discount stores -- stores
selling a high volume of film -- regardless of whether the store size is above or below 500 square meters.
The remaining stores -- not major distribution channels of film -- consist of convenience stores and
kiosks for the most part, and show lower availability of imported film. Thus, the US claim is far from
the market reality. Stores selling a high volume of film, for example photospecialty stores and
supermarket stores, are likely to carry multiple brands to meet their consumers’ demand, while others
like kiosks tend not to do so.
3. BACKGROUND AND PURPOSE OF THE LARGE STORES LAW
5.263 The United States argues that large stores posed a challenge to the Government of Japan's
policy of systematizing distribution into vertically aligned, exclusive channels dominated by Japanese
manufacturers. The purchasing power of large stores would allow them to bargain with wholesalers
or directly with manufacturers for the best terms and operate outside a vertically-integrated, manufacturer-
dominated structure and would bring greater price competition to the market, contrary to the Government
of Japan's aim of maintaining stable prices to maximize profits for domestic manufacturers. In addition,
limiting price competition allowed the inefficient, small retailers, who were the easiest to "systematize"
under the control of domestic manufacturers, to survive. Finally, the large stores' greater ability to
carry foreign products and to by-pass the domestically-controlled distribution system to deal directly
with foreign manufacturers threatened the basic underlying purpose of distribution systemization:
supporting Japanese manufacturers. Japan, therefore, sought to limit the proliferation of large stores
as a way to support manufacturer domination and control of distribution as well as to protect small
retailers.
5.264 Japan, however, notes that the Large Stores Law does not regulate retailers based upon their
relationship with manufacturers. If the purpose of the law was to restrict those retailers with enough
purchasingpower todirectlydeal withmanufacturers,as the UnitedStates alleges, the law wouldimpose
restrictions on retailers based upon the aggregate price of transactions with manufactures or some other
measure to serve this purpose. The law imposes no such restrictions because the law is indifferent
to relationships between retailers and manufacturers.
5.265 The United States rebuts that the concern that large stores would undermine the manufacturer-
dominated distribution system comes through clearly in a 1969 survey of transaction terms in the
photographic sector. According to the United States, the survey describes the Japanese film industry
as a stable oligopoly of two domestic manufacturers and the photo film industry as having "established
267The United States submits that to make this diagram, Japan discarded 1,802 of its 1,966 responses, and plotted the
diagram based only on 164 cases consisting of those stores in the sample that were over 500 square meters. Japan therefore
makes no attempt, in the view of the United States, to correlate sales volume and store size with respect to the vast majority
of the stores in the study that are less than 500 square meters. In the US view, it is not possible to produce a sound study
of store size and sales volume while categorically excluding small stores. Even with respect to the 164 stores in the diagram,
Japan uses such a large scale for the horizontal axis that most of the data points end up in a black smudge crammed into
the lower left corner of the diagram. This, in the view of the United States, allows for no meaningful conclusions at all.

a distribution system where oligopolistic manufacturers lead". The survey also identifies the "growth
of retail routes (especially regular chains and supermarkets) other than the photo retail route" and the
"effects of full participation of Eastman Kodak" as future problems.268 The US also submits that in
several other surveys, the Government of Japan has drawn a connection between the growth of large
stores and a challenge to vertically integrated distribution.269
5.266 Japan challenges the US characterizationof the 1969Report byexplainingthatthe reportsimply
notes the need for existing stores to streamline commercial practices to improve their efficiency, even
setting aside the issue of whether the report was legitimized by the Government of Japan.
5.267 Furthermore, the United States responds that Japan fails to mention that convenience stores
under 500 square meters frequently are subjected to review and adjustment under measures applied
by local governments. According to the United States, Japanese government studies have found that
these local regulations continue to be widespread and that they impose a significant burden on the opening
of stores of less than 500 square meters. Just as under the Large Stores Law, the local measures
frequently require a builder or retailer to provide advance notice of its plans to establish or expand
a new store and undertake adjustments with local competitors. The United States cites an example
where the retailer felt compelled to enter into an agreement with a local shopping centre association.270
5.268 Japan responds that MITI has undertaken significant efforts in recent years to ensure that
additional local regulations are not excessive or inconsistent with the Large Stores Law. In this respect,
the agreement cited by the United States is a purely private action and does not demonstrate the intent
of the government; there is no government requirement for any store openers -- whether large or small
and medium-sized -- to negotiate with local retailers, because Japan has made a continual effort to detect
and correct such local rules.
5.269 The United States further submits that the Government of Japan was particularly concerned
that the above effects would multiply significantly if large foreign retailers were allowed to enter the
Japanese market. Large foreign retailers had the capital strength to establish quickly a major presence
in the Japanese market once Japan lifted investment restrictions in the distribution sector. Their large
size would ensure that they could deal with Japanese manufacturers directly and on the most competitive
terms. In addition, their established relationships with foreign manufacturers would allow them to
introduce more foreign products into the Japanese market, and to use this access to foreign products
as a strong bargaining chip with domestic manufacturers.
5.270 Japan responds, however, that first, there is no reason to consider that retail stores operated
by foreign capital are more likely to carry imported brands. Second, the Large Stores Law does not
discriminate against foreign retailers in favour of domestic retailers. In fact, numerous foreign retailers
have recently opened in Japan.
5.271 The United States cites two of Japan's leading antitrust scholars, one a former and one a current
senior official of the Japan Fair Trade Commission, who note that relatively sparse competition in
distribution had prevented price competition among Japanese manufacturers on the domestic market,
268The United States indicates that Japan submitted a version of the survey edited and republished by MITI in 1971, which
differs in several important respects from the original. The United States quotes from the original (US Ex. 15). See Japan
Ex. B-1, p. 309.
269The United States cites the Economic Planning Agency, Economic Theory of Deregulation, 10 June 1989, US Ex.
64 and Distribution and Business Practices of Imports, Edited by the Price Policy Department, Price Bureau, Economic Planning
Agency, 28 March 1986, US Ex. 54.
270The agreement, among other things, limited the retailer's floorspace, mandated certain holidays and closing times,
restricted the retailer's ability to "sell competing products at a significantly discounted price, and required the retailer to
advertise on behalf of its competitors". Arrangement between A New Retail Store and the Local Shopping Centre Association,
1996, US Ex. 93.

thus stabilizing prices271. These scholars also noted the protective effect of a vertically integrated
distribution system:
"Distribution keiretsu ... may work to foreclose the access of foreign products into
the Japanese market. A manufacturer's dominant position might work as a disincentive
for distributors to lower their prices. A distributor's dependence on a particular
manufacturer would make distribution channels exclusive and raise entry barriers
significantly."272
5.272 Accordingtothe UnitedStates, MITI's IndustrialStructure Council understoodthatlarge stores
could challenge the vertically integrated distribution structure that its policy reports aimed to create.
In its Ninth and Tenth Interim Reports (1971 and 1972), the Council acknowledged that large stores
could improve distribution efficiency in Japan, but opted instead for a policy of restricting large stores
in favour of supporting small and medium retailers. Although the Council's concerns extended to all
types of large retail stores, it was most concerned about the adverse effects that large, foreign retail
stores could have directly on small and medium retailers and indirectly on the government's systemization
policy. Specifically, in the Ninth Interim Report273, the Council recommended only limited liberalization
in the retail sector, and that measures be taken to protect small and medium retailers from large or
chain retailers in light of foreign capital liberalization.274 In the Tenth Interim Report, the Council
developed this policy further, again stressing the need to protect small and medium retailers in light
of foreign capital liberalization.275
5.273 In the view of Japan, however, the United States cites not a single shred of evidence in support
of its allegation that the Large Stores Law was enacted as a "liberalization countermeasure" designed
to impede imported products - especially photographic film. For Japan, a careful review of the US
citations of statements that supposedly document the protectionist purpose of the Large Stores Law
reveals that not one of them has anything to do with the expected effect of the law on goods at all,
much less consumer photographic film. For Japan, the Ninth and Tenth Interim Reports of the
Distribution Committee discuss competition between large and small retailers, and specifically ways
to promote the competitiveness of small retailers. There is nothing suggesting concern about competition
between domestic and foreign products.
5.274 Japan argues that the United States tries to create the impression that the Large Stores Law
"represents a systematicand elaborateplan toobstruct[Japan'stradingpartners] marketaccess" through
"one potentially significant alternative distribution channel" for imported consumer photographic film.
This argument ignores the actual operation of the law and implies a focus on products that simply does
271See The Antimonopoly Laws and Policies of Japan, H. Iyori and A. Uesugi, Federal Legal Publications, Inc., 1994
p. 293, US Ex. 94-1.
272Ibid., p. 107.
273Distribution for the 1970s, Ninth Interim Report, Industrial Structure Council Distribution Committee, July 1971,
p. 64, US Ex. 71-9.
274Ibid., p. 68 (emphasis added).
275The United States quotes the following from Retail Business Under Distribution Reforms: The Direction of Revising
the Department Stores Law, Tenth Interim Report, Distribution Committee of the Industrial Structure Council, US Ex. 72-3:
"[I]n light of the international conditions following the currency crises, and economic demands for modernization of the
distribution system, it is necessary to advance liberalization in stages in accordance with the progress being made in the small-
and medium-scale retailers countermeasures" (p. 82).
"Attempts should be made to further strengthen and expand small and medium-sized retail policies. For example, legislative
measures need to be explored to promote small and medium-sized retailers. Active subsidies should be given to small and
medium-sized retailers for various independent and cooperative modernization efforts for the strengthening of management.
These efforts are being done to counter the anticipated advancement of giant foreign capital into the distribution sector following
full-scale capital liberalizationaswell as[to counter] thedevelopmentof vigorousnation-wide activitiesof large-scale retailers,
including department stores and super chain stores" (p. 88, emphasis added).

not exist. The Large Stores Law does not regulate particular products. The purpose of the Large Stores
Law, as clearly stated in Article 1, is
"to foster the sound development of the national economy. To achieve that end, giving
due consideration to the protection of consumers interests, the Law allows for the
adjustment of retail business operations in large-scale retail stores, thereby ensuring
that small and medium-sized retailers operating within their vicinity enjoy reasonable
opportunities for business, and that the retailing sector as a whole achieves sound
development".276
Thus, the Large Stores Law does not address the sale of consumer photographic film in the Japanese
market.
5.275 Japan submits that like many countries around the world (such as the United Kingdom)277, Japan
would like its domestic market to have a variety of small, medium, and large scale retailers to provide
consumers with the maximum degree of choice. Similarly, communities in Japan care about the mix
of different business uses in their neighbourhoods.
5.276 Japan explains that while many other countries use a permission system, the function of the
law in Japan is to provide adjustments, when necessary, to ensure that new large store openings are
consistent with continued retailing diversity. The Large Stores Law accomplishes its objective through
a notification and coordination system for large scale retailers. Large retailers are obligated to provide
requisite notification of their plans; they may then proceed with those plans unless it is decided that
some adjustment is necessary. As part of the adjustment process, the Large Stores Law allows the
government occasionally to recommend modifications in certain operating characteristics upon the opening
or expansion of the large store. The statute and regulations permit only four adjustment parameters:
(1) retail space, (2) opening day, (3) closing time, and (4) store holidays. The Large Stores Law does
not regulate what products a large store decides to carry.
5.277 According to Japan, determinations under the law are in no way based on which products,
or the origin of the products, that a particular large store decides to carry. Likewise, there is no reason
to think that a particular retailer's product purchasing decisions would be in any way influenced by
any of the possible adjustments under the law. In sum, the Large Stores Law is incapable of establishing
unfavourable conditions of competition with respect to imported products. The only instance in which
product origin is considered at all in the process actually treats foreign products more favourably than
domestic products.278
5.278 The United States responds to Japan’ s claim that the Large Stores Law does not influence
the products that large retailers carry by submitting evidence showing that prospective large retailers
enter into agreements with existing local merchants that limit the types of products that the prospective
retailer may sell.279
5.279 Japan also argues that decisions under the law are made taking account of certain qualitative
and quantitative factors, none of which is related to whether the large store at issue, or small stores
276Large Stores Law, Article 1, Japan Ex. C-1.
277See Planning Policy Guidance: Town Centres and Retail Developments, Department of the Environment, United Kingdom,
revised PPG6, June 1996, Article 1.1, Japan Ex. C-2.
278When calculating the retail space of the retailer to determine whether it falls under the Large Stores Law coordination
process, up to 1,000 square meters of retail space devoted to imported products is taken out of the calculation.
279See para. 5.243.

in the vicinity, carry particular products, much less the origin of the products they carry.280 Similarly,
the four adjustmentparameters underthe law - retailspace, openingday, closingtime, and storeholidays
-- have no connection to a retailer's decisions regarding which products to carry or whether to stock
domestic or imported brands. Accordingly, none of the four adjustment factors alters the competitive
relationship between imported and domestic products.
5.280 Japan further submits that it has long regulated large stores to preserve retailing diversity.
This policy concern long predates the capital liberalization of the 1960s and '70s. The history of the
origin and amendment of the Large Scale Retail Stores Law makes it clear that the law concerns retailing
services, and does not address particular products.
4. PROCEDURES UNDER THE LARGE STORES LAW
5.281 The Large Stores Law regulates the opening and expansion of large-scale retail stores above
500 square meters in floor space. Stores above that threshold are divided into two categories: Class
I stores, with more than 3,000 square meters of floor space, which are regulated by MITI; and Class
II stores, with more 500 square meters and less than 3,000 square meters of floor space, which are
under the jurisdiction of the prefectural governor.
5.282 The United States explains that the key procedures under the law currently include the following.
5.283 Article 3 Notification - Parties planning to build or open a large scale retail store must submit
a notification, which includes the proposed floor area of the store, planned opening date, and area
surrounding the building, at least 12 months before the proposed completion and opening of the new
store or expanded retail store to MITI or the prefectural governor (appropriate authority).
5.284 Local Explanations - Within four months after filing the Notification, the builder or retailer
must explain the plans for the store opening, i.e., the name of the store, floor area, opening date, closing
times, and number of days closed, first to MITI, the prefectural governor, local government officials
in the city or town where the building will be located, the Chamber of Commerce and local merchants'
associations (collectively "Chamber of Commerce"), and then to local medium and small retailers,
retailers associations, and consumers.281 After the local explanations, the appropriate authority must
post a notice as to whether the store will be subject to "adjustment".282 The retailer may not commence
business until seven months after the date of this notice.283
280The factors considered are the following:
(i) qualitative factors:
(a) protection of consumers' interests;
(b) effects on small and medium-sized retailers and commercial integrations within the vicinity;
and
(c) local "community development"; and
(ii) quantitative factors:
(a) the shares of large scale retail stores in a relevant municipality;
(b) the level of retail space per capita;
(c) local population trends; and
(d) the influx and outflow of customers.
See Deliberation Procedures, Section I, Japan Ex. C-4.
281For Class I stores, MITI determines the area in which the local explanation should be made as well as the groups to
whom the explanation should be made. The prefectural governor decides the procedures for Class II stores (Guidance for
Local Explanation for Class I Stores that have Submitted a Notification for a New Building, Directive No. 93, 1 April 1994,
US Ex. 94-7).
282Large Stores Law, Article 3(2), US Ex. 74-4.
283Large Stores Law, Article 4.

5.285 Japan, however, explains that a public briefing is to be given to the Chamber of Commerce
and Industry (or alternatively, the Commerce and Industry Association), consumers or consumers’
unions, and local retailers or their associations. The purpose is to help the Large Stores Council form
its views based upon well-informed opinions. Further, the appropriate authority must post a notice
after an Article 3 Notification is filed, rather than after a public briefing is completed.
5.286 Article 5 Notification -- The United States notes that at least five months before the opening
of a new or expanded large scale store, the retailer must submit an Article 5 Notification to the
appropriate authority.284 The authority then determines whether the proposed store poses the risk of
a significant effect on nearby small and medium retailers' business activities, and may recommend
that the store reduce sales floor space, and/or delay opening date.285
5.287 Large Store Council Recommendation - If the appropriate authority determines that elements
of the proposed plan pose a risk of significant effect, it refers the items to the national (in the case
of Class I stores) or prefectural (in the case of Class II stores) Large Store Council, which is an official
advisory body to MITI and the prefectural governors, respectively.286 The Council must submit the
results of its deliberations to the appropriate authority.287
5.288 Japan points out that under Article 7.2 of the Large Stores Law, in order to conduct deliberation,
the Council must hear views from the Chamber of Commerce and Industry (or alternatively, Commerce
and Industry Association), consumers or consumers’ unions, and local retailers or their associations.
5.289 Recommendations and Orders - The United States submits that after receiving the Large Store
Council's views, the appropriate authority may submit recommendations to the persons proposing the
large scale store, among other things, delay the store's opening or reduce its floor space.288 If the
store does not follow the recommendation, MITI may order it to do so.289
5.290 According to the United States, the entire process from the Article 3 Notification through the
completion of the review and "adjustment" process is supposed to take no more than 12 months.290
In addition to the "adjustments" that may be applied to large stores on a case-by-case basis, the Large
Stores Law requires all large stores to close for a minimum of 24 days per year and by 8:00 p.m. each
working day (except stores may petition to stay open until 9:00 p.m. for up to 60 days per year).291
5.291 Japan remarks, however, that this assertion is factually incorrect. Japan rebuts that the Large
Stores Law does not obligate large stores to close no less than 24 days per year, or no later than
284Large Stores Law, Article 5.
285Large Stores Law, Article 7(1).
286Large Stores Law, Article 7(1). Councils generally are comprised of academics, business persons, press, and consumer
representatives, of which the local retailers generally are the most influential. The Council must seek the opinion of the
Chamber of Commerce or other business organizations, retail organizations, retailers and consumers. (Large Stores Law,
Article 7(2), US Ex. 74-4, JFTC Council Report, pp. 16-17).
287Large Stores Law, Article 7(1), US Ex. 74-4. According to the US, the examination of a new store by the Large Store
Council is basedupon mathematical formulas for comparing the CommercialPopulation and large scale retailstore Occupation
Rate of one city with similar cities. See, Large Store Council Decision, Investigatory Procedures for the Adjustment of
the Business Activity of Large Scale Retail Stores, 14 November 1991, US Ex. 91-4. The US emphasizes that the quantitative
approach allows the Large Store Council to ration retail space. Japan disagrees because in its view quantitative factors are
never determinative. See translation issue 11.
288Large Stores Law, Article 7(1).
289Large Stores Law, Article 8(1).
290The Application of the Law Regarding the Adjustment of Business Activities of Large Scale Retail Stores, Directive
No. 90, 1 April 1994, US Ex. 94-8.
291Enforcement Regulations for the Law Regarding the Adjustment of Business Activities of Large Scale Retail Stores,
MITI Ministerial Order No. 17, 27 February 1974, US Ex. 74-2, Article 10(2), as revised by Ministerial Order No. 33,
1 April 1994 and Article 3 of the Supplementary Provision for MITI Ministerial Order No. 33, 1 April 1994, US Ex. 94-6.

8:00 p.m. The law only subjects them to the notification and adjustment procedures if they operate
beyond these thresholds. Further, in practice, 12 percent of notified stores close after 10:00 p.m.292
and 89 percent of notified stores close less than 20 days per year; 22 percent of notified stores close
less than 10 days per year.293
5. EVOLUTION OF THE REGULATION OF LARGE STORES
5.292 In the view of the United States, the Government of Japan imposed and progressively
strengthened restrictions on large stores, and in most important respects, the Law today remains more
restrictive than when originally enacted. The United States argues that the Government of Japan's
efforts to restrict large stores to counter the effects of trade and investment liberalization proceeded
in stages. After the close of the Kennedy Round, MITI issued three directives to strengthen the
Department Stores Law, whichhad existedsince 1956. When thedirectivesprovedineffective at closing
the loopholes for large store expansion, MITI recommended in 1972, and the Diet passed the following
year, the Large Stores Law as an expansion and replacement of the Department Stores Law. The Large
Stores Law has been revised several times.
5.293 Japan responds that whatever restrictions are imposed on large stores by the Large Stores Law294,
and whatever the legal relevance of any such restrictions295, the fact remains that the law has been
significantly liberalized in recent years and is more liberal today than at any point in the relevant past.
Accordingly, the law today cannot be upsetting competitive conditions with respect to imported film.
5.294 The United States rebuts, however, that the law has not been significantly liberalized in recent
years. For the United States, the Law today does currently suppress large stores, as described further
below (see Section VII), and it is also important that Japan aggressively imposed restrictions on large
stores in the past. Without these strong measures against large stores, it is quite possible that large
stores would have brought sufficient bargaining power and competition into the Japanese distribution
system to erode the exclusive vertical control over distribution exercised by Japanese manufacturers.
(a) Department Stores Law
5.295 The Japanese Diet enacted the Department Stores Law in 1956296 to, inter alia, "secure business
opportunities for small and medium merchants by adjusting the business activities of department stores".297
It prohibited the opening of a "department store" with floor space in excess of 1,500 square meters
unless the retailer obtained a permit from MITI298, which MITI could deny if the store would "affect
the business operations of small and medium merchants and pose a significant risk of injuring their
interests".299
5.296 The United States submits that by the late 1960's, the Department Stores Law no longer
accorded adequate protection to small retailers because large stores were evading its application by
292See Article 9-1 of the Large Stores Law, Executive Regulations Regarding the Law Concerning the Adjustment of
Retail Business Operations at Large Scale Retail Stores, 27 February 1994, Article 10.2, Japan Ex. C-10.
293See Article 9-2 of the Large Stores Law, LSRSL Executive Regulations Article 10.4, Japan Ex. C-10.
294As discussed below, the Large Stores Law as currently administered does not restrict the opening of large stores. See
Section VII.B.4. below.
295As discussed above, the Large Stores Law is not concerned with any particular products. Therefore, regardless of
how restrictive or liberal the Large Stores Law was and is, the law is incapable of establishing unfavourable conditions of
competition with respect to imported products.
296The Department Stores Law, Law No. 116, 23 May 1956, US Ex. 56-2 and Japan C-3.
297Article 1, Department Stores Law.
298Article 3, Department Stores Law. The threshold was 3,000 square meters in cities designated by ministerial ordinance.
299Article 5, Department Stores Law.

creating so-called "pseudo-department stores".300 MITI closed this loophole on June 7, 1968 by issuing
a directive, which mandated that such entities obtain department store permits.301 When small retailers
continued to complain, MITI issued a second directive in September 1970, which further limited the
entry and business activities of large stores, by inter alia, requiring that they "make appropriate
adjustments with the local retailers regarding new store expansion, advertising, bargain sales, number
of days closed, and hours of operation".302 MITI issued a third Directive in October 1972303, which
instructed large stores to respect local business "customs" and to not "disturb the order in the retail
[market]" by using aggressive sales promotions.304
5.297 The United States explains that ultimately, however, MITI recognized that issuing directives
to supplement the Department Stores Law was insufficient. Accordingly, in its Tenth Interim Report,
MITI's Industrial Structure Council called for replacing the Department Stores Law with a new law
that would apply to all types of large scale retail stores, not just department stores.305
5.298 The United States also submitsthat concern for the effects of large stores was widespread among
Japanese industry, particularly among consumer goods industries such as the photosensitive materials
sector. In this sector, manufacturers, wholesalers, and retailers shared a common interest in opposing
large stores. In the mid 1960s, the film manufacturers, the wholesalers, and the photospecialty retailers
worked together to find ways to counter bargain sales by the large stores. At a meeting in 1964, the
three groups agreed to cooperate and set up a joint investigation committee to develop countermeasures
for "bargain sales of film by supermarkets".306 At a 1964 meeting of the manufacturers, wholesalers,
and retailers endeavoured to determine which primary distributors were selling film to Daiei, the largest
supermarket chain, at a discount price.
5.299 The manufacturers, wholesalers, and retailers continued working together against the discount
stores and supermarkets in the late 1960s. A meeting of the three groups on February 14, 1969 again
focused on Daiei and the problem raised by its "cheap price attack". Each of the three groups committed
to do its part to attack the problem. The wholesalers took action a few months later, on November
1, 1969, when the Federation of Photosensitive Materials Wholesalers (Shatokuren) issued the "Directive
Regarding the Supermarket Problem" to its membership to "maintain order in the industry".
5.300 The United States claims that these actions taken by the manufacturers, wholesalers, and retailers
in the photographic materials sector show the concerns large stores raised throughout Japan:
manufacturers were concerned by large stores' low prices; wholesalers were concerned about the large
stores' ability to bypass them or bargain for better terms; and retailers, of course, were worried about
increased competition. The Government of Japan took action to address these concerns first by
strengthening the existing law restricting department stores. When that proved inadequate, the
Government replaced the law with the more comprehensive Large Stores Law.
5.301 Japan points out that the United States offers statements of concern by photographic industry
representatives concerning large stores’ pricing policies -- nothing, however, about their alleged tendency
to carry imported merchandise. Further, Japan explains that, as the United States itself notes, the Large
300Stores established "pseudo-department stores" by creating legal identities for separate sales floors that were below
the Department Stores Law's floor space threshold.
301Directive No. 941, Guidance Considering Pseudo Department Stores, 7 June 1968, US Ex. 68-6.
302Directive 1759, Concerning the Construction and/or Expansion of Specified Stores, 28 September 1970, US Ex. 70-6.
303Directive No. 971, Concerning the Construction and/or Expansion of Specified Stores, October 1972, US Ex. 70-6.
304MITI History, Volume 13. US Ex. 78-2 and 78-5.
305Tenth Interim Report, p. 4, US Ex. 72-3.
306The Establishment of the Countermeasures Committee - Photo-sensitive Materials Three-Party Liaison Meeting to
Deal with Aggressive Supermarkets, Camera Times, 1 October 1963, US Ex. 63-3. Kinki District Three-Party [Manufacturers,
Wholesalers, Retailers] Market Countermeasures Council - Daiei Bargain Sales - ¥120 for 36 Exposure Black and White
Film, Camera Times, 21 April 1964, US Ex. 64-2.

Stores Law was preceded by the Department Store Law. By the late 1960s, however, this law was
failing to meet its objective, both due to the emergence of new types of large stores (e.g., supermarkets)
and the deliberate circumvention of the law through division of a single large store into a number of
subsidiaries that each fell below the 1,500 square meters threshold. As the United States notes, MITI
first attempted to supplement the law through a series of anti-circumvention directives; in the end,
however, it was decided that the Department Store Law should be replaced with a law that deals explicitly
with all kinds of large stores.
(b) Enactment of the Large Stores Law
5.302 In the view of the United States, the purpose of the Large Stores Law307 was to protect small
stores from competition and to help the Japanese distribution system restructure to resist foreign
competition. Former Prime Minister and then MITI Minister Yasuhiro Nakasone emphasized this purpose
during a Diet proceeding on July 19, 1973:
"[T]he Government is about to provide thorough and generous measures to small- and
medium-sized companies. With regard to the problems of internationalization and
liberalization, we are not doing this too suddenly, we are nurturing and nourishing
the small- and medium-sized companies' resistance so as to provide them with the ability
to ambush [foreign capital], so we are implementing liberalization in a step-by-step,
gradual fashion.
As part of this policy to increase resistance [to foreign capital], we have decided to
amend the Department Stores Law in order to make adjustments to the business
operations of department stores, supermarkets and the retail industry".308
5.303 Japan notes, however, that these quotations address the competitive challenge posed by foreign
companies (large retailers) to smaller Japanese retailers and there is no mention of the competitive
challenge posed by foreign products. Japan also notes that the Nakasone statement neither indicates
the actual purpose of the law, nor reflects the "subjective intent" of the government at the time of its
enactment.
5.304 The United States further explains that concurrently with the passage of the law, MITI issued
Directive No. 123 of February 28, 1974, which elaborated procedures applicable to the Large Store
Council review process and formalized the role of local retailers in influencing whether a new large
store would be subject to "adjustment". Over time, changes in the law, administrative measures, and
practices, would greatly strengthen this influence.
5.305 According to the United States, implementation of the Large Stores Law had an immediate
and negative effect on the growth of large stores. For example, Daiei, Japan's largest supermarket
then and now, attributed its downturn in profitability, in part, to the new law. The applications for
new stores declined by over one-third from 399 applications in 1974 to 264 in 1976.
5.306 Japan submits, however, that the Department Store Law imposed more restrictive regulations
on large retailers than the Large Stores Law. Specifically, the Department Store Law required entities
to obtain permission to operate a "department store business", which it defined as a business operating
307The United States notes that another law of related concern is the Law on Special Measures for the Adjustment of
Retail Businesses (Commercial Adjustment Law), Law No. 155 of 1959, 23 April 1959, US Ex. 59-1, which applies to stores
not covered by the Large Stores Law.
308Kanpo, 71, Diet Commerce Committee Session, Upper House Diet Record, No. 52, 19 July 1973, US Ex. 73-2. The
United States argues that on 13 September 1973, Minister Nakasone further confirmed that the bill formed part of the plans
put forth by the Industrial Structure Council to restructure the distribution sector.

more than one retail store with retail space in excess of 1,500 square meters. In addition, the law
prohibited those entities engaging in a "department store business," from opening retail stores,
irrespective of the size of their retail space, without a permit from MITI. Nevertheless, it did not
regulate large retail stores with retail space in excess of 1,500 meters, if all retailers in it independently
operated their own stores each of which had retail space no more than 1,500 square meters. This
regulatory scheme created a circumvention problem. To solve this problem, the Large Stores Law
regulates not large retailers, but the opening of large retail store structures in which more than one
retailer may operate, and the opening and operation of retailers operating in such structures.
5.307 Japan emphasizes two differences between the two laws. The Department Store Law regulated
the opening of small stores if they were operated by a company which operates more than one large
store, while the Large Stores Law does not. More importantly, the Large Stores Law has adopted
a notification and coordination system, which is less restrictive than the permission system of the
Department Store Law.
(c) 1979 Revisions to the Large Stores Law
5.308 The United States submits that after the conclusion of the Tokyo Round, the process of
strengthening measures against large stores took on new urgency. The Photospecialty Retailers
Association, along with other retail groups, strongly supported amendments to the Large Stores Law.
5.309 The Diet amended the Large Stores Law on 15 November 1978, with the amendments effective
on May 14, 1979.309 The most important changes to the Large Stores Law in the 1979 amendments
were: (1) to lower the threshold for stores covered by the Law from 1,500 square meters to 500 square
meters; and (2) to divide large stores into two classes - Class I stores (1,500 square meters and above)
under MITI jurisdiction, and Class II stores (500 up to 1,500 square meters) under the regulation of
the prefectural governors.310
5.310 The United States explains that lowering the threshold by two-thirds swept a whole new group
of stores under the Law, and giving the prefectures authority over Class II stores significantly increased
the personnel and other resources available to investigate and order adjustments to large stores. A
veritable explosion in notifications for large stores occurred in 1979, most attributable to notifications
for the newly-covered Class II stores. However, implementation of the Large Stores Law amendments
soon succeeded in suppressing Class II stores, as shown by the decline in the number of Class II
notifications from 1,029 in 1979 to 424 in 1980, to 308 in 1981.311
5.311 Simultaneously with the May 1979 amendments to the Large Stores Law, MITI issued a
Ministerial Order which reinforced the role of the Commerce Adjustment Board, the body representing
local retailers and other trade associations.312
309Large Stores Law Revision, Law No. 105 of 1979, 14 May 1979, US Ex. 74-4. The United States argues that during
the interval between Diet passage of the amendments and their entry into effect, the Government of Japan anticipated, and
took administrative actions to prevent, an influx of new stores intended to avoid the strengthened Law. Directive No. 205,
Self Restraint Regarding the Rush for Construction and Expansion of New Stores, 13 March 1978, MITI History, Volume
13, p. 525, US Ex. 78-2. The United States also cites: Directive No. 564, Self Restraint Regarding the Rush for the Expansion
and Building of New Stores, 3 July 1978, MITI History, Volume 13, p. 525, US Ex. 78-5.
310Law No. 105 of 1978, US Ex. 78-1.
311The Status of Large Scale Retail Store Notification, Explanation of the Large Scale Retail Stores Law, p. 16-17, US
Ex. 94-9.
312Enforcement Regulations, Article 8(2), MITI Ministerial Order No. 38, 11 May 1979, MITI History, Volume 13,
p. 528, US Ex. 79-2.

5.312 MITI Directive No. 365313 created "prior adjustment" and "formal adjustment" processes.
The prior adjustment process took place after the Article 3 Notification (store construction) and before
the Article 5 Notification (store opening). The United States explains that the idea was for the retailer
to seek consensus among those involved in the adjustment process (e.g., the local retailers in the
Commerce Adjustment Board) before the formal adjustment process, which began after the Article
5 Notification. Successful prior adjustment negotiations would lead to "smooth" formal adjustment
procedures based on the understandings reached during prior adjustment". In the view of the United
States, the Directive thus institutionalized not just consultation but negotiation with local interests as
part of the large store opening process. Because of the importance to a large retailer of ensuring a
successful "prior adjustment" process, many large retailers began to coordinate with local interests
in advance of even their initial Article 3 Notification.314
(d) 1982 Administrative measures under the Large Stores Law
5.313 According to the United States, although the strengthened Large Stores Law had an immediate
effect in suppressing openings of large stores315, Japanese manufacturers, wholesalers, and small retailers
continued to fear the threat of increased price competition from large stores. Large-scale stores had
developed new strategies such as selling products produced by secondary and foreign manufacturers
under the store's own brand name at discount prices ("private brand" strategy). Also, alliances with
foreign manufacturers were particularly attractive because imported goods were becoming increasingly
cheaper as a resultof the appreciating yen and decreasing tariff rates. Small and medium retailersreacted
forcefully to these threats.
5.314 The United States explains that in response to continuing concerns about the threat of large
stores, MITI in 1982 implemented new administrative measures under the Large Stores Law to further
severely tighten restrictions on the opening of new large stores. MITI instituted, through Directive
No. 36, a "prior explanation" requirement to precede the builder's Article 3 Notification, which obligated
the notifier to consult with, and obtain the consent of, local retailers before submitting its Article 3
Notification.316 The practical effect of the prior explanation process was to force the builder to negotiate
"adjustments" with local retailers before it took the first formal step under the Law, as was confirmed
by the JFTC's June 1995 report.317
5.315 In Directive No. 36, MITI also mandated that the adjustment process "be carried out in a
restrictive manner"318, stating that in some cases large stores should be given direct instructions "to
exercise 'self restraint'", i.e., to scale back or abandon their plans.319 From 1981 to 1982, almost
every store that attempted to open was reportedly forced to exercise self restraint.320
313Directive No. 365, The Operation of the Commerce Adjustment Board, MITI History Volume 13, p. 528, US Ex.
79-2.
314MITI also lengthened the Large Stores Law adjustment process by issuing Directive No. 366, Obligatory Action Pursuant
to the Implementation Regulations for the Law Pertaining To Adjustment of Business Activities of the Retail Industry for
Large Scale Stores, Directive No. 366, 11 May 1979, US Ex. 79-4.
315Notifications for Class I retail stores dropped precipitously from 576 in 1979 to 132 in 1982. For Class I and Class
II combined, notifications dropped from 1,605 in 1979 to 402 in 1982 (The Status of Large Scale Retail Store Notifications,
Explanation of the Large Scale Retail Stores Law, pp. 16-17).
316Directive No. 36, Immediate Measures Regarding Notification to Establish Large Scale Retail Stores, 30 January 1982,
US Ex. 82-2 and Japan C-16. Japan disagrees with the US interpretation of the Directive No. 36. See translation issue 13.
317Concerning the Reevaluation of Government Regulations in the Distribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, pp. 18-20, US Ex. 95-11.
318Immediate Measures Regarding Notification to Establish Large Scale Retail Stores, Directive No. 36, 30 January 1982,
US Ex. 82-2.
319Ibid.
320Footnote on page 53 of Zaidan Hojin Nihon Sogo Kenkyujo, The Effect of Large Scale Retail Stores on Metropolitan
Areas, February 1983, US Ex. 83-5.

5.316 According to the United States, the results of the Directive were striking. By 1983, new large
store notifications had fallen by 75 percent from 1979 levels, from 1,605 to 401, and stayed at these
low levels throughout the 1980's. Even more notable, the number of notifications for Class I and Class II
stores combined hovered throughout the 1980's at levels typical for Class I stores alone before the
1979 amendments created Class II. Thus, MITI in the 1980's succeeded in restraining openings of
all stores above 500 square meters to the levels typical in the 1970's for stores above 1,500 square
meters.
5.317 The United States cites particular cases where photospecialty retailers entered into agreements
withlocal retailersorretailersassociationstoillustratehowthisrestrictiveapplicationof the law affected
the photographic materials sector and of how the process of local consultation and prior adjustment
instituted by the Government of Japan under the Large Stores Law gives local retailers power to extract
restrictive conditions from large stores. The United States cites the following examples:
- In November of 1982, Doi Camera, a large photospecialty retailer attempted to open a store
inthe Shibuyasectionof Tokyo, butwas stoppedby the formationof a groupcomposed of local retailers.
The TokyoMetropolitan government issuedadministrativeguidance whichled toan agreement between
Doi and local retailers. This agreement included a prohibition against expansion of the sales floor
area in its Shibuya store, and a requirement that it "negotiate in good faith [with the local dealers]
if the market environment were to change in the future".
- On June 4, 1983, the Large Stores Law was used to force the Sakuraya electronics and
photospecialty store to enter into an agreement with the Tokyo branch of the Photospecialty Retailers
Associationin order to open a large store in the Shinjuku section of Tokyo. According to the agreement,
Sakuraya was, among other things, "prevented from expanding its store space without consulting local
dealers," and prohibited from wholesaling and in-house photoprocessing".
- On February 28, 1989, Yodobashi notified the Tokyo Metropolitan government of its intent
to open a Class II store in Hachioji City, Tokyo. The Tokyo 9th branch announced its opposition to
Yodobashi's plans and demanded that it withdraw them immediately. After a series of unsuccessful
meetings with the leader of the Federation's Tokyo 9th branch office and of meetings of the Chamber
of Commerce, Yodobashi prepared an agreement based on the association's demands, which it executed
with the Photospecialty Retailers Association and the Photographer's Association. The agreement
provides, inter alia, that the parties agree to "conduct their business activities based on co-existence
and co-prosperity, and regional cooperation and will always cooperate in good faith". The agreement
further bound Yodobashi to undertake commitments set out in an attached memorandum.
5.318 Japan responds that the 1982 circular has been repealed. Thus, as discussed in Section VI.C.1(b)
below, the past operation of the circular is irrelevant. Also, Japan argues that the Large Store Law
does not regulate which products large retailers can carry nor does it take into account what products,
much less the origins of the products, that a large retailer or small and medium-sized retailers within
the vicinity sell when determining whether and what adjustments are necessary, as discussed in Section
B.1. above. Japan, nevertheless, point out that there is no phrase in the 1982 circular that obligates
a store opener to obtain the consent of local retailers before submitting its Article 3 Notification.
(e) Restrictions on acquisitions
5.319 The United States further argues that, as the Government of Japan strengthened restrictions
on new or expanded large stores in the early 1980's, some large store chains looked for an alternative
route to grow through acquisition. However, Japan's application of merger guidelines in the retail
sector limited the opportunity to pursue this avenue.

5.320 Japan submits that the US argument on the difficulty of mergers between large-scale retailers
-- due to the review rule to consider the market share of large-scale stores alone -- is misguided. Even
if such mergers become easier, the total area of floor space will not increase. Therefore, there is no
link between the merger regulations and the large-scale store regulations.
5.321 The United States cites the example of one of Daiei's subsidiaries, which planned to merge
with a large local supermarket, and was required to lower its shareholdings in the new company before
the JFTC would approve the merger.321 In that case, the JFTC had concluded that the merger would
result in a store with more than a 25 percent market share for certain products, giving rise to competition
policy concerns. The JFTC calculated this market share by defining the market as including only large
stores. Thus, it found that the merged store would account for more than 25 percent of the retail market
served by large stores, not the retail market as a whole.322
5.322 The United States explains that on July 24, 1981, the JFTC formalized this analysis of the
market in Retail Merger Guidelines, a new set of guidelines which applied only to the retail sector.
The Guidelinesdefined three typesof retail markets, categorized by the same floor space criteria utilized
at the time in the Large Stores Law to distinguish Class I stores, Class II stores, and stores excluded
from the law. The three categories included department stores (with floor space at or above 1,500
square meters), mass-merchandizing stores(withfloorspace at orabove 500square meters), and general
retail stores (with floor space of less than 500 square meters). In essence, the JFTC considered each
of these categories to belong to a separate market. This definition of the market meant that a large
store would more easily reach a high market concentration through acquisition than if the market were
defined as a combination of the different types of stores. Accordingly, this policy had the effect of
limitingopportunitiesfor storestoavoidthe LargeStores Law restrictionsthroughpursuingacquisitions
rather than opening or expanding new stores.
(f) Changes to the law since 1990
5.323 In the view of the United States, revisions to the Large Stores Law and related administrative
measures from 1973 through 1990 in most cases strengthened the regulation of large stores. However,
since 1990, Japan has modified some of the requirements under pressure from the United States under
the US-Japan Structural Impediments Initiative, and from other governments. For example, MITI
in 1990 issued administrative guidance that the prior explanation process was not to be used "to obtain
an agreement between the new store and the small and medium retailers".323 In 1992, MITI replaced
the "prior explanation" process with a procedure for "local explanation".324 MITI also raised the
minimum floor space requirements for Class I stores from 1,500 square meters to 3,000 square meters
(6,000 square meters in cities designated by ordinance), extended the store closing time from 7:00
p.m. to 8:00 p.m., and decreased the number of mandatory days closed from 48 to 24.325
5.324 For the United States, however, the law's requirement to consult with local retailers continues
to lead to an informal adjustment process that substantially suppresses the opening and expansion of
large stores. Moreover, Japan continues to vigorously apply the formal adjustment procedures, and
321Investigation Condition of Recent Major Notification (International Contract, Merger, etc.), Kosei Torihiki, No. 398,
December 1983, US Ex. 83-23.
322Distribution Problems and Antimonopoly Law, Yamamoto Takeshi, pp. 263-264, US Ex. 96-6.
323Directive No. 135, Guidance for Prior Explanation of Builders Carrying out a Notification for a Class I Store, 24 May
1990, US Ex. 90-4.
324According to the United States, "Prior Explanation" was abolished by Directive No. 24 on Local Government Regulations
Concerning Store Openings, etc., 29 January 1992 and "Local Explanation" was implemented by Directive No. 25, Guidance
for Local Explanation to Those Who submitted a Notification for New Construction of a Class I Large Scale Retail Store,
29 January 1992, US Ex. 90-4. However, Japan points out that "jimotosetsumei" should be translated as "public briefing"
rather than "local explanation". See translation issue 14.
325Ministerial Order No. 33, 1 April 1994, US Ex. 94-6.

these adjustments continue to impair the growth of large stores as before the recent amendments. Finally,
the law continues to apply to stores above 500 square meters (Class II stores), as compared to 1,500
square meters when the law was implemented in 1974.
5.325 Japan explains that over the course of the 1990s, the Government of Japan has instituted
successive reforms of the Large Stores Law. In particular, in the past the review and adjustment process
of the Large Stores Law had no strict time limits and could sometimes drag on for years; in 1994,
however, MITI issued a circular directing that the entire process - from first notification to completion -
would last no more than twelve months.326 The average length of time tocomplete the processis actually
only 6 months.327 Also in 1994, MITI issued a general exemption from the normal Large Stores Law
process for stores under 1,000 square meters in size.328 In addition, the latest closing time that requires
no notification has been changed from 6:00 p.m. (based on the Department Store Law), to 7:00 p.m.
in 1990, and then to 8:00 p.m. in 1994. The number of the fewest annual business holidays that requires
no notification has been changed from 48 days (also based on the Department Store Law) to 44 days
in 1990 and then to 24 days in 1994. In parallel with these reforms, there has been a dramatic increase
in new large stores (see Section VII below).
5.326 Accordingly, for Japan, the provisions of the Large Stores Law are now more liberal than those
in 1979 and 1994, when the law had already been expanded in scope to include stores above 500 square
meters in size. In addition, under the present Large Stores Law, large scale retail stores are free to
open until 8:00 p.m. and with as few as 24 store holidays without a notification requirement. Under
the law at the time of the 1979 tariff concession, large scale retail stores were only free to open until
6:00 p.m. and with as few as only 48 store holidays without a notification requirement. The law is
therefore incapable of upsetting competitive conditions for imported film relative to conditions at the
time of either tariff concession made by Japan on this product (i.e., the Tokyo Round concession in
1979 and the Uruguay Round concession in 1994). Furthermore, the Large Stores Law is also more
liberal than its predecessor, the Department Store Law in 1967. First, the former law has adopted
a notification and coordination system, while the latter law used a permission system. Second, the
former law expressly mentions the protection of consumers' interest as one of its legislative objectives,
while the latter law did not have such a consideration. Third, under the former law, large scale retail
stores are free to open until 8:00 p.m. and with no fewer than 24 stores holidays without any
requirement, while under the latter law large retailers were free to open only until 6:00 p.m. and needed
at least 48 store holidays without permission.329 In addition, under the Large Stores Law, as indicated
above, approximately 96 percent of notified plans are implemented330, while under the Department
Store Law, only 84 percent of applications were permitted and implemented.331 Thus, the Large Stores
Law is more liberal than the Department Store Law was at the time of the Kennedy Round tariff
concessions.
326Handling Procedures for the Enforcement of the Law Concerning the Adjustment of Retail Business Operations at
Large Scale Retail Stores, Sankyoku, No. 97, issued by DG, MITI, 1 April 1994, Section (1), Japan Ex. C-6.
327Figures compiled on a notification basis by MITI, Distribution Industry Division, Industrial Policy Bureau, for the
fiscal year of 1995.
328Standards for Evaluating Probability under Article 7, Paragraphs 1 and 4 of the Large Stores Law (hereinafter "Probability
Standards"), Sankyoku, No. 96, issued by DG, MITI, 1 April 1994, Section I(2)(iii), Japan Ex. C-7.
329With respect to the scope of regulated retail service, Japan submits that it is not definite that either is more restrictive.
On the one hand, the Large Stores Law regulates retail stores with retail space in excess of 500 square meters, while it imposes
no regulation on the opening and operations of retail stores with retail space no more than the threshold. Moreover, in practice,
no adjustment is likely to be imposed on retail stores with retail space less than 1,000 square meters. On the other hand,
the Department Store Law regulated only retailers operating more than one retail store with retail space in excess of 1,500
square meters, while it regulated all retail stores which were operated by such retailers (Japan Ex. C-1 and C-3).
330Figures compiled on a notification basis by MITI, Industrial Policy Bureau, Distribution Industry Division.
331Hyakkatenhorei no Kaisetsu (Guidebook of Department Store Law), Commercial Division, MITI, 1956, p. 65, Japan C-9.

5.327 The United States responds that Japan’ s contention that the current operation of the Large
Stores Law does not severely restrict the growth of large stores is undercut by its own recent studies,
which reached the opposite conclusion. These studies show that MITI and the prefectural governors
are requiring significant floorspace reductions for proposed new stores, and that the number of directed
floorspace reductions is increasing. Moreover, a 1995 JFTC study found that a number of local
government bodies are imposing their own guidelines on store openings, and that "those planning to
open stores continue to bear unreasonable burdens in the form of demands requiring very intricate
store opening plans to be submitted and other unreasonable demands." Finally, the Japanese Government
studiesfoundthatmany largerstoresfeelcompelled tonegotiateinformaladjustmentswithlocal retailers
to ensure that they do not oppose their store in the review process. As a result, according to the JFTC
in 1995, "those planning to open a store are unfairly hindered from opening new stores and freely
developing business."
6. FORMAL AND INFORMAL ADJUSTMENTS
5.328 In the view of the United States, the formal adjustment procedure in combination with the
adjustments arising from consultations with local retailers, cause large stores to reduce floorspace or
hours or days of operation in a substantial number of cases.
(a) Adjustments under formal procedures
5.329 According to the United States, MITI and the prefectural governors require downward adjustment
of floor space in a large percentage of notifications. The larger the store, the more likely it is to be
subjected to downward adjustment and the greater the amount of the recommended adjustment.
According to Japanese government data, for the years 1992-1995:
- For Class I stores, MITI ordered floor space reductions in 45 percent of the cases;
- For Class II stores, the prefectural governors ordered floor space reductions in 10 percent of
the cases; and
- For Class I and Class II stores combined, the reviewing authorities ordered floor space
adjustments in 29 percent of the cases.332
Government of Japan data based on reports from MITI regional offices show that the amount of floor
space reduction is significant. For Class I stores, average floor space cut-backs ranged from 15 to
50 percent range. For Class II stores,the average reductionsgenerally were between 3 and 30percent.333
5.330 The United States further submits that data analyzed by the JFTC-sponsored Government
Regulation and Competition PolicyCouncil showsthatthe average size of floorspacereductionsordered
under the Large Stores Law has increased markedly in recent years. During 1988-1990, large
supermarket owners were ordered to reduce the sales area of their proposed stores by an average of
13 percent in order to receive approval. By 1994, this average had increased to 22.6 percent.334 The
US submits individual examples to show the extent and burden of floor space reductions imposed on
large scale retailers.335 From such aggregated statistics and examples, there can be no question, according
332Table of official statistics provided to the Government of the United States by the Government of Japan by a letter
dated 10 December 1996.
333MCA Survey, p. 3, US Ex. 95-15.
334Concerning the Reevaluation of Government Regulations in the Distribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p. 19, US Ex. 95-11.
335The United States cites the following examples:
-Floor space reductions for a leading chain store have escalated since the early 1990's even though the store's requested
sales area declined by 9.3 percent per year. In 1992, three of its stores were ordered to reduce their proposed sales areas
by 43 percent, 53 percent, and 63 percent. In 1996, Retailer X abandoned plans to build a store after being served with
a store adjustment decision ordering it to reduce the floor space by a prohibitive 39 percent.

to the United States, that the floor space adjustment provisions of the Large Stores Law forces large
retailers to significantly scale back their store size to obtain approval for the establishment or expansion
of a large store.
5.331 Japan rebuts, however, that the United States fundamentally mischaracterizes the operation
of the Large Stores Law. Focusing on the isolated exceptions to the general practice, it leaves the
impression that all large stores are restricted, when in fact the vast majority of large stores - 80 percent -
go through the entire process without having to make any changes in their planned retail space.
5.332 Japan argues that it is important to keep the overall adjustment process under the Large Stores
Law in context. To obtain a clear picture of how the law actually operates, Japan requests the Panel
to focus on two issues: (1) how often are the adjustment mechanisms actually invoked, and (2) if
invoked, the magnitude of adjustments that are actually recommended.
5.333 Over the FY1992 toFY1995period,4,513out of 5,679notifications - approximately80 percent
of notifications - received no adjustment at all to retail space.336 In other words, simply being subject
to the Large Stores Law process does not mean that some adjustment will automatically occur. On
the contrary, most stores require no adjustment at all.
5.334 In particular, the current law is rarely applied at all to stores with retail space under 1,000
square meters. Such stores are exempt from the normal process unless a municipal government or
a Chamber of Commerce and Industry (or alternatively a Commerce and Industry Association) requests
the deliberation by the Large Scale Retail Store Council on a notified plan, and the administering
authority finds that the store is not comparable to other stores in the vicinity based on closing time
and number of store holidays.337 During the period May 1994 to April 1996, only 66 out of 2,280
new stores with less than 1,000 square meters of retail space, or 2.9 percent, had to follow the normal
Large Stores Law process.338
5.335 Even when adjustments are made, they are generally modest. Actual experience with the Large
Stores Law shows how limited these adjustments have been in practice:339
- For retail space, only 20.5 percent of the notifications receive any adjustment at all. For those
stores adjusted, the average adjustment was only a 24 percent reduction in retail space.340
-Floor space reductions for a major national supermarket have increased substantially over the past two years. In 1994,
Retailer Y was ordered to reduce floor space of new stores an average of 15.1 percent. In 1995, the average increased to
27.1 percent. Data for the first half of 1996 indicates an average floor space reduction of 24.2 percent, with two stores
in Kyoto being hit with floor space cuts of 48.8 and 66.9 percent.
-In Kyoto, the Large Store Council required a supermarket to reduce the floor space of a new store from the requested 6,368
square meters to 2,500 square meters, a 61 percent reduction.
-The Large Store Council recommended that Daiei reduce the floor space of a store by 59 percent from the proposed 17,000
square meters to 7,000 square meters. In January 1996, Daiei appealed to the Regional Bureau of MITI explaining that it
could not keep sufficient inventory with such a small store. In March, 1996, without modifying the decision, MITI issued
an order that Daiei follow the decision made by the Large Store Council.
336Figures compiled on a notification basis by MITI, Industrial Policy Bureau, Distribution Industry Division.
337Probabilities Standards, Section 1, para. 4, Japan Ex. C-7.
338Japan notes that only a subset of this small number (34 cases or 1.5 percent) received any adjustment after the process.
339The data regarding store hours and holidays cover the period May 1994 - March 1996, while the opening days and
retail space data cover FY1992 - FY1995.
340Japan notes that although the United States cites a few examples of large adjustments to retail space, such large restrictions
are exceptional. Over the period FY 1992 - FY 1995 there were only 67 cases - 2 percent of all notifications - in which
retail space reductions of over 50 percent were made.

- For opening days, only 2.8 percent of the notifications receive any adjustment at all. For those
adjusted, the average delay in opening has been about 4.5 months, and in no case has the delay
been longer than 12 months.
- For closing time, the adjustment only becomes an issue if the store wishes to be open past 8:00
p.m. Otherwise, there is not even an obligation to notify the authorities. Only 24 percent
of the notifications receive any adjustment at all.
- For store holidays, the adjustment only becomes an issue if the store wishes to close fewer
than 24 days per year, or basically twice a month. Otherwise, there is not even an obligation
to notify the authorities. Only 27 percent of the notifications receive any adjustment at all.
5.336 In the view of Japan, the retail space reduction rate of 29 percent cited by the United States
exaggerates the current rate and conceals the declining trend over time. This figure from the MCA
Report cited by the United States refers only to the six MITI branches and six prefectural governments
included in the MCA Report. Although the US data are technically correct, country wide data more
appropriately represent the complete picture. The following are the average reduction rates in retail
space, as calculated on the basis of those cases where adjustment is made.341 The average reduction
percentage of all notifications will likely be much lower:342
Figure N
Average Rate of Retail Space Reduction
for Large Scale Stores
1992 1993 1994 1995
Class I: 27.7 27.5 24.5 22.3
Class II: 19.9 25.9 20.6 20.4
Total: 24.6 26.9 23.6 22.0
5.337 Japan further argues that there are no significant procedural burdens imposed by the Large
Stores Law. The average examination period under the law is now only six months.343 Furthermore,
the expenses associated with going through the process are not a substantial barrier to entry.
(b) Continued effect of local measures
5.338 The United States submits that supplementing the Large Stores Law are prefectural and local
ordinances and regulations requiring notification and "adjustment" by medium and large-scale retail
stores planning to open or expand a retail outlet. Several local jurisdictions in Japan maintain such
measures. The Large Stores Law expressly recognizes the existence of these local measures, and rather
341According to Japan, contrary to US allegations, the retail space reduction rate has declined. The data used in the
report of the JFTC ad hoc study group cited by the United States are only those relating to "the cases where the deliberation
by the Large Scale Retail Store Council is settled, classified depending on the time of Article 3 Notifications of subject
supermarkets," as expressed in the appendix to this report (5 supermarkets were subject to this study). While such data
are not necessarily inappropriate as a basis for a report prepared by such an ad hoc study group for a governmental official,
they are definitely inappropriate to be used as materials for adjudicatory factfinding proceedings. This is also the case with
respect to the MCA Report.
342Japan does not concede that the average reduction rate indicates the degree of restrictions. According to Japan, the
cases cited by the United States are exceptional.
343Data determined by MITI, Distribution Industry Division, Industrial Policy Bureau, based on Article 3 notifications.

than prohibiting them, merely requires that they "respect the intent" of the Large Stores Law.344 In
the view of the US, these local measures provide another avenue for government authorities to impose
adjustments on large stores, and for local retailers to informally extract concessions from large stores.
5.339 According to the United States, the JFTC Council found that, as of March 1995, a number
of local government bodies were still imposingtheir own written guidelines on store openings, so-called
"augmenting" or "supplementary" regulations, which are beyond the scope and requirements of the
Large Stores Law, in that they apply to stores with a floor space of less than 500 square meters.345
It concluded that:
"[T]hese excessive regulations and non-transparent administrative guidance on the part
of local government bodies and public entities make those planning to open stores
continue to bear unreasonable burdens in the form of demands requiring very intricate
store opening plans to be submitted and other similar demands".346
5.340 The JFTC Council report also found that some local governments have so-called "augmenting"
regulations, which are in addition to the requirements of the Large Store Law. The Council cited as
examples the imposition of obligations to engage in consultations with local government bodies and
to "explain to local governments a specific program for co-existence and co-prosperity with local
retailers".347 The 1995 Survey by the Management and Coordination Agency made similar findings.348
5.341 Local regulations have, as the JFTC Council concluded, "resulted in a lengthening of the store
opening adjustment time and a loss of transparency in the adjustment process, resulting in some cases
in significant handicaps to the opening of new large scale retail stores".349 The "adjustments" taking
place under these local measures add to the burdens on large stores. The measures also create another
opportunity for local retailers to impose requirements on large stores in order for the large stores to
clear the regulatory process without objection.
5.342 Japan rebuts that based upon its authority under Article 15-5 of the Large Stores Law, in fact,
MITI has undertaken significant efforts in recent years to ensure that additional local regulations are
not excessive or inconsistent with the Large Stores Law. Japan notes that the Constitution and national
law contemplate that local governments will enact regulations, but does not permit local governments
to enact regulations beyond the provisions of national law. In 1989, a MITI survey revealed over 400
additional local regulations that were deemed excessive.350 MITI ordered corrective action, and by 1993
all of the offending local measures had been brought conformity with the national law. In 1992, the
Large Stores Law itself was amended to state explicitly that additional local regulations must "respect
the spirit and intentions" of the Law.351 Japan also argues that the surveys cited by the US are not
representative of current conditions.
344Large Stores Law, Article 15-5, US Ex. 74-4.
345Concerning the Reevaluation of Government Regulations in the Distribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p. 23, US Ex. 95-11. Japan disagrees with the US interpretation
of the JFTC ad hoc study group report. See translation issue 12.
346Ibid.
347Ibid.
348MCA Survey, p. 61, US Ex. 95-15. Japan disagrees with the US interpretation of the MCA survey. See translation
issue 12.
349Ibid., p. 17.
350It would be permissible "to supplement incidental procedures which help accomplish the adjustments in a smooth and
appropriate manner". Additional Local Regulations on New Store Openings, etc. by Local Governments, Sankyoku, No.
24, issued by DG, MITI, 29 January 1992 (hereinafter "Additional Local Regulations Circular"), Japan Ex. C-13.
351Large Stores Law, Article 15-5, Japan Ex. C-1.

5.343 Japan further explains that in 1994, MITI created ombudsmans offices in all of its branches
to hear complaints of excessive local regulations and take corrective action.352 Thus, the US
characterization of local regulations is not consistent with current reality.353 In any event, the record
numbers of new notifications and large store openings confirm that neither the national law nor local
measures are restricting the growth of large stores.
5.344 The United States provides examples of recent cases in which local measures were applied
to scale back the size and operations of retail stores.354
(c) Informal procedures under the Large Stores Law
5.345 The United States contends that the formal process established by the Large Stores Law and
related administrative measures and local measures are only the tip of the iceberg. Many larger stores
feel compelled to negotiate informal adjustments with local small and medium retailers to ensure that
the local retailers do not oppose their store in the formal review process. This informal adjustment
process in turn promotes the negotiation and signing of agreements between competitors that restrict
the business activities and price competitiveness of large stores. Although these anticompetitive
agreements are technically "private" agreements, the mechanisms of the Large Stores Law and local
measures all but assure the need for large retailers to enter into them, at least in those regions where
the formal review process is particularly strict.
5.346 The United States submits that the Large Stores Law presents three opportunities for local
retailers to impose informal and formal "adjustments" on plans for new or expanded large stores.
The first is the "prior-explanation"355 adjustment process that may precede the builder's Article 3
Notification of its intent to build a new or expanded large store. The second is a "local explanation"
process that occurs after a builder or retailer submits an Article 3 Notification, but before it submits
an Article 5 Notification. The third is the Large Store Council review process that occurs after a retailer
submits an Article 5 Notification of its intent to open a new or expanded store.
(i) "Prior explanations"
5.347 The United States submits that although MITI revoked in 1992 its administrative guidance
requiring the builder of a new store to consult with, and obtain the consent of local retailers before
submitting an Article 3 Notification initiating formal procedures under the Large Stores Law, a 1995
survey by the Management and Coordination Agency (MCA), found that MITI regional offices and
some prefectural governments still guide and advise large scale retailers to provide national, prefectural
and local governments and the Chamber of Commerce with explanations of their store opening plans
before submitting an Article 3 Notification.356 Retailers responding to the MCA survey indicated that
they do provide such explanations, and that sometimes they are forced to enter into agreements with
local retailers in this process in order to ensure that their formal notification proceeds smoothly.357
352Establishment of Ombudsman on Additional Local Regulations Etc. on New Store Openings by Local Governments,
Sankyoku No. 92, issued by DG, MITI, 9 April 1994, Japan Ex. C-14.
353According to Japan, the examples cited by the United States are not inconsistent with the national law on their face.
Further, Japan claims to have appropriately dealt with local regulations on medium stores mentioned in the MCA Report
after reviewing the text of the regulations in light of the Additional Local Regulations Circular, Japan Ex. C-13.
354Arrangement Letter and Agreements between a New Retail Store and the Local Shopping Center Association, 1996,
US Ex. 93.
355JFTC Report, pp. 15-16. MCA Survey, pp. 24-25, US Ex. 95-15.
356MCA Survey, p. 31; Directive No. 93, 1 April 1994, US Ex. 94-7.
357Ibid. See also, Concerning the Reevaluation of Government Regulations in the Distribution Sector, Government Regulation
and Competition Policy Research Council, JFTC, June 1995, pp. 15-18.

5.348 Japan responds that citations relating to past MITI actions that allegedly fostered negotiations
between large store planners and local retailers are irrelevant, since all of these measures were abolished
in 1992.358 There is no longer any "prior adjustment" or "prior explanation," and there is no longer
any Commerce Adjustment Board. Since 1992, MITI has been making continuing efforts to correct
the practice of requiring "prior explanation." The instances of "prior explanation" described in the
MCA report are rare cases, and MITI has already instructed the relevant MITI branches and prefectural
governments to stop giving advice calling for "prior explanation." Should any advice be given, MITI
will take appropriate measures as soon as possible.
(ii) "Local explanations"
5.349 The next opportunity for retailers to impose informal adjustment, according to the United States,
comes after the formal Article 3 notification. A MITI Directive specifically directs MITI regional
offices and prefectural governments to request retailers to provide local parties with an explanation
of their plans within four months after submitting the Article 3 Notification.359 According to the 1995
MCA survey, the governmental entities generally designate the localities and associations to whom
such explanations are to be given.360 The MCA Survey revealed that between 1992-1994, the average
number of organizations designated to receive explanations ranged from four to 13, with a high of
180 organizations.361 MCA also surveyed the costs of such explanations, and found that large retailers
spend several hundred thousand yen to provide the explanations, and in some cases the costs exceeded
3,000,000 yen.362
5.350 For the United States, MITI has given further legitimacy to the local explanation process by
providing in a Directive that the local explanations "serve as a resource for the deliberations of the
Large Store Council".363 Since MITI must take into account the Council's recommendations on
"adjustments", the local retailers at the Article 3 "local explanation" stage have a direct means to
influence MITI's decision on whether toimpose "adjustments" onthe large retailer after the later Article
5 Notification. Thus, local explanations give local retailers leverage to extract concessions from the
large store outside the formal process, and provide an incentive to the large retailer to placate local
retailers to ensure that it is able to proceed with its plans, even if it is in a reduced form.
5.351 Japan submits that all that is required is that the large store planner make a "public briefing"364
after the Article 3 notification (new store construction) but before the Article 5 notification (new store
opening). The "public briefing (after Article 3 notifications) is necessary in order to clarify the content
of the store opening plan to small and medium-sized retailers and consumers around the site for the
store, thereby facilitating the deliberations by the Large Scale Retail Store Council" by helping local
interested parties understand the plan and comment on it.365 The relevant MITI circular expressly
indicates that the purpose of the public briefing is "not to seek consent, etc., from them".366 Japan
358Instructing Parties FilingNotifications of NewType-I Large ScaleRetailStores, etc. toHold Public Briefing, Sankyoku,
Nos. 25 and 26, issued by DG, MITI, 29 January 1992 (hereinafter, collectively, "1992 Public Briefing Circulars"), Japan
Ex. C-17.
359Directive No. 93, 1 April 1994, US Ex. 94-7.
360MCA Survey, p. 31, US Ex. 95-15.
361Ibid., p. 35.
362Ibid., p. 41.
363Section 1, Directive No. 93, 1 April 1994, US Ex. 94-7.
364In US submissions, the "public briefing" is referred to as a "local explanation". See translation issue 14.
365Instructing Parties Filing Notifications of New Type-I Large Scale Retail Stores etc. toHold Public Briefing (hereinafter
"1994 Public Briefing Circulars"), Sankyoku, Nos. 93 and 94, issued by DG, MITI 1 April 1994, Section 1, Japan Ex. C-18.
366Ibid.

also notes that the United States exaggerates the amount of money that large stores must spend during
the public briefing process.367
(iii) Large Store Council Review
5.352 The United States further argues that the third opportunity for local retailers to impose
adjustments occurs during the Large Store Council review. The MCA survey found that in the
overwhelming majority of cases the authorities designate the local chambers of commerce and business
associations as the main or only parties to provide views to the Large Store Council. The survey found
that in 99.2 percent of the cases, the recommendations of the Large Store Council were based directly
on the views of local chambers of commerce or business associations in the locality where the store
was to be opened.368
5.353 The United States cites the June, 1995 report to the JFTC from its Government Regulation
and Competition Policy Research Council, quoting that the Large Store Council's consideration of
a large store notification "can easily reflect the views of local retailers".369 According to this JFTC
Council, "existing local retailers remain influential members of these organizations" and even "consumer
and academic representatives [on the Councils] have close ties to local retailers".370 The report concluded
that in order to prevent recommendations by Large Store Councils of substantial adjustments, large
scale retailers enter into negotiations with local retailers.371 The report also found that in some cases,
MITI itself forced large retailers to negotiate with local retailers in connection with an Article 3
Notification and local explanation process:
"Prior to Article 3 Notification, it appears that in quite a number of cases, those
planning to open a store are providing not merely explanations of outline of plans but
what amounts effectively to "adjustment".
[S]ome large supermarkets have pointed out that: 1) they have been required to deliver
a very large number of explanations (to as many as 45 organizations in one case); 2)
they have been forced to alter the method of delivery of the explanation for each
recipient organization; 3) some local offices of MITI have orally demanded they lay
ground work following local rules or customs; and 4) they have been forced into what
amounts to an adjustment process due to demands from existing local retailers to make
out an agreement, etc. Thus, it appears that those planning to open a store continue
to be saddled with unpredictable and excessive burdens".372
5.354 Japan submits that ultimately, only objective criteria are used to determine the need for an
adjustment under the Large Stores Law; the law does not necessitate any sort of negotiation between
the store planner and the local retailers.373 The procedures require consideration of all opinions, thereby
ensuring a fair and impartial process.
367Even using the largest reported expenditure of ¥3,400,000 as a base, this amount constitutes less than 0.5 percent of
a single year's turnover for a large store over 20,000 square meters This expense represents only a tiny fraction of a large
store's initial start-up costs. data taken from Census of Commerce: Statistics on Large Scale Retail Stores (Retailers), August
1996, pp. 10-11, Japan Ex. C-8.
368MCA Survey, p. 50, US Ex. 95-15.
369Concerning the Reevaluation of Government Regulations in the Distribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p. 17, US Ex. 95-11.
370Ibid. According to Japan, the United States misleadingly suggests that in the JFTC ad hoc study group report "these
organizations" refer to the "Large Scale Retail Store Council". However, in Japan's view, the text of the report clearly
shows that "these organizations" refer to the "Chamber of Commerce and Industry". See translation issue 15.
371Ibid., pp. 20-21.
372Ibid., p. 16 (emphasis added by the United States).
373See Deliberation Procedures, Sections II and III, Japan Ex. C-4.

5.355 Japan further explains that the Large Scale Retail Store Council is organized so as to ensure
the fairness of the process. Members of the Council are selected and appointed by the MITI Minister
from among neutral members of learning and experience. No retailer is included as a member. The
US claim that the Large Stores Law process is controlled by small and medium-sized retailers has no
support in the membership of the Large Stores Law. The Large Stores Law thus does not provide
opportunities for local retailers to "extract concessions" at each stage of the process; the Council applies
objective standards to reach a neutral and unbiased decision.
5.356 The United States further submits that informal adjustments have also led to the extraction
of "cooperation money" from large scale retailers. The JFTC Council found cases in which operators
of new stores were forced to pay cooperation money to local retailers, which was "labelled a 'membership
fee' or 'modernization fund contribution'".374 The MCA Survey made similar findings regarding the
payment by large retailers of "cooperation money" or membership fees in the local shopping district
business associations.375 These findings illustrate the power that local retailers wield in the process
of large retailers' attempts to establish competing large stores. In the view of the US, the Large Stores
Law process virtually guarantees that local retailers will force large retailers to make downward
adjustments in their business plans.
5.357 Japan contests that the law contains no requirement forcing store openers to negotiate with
local retailers, enabling the latter to extract onerous concessions from a new large store as the price
to be paid for being allowed to open. To the extent there are any local regulations which result in the
imposition of such a requirement in contravention of the stated policy of the Government of Japan,
appropriate corrective actions have been and will continue to be taken.376
7. IMPACT OF FLOOR SPACE ADJUSTMENTS AND RESTRICTIONS ON OPERATION
ON THE GROWTH OF LARGE STORES
5.358 The United States claims that the adjustments in opening date, floor space, days closed and
hours of operation have the effect of restricting the growth of large stores in Japan.
5.359 Opening Date - The United States argues that while a retailer is waiting to earn a return on
its investment during the review and adjustment process, it may have interest payments or other costs
associated with the capital tied up in that investment. Costs without returns mean losses, and losses
delay expansion plans, and investment cannot be used for another project. Causing delay in the opening
of a store translates into suppressing the growth and expansion of large stores.
5.360 Official MCA data also show that the delays from the review and adjustment process are
significant. The average length of time from the Article 5 Notification (store opening advance
notification) to the completion of the Large Store Council review in recent years consistently has averaged
from seven to eight months.377
5.361 Japan notes, however, that only 2.8 percent of the notifications receive any adjustment at all
with respect to their opening dates. Also, Japan points out that the average length of time of the
procedure is now only six months.
5.362 Floor Space - According to the United States, the profitability of a retail store is directly related
to the amount of floor space required to operate efficiently. The Large Stores Law has a chilling effect
374Ibid.
375MCA Survey, p. 42, US Ex. 95-15.
376Japan further notes that the Government of Japan neither requires nor recommends that such payments be made. Whether
or not private businesses voluntarily choose to make such contributions is outside the government's responsibility.
377MCA Survey, Table 6.

on the opening of large stores because retailers have no assurances that the size of the store they will
be allowedto open will coincide with the size of the store required bytheir business plan to be profitable.
5.363 On the basis of a major retailer's sales estimates, the United States calculates that a 20 percent
floor space reduction to 12,000 square meters effectively decreases revenue by about 500 million yen
per year. A 30 percent reduction reduces annual revenue by about 1 billion yen, and a 50 percent
floor space reduction translates into a 2.5 to 3 billion yen loss in revenue per year.378 According to
the US, floor space reductions of this magnitude render any original business plan useless.
5.364 In the view of Japan, however, in the first place, these estimates are useless since they do
not take into account cost reductions that would ensue from reduced retail space. In any event, the
fact that 96 percent of all notifications result in store openings demonstrates that neither retail space
adjustments, nor adjustments of other parameters, nor alleged procedural burdens are having any kind
of disruptive impact.
5.365 Store Hours and Days Closed - The United States submits that the JFTC's June 1995 report
found that limiting hours and days of operation also hurts the competitiveness of large stores:
"The restrictions on store closing time, number of days closed and other matters of
store operation under the current Large Stores Law do more than just interfere with
the free development of business on the part of business operators. For example,
extending store hours can help bring in new customer groups and thereby encourage
store operators to rethink their sales methods and otherwise use their creativity. Thus,
extended store hours represent an important competitive tool with great possibilities.
However, restricting these activities not only limit fair and free competition among
business operators, but is also likely to limit consumers' freedom of choice as a
result".379
5.366 Japan points out that for closing time, the adjustment only becomes an issue if the store wishes
to be open past 8:00 p.m. Otherwise, there is not even an obligation to notify the authorities. Only
24 percent of the notifications receive any adjustment at all. Also, for store holidays, the adjustment
only becomes an issue if the store wishes to close fewer than 24 days per year, or basically twice a
month. Otherwise, there is not even an obligation to notify the authorities. Only 27 percent of the
notifications receive any adjustment at all.
5.367 In the view of the United States, perhaps the best indication of the continuing effectiveness
of the restrictions on large stores is the fact that the presence of large stores in the Japanese market
has not increased despite the recent changes in the laws and measures. From 1982 to 1994 (the most
recent year for which figures are available), the share of retail sales in Japan by large stores remained
essentially constant and the share of total retail establishments that were large stores also remained
essentially constant:
378Estimates by staff of Retailer X. Frederick Nagai Affidavit of 14 February 1997, p. 3, US Ex. 97-8.
379Concerning the Reevaluation of Government Regulations in the Distribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p. 22, US Ex. 95-11.

Percent of Retail
Percent of Retail Establishments in
Sales in Japan by Japan That Are
Year Large Stores380 Large Stores381
1982 20.8 0.6
1985 21.4 0.6
1988 22.0 0.7
1991 21.7 0.8
1994 22.2 0.9
For the United States, this consistent suppression of the growth of large stores limits opportunities
for imports to by-pass Japan's manufacturer-controlled, vertically integrated distribution system and
to reach Japanese consumers through more direct channels.
5.368 For Japan, however, the facts are contrary to the US allegation that the adjustments and
procedural burdens of the law have a restrictive chilling effect on the growth of large stores. As noted
above, new large store notifications have surged from around 500 per year in the 1980s to over 2,000
per year currently. This surge results from a variety of factors, including increased consumer demand
for various types of large stores and the increased mobility of Japanese consumers. During the 1980s,
new notifications under the law averaged around 500 per year. When deregulatory initiatives took
effect, new notifications surged to record levels:382
Number of New Notifications
for Large Stores
Year New Notifications
FY 1992 1,692
FY 1993 1,406
FY 1994 1,927
FY 1995 2,206
The dramatic growth in notifications has been matched by growth in actual store openings. Over the
same four fiscal years, 96 percent of all notifications resulted in actual store openings.383
380MITI, Shogyo Tokeihyo Dai Kibo Kouri Tenpo Tokeihen 1982, p. 342; Ibid., 1985, p. 114; Ibid., 1988, p. 114; Ibid.,
1991, p. 116; Ibid., 1994, p. 114 (number of large-scale stores), US Ex. 82-1. MITI, Census of Commerce 1994, Vol. I,
p. 19 (total retail stores). Large Stores include Class I and Class II stores.
381Ibid.
382Figures compiled on a notification basis by MITI, Distribution Industry Division, Industrial Policy Bureau, including
the four most recently completed fiscal years.
383Ibid. In a few cases, retailers decided for their own business reasons not to go forward with their plans. It is unrealistic
to expect 100 percent follow-through on plans.

5.369 In parallel to the increase in the number of new notifications, the sales share of large stores
in all sales by all retailers have been increasing steadily:384
Share of the Total Retail Sales385
Year Sales Share of Large Stores
1982 27.1 %
1985 27.9 %
1988 28.6 %
1991 28.2 %
1994 29.3 %
5.370 Japan further stresses that 96 percent of all notifications in recent years have resulted in actual
store openings. These figures belie the US claim of a chilling effect. As currently administered, the
Large Stores Law does not act to restrict the growth of large stores in Japan. For Japan, it is hard
to find in any of the data discussed above support for the US view of the Large Stores Law as a
restrictive regulatory structure that prevents or chills new store openings.
384Japan notes thatindeed, the United States itself cites data which showthat from 1982to 1994, large storesas a percentage
of total retail establishments climbed from 0.6 percent to 0.9 percent - an increase of 50 percent.
385Census of Commerce: Statistics on Large Scale Retail Stores (Retailers), 1984, pp. 342-343; 1987, pp. 114-115; 1990,
pp. 114-115; 1993, pp. 116-117; 1996, pp. 114-115, Japan Ex. C-8. Japan notes that these figures differ from those cited
by the United States. The US figures are based upon the sales by those large retailers operating a store with retail space
in excess of 500 square meters in large scale retail stores, while Japan's figures are based upon the sales by all retailers,
that are operating in large scale retail stores. Japan claims that their figures rather than the US figures provide a fair basis
for the evaluation of the effect of the Large Stores Law, because the law regulates all retailers in large retail stores. The
trend has been positive; however, in principle Japan does not agree that the large scale store share of the total retail market
is an appropriate measure of the nature of the law.

C. PROMOTION "COUNTERMEASURES"
1. INTRODUCTION
5.371 The United States submits that Japan has reinforced its "liberalization countermeasures" directed
against wholesalers and retail stores by limiting how photographic materials producers can promote
their products. In doing so, the Japanese Government has, in the view of the United States, curtailed
two of the most important remaining means by which imported film and paper may gain a foothold
or expand their position in the domestic market: economic inducements to customers and aggressive
advertising.
5.372 According to the United States, Japan has implemented its "promotion countermeasures" through
application of the following laws: (1) restrictions on the use of economic inducements and statements
in advertising under Articles 2 to 4 of the "Act Against Unjustifiable Premiums and Misleading
Representations" ("Premiums Law")386; (2) an unduly restrictive enforcement regime under Articles
6, 9 and 10 of the Premiums Law; and (3) restrictionsonthe use of economic inducements and statements
in advertising under regulations promulgated pursuant to Articles 2(9) and 19 of the "Act Concerning
Prohibition of Private Monopoly and Maintenance of Fair Trade" ("Antimonopoly Law").387
Enforcement of these measures primarily is the responsibility of the Japan Fair Trade Commission
("JFTC"), which has issued numerous "designations" and "notifications" specifying the activities that
fall within the scope of the laws. The United States further argues that Japan has bolstered enforcement
efforts by empowering the prefectural governments to issue cease and desist orders under the Premiums
Law and by deputizingmembers of the domestic industry,inthe guiseof "fair trade councils",to enforce
the Premiums Law through the use of "fair competition codes".
5.373 The UnitedStates arguesthatJapan's"promotioncountermeasures" have disadvantagedforeign
film and paper manufacturers by constraining their ability to increase sales through the use of certain
discounts, gifts, coupons and other inducements, or to rely upon innovative advertising campaigns,
particularly where price or price comparisons are discussed. In the US view, Japan imposed these
"countermeasures" for the purpose of dampening import competition and, to ensure their success, enlisted
the aid of the domestic photographic materials industry in enforcing the regime. Though many of the
measures are facially neutral, others are, according to the United States, blatantly protectionist in
discriminating against imports. Regardless of form, each has served to maintain the dominant position
of Japanese film and paper manufacturers by shielding them from significant forms of promotion
competition.
5.374 For Japan, the major part of the US submission rests on a conspiracy hypothesis which should
be treated with caution. Although the United States claims that the JFTC has taken part, consistently
and surreptitiously over the past 35 years, in a concerted action which is a diametrical opposite of the
espoused policy, according to Japan, the truth is that the JFTC has long been an active advocate of
a more open Japanese economy. Japan argues that the concept of "promotional countermeasures" as
used by the United States is fictional. It has no place in the Japanese regulatory language, nor has
the Japanese Government ever taken such measures. According to Japan, the United States has admitted
that there is no original Japanese phrase or word corresponding to "promotion countermeasures".388
5.375 In Japan's view, the US argument emphasizes what an American business was not able to do
in selling film in Japan. Japan notes that there are a wide range of lawful promotional initiatives and
that the JFTC regulates nothing other than distortive practices, namely, (i) excessive premiums and
(ii) misleading representations. The Premiums Law does not restrict in any way low price sales.
386Law No. 134 of 15 May 1962, Kanpo, 15 May 1962, amended by Law No. 44 of 30 May 1972, US Ex. 72-1.
387Law No. 54 of 1947, US Ex. 47-1.
388See translation issue 1.

Advertising is entirely lawful unless it is misleading to consumers. Japan concludes, therefore, that
American businesses have been able to compete freely, subject to no restriction whatsoever under the
Premiums Law, in pricing and quality, the two most important aspects of market competition.
5.376 Japan further submits that the United States does not show how much discriminatory impact
the "promotional countermeasures," if they ever existed, would have on trade in photographic film
and paper. Evenif the Premiums Law should have some negative impact onmarket entry, Japan submits
that it could not have been a substantial impediment for established foreign companies such as Kodak
which had been active in the Japanese market for a long time with a recognized brand name. Japan
also argues that no applicable "fair competition code" or "fair trade council" exists in photographic
film and paper. Moreover, in Japan's view, self-regulation similar to a "fair competition code" or
a "fair trade council" is not unique to Japan, but exists in many parts of the world as a tool to effectively
implement regulations of excessive premiums and misleading representations.
2. THE LAWS UNDERLYING THE PROMOTION "COUNTERMEASURES"
5.377 The United States claims that Japan's "promotion countermeasures" arise from articles of the
Premiums Law and certain designations under the Antimonopoly Law. At first glance, these measures
may appear to be standard trade regulation rules, but, in the US view, some of their provisions have
been interpreted and applied by Japan in an overly broad manner so as to impede import sales.
(a) The Antimonopoly Law
5.378 For the United States, the Japanese Antimonopoly Law, as originally enacted on 14 April 1947,
was a comprehensive antitrust statute. It targeted four general economic evils for elimination: private
monopolization, unreasonable restraints of trade, unfair methods of competition and excessive
concentrations of power. The Antimonopoly Law was promulgated during the allied occupation of
Japan following World War II and was designed to reduce the influence of powerful cartels in Japan.
The Antimonopoly Law also established the JFTC, which was created to enforce the law.
5.379 For Japan, the Antimonopoly Law is a competition law with the purpose of promoting fair
and free competition. Similar to competition laws of various countries, its goal is fully consistent with
the principle of the WTO in ensuring an open and free trading system. According to Japan, the JFTC
is the sole administrative agency responsible for the enforcement of the Antimonopoly Law. The Law
delegates an independent and exclusive authority to the JFTC, and its interpretation and application
of the Law is not subject to coordination or consultation with other agencies.389
5.380 The United States maintains that, during World War II, trade associations in Japan facilitated
government control over industries, enhanced cartel influence and enforced cartel practices.390
"Essentially, the Japanese Government granted legal authority to these private control associations to
enforce economic cartel decisions, which in turn permitted the government to control economic activity
through these control associations."391 In 1948, the Japanese Diet supplemented the Antimonopoly
Law by enacting the Trade Association Law.392 The Trade Association Law proscribed a wide variety
of anticompetitive trade association activities, including price controls and other restraints of trade,
and enumerated limited permissible activities, such as exchanging public information and product
standardization guidelines.393
389See Article 28 of the Antimonopoly Law.
390Thomas A. Bisson, Zaibatsu Dissolution in Japan, (1954), p. 191, US Ex. 54-1.
391Seita Alex and Tamura Jiro, The Historical Background of Japan's Antimonopoly Law, 115 University of Illinois Law
Review, (1994), pp. 63-64, US Ex. 94-2.
392Iyori Hiroshi and Uesugi Akinori, The Antimonopoly Laws of Japan, (1983), p. 13, US Ex. 83-1.
393Ibid.

5.381 According to the United States, after the end of the allied occupation, the Japanese Diet in
1953 amended the Antimonopoly Law in several significant aspects. The amendments included new
provisions permitting formation of "rationalization and depression cartels".394 "Under the amendment,
these two types of cartels were given exemption from the application of the Antimonopoly Law when
they were licensed by the JFTC, and enterprises could enter into agreements among themselves for
the purpose of overcoming a depression and also in order to rationalize their business operations".395
The amendments also expanded the authority of the JFTC to restrict certain trade practices it found
to be unfair or excessive when compared to norms in a particular industry.396
5.382 The United States submits that the Antimonopoly Law in its initial form permitted only limited
exemptions.397 However, in 1952,the Dietpassed the firstof many laws that expresslyexempted certain
kinds of cartel behaviour from the Antimonopoly Law: the Stabilization of Specific Small and Medium
Enterprises Temporary Measures Law"398 and the "Export Trading Law".399 The former permitted
smaller businesses to form cartels to restrict output in the face of declining demand, while the latter
allowedfor the creation of exportingcartels.400 The Dietsubsequentlypassed many other Antimonopoly
Law exemption laws.401 "These lawshad provisions allowing the formationof cartels, and furthermore,
allowed the issuance of ministerial orders to non-members of the cartel agreement to make them observe
the restrictions of the cartel agreement ... [T]hese provisions were modelled after prewar cartel-promotion
laws".402 For the United States, the 1953 amendments marked a retreat by the Japanese Government
from opposition to restrictive trade practices and the beginning of overt government/private sector
cooperation in the cartelization of sectors of the Japanese economy, as was the practice during World
War II.403 A byproduct of this development was the erection of barriers defending against foreign
competition. As one of Japan's leading scholars of international trade law has explained, "[W]hen
one considers the gap that exists between domestic and foreign firms with respect to scale of business,
managerial power, financial resources, and other matters, it probably cannot be denied that, by
maintaining fair competition through the Antimonopoly Law, the actual result will include an aspect
of protection for domestic firms from unjust pressure by foreign-capital."404 The sections of the AML
banning "unfair trade practices," as revised in 1953, remain largely the same today.405
5.383 The United States further argues the following in respect of the JFTC's activities in regulating
unfair trade practices. It notes thatArticle 19 of the AntimonopolyLaw provides that"[n]o entrepreneur
shall employ unfair trade practices". Antimonopoly Law Article 2(9) sets forth categories of "unfair
trade practices" and delegates to the JFTC authority to designate impermissible practices under the
law.
394Matsushita Mitsuo, International Trade and Competition Law in Japan, 1993, pp. 79-80, US Ex. 93-1.
395Iyori Hiroshi and Uesugi Akinori, The Antimonopoly Laws of Japan, 1983, p. 16, US Ex. 83-1.
396Ibid., US Ex. 83-1.
397See Antimonopoly Law, Articles 20-24.
398Law No. 294 of 1952. This law was repealed by Law No. 185 of 25 November 1957.
399Law No. 299 of 1952, US Ex. 52-1. This law was renamed Export and Import Trading Law, Law No. 188 of 8 August
1953.
400Iyori Hiroshi and Uesugi Akinori, The Antimonopoly Laws of Japan, 1983, p. 19, US Ex. 83-1.
401Ibid., US Ex. 83-1.
402Iyori Hiroshi and Uesugi Akinori, The Antimonopoly Laws and Policies of Japan, 1994, p. 32, US Ex. 94-1.
403Ibid., pp. 30-34.
404Matsushita Mitsuo, Antimonopoly Law & International Transactions (25 May 1970) p. 83, US Ex. 70-2.
405The 1953 amendments established the basic structure of the current AML and the modern "unfair trade practice" provisions
that underlie Japan’ s promotion countermeasures. The AML was amended in 1977 to provide the JFTC with additional
authority to control monopoly and cartel activity, as well as to impose a reporting system on prices in oligopolistic markets.
However, the 1977 amendments are not pertinent for present purposes. See Mitsuo Matsushita, International Trade and
Competition Law in Japan, (1993), pp. 79, 82-84, US Ex. 70-2.

5.384 The JFTC issued a list of designated "unfair trade practices" shortly after the Antimonopoly
Law was amended in1953.406 The JFTC defined unjust inducements as "[i]nducing orcoercing, directly
or indirectly, customers of a competitor to deal with oneself by offering unjust advantages or by
threatening unjust disadvantages in the light of normal business practices".407
5.385 The United States submits that the JFTC revised its list of "unfair trade practices" in 1982,
modifying the earlier designations and expanding the list from 12 to 16 practices.408 With respect to
unjust inducements, the JFTC prohibited "[i]nducing customers of a competitor to deal with oneself
by offering unjust benefits in light of normal business practices".409 The JFTC also added a new
provisionaddressingrepresentationsrelatedtocommercialtransactions. TheJFTCoutlawed"[u]njustly
inducing customers of a competitor to deal with oneself by causing them to misunderstand that the
substance of a commodity or service supplied by oneself, or terms of the transaction, or other matters
relating to such transaction are much better or much [more] favourable than the actual one or than
those relating to the competitor".410
5.386 In the US view, these designations ostensibly protect consumers and guard against well-capitalized
businesses actingin a predatory fashion(i.e., using theircapital strength to dominate the market through
massive give-away-type promotions). According to the United States, however, Japan has employed
the unjust inducement and misleading representation designations to insulate domestic film and paper
manufacturers from competitive promotional activities by imports.
5.387 In Japan's view, the JFTC has never accorded any foreign entity or product treatment less
favourable than that accorded to a Japanese entity or product. On the contrary, the Commission has
taken a series of measures, such as economic surveys and reports, the formulation of "Distribution
Guidelines," the establishment of a special task force, as well as enforcement actions, in order to
eliminate impediments to the market access of foreign products.
5.388 Japan submits that the film manufacturing industry and its oligopolistic structure has been a
target of the JFTC's attention since the 1960s. To demonstrate this, Japan provided the Panel with
a series of actions taken by the JFTC with respect to the film manufacturing industry. It also argues
that since the introduction in 1977, by an amendment to the Antimonopoly Law, of measures against
monopolistic conditions and parallel price increases411, the JFTC has been monitoring the film
manufacturing industry.
(b) The Premiums Law
5.389 The United States submits thatthe Japanese Dietenacted the Premiums Law on15May 1962.412
In the US view, as they relate to premiums and representations, the Premiums Law and Antimonopoly
Law overlap. The Premiums Law regulates use of premiums and representations in a narrower, more
pointed manner. JFTC designations under the Premiums Law typically set out specific criteria with
respect to premiums or promotional representations as used within selected industries. In contrast,
the JFTC's designations under the Antimonopoly Law serve as catch-alls, applying normal business
practice as a standard governing premiums and representations by members of all industries. The
406JFTC Notification 11 of 1953.
407Ibid., designation 6.
408Notification on Unfair TradePractices, JFTCNotification 15 of 15 June1982, US Ex. 82-6, whichreplaced Notification
11 of 1953.
409JFTC Notification 15, designation 9.
410Ibid., designation 8.
411See Articles 8-4 and 18-2 of the Antimonopoly Law.
412The United States translation of the Premiums Law is contained in US Ex. 62-6. Japan indicates that it disagrees with
a number of points of the US translation. See Japan Ex. D-1. The expert opinions on the translation issues raised by Japan
are contained under item 16 of the Annex on Translation Problems.

redundant nature of the Premiums Law and the premium and representation designations under the
Antimonoploy Law doubly burden imports attempting to market products aggressively.
5.390 For the United States, the Premiums Law supplements the Antimonopoly Law's economic
inducement and representation provisions by authorizing the JFTC to further restrict the use of
purportedly unjust economic benefits and misleading promotional statements. According to the United
States, the Premiums Law, which was revised in 1972, exempts from Antimonopoly Law enforcement
cartel-like practices by members of selected industries who are authorized under the law to establish
codes governing the use of premiums and promotional representations. In doing so, the United States
argues, the Premiums Law and its attendant codes inhibit the use of a variety of pro-competitive
marketing activities.
5.391 In Japan's view, the Premiums Law is a sub-set of competition law which provides for an
expedited enforcement procedure, different from the quasi-judicial process under the Antimonopoly
Law, todeal withexcessive premiums and misleadingrepresentations. UnderArticle 6 of the Premiums
Law the JFTC may issue cease and desist orders to non-compliance without a hearing process. According
toJapan, misrepresentationsorexcessive premiums couldbe consideredas a typeof unfair trade practice
prescribed by the Antimonopoly Law, either as deceptive customer inducement or as customer inducement
byuse of unjustbenefits. However, inJapan'sview, at the theoreticallevel the Premiums Law'sprimary
purpose is not consumer protection per se: the above-mentioned practices have a unique feature of
easily spreading wider as competitors scramble to imitate each other; moreover, competitors tend to
escalate these practices as the process goes on.
5.392 Japan further submits that premiums are often offered for a limited period of time. If
enforcement against them requires a lengthy procedure, the regulation will become ineffective. In
order to prevent impediment to fair competition by these practices and to protect consumer interests,
it was necessary, therefore, to counter these practices through swift enforcement action. In that sense,
Japan argues, the Premiums Law is not redundant. It incorporated the element of consumer protection
in the text of the Law, and introduced a swift enforcement mechanism to restrict excessive premiums
and misleading representations. Moreover, as the Law laysout specific standardsof unlawful premiums
or representations, it enhances foreseeability for the business and serves to prevent actual excessive
activities.
(i) Background and objective
5.393 In the view of the United States, Japan promulgated the Premiums Law, at least in part, to
counteract aggressive competition by imports that was expected to occur with trade liberalization.
According to the United States, the Japanese Government's protectionist intentions pervade the record
of the law's enactment.413
413The United States submitted that when the Premiums Law was first proposed in the Diet, proponents of the bill
acknowledged that the Premiums Law would soften the effects of trade liberalization:
Mr. Tanaka (Takeo): "The second point relates to the liberalization which is now underway ... With respect to liberalization
countermeasures, we are of the view that the issue of excessive advertisement, etc. should be considered as well. That is
because Japanese [companies] will not be able to successfully compete if large foreign companies, etc., came in and conducted
various excessive premium campaigns. Accordingly, this [bill] is related to liberalization countermeasures."
Minister Fujiyama: "The enactment of this law is appropriate for purposes of consumer policy ... In addition, as a result
of liberalization, it could possibly happen that foreign trading companies etc. may come into Japan and enjoy advantageous
positions through excessive advertisement or by inviting buyers to foreign countries."
(Diet Record of the 40th Session of the Lower House Committee on Commerce and Industry, No. 31, 18 April 1962, US
Ex. 62-4).
The United States also submitted that the Director General of the Prime Minister's Office testified before the Diet Committee
on Commerce, stating that restrictions on premiums were needed because "[i]t appears foreign companies will threaten domestic
companies by these methods" (Diet Record of the 40th Session of the Upper House Committee on Commerce and Industry,
No. 21, 13 April 1962, US Ex. 62-2).

5.394 Japan submitsthat,as theJapanese economy enteredthe phaseof mass production/consumption
in the 1950s, premiums sales, including promotional lotteries, became increasingly popular. Prize
money and merchandises grew very expensive. According to Japan, the society grew concerned about
these promotional prizes which encourage speculative behaviour and could impede consumers' rational
selection of goods.
5.395 According to Japan, additional impetus for the legislation came in 1960 when it was uncovered
that canned horse meat had been marketed as canned "beef," which was very expensive then. A survey
found that only two of the 20-plus canned food manufacturers used 100 percent beef. Concerned about
the lack of adequate means to control misrepresentation, the public called for introduction of effective
control of misleading representations. The JFTC initially tried to restrain the deceptive expressions
as an "unfair trade practice" under the Antimonopoly Law, and issued a notification on the "Specific
Unfair Trade Practice in the Canned Meat Industry" in February 1961, which banned the "use of
expressions or advertisement misleading to customers." In a December 1960 hearing, voices from
consumer representatives and scholars called for expansion of the regulation to all misleading
representations in general and for introduction of a new legislation to deal with the matter.414
5.396 Japan submits that the objective of the Premiums Law is found in Article 1:
"This law, in order to prevent inducement of customers by means of unjustifiable
premiums or misleading representations ..., aims to secure fair competition, and thereby
to protect the interest of consumers in general".
Japan argues that, as the panel on Japan - Taxes on Alcoholic Beverages found415, interpretation of
domestic law should be based primarily on the text of the statute, rather than in legislative history.
For Japan, reference to this twin objective of fair competition and consumer protection is recorded
in various parts of the Diet minutes as well.416 Japan argues that the statements cited by the United
States are selective and miss the overall context.
5.397 Japan further argues that, as the United States admitted, the express text of the Premiums Law
makes no distinction between imported or domestic products. It does not contain a mechanism which
discriminates, inherently, imported products against domestic products. The Law's impact on the market
access will be felt equally by domestic and foreign products. In this sense, the Law is trade-neutral.
5.398 The United States submits that Japan erred in arguing that its promotion restrictions serve
to protect only consumers. Japan's restrictions not only were intended to protect consumers, but they
also were designed to protect domestic production. This purpose is evident in a variety of measures,
most notably Japan's 30-year restriction on the use of premiums between businesses - a measure which
clearly had less to do with consumer protection than dampening competition from foreign competitors.
The United States argues that despite Japan's protest that the JFTC is not a "collaborator" in efforts
414Opinions submitted to the JFTC at the public hearing concerning Designation of the Specific Unfair Trade Practices
in the Canned Meat Industry, Kosei Torihiki, February 1961, Japan Ex. D-24.
415Panel Report, adopted on 1 November 1996, WT/DS8, 10 and 11/R, para. 87.
416Japan cited the following examples:
- reaffirming the objective of the Premiums Law, the Commerce and Industry Committee of the House of Representatives
passed a resolution which emphasizes that "the Law has an important function as part of the overall promotion of consumer
policy" when it passed the bill on April 19, 1962.
- Kodaira Hisao, then Cabinet Minister for General Affairs, introduced the bill to the Diet, stating that "...[i]nducement
of customers through excessive premiums or misleading representations, not by value of the merchandise or service, impairs
general consumers' proper selection of the goods and services, and undermines fair competitive conditions... [A]ccordingly,
the bill is hereby submitted in order to ensure fair competition and to protect general consumers' interests by providing for
a swift and appropriate means to effectively control excessive premium sales and misleading representations, as a special
rule to the Antimonopoly Law".

to counteract the effects of trade liberalization, Japan has failed to explain the JFTC's expressions of
protectionist intent by officials of the JFTC and other agencies of the Japanese Government.
5.399 Japan argues that in pursuing the goal of promoting fair and free competition in the Japanese
market, the JFTC has never accorded any foreign entity or product treatment less favourable than that
accorded to a Japanese entity or product. Japan submits that the JFTC has allowed prize offers linked
to sales -- a practice which is prohibited in the United States and other countries -- to the extent
compatible with the goal of fair competition. Foreign business in Japan has been able to promote their
sales through this type of prize. Had the objective of the JFTC’ s premiums regulations been to restrict
foreign manufacturers’ promotional activities these practices would have been made unlawful as well.
Indeed, Kodak has been actively taking advantage of this policy and offered a series of promotional
prizes. More fundamentally, the ultimate litmus test of intent should be whether or not there is
recognizable "intent" or "objective" built in the structure of the system in dispute, rather than individual
statements. The fundamentally origin-neutral regulation of the Premiums Law contains no such built-in
mechanism based on an "intent" or "objective" of discrimination.
(ii) Substantive provisions
5.400 The United States submits that Article 2 of the Premiums Law defines the term "representations"
to mean "advertisements or any other representations which a business makes or uses as means of
inducement of customers, with respect to the substance of the commodity or service which he supplies
or the terms of the sale or any other matter concerning the transaction, and which are designated by
the Fair Trade Commission as such". Article 4 proscribes the use of "any representation by which
the quality, standard or any other matter relating to the substance of a commodity or service shall lead
the general consumer to believe that it is much better than the actual one or than that of other businesses
who are in competitive relationship with the business concerned, and thereby which is found likely
to induce customers unjustly and to impede fair competition". In addition, Article 4 empowers the
JFTC to designate as unlawful "any representation by which any matter relating to transactions as to
a commodity or service is likely to be misunderstood by consumers in general".
5.401 For the United States, the definition of a premium is unclear. The JFTC has issued many
notifications limiting the value of economic benefits that may be offered and indicating the industries
or businesses affected, but these notifications do not specify the nature of the economic inducements
subject to the law. The JFTC has explained that "[p]remiums which are the object of notifications
refer to products, cash, marketable securities, entertainment, or other economic benefits which are
given in connection with a transaction involving commodity or service".417 At the same time, the JFTC
has indicated that it distinguishes between premiums and price discounts or rebates on a case-by-case
basis, examining the facts "in light of normal business practices, taking into account details of the
transaction, details of the economic benefit, the method and the conditions of offer, and the customs
of that particular industry".418 Nonetheless, the United States argues, the JFTC acknowledges that some
forms of discounts or rebates may be premiums.419 In the US view, given this ambiguity and the fact
that the bulk of the JFTC's enforcement actions are informal and unrecorded, businesses often have
difficulty knowing whether the inducements they offer fall within the scope of any prohibition.
5.402 Japan argues that the US characterization of the Premiums Law is fundamentally inaccurate.
The Premiums Law restricts only excessive premiums and misleading representations, and does not
control the major part of the promotional activities, including competition by premiums, advertising
and low prices.
417FTC/Japan Views: Information and Opinion from the Japan Fair Trade Commission, No. 2, April 1988, p. 15, US
Ex. 88-3.
418Ibid., p. 16.
419Ibid.

5.403 Japan also submits that the US claim that the distinction between premiums and rebates or
discounts is "ambiguous" is unfounded. For Japan, the Premiums Law, the JFTC Notifications and
the Standards of Application clearly define what constitute premiums. First, Article 2 of the Premiums
Law defines premiums as follows:
"Premiums' as used in this Law shall mean any article, money and other kinds of
economic benefits which are given, as means of inducement of customers ..., and which
are designated by the JFTC".
Second, the "Designation of Premiums and Representations"420 further clarifies the boundary by
establishing that "goods, money or other economic benefits offered in connection with trade do not
fall under premiums if they are considered as discounts, post-sales services or others in light of normal
commercial practices". Finally, the Designation Notification is further clarified by the JFTC's
"Guidelines for the Implementation of the Notification concerning Designation of Premiums, Etc.".421
5.404 For Japan, the Premiums Law does not, contrary to the US allegation, prohibit all kinds of
premiums. Criteria of the restriction are contained in Article 3 of the Premiums Law which provides:
"The JFTC may, when it finds that it is necessary to prevent unfair inducement of
customers, limit either the maximum value of a premium or the aggregate amount of
premiums, the kind of premiums or methods of offering of premium or any other
matter relating there to, or may prohibit the offering of a premium".
Japan notes that the word "premiums" in the Law signifies both (a) gifts, namely goods offered free
of charge ("premiums" in a narrow sense) and (b) prizes, namely cash, goods or trip offered through
lotteries or prize competition.
5.405 Japan further submits that similar restrictions of excessive premiums can be found in other
countries. According to Japan, some European countries place even more stringent regulations on
these practices. For example, the JFTC has allowed prize offers linked to sales - a practice which
is prohibited in the United States and other countries - to the extent compatible with the goal of fair
competition. Japan argues that Kodak has been actively taking advantage of this policy and offered
a series of promotional prizes.
5.406 Japan argues that the restriction on misleading representations under the Premiums Law applies
only to false or unsubstantiated advertisement which would mislead consumers, and would thereby
impair fair competition. Article 4 of the Premiums Law defines what specifically constitute misleading
representations of the quality of a product, of the price or of other elements. According to Japan,
the Premiums Law does not restrict advertisement or representations as long as they are based on facts.
Japan argued that the United States failed to give any specific type of advertising representation that
Kodak wanted to do but was banned because of the Premiums Law. In Japan's view, restriction of
deceptive or misleading representations can be found all over the world. Moreover, according to Japan,
the Premiums Law does not restrict low price offers. On the contrary, the Law serves to promote
low price offers and other price/quality competition by placing a restriction on excessive premiums.
5.407 For the United States, Japan's argument that its promotion restrictions are essentially insignificant
-- because of the availability of other ways of competing -- rests on flawed assumptions. In the US
view, Japan's argument that foreign producers are free to rely upon discount pricing to compete is
simply untrue. Designation 6 under JFTC Notification 15 of 1982 prohibits "unjust low price sales",
including"unjustlysupplying a commodity or service at a low price, therebytending tocause difficulties
420JFTC Notification No. 3 of 1962 enacted pursuant to Article 2 of the Premiums Law, Japan Ex. D-28.
421JFTC/Secretary General Circular No. 7 of 1977, Japan Ex. D-29.

to the business activities of other entrepreneurs". Indeed, the Japanese Government has admitted that
it would "monitor" film prices so that Kodak could not dominate the market in Japan as it had elsewhere.
5.408 Japan notes that MITI's survey on film distribution including film price was carried out from
the standpoint of industrial policy, and not from the viewpoint of the Antimonopoly Law.
5.409 The United States submits that the ability of foreign manufacturers to use price discounts to
expand their presence in Japan has been rather limited. Kodak has reduced its prices by 56 percent
since 1986, substantially undercutting its Japanese competitors. Kodak's dramatic price discounts have
had virtually no effect on the market. Price reductions by foreign photographic material producers -
- even to levels well below those of domestic competitors - often are not passed on to consumers at
the retail level. According to the United States, this lack of price competition in the photographic
materials sector is reflected by the fact that Japan's consumer price index for film has shown almost
no movement between the third quarter of 1989 and the third quarter of 1996, a period of seven years.422
Little price differential exists among Fuji, Konica and Kodak at either the retail level423 or with respect
to wholesaler prices to retail outlets.424 The same lack of price differentiation is observable with respect
to various film speeds, types of outlets and individual cities.
5.410 According to the United States, limited price competition, coupled with foreclosed distribution
channels, render promotions especially significant to foreign photographic material producers. The
United States believes that Japan has understated the importance of the promotional activities at issue
and that the zeal with which Japan has regulated premiums and representations, in and of itself, should
suggest to the Panel the true significance Japan ascribes to these marketing techniques.
(iii) Enforcement
5.411 The United States submits that authority to enforce the Premiums Law is shared among the
JFTC, the prefectural governmentsand members of thephotographicmaterials industry. The Premiums
Law accords to the JFTC the leading enforcement role. Article 6 provides the JFTC with the power
to instruct violators "to cease and desist" or to "take the measures necessary to prevent the recurrence
of the said act". Article 9 gives the prefectural governments enforcement authority, including the power
to issue cease and desist orders.
5.412 The United States notes that Article 10 provides for the creation of "fair competition codes"
regulating the use of premiums and promotional representations, as drafted by "fair trade councils"
comprised by representatives of the domestic industry. Article 10 permits the JFTC to authorize
"businesses ora trade association" to"enter intoan agreement or toestablish a code" inorder to"prevent
unjust inducement of customers and to maintain fair competition". "Fair competition codes" must
be approved by the JFTC. "Fair trade councils" employ various methods of coercion and monetary
penalties to enforce their codes.
5.413 The United States argues that Article 10 of the Premiums Law has allowed powerful photographic
industry trade associations to suppress competition by establishing cartel-like groups that suppress
competition through enforcement of restrictions on marketing activities. The United States also notes
that the Premiums Law does not explain how membership in a council or participation in a code is
to be determined.
5.414 In the US view, the statute fails to address whether parties who do not participate in the
formulation or administration of the "fair competition codes" are covered by them. The United States
422Photo Market, 1996, p. 31, US Ex. 101.
423Management Analysis of Photo Stores, Camera Times, 1979-1996, US Ex. 40.
424ConstructionResearchInstitute, Information onPrices, MonthlyEdition,December1972- September1996, USEx. 22.

argues that although the codes are designed to apply exclusively to members, the standards established
by the codes are often adopted by the JFTC for application to non-members.
5.415 Japan submits that the JFTC does not approve a fair competition code unless it finds that the
draft code satisfies the following requirements of Article 10, paragraph 2:
"(i) That itisappropriatetopreventunjustinducement of customers and tomaintain
fair competition;
(ii) That it is not likely unreasonably to impede the interests of consumers in general
or the related businesses;
(iii) That it is not unjustly discriminatory; and
(iv) That it does not restrict unreasonably the participation in or withdrawal from
the fair competition code".
According to Japan, and contrary to the US argument, this review eliminates any possibility of a fair
competition code becoming a "quasi-cartel." For Japan, the notion of "related businesses" mentioned
in paragraph 2 (iii) of Article 10 includes non-members ("outsiders"). Therefore, the JFTC is obligated
to protect outsiders' interests.
5.416 AccordingtoJapan, "faircompetitioncodes" are autonomousrulesand cannotbindoutsiders.425
Moreover, Japan argued, a 1982 Tokyo Court of Appeals judgment made it clear that non-compliance
with a fair competition code by an outsider does not constitute violation of the Premiums Law.426 The
JFTC alone has the authority to take enforcement action against an outsider.
5.417 Japan further submits that the JFTC does not cease to exercise its authority to enforce the
premiums regulations in respect of industries which adopt fair competition codes. Generally, if an
insider does not comply with a code, the related fair trade council takes a remedial measure. However,
if the JFTC finds it necessary to take an enforcement action for the protection of consumer interests
and to ensure fair competition it will choose to exercise its statutory authority as well.
5.418 In response,the UnitedStates providedthe followingstatementbythe JFTC Secretary-General:
"self-regulatory codes cannot reach businesses who do not participate in the fair competition codes,
even when they engage in sales activities that violate the codes. However, when the JFTC takes
regulatory actions againstunjustifiable premiums and misleadingrepresentations, the Commission uses
the content of the fair competition codes, as the industry’ s business practices designed to secure fair
competition, to interpret and apply the Premiums Law. Accordingly, businesses engaging in sales
activities that violate the codes can be subject to them under the Premiums Law, even when they do
not participate in the codes."427 Although the Premiums Law does not require companies to join a
fair trade council, in order to be effective in the Japanese market, businesses often feel compelled,
or are required by the relevant association, to join the council.
425In this respect Japan provided the following statement by the JFTC Secretary-General: "Voluntary restraint in a fair
competition code is not applicable to sales activities of business entities who are not members of the code, even if the activities
are not compliant with it" (Itoda Shogo, JFTC Secretary-General, Jirei Dokusen Kinshiho (Competition Policy Law), 1995,
p. 423, Japan Ex. D-75, US Ex. 95-20).
426JFTC v. Sanki Co., Ltd, et al, of 1982, Tokyo Court of Appeals, Japan Ex. D-76.
427Itoda Shogo, JFTC Secretary General, Antimonopoly Law, (15 December 1995), pp. 392-393, 396, 420-424, US Ex.
95-20.

(iv) Exemptions from the Antimonopoly Law
5.419 Article 10, paragraph 5, of the Premiums Law provides that:
"TheprovisionsofSection48[recommendation,recommendationdecision]andSection
49 [initiation of hearing procedures], Section 67(1) [urgent injunction] and Section
73 [accusation] of the [Antimonopoly Law] shall not be applied to the fair competition
codes that have been authorized under section (1), and to such acts of businesses or
a trade association as have been done in accordance therewith."
5.420 According to the United States, this exemption is noteworthy because preparation and application
of the "fair competition codes" may involve activities among competitors and trade associations that
would be actionable under the Antimonopoly Law.428
5.421 In Japan's view this US statement is incorrect. According to Japan, Article 10, paragraph 5,
of the Premiums Law only confirms that fair competition codes, as approved by the JFTC, do not
constitute violations of the Antimonopoly Law. If a fair competition code later fails to be in compliance
with the Antimonopoly Law due to changes in the economic situation, the JFTC will have to revoke
its approval according to Article 10, paragraph 3. After the cancellation, the JFTC is authorized to
take necessary measures against the actions in question. Moreover, any activity of entrepreneurs or
trade associations including fair trade councils which is not taken "in accordance with the fair competition
code" approved by the JFTC does not enjoy exemption from the operation of the Antimonopoly Law.
5.422 The United States pointed out that Japan’ s position in this regard overlooks the language of
Article 10, paragraph 5 of the Premiums Law, which exempts from antitrust enforcement not only
the fair competition codes themselves, but also "such acts of businesses or trade associations as have
been done in accordance therewith." Given that fair competition codes, including the 1987 Retailers
code, provide councils with extensive enforcement powers and allow for the imposition of penalties
for non-compliance, the United States maintained that the exemption permits cartel-like practices by
Japanese businesses against foreign competition.
3. INITIAL IMPLEMENTATION OF THE ANTIMONOPOLY AND PREMIUMS LAW
5.423 The United States submits that during the years immediately following the enactment of the
Premiums Law, enforcement of the law was sluggish. For the United States, the most noteworthy
development during this time was the JFTC's imposition of a notification on "Restriction on Premium
Offers by Prize Competition".429 The notificationlimited premiums offered in connectionwith "closed"
lotteries430 or as prizes in games of random selection. On July 15, 1965, the JFTC expanded the scope
of the lottery notification to include competitions involving some element of skill, such as quizzes or
"pick-a-slogan" competitions.431
5.424 According to the United States, the Japanese Government recommended more stringent application
of the Premiums Law and Antimonopoly Law against "unfair trade practices" in April 1965.432 The
JFTC responded in April 1966 by implementing changes in its organizational structure, including the
428In this respect the United States submitted the following statement by the present JFTC Secretary-General: "[e]ven
if the contents of the codes or the activities based on the codes violate the Antimonopoly Law, no proceedings to restrict
them will be taken based on the Antimonopoly Law" (Itoda Shogo, JFTC Secretary-General, Competition Policy Law, 15
December 1995, p. 422, US Ex. 95-20, Japan Ex. D-75).
429JFTC Notification 5 of 1962, Kanpo, 30 July 1962, pp. 626-627, US Ex. 62-1.
430A "closed" lottery requires purchase of a good or service. An "open" lottery requires no such purchase.
431JFTC Notification 20 of 1965, Kanpo, 15 July 1965, p. 5, US Ex. 65-1.
432Industrial Structure Council Distribution Committee, Regarding the Basic Direction of the Distribution Policy, Tsusansho
Koho, 24 April 1965, p. 8, US Ex. 65-2.

creation of the Premiums and Representation Division.433 Following establishment of this office, total
enforcement actions by the JFTC under the Premiums Law rose sharply from 147 actions in 1965,
to 327 in 1966, then to 548 in 1967, and 1,203 in 1971.434
5.425 Japan argues that, initially, the enforcement of the Premiums Law was carried out exclusively
by the JFTC. Whether or not enforcement actions rose sharply due to the creation of the Premiums
and Representations Division of April 1966, as the United States argues, the JFTC had been vigorously
enforcing the regulation on excessive premiums and misleading representations which are detrimental
to fair competition, and the number of the issuance of cease and desist orders was increasing.
5.426 The United States argues that despite the JFTC's slow start in enforcing the Premiums Law,
one of the subjects it first chose to regulate was cameras. The camera industry in Japan had experienced
high growth during the preceding decade.435 "However, in 1964 and 1965, the growth of the Japanese
economy slowed down. The domestic demand for cameras became stagnant, and it became necessary
to increase exports in order to absorb large [portions] of the production".436 At the time, though,
Japanese manufacturers faced stiff competition from Kodak, due in large part to an innovative product
Kodak created allowing for easier installation of its film.
5.427 According to the United States, domestic photography businesses relied upon ever larger premium
offers in response to this competition. "Retailers have started to offer excessive premiums such as
trips to Hawaii, Hong Kong, Europe, etc. or even automobiles".437 The United States further submits
that to combat what was perceived as a bloodletting in the domestic photographic sector, the industry
formed a "depression cartel". The JFTC certified the "cartel" on June 30, 1965. Domestic photograph
businesses began their "move to correct those excessive activities . . . retailers decided to voluntarily
refrain from sales with invitation or premiums. The industry filed an application for certification of
fair competition codes according to the Premiums Law".438
5.428 The United States argues that the JFTC soon acted to protect the "camera cartel" from
competition on premium offers. On October 15, 1965, the JFTC issued a notification entitled,
"Restrictions onPremium Offers in the Camera Industry",which severely curtailed the use of premiums
by camera manufacturers, wholesalers and retailers to one another or to general consumers. Also on
October 15, 1965, the JFTC approved the "Fair Competition Code Regarding Restrictions on Premium
Offers by the Cameras and Related Products Manufacturers' Industry", as promulgated by the domestic
industry in the form of the Camera Manufacturers Fair Trade Council. Like the notification, the code
restricted premium offers by participating camera industry manufacturers. On October 29, 1966, the
JFTC issued Notification 35, approving an almost identical fair competition code on premiums for
wholesalers of cameras and related products.439
5.429 In the US view, the notification and codes, though aimed at cameras, affect important promotions
for film and paper. Almost all leading film manufacturers in the Japanese market -- including Fuji,
Konica and Kodak -- are significant producers of cameras. By circumscribing the use of premiums
in promoting cameras, these restrictions limited the ability of foreign manufacturers to promote their
film and paper products by offering them as premiums along with cameras.
433Interview with Iyori Hiroshi: the Role of Premiums and Representation Law and Issues for the Future, Kosei Torihiki,
No. 502, August 1992, US Ex. 92-3.
4341966 JFTC Annual Report, US Ex. 66-1; 1988 JFTC Annual Report.
435 Otsuka Noritami, JFTC Trade Practices Division, Recent Activities Concerning the Premiums Law, Kosei Torihiki,
November 1965, p. 3, US Ex. 65-5.
436Ibid.
437Ibid.
438Ibid.
439In Japan's view, kamera-rui means "camera category" rather than "cameras and related products". See translation
issue 17.

5.430 For Japan, there has been no JFTC Notification applicable specifically to photographic film
and paper; nor have there been fair competition codes specifically applicable to film and paper either.
4. GENESIS OF THE PROMOTION "COUNTERMEASURES"
5.431 The United States submits that during the 1960's and 1970's, as Japan made tariff concessions
and implemented other trade liberalizing measures on photographic film and paper products, the Japanese
Government expressed concern that liberalization would open the Japanese photographic materials market
to stiff competition from imports. As a consequence, MITI determined that the government needed
to initiate policies to forestall that competition. In the US view, the government identified its premium
and representation restrictions as efficient tools to blunt the strength of the perceived advantages of
foreign manufacturers of film and paper. For the United States, there can be no doubt that Japan's
promotion countermeasures were aimed at diminishing the effects of promotional campaigns that could
be waged by foreign enterprises with significant capital resources.440
5.432 Japan argues that the JFTC has been fully aware of Japan's commitment to non-discriminatory
treatment of foreign products and business and that evidence to that effect can be found in a series
of statements and articles by the Commission officials which were published during the 1960s.441
5.433 The United States further submits that the Japanese Government imposed its promotion
countermeasures, at least in part, because it recognized the importance of marketing to foreign
manufacturers of film and paper competing against domestic market leaders. A leading competition
scholarinJapansimilarlyexplainedthatindustry-specificnotificationswere "adopted because offoreign
capital affiliated firms’ excessive premium offer sales ... Fair competition codes are effective in
controlling sales with excessive premiums that might disturb the market. We expect active use of fair
competition codes in the future.442 According to the United States, these modes of competition were
particularly significant in Japan, given the difficulties foreign photographic materials manufacturers
faced with respect to distribution and other market factors. In the US view, Japan understood that,
if it were able to handcuff foreign manufacturers in their use of promotions and shackle the distribution
network, its tariff concessions would have considerably less impact and the market dominance of domestic
players wouldbe preserved. In thisregard, the UnitedStates maintained that a former Secretary General
and Commissioner of the JFTC confirmed that the promotion countermeasures originated from a need
to controlforeign capital. He stated: "[O]ne reason the restrictionsconcerning the offering of premiums
to businesses are established is to prevent the sale with excessively large premiums by foreign capital
related businesses in general, and the resulting distortion of fair competition. There have been three
restriction notifications concerning specific industries ... All of these were adopted as a result of selling
with excessively large premiums by [a] special foreign capital affiliate.443
440The United States provided, inter alia, the following statement by MITI: "Along with the liberalization of capital and
trade, the major issues facing this industry today include the U.S. landing in Japan and market expansion ... The struggle
to capture market share will depend substantially on promotional activities based on financial strength. Therefore, those
film manufacturers in Japan that are lacking in financial strength, even though they are in a monopolistic position domestically,
are likely to face serious testing in the future" (MITI, Manual for the Systemization of Camera and Film Distribution, March
1975, p. 121, US Ex. 75-5).
441Japan provided, inter alia, the following statement by Yamada Sei-ichi, then Chairman of the JFTC: "[Asked whether
the JFTC would thwart foreign capitalby the Antimonopoly Law: ] If we were to treat foreign capital harshlyand treat domestic
capital leniently, there would be no rule of law any more. The Law must be applied fairly to domestic and foreign capital
alike" (Interview of Yamada Sei-ichi by Kanamori Hisao, 205 Kosei Torihiki 20, p. 24, 1967, Japan Ex. D-22).
442Matsushita Mitsuo, Antimonopoly Law and International Transactions (With Focus on Extra-territorial Application),
25 May 1970, pp. 83-89, US Ex. 70-2.
443Iyori Hiroshi, Basic Approach to Capital Liberalization and Antimonopoly Law: Types of Regulation, Sample Cases,
Zaisei Keizai Koho, No. 1332-1333, 24 November 1969, p. 7, US Ex. 69-7.

5.434 The United States argues that during the 1950's and early 1960's, large Japanese consumer-
product manufacturers built powerful brand images and proportionately large market shares as a result
of their "substantial financial commitments to establish and promote their brands".444 At the same time,
several foreign manufacturers demonstrated that imports could follow similar strategies based on use
of promotional tools to mount successful challenges to entrenched Japanese brands. The United States
providesexamples of foreigncompanies, suchas Bristol-Meyer, Nestléand Colgate, which successfully
captured the Japanese market with promotion campaigns.
5.435 Japan argues that the examples provided by the United States fail to prove the US argument
that a freer marketing environment had existed prior to the introduction of the Premiums Law; the
cited cases are all examples of promotional activities which would not be restricted by the JFTC
regulations of excessive premiums even today. Japan argues that Schick's distribution of free stainless
steel razor blades to Japanese males has been lawful under the Premiums Law at any point of its history;
that Nestlé's promotion was a low price offer, thus falling outside the scope of the Law; and that
Colgate's distribution of free toothpaste samples would not have been subject to the Premiums Law.
For Japan, these cases demonstrate, on the contrary, that there are plenty of lawful promotional
opportunities in Japan, and that foreign business has been able to take advantage of those opportunities
successfully.
5.436 In the view of the United States, Japan's contention that these examples would be "lawful
under the Premiums Law at any point in its history" is inaccurate. JFTC Notification 17 of 1967,
restricting premiums between businesses, and JFTC Notification 5 of 1977, restricting premiums to
general consumers, provides that samples are exempt from coverage only if they are "found reasonable
in the light of normal business practices." In addition, certain low price offers may be regulated as
an "unjust low price" under designation 6 of Notification 15 of 1982.
5.437 Japan submits that regulations on premiums and representations under the Antimonopoly Law
and the Premiums Law do not restrict low price offers.
5.438 According to the United States, the Japanese Government expressed strong concerns about
the abilityof importsand foreignfirms touse suchstrategiessuccessfullyand began toformulate policies
for countering this challenge. Japan's concerns regarding aggressive marketing techniques were
particularly acute for film and paper due, at least in part, to Fuji's strong name-brand recognition among
Japanese consumers. The United States points out that one Japanese official later explained that "we
were afraid that Kodak would use its capital strength to control the market with huge incentives like
low prices, or attach some kind of gift to the films, and then, after ruling the market, they would raise
price ... There was this worry, so we issued guidelines so that the competition would be fair."445 Japan
thus set out on a course to impede the ability of imports to challenge Fuji's name-brand advantage.
5.439 For the United States, basic economic theory supports Japan's decision to hinder promotion
competition for photographic materials. Economists have long noted that new market entrants or products
withlimited market share - often characteristics of imports- face an uphillbattle when competingagainst
established products with strong brand-name recognition.446 According to the United States, this difficulty
is even greater for so-called "experience goods", which develop consumer loyalty based on repeated
satisfactoryexperiences. The naturalmarket advantages enjoyedbyestablishedbrandsmay be enhanced
furtherwhenthe productinquestionisrelativelyinexpensive,therebyreducingthe consumer'sincentive
to try alternatives.
444M.Y. Yoshino, The JapaneseMarketingSystem: AdaptationsandInnovations, MITI Press, 1971, p. 103, USEx. 71-1.
445Japanese See Kodak Case As Hardly Black and White, New York Times, 5 July 1995, US Ex. 95-14.
446See J.S. Bain, Barriers to New Competition, 1956, p. 216, US Ex. 56-1.

5.440 The United States submits that new brands and products challenging leading brands can use
a variety of competitive tools to attract consumers away from the market leader, but that, in the words
of one academic study, the challenging brand must provide "something extra".447 The "something
extra" often consists of some form of premium to attract customers away from their traditional brands.
As a first step, however, the challenging brand must be heavily advertised. Essentially, products
challenging leading brands must "shout louder to be heard". In the US view Japan has, through
application of its promotion countermeasures, sought to thwart foreign producers attempting to do just
that.
5.441 Japan argues that excessive premiums are subject to restriction in other countries as well and
that the Japanese regulations are not particularly more stringent than foreign counterparts. According
toJapan, reflectingthedivergentsocial/culturalbackground,theoverseasregulationsdiffer inthedegree
of restriction of premium offers, and can, generally speaking, be categorized into two groups.448 The
firstcategoryof countriesincludingGermany,France, Belgium,the Netherlands,NorwayandDenmark
have taken a negative approach to premiums as their policy emphasizes price/quality competition.
All-purchaser premiums are generally held to a very low level in these countries, and prizes are
prohibited.
5.442 In Japan's view, the basic philosophy in those countries where the use of premium offers "per
se" is restricted, is as follows:
- as premium offers may lead to competition being concentrated on matters other than price,
quality and service, they make it more difficult for the consumers to survey the market;
- premiums offers are likely to divert the interest of the consumers from the main item and thus
entice them to buy one item out of interest for another item;
- there is a tendency for consumers to overestimate the value of premiums;
- the consumer may in some cases have difficulties if he wants to make a claim for a faulty or
defective premiums;
- in some cases, the consumer is only interested in either the main item or the premium and
has no chance to acquire the item he wants without buying also other item which he does not
want;
- the market would be artificially inflated by articles which the consumer initially did not want.
It would be preferable if consumers were given an adequate price reduction instead.
5.443 Japan further argues that the United States and the United Kingdom belong to the second category
which favours premiums. They do not restrict all-purchaser premiums. On the other hand, however,
they either prohibit or severely restrict sales with lotteries or prize competition, which are lawful in
Japan.
5.444 The United States submits that Japan's attempts to compare its "promotion countermeasures"
to laws in other countries are unavailing. Though Japan has pointed to individual aspects of its
"promotion countermeasures" that approximate facets of measures found elsewhere, the United States
argues that it is unaware of any nation with a regime that is quite like Japan's. In particular, no nation
has an enforcement mechanism of government/industry cooperation akin to Japan's system of "fair
trade councils" and "fair competition codes".
5.445 Japan notes that a mechanism of self-regulation on premiums or representations exists elsewhere,
citing Germany's Act Against Restraints on Competition (1957) which also provides for self-restraint
of business entities. According to Japan, Germany has about 60 "competition rules" approved by virtue
447CarpenterandNakamoto, ConsumerPreference Formation andPioneering Advantage, Journalof MarketingResearch,
Volume 26, August 1989, p. 297, US Ex. 89-4.
448OECD Premium Offers and Similar Marketing Practices (1977), Japan Ex. D-36.

of Sections 28 through 33 of the Act. The United Kingdom's Fair Trading Act of 1973 provides, in
Article 124, paragraph (3), that "it shall be the duty of the Director to encourage relevant associations
to prepare, and to disseminate to their members, codes of practice for guidance in safeguarding and
promoting the interests of consumers".449 Japan further submits that more recently, in the wake of
deregulation/liberalization of industries, countries such as Australia or Canada are contemplating an
increased use of self-regulation for the protection of consumers, as well as for the reduction of
administrative cost.
5.446 The specific "promotion countermeasures" challenged by the United States are listed in para. 3.6
above and outlined in Section II.B.3.(b) and (c) and 4.(a) and (b) above.
5. POST-KENNEDY ROUND PROMOTION "COUNTERMEASURES"
(a) JFTC Notification 17 of 1967 (premiums to businesses)450
5.447 According to the United States, the sweeping limitation imposed by JFTC Notification 17 of
10 May 1967 affected nearly all premium offers between two businesses - that is, premium offers made
by manufacturers to wholesalers and retailers, as well as premium offers made by wholesalers to
secondary wholesalers or retail stores - if used to (1) open a new relationship or (2) reinforce sales
volume targets.451 The JFTC explicitly included "photosensitive materials" as one of the industries
covered by the notification.452
5.448 For the United States, JFTC Notification 17 imposed a double restriction on premiums between
businesses. It limited the aggregate amount of premiums that one business may offer to another enterprise
to 100,000 yen per year, subject to a determination that any premium within the 100,000 yen exception
is "reasonable in the light of normal business practices". The United States argues that industry "fair
competition codes" would play a critical role in the assessment of what constituted "normal business
practices". "As for 'normal business practices,' if there is a fair [competition] code, then the code
will be used as the standard. If none exists, the JFTC will make a determination after investigating
the business practices of that industry or issue guidance to the industry to establish a fair [competition]
code".453
5.449 In the US view, pursuant to JFTC Notification 17, imported film and paper products attempting
to expand their market share were permitted to offer incentives amounting to no more than 100,000
yen to any one business. According to the United States, in so sharply limiting the use of premiums
between businesses, the notification all but eliminated one of the seminal methods by which manufacturers
open relationships with wholesalers and retailers or provide incentives for down-line distributors to
increase sales.
5.450 The United States further submits that the JFTC indicated in its 1966 Annual Report that JFTC
Notification 17 was issued as a liberalization countermeasure, noting that premiums "1) impede the
rationalization of distribution; 2) harm consumer interest; 3) will lead to competition based on financial
resources and sales power where the stronger prey upon the weaker; and 4) point 3 [above] will intensify
particularly with capital liberalization".454 The JFTC further explained that "[t]he primary objective
of [Notification17] is (a) rationalization of the distribution stage ...; and (b) eliminat[ion] of the stronger
449Japan Ex. D-62.
450See Section II.B.3.(b).(ii) above.
451Severe Restrictions Placed on Businesses for Premium Offers: Shatokuren Hears JFTC Explanations at Jyosui Kaikan
on the 12th, Nihon Shashin Kogyo Tsushin, 20 June 1967, p. 25, US Ex. 67-8.
452See table attached to JFTC Notification 17.
453Severe Restrictions Placed on Businesses for Premium Offers, op.cit.
454JFTC Annual Report, 1966, US Ex. 66-1, emphasis added by the United States.

prey upon the weaker sales competition based on the power of capital ... If US capital were to conduct
[premium offers] directed at the Japanese distribution sector, this would be no match for [Japan], so
the restrictions should be applied as a breakwater before liberalization".455 For the United States, the
JFTC clearly issued the notification with foreign competition in mind.
5.451 For Japan, the object and purpose of the notification should be found, by and large, not in
the section of the 1966 JFTC Annual Report quoted by the United States, but in the preceding section
of the Report:
"In June 1966, the Consultative Body on Prices, an advisory organ to the Director
General of the Economic Planning Agency, recommended that 'premiums offers at
the distribution of household goods would unnecessarily raise sales/distribution cost
and runs counter to rationalization of distribution and is therefore undesirable from
the viewpoint of combating rising prices. The matter should not be left unattended and
it is necessary to regulate the practice under the Premiums Law in order to promote
fair competition and rationalize distribution, and thereby to pass the benefits of
competition to consumers.' In response to this recommendation, the JFTC surveyed
80 organizations including manufacturing associations of consumer goods in August
of the same year for the facts surrounding tour invitations ...".456
Japan argues that the notification applied regardless of the nationality of the entity engaged in the practice.
5.452 Japan further submits that JFTC Notification 17 was applicable only to offers of goods. Low
price offers, rebates and offers of goods to assist the other parties' promotional activities were outside
the scope of the regulation. Moreover, the notification makes it clear that it does not restrict businesses
to "offer equipment or facilities for selling or storing such goods, to offer equipment, facilities, etc.
for advertisement or any other aids for advertisement, or to provide guidance on the information on
commodities or repair technique". Hence, according to Japan, the manufacturers, both foreign and
domestic, have had a large variety of means to establish new, or strengthen existing, relationships with
distributors.
5.453 Japan notes that the photographic materials industry was not singled out since almost all the
industries producing goods consumed or used in every day life - more than 100 industries ranging from
automobiles to soaps - were covered.
5.454 Japan argues that the regulation restricted only excessive premium offers - not normal promotional
activities- todistributors. The rationalewas thatsuchoffers couldimpair fair and free price competition
in the distribution and could increase the distribution cost to the detriment of consumer interests.
However, manufacturers were stillable tooffer lowprices orrebates and were free to engage themselves
in other normal promotional activities under the notification.
5.455 Japan further notes that premiums offered to employees of companies which were in a special
relationship(shareholdingsorsendingexecutives)withthemanufacturer werenotconsideredpremiums
under the regulation, because they were no different from premium offers to its own employees. This
exception applied only to transactions which were virtually identical to operation within a single entity.
The relationship between Fuji Film and its primary wholesalers were not eligible for the exception
because they were not in special relationship.
5.456 Japan submits that JFTC Notification 17 has already been abolished since April 1996 and
therefore falls outside the scope of the present proceeding. As price competition intensified at the
455Severe Restrictions Placed on Businesses for Premium Offers, op.cit.
456JFTC Annual Report, 1966, Japan Ex. D-43.

distribution level due to changes in the Japanese economy since 1967, distributors tended to demand
lower prices, rather than premiums, from the manufacturers. The need for the regulation declined,
commensurate with the trend. For these reasons, the Notification was abolished.
5.457 The United States notes that the notification remained in effect through March 1996, but that
the repeal of Notification 17leaves premium offers between businesses subjectto JFTC Notification 15,
Designation 9, of 15 June 1982 on unjust inducements under the Antimonopoly Law. The United States
argues that that designation prohibits premium offers in excess of "normal trade practice". Given that
premiums worth more than 100,000 yen per year to a single business were unlawful from 1967 to
1996, and thus the "normal trade practice" may effectively be limited tothat amount, there is uncertainty
as to the extent to which any present restrictions under the Antimonopoly Law will differ from the
former standard pursuant to the Premiums Law.
5.458 However, according to Japan, the fact is that under Designation 9 of JFTC Notification 15
on "Unfair Trade Practices", the automatic trigger level of 100,000 yen does not exist any more, and
that the burden of proof lies with the JFTC.
(b) 1967 Cabinet Decision (guidance on fair competition codes)457
5.459 The United States submits that in June 1967, the Foreign Investment Council ("FIC") Expert
Committee, an advisory committee of the Ministry of Finance, called for the establishment of additional
"fair competition codes" as an "effective countermeasure".458 These codes were to be established,
the Committee suggested, "with assistance from the industry that might be affected".459
5.460 According to the United States, Japan was well aware that its treaty obligations did not allow
the government totreat foreigncompanies ina facially discriminatory manner. In the wordsof a Foreign
Investment Council Expert Committee member, although Japan wanted "legal countermeasures to prevent
any risk of foreign capital disturbing domestic businesses or the Japanese economy, a risk which will
arise with capital liberalization," it recognized that "if any discriminatory countermeasures are to be
taken ... it will have to be the [domestic] companies taking them on their own".460 To outsiders, the
measures would seem evenhanded: "the government must naturally counter such new situations by
expanding the application of the [Premiums and Antimonopoly Law,] but it may be that the laws should
be technically applied in a fair manner to domestic and foreign firms...".461
5.461 The United States further submits that in July 1967, the Japanese Cabinet adopted the
recommendations of the FIC and its Expert Committee that the Premiums Law should be used as a
liberalization countermeasure by establishing fair competition codes.462 For the United States, the
government directed that the codes were to be established by industry representatives and trade
associations, as provided under Article 10 of the Premiums Law, and the government would exercise
"active guidance".463
457See Section II.B.1 above.
458Report of the Foreign Investment Council Expert Committee, Finance, June 1967, p. 3, US Ex. 67-5. See Section II.B.1.
459Ibid.
460Postwar Developments and Challenges of Corporate Law Part II: Capital Liberalization Countermeasures, Hogaku
Seminar, April 1968, p. 3, US Ex. 68-4.
461Ibid.
462See Section II.B.1.
463"What has gained special attention in this law as a liberalization countermeasure is the establishment of fair competition
codes, which have a self-regulatory character for industry (Article 10 of the same law) ... it was concluded that offering
excessive premiums and other such practices can probably be prevented effectively by the more efficacious utilization of
this system. There was strong feeling that what is needed for this purpose are the efforts of Japanese industry itself in
establishing these codes and active guidance in the government in the direction of helping these efforts" (Sato Hiroshi, Deputy-
Director, Foreign Investment Division, Ministry of Finance, Legislative Countermeasures for Preventing Disorder Resulting

5.462 Thereafter, the United States argues, the JFTC urged the private sector to promulgate more
"fair competition codes" and offered guidance on drafting them. Industry and associations initially
resisted, but the JFTC nonetheless succeeded in securing commitments to adopt such codes: "With
respect to establishing the fair competition codes, unlike today, they were all extremely unwilling.
They thought that [the codes] were disgraceful . . . Various industries were originally unwilling to
establish fair competition codes, but by [1969], they began establishing the codes on their own
initiative".464
5.463 Japan submits that it did not believe it is necessary to elaborate on fair competition codes or
fair trade councils as none of them cover photographic film and paper. Nevertheless, it felt compelled
to rectify misperceptions contained in the United States submissions. Japan argues that excessive
premiums and misleading representations tend to quickly spread among competitors, and to escalate
in the process. It is therefore desirable for effective enforcement of the Premiums Law to have business
entities agree on self-restraint of such behaviour and to prevent actual violation of the Law. Japan
submitted that it is against this background that the Premiums Law allows business entities to adopt,
subject to the JFTC's approval, voluntary rules (fair competition codes) on premiums and representations,
to ensure consumers' proper selection of merchandises and fair competition in the market.
5.464 Japan argues that the report of the FIC's Expert Committee, invoked by the United States,
also clearly states that "[i]n applying the Antimonopoly Law, enterprise with foreign capital should
not be treated differently".465 According to Japan, neither the Antimonopoly Law nor the Premiums
Law has any provision that allows treating enterprises with foreign capital differently, and these laws
have never been enforced in such a manner.
5.465 For Japan, the report only contained recommendations most of which "had to be further discussed
in other expert councils or administrative agencies for their implementation, in light of the character
of being an advisory organ to consider important matters in connection with foreign investment".466
The report specifically states that "for most of the matters discussed here, neither the Committee nor
the Council is able to render conclusive judgment". Japan submits that the JFTC has not enforced
the Premiums Law to implement these recommendations. Japan also argues that, contrary to the US
allegation, the Japanese Cabinet did not adopt the report. Therefore the Japanese Government did
not exercise "active guidance".
5.466 According to the United States, Japan tries to remove the codes and councils from review
by arguing that they do not regulate the sale or promotion of photographic materials. Japan claims
that the codes were not drafted with film or paper in mind. In making this argument, Japan overlooks
the actual market effects these codes and councils have on the promotion of photographic materials.
For the United States, the codes and councils stultify promotions for photographic materials in the
Japanese market, and it is this actual effect to which it objects.
5.467 The United States further submits that to buttress the fledgling fair trade councils, Japan took
steps to ensure that foreign firms would be unable to make inroads into the Japanese market prior to
full enforcement of fair competition codes that were being put into effect. The JFTC initiated proceedings
against imports to discourage aggressive promotional efforts. These enforcement actions sent a strong
signal thatthe government intendedto use itsrestrictions onpromotionstosuppress importcompetition.
from Liberalization of Direct Investment, Finance, July 1967, p. 6, US Ex. 67-5).
464Interview with Iyori Hiroshi: The Role of Premiums and Representation Law and Issues for the Future, Kosei Torihiki,
No. 502, August 1992, US Ex. 92-3. Japan submitted that the reason why the private sector was "unwilling" to adopted
the codes was that the target industries had been exercising outrageous misrepresentations (e.g., souvenirs, real property)
and felt it was dishonourable to adopt such codes.
465Finance, June 1967, Japan Ex. D-58, US Ex. 67-5.
466Finance, July 1967, Japan Ex. D-59, US Ex. 67-9.

The United Stated provides three examples where the JFTC enforced the Premiums Law against
subsidiaries of foreign companies or importers of foreign products. One example involved a Japanese
subsidiary of a Swiss watch company which wanted to provide its top customers with trips to attend
seminars in Switzerland. In another example action was taken against importers of US-made air
conditioners wanting to offer a free colour television with each product sold. In a third example, a
US soft drink producer was prohibited to offer its consumers certain sweepstakes with prizes of cash
or a three-pack of soda. The JFTC Premiums and Representations Division director acknowledged
at the time that the JFTC was concerned about "flashy premium sales" by large foreign competitors
and that a "fair competition code" was needed to protect domestic industries.467
5.468 According to Japan, each of the examples cited by the United States had nothing to do with
the origin of the product. The same action would have been taken against domestic producers. Japan
further notes that for the three-year period of 1969 to 1971, JFTC issued cease and desist orders in
159 cases and only three were against foreign products. For Japan, the JFTC has been fully non-
discriminatory in enforcement of the Antimonopoly Law and the Premiums Law.
5.469 According to the United States, in addition to these enforcement actions, the JFTC took less
formal action by issuing "administrative guidance" to foreign companies and their domestic importers.
Though not as drastic a form of regulation as a cease and desist order, "administrative guidance"
essentially has the same effect.
5.470 The United States also argues that the Japanese Government took additional steps to enhance
the promotion countermeasures while fair trade councils were being formed. In 1972, the Premiums
Law was amended to provide authority for prefectural governments to initiate premium and representation
enforcement actions.468 Under revised Premiums Law Article 9-2, prefectural governments may direct
violators to cease from acting inconsistentlywith Articles 3 or 4. To mobilize public pressure insupport
of an enforcement measure, prefectural governments may publicize their findings. If a violator fails
to comply with a directive issued under Article 9-2, or if a prefectural government requests, the JFTC
also may "take appropriate measures".469 According to the United States, the 1972 amendment resulted
in a dramatic upturn in the number of enforcement actions brought under the law: from 1972 to the
present, prefectural governments have been responsible for approximately 75 percent of all Premiums
Law enforcement actions.
5.471 Japan submitsthatthe 1972amendment was inresponsetocallsfor furthercooperationbetween
the JFTC and local governments for the purpose of better protection of consumer interests.470 The
amended Premiums Law empowers Prefectural Governors to investigate possible violations of the law
through the requirement of reports and on-the-spot inspection. They are also authorized to issue a
non-binding direction to parties in a case to refrain from violation of the Law. Japan noted, however,
that the Prefectural Governors do not have the authority to issue cease and desist orders (Article 9
bis of the Premiums Law). If parties do not voluntarily follow non-binding directionsby the Governors,
compulsory actions will have to be taken by the JFTC. Moreover, the prefectural governments are
under the JFTC's control as far as the enforcement of the Premiums Law is concerned (Article 9-5).
Bothauthoritiesareengaged inclose communicationwitheachotherinconnectionwiththe enforcement,
and there is no practical discrepancy in the interpretation or policy of the premiums regulations.
467Ueno Toshiro, JFTC's Premiums and Representation Division, Pepsi Cola Premiums Law Case, Kosei Torihiki, December
1971, US Ex. 71-12.
468Premiums Law, Articles 9-2 and 9-3, US Ex. 62-6.
469Ibid., Article 9-2.
470Thirty-Years of Competition Policy, pp. 286-287, Japan Ex. D-56.

5.472 In Japan's view, it should be no surprise that "75 percent of all Premiums Law enforcement
actions" are handled by prefectural governments, as noted by the United States submission, because
the JFTC has one headquarters and 8 local offices whilethere are 47 prefectural governmentsaltogether.
(c) JFTC Notification 34 of 1971 (open lotteries)471
5.473 The United States submits that this notification rules that prizes offered through advertised
or "open" lotteries, involving no required purchase of a product, may not exceed 1,000,000 yen. In
the US view, the JFTC included "photosensitive materials" among selected industries subject to the
new restriction.
5.474 Japan argues that Kodak's use of prizes for their sales promotion has hardly been affected
by Notification 34 of 2 July 1971. Kodak has conducted a large number of promotion campaigns using
open prizes. Japan submits that between 1971 and 1996 (when the limit on "open" prizes was changed
from 1 to 10 million yen), Kodak offered 1-million-yen prizes on only a few occasions. In the majority
of Kodak's promotion campaigns, the first prizes were between 300,000 to 500,000 yen. Even after
the limit was raised to 10 million yen, Kodak kept offering prizes far less than the former limit of
1 million yen. In late 1996, for example, Kodak offered in its promotion campaign 500,000 yen prizes
for first place winners.472
5.475 The United States argues that Kodak has largely curtailed premiums promotions due to the
tight controls imposed. Kodak has developed many ideas for premiums and prizes, but "they were
removed from the plans if they potentially conflicted with government regulations or the industry self-
regulation."473
(d) JFTC Notification 34 of 1973 (country of origin of goods)474
5.476 The United States argues that JFTC Notification 34 of 16 October 1973 limits the extent to
which promotional representations for imported products may be made in Japanese. Among other
things, the notification designates as misleading "[r]epresentations ... which, when applied to foreign
made goods, are found to make it difficult for general consumers to distinguish the goods as made
in the foreign country in question: ... [r]epresentations in which all or a principal part of the literal
description is made in Japanese letters."
5.477 In the US view, limitations on the use of the native language by foreign firms can dramatically
impair the efficacy of marketing efforts for imported products. This is especially true if the restriction
is applied to the brand name or other essential information about the product.475 For the United States,
the less favourable treatment accorded to imports by any limitation on the use of Japanese is manifest
and is exacerbated by guidelines interpreting the notification.476 These guidelines establish exceptions
from the notification in favour of domestic products, exceptions for which there are no analogies
applicable to foreign-made items.
471See Section II.B.3.(a).(ii).
472See Japan Ex. D-27, containing a "List of Kodak's Previous Prizes".
473Affidavit of Sumi Hiromichi, p. 27, US Ex. 96-10.
474See Section II.B.3.(b).(iii). Even though this notification does not appear on the US list of measures challenged,
it is extensively referred to in both parties' submissions.
475In the US view, though the notification also restricts the extent to which representations related to the origin of Japanese
goods may be made in a foreign language, the inability to promote goods in a language other than Japanese does not amount
to a comparable burden.
476Application Standards for "Misleading Representations Regarding Country of Origin of Goods", Secretary General's
Directive No. 12, 16 October 1973, US Ex. 73-5.

5.478 The United States notes, for example, that paragraph 2 of the guidelines permits representations
referring to foreign nations or places to be made in connection with Japanese products if it is "obviously
understood" that the business involved is a Japanese firm. Paragraph 3 provides that domestic products
may be identified with a foreign name, e.g., "French bread," if "clearly not to imply that the country
of origin of the goods in question is a foreign country".477
5.479 For the United States, JFTC Notification 34 and its guidelines clearly disadvantage imports
by imposing restrictive requirements concerning promotional representations bearing upon the country
of origin of products. The notification's regulation of imports in their use of Japanese serves no proper
consumer protection purpose because, regardless of where a product is manufactured, the country of
origincan be clearly identified inJapanese. Moreover, the UnitedStates argues, nolegitimateconsumer
protection purpose is served by carving out exceptions from the notification for domestic but not for
foreign goods.
5.480 In response to the US arguments with respect to JFTC Notification 34, Japan submits that
in the late 1960s, a huge quantity of imported goods began to be distributed in the Japanese market,
in the course of the expansion of exchanges of capital, technology and goods. Unfortunately, improper
representations of the country of origin became widespread in the process. Those representations were
designed to deceive consumers to mistake domestic goods for products of Europe or North America,
and to exploit the consumers' preference of certain products made abroad. With a view to effectively
controlling representation which would mislead general consumers on the countryof origin of products,
the JFTC adopted Notification 34 and also published "Guidelines for the Interpretation of Application
of the Notification".478
5.481 For Japan, the Notification was thus devoid of any purpose or effect of restricting importation
of foreign products; on the contrary, it was designed, partly at least, to preserve fair competitive
opportunities for foreign products against disguised domestic goods in the Japanese market.
5.482 Japan further submits that JFTC Notification 34 is symmetrical and consists of two Items.
Item 1 provides for a regulation of representations which could misrepresent domestic goods as foreign
goods, and Item 2 deals with misrepresentations of foreign goods as domestic goods, as well as
misrepresentation between foreign goods in general.479 The guidelines enacted under the notification
clarify Item 1 in particular. According to Japan, this is because the notification was issued primarily
to deal with representations which disguise domestic goods as foreign goods, and to protect foreign
products. Japan argued that the guidelines apply mutatis mutandis to Item 2 as well.
5.483 Japan argues in addition that as long as the country of origin is clearly expressed in any manner
whatsoever, be it in Japanese, in a foreign language, or in a non-literal expression, the use of the
Japanese language to express all or a major part of literal representations is entirely lawful.
477The United States also noted paragraph 6 which allows domestic products to use:
"(i) Representations comprising the name of or trade mark of a Japanese business written in foreign letters (including
Romanized Japanese), which are found to be clearly distinguished by general consumers as those which are applied
to domestically made goods;
(ii) Representations which are allowed by law to be used as descriptions for general consumers instead of Japanese
(e.g., "All Wool," "Stainless Steel," etc.);
(iii) Representations which are accepted by general consumers as Japanese by virtue of general business practices (e.g.,
"size," "price," etc.); and
(iv) Representations which comprise foreign letters, but where it is obvious that the said letters are used only as patterns,
ornaments and the like, and will not imply that the country of origin of the goods is a foreign country (e.g., the
c[l]ippings from English-language magazines used as patterns on carrier bags)".
478JFTC/Secretary General Circular No. 12 of 1973, Japan Ex. D-54.
479See Section II.B.3.(b).(iii).

5.484 Japan also submits that paragraphs 2, 3 and 6 of the guidelines do not provide for an "exception
of domestic goods" as the United States argues; they are illustrations of representations which would
not mislead consumers. According to Japan, the country of origin rules treat domestic and foreign
goods in a symmetrical manner. Domestic goods may not use a foreign language to express all or
a major part of literal representations unless they carry a recognizable representation to indicate its
Japanese origin. The restriction of the use of the Japanese language for foreign goods should be
understood as a counterpart of the rule applicable to Japanese goods, and should not be understood
to be discriminatory by any means. In this respect Japan notes that the US Federal Trade Commission's
principle of the foreign origin provides that "it is unfair, as a general rule, to sell a foreign product,
or to offer for sale, without disclosing the country of its origin".480 The FTC does not require, on
the other hand, American goods to identify their domestic origin. For Japan, in contrast, the Japanese
countryoforiginrulesunderthePremiums Lawrestrict,equallybetween domesticand foreignproducts,
representations which could mislead consumers about the origin.
(e) JFTC Notification 3 of 1977 ("closed" prizes)481
5.485 The United States argues that the most noteworthy development during early enforcement
of the Premiums Law was JFTC Notification 20 of 1965, regarding "Restriction on Premium Offers
by Prize Competition." In that notification, the JFTC expanded the scope of the lottery notification
to include competitions involving some element of skill, such as quizzes or "pick-a-slogan."482
Notification 3 of 1977 built upon Notification 20 of 1965. The 1977 Notification limited premiums
offered in connection with "closed" lotteries or as prizes in games of random selection as follows:
(1) where the transaction value involved in the premium offer by prize competition is less than 500
yen: 20 times the transaction value; (2) where the value of a connected transaction was not less than
500 yen and below 50,000 yen, premiums were permitted to be worth 10,000 yen; (3) where the
transaction value was at least 50,000 yen but below 100,000 yen, premiums were permitted to be no
more than 30,000 yen; and (4) where the transaction value was 100,000 yen or more, premiums were
capped at 50,000 yen.
5.486 Japan submits that JFTC Notification 3 of 1 March 1977 restricts only unfair sales by lotteries
or prize competition. The ceiling has been set at 20 times of the purchase price or 100,000 yen,
whichever is the lower. The total value of prizes is held within 2 % of total planned sales. The JFTC
has publishedthe "Guidelinesfor the Interpretationof the NotificationonRestriction onPremium Offers
by Lotteries or Prize Competition" ("Prize Guidelines").483 Japan argues that Kodak has taken full
advantage of the availability of "closed prize" campaigns in its sales promotion in Japan. In the list
of Kodak's premiums offers484, the number of "closed prize" offers is almost the same as that of "open
prize" offers. In the United States, sales with lotteries are prohibited in all 50 states by law.
(f) JFTC Notification 5 of 1977 (premiums to consumers)485
5.487 In the view of the United States, Notification 5 of 1 March 1977 on offers of premiums to
consumers, which limits such premiums to 10 percent of the value of associated merchandise, was
particularly detrimental to competition in the film sector. The 10 percent limitation might allow for
480Foreign Origin, Trade Reg. Rep., 7551, Japan Ex. D-55.
481See Section II.B.3.(b).(iv).
482JFTC Notification 20 of 1965, reprinted in Kanpo (Official Gazette), 15 July 1965, p. 5, US Ex. 65-1. The restrictions
imposed under the notification were expanded in 1969, clarified in 1977 and somewhat liberalized in 1981 and 1996. See
JFTC Notification 16 of 1969, US Ex. 69-1, Notification 3 of 1977, US Ex. 77-1, and Notification 13 of 1981, US Ex.
81-1. Nonetheless, the restrictions have remained significant, and currently the maximum premium that may be offered
is 100,000 yen.
483JFTC Secretary General Circular No. 4 of 1977, Japan Ex. D-35.
484Japan Ex. D-27.
485See Section II.B.3.(b).(v).

some meaningful premiums to be offered on high-price items, but it has a far greater impact on sales
of relatively low-price photographic materials. The value of premiums used in connection with low-
priced goods must be high relative to the transaction price, otherwise the rest of the promotion likely
will outweigh its benefits. This meant that brands challenging market leaders could not "shout louder"
in the marketplace. Just as Japan had cut off premiums from manufacturers to wholesalers and retailers,
the United States argued, JFTC Notification 5 essentially precluded large-scale premium promotions
to consumers.
5.488 For the United States, though Notification 5 excludes samples, secondary products necessary
to the use of main products, items given away at store openings or other celebrations, and coupons,
all are subject to the requirement that they must be "reasonable in the light of normal business practice."
5.489 Japan argues that only excessive premium offers are subject to restrictions under JFTC
Notification 5. Japan submitted that it is lawful for film products of 1,000 yen or less to carry premiums
up to 100 yen by means of an all-purchaser offering. For example, a premium of 100 yen, or 25 percent
of the price, may be lawfully offered for a film roll worth 400 yen. For Japan, it is certainly doubtful
if, under normal situations, enterprises can offer, for a sustained period of time, premiums with a value
of 25 percent of the commodity. Kodak, in its recent promotion campaign, has offered a premium
worth 50 yen to each purchaser of a packet of film. This is only half of the upper limit of the purchaser
premium. Japan also noted that for the ease of understanding the notification, the JFTC has published
the "Guidelinesfor the Interpretationof the Notificationonthe Restriction onPremium Offers toGeneral
Consumers" ("All-Purchaser Guidelines").486
6. POST-TOKYO ROUND PROMOTION "COUNTERMEASURES"
5.490 The United States submits that tariff negotiations between the United States and Japan in the
Tokyo Round of Multilateral Trade Negotiations were effectively concluded by August 1978. At the
same time that the Japanese Government agreed to tariff concessions on photographic materials, it
expressed concerns to the United States regarding the ability of foreign producers - most notably Kodak -
to compete aggressively in the Japanese market.487
5.491 The United States further argues that after the conclusion of the Tokyo Round, the Japanese
Government established new institutions to strengthen its existing measures to restrict the use of
premiums. Its first step was to provide greater coordination for the growing number of fair competition
codes and fair trade councils that the JFTC was approving in almost all sectors of the Japanese market.
On 1 April 1979, the JFTC issued administrative guidance to the councils to create an umbrella group,
the Federation of Fair Trade Councils, to coordinate the activities of the various fair trade councils
and provided cooperation and support for them to do this.488
(a) JFTC guidance on the use of dispatched employees489
5.492 According to the United States, in October 1979, the JFTC proposed and the Cabinet approved
the establishment of a Distribution Sector Office ("DSO") to "administer duties pertaining to unfair
486JFTC Secretary General Circular No. 6 of 1977, Japan Ex. D-34.
487The United States submitted the following quote from a letter sent by the US Deputy Special Representative for Trade
Negotiations to the president of Kodak: "I should mention to you something that the Japanese have always mentioned as
an aside during our talks with respect to colour film and paper. The Japanese are very worried about their ability to compete
with Kodak. They have asked for an assurance that Kodak would not market aggressively in Japan. I have indicated to
the Japanese that this is not the kind of assurance that the United States Government has ever given with respect to concessions
we have received" (letter dated 30 August 1978, US Ex. 78-6).
488The Fair Competition Code System and Status of establishing Fair Competition Codes, Kosei Torihiki, No. 390, April
1983, pp. 37-38, US Ex. 83-8.
489See Section II.B.3.(c).(i).

trade practice designations related to distribution".490 Upon its establishment, the DSO studied 16
business sectors, issuing its findings on cameras and photographic materials in December 1981.491
For the United States, the DSO's report conveyed guidance to the "camera, photographic materials,
colour photo laboratories and related industries" to develop "self-regulating measures" - meaning enforced
by the private sector rather than the government - controlling "the permanent dispatch of sales people
so as not to go too far [with] manufacturers' sales promotion methods".492 In the US view, dispatched
employees are a unique form of economic inducement between businesses: they reduce costs for
wholesalers and retailers and thereby allow for increased sales based upon cost or price reductions
passed down the line of distribution.
5.493 Japan submits that the photographic industry was in fact working on standards for the dispatch
of personnel even before the JFTC published the result of the "Survey of Distribution of the Camera
Industry" in December 1981 and issued administrative guidance in the matter.493
(b) 1982 Self-Regulating Measures (dispatch of employees)494 and the Promotion Council495
5.494 According to the United States, the domestic photographic industry responded to the JFTC's
guidance in June 1982 when it promulgated "Self-Regulating Measures Regarding Making Business
Dealings With Trading Partners Fair."496 These measures govern the use of dispatched employees
and contributions by manufacturers and wholesalers to promotions by photospecialty retailers.497 The
NationalPhotographic IndustryFair Trade PromotionCouncil ("Promotion Council"), the enforcement
body for the 1982 Self-Regulating Measures, was established on 23 December 1982.498 The United
States submits that the JFTC has acknowledged that it relies on the Promotion Council to regulate the
use of dispatched employees and promotional contributions to retailers among council members and
that the JFTC also relies on the standards set by the council in regulating the affairs of non-members.
5.495 In the US view, the close relationship between the JFTC and the Promotion Council is reflected
in the council's articles of association, which state that "establishing or abolishing provisions of these
Articles of Association and the responsibilities of this Council shall require prior approval from the
Japan Fair Trade Commission".499 From its inception, the Promotion Council intended to look to
the JFTC for approval and guidance. The Promotion Council’ s Chairman explained the Council’ s
approval process with the JFTC: "And on 22 April, we submitted a draft ... [which went] as the report
of the Distribution Sector Office Director to the Japan Fair Trade Commission. The draft is expected
to pass as it stands, and if passed, the six trade organizations...will look to the Fair Trade Commission
for administrative guidance as we implement self-regulating measures.500 Furthermore, the 1982
Self-Regulating Measures provide that each member "shall exert self-regulation in accordance with
these standards, and the Fair Trade Promotion Council shall, under the guidance of the Japan Fair
490Cabinet Order No. 43 of 1979 as reported in JFTC Annual Report 1980, p. 283, US Ex. 79-1.
491The report referred to by the United States is an article by Kosugi Misao (signed in his personal capacity), an official
at the Trade Practices Department, Distribution Sector Office JFTC, The Status of Distribution of Cameras, Kosei Torihiki,
No. 377, March 1982, US Ex. 82-3. See Section II.B.3.(c).(i).
492Ibid., p. 8. See Section II.B.3.(c).(i).
493According to Japan, the establishment of the DSO led only to sector-specific advisory reports, not any government
action.
494See Section II.B.4.(a).(i).
495See Section II.B.4.(a).
496See translation issue 23.
497See Section II.B.4.(a).(i).
498See Section II.B.4.(a).
499Fair Trade Council Established, "An Attempt to Improve the Structure of Industry," Fujimori Masao (Misuzu) Zenren
Tsuho, January 1983, p. 4, US Ex. 83-3.
500"Six Trade Organizations to Promote Self-Regulating Measures Enhance Normalization of Trade Shashoren’ s Annual
Meeting on 22 April," Nihon Shashin Kogyo Tsushin, 1 May 1982, p. 10, US Answers to First Panel Questions, US Ex.
18.

Trade Commission, issue guidance to them as appropriate and necessary".501 Unlike the "fair trade
councils" previously discussed, which are comprised of representatives of horizontal competitors (e.g.,
camera manufacturers), the Promotion Council is a vertically-integrated industry association representing
photographic materials and equipment businesses at every stage of the distribution system: manufacturers,
wholesalers, retailers and photospecialty laboratories.
5.496 The United States further submits that the Promotion Council took action against imported
film in 1983 when Nagase Sangyo, Kodak's main importer, devised a promotion strategy for the launch
of a special limited edition of Kodak's VR film series, known as Kodak's trial pack. The trial pack
included a 12-exposure roll of each speed of VR film (100, 200, 400 and 1000 ASA). It involved
a number of innovations: the Kodak VR 1000 was the world’ s first color negative film offered at such
a high speed point502 and the series contained a new electronically readable bar code. The series and
promotion were significant in that they were part of Kodak’ s most important campaign in Japan during
the first half of the 1980s.503 The promotion plan entailed extensive print and television advertising
in order "to have as many people as possible become aware of the merits of the VR Series."504
5.497 According to the United States, while the Japanese photographic industry viewed the trial pack
as "really smart" and a "good plan" with substantial potential for success,505 it also saw the campaign
as a significant threat -- "an extraordinary new expansion strategy targeting Japan’ s market.506 This
was so, at least in part, because the VR sold at a 38 percent discount off the standard retail price.
The day after Kodak announced its plans for the VR Series, the Japanese photographic retailers
association indicated that it considered the pricing of the trial pack as problematic. It was concerned
with the impact Kodak’ s trial pack price would have on the prices of domestic film, particularly at
a time when domestic film manufacturers had managed to raise prices.507
5.498 The UnitedStates explained thatmembers of the Japanese photographicmaterials industryacted
swiftly to block Kodak's campaign. The photographic retailers association, acting through the Promotion
Council, moved to prevent implementation of the campaign and asked for the assistance of the JFTC.
The JFTC summoned representatives of Kodak to explain the promotion plan. After hearing the
comments of Kodak's representatives, the JFTC officials issued administrative guidance to Kodak,
instructing Kodak to (1) clarify the limited nature of the offer, identifying the volume of trial packs,
the stores carrying them and the terms of the offer; and (2) cut back its second shipment of trial packs
and announce at each store counter when the product was no longer available.508 Kodak complied with
the guidance.
5.499 The United States further explained that the Promotion Council and the retailers association
convinced Nagase to curtail the trial pack's promotions. In its request, the retailers association urged
Nagase to refrain from showing its discount price in advertisements.509 Furthermore, retail associations
501Self-Regulating MeasuresRegardingMakingBusinessDealingswithTradingPartners Fair,reprintedinCameraTimes,
22 June 1982, p. 3, US Ex. 82-8.
502John Babbitt Affidavit, US Ex. 97-7.
503Ishikawa Sumio Affidavit, US Ex. 97-10.
504Ibid.
505Nagase Sangyo, Limited Edition Pack of Four Types of VR Film to Be Sold Simultaneously Nationwide, Camera
Times, 14 June 1983, p. 5, US Ex. 83-13.
506Photosensitive Materials: Kodak’ s So-called CommemorativeSpeciallyReducedPrices: AnExtraordinaryNewMarket
Expansion Policy? Nihon Shashin Kogyo Tsushin, 20 June 1983, p. 6, US Ex. 83-14.
507US Ex. 83-11, 83-14, 83-15, 83-22.
508Ishikawa Sumio Affidavit, US Ex. 97-4.
509Kodak’ s Trial Pack May Be Packed with "Trouble"? Zenren Fears "Dual Pricing," Like Throwing Cold Water on
a Stabilizing Market, Shashin Kogyo Junpo, 20 June 1983, p. 10, US Ex. 83-16.

asked Nagase "notto list prices in newspapers, and among other places." Kodak was forced to minimize
its promotion of the trial pack.510
5.500 In the US view, the Promotion Council continues to apply pressure on photographic material
manufacturers to reduce the number of employees they dispatch to retailers. As recently as July 22,
1996, the Promotion Council issued a "directive" to Kodak stating that the council has "decided in
July 1995 to request your [Kodak's] cooperation in continuing to reduce dispatched employees" and
that Kodak is to "immediately report the status of your company to this Council".511
5.501 For Japan, the Promotion Council is a private-sector organization and has no governmental
authority. Its action is therefore not subject to the inquiry of the WTO. Generally speaking, the JFTC
is consulted by business entities or organizations over issues under the Antimonopoly Law and responds
to their inquiries. Indeed, the Promotion Council was established after consultation with the JFTC.
These consultations with the JFTC may not delegate any authority to the Council. If the organizations
should commit unlawful activities - such as a cartel to restrict importation - , the JFTC will vigorously
apply the Antimonopoly Law.
5.502 According to Japan, there has not been a problem of dispatched employees in the photographic
film andpaper industry. Thisisprobablybecause the sales method of promotionthroughmanufacturers'
employees is, normally, not an effective marketing tool of film products; most consumers choose
merchandise on their own, rather than relying on employees' sales talks. On the other hand,
photographic paper is marketed to professionals who do not normally rely on dispatched employees.
5.503 Japan argues that membership of the Promotion Council is non-discriminatory and open to
domestic and foreign entities. In fact, Kodak is a member through its affiliation with the Camera
Manufacturers' Association, and has been in a position to be fully aware of the council's activities.
5.504 Japan notes that the Promotion Council refers to the JFTC's "approval" or "guidance". Although
they are free to declare that they will seek the JFTC's approval, or follow its guidance, such reference
does not confer on the Council any authority of the JFTC. No law allows the JFTC to delegate its
authority to the Promotion Council.
5.505 According to Japan, there is no evidence that the Promotion Council has treated foreign entities
in a discriminatory manner. The only case the United States refers to is the VR series case.512 For
Japan, the only role the JFTC played in the VR campaign was that its staff invited Kodak employees
and exchanged views on the promotional plan of VR series. Whatever the Promotion Council did in
the campaign has nothing to do with the JFTC. There is no alignment between the JFTC and the
Promotion Council or Zenren (the retailers association). Officials who were in charge of the matter
at the JFTC do not have accurate recollection of the meeting where Kodak allegedly had to explain
itspromotionplan. Judgingfrom the circumstances, the officialsmighthave heard both parties' position
and explained the relevant regulations. In any event, since apparently the promotion by Kodak was
and is lawful, the officials could not have exercised any substantial guidance.513 For Japan, it should
be obvious that the JFTC did not impede the VR campaign and it is simply untrue that Zenren, the
Promotion Council and the JFTC acted in unison to prevent the VR campaign.
510Zenren Boldly Advances Two Strategies for Rectifying the Increasingly Meaningless Nature of Standard Pricing at
its 50th Anniversary Gathering, Zenren Tsuho, November 1983, pp. 8-15, US Ex. 83-22.
511Promotion Council Issue No. 8-1, 22 July 1996.
512Japan argued that statements contained in Mr. Ishikawa Sumio's affidavit of the United States are not substantiated
by objective evidence and therefore are not trustworthy.
513Ibid.

5.506 The United States submits that Japan's efforts to disassociate itself from the codes and councils
it created should be accorded little weight. The "fair trade councils" and "fair competition codes"
are the direct result of section 10 of the Premiums Law, which explicitly authorizes businesses and
trade associations to create codes relating to premiums and advertising. The Premiums Law further
provides the JFTC with oversight authority, allowing the JFTC to subsequently revoke its approval
of a code. Moreover, the United States points out that Japan’ s position that the codes and councils
cannot be attributed to the government directly contradicts the position it took in the 1987 Japan -
Liquor Taxes and Labelling Practices Dispute, where it cited its system of "fair competition codes"
under the Premiums Law as a form of "legal regulation." Japan stated in its submission to the Panel
that "labelling of alcoholic beverages in Japan is regulated by a range of legal controls as follows....
(iii) fair competition codes in accordance with the said Act [against Unjustifiable Premiums and
Misleading Representations.]"514
(c) JFTC guidance on dumping and loss-leader advertising515
5.507 The United States argues that in May 1983, the Director of the JFTC's Premiums and
Representations Guidance Division pressed the Promotion Council to expand its operations into new
areas: "it is of critical importance to develop rules one by one against dumping and loss-leader
advertising."516 The Division Director explained that, "from the perspective of those of us who apply
[the laws,] our position is that we will respect the voluntary standard you establish...so we feel that
you need to establish your own voluntary standard."517 According to the United States, the Promotion
Council recognized that dumping cases can be quite difficult to prove and administer, but determined
that a charge of misrepresentation may be a better course. As the Promotion Council explained: "If
dual pricing can be taken up as a representation issue, we can certainly tackle the problem by
communicating closely with the JFTC. It is true that the representation issue rather than prices in and
of themselves is better suited to self-regulating measures. There are the fair competition codes based
on the Law Against Unjustifiable Premiums and Misleading Representations from which the
manufacturers and wholesalers have already made their own Codes on camera premiums. Just like
it is with premiums, the issue of price representation is well suited to the concept of voluntary
restrictions."518
5.508 Japan argues thatthe above-quoted"guidance" wasnotproperlytranslatedbytheUnitedStates.
The proper translation of "it is of critical importance to develop rules one by one against dumping
and loss-leader advertising", is, according to Japan, "with regard to unjustifiable low prices and bait
advertising, it is important to pile up one by one". For Japan, the meaning of this sentence is not even
clear from the context.
(d) 1984 Self-Regulating Standards (developing fees)519
5.509 The United States submits that the 1984 Self-Regulating Standards prescribed the manner in
which prices for film developing and printing could be represented. The standards stipulate "provisions
in regard to the representation of photo processing fees for colour negative film ... and printing fee[s]
for service-size prints for direct orders from general consumers until the Fair Competition Code
514Panel Report on Japan - Liquor Taxes and Labelling Practices, adopted 10 November 1987, BISD 34S/83, 86-87,
para. 2.7.
515See Section II.B.3.(c).(ii).
516Yamada Akio, Premiums and Representatives Guidance Division Director, as quoted in Suggestions on How the Fair
Trade Promotion Council Should be, Zenren, Tsuho, May 1983, p. 2, US Ex. 83-9. Japan disagrees with the US translation
of this phrase. See translation issue 22.
517Regarding the Antimonopoly Law and "Fair Trade", Shashoren Lecture Series (Part II), Shashin Kogyo Junpo, 10
June 1983, p. 10, US Ex. 83-11.
518Zenren Tsuho, October 1983, pp. 8-9, US Ex. 83-21.
519See Section II.B.4.(a).(ii).

[governing such representations on prices] is established". The standards also authorize the Promotion
Council to "conduct investigations and provide guidance on the operation of these Standards if necessary".
5.510 According to Japan, these standards were adopted when service providers only displayed
inexpensive print charges and then charged customers a high developing fee. The intention of the
guidelines was to give consumers adequate information of both charges. As such, the guidelines are
not related to sales of film products, and the JFTC's role was limited. Incidentally, the guidelines
were not effectively implemented because there were too many outsiders. In this respect, Japan also
referred to the Code of Practice for Photographic Industry of the United Kingdom which provides that
"[t]he retailer will display his prices for developing film and for the main sizes of print" and that
"[r]etailers will have on display, or be prepared to indicate to customers, their service times for prints,
and will maintain close contact with the processing laboratory".
5.511 The United States submits that since the 1984 Self-Regulating Measures cover "DP
representations", or "representation[s] of the photo processing fee for colour negative film", there is
a relationship between these measures and photographic materials.
(e) JFTC approval of 1987 Retailers Code and Retailers Council520
5.512 For the United States, the Retailers Code sets forth numerousrequirements for almost all forms
of promotions, such as identifying the name of the manufacturer and price of the merchandise. Article
5 requires that, in the event an advertisement compares the price of a camera or related product to
other such products, the advertisement must: (1) rely upon the manufacturer's suggested retail price,
the importer's suggested retail price or the shop's normal retail price for the comparative rate; and
(2) state a discount rate that is based upon the manufacturer's suggested retail price, the importer's
suggested retailprice orthe shop'snormal retailprice. Article7 restricts the use of terms like"cheapest"
or "very best" in advertising, mandating that "objective factors" be demonstrated in order to do so.
Article 10 prohibits, among other things, the use of expressions such as "super cheap," "give-away
price" or "super special price" if such expressions will lead the "consumer to believe the offer is better
than it actually is." The United States explained that the purpose underlying the establishment of these
rules was to inhibit aggressive promotions and price discounts. In this regard, the United States
maintained that the Retailers Council Secretary General informed Kodak that the Council "would
contribute significantly in particular to stabilize price ... ."521
5.513 In the US view, Articles 3 and 4 include provisions that, on their face, discriminate against
imports with respect to representations concerning the country of origin of the product. Article 3,
pertaining to storefront displays, and Article 4, governing fliers, require advertisements to indicate
the country of origin for imported merchandise. Advertisements subject to Articles 3 and 4, however,
do not have to include a statement indicating that items were made in Japan, unless such domestic
merchandise may be confused with imported products.
5.514 For the United States, though it does not explicitly include film within its scope522, the Retailers
Code has been applied to promotions for film and paper products. This expansive application arises
from Article 2.2 of the code which provides: "To attain the objectives outlined in the above Article
[1], businesses are to respect the spirit of this code even when the products being dealt with do not
520See Section II.B.4.(b).
521Ishikawa Sumio Affidavit 1, p. 1, US Ex. 97-4.
522Article 2 of the Retailers Code states that the code applies to "Cameras and Related Products". Japan disagrees with
the US translation of "Kamera-rui". See translation issue 17.

correspond exactly to Cameras and Related Products".523 According to the United States, application
of the code to film and developing and printing was fundamental to securing support for the Retailers
Code and the Retailers Fair Trade Council from the retailers association.524
5.515 In the US view, the Japanese Government has delegated authority to the Retailers Council to
take enforcement actions under both the Retailers Code and the Premiums Law.525 For the US, the
council is just like a subcontractor for the JFTC. This authority was made plain upon commencement
of the Retailers Council's operations in June 1987, when the director of the JFTC's Premiums and
Representations Division Office remarked that, by approving the Retailers Code, the JFTC had deputized
the Retailers Council to take action on its behalf: "The approval of the Code means that the role I
play in following up on violations will be left to the Fair Trade Council. If this expectation is not
met, [the approval] will have no meaning."526 The council may provide "directions in connection with
the Code", make "adjustments in how the Code is being observed", investigate "the facts when there
is suspicion of violation of the Code", take "necessary steps against those who have violated the Code",
process "complaints received from the general consumer", and serve as a liaison "with competent
authorities". With regard to Article 14-7, the Council is authorized to engage in "[a]ctivities pertaining
to making the Act Against Unjustifiable Premiums and Misrepresentations and other laws and ordinances
pertaining to fair trade widely understood and preventing violations thereto" (emphasis added). For
the United States, the language of Article14-7 delegates authorityto the Council totake actiontoprevent
violations of fair trade laws. This language indicates that the Council plays an integral role in enforcing
the law. Article 15 provides that the Council may investigate suspected violations of the Code and,
if such violations are found, Article 16 states that the Council may punish offenders through fines or
other methods of coercion.527
5.516 The United States argues that even before the Retailers Code went into effect, the Retailers
Council took action to chill competition through restrictions on advertising. As of the time the Code
and the Council became fully operational, discounters with large store networks had already "toned
down"theirrepresentationsandevennon-participantsinthecode,or"outsiders",hadbeen "silenced".528
The United States submits that just as the Promotion Council had used its authority to regulate
misrepresentations to suppress Kodak's discount VR campaign, the Retailers Council similarly uses
its power over price representations to limit discounting and promote stability among competitors.
Ironically, when confronted with a large-scale promotion similar to the VR campaign conducted by
a domestic manufacturer, Konica, the Retailers Council took no action.529
5.517 According to the United States, a key element of the Japanese Government's enforcement strategy
to control the nature and level of promotion competition in the photographic sector was to ensure that
the standards established in the Retailers Code applied to the activities of all businesses selling
523TheUnitedStates quoted, for example, theFair TradeCouncilvice-chairman asfollows: "Camerasandrelatedproducts
does not mean cameras alone but also means [more] broadly products handled by camera shops ... Photosensitive materials
and developing and printing are never outside of the scope" (Interpretation of the Fair Competition Code Seems Still in
Confusion, Shukan Shashin Sokuho, 7 August 1987, US Ex. 87-9).
524Discussion on Progress of Fair Trade Council Focuses on Making Fair Competition Code Fully Known, Zenren Tsuho,
August 1987, US Ex. 87-7. Japan disagrees in part with the US translation of this article. See translation issue 18.
525"Fair Trade Council Established," Operated by Zenren, Will Respect "Fair Competition Code" - Urgent Need to Make
Code Known by October Start, Zenren Tsuho, July 1987, p. 3, US Ex. 87-5. Japan disagrees with the US translation of
"teki-hatsu" as "enforcement action" in US Ex. 87-5. See translation issue 20.
526Ibid., p. 7.
527Fair Trade Competition Code Regarding Representations in Camera and Related Products Retail Industry, 1987, US
Ex. 87-1.
528Don't Give Up Exposing and Forwarding Materials [Regarding Violations] - Japan Fair Trade Commission Probing
Non-Members' "Representations Violations", Zenren Tsuho, February 1988, US Ex. 88-2. Japan disagrees with the US
translation of a phrase in US Ex. 88-2. See translation issue 21.
529Japan argued that Konica's offer of free sample films, referred to by the United States, does not constitute a violation
because the Premiums Law does not restrict the distribution of free samples not linked to sales.

photographic items - not just businesses that agreed to adhere to the codes. The United States submits
that the JFTC confirmed that it relies upon "fair competition codes" when applying the Premiums Law
to "outsiders" and that "outsiders" may be treated more severely than code participants.530 As recently
as 1995, the JFTC confirmed that it relies upon "fair competition codes" when applying the Premiums
Law to "outsiders": "The Japan Fair Trade Commission will directly regulate those who do not participate
in the Codes, but as long as the Codes are observed and recognized as having been established in
accordance with normal businesspractices, the Japan Fair Trade Commission uses the Fair Competition
Codes as reference when it applies the law."531
5.518 Japan submits that members of the Retailers Code consist of 49 prefecture-wide retailers
organizations, which represent 6600 individual business entities. The Retailers Code deals only with
representations; premiums are completely outside its scope. The purpose of the code is to "protect
the opportunity of general consumers to properly choose merchandises, to prevent undue inducement
of customers, and thereby to ensure fair competition".532 The Code does not hinder normal sales
promotion activities of the enterprises, either domestic or foreign.
5.519 In Japan's view, the language of the Retailers Code makes it clear that it applies only to the
"camera category" and has never been applied to film and paper.533 Article 2, paragraph 1, of the
Code defines the "camera category" as follows:
"The 'camera category' of the present code shall mean those which are specified in
the implementation rules to the present code".
Article 1 of the implementation rules then defines:
"The 'camera category' ... shall mean (i) portable cameras, substitute lenses, small
movie equipments (8-mm cameras, 16-mm cameras, 8-mm projectors and 16-mm
projectors), electronic visual equipment (video cameras and still videos) and slide
projectors; (ii) photographic electronic flash, photographic filters, photographic
attachment lenses, photographic conversion lenses, camera tripods and camera bags.
For Japan, it is obvious from the text that film or paper is not included here.
5.520 Japan argues that although Article 2, paragraph 2, of the Code provides that "business entities
should observe the object of the present code with respect to the camera category not specifically included
in the scope of the code," the term "camera category not specifically included" means such equipment
which was not existent at the time of the adoption of the Code but may be manufactured through
technological innovations. Film and paper, on the other hand, are photographic material and do not
fall under the "camera category". Japan submits that the JFTC has never allowed and has no intention
to allow application of the code to film or paper.534
5.521 Japan submits that even assuming that the Code would apply to film and paper, the fact remains
that the United States has failed to mention which specific provisions of any "code" or which specific
530See translation issues 24(1) and 24(2) concerning a quotations from: "Consumer Life and the Fair Competition Codes",
All Japan Fair Trade Council Federation, US Ex. 95-9; and "Fair Competition Code Regarding Representations in the Camera
Category Retailers Industry," US Ex. 87-1.
531Shohisha no Kurashi to Kosei Kyoso Kiyaku [Consumer Life and Fair Competition Codes], March 1995, p. 10, US
Ex. 95-9. Published by All Japan Fair Trade Council Federation, and commissioned by the JFTC (emphasis supplied).
532Article 1 of the Retailers Code.
533See also translation issue 17.
534In this context, Japan states that it disagrees with a number of respects with the US translation of "Fair Competition
Codes, Sweet Fantasies and Illusions Ought to be Taboo, Shashin Kogyo Junpo, 1 August 1987, US Ex. 87-8. See translation
issue 19.

activities of any "council" have upset the competitive conditions of imported photographic film and
paper.
5.522 Japan also submits that even the substantive rules of the Retailers Code by no means upset
the competitive conditions of any imported products. Japan argues that self regulatory rules on
advertisement including representations is quite common in North America, Europe, and almost
everywhere. Japan mentions the "Distilled Spirits Council of the United States, Inc." and the
"Advertising and Marketing Code" among the members of the "Beer Institute" in the United States.
5.523 Japan further notes that the Retailers Council is merely responsible for the observance of the
code against misleading representations and has no authority to enforce the Premiums Law nor may
it restrict low price offers in any way. For the purpose of implementation, codes normally establish
a fair trade council as a voluntary organ to ensure observance of the self-regulation. Some of the codes
contain provisions for monetary penalties for non-compliance or for expulsion of parties involved.
According to Japan, these measures are designed to ensure effectiveness of voluntary restraint. They
do not mean that the JFTC's authority has been delegated to these bodies. In this respect Japan referred
to codes with similar enforcement mechanisms in the United Kingdom and Australia.
5.524 Japan argues that the Retailers Council may take measures agreed in the self-regulation against
insiders, but may not apply the Code to non-members. Outsiders will not be subjected to any action
of the Council for any non-compliance with the Code. The JFTC, in the meantime, makes its own
judgment about the conduct of the outsider, and will not take any action unless it is in violation of
the Premiums Law. Japan notes that the rule on representations in the codes embodies the Premiums
Law, and that there is no fundamental disagreement between the concept of misleading representations
under the Premiums Law, and that prohibited by the codes.
5.525 With respect to the US argument that Articles 3 and 4 of the Retailers Code require the
representation of the country of origin only with respect to foreign goods but not to domestic goods
in general, Japan argues that the concept behind these Articles is fundamentally no different from the
JFTC Notification 34 on country of origin of goods. They are intended to provide adequate information
to consumers.
5.526 The United States emphasizes that it is irrelevant whether the codes and councils govern film
and paper de jure or de facto. What does matter is that Japan has organized the most powerful elements
of its domestic photographic industry and allowed them to set standards on how products in their sector
may be promoted. For the United States, Japan made a bold contention in suggesting that rules adopted
by Japan's leading photographic retailers or wholesalers, which govern the promotion of almost every
item these businesses sell, will have no effect on film and paper. The United States also points out
that the developing and printing division manager of the Retailers Council explained that film and
developing and printing are subject to the Code: "They are not included in the items subject [to the
Code], but the spirit of the Code is to recover order in the industry and, in the photosensitive materials
and development printing divisions as well, we would like to deal with them by making the most of
Article 2 Section 2 of the Code – - that is, ‘ to respect the spirit of this Code even when the products
being dealt with do not correspond exactly to Cameras and Related Products".535 Indeed, coverage
of film and developing and printing was fundamental to securing support for the Retailers Code and
the RFTC from the retailers association: "Based upon the explanation given by some executives, we
first understood photosensitive materials and development printing to also be included. With that
understanding, we persuaded Zenren [photographic retailers association] members and they, in turn,
with that understanding, contributed funds."536 It would, "indeed, have been impossible to persuade
535Discussion on Progress of Fair Trade Council Focuses on Making Fair Competition Code Fully Known, Zenren Tsuho,
August 1987, p. 17, US Ex. 87-7.
536Ibid., p. 18.

Zenren members whose main line of business is development printing to contribute if [the regulations]
only [apply to] hardware."537 The vice-chairman of the Retailers Council has confirmed this, stating
that: "Cameras and related products does not mean cameras alone but also means [more] broadly
products handled by camera shops ... Photosensitive materials and developing and printing are never
outside of the scope."538
7. SUBSEQUENT ENFORCEMENT
5.527 TheUnitedStatesarguesthatJapan's"promotioncountermeasures"havebeenemployedlargely
through informal enforcement mechanisms - primarily warnings and threats - that leave businesses
uncertain as to the scope of the governing laws, codes, rules or standards. The JFTC has initiated
relatively few formal enforcement actions, but it has issued many "administrative guidances". These
informal procedures often target imports, volume sales stores and other mavericks who threaten to
undermine the artificial stability of the Japanese photographic materials market.
5.528 In the US view, the effect of the overlapping enforcement mechanisms - the JFTC, the Promotion
Council, the "fair trade councils" and trade associations - coupled with the numerous legal provisions
that could stymie a promotion, have had a significant chilling effect on importers like Kodak. Kodak
has attempted to implement innovative marketing campaigns within the restrictive confines of the
promotion countermeasures. However, these restrictions have repeatedly thwarted Kodak’ s efforts
to promote its products. Kodak has developed many ideas for premiums and prizes, but, according
to a general manager of Kodak, "they were removed from the plans if they potentially conflicted with
government regulations or the industry’ s self-regulation ... we tried to regulate ourselves before receiving
such measures from the JFTC on the Fair Trade Council. In this sense you can surely say that the
regulations on premiums and prizes have had an effective deterrent effect and have actually limited
Kodak’ s sales promotional activities". Furthermore, "Kodak has invariably devised its sales strategy
and its representations and advertisement while giving consideration to how the Japan Fair Trade
Commission on Fair Trade Council would react. In this way, the Japan Fair Trade Commission’ s
regulations and Fair Trade Council’ s views have had a formidable deterrent effect on Kodak’ s premium
and prizes".539
5.529 The United States mentions several examples involving premiums in connection with film
developing, prizes and other promotions which Kodak attempted to launch but had to cancel. In 1990,
the JFTC intervened in a promotion conducted by a Kodak-affiliated retail outlet. Nakamurabashi
Photo Station, a photofinishing laboratory, offered a premium in connection with film developing:
a photo album worth around 200 yen. According to the United States, the JFTC found this promotion
tobe too radical and gave guidance totake sufficientprecautions onsubsequentpromotionalactivities.540
In another instance, in 1979, Kodak conducted a contest offering video cassette recorders as prizes
worth approximately 100,000 yen. The JFTC informed Kodak that its contest was improper.541 Later,
Kodak attempted to devise joint promotions with McDonald's but was frustrated by the ten-percent
limitation on premiums that may be offered to general consumers. Kodak wanted to give away free
Kodak Panorama single-use cameras with McDonald's meals. Because of the ten-percent rule, Kodak
had to settle for a promotion in which purchasers of a McDonald's meal got a 'luck draw' which gave
them a ticket and a chance to win a Panorama camera through a drawing.542
537Ibid.
538Shukan Shashin Sokuho, 7 August 1987, p. 3, US Ex. 87-9.
539Affidavit of Sumi Hiromichi, p. 27, US Ex. 96-10, p. 5 and 6.
540Affidavit of Isshi Norito, 1 February 1997, US Ex. 97-5.
541Affidavit of Yasuyuki Suzuki, p. 1, US Ex. 97-6.
542Affidavit of William Jack, former Kodak vice-president for marketing in Japan, p. 8, US Ex. 97-2.

5.530 For the United States, this "chilling effect" has been compounded by the opaque nature of the
operation of the "fair competition codes" and "fair trade councils," which create a kind of cartelization
arrangement by which cutthroat competition is avoided and profit levels are maintained. The system
of codes and councils elevates industry trade associations, like the retailers association, to quasi-
governmental institutions with wide-ranging powers. As a result, Kodak has faced frequent opposition
to its proposed promotions from the retailers association (Zenren). The United States cites the example
of a 1987 arrangement between the Ministry of Posts and Communications and Kodak according to
which Kodak would sell photographic post cards at post offices across Japan at prices undercutting
the going retail price. Consumers would be able to charge the cost of the postcards against their savings
deposits at the post offices. However, the Ministry withdrew from the arrangement because of pressure
exercised by Zenren and issued administrative guidance to Kodak to withdraw from the plan. Kodak
was forced to comply because of commercial risks involved in disobeying the ministry's guidance.543
5.531 Japan submits that in the cases it was aware of actions were taken because premiums involved
were in excess of the lawful ceiling. Japan argues that the origin of the product had nothing to do
with the JFTC's action, and similar campaigns for domestic products would have been equally held
unlawful. Japan argues that premiums regulations have been further relaxed, in particular since 1994,
and are subject to the JFTC's continuous review in light of the shifting economic environment. In
February 1996, the JFTC announced the result of the review and implemented the "new general
premiums rule" applicable to all industries in April of the same year.544 As the next step, the JFTC
is reviewing, since April 1996, premiums regulations applicable to individual industries, including
industry-specific JFTC Notifications or private "fair competition codes" in order to ensure consistency
with the new general premiums rule. As a result, out of 29 industry-specific notifications, 10 (including
the Notification regarding the "Restrictions on Premium Offers in the Camera Industry") have been
abolished as of March 1997.545
5.532 Japan submits that since film and paper fall outside the scope of any fair competition code,
and are not subject to any action by a fair trade council, the US arguments on the "chilling effect"
of these codes and councils make sense only in relation to Kodak cameras, and not to film products
on which the United States bases its complaint in the present proceeding. According to Japan, Kodak's
account of an attempted "post card" campaign is somewhat mysterious. No one in the relevant Japanese
government office apparently remembers such an incident. In any case, for Japan, such episode has
nothing to do even with the alleged "promotion countermeasures".
543Affidavit of Suzuki Mikio, p. 3, US Ex. 97-3.
544Kanpo, 16 February 1996, Japan Ex. D-30.
545Kanpo, 10 December 1996, Japan Ex. D-31.