Document: WT/DS44/R Page 1
Date: 13 June 1996
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

I. PROCEDURAL HISTORY
1.1 On 13 June 1996, the United States requested consultations1 with Japan pursuant to Article 4.4
of the Dispute Settlement Understanding (DSU) and Article XXIII:1 of the General Agreement on Tariffs
and Trade 1994 (GATT) regarding certain laws, regulations and requirements of Japan affecting the
distribution, offering for sale and internal sale of imported consumer photographic film and paper.2
The United States considered that the Japanese measures specified in its consultation request violated
the obligations of Japan under GATT, including Article III and Article X, and that those measures
nullified or impaired benefits accruing to the United States directly or indirectly under GATT, within
the meaning of Article XXIII:1(a) and (b). The United States further stated that it reserved the right
to raise additional factual claims and legal matters during the course of the consultations. The
consultations were held on 11 July 1996, but failed to resolve the dispute.
1.2 On 20 September 1996, the United States requested the establishment of a Panel pursuant to
Articles 4 and 6 of the DSU.3 In its request, the United States alleged that Japan has implemented
and maintainscertainlaws,regulations,requirementsand measures(hereinafter collectively"measures"
or "'countermeasures'")4 affecting the distribution, offering for sale, and internal sale of imported
consumer photographicfilm and paper. The US consideredthatsuchmeasures nullifyorimpair benefits
accruing to it, within the meaning of Article XXIII:1(a), as a result of the failure of Japan to carry
out its obligations under Articles III and X of GATT. More specifically, the United States claimed
that the Japanese Government measures:
a. were implemented and maintained so as to afford protection to domestic production
of consumer photographic film and paper within the meaning of Article III:1 of GATT;
b. conflict with Article III:4 of GATT by affecting the conditions of competition for the
distribution, offering for sale, and internal sale of consumer photographic film and
paper in a manner that accords less favourable treatment to imported film and paper
than to comparable products of national origin; and
c. conflict with Articles X:1 and X:3 of GATT because the measures lack transparency
in that they were not promptly published and were not administered in a uniform,
impartial and reasonable manner.
In addition,theUnitedStates claimed thatthe applicationof these measures byJapan nullifiesorimpairs,
within the meaning of Article XXIII:1(b) of GATT, the tariff concessions that Japan made on black
and white and colour consumer photographic film and paper in the Kennedy Round, Tokyo Round,
and Uruguay Round multilateral tariff negotiations. The US claims are discussed in more detail in
Part III below.
1The request was circulated as WT/DS44/1 on 21 June 1996.
2The term "consumer photographic film" as used by the United States includes both colour and black and white film
designed and used for capturing personal images by consumers through still photography using silver halide technology.
It includes both negative and reversal (slide) film, and includes film incorporated in so-called "single-use cameras" which
are returned along with the film to the photoprocessing facility. It excludes various specialized films used by professional
photographers for resale ("professional" film) and various other specialty films (x-ray film, microfilm). The term "consumer
photographic paper" as used by the United States refers to photosensitive paper used to make still colour and black and white
photographic prints from consumer photographic film for the images and applications typically demanded by consumers.
3The request was circulated as WT/DS44/2 on 23 September 1996.
4The parties disagree on the translation on the Japanese word taisaku. The United States uses "countermeasure", whereas
in Japan's view, "measure" or "policy in response to" are more adequate. See Annex on Translation Problems, translation
issue 1.

1.3 At its meeting on 16 October 1996,5 the Dispute Settlement Body (DSB) established a Panel
in accordance with Article 6 of the DSU. However, since Japan expressed its concerns about the
procedural problems of the US panel request, the DSB agreed that the terms of reference were to be
drawn up by the parties to the dispute within 20 days in accordance with Article 7.1 of the DSU.
The parties to the dispute failed to agree on the terms of reference and, as a result, the standard terms
of reference as set out in Article 7.1 of the DSU were applied:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the United States in document WT/DS44/2, the matter referred to the DSB by the
United States in that document and to make such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those agreements".6
1.4 The European Communities and Mexico reserved their rights as third parties to the dispute.
1.5 On 12 December 1996 the United States, pursuant to Article 8.7 of the DSU7, requested the
Director-General to determine the composition of the Panel.
1.6 On 17 December 1996, the Director-General composed the Panel as follows:
Chairman: Mr. William Rossier
Members: Mr. Adrian Macey
Mr. Victor Luiz do Prado
1.7 The Panel held two substantive meetings with the parties to the dispute. The first was held
on 17 and 18 April 1997, and the second on 2 and 3 June 1997. The Panel had one meeting with
the third parties to the dispute, on 18 April 1997.
1.8 In view of the fact that the dispute involved the consideration of a large volume of documents,
which were predominantly in the Japanese language, it was essential that these documents be translated
into the working language of the Panel, which was English. It was essential that such translations be
correct, and that in the event of any disagreement between the parties as to the correct translation,
a mechanism be established to resolve such translation problems.
1.9 Inthisregard, the Panel, inconsultationswiththe parties,drew upProcedures for the Resolution
of Possible Translation Issues. These provided as follows -
1. The party first relying on a Japanese-language document in a written submission or
oral presentation shall provide copies of the full Japanese-language document and the relevant
portions in English at the time that the party first makes reference to the document in the Panel
proceedings.
2. If one party believes that additional portions of a previously submitted document are
relevant, it shall then supply the additional translation at the time that that party first makes
reference to the document in the Panel proceedings.
5WT/DSB/M/24.
6WT/DS44/3, dated 7 December 1996.
7Article 8.7 of the DSU: "If there is no agreement on the panelists within 20 days after the date of the establishment
of a panel, at the request of either party, the Director-General, in consultation with the Chairman of the DSB and the Chairman
of the relevant Council or Committee, shall determine the composition of the panel by appointing the panelists whom the
Director-General considers most appropriate in accordance with any relevant special or additional rules or procedures of
the covered agreement or covered agreements which are at issue in the dispute, after consulting with the parties to the dispute.
The Chairman of the DSB shall inform the Members of the composition of the panel thus formed no later than 10 days after
the date the Chairman receives such a request".

3. Ifone partydisagreeswiththeotherparty'stranslationofaJapanese-language document
or portion thereof, it shall prepare an alternative version of the contested portion of the
translation. This shall be submitted to the Panel and to the other party with supporting written
argumentation as needed. The other party may also submit its argumentation at this stage.
4. To the extent relevant for the resolution of the legal issues involved in this case, the
Panel shall attempt to resolve any translation problem submitted to it, having recourse as
necessary to independent experts appointed by the Panel, or to such other means as the Panel
deems appropriate to the circumstances.
1.10 The Panel appointed the following translation experts:
Professor Zentaro Kitagawa, Kyoto Comparative Law Center, Kyoto, Japan; and
Professor Michael Young, Center for Japanese Legal Studies, Columbia University School
of Law, New York, USA.
1.11 The translation problems raised by the parties which were submitted to the experts, and the
responses by both experts are attached to this report in an "Annex on Translation Problems".
1.12 The Panel issued the descriptive part to the parties on 22 September 1997. The interim report
was issued on 5 December 1997. Pursuant to Article 15.2 of the DSU, both parties submitted written
requests for the Panel to review precise aspects of the interim report on 19 December 1997, but did
not ask for a further meeting to discuss the issues identified in their requests. The Panel issued the
final report to the parties on 30 January 1998.

II. SUMMARY OF FACTUAL ASPECTS
A. THE MARKET FOR PHOTOGRAPHIC FILM AND PAPER IN JAPAN
2.1 This dispute concerns the distribution of imported consumer photographic film and paper in
Japan. Throughout this report, the terms "photographic film and paper" and "photographic materials"
shallbe understoodtomean consumer photographicfilm andpaper orconsumer photographicmaterials.
2.2 The history of the Japanese tariff bindings and applied rates for photographic film and paper
in Japan are as follows:
ROUND FILM PAPER
B&W Colour B&W Colour
Pre-Kennedy (1964) 30%* 40%* 25%* 40%*
Kennedy Round (1967) 15.0% 40%* 12.5% 40%*
Tokyo Round (1979) 7.2% 4.0% 6.6% 4.0%
Uruguay Round (1994) Free Free Free Free
(* = Applied, not bound)
Until 1970-72,black and whitefilm and paper were the predominantproducts usedinJapan. Thereafter,
the dominant products were colour film and paper. Today, colour film and paper account for 97 percent
of Japan's total market for consumer photographic materials, with black and white film and paper
accounting for only 3 percent.
2.3 Japan's photographic materials market is supplied by four manufacturers, two domestic and
twoforeign.8 The twodomestic manufacturers are FujiPhotoFilm, Ltd. (Fuji), and Konica Corporation
(Konica). The two foreign manufacturers, Eastman Kodak Company of the United States (Kodak)
and Agfa-Gevaert Aktiengesellschaft of Germany (Agfa).
2.4 Japan notes that since 1965 the share of imports in the Japanese market for colour film has
ranged from 9 percent to a peak of 20.0 percent in 1981. According to the United States and Japan,
the import share of the Japanese market for photographic film was around 15 percent by 1995 and
that of this, Kodak's share is around 10 percent and Agfa's around 5 percent of the market. Japan
further submits that for black and white film the share of imports has ranged from about 2 percent
in 1965 peaking at around 41.4 percent in 1985 and settling at around 25 percent by 1995. According
to Japan, Kodak's share of the black and white market has increased from 3.6 percent in 1967 to a
peak of 17.6 percent in 1983.
2.5 The United States submits that foreign film manufacturers distribute all of their film through
wholly-owned local sales subsidiaries. Two-thirds of Kodak film is, in turn, sold to retailers, 9 per
cent is sold to so-called secondary photospecialty wholesalers, with the remaining sold through Kodak-
affiliated photofinishing laboratories. Agfa's local subsidiary sells 90 per cent of its film to retailers
and the rest to secondary wholesalers. Fuji sells all of its film to primary wholesalers, who then resell
through regional secondary wholesalers and 8 per cent through laboratories, while the remainder is
sold direct to retail. Konica sells through sales subsidiaries that were once independent photospecialty
wholesalers.
8Polaroid, which specializes in instant-print film, also sells photographic materials in Japan. However, the United States
is not claiming nullification and impairment or violation with regard to instant-print film. Two domestic manufacturers,
Oriental Photo Industrial Co., Ltd. and Mitsubishi Paper Mills, Ltd., produce paper only. All four domestic photographic
manufacturers distribute paper to photo finishing laboratories.

2.6 According to the United States and Japan, photographic film is sold in Japan by 280,000
retailers. These retailers can be divided into three groups:
(a) Traditional photospecialty stores, whose primary line of business is the sale of film,
cameras and accessories. There are some 30,000 such stores, selling roughly half of the film sold
in the Japanese market.
(b) General merchandise stores (including supermarkets and discount, department, drug
and convenience stores). There are some 70,000 such stores, selling roughly one-third of the film
sold.
(c) Other retail outlets (including kiosks, tourist resorts, parks and other small outlets).
There are some 180,000 such outlets, selling the remainder of the film not sold by traditional
photospecialty and general merchandise stores.
B. JAPANESE ENTITIES AND MEASURES RELATED TO THE US CLAIMS
2.7 As summarized in Sections III and IV, the claims raised by the United States concern two
principal government agencies, several councils and business associations, and numerous specific
measures. The "countermeasures" are divided by the United States into three broad categories:
(1) distribution "countermeasures", which allegedly encouraged and facilitated the creation of market
structures for film and paper in which imports are excluded from traditional distribution channels
(collectively referred to by the United States as "distribution countermeasures"); (2) the Large Stores
Law, which allegedly restricts the growth of an alternative distribution channel for film; and (3)
restrictions on premiums and misleading representations under the Premiums Law, which allegedly
disadvantage imports by restricting sales promotions (collectively referred to by the United States as
"promotions countermeasures"). The United States refers to the three sets of measures collectively
as "liberalization countermeasures."9
2.8 This section contains descriptions of the two principal Japanese government agencies and other
entities (i.e., several councils and business associations) whose activities have been challenged by the
United States. The provisions of specific measures challenged by the United States are described in
relevant parts under the relevant entity, except for the 1967 Cabinet Decision, which is set outseparately
at the beginning. The provisions of these measures are set out here so as to provide a single reference
point containing the background and text of these measures for the arguments of the parties and the
findings of the Panel. The inclusion of a measure or selected text of a measure in this section does
not address whether it is a "measure" as that term is used in a technical sense in any particular GATT
provision.
1. 1967 CABINET DECISION
2.9 The United States focuses attention on the Cabinet Decision Concerning Liberalization of Inward
Direct Investment of 6 June 1967 ("1967 Cabinet Decision").10 This was a decision of the Cabinet
of the Government of Japan regarding liberalization of direct investment and the "(counter)measures"
9According to the United States, the "distribution countermeasures", Large Stores Law and related measures, and "promotion
countermeasures" in combination nullify or impair benefits within the meaning of Article XXIII:1(b). The "distribution
countermeasures", as a set, also violate Article III:4 and nullify or impair benefits within the meaning of Article XXIII:1(b).
The Large Stores Law and related measures also nullify or impair benefits within the meaning of Article XXIII:1(b), in the
context of the restrictive distribution structure in Japan. And, the promotions countermeasures, as a set, nullify or impair
benefits within the meaning of Article XXIII:1(b), in the context of the restrictive distribution structure in Japan. The specific
failures topublish laws, regulations, or administrative rulingsof general applicationdiscussed beloweach constitutea violation
of Article X:1.
101967 Cabinet Decision, US Ex. 67-6.

that should be taken in proceeding with liberalization. The Government of Japan had requested the
Foreign Investment Council ("FIC") to conduct an enquiry regarding inward direct investment. It
was on the basis of the report of this Council that the Government of Japan made its Decision. In
this decision the Japanese Government expressed its support for the Report of the Foreign Investment
Council Expert Committee of 2 June 1967 ("1967 FIC Report").11 The FIC was established pursuant
to the Law Concerning Foreign Investment, which provided it would be established as an organization
attached to the Ministry of Finance with the Minister of Finance as its chairman.12 The 1967 FIC Report
was, in turn, based on the Report of the FIC Expert Committee of 17 May 1967 ("1967 FIC Expert
Committee Report").13 Regarding the regulation of unfair trade practices, the 1967 FIC Expert
Committee Report also stated what follows:
"(1) When foreign capital is brought into Japan, it is possible for a parent company
to use vast amounts of capital to engage in dumping, offer premiums, and conduct
large-scale publicity and advertising, etc. In the future, as liberalization of direct
investmentinthe domestic market progresses,suchriskmayconceivably be reinforced.
Therefore, in sucha situation,it isnecessary tofully studywhether these actions qualify
as unfair trade practices as defined in Article 2 of the Antimonopoly Law and can be
regulated pursuant to provisions under Article 19 of the said Antimonopoly Law or
the Law Against Unjustifiable Premiums and Misleading Representations.
(2) For the application of the Antimonopoly Law, while one may not specifically
select foreign capital affiliated firms for differential treatment, foreign capital affiliated
firms nevertheless have the strong capital and technological background of the parent
company and are usually in an economically strong position. Consequently, it is
believed that they will often become the object of regulation of the Antimonopoly Law.
On this point, we must be able to apply standards to deal with any disorderly activities
by foreign capital because existing standards of regulation of unfair trade practices
are not necessarily clear and we may, for example, clarify them by making use of a
special designation or some other method".14
(3) For the provision of large-scale premiums, it is believed that establishing fair
competition codes pursuant to the [Premiums Law] with assistance from the industry
that might be affected, would be an effective ["countermeasure"]".15
The 1967 Cabinet Decision provided the following basic direction for the "(counter)measures" to be
taken in carrying out capital liberalization:
"One. Basic Policy Concerning the Liberalization Inward Direct Investment
1. Basic Attitude Toward the Liberalization of Inward Direct Investment
Our country has been endeavouring to deepen its ties with the international
economic community through such means as the liberalization of foreign trade, foreign
exchange and participation in the Kennedy Round tariff cut negotiations. Now we
are prepared to move forward also with regard to the liberalization of capital movements.
11US Ex. 67-5A.
12Article 19 of the Foreign Investment Law.
13US Ex. 67-5B.
14Ibid., p. 3.
15Ibid.

Under these internal and external circumstances, it is time to gather the energy
and wisdom of the [Japanese] people in order to further develop our economy and to
improve the standard of living. For the liberalization of capital movements, and in
particular, the liberalization of inward direct investment, which is an issue with this
Council, it has been determined that this country should be taken to deal with them
as independent tasks, in order to deepen cooperation with the international economic
community and plan the long-term development of our own economy ...
As for our national economy as liberalization progresses, although foreign capital
may advance in to many of our industries, it is hoped that our firms will be able to
compete fairly and effectively with them fairly and cooperate with them on equal terms,
thereby promoting national economic interests. The largest future goal of the people,
business circles and government must be the swift attainment of such a stage by our
national economy ...
In order to facilitate such activities on the part of the private sector, and guide
and complement these efforts, the government, too, must make unprecedented efforts
to revitalize science and technology and research and development, while paying close
attentiontothe improvement of industrialsystemand the financial systemsoas tocreate
an environment in which the economy can cope with liberalization. At the same time,
the government should take the initiative by setting an example of good administration
befitting the age of liberalization by making its own finance and administration efficient
and modernized and lowering the cost of administration. It is hoped that such efforts
will build the basis on which our enterprises can compete against foreign capital on
equal terms. The measures for liberalization should be reviewed after an appropriate
interval of one to two years to expand the scope of liberalization, taking into
consideration the results of efforts made by the private sector and the effect of
government measures.

If, therefore, our enterprises are to compete against foreign capital on equal
terms, the following would be necessary: companies must improve their own quality
and pursue the organization of the industrial system, intensively strengthen the capacity
for technological development, organize the financial system in parallel with the
organization of the industrial system, and lower of long-term interest rates.
On the other hand, it would be necessary to restrain foreign enterprises coming
intoJapan after liberalization from disturbingorder in domestic industries, by resorting
to the strength of their superior power, and from advancing into the non-liberalized
sectors by evading control.
The establishment of these "(counter)measures" for strengthening the capacity
of our enterprises for international competition and for preventing foreign enterprises
from disturbing order in our industries and market would be a basic necessity if the
liberalization is to be promoted and if our people are to enjoy its economic benefits.

The basic direction of the "(counter)measures" that the government should adopt
are the following three points:
1) Prevent disorder that may arise from the advancement of foreign capital;

2) Create the foundation to enable our enterprises to compete with foreign
enterprises on equal terms;
3) Actively strengthen the quality of [domestic] enterprises and reorganize the
industrial system so that they can fully compete with foreign capital.16

Modernization lags behind most in the distribution sector. Here, the power
of resistance against the inroad of foreign capital is weak, and the impact of foreign
capital advancing into this sector will also pose significant impact on the production
sector. It is necessary, therefore, to implement countermeasures in support of the efforts
of industry with the objectives of modernizing the distribution structure,fundamentally
strengthening the enterprises in this sector, and establishing a mass sales system."17
2.10 Japan submits that the 1967 Cabinet Decision was formally repealed 26 December 1980.18
The United States contends that the repeal affects only the portion of the Cabinet Decision relating
to controls on international investment in Japan. The United States alleges that the 1980 decision did
not revoke the distribution policies and liberalization "countermeasures" directed by the 1967 Cabinet
Decision.
2. MITI AND RELATED ITEMS
2.11 The US submissionsfocus in particularonthe activitiesof the Japanese Ministry of International
Trade and Industry (MITI). Among other things and of particular concern in this proceeding, according
to the United States, MITI established various groups in the 1960s and 1970s to examine issues related
to distribution of goods, both generally and in respect of photographic materials. In addition, MITI
is responsible in part for the implementation of the Large Scale Retail Store Law, one of the principal
measures challenged by the United States.
(a) Industrial Structure Council Distribution Committee: Sixth and Seventh Interim Reports
2.12 The United States notes that in 1964, MITI established the Industrial Structure Council,
authorizing it to "investigate and examine important issues concerning industrial structure" in response
to an inquiryby the MITI Minister.19 The IndustrialStructure Council isan advisorycouncil, composed
of academics and industry representatives. MITI plays an important role in staffing20 the Council and
the general affairs of the Council are managed by MITI, its Industrial Policy Bureau and Industrial
16MITI History Vol. 17, pp. 379-388, (provisional translation) US Ex. 67-6, pp. 3-4.
171967 Cabinet Decision, p. 6, US Ex. 67-6. According to the United States, on the same day the Cabinet announced
its decision, the Chief Cabinet Secretary issued a formal statement directing foreign firms to inter alia: "collaborate with
our industry's efforts to voluntarily maintain order; cooperate with the improvement of international balance of payments,
such as export promotion; hire Japanese nationals as executives ... [and] cooperate with the economic policies of the
government." Chief Cabinet Secretariat Talk, Regarding Implementation of Liberalization Measures for Inward Direct
Investment, 6 June 1967, reprinted in Yoshida Fujio, Capital Liberalization and Foreign Investment Law, 30 October 1967,
p. 160, US Ex. 67-16.
18Cabinet Decision of 26 December 1980 Concerning the Application Policy of Inward Investments, Japan Ex. B-55.
19Article 102 of the Cabinet Order No. 390. The Industrial Structure Council Order provides that the ISC be "composed
of no more than 130 members" to be "appointed by the Minister of International Trade and Industry." Industrial Structure
Council Order, Cabinet Order No. 79, 31 March 1964, Japan Ex. B-3.
20Japan disagrees with the US allegation that the Distribution Committee was staffed by MITI officials and contends
that the Industrial Structure Council including the Distribution Committee consists of persons with learning and experience
appointed by MITI. Investigations, deliberations, and decision-making are all carried out by the members. According to
Japan, although MITI officials sometimes attended meetings as observers, they take no part in the decision-making process.

Structure Division.21 The Industrial Structure Division has responsibility for "matters pertaining to
the Industrial Structure Council".22
2.13 The United States notes that the Council established the Distribution Committee to study and
report on matters relating to the Japanese distribution system. The Distribution Committee issued 19
interim reports between 1964 and 1995. Both parties refer to a number of these interim reports in
their submissions and the United States lists two of them, the Sixth Interim Report on "Distribution
Modernization Outlook and Issues (5 August 1968)23 and the Seventh Interim Report on "Systemization
of Distribution Activities" (22 July 1969)24, as among the specific measures that it is challenging in
this dispute. As set out in the description of the parties' arguments, the parties cite different parts
of the reports to support their contentions as to the general thrust of the reports.
(i) The 1968 Sixth Interim Report
2.14 The Sixth Interim Report dealt with a broad spectrum of issues with a bearing on distribution.
These issues were categorized into four parts:
(i) the strengthening and modernizing of persons in charge of distribution functions;
(ii) the adjustment of market conditions;
(iii) the rationalization of physical distribution;
(iv) the adjustment of the environment which is the common basis for the realization of
these issues.
The Report listed the goals of distribution policy for the next five years as:
(i) organization and cooperative business formation;
(1) the formation of voluntary chains;
(2) the formation of combinations among stores in the retail industry group
department stores, group supermarkets, universal markets, etc.;
(3) the redevelopment or construction in shopping districts;
(4) the integration of functions based on wholesale industry collectivization (general
wholesale centres, wholesale trade complexes);
(ii) the modernization of management methods and facilities;
(iii) securing the labour force and education of personnel;
(iv) the rationalization of trade practices and trade system;
(v) reform of physical distribution technology;
(vi) the rationalization of conditions of location;
(vii) the formation of a distribution information network and improvement of statistics;
(viii) facilitating financial aspect of distribution.
According to the United States, the Report also addressed the negative impact liberalization could have
ondistributioninJapan, notwithstandingthatliberalizationcouldrationalizeand modernizethe Japanese
distribution system:
21Article 7 of the Industrial Structure Council Order, US Ex. 64-1 and Japan Ex. B-3.
22The United States provides in US Ex. 52-2 the following translation:
The Industrial Structure Division is in charge of the following administrative matters:
1. development of, as well as comprehensive coordination in implementing, the policies and plans relating to the
industrial structure relating to business under the supervision of the MITI;
2. general management of administrative matters pertaining to new industries under the supervision of the MITI; and
3. matters pertaining to the Industrial Structure Council.
23US Ex. 68-8, and Japan Ex. B-7.
24US Ex. 69-4.

1. There is a risk that growth sectors will fall under the monopolistic control of
foreign capital, resulting from the difference in capital resources and the like.
2. There is a risk that the process of sales expansion by foreign capital affiliated
distribution enterprises will aggravate excessive competition and hinder the
smooth implementation of distribution modernization plans, and the [established]
order of trade will be disrupted.
3. There is a risk that the manufacturing sector will be dominated by controlling
the sales routes, bringing about the international subcontracting of Japanese
industry.25
(ii) The 1969 Seventh Interim Report
2.15 The United States also submits that the Seventh Interim Report was issued as a "first step in
meeting the challenges currently facing Japan's distribution sector". Although the Report notes that
the aim of systemization26 in the distribution system was to improve functionality and productivity,
it specifically identified the threat of foreign capital as a reason to reform the distribution sector:
"Today, amidst calls for the active promotionof capital liberalization inthe distribution
sector, we thinkthat efforts tosystemize distributionhave a vitalimportance in strategic
significance. ... [T]he systems gap [between Japan and America] is expected to have
a decisive effect on distribution activities in particular, the concerted efforts of the
government and the private sector must be directed at systemization from the point
of view of a capital liberalization countermeasure.

[I]t is truethat one effect of systemizing Japan'sdistribution system isthe simplification
of entry [into Japan's market] by foreign capital, [enterprises] which are more adept
at systems methodology. [But] to make inroads, we should instead emphasize preventing
the immense impact that would be felt if foreign capital took the lead in systemizing
Japan's distribution activities, and quickly develop a system sufficiently capable of
countering the rational systems introduced by foreign capital."27
In the US view, the Report acknowledged that systemization must be approached by looking at the
distributionsystemasa singlewholeand notasa clusterofseparate and individualdistributionfunctions.
It was acknowledged that with respect to goods, the most important factor is distribution, and that
systemization could only progress around the centralized processing of physical distribution control
at distribution centres and stock points. The Committee identified three approaches to systemization:
(i) the commodity approach;
(ii) the institutional approach;
(iii) the functional approach.
The Committee proposed the following policies for the government to adopt:
25Sixth Interim Report, p. 8, US Ex. 68-8.
26It is Japan's view that MITI distinguished rationalization and systematic policies. The United States does not follow
this distinction and uses the single term "systemization" to cover both concepts.
27Industrial Structure Council Distribution Committee, Systemization of Distribution Activities (Seventh Interim Report),
22 July 1969, p. 4, US Ex. 69-4.

(i) establishing a Distribution Systemization Council;28
(ii) presenting guide posts and promoting standardization;
(iii) establishing a system for providing distribution-related information;
(iv) providing incentives in the areas of financing, taxation, etc.
(b) 1969 Survey on Transaction Terms
2.16 In 1968, the Institute for Distribution Research, a private, but MITI-affiliated organization,
was commissioned by MITI to conduct a survey of transaction terms in several industries. Its survey
on transactions terms in the film industry (1969 Survey)29 was submitted by the Institute to MITI in
1969, and (re-)published by MITI in 1971.30 The purpose of this Survey was "to research current
trade practices, isolate problems, and prepare basic materials to develop and spread rational trade
practices."31 The Survey identified foreign companies and changes in distribution as problems:
"As we have already seen, there is a view and an impression that the industry of general
use photographic film, based on an oligopoly of two domestic manufacturers, is
superficiallyina stableand normal stateinwhichcontract formationand documentation
of transactions are progressing. Consider, however, one postulate:
(1) If the oligopoly of the two domestic manufacturers is broken up by
a foreign company; and
(2) If a new [distribution] route emerges to compete against the route of
photographic material dealers, which is the core existing route in the
distribution market.
There may be very few observers who have a sense of crisis regarding (1) and (2) as
realistic issues; however, they should now be considered as the most concrete and
realistic problems.32
Based on these perceived problems, the Survey made the following policy recommendation:
Given this situation, it is necessary to formulate measures before hand in order to
minimize the anticipateddisorderinthe distributionmarket. This iswhyitissignificant
to rationalize and standardize transaction terms and to create an [established] order
of distribution.33
28SeesectionII.B.1.(d) (discussingtheestablishmentoftheDistributionSystemizationPromotionCouncil,whichproduced
the 1971 Basic Plan for the Systemization of Industry).
29Institute of Distribution Research, Fact-Finding Survey Report Pertaining to Transaction Terms: Actual Conditions
of Transaction Practices in the Wholesale Industry, March 1969, US Ex. 15. The survey became the basis for MITI’ s July
1970 "Guidelines for the Standardization of Transaction Terms for the Photofilm Industry." See p. 3, US Ex. 70-4. According
to the United States, in 1971, MITI republished an edited version of the survey under its own name. MITI Business Bureau,
Actual Conditions of Transaction Terms in the Wholesale Industry, 21 August 1971, US Ex. 20.
30The parties disagree on the publication date of the 1969 Survey. According to the United States, the 1969 Survey
was published in 1969 and re-published by MITI in 1971. Japan contends that in 1969, the Institute for Distribution Research
submitted the survey to MITI and that is was published by MITI only in 1971.
31US Ex. 20, p. 7.
32US Ex. 15, p. 62.
33Ibid., p. 63.

(c) 1970 Guidelines for Rationalizing Terms of Trade for Photographic Film
2.17 In 1970, MITI's Transaction Terms Standardization Committee, published "Guidelines for
Rationalizing Terms of Trade for Photographic Film" (1970 Guidelines)34. The Committee was set
up by MITI to study the question of standardization of transaction terms in industry generally, and
in light of capital liberalization, more specifically.35
2.18 According to the United States, the introduction of the 1970 Guidelines noted that, "[I]n order
to prevent disruption of the established order of trade by foreign businesses with powerful capital
strength, the standards for rational transaction terms must be clarified."36
2.19 The guidelines were as follows:
"I. Transaction terms concerning sales contracts
(1) Stocking method
Current situation. The most commonly used stocking method for both the
wholesalers (i.e., resalers) and retailers is purchasing.
(2) Discounts
Current situation. When we look at the current situation of the cash discount
system (the system of discounting transaction price according to the length of the account
payment period) mainly among the wholesalers, we see that a large number of businesses
receive discounts for purchasing, and over half of the businesses use this system for
selling as well. Furthermore, for the most of these, the criteria for discounting appear
to be made clear in advance.
Concerning the volume discount system (the system of discounting the
transaction price according to the volume of a single order), the majority of wholesalers
enjoy this system for purchasing, but only a few use it for sellers. The volume discount
has generally come to be used less as the size of the transaction grows, because the
burden on the seller is greater.
Problems and Direction of Corrective Measures. Both the cash discount and
volume discount systems are relatively systematized, but the discount amount is often
paid at a fixed date such as at the end of a [certain] term after the completion of the
transaction, this practice makes it difficult to differentiate from a rebate. It is best
if the corresponding amount is discounted and settled at the time of account settlement
since then the discount criteria is made clear in advance. A negative trend is seen for
volume discounts, but it is desirable to move in the direction of using them in the photo
film industry from the perspective of reducing distribution costs.
(3) Rebates
Current situation. For rebates (returning to the buyer a portion of the amount
paid by the buyer) from the wholesales suppliers, most businesses receive rebates in
much the same way as discounts. There are three ways to receive rebates: directly
34US Ex. 70-4, and Japan B-24.
35Ibid.
36Ibid., p. 2. This policy objective was reiterated in the 1971 Basic Plan. See section II.B.1.(d).

from the manufacturer, from the manufacturer through the tokuyakuten, and as the
tokuyakuten's own rebate. The main types of rebates are a fixed-rate rebate, settlement
rebate, and the goal achievement rebate; cumulative rebates are rare.
Approximately 30 percent of the wholesalers provide rebates to their purchasers,
which is substantially lower than the percentage [of wholesalers] who receive rebates.
Problems and the Direction of Corrective Measures. In general, the rebate
[system] depends on the seller's discretion. It is widely used, therefore, as a means
of controlling the distribution process. When this is excessively done, however, this
practice could be an unfair trade practice under the Antimonopoly Law. Even when
it does not go that far, it can lead to substantial control of a distribution channel, and
make it difficult for the recipient of the rebate to make clear management plans.
Subsequently, this practice may cause the problem of preventing the merits [of the
rebate system] from being passed on to the final price. Moreover, the rebate system
has recently become so complicated that negative aspects such as an increased
administrative burden have arisen. It is the principle of the discount system to pass
on the advantages gained from large-volume transactions and the like to consumers.
Although we recognize that rebates have a supplemental role in other price policies,
this should be kept to a minimum.
II. Transaction terms for the delivery of goods
(1) Frequency of delivery of goods
Current situation. The frequency of goods delivery to purchasers by wholesalers
ranges from daily and once every two weeks or more to no delivery. A noteworthy
point is that as many as 30 percent of all businesses make deliveries every day to all
of their purchasers. This is thought to be due to the importance of delivery as an
element of the wholesale function and also due to the fact that orders are taken and
market information is gathered at the delivery. Over half of the wholesalers expressed
negative opinions about setting regular delivery dates and charging fees for deliveries
made on the other days.
ProblemsandDirectionofCorrectiveMeasures. Asmentionedabove,delivery
frequencyishighlyregardedas oneimportantfunctionof wholesaling,and itsfrequency
is not really regarded as a problem. It is believed, however, that the changes in the
economic environment surrounding the distribution sector such as labour shortages
and the worsening traffic situation will not allow this custom to continue indefinitely.
Therefore, it is recommended that, in principle, wholesalers make deliveries twice
a week for the time being, and impose charges for special services.
(2) Arrangements for minimum orders per delivery
Current Situation. Although wholesalers will make deliveries even every day
if there's sufficient quantity, they are willing to set minimum delivery requirements.
At present, however, almost no such arrangements are being made. Approximately
half [of the wholesalers] want to implement minimum delivery requirement arrangements
and believe it to be feasible.
Problems and the Direction of Corrective Measures. Due to the nature of the
product, demand is less diversified compared to other products. It is necessary to set
a minimum delivery requirement to reduce distribution costs.

(3) Returned goods
Current situation. Generally, there are not many returns. In particular, returned
goods from wholesalers (tokuyakuten and resalers) are rare. The number of returned
goods from retailers to wholesalers is also low.
III. Transaction terms for account settlement
Current situation. The collection method of wholesalers is generally "collection
on a specific date after the due date", but "collection on delivery" is also relatively
frequently used.
Collection on a specific date includes both collection of the full amount and
collection of the partial amount; it is determined by the size of the retailer and its cash
flow. Cash collection is more frequent in most cases compared with the collection
of notes. The most common sight of a note is between 61 to 70 days.
A common payment method of the wholesalers is "payment of the full amount
on a specific date after the due date". Although cash payment is more commonly used
than notes, the percentage of note payments made by the wholesalers is higher than
that of the collections made from the retailers. The most common sight [credit] of
a note is approximately 60 days.
Problems and Corrective Measures. In both payment and collection mainly
by wholesalers, cash settlement is predominant and the sight [credit] notes are shorter
compared with those of other products. The practice of partial payment is particularly
prevalent among retailers; leaving the balance on credit destabilized the term-end book
closing. Consequently, it makes the entire transaction uncertain, thus, inhibiting the -
promotion of reasonable terms of trade such as a discount system. Therefore, the
account should be settled in full with cash and a promissory note. Also, while still
only few in number, there are promissory notes with unusually long sight. For such
promissory notes, appropriate interest should be charged on the same principle as the
cash discount system.
IV. Dispatched employees
Current Situation. Dispatched employees are rarely seen at general photography
materials retailers. There are dispatched employees in the DPE departments of large
retailers; however, few are systematized practices and the dispatch is made only in
special cases".
(d) 1971 Basic Plan of the Distribution Systemization Promotion Council
2.20 The UnitedStates notesthatinitsSeventh Interim Report, the DistributionCommittee proposed
the creation of the Distribution Systemization Promotion Council in order to "set the basic direction
for systemizing distribution activities". In 1970, MITI established the Council and in 1971, the Council
published the "Basic Plan for the Systemization of Distribution" (the "Basic Plan").37 The Council
described the Basic Plan as representing "the result of government and the private sector joining forces
to consider the basic direction and goals for the systemization of distribution in Japan, and the means
37US Ex. 71-10 and Japan Ex. B-18.

of realizingthese goals,with the year 1975set as the tentativetargetdate for completion."38 The Council
affirmed the "government and the private sector will make a wholehearted effort to realize this basic
plan."39
2.21 According to the United States, MITI's introduction to the Basic Plan stated that among the
various problems facing the trade and industrial policy in the 1970s, "the modernization of Japanese
distribution is urgent from the standpoint of achieving balanced development of the Japanese economy,
as well as from the standpoint of consumer price "(counter)measures" and capital liberalization
"(counter)measures".40 The introduction further acknowledged that the Japanese economy had grown
tremendously,and the questionof how bestto supplyconsumers with goodsproduced in large quantities
was still an issue. Consequently, the Basic Plan acknowledged that the role of distribution, which
connects productionwithconsumption, was very important. The Basic Plan notedthatsince distribution
activity involves numerous enterprises, the close interconnections between these enterprises must be
given careful attention. As a result, it was necessary to regard the entire distribution process from
production to consumption as a single system, and to effect a comprehensive increase in the efficiency
of this system. The Committee which produced the Basic Plan indicated that with this plan, MITI
had decided to make every effort toward the fulfilment of distribution systemization policies.
2.22 The United States further notes that the Basic Plan determined that there was a need for
standardizing transaction terms to secure effective and fair competition and to reorganize market
conditions generally, but also more specifically in connection with capital liberalization to "prevent
disruption of the [established] order of trade by foreign capital-affiliated firms, which have enormous
strength."41
(e) 1975 Manual of the Distribution Systemization Development Centre
2.23 The United States notes that the Distribution Systemization Development Center42 was established
with MITI funding in 1972 in order to facilitate the work of the Distribution Systemization Promotion
Council and was delegated the task of working with industry to produce various "Systemization Manuals"
for specific industries. The Center was created pursuant to the Distribution Systemization Promotion
Council's 1971 Basic Plan. In 1975, it published the "Manual for Systemization of Distribution by
Industry: Camera and Film" (the 1975 "Manual").43
2.24 The 1975 Manual was prepared in collaboration with industry groups, camera manufacturers,
film manufacturers, camera and film wholesalers, camera and film retailers, and camera and film industry
publishers. The Center acknowledged that as the economic environment grew worse as a result of
inflation and liberalization, the systemization of distribution activities had become an issue of critical
importance.
38Foreword of the Basic Plan, US Ex. 71-10. Japan translates this quote from the foreword as follows: "the result
of an investigation of the public and private sectors for the purpose of realizing a means to achieving the goal of pointing
our national economy in the direction of distribution systemization by the target year of 1975." Foreword of the Basic Plan,
Japan Ex. B-18.
39Foreword of the Basic Plan, US Ex. 71-10. Japan translates this quote from the foreword as follows: "public and
private sectors put forth their combined effort to realize this basic plan." Foreword of the Basic Plan, Japan Ex. B-18.
40Basic Plan, Cover Note by Enterprise Bureau Chief, MITI, August 1971. US Ex. 71-10. Japan translates this quote
from the cover note as follows: "... [were] urgent issues from balanced regional economic development to measures to deal
with high prices for consumers, to measures for capital liberalization." Basic Plan, Cover Note by Business Bureau Chief,
MITI, August 1971, Japan Ex. B-18.
41US Ex. 71-10, p. 10.
42Japan translates the name of this institute as "Distribution System Research Institute".
43Manual for the Systemization of Distribution by Industry, US Ex. 75-5. Japan contends that the Institute submitted
the 1975 Manual to MITI only for internal use of MITI.

"Although Japan has a monopolistic position inhigh-quality cameras, the future camera
and film industries must not be complacent with their monopolistic or oligopolistic
position within Japan.
Therefore, strengthening the constitution of the camera and film industry is a serious
issue that must be addressed immediately against the background of today's chronic
inflation and intensifying conditions of international competition."44
The Center indicated that the development of this Manual was one part of MITI's policy to actively
develop effective policies related to the systemization of distribution activities. The Manual indicated
that distribution systemization is not grounded in the independent profit notions of manufacturers,
wholesalers and retailers engaged in distribution activities, but must emphasize the establishment of
an integrated system designed to reduce the overall distribution cost required for products to reach
the final consumer.
2.25 Thereafter, the Photosensitive Materials Committee of the Distribution System Promotion Council
was established for the Systemization of Distribution by Industry (Camera-Film). The Committee was
charged with the responsibility of promoting information ties and physical integration of distribution
facilities. The membership included representatives from all levels of Japanese photographic film and
paper distribution (each of the four domestic manufacturers, the photospecialty wholesalersassociation,
the photofinishing laboratory association, and the photospecialty retailers association), an official from
the Distribution System Development Center. An official from the MITI Chemical Industry Division
observed the Committee's proceedings. The Committee produced the "Distribution Facilities Basic
Plan,"45 whichwasintendedtoimprovedistributioninresponseto"liberalization"andoutlinedmeasures
to promote joint distribution facilities between Japanese manufacturers and distributors.
(f) Large Stores Law
2.26 A principal focus of the US complaint is the Large Scale Retail Store Law ("Large Stores Law")
which was passed by the Japanese Diet on 1 October 1973 and entered into force on 1 March 1974.46
The provisions of the Large Stores Law and its evolution over time are discussed in detail in Section V.B.
This law was preceded by the Department Stores Law (1956),47 which required retailers wanting to
open a large store with floor space in excess of 1,500 square meters, and retailers with such stores
wanting to open a new store regardless of floor size, to obtain a permit from MITI. Because the
Department Store Law processallowed retailersto circumvent its restrictionsbycreating legal identities
for separate sales floors that were below that law's threshold, the Large Stores Law was enacted close
the loophole. The Large Stores Law regulates the opening of all large store structures (where more
than one retailer may operate) and the opening and operation of all retailers (e.g., grocery stores, discount
stores, and department stores) operating in such structures, through a notification system. When originally
enacted, it only regulated stores with floor space in excess of 1,500 square meters.
2.27 The Large Stores Law was revised in 1979 (amended on 15 November 1978 with an effective
date of 14 May 1979).48 Through these amendments, two main changes were effected: (1) the threshold
for storescovered by the Law was lowered from 1,500 square meters to 500 square meters, and (2) large
stores were divided into two classes: Class I stores (1,500 square meters and above) under MITI's
jurisdiction, and Class II stores (500 up to 1,500 square meters) under the jurisdiction of prefectural
441975 Manual, pp. 27-28, US Ex. 75-5.
45US Ex. 76-2.
46US Ex. 74-4 and Japan C-1.
47US Ex. 56-2 and Japan Ex. C-3.
48US Ex. 78-1.

governors. This dividing line has been moved up to 3,000 square meters (or 6,000 square meters in
designated large cities) since 1992.
2.28 The Large Stores Law currently includes the following procedures: parties intending to build
or open a large scale retail store must submit a notification including the proposed floor area of the
store and planned opening date at least 12 months before the proposed completion and opening of the
new store or expanded retail store to the appropriate authority (MITI or prefectural governor) (Article
3 notification). The appropriate authority will then issue a notice as to whether the store will be subject
to the procedures under the Large Stores Law. The retailer may not commence business until seven
months after this notice. Within four months after filing this initial notification, the plans must be
explained to MITI and prefectural authorities, the local Chamber of Commerce and Industry, (or
Commerce and Industry Association) and local retailers or their associations and consumers ("local
explanation"/"public briefing"49). At least five months before the opening of the store, the retailer
must submit a notification (Article 5 notification) to the appropriate authority, who will determine whether
the proposed store poses a probability of a significant effect on nearby small and medium business
retail activities, (since 1994, stores with retail space of no more than 1,000 square meters in principle
have been deemed to have no such probability), and may recommend that the store reduce its sales
floor space, and/or delay its opening date. If the appropriate authority determines that elements of
the proposed plan pose a probability 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 toMITI and the prefectural governors, respectively. The Council mustsubmit the results
of its deliberations to the appropriate authority. 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. If the store does not follow the
recommendation, MITI or the prefectural governors may order it to do so.
2.29 In 1982 MITI instituted, through Directive No. 36,50 a "prior explanation" requirement to precede
the builder's Article 3 Notification, which obligated the notifier to provide local retailers with an
explanation before submitting its Article 3 Notification. This directive was revoked in 1992.
(g) Japan Development Bank and the Small and Medium-Sized Enterprise Agency
2.30 The Japan Development Bank (JDB) is a quasi-governmental financial institution, and the Small
and Medium-Sized Enterprise Agency (SMEA) is one of the agencies of MITI.51 The JDB and SMEA
provide subsidized financing to industry.52 For example, JDB provided funding for Konica to establish
joint distribution facilities with several independent wholesalers.
3. JFTC
2.31 The US submissions also focus attention on the Japan Fair Trade Commission (JFTC). The
JFTC is an independent Japanese Government agency. The JFTC has responsibility for enforcement
of the Antimonopoly Law and the Premiums Law. For purposes of this dispute, the most important
provisions of those laws and measures taken under them are the following:
49See translation issue 14.
50Japan C-16 and US Ex. 82-2.
51US Ex. 67-11, US Ex. 12, and US Ex. 70.
52Takashi Yokokura, Chapter 20 Small and Medium Enterprise, Industry Policy of Japan Edited by Ryutaro Komiya,
Masahiro Okuni, and Kotaro Suzumura, 1988, p. 521 (US Ex. 59) and Chapter 11: The Development of New Policy Measures,
MITI History, Volume 15, 31 May 1991, pp. 1-2, US Ex. 70.

(a) Antimonopoly Law
(i) JFTC Rule No. 1 under Article 6 of the Antimonopoly Law
2.32 Article 6 of the Antimonopoly Law of 194753 provides:
"(1) No entrepreneur shall enter into an international agreement or an international
contract which contains such matters as constitute unreasonable restraint of trade or
unfair trade practices.
(2) An entrepreneur who has entered into an international agreement or an
international contract (limited to only such an agreement or contract that belongs to
the types which are prescribed by the rules of the [JFTC] as tending to contain such
matters as constitute unreasonable restraint of trade or unfair trade practices) shall,
in accordance with the Rules of the [JFTC], file a notification thereof with the [JFTC],
accompanied by a copy of the said agreement or contract (in the case of an oral
agreement or contract, a document describing the contents thereof), within thirty days
as from the conclusion of such agreement or contract".
2.33 JFTC Rule No. 154 under Antimonopoly Law Article 6.2 requires notification to the JFTC
of the conclusion of an international agreement or an international contract in certain specified areas,
including "comprehensive sales agreements"55 or "sole distributorship contracts"56. A bill to repeal
the international contract notification requirement was introduced in March 1997 to the Diet. Japan
submits that the bill was enacted in June 1997, amending Article 6(2) of the Antimonopoly Law, and
simultaneously abolishing JFTC Rule No. 1.
(ii) JFTC Notification 34 of 1971 (open lotteries)
2.34 JFTC Notification 34 of the JFTC on Unfair Trade Practices Offering Economic Benefits by
Means of Advertising Lotteries, etc. of 2 July 1971 ("JFTC Notification 34 of 1971"), also referred
to as notification on "open" prizes.57 This Notification designates, inter alia, the following as unfair
trade practices pursuant to Article 2, paragraph 7, of the Antimonopoly Law when offering economic
benefits by means of advertising lotteries, etc. :
"Activities in which businesses who produce ... or sell the products listed in attached
Table 1 ... , as a means to attract consumers, select people from among general
consumers through advertisements and offer them excessive amounts of cash, goods
or other kinds of economic benefits in light of normal business practices ...".58
AccordingtotheUnitedStates, Table1attachedtothisNotificationincludes"photosensitivematerials".
Photosensitive materials were among a number of products explicitly identified by the JFTC as subject
to this notification. Secretary General Directive No. 5 of 2 July 1971 provides for "Guidelines Pertaining
to the Designation of Unfair Trade Practices Offering Economic Benefits by Means of Advertising
Lotteries, etc". These guidelines provide, inter alia, that:
53The Law Concerning Prohibition of Private Monopoly and Maintenance of Fair Trade Law No. 88 of 1947, US Ex. 47-1.
54US Ex. 71-6.
55US translation.
56Japanese translation.
57Antimonopoly Law: related Laws and Regulations, 28 June 1995, pp. 85-88, exhibit submitted by the United States
by letter to the Panel of 6 August 1997.
58Ibid., provisional translation, p. 85.

"Excessive amounts of cash, goods, or other kinds of economic benefits in light of
normal business practices' (hereafter referred to as "excessive economic benefits")
stipulated by [JFTC Notification 34 of 1971] should be dealt with in the following
manner:

c. An economic benefit exceeding 1,000,000 yen ... is considered to be an
excessive benefit".59
Japan submits that as of 1 April 1996, this ceiling of 1,000,000 yen has been increased to 10,000,000
yen and that no limit has ever been set to the total amount of prizes.
(iii) JFTC Notification 15 of 1982
2.35 Antimonopoly Law Article 2.9 sets forth categories of "unfair trade practices" and authorizes
the JFTC to designate impermissible practices under the law. In 1982, the JFTC issued Notification
No. 15, which revised and expanded the categories of unfair trade practices from twelve to sixteen.
The following is prohibited pursuant to the respective designations:
Unjust Low Price Sales:
6. Without proper justification, supplying a commodity or service continuously
at a price which is excessively below cost incurred in the said supply, or otherwise
unjustly supplying a commodity or service at a low price, thereby tending to cause
difficulties to the business activities of other businesses.

Deceptive Customer Inducement:
8. Unjustly inducing customers of a competitor to deal with oneself by causing
them tomisunderstandthatthe substanceof a commodity orservice suppliedbyoneself,
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.
Customer Inducement by Unjust Benefits:
9. Inducing customers of a competitor to deal with oneself by offering unjust
benefits in the light of normal business practices.
(b) Premiums Law
2.36 Pursuant to Articles 3 and 4 of the Premiums Law60, the JFTC issues notifications interpreting
the Premiums Law in respect of unlawful premiums and representations. The United States lists
Notifications 5, 17 and 34 (open lotteries) as specific measures that it is challenging in this dispute.
It also refers in its submissions to Notifications 3 and 34 (origin). Under Article 10(1) of the Premiums
Law, the JFTC may approve fair competition codes for specific industries. The 1987 Retailers Code,
discussed in Section II.B.4.(b) below, is an example of such a code.
2.37 The JFTC has explained that, as used in its notifications, "premiums ... refer to products, cash,
marketable securities, entertainment, or other economic benefits which are given in connection with
59Ibid., pp. 86-87.
60US Ex. 62-6; Japan Ex. D-1.

a transaction involving a commodity or service.61 Article 3 of the Premiums Law gives the criteria
for restrictions on premiums. It 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 methodsof offering of premium orany other matter
relating thereto, or may prohibit the offering of a premium".
2.38 Article 2 of the Premiums Law defines "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 of the Premiums Law proscribes the use of
(i) "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 is62 much better than the actual one or than that of other businesses who are
in a competitive relationship with the business concerned, and thereby which is found
likely to induce customers unjustly and to impede fair competition;" or
(ii) "any representation by which price or any other terms of transaction of a
commodity or service will be misunderstood by consumers in general to be much more
favourable to the customer than the actual one or than those of other businesses who
are in a competitive relationship with the business concerned, and thereby which is
found likely to induce customers unjustly and to impede fair competition."
2.39 Article 6 of the Premiums Law authorizes the JFTC to instruct violators to "cease and desist"
or to "take the measures necessary to prevent the recurrence of the said act." Article 9 of the Premiums
Law gives the prefectural governments enforcement authority, including the power to instruct violators
to "cease and desist" and to publish findings of violations.
2.40 Article 10 of the Premiums Law, dealing with fair competition codes, provides:
"(1) Businesses or a trade association may, upon obtaining authorization from the
Fair Trade Commission in accordance with the Rules of the Fair Trade Commission,
with respect to matters relating to premiums or representations, conclude or establish
an agreement or a code, aiming at prevention of unjust inducement of customers and
maintaining fair competition. The same shall apply in the event alterations thereto
are attempted.
(2) The Fair Trade Commission, unless it finds that an agreement or a code under
the preceding section (hereinafter referred to as "fair competition code") meets each
of the following paragraphs, shall not grant authorization under the preceding subsection:
(i) That it is appropriate to prevent unjust inducement of customers and
to maintain fair competition;
(ii) That it is not likely unreasonably to impede the interests of some
consumers in general or the related businesses;
61 FTC/Japan, Views: Information and Opinion from the Fair Trade Commission, No.2, April 1988, US Ex. 88-3, p. 15.
62Japan translates the italicized words above as "will be misunderstood by consumers in general to be". See Annex
on Translation Problems, translation issue 16 and the appendix thereto.

(iii) That it is not unjustly discriminatory; and
(iv) Thatit doesnot restrictunreasonably the participation inor withdrawal
from the fair competition code".

(5) The provisionsof Section 48 [recommendation, recommendation decision]and
Section 49 [initiation of hearing procedures], Section 67(1) [urgent injunction] and
Section 73 [accusation] of the Act Concerning Prohibition of Private Monopoly and
Maintenance of Fair Trade shall not apply to the fair competition code that has been
authorized under Subsection (1), and to such acts of entrepreneurs or a trade association
as have been done in accordance therewith".
(i) JFTC Notification of 1965
2.41 The JFTC issued a Notification on 15 October 1965 entitled "Restrictions on Premium Offers
in the Camera Industry." The notification provided that "[t]hose who engage in the manufacture or
sale of cameras or related products cannot offer premiums to general consumers" or "to those who
engage in the sale of cameras and related products."63
(ii) JFTC Notification 17 of 1967
2.42 JFTC Notification 17 on Restriction on Premium Offers to Businesses of 10 May 1967 ("JFTC
Notification 17").64 This Notification was made in accordance with Article 3 of the Premiums Law.
It provides essentially the following:
"Businesses ... who manufacture (including process, hereinafter the same) the products
listedin the attached table or businesseswho sellsuch productsshall notoffer premiums
to businesses who purchase and sell the products involved in such manufacture or sale,
or who use the products to supply services to general consumers (hereinafter referred
to as "other party business"), as a means of inducing the other party business to begin
to transact such products, or on the condition that the other party business's transaction
amount or such other transaction condition satisfy certain criteria which the [first]
business has established. Provided, however, that the preceding provisions shall not
apply to cases of premium offers which are within the annual limit of 100,000 yen
or less per one other party business, and which are found reasonable in the light of
normal business practices".
The table attached to this Notification includes "photographic materials". The parties agree that
Notification 17 was abolished in April 1996. However, according to the United States, premiums
from manufacturers to wholesalers are still subject to JFTC Designation 9 of JFTC Notification 15
of 1982.65 This provision governs the use of "unjust inducements" under the Antimonopoly Law and
prohibits premium offers in excess of "normal business practice". Japan contends that Designation
9 has not been listed in the US panel request and thus is not properly before the Panel.
63Otsuka Noritami, Japan Fair Trade Commission, Trade Department, Recent Activities Concerning Premiums Law,
Kosei Torihiki, No. 182, November 1965, p. 15-18, US Ex. 65-5.
64US Ex. 67-4, Japan Ex. D-42 (provisional translation).
65US Ex. 82-6.

(iii) JFTC Notification 34 of 1973 (origin)
2.43 JFTC Notification 34 on Misleading Representations Concerning Country of Origin of Goods
of 16 October 1973 ("JFTC Notification 34 of 1973").66 This Notification was made in accordance
with Article 4 of the Premiums Law. It provides essentially the following:
"Representations provided for in the following sections which, when applied to
domestically made goods, are found to make it difficult for general consumers to
distinguish the goods as domestically made:
(i) Representations comprising the name of a foreign country, the name of a place
in a foreign country, the flag or crest of a foreign country, or any other similar
representations;
(ii) Representations comprising a full name, title, or trade mark of any foreign
business or designer; or
(iii) Representations in which all or a principal part of the literal description is made
in foreign letters.
Representations provided for in the following sections 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:
(i) Representations comprising the name of a country, the name of a place in a
country, a flag or crest of a country other than the country of origin of the
goods, or other similar representations;
(ii) Representations comprising a full name, title, or trade mark of a business or
designer in a country other than the country of origin of the goods;
(iii) Representations in which all or a principal part of the literal description is made
in Japanese letters".
According to the United States, the JFTC Application Standards for "Misleading Representations
Concerning Country of Origin of Goods" of 16 October 1973 provide JFTC interpretation of the
provisions of Notification 34 on origin of goods.67 The United States placed particular emphasis on
the following aspects of the guidelines: Paragraph two 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 three 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." Paragraph six 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 allowedby law to be used as descriptionsfor general
consumers instead of Japanese (e.g., "All Wool," "Stainless Steel," etc.);
(iii) Representations whichare accepted bygeneral consumers as Japanese byvirtue
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
66US Ex. 73-5, Japan Ex. D-53 (provisional translation).
67See US Ex. 73-5.

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).
According to the United States, paragraph seven provides several ways that goods may indicate that
they were made in Japan, including simply identifying the name of the manufacturer in Japanese or
identifying the name of the manufacturer in another language with the location of production.
(iv) JFTC Notification 3 of 1977
2.44 JFTC Notification 3 on Restriction on Premium Offers by Prize Competition of 1 March 1977
("JFTC Notification 3"), also referred to as notification on "closed" prizes.68 This Notification was
made in accordance with Article 3 of the Premiums Law. It provides essentially the following:
"2. The maximum value of premiums offered byprize competition shallnot exceed
the value in accordance with each category provided for in the following paragraphs:
(i) In the case where the transaction value involved in the premium offer by prize
competition is less than 500 yen: 20 times of the transactions value;
(ii) In the case where the transaction value is not less than 500 yen and below
50,000 yen: 10,000 yen;
(iii) In the case where the transaction value is not less than 50,000 yen and below
100,000 yen: 30,000 yen; or
(iv) In the case where the transaction value is not less than 100,000 yen: 50,000
yen.
3. The aggregate of the premiums offered by prize competition in one scheme
shall not exceed 2 per cent of the estimated total amount of transactions involved in
that scheme.
4. Irrespective of the preceding two Clauses, in any one of the cases provided
for in the following sections, the maximum value offered by prize competition may
amount to 200,000 yen and the aggregate of the premiums offered by prize competition
in one scheme may amount to 3 percent of the estimated total value of transactions
involved in that scheme. However, these limits will not be applied to the case where
they unjustly constrain the participation of other businesses:
(i) In the case where a considerable number of retailers or service suppliers in
a certain district carry out a joint scheme;
(ii) In the case where a considerable number of retailersor service suppliers located
in a shopping area carry out premium offers in a joint scheme; However, the
foregoing shall apply only to cases where the premium offers are carried out
during the seasons such as "chugen" [midyear] and end of year, three times
a year at most and below the period of 70 days in total a year; or
(iii) In the case where a considerable number of businesses in a certain industry
within a certain district carry out a scheme jointly".
On 16 February 1996, the JFTC amended JFTC Notification 3 as follows:
"Section 2 of the Notification is amended as follows:
68US Ex. 77-1, Japan Ex. D-33 (provisional translation).

2. The maximum amount of premiums offered by prizes shall not exceed twenty
times of the amount of transaction to which the premium offer is related, provided
that when the amount exceeds 100,000 yen, it will be limited to 100,000 yen.
In Section [4], the "200,000 yen" shall be replaced by "300,000 yen".69
(v) JFTC Notification 5 of 1977
2.45 JFTC Notification 5 on Restriction on Premium Offers to General Consumers of 1 March 1977
("JFTC Notification 5").70 This Notification was made in accordance with Article 3 of the Premiums
Law. It has been amended by JFTC Notification 2 of 16 February 1996 (which removed the ceiling
of 50,000 yen for premiums to all purchasers). It provides essentially the following:
"1. The value of a premium offered to general consumers, excluding those by
lotteries or prize competition ..., shall be within 10 percent of the transaction value
involved in the premium offer (provided that if the amount is less than 100 yen, the
limit shall be 100 yen), and which is found reasonable in the light of normal business
practices".
(c) JFTC guidance
(i) 1981 JFTC guidance on dispatched employees
2.46 Guidance provided by the JFTC in recommending the establishment of rules on the use of
dispatched employees reflected in an article by Kosugi Misao (an official of the Executive Office of
the JFTC) entitled "The Status of Distribution of Cameras" ("JFTC guidance on the use of dispatched
employees").71 The relevant partof the article byKosugi Misao statesthe followingregarding personnel
dispatched to specified volume sales stores:
"The JFTC is issuing guidance to the camera, photographic accessories, colour photo laboratories
and related industries to examine the use of self-regulating measures with respect to the
permanent dispatch of sales people so as not to go too far as manufacturers' sales promotion
methods or as acts based on the buying power of volume sales stores".72
(ii) 1983 JFTC guidance on advertising rules
2.47 Guidance provided by the JFTC in recommending the establishment of rules on dumping and
loss-leader advertising reflected in an article in Zenren Tsuho of May 1983 quoting from a conference
speech given by Yamada Akio (Director of the Premiums and Representations Guidance Division of
the JFTC).73 Yamaka Akio is stated to have said, inter alia, the following:
"In any case, it goeswithout saying thatrule abiding sales practices and fair competition
must be established. Fortunately, the photo industry has its "self-regulating standards
for normalizing trade". Nevertheless, it is of critical importance to develop rules one
by one against dumping and loss-leader advertising. With the regard to loss-leader
69JFTC Notification 1, Kanpo (Official Gazette) of 16 February 1996, translation, Japan Ex. D-30, p. 2.
70Japan Ex. D-32 (provisional translation).
71Kosei Torihiki, March 1982, No. 377, p.45-49, translation, US Ex. 82-3.
72Ibid., p. 8.
73Zenren Tsuho, May 1983, pp. 14 ff, translation, US Ex. 83-9.

advertising, if the photo industry will clarify what the problems are, how we should
apply the law will become clear".74
4. COUNCILS AND ASSOCIATIONS
(a) Fair Trade Promotion Council
2.48 The Fair Trade Promotion Council was established by the national photographic industry on
23 December 1982.75 According to the Articles of Association of the Fair Trade Promotion Council,
the Council, inter alia, establishes fair transaction order in the photography industry and promotes
and enforces the 1982 Self-Regulating Measures described below. It also enacted the 1984 Self-
Regulating Standards, described below.
(i) 1982 Self-Regulation Measures (dispatch of employees and promotional money)
2.49 Self-Regulating Measures Regarding Making Business Dealings with Trading Partners Fair,
enacted by the photographic industry and published on 22 June 1982 ("1982 Self-Regulating Measures").76
For the US claim, the relevant parts thereof relate to self-regulating standards concerning the dispatch
of employees by manufacturers or wholesalers to retailers for the purpose of sales promotion or other
sales activities and the extent to which suppliers may contribute to retail marketing campaigns:
[1] Self-regulating standards concerning the dispatch of employees:
"(1-1) It may be proper to dispatch employees in the following cases which would
directly help to promote the sales of the goods handled by the supplier and contribute
to his or her profit:

Accordingly, the following shall not occur:
Causing the dispatched employee to be mainly engaged in the sales promotion, physical
inventory, or other activities that pertain to goods other than those handled by the
supplier.
(1-2) Other general retailers shall not be treated in a discriminatory manner.
(1-3) The employee shall be dispatched under mutual agreement.
Accordingly, the following things shall not occur:
[1] The supplier shallnotdispatch hisorher employees outof the necessity
of continuing trade with the retailer.
[2] Retailers shall not coerce suppliers to dispatch the employees by
recourse to words or actions akin to a refusal to deal.
[3] Retailers shall not supplement an employee shortage with dispatched
employees (permanent dispatch).

74Ibid., p. 2. Japan contested the correctness of this translation. See translation issue 22.
75Articles of Association, 23 December 1982, Section 2 "Responsibilities", US Ex. 83-3, pp. 2 ff.
76Camera Times, 22 June 1982, pp.3 ff., US Ex. 82-8, see translation issue 23.

(1-4) Employees shall be dispatched in those other cases where approval from the
Fair Trade Promotion Council has been obtained".77
[2] Self-regulating standards on promotional money and contribution:
(2-1) It may be proper to make a contribution to activities which directly assist the
sales promotion of the goods handled by the supplier and that would contribute
to his or her profit.
Accordingly, the following shall not occur:
[1] [The retailer] shall not demand a contribution for expenses that are not directly
related to the sales promotion, brand advertisement, etc. of the goods handled
by the supplier.
(2-2) It may be proper to make a contribution if other general retailers are not treated
in a discriminatory manner.
(2-3) It may be proper to make a contribution if mutual agreement is reached.
Accordingly, the following shall not occur:
[1] [Retailers] shall not demand contribution without prior agreement as to the
basis and use of the contribution even if the contemplated activity is considered
to contribute to the profit of the supplier.
[2] [Retailers] shall not change the amount or use of the contribution unilaterally
without the consent of the supplier.
[3] [Retailers] shall not unilaterally offset the supplier’ s account receivable against
the contribution without the consent of the supplier.78
(ii) 1984 Self-Regulating Standards (developing fees)
2.50 The Self-Regulating Standards Regarding Representation of Developing Fees for Colour Negative
Film were enacted by the Fair Trade Promotion Council on 15 May 1984 ("1984 Self-Regulating
Standards").79 The representation standard is defined as follows:
"... businesses should properly list fees such as the developing fee of colour film and
should not make representations that might mislead the general consumer or possibly
lead them to have excessive expectations. This standard should not be used to limit
or restrain businesses freedom to set fees".80
The 1984 Self-Regulating Standards also set out the method of representation for printing fees, developing
fees and finishing time. They also provide that the Fair Trade Promotion Council shall conduct
investigations and provide guidance on the operation of the standards if necessary.81
77Ibid., translation, US Ex. 82-8, pp. 1-2.
78Camera Times, 22 June 1982, pp. 3 ff., US Ex. 82-8, see translation issue 23.
79Translation, US Ex. 84-4.
80Ibid., p. 2.
81Ibid., p. 3.

(b) Retailers Council and 1987 Retailers Code
2.51 On 31 March 1987, acting pursuant to Article 10(1) of the Premiums Law, the JFTC approved
the Fair Competition Code Regarding Representations in the Camera and Related Products82/Camera
Category83 Retailers Industry ("1987 Retailers Code") and its enforcement body the Cameras and Related
Products/Camera Category RetailersIndustryFairTradeCouncil("RetailersCouncil").84 Theobjective
of the 1987 Retailers Code is "to protect the general consumers' appropriate product selection, prevent
the unfair inducement of customers, and thereby to secure fair competition".85 The Code, inter alia,
providesfor requisiterepresentations for storefrontsand infliers, includingidentificationof the country
of origin of imported goods; it imposes standards for the representation of dual prices, for the use
of special expressions and comparative representations; and prohibits misleading representation and
loss-leader advertisement. The Code also identifies the powers of the Council with respect to
investigating suspected violations of the provisions of the Code and the penalties that may be imposed
for such violations.
(c) Chambers of Commerce and Industry
2.52 According to the United States, Japanese Chambers of Commerce and Industry are established
pursuant to the Chamber of Commerce and Industry Law, which allows for the creation of local bodies
under the control and oversight of MITI. Chambers of Commerce and Industry are delegated the
responsibility to "conduct administrative matters commissioned by administrative agencies", such as
MITI.86 MITI also has the authority to "investigate" the on-going activities of the Chambers of
Commerce and Industry.87
82US translation of "kamera-rui". See translation issue 17.
83Japan's translation of "kamera-rui". See translation issue 17.
84Kanpo (Official Gazette), 11 April 1987, pp. 1-3, translation, US Ex. 87-1, Japan Ex. D-66.
85Id., p. 1.
86Article 9-17 of the Chamber of Commerce Law, Law No. 143, 1 August 1953.
87The investigatory activity is defined in the Chamber of Commerce Law to include requiring the submission of an annual
financial statement to MITI (Article 57), and MITI authority to audit the Chambers of Commerce (Article 58), as well as
to dissolve a Chamber of Commerce (Article 59 of the Chamber of Commerce Law). MITI has the authority over Chambers
of Commerce to accept or deny the permit of a new Chamber. Article 5-19 of the MITI Establishment Law, US Ex. 52-2.

III. SUMMARY OF CLAIMS AND PROCEDURAL OBJECTIONS
A. EVOLUTION OF THE US CLAIMS
3.1 This section details the evolution of the US claims, using where appropriate the short titles
of the various measures as defined in the foregoing section. The US request for consultations identified
the following Japanese measures as being at issue:
a. liberalization countermeasures;88
b. distribution guidelines and related measures;
c. the Large Stores Law;
d. the Premiums Law;
e. measures regarding dispatched employees;
f. the application of the Law to Promote Business Reform for Specified Industries;
g. the Ministry of International Trade and Industry Establishment Law;
h. and related legislation, regulations, and administrative measures.
3.2 The US request for the establishment of a panel identified the following Japanese measures
as being at issue:
a. liberalization countermeasures;
b. distribution measures, such as, but not limited to, the cabinet decision, administrative
guidance, and other measures listed in Attachment A;
c. i. the Large Stores Law;
ii. Special Measures for the Adjustment of Retail Business; No. 155 of 1959
(Shocho Ho);
d. the Premiums Law;
e. measures regarding dispatched employees pursuant to the Antimonopoly Law;
f. the Law Concerning Enterprise Reform for Specified Industries, No. 61 of 1995;
g. the Ministry of International Trade and Industry Establishment Law, No. 275 of 1952;
h. and related measures.
Attachment A contained the following list of distribution measures:
i. MITI, "Administrative Guidance to Promote Rationalization of Distribution
System", 1966;
ii. 1967 Cabinet Decision;
iii. Distribution Committee Seventh Interim Report;
iv. 1969 Survey;
v. 1970 Guidelines;
vi. MITI, "Business Bureau Report on Film Prices", 1970;
vii. 1971 Basic Plan;
viii. 1975 Manual;
ix. 1990 Guidelines;
x. MITI and the Small and Medium Enterprises Agency, "Distribution Vision for the
21st Century", 1995 (and earlier versions for the 1970s, 1980s, and 1990s);
xi. Photo Industry Distribution Information Systemization Council [Kyogikai],
"Comprehensive Manual for Photo Distribution Industry Distribution Information
Systemization", 1996 (and 1989, 1990, 1991, and 1992 versions);
xii. Other related measures, including guidelines.
88Japan disagrees with this translation of the Japanese word taisaku. See translation issue 1.

3.3 In response to a question by the Panel at the first substantive meeting, the United States submitted
the following list of specific "liberalization countermeasures" which are subject to claims under
Articles III, X:1 and XXIII:1(b) of GATT. The list is divided into three categories: distribution
countermeasures; large stores law; and promotion countermeasures.
3.4 The following measures were included in the list of distribution countermeasures:
(1) 1967 Cabinet Decision
(2)* JFTC Notification 17
(3)* Distribution Committee Sixth Interim Report
(4) Distribution Committee Seventh Interim Report
(5) 1969 Survey on Transaction Terms
(6) 1970 Guidelines for Rationalizing Terms of Trade for Photographic Film
(7)* International Contract Notification under the Antimonopoly Law and JFTC Rule 1
(8) 1971 Basic Plan
(9) 1975 Manual
(10)* 1976 JDB funding for Konica's wholesalers
(11)* 1977 SMEA funding for photoprocessing laboratories.
3.5 The following measures were included under the heading "Large Stores Law":
(12) LargeStoresLawandrelatedregulationsandadministrativemeasures,includingrelated
local measures;
(13) 1979 Diet amendment to Large Stores Law
3.6 In addition to items (1) and (2) above, the following measures were included under the heading
"Premiums Law/promotion countermeasures":
(14)* 1971 JFTC Notification 34
(15)* 1977 JFTC Notification 5
(16) 1981 JFTC guidance on dispatched employees
(17) 1982 Self-Regulating Rules
(18) 1982 Establishment of Fair Trade Promotion Council
(19)* 1983 JFTC guidance on advertising rules
(20) 1984 Self-Regulating Standards
(21) JFTC approval of the 1987 Retailers Code and its enforcement body, the Retailers
Fair Trade Council.
3.7 In response to another Panel question, the United States indicated that in respect of its claims
under Article III:4, Article X:1 and Article XXIII:1(b) of GATT:
a. The measures alleged to be inconsistent with Article III:4 are the "Distribution
Countermeasures" listed in paragraph 3.4.
b. The measures alleged to be inconsistent with Article X:1 are (i) unpublished enforcement
actions by the JFTC and fair trade councils under the Premiums Law and relevant fair
competition codes that establish or modify criteria applicable in future cases; and (ii)
unpublished guidance through which the Japanese Government makes applicants for
a new or expanded store under the Large Stores Law coordinate their plans with local
competitors before submitting a notification for government review.

c. The measures alleged to nullify or impair benefits within the meaning of
Article XXIII:1(b) of GATT are the "Distribution Countermeasures", "Large Stores
Law," and "Premiums Law/PromotionCountermeasures" listedinparagraphs 3.4-3.6.
3.8 In response to that Panel question the United States also indicated the extent to which it claimed
that the individual measures listed above should be considered in conjunction with each other in
determining whether Articles III and X have been violated and whether there has been a nullification
or impairment of benefits under GATT within the meaning of Article XXIII:1(b). According to the
United States, the distribution countermeasures work together as an organic whole to violate Article III
and nullify or impair benefits within the meaning of Article XXIII:1(b). In addition, the United States
takes the position that the Large Stores Law and related measures should be considered as an important
measure in Japan's overall efforts to create and support manufacturer-dominated, vertically aligned
distribution in Japan under the distribution countermeasures. Thus, it claims that the Large Stores
Law and related measures and the distributioncountermeasures incombinationnullifyorimpair benefits
under Article XXIII:1(b). The United States also claims that the promotion countermeasures as a set
by themselves have nullified or impaired benefits under Article XXIII:1(b). Finally, the United States
claims that the distribution countermeasures, the Large Stores Law and related measures and the
promotion countermeasures, taken as three sets of measures, have also operated in combination so
as to nullify or impair benefits within the meaning of Article XXIII:1(b). See Section D of Part IV
and Section F of Part V for a detailed discussion of the combined effects of the three sets of measures
acting in combination.
3.9 Japan contends that the US case is highly unusual in commencing its legal argument with "non-
violation nullification or impairment" claims because such claims normally would be considered
subsidiary to violation claims. To the extent that the same alleged measure gives rise to both violation
and non-violation claims, panels normally do not consider non-violation issues until the alleged violations
have been addressed.89 The US allegations regarding so-called "distribution countermeasures" - i.e.,
alleged measures takenbythe Japanese Governmentinthe 1960sand‘ 70stoencouragethe establishment
of an exclusionary market structure that impedes market access for imported film and paper - form
the centrepiece of the US non-violation claims. At the same time, the US argues that these "distribution
countermeasures" constitute violations of Article III national treatment obligations.90
3.10 Japan emphasizes that only the specific measures mentioned in the foregoing US responses
need to be evaluated by the Panel. In Japan's view, measures not mentioned in the US responses are
outside the scope of the dispute, and need not be considered further.
B. PROCEDURAL OBJECTIONS
3.11 Japan requests the panel to dismissthe US claims marked with an asterisk inparagraphs 3.4-3.6
above because these "measures" were raised by the United States for the first time in its initial submission
to the Panel, and had not been identified specifically in the request for the establishment of the panel.91
Japan originally objected to nine items, but the United States did not include two of them - certain
89In prior panel decisions addressing non-violation allegations, the panels first addressed the violation claims, and then
addressed non-violation claims. See e.g., Panel Report on European Economic Community - Payments and Subsidies Paid
to Processors and Producers of Oilseed, and Related Animal Feed Products ("EEC - Oilseeds"), adopted on 25 January 1990,
BISD 37S/86, 126, para. 142. See also, Working Party Report on the Australian Subsidy on Ammonium Sulphate ("Australia -
Ammonium Sulphate"), GATT/CP.4/39, adopted on 3 April 1950, BISD II/188, 192, paras. I, 12.
90Japan notes that the US also makes Article X violation claims with respect to the Large Scale Retail Store Law and
the Premiums Law.
91Japan pointed out that it had listed only those items which appeared in the "legal argument" section of the first US
submission, although, in Japan's view, there were other items which are raised for the first time in the "factual background"
section of the first US submission. It was Japan's understanding that those items not specifically mentioned in the "legal
argument" section are not part of the US legal claims in the proceeding.

countermeasures by the Photosensitive Materials Committee of the Distribution Systemization Promotion
Council and directives to strengthen the Department Stores Law - in its response to the Panel's request
that it specify the measures subject to US claims. Japan later objected to an additional tenth item -
1983 Guidance on advertising rules - which the United States included in its response to the Panel's
request, but which Japan contends was neither specifically identified in the panel request nor raised
in the consultations. In Japan's view, the items that were not specified in the panel request should
be dismissed as not being properly before this panel and vague reference to "measures, such as, but
not limited to," "related measures," and "other related measures, including guidelines" in the panel
request are inconsistent with Article 6.2 of the DSU, which requires the complaining party to identify
the "specific measures at issue." In Japan'sview, the USrequestsfor consultationsandthe establishment
of a panel insufficiently identified the measures in dispute. In particular, the US panel request failed
to meet the specificity requirements of Article 6.2 of the DSU.
1. THE REQUEST FOR CONSULTATIONS AND THE CONSULTATIONS
3.12 Article 4.4 of the DSU reads:
"Any request for consultations shall be submitted in writing and shall give the reasons
for the request, including identification of the measures at issue and an indication of
the legal basis for the complaint".
3.13 Japan emphasizes that it is particularly important in this case for the United States to have
specifically identified the "measures" in its panel request, because the request for consultations was
overly broad and vague, and did not "identify" the measures for the purposes of Article 4.4 of the
DSU, which requires the complaining party to include "identification of the matter at issue". Japan
points out that the consultations themselves in this case also did not identify the specific measures.
AccordingtoJapan, properconsultationsarefundamentaltothe operationof theWTO disputesettlement
procedures and the United States has often stressed the importance of matters being raised in the
consultation stages prior to the panel request, e.g., arguments raised by the United States led the panel
in Norwegian Salmon to explain that "for a claim to be properly before the panel, it had to be within
the Panel's terms of reference and it had to have been identified during prior stages of the dispute
settlement process".92 In United States - Measures Affecting Alcoholic and Malt Beverages ("United
States - Alcoholic Beverages"), the United States summarized the policy rationale as:
"... consultations provide the parties an opportunity to reach a satisfactory solution
to the dispute before proceeding toa panel. The partycomplained against mightmodify
its practice or, alternatively, convince the complaining party of the GATT consistency
of its measure, in either case avoiding the need for a panel. Furthermore, in those
situations where resolution is not possible without recourse to a panel, consultations
provide the defending party notice of the measure(s) complained of and the consequent
opportunitytoprepare adequately for the issue. Such basic due processisa fundamental
element of all equitable adjudicatory systems".93
3.14 The United States submits that consultation requests and panel requests share one common
purpose, i.e., to give notice. The notice given should be increasingly more specific at each stage and
the degree of specificity required should be proportional to what notice is needed to ensure the parties'
meaningful participation at each stage. Article 4.4 of the DSU requires that requests for consultations
include "identification of the measures at issue and an indication of the legal basis for the complaint."
92Panel Report on United States - Imposition of Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon
from Norway ("United States - Norwegian Salmon"), adopted on 26 April 1994, ADP/87, 100, para. 338.
93Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages ("United States - Alcoholic Beverages"),
adopted on 19 June 1992, BISD 39S/206, 226, para. 3.2 (summary of US argument).

The specificity of the notice given by the complaining party to the responding party must be sufficient
for the responding party to understand the nature of the matter alleged by the complaining party, and
to prepare for the consultations so that they will be meaningful.
3.15 The United States argues that the DSU does not prescribe the specificity with which a matter
must be raised and discussed in consultations. The complaining party's description of the matter should
include a description of how the measures it understands to be related to the matter operate and a
description of how those measures are inconsistent with the relevant WTO agreements. It is not unfair
for the responding party to bear responsibility for knowing about its own interpretations or applications
of its measures, particularly since those rulings and interpretations would be made under its own legal
system in its own language. But the discussions should be specific enough to serve the purpose of
the consultations, i.e., to give the complaining party an opportunity to explain the matter complained
of, to give the responding party the opportunity to explain the basis for maintaining the measures and
to provide the opportunity for the parties to reach a satisfactory adjustment of the matter before
proceeding to a panel.
3.16 The United States explains as a general matter, if a party complains about the operation and
effect of a given law or measure, it should not be required to discover and present in the consultations
every potentially relevant amendment, regulation, directive, notice, administrative action, or judicial
decision interpreting and applying that law or measure. In many countries, including the United States,
the full panoply of regulations, administrative rulings, and judicial decisions regarding a particular
law could fill an entire wall of bookshelves. The approach advocated by Japan would compel a
complaining party to research every last volume on the shelves before requesting consultations to be
sure that it could identify and mention in the consultations each ruling and interpretation that might
possibly be relevant in a panel submission. Such an approach would compel the complaining party
to become as knowledgeable about the measures as the responding party that promulgated and administers
the measures before requesting consultations. Placing such a difficult and unnecessary burden on
complaining parties would discourage Members from requesting consultations unless they had already
written their first submission to the panel. Such a heavy burden is not reflected in the DSU and would
impair the settlement of disputes.
3.17 Japan responds that the fundamental reason behind Japan's request for the dismissal of certain
US claims is that the measures were not even specifically mentioned in the US panel request. Japan
further explains that the DSU does not require that every interpretation or application of a measure
be identified, but that it rather requires the complaining party to identify the specific measures at issue.
It is Japan's view that in this case the United States, e.g., complains against certain specific notifications
under the Premiums Law, such as the issue of representations, but did not disclose those specific
notifications until its first submission.
3.18 The United States maintains that each of the measures which are subject to Japan's procedural
objections was within the scope of the measures identified and described by the United States in the
consultations as reflected in the statement that the United States delivered at the consultations and the
US delegation's notes of the dialogue between the parties. During the consultations, the United States
presented a detailed and coherent picture of the means and results of Japan's liberalization
countermeasures. Japan was apprised in great detail of all the measures at issue, the factual basis for
the dispute, the exact nature of the US assertions and the legal arguments that the United States
considered applicable.
3.19 In Japan’ s view, the United States’ argument that it presented in the consultation "a detailed
coherent picture of the means and results of Japan’ s liberalization countermeasures" does not justify
the US failure to meet the requirement under Article 6.2 of the DSU to identify the "specific measures
at issue." Japan argues that the United States appears to misunderstand the notice requirement of

Article 6.2 which provides that the panel request "shall ... identify the specific measures at issue" and
thus it requires greater specificity and detail in the request.
3.20 The United States contendsthatit has noobligation to"discover and presentin the consultations
every potentially relevant amendment, regulation, directive, notice, administrative action, or judicial
decision interpreting and applying that law or measure."
3.21 Japan responds that the United States has misunderstood the Japanese argument. First, the
fundamental reason behind Japan’ s request for the dismissal of certain US claims is that the measures
were not even specifically mentioned in the US panel request. Second, the DSU does not require that
every interpretation or application of a measure be identified; rather, it requires the complaining party
to identify the specific measures at issue. In this case, e.g., the United States complains against certain
specific notifications under the Premiums Law, such as the issue of representations, yet did not disclose
those specific notifications until its first submission.
3.22 More specifically, the United States insists that seven of the nine measures referred to by Japan
under its procedural objections form part of the broader group of government actions and policy processes
that the United States categorizes as "distribution countermeasures":
(1) Distribution Committee Sixth Interim Report;
(2) Japan Development Bank (JDB) financing to Konica;
(3) Smalland MediumEnterpriseAgency(SMEA) financingtophotofinishinglaboratories
(4) Countermeasures by the Photosensitive Materials Committee of the Distribution
Systemization Promotion Council;
(5) Directives to strengthen the Department Stores Law;
(6) International Contract Notification under the Antimonopoly Law and JFTC Rule 1;
(7) JFTC Notification 17.
Moreover, the United States contends that three of the nine measures referred to by Japan under its
procedural objections are interpretations or applications of the Premiums Law. In addition to the just-
mentioned Notification 17, these are namely:
(8) JFTC Notification 34;
(9) JFTC Notification 5.
The United States discusses each of these measures in turn.
3.23 (1) DistributionCommitteeSixthInterim Report: The United States submits thatthis report
was one of a series of studies by the Council that formed the basis for distribution policy in Japan,
reflecting an analysis and consensus-building process between government and the private sector. In
the consultations, the United States specifically identified and described this process by the Industrial
Structure Council and its series of reports. The United States stated that MITI charged the Distribution
Committee of the Industrial Structure Council with devising measures for consolidating and strengthening
the distribution system in anticipation of market liberalization and that MITI's instructions on how
to consolidate the distribution system were set forth in a series of reports and guidelines to industry
in the late 1960s and early 1970s. The United States mentioned examples of Distribution Committee
reports and therefore, Japan had sufficient notice of the US concern about all of the Distribution
Committee reports. The United States maintains that the Sixth Interim Report is within the scope of
the "series of reports and guidelines to industry in the late 1960s and early 1970s", and "[actions by
the Distribution Committee of the Industrial Structure Council ... for consolidating and strengthening
the distribution system" discussed by the United States in the consultations.

(2)-(3) JDB and SMEA Financing: In respect of the US claims related to the JDB financing
given to Konica to establish common distribution facilities with its wholesalers and the SMEA financing
given to photofinishing laboratories to help align them with domestic manufacturers, in the US view,
Japan was on full notice from the consultations that the United States was concerned about government
financing to assist the consolidation of distributors under the domination of Japanese manufacturers.
Specifically, the United States noted that the 1971 Basic Plan set forth objectives and a process for
the Japanese industry to accomplish those objectives under the "systemization" policy. The United
States pointed out that the Basic Plan did not rely on voluntary efforts alone, but looked for financial
incentives to achieve keiretsu-nization [of distribution]. The United States emphasized several provisions
of the Basic Plan to support this point, including the statement in the Basic Plan that "positive support
and guidance from the government will be necessary" to carry out systemization. Based on these
discussions, the United States argues that Japan had reason to expect that the United States would continue
pursuing the specific ways in which Japan gave its "positive support" for wholesalers and laboratories
(which also act as wholesalers) to establish or strengthen their exclusive ties with Japanese manufacturers.
(4) "Countermeasures" by the Photosensitive Materials Committee: The United States further
contends that actions by the Photosensitive Materials Committee (Committee) of the Distribution
Systemization Promotion Council (Council) also fit within the confines of the distribution countermeasures
discussed by the United States in the consultations. The United States addressed in detail the actions
of the Committee's parent, the Council, which authored the 1971 Basic Plan. The United States
described how the Basic Plan called for the "support and guidance" of the Japanese Government to
accomplish the systemization goals. The United States specifically stated that over the next several
years following the Basic Plan, the Japanese Government followed up with further studies to see how
its plans were being implemented and to add to or refine its guidance for consolidating the distribution
structure. Such follow-up and further guidance is exactly what the Committee did and it played an
important role in ensuring that Konica received subsidized financing from the Japan Development Bank
to establish a joint distribution facility with its wholesalers.
(5) Directives under the Department Stores Law: The United States does not include the
MITI directives issued between 1968 and 1971 under the Department Stores Law as measures that
violate Article III or X or that nullify or impair benefits under Article XXIII:1(b). However, these
directives form part of the factual context in which Japan carried out the restructuring of its distribution
sector for photographic film and paper. The 1969 MITI-commissioned survey of transaction terms
in the photographic film sector specifically described the growth of large stores, along with the
competitive challenge of Kodak, as the two greatest threats to maintaining the oligopoly of Fuji and
Konica. In the consultations, the United States mentioned that Japan saw the need to revise the
Department Store Law and replace it with the more comprehensive Large Stores Law as part of the
overall effort to insulate the distribution system from foreign control following capital liberalization.
(6) International Contract Notification: The United States alleges that the international
contract notification provisions of the Antimonopoly Law have played an important role in protecting
the exclusive distribution system fostered by Japanese Government policy. The international contract
notification provisions require each contract between foreign manufacturer and a Japanese wholesaler
to be reported to the JFTC. Once transaction terms are standardized, the JFTC more easily can find
that transaction terms departing from the standard are unfair trade practices. In the consultations, the
UnitedStates discussedJapan'spolicyof standardizingtransactiontermsandtherationaleforthispolicy,
including that standardized transaction terms would help to protect Japanese manufacturers against
foreign competition. The United States referred to the following passage in the 1970 Guidelines: "In
order to prevent foreign corporations with huge investment capacity from disrupting the trade order,

reasonable terms of trade must be clearly stated". The United States also quoted a passage94 from an
industry journal which explained the purpose of the guidelines that standardizing transaction terms
would facilitate application of the Antimonopoly Law to non-standard practices. The United States
also quoted from a report by the Foreign Investment Council, the companion government-industry
committee to the Industrial Structure Council. This report95 emphasized that the Antimonopoly Law
could be used to help check the competitive advance of foreignsuppliers. The United States underscores
that Japan had clear notice of the US concern with standardized transaction terms as a means of blunting
the competitive abilities of foreign firms, and its use of the Antimonopoly Law to support these policies.
The United States maintains that Japan cannot be surprised that the first US submission described more
precisely the mechanisms under the Antimonopoly Law that helped to force standardized terms upon
foreign manufacturers.
(7) JFTC Notification 17: The United States asserts that JFTC Notification 17 was a tool
employed by Japan to blunt the ability of foreign firms to make competitive offers to Japanese
distributors. It essentially ruled out all manner of premiums from manufacturers to wholesalers, except
those of token value that could be considered reasonable in light of normal business practice.
Notification 17 reinforced the standardized transaction terms and the systemization policies which the
United States discussed at length with Japan in the consultations and Japan thus cannot claim surprise
that the first submission of the United States discusses Notification 17. In addition to being within
the scope of the consultations on "distribution countermeasures", the United States submits that
Notification 17 is also an interpretation or application of the Premiums Law which it considers as forming
part of the "promotion countermeasures".
(8)-(9) JFTC Notifications 5 and 34: The United States maintains with respect to two other
such interpretations or applications of the Premiums Law that it discussed the Premiums Law at length
with Japan in the consultations. It stressed in particular the intent and effect of the Premiums Law
inblunting the abilityof foreignmanufacturers toapply theircompetitivestrengths inJapan. The United
States quoted a passage from a report of the Foreign Investment Council96 and emphasized that the
limitations on competition under the Premiums Law worked to the disadvantage of companies who
are not the dominant suppliers. In the US view, Notifications 5, 17 and 34 are cornerstone applications
of the Premiums Law that impose substantial limits on the ability of foreign film manufacturers to offer
meaningful premiums in connection with products sold in Japan. The substantial discussion of the
Premiums Law during the consultations gave Japan more than adequate notice that its particular
interpretations and applications of the law restricting competition were within the scope of this dispute.
3.24 Japan reiterates that the request for consultations in this case was overly broad and vague,
and did not "identify" the measures for the purposes of Article 4.4 of the DSU, which requires the
complaining party to include an "identification of the matter at issue". According to Japan, the
94"In the case of the photographic sector, ... the reduction in tariffs and the capital liberalization, etc., makes the inroads
Kodak is gaining a problem that it [the industry] faces. The Ministry of International Trade and Industry's guidelines for
normalizing transaction conditions is what may be called an 'immunization'. ... [B]ecause of the fear of confusion of transaction
order due to the development of liberalization, it [the Guidelines] embodies the idea of 'immunizing' the distribution system
as a whole by rationalizing and clarifying the transaction condition of rebates and discounts ... . The guidelines may be
described as an attempt to equalize the conditions of competition. For instance, standard rebates were adopted so that the
use of non-standard rebates by foreign capital may be checked by the application of the Antimonopoly Law." Draft Standard
Contract for Film with Criteria for Standardization on Transaction Terms, Zenren Tsuho, August 1971, US Ex. 71-11.
95"For the application of the Antimonopoly Law, while it may not be possible to specifically select foreign capital enterprises
for differential treatment, foreign capital enterprises nevertheless have the strong capital and technical background of the
parent company and are usually in an economically strong position. Consequently, it is believed that they often will become
the object of the regulation of the Antimonopoly Law." US Ex. 67-5, pp. 76-78.
96When foreign capital is brought into Japan, it is possible for a parent company to use vast amounts of capital to engage
in dumping, offer premiums, and conduct large-scale advertising and public relations. Therefore ... it is necessary to fully
study whether these actions qualify as unfair business practices as defined in Article 2 of the Antimonopoly Law and can
be regulated pursuant to Article 19 of the Antimonopoly Law or under the Premiums Law.

consultations themselves in this case also did not identify these specific measures and the United States
admitted as much during the first meeting with the panel. While the United States purports to
demonstrate how "measures" were discussed in the preceding paragraph, in fact the discussion shows
just the opposite. In Japan's view, the United States is forced to make rather strained arguments for
each measure.
2. THE REQUEST FOR THE ESTABLISHMENT OF THE PANEL
3.25 Article 6.2 of the DSU provides:
"The request for the establishment of a panel shall be made in writing. It shall indicate
whether consultations were held, identify the specific measures at issue and provide
a brief summary of the legal basis of the complaint sufficient to present the problem
clearly".
3.26 Japan submits that Article 6.2 of the DSU requires the complaining party to identify all alleged
measures at issue in its request for the establishment of a panel, as well as the legal basis for its claims
relating to those measures. Given that Article 4.4 of the DSU provides that a request for consultations
includes "identification of the measure at issue", whereas Article 6.2 of the DSU requires that the panel
request "identifythe specific measures at issue",Japan argues thatin the panel requestgreater specificity
and detail is required than in the request for consultations. This requirement serves the important
purposes of both providing notice to the parties complained against and third parties, and defining
precisely what the panel should consider. Without a specific indication of the measures being challenged,
the parties complained against cannot defend themselves adequately and third parties cannot judge whether
they need to participate in the panel proceedings.
3.27 The United States explains that Article 6.2 of the DSU requires the complaining party to
"identify the specific measures at issue and provide a brief summary of the legal basis of the complaint
sufficient to present the problem clearly". The panel request then becomes the primary document
defining the panel's terms of reference which "fulfil an important due process objective, i.e., giving
the parties and third parties sufficient information concerning the claims at issue in the dispute in order
to allow them an opportunity to respond to the complainant's case".97 While the DSU requires greater
specificity in the panel request than in the request for consultations, the United States argues that the
panel request need not restate the consultations norsummarize the complaining party's first submission.
3.28 Japan furthersubmitsthatArticle6.2 ofthe DSUreflects pastpanel practice, whichconsistently
has interpreted the terms of reference narrowly. In Canada - Administration of the Foreign Investment
Review Act, the panel declined to consider any measures related to "manufacture" of goods because
of its terms of reference "which only refer to the purchase of goods in Canada and/or the export of
goods from Canada."98 The panel in Norwegian Salmon summarized the policy rationale for panels
to confine themselves to the examination of matters identified in their terms of reference:
"[T]erms of reference served two purposes: definition of the scope of a panel
proceeding, and provision of notice to the defending Party and other Parties that could
be affected by the panel decision and the outcome of the dispute. The notice function
of terms of reference was particularly important in providing the basis for each Party
to determine how its interests might be effected and whether it would wish to exercise
its right to participate in a dispute as an interested third party. The panel observed
97Appellate Body Report on Brazil - Measures Affecting Desiccated Coconut ("Brazil - Desiccated Coconut"), adopted
on 20 March 1997, WT/DS22/AB/R, p. 22.
98Panel Report on Canada - Administration of the Foreign Investment Review Act ("Canada - FIRA"), adopted on 7 February
1984, BISD 30S/140, 158, para. 5.3.

that terms of reference often were standard terms of reference . . . in which the
definition of the matter had been supplied by a written statement prepared entirely by
the complaining party. In the light of these considerations, the Panel concluded that
a matter, including each claim composing that matter, could not be examined by a panel
under the Agreement unless that same matter was within the scope of, and had been
identified in, the written statement or statements referred to or contained in its terms
of reference ..."99.
3.29 According to the United States, only two panel reports have considered the question of whether
a "measure" should be considered within the panel's terms of reference.100 A number of prior panel
reports have considered the related, but different, question of whether "matters" or "claims" are within
the panel's terms of reference.101 In the United States view, these prior decisions demonstrate that
panels have excluded only those measures, claims, and matters that fall outside the parameters of the
dispute as it was understood by the parties at the time the panel's terms of reference were established.
3.30 Japan submits that the outer limits of a panel's jurisdiction are defined by its terms of reference
which in this case refer to the matter specified in the panel request. Panels should thus focus on the
exact wording of the terms of reference to define precisely their mandate. Claims with respect to items
raised by the United States in its first submission that had not been mentioned in its panel request should
be dismissed at the outset as outside the scope of the Panel's terms of reference.
3.31 The United States contends that its request for the establishment of this Panel does not differ
greatly from other WTO panel requests in the degree of detail provided. The panel request in the case
concerning the European Communities - Regime for the Importation, Sale and Distribution of Bananas
("EC - Bananas") of April 1996 just described that the regime was established by an EC regulation,
and subsequent legislation, regulations and administrative measures and that the regime and related
measures appear to be inconsistent with the provisions of the WTO Agreements. The United States
takes the position that in view of the nature of Japan's distribution measures in the consumer photographic
film and paper market, it was necessary for the United States to describe those measures in similar
terms.
3.32 Japan explains its position with regard to the differences between the issues for this case and
those for the EC - Bananas case. Contrary to the US claims, in Japan’ s view, the panel request in
this case differs greatly from the panel request for the EC - Bananas case. The panel request for the
EC - Bananas case did apparently identify the basic EC regulation at issue which established the banana
"regime" and referred to "the subsequent EC legislation, regulations and administrative measures that
further define and implement the basic regulation." By contrast, in the present case, the cores of the
99United States - Norwegian Salmon, ADP/87, 99, para. 336. Although this panel involved a dispute under the Antidumping
Code, in Japan's view, the policy rationale is equally compelling in the present case.
100In Japan - Alcoholic Beverages the panel ruled against the proposed inclusion of a new measure, the Taxation Special
Measures Law, that was unrelated to the measure that had been discussed in consultations and named in the panel request,
the Japan Liquor Tax Law. Panel Report on Japan - Taxes on Alcoholic Beverages, adopted on 1 November 1996, WT/DS8/R,
para. 6.5. In United States - Alcoholic Beverages, the panel adopted an agreement of the parties as to the scope of the measures
to be considered, but rejected Canada's request to include in the terms of reference "any new measure which may come
into effect during the Panel's deliberations." BISD 39S/206, 227, para. 3.5.
101See, e.g., Panel Report on United States - Denial of Most-Favoured-Nation Treatment as to Non-Rubber Footwear
From Brazil, adopted on 19 June 1992, BISD 39S/128, 148, para 6.2 (rejecting two new "issues" under Article X and
XXIII:1(b)); Panel Report on United States - Restrictions on Imports of Sugar, adopted on 7 November 1990, BISD 37S/228,
237, para. 3.19 (rejecting attempt to include new Article XIII "matter"); and United States - Norwegian Salmon, ADP/87,
99, para. 336 (rejecting attempt to include a new Article III "claim" where existing claims related to the Antidumping
Agreement). Cf. Panel Report on United States - Section 377 of the Tariff Act of 1930, adopted on BISD 36S/345, 383,
para. 5.5 (accepting two new EEC arguments relating to "legal procedures").

measures in question themselves are presented with such unclear expressions as "liberalization
countermeasures," a phrase created by the United States, and many of the alleged measures are not
the kind of measures which "further define and implement the basic regulation," but are presented
with vague and undefined expressions like "but not limited to" and "other related measures including
guidelines."
3.33 Japan further argues that although the panel on the EC - Bananas case states that "the DSU
must be interpreted so as to promote the prompt settlement of disputes, without adopting a reading
of DSU provisions that would prolong disputes unnecessarily," undue emphasis on the promptness
of the settlement without taking due account of the defending party’ s burden may invite abuse of the
dispute settlement system and could cause serious damage to the proper operation of the system. Japan
submits that the DSU must be interpreted so as to serve the purpose of the fair settlement of disputes.
3.34 The United States urges the Panel to include the measures subject to Japan's procedural
objections within its terms of reference
(1) because Japan was on adequate notice of the measures implicated in the US request;
(2) because Japan has notcomplained thatany of the measures are not"related" tomeasures
that were discussed at the consultation and named in the panel request; and
(3) because of the nature of the measures themselves.
(a) Adequate notice
3.35 From the standpoint of the object and purpose of Article 6.2, the United States argues that
its panel request was more than sufficient in view of the Appellate Body's finding in its report in the
Brazil - Desiccated Coconut dispute that "terms of reference fulfil an important due process objective -
they give the parties and third parties sufficient informationconcerning the claims at issue in the dispute
in order to allow them an opportunity to respond to the complainant's case".102
3.36 In the current dispute, the United States claims that Japan was not denied "an opportunity to
respond to the [US] case". As its first submission demonstrates, Japan did not lack an understanding
of the problem the United States was complaining about. Japan had six weeks to respond to the first
US submission which is double the maximum amount of time in the DSU's proposed timetable for
panel work. If there were any prejudice caused to Japan by the inclusion in first US submission of
the nine measures which are subject to Japan's procedural objections, the United States argues that
prejudice has been cured by the extraordinarily long period of time that Japan had to prepare its first
submission.
3.37 Japan responds that even if it had more time to prepare its first submission that would not
excuse the violation of Article 6.2 of the DSU. Moreover, disclosure after the panel request does nothing
to remedy the harm suffered by third parties who might have made different decisions about whether
or not to participate based on the specific items raised in the panel request. Japan further submits the
following four points. First, a written submission does not substitute for the notice function required
by Article 6.2 of the DSU. For another, the lack of specificity in the panel request requires extensive
work on the defending party for the preparation of its defense, which could be avoided if the panel
request were sufficiently specific. Making the defending party engage in what may eventually turn
out to be unnecessary work, and in view of the limited amount of resources and time available,
constraining theirability todefend adequately is prejudicialand unfair. Thirdly, the first US submission
included such measures as international contract notification, SMEA financing, and JDB loan, the
inclusion of which Japan was not able to foresee even after extensive preparation. Finally, the US
102Brazil - Desiccated Coconut, WT/DS22/AB/R, p. 22. See also United States - Norwegian Salmon, ADP/87, 99,
para. 336.

first submission itself still did not clarify which measures are complained against. Even the list of
the "measures" submitted by the United States in response to a question by the Panel at the first
substantive meeting included vague expressions, such as "related regulations and administrative measures,
including related local measures."
3.38 The United States contends that all the measures in question are elements of Japan's liberalization
countermeasures plan; six are "distribution measures, such as, but not limited to" the measures identified
in the body and Attachment A of the US panel request; and three are notifications made by the JFTC
pursuant to the Premiums Law or the Antimonopoly Law identified in the body of the US panel request.
According to the United States, its panel request stated explicitly and clearly the problem that the United
States was asking the panel to address and gave Japan and third parties sufficient informationconcerning
the claims at issue in the dispute for them to respond fully to the United States.
(b) Related measures
3.39 According to the United States, in the current dispute, the measures that Japan would have
the Panel exclude from consideration are an integral part of the corpus of the distribution and premiums
countermeasures, they were discussed in detail during the consultations and thus do not fall outside
the parameters of the dispute as the parties understood it.
3.40 Japan requests the Panel to exclude the vague and overly inclusive expressions used by the
United States in the panel request as inconsistent with Article 6.2 of the DSU. Only "measures"
specifically mentioned in the panel request should be deemed to be brought properly before the Panel.
At the DSB meeting of 16 October 1996, when the Panel was established, Japan expressed its serious
concerns about the procedural problems of the US request for the establishment of the panel in light
of the DSU, and reserved its rights to request the Panel to make a ruling on the matter.103
3.41 In particular, in Japan's view, "liberalization countermeasures", to which the United States
refers in its panel request, are not a set of concrete measures, but rather a generic term, and are too
general and ambiguous tobe regarded as "specific measures" in the sense of Article 6.2. Attachment A,
in which the United States listed what it believes to be "distribution measures", contains a measure
which Japan is unable to identify, namely the "Administrative Guidance to Promote Rationalization
of Distribution System, 1966".
3.42 The United States submits that it used the term "distribution measures" in its panel request
to refer to the series of measures used to implement Japan's policy of restructuring the distribution
system for photographic materials into exclusionary distribution channels. The United States included
Attachment A in its panel request to indicate the types of measures that were included in the term
"distribution measures", even though, in the US view, Japan would have fully understood the meaning
of that term based on the consultations between the parties.
3.43 Japan claims that there are other references in the panel request which imply that the United
States has not yet identified specific measures at issue, e.g., expressions such as, "but not limited to",
"other related measures, including guidelines", which appear in Attachment A, as well as "related
measures" which is found at the end of the first paragraph of the panel request.
3.44 The United States responds that the phrases "measures, such as, but not limited to" in line 4
of the first paragraph and "other related measures, including guidelines" at the end of Attachment A
indicate that Attachment A is an illustrative, not exhaustive, list of the distribution measures that Japan
used to close the primary Japanese distribution channels to imported film and paper. The phrase "and
103WT/DSB/M/24.

related measures" at the end of the first paragraph refers to amendments, regulations, administrative
guidance, notifications, and surveys, that Japan implemented with respect to
(a) the Large Stores Law;
(b) Special Measures for the Adjustment of Retail Business;
(c) the Premiums Law;
(d) measures regarding dispatched employees pursuant to the Antimonopoly Law;
(e) the Law Concerning Enterprise Reform for Specified Industries;
(f) the Ministry of International Trade and Industry Establishment Law.
3.45 Japan points out that the United States continues to use vague expressions in its response to
the Panel question for clarification of its claims. The response included expressions such as "including
related actions to implement recommendations in the Guidelines"; "including actions to implement
recommendations"; and "related regulations and administrative measures, including related local
measures". Since these expressions hardly indicate "specific measures", Japan criticizes that the United
States continues not to clarify the scope of its claims and emphasizes that a complaining party should
not be allowed continually to raise additional items in a panel proceeding.
3.46 Giventhat,according tothe United States, Japan doesnot disputethatthe measures withrespect
to which it raises procedural objections are "related to" the measures that the United States specifically
named in its panel request, the Panel should consider these related measures to be within its terms
of reference.
3.47 Japan contests that the nine items identified against which it has raised procedural objections
as well as rules on loss leader advertising, are not "related" to those that are properly before the Panel.
With respect to the US argument that Japan had not early enough objected to the "relatedness", Japan
responds that, since the United States first made this argument in the first substantive meeting of the
Panel, Japan could not respond until that time. Japan further argues that the United States should bear
the burden of establishing the "relatedness" of these measures not specifically mentioned in the panel
request. Japan should not bear the burden of proving the converse. While the United States has made
general claims about these items, Japan takes the position that the United States has not identified the
measures properly before the Panel to which these measures are "related".
3.48 Specially, Japan contends that several of these measures which are subject to its procedural
objections bear no meaningful relationship to the US claims regarding Japanese policies on distribution,
large stores, or sales promotions. In particular, Japan submits that:
(2-3) SMEA and JDB Financing: Japan recalls that the US defense is that the mere phrase
"positive support" in the 1971 Basic Plan should have been sufficient to place Japan on notice about
the SMEA and JDB financing programs. With respect to the US allegation that during the consultations
it pointed out that the 1971 Basic Plan looked to "financial incentives", Japan notes that according
to its record and recollection, this point was never raised in the consultations. Japan declares that the
United States is looking for isolated phrases in documents to excuse its failure to specify what measures
were to be at issue in this dispute. In Japan's view, the phrase "positive support" is too vague to
constituteany meaningful noticetoJapan ortoestablishany relationshipbetween themeasures identified
in the panel request and the measures ultimately attacked by the United States.
(4-5) "Measures" by the Photosensitive Committee and Directives under the Department Stores
Law: Japan notes that the United States itself dropped these items from those it requests the Panel
to consider.

(6) International Contract Notification: Japan notes that in the US panel request the only
item mentionedwithrespecttotheAntimonopolyLawwas"measuresregardingdispatchedemployees",
an issue unrelated to the international contract notification requirement under the Law.
3.49 Japan concludes that the Panel should exclude vague and overly inclusive expressions from
the scope of the terms of reference and only those"measures" specifically mentionedin the panel request
for the establishment of the Panel should be deemed properly before the panel. Otherwise the scope
of the panel request and thus the terms of reference themselves would be rendered meaningless. If
the United States needed more time to translate or evaluate Japanese language materials, it could simply
have waited to make its panel request. When the complaining party reaches the stage of a panel
proceeding, it must be ready to identify specific measures as the basis of its claim. Japan insists that
US efforts to include vague "catch-all" phrases are contrary to the basic principles of the WTO dispute
settlement process.
(c) Nature of the measures
3.50 The United States further submits that Japan was aware that the United States is complaining
about a collection of measures, not a single measure, that resulted in the creation of an exclusionary
distribution system for consumer photographic materials. Had Japan implemented its distribution policies
through transparent laws and regulations, the United States would not have needed to go to such great
lengths to describe the distribution measures in its panel request. Therefore, United States asserts that
the means selected by it to describe these measures are necessitated by the nature of the measures
themselves. It had taken the United States years to fully understand Japan's labyrinth of liberalization
countermeasures and it continues to learn every day, including the names and applications of other
related measures that constitute individual bricks in Japan's protectionist wall. In the US view, Japan
has used an extraordinary array of measures which have been difficult to identify and fitting the pieces
of this puzzle together has been an extremely difficult task. To dismiss the measures in question as
being beyond the Panel's terms of reference would reward Japan for its nontransparent approach to
protectionism and would give responding parties an incentive for withholding information in consultations,
and would prevent the United States from obtaining complete relief from a problem that is well
understood by Japan. The United States submits that such a dismissal would not be within the letter
or the spirit of the DSU.
3.51 Japan rebuts that the US allegations concerning the nature of the measures are undermined
by the breadth and detail of the US submission given that in the thousands of pages in the appendix
to its submission, the United States has provided translated copies of the reports and other items it
considers relevant to Japan's various policies. The policies have all been published and are publicly
available, and thus these supposedly opaque policies are actually easily accessible to the public. Japan
points out that the United States had no problem identifying everything with perfect specificity just
several weeks after drafting its panel request. The fact that the United States did not review these
materials earlier in no way means the United States could not have done so. Japan asserts that the
US complaint essentially seems to be "we should not have to wait to request a panel until we know
what we are complaining about". Japan emphasizes that Article 6.2 of the DSU requires the United
States to wait until it can precisely identify the specific measures involved in a dispute.

IV. SUMMARY OF ARGUMENTS
4.1 The claims raised by the United States concern three broad categories of measures:
(1) distribution measures, which allegedly encouraged and facilitated the creation of market structures
for film and paper in which imports are excluded from traditional distribution channels; (2) the Large
Stores Law, which allegedly restricts the growth of an alternative distribution channel for film; and
(3) restrictions on premiums and misleading representations under the Premiums Law, which allegedly
disadvantage imports by restricting sales promotions.
A. DISTRIBUTION "COUNTERMEASURES"
4.2 The United States argues essentially that at the beginning of the Kennedy Round in 1963, foreign
and domestic manufacturers distributed photographic film and paper through Japan's primary wholesalers
who, in turn, sold to other wholesalers or retailers. Photographic material manufacturers competed
against one another to market their products to the same wholesalers. Foreign as well as Japanese
manufacturers did business with many of Japan's distributors. By the mid-1970's, however, when
many formal market barriers had fallen, the Japanese Government had fundamentally altered relationships
between manufacturers and wholesalers. By then, all of the leading wholesalers in Japan exclusively
handled Japanese products. The United States claims that so far no foreign firm has succeeded in
penetrating these closed distribution channels.
4.3 According to the United States, when the liberalization of international trading conditions became
imminent, MITI and Japanese manufacturing interests recognized that foreign firms in many instances
were not only positioned to offer competitive products, but also to deploy superior resources and
managerial expertise in distribution and marketing. MITI foresaw that these foreign advantages could
create serious competition for Japanese manufacturers and their products and that foreign enterprises
would be able to displace domestic manufacturers at the wholesale and retail levels. MITI officials
and Japanese manufacturers therefore jointly devised a plan to streamline Japan's distribution system
while at the same time bringing it under the control of domestic producers. Under this policy, which
was referred to as the "systemization of distribution", MITI sought to strengthen vertical distribution
channels from manufacturer to wholesaler to retailer in order to establish distribution chains of
wholesalers and retailers that would exclusively handle the products of a particular domestic
manufacturer.
4.4 The United States alleges that MITI targeted three ways to tie distributors more closely to
domestic manufacturers:
First, MITI promoted the use of transaction terms that would result in a distributor selling
the products of just one domestic manufacturer: volume discounts, rebates and standardized
and shortened payment terms. Discounts and rebates encouraged wholesalers to purchase greater
volume from fewer suppliers. The standardized and shortened payment terms limited the
opportunities for wholesalers to seek better credit rates from other suppliers. This left
wholesalers more dependent on and vulnerable to the credit terms offered by the manufacturer
with whom they primarily did business.
Second, MITI urged the photographic materials industry to rely upon shared facilities and
operations,suchas jointwarehousesand distributionroutes. Thegovernment offered subsidies,
expertise, and other benefits to induce businesses to enter into more cooperative arrangements.
Third, MITI determined that common information and computer links would forge closer
relationships among a particular Japanese manufacturer and its downline wholesalers and
retailers. MITI therefore guided manufacturers and wholesalers to use standardized data bases,
commercial orders and financial information.

4.5 The United States further claims that at the same time MITI sought to tighten the bonds among
horizontal elements of the distribution system. MITI attempted to join retailers into "voluntary chains"
that would do business with affiliated Japanese manufacturers. The principal result would be the
consolidation of previously independent photo finishing laboratories within newly-formed groups of
Japaneseretailersorwholesalers,orina consortiumdoingbusinesswitha singleJapanese manufacturer.
4.6 Japan responds that the aim of MITI’ s distribution policies was not to block imports but to
modernize the Japanese distribution industry and help it to meet the foreign competitive challenge that
would be unleashed by liberalization. Nothing in MITI’ s distribution policies or any other so-called
"liberalization countermeasures" did anything to encourage or facilitate the creation of an exclusionary
market structure that discriminates against imported film or paper. Since the MITI policies in question
actually say nothing about encouraging single-brand distribution of film, the United States struggles
to establish some connection between MITI’ s policies and the market structure that is the main target
of its complaints. Japan asserts that when confronted with the actual facts of this market, however,
the US arguments about "distribution countermeasures" collapse.
4.7 Japan further responds that MITI's concern with modernizing the Japanese distribution sector
has existed continuously for over 30 years, including the periods before and after capital liberalization.
According to Japan, MITI had diverse rationales for encouraging distribution modernization. Originally,
MITI sought to improve the relatively low productivity of the distribution sector, thereby alleviating
a growing labour shortage and the continuing increase in consumer prices in the late 1960s. To the
extent that MITI's distribution modernization policies were a response to capital liberalization, MITI's
concern was to improve the efficiency and competitiveness of a relatively backward distribution sector.
The objective was to compete more effectively with new foreign entrants. MITI was not trying to
prevent imports from enjoying the allegedly unique advantages of traditional distribution channels.
To the contrary, MITI viewed traditional distribution channels as competitively disadvantaged and sought
to remedy their defects.
4.8 Japan explains more specifically that MITI's distribution policies in the 1960s and '70s pursued
modernizationthroughbothrationalizationandsystemizationpolicies. Astothe rationalizationpolicies,
the objective was to eliminate traditional outmoded business practices considered to be economically
irrational. In the film sector, MITI's issued the 1970 Guidelines for Rationalization of Transaction
Terms which explicitly discouraged the use of rebates and did not call for shorter payment terms.
Thus,inJapan'sview, theywere unrelatedandinimicaltothe establishmentofsingle-branddistribution.
4.9 Moreover, Japan argues that the US theory has intractable timing problems. Three of Fuji’ s
four major primary wholesalers were already single-brand distributors by 1968, two years before the
guidelines were issued. While Fuji’ s fourth primary wholesaler did not become a single-brand distributor
until after the issuance of the Guidelines, it only made this private business decision after Kodak explicitly
refused to deal with the primary wholesalers directly. As to the other domestic manufacturer, Konica,
all of its primary wholesalers had been single-brand distributors by 1955. There was thus no causal
connection between the 1970 Guidelines and the development of single-brand wholesale distribution
in the film sector.
4.10 Japan further explains that the second objective of MITI's distribution modernization policies
was systemization.104 These policies encouraged the adoption of standardized forms and procedures,
and the increased use of computer technology. In the film sector, a study groupin a MITI-commissioned
public corporation issued a manual along these lines in 1975. According to Japan, systemization of
distributionwas believed tofacilitate, notexclude ordiscourage, entrance offoreigncompanies, because
104As discussed below, Japan argues that MITI distinguished between rationalization and systemization policies. The
United States uses the single term "systemization" to cover both concepts.

standardizationwouldalleviate the burdenof having toadjust tohundredsor thousandsof individualized
ways of doing business.
4.11 Japan points out that the US allegations ignore the timing of the alleged measures and what
actually happened in the market. According to Japan, single-brand distribution occurred as an industry
trend before the alleged measures were implemented. Also Fuji did not establish its first on-line
connection with a primary wholesaler until 1989, 14 years after the alleged government action was
taken. There was simplyno causal connectionbetween MITI's systemization policies, and the decisions
by primary wholesalers about which film brands to carry.
4.12 Japan further contends that there is nothing at all unusual about the Japanese market structures
for film and paper. Single-brand wholesale distribution of film is a common business practice which
prevails in every major market in the world. Likewise, affiliations between photosensitive materials
manufacturers and photofinishing laboratories prevail worldwide. The consistent prevalence of these
market structures around the world is due to market factors, not government measures.
4.13 Japan notes MITI’ s efforts to promote distribution organization continue to this day. To this
end, in 1990 MITI issued distributionguidelines thatonce again addressed the same kindsof "irrational"
distributionpracticesthathadbeentargeted bythe1970Guidelines,e.g.,unclear rebates,liberalreturns,
and dispatched employees to customers. Now, however, encouraging imports was one of the guiding
purposes for targeting these practices. For its part, the United States has strongly endorsed the 1990
Guidelines. As recently as November 1996, during the pendency of this proceeding, the United States
specifically urged MITI to "maintain and report an adherence by the Japanese business community"
to these Guidelines. In Japan’ sview, the internal inconsistencyof the US position isremarkable because
the United States is simultaneously urging Japanese business to follow the current administrative guidance
onrationalizingdistributionpractices andarguingbefore thisPanel thatsimilarguidance 20yearsearlier
was part of an anti-import conspiracy.
B. LARGE STORES LAW
4.14 The United States argues that large retail stores remain one potentially significant alternative
distribution channel despite the Japanese Government's reorganization of wholesale operations in the
photographic materials sector. In the late 1960's, the number of supermarkets and other "self-service
stores" was growing rapidly and, in the US view, such large retailers offered foreign manufacturers,
foreclosed from the primary distribution network, a partial alternative to wholesalers. The United
States claims that large stores have carried imported products, including film, more frequently than
small stores and have been less susceptible to pressure by domestic manufacturers. If such stores were
permitted to proliferate across Japan, wholesalers would become less significant and foreign
manufacturers could circumvent the bottle-necked distribution system. In response to this threat, the
United States submits, in 1967 and 1968 Japan began to impose controls on the expansion of large
stores and finally enacted the Large Stores Law in 1973. This law imposed a burdensome process
on the opening and expansion of large retail stores.
4.15 Japan explains that the Large Stores Law reflects longstanding Japanese policy--dating back
to the enactment of the Department Store Law in 1956--of regulating large stores to preserve a diversity
of small, medium and large retailing competitors, a policy found in other countries as well. Japan
contends that the law does not concern products generally, or film in particular. The law does not
regulate which products large retailers can carry, nor does it take into account which products a retailer
sells when determining whether and what adjustments are necessary. Accordingly, in Japan's view,
the Large Scale Retail Store Law is incapable of adversely modifying competitive conditions for any
imported products, including film. As to the US argument that large stores are more likely to carry
imports, in Japan's view, 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. Thus, there is no difference between them in choosing the products they carry.
Further, there is in fact no correlation between a store's size and its likelihood of carrying foreign
film brands, although a competitive relationship cannot be deduced from market survey results. Japan
also notesthat the law has been significantly liberalized inrecent years and is more favourable to imports
now than at the time of any of the relevant tariff concessions.
C. PROMOTION "COUNTERMEASURES"
4.16 The United States argues that Japan has reinforced the distribution countermeasures not only
through legal restrictions on retail stores but also through a system of measures limiting how photographic
material manufacturers, wholesalers and retailers may promote their products in order to expand their
sales of photographic film and paper in the Japanese market by means of economic inducements and
aggressiveadvertising. TheUnitedStates claimsthat"promotioncountermeasures" have disadvantaged
foreign manufacturers of film and paper by constraining their ability to use certain discounts, gifts,
coupons, and other inducements, or to rely upon innovative advertising campaigns, particularly where
price or price comparisons are discussed. The United States argues that Japan has implemented these
promotion countermeasures through the Premiums Law and certain regulations issued by the JFTC
under the Antimonopoly Law. Although these measures also apply to domestic film and paper producers,
the United States contends that Japan has imposed them with the intention of striking against two aspects
of international competition by foreign imports following trade liberalization, i.e., (i) the strong
capitalization and cost competitiveness of foreign manufacturers and (ii) their ability to convert these
resources into potent marketing strategies and aggressive promotional competition.
4.17 Japan responds that the Premiums Law imposes restrictions only on excessive premiums and
regulates only misleading representations. In the interest of consumer protection, the Premiums Law
is designed to effectively deal with unfair trade practices and encourage manufacturers to compete
principally on the basis of price and quality, not unfair inducements or deceptive and misleading
representations. Japan emphasizes that the law makes no distinctions between imported or domestic
products. Japan further argues that the Premiums Law does not hinder vigorous price and promotional
competition. Low price offers are not only permitted, but are, in Japan's view, facilitated by the law
and a broad range of promotional practices are consistent with the law. All companies, both domestic
and foreign, have been and continue to be free to spend as much money as they want on advertising.
Companies are free to use any expressions they wish, so long as they do not deceive or mislead
consumers. Japan also submits that no businesses have ever been restricted from offering promotional
giftsor prizes by lotteriesand competition,solong as they are in linewith the standards setin accordance
with the law to protect consumers. In Japan's view, these standards are no more rigid than those set
by similar laws in many other countries. Japan also contends that in some respects, the standards are
actuallyless rigidthan thoseof the United States because certain types of lotteries and prize competitions
prohibited in the United States have been allowed in Japan.
4.18 The United States points out that enforcement actions under the Premiums Law may be taken
by the JFTC and the 47 prefectural governments. In addition, the JFTC has given its official sanction
to so-called "fair competition codes" promulgated by private sector "fair trade councils". The United
States also argues that the "fair trade councils" have authority to discipline members who violate the
codes, often employing methods of coercion and monetary penalties. The United States further claims
that the standards established by the councils in their codes typically are adopted by the JFTC, which
then applies the same rules to "outsiders". According to the United States, the Premiums Law expressly
exempts the cartel-like practices of the councils from antitrust enforcement.
4.19 Japan responds that private "fair competition codes", and the "fair trade councils" are not
relevant to this case because no "code" or "council" covers photographic film and paper. 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.

D. THE COMBINED EFFECT OF THE THREE SETS OF MEASURES
4.20 Distribution countermeasures: The United States claims that the distribution countermeasures
operate as a set, i.e., the distribution countermeasures acting in combination, on the one hand, violate
Article III:4 and, on the other, nullify or impair benefits under the GATT within the meaning of
Article XXIII:1(b).
4.21 Distribution countermeasures in combination with the Large Stores Law: The United States
further claims that the Large Stores Law and related measures and the distribution countermeasures
in combination nullify or impair benefits under the General Agreement within the meaning of
Article XXIII:1(b).
4.22 Restrictions onlargestores: The UnitedStates alsoclaims that the Large Stores Law and related
measures by themselves, in the context of a closed distribution system, nullify or impair benefits under
the General Agreement within the meaning of Article XXIII:1(b), in addition to the position stated
above regarding the Large Stores Law acting in combination with the distribution countermeasures.
4.23 Promotion countermeasures: A further US claim is that the promotion countermeasures as
a setby themselves have nullifiedor impaired benefits underArticle XXIII:1(b), giventhat in the current
market structure in Japan foreign manufacturers effectively had no access to the primary wholesaler
channels.
4.24 Promotion measures, distribution measures and restrictions on large stores: The United States
further claims that the promotion countermeasures as a set have operated in combination with Japanese
Government efforts to restructure the distribution system through the distribution countermeasures and
restrictions on large stores to nullify or impair benefits under the GATT within the meaning of
Article XXIII:1(b).
4.25 Japan contends that the US claims against the three categories of measures acting in combination
with each other are factually and logically flawed. According to Japan, the United States did not submit
credible evidence that the measures were intended to and in fact acted in combination. In Japan's view,
the distribution policies, the Large Stores Law and the promotion measures pursue very different policy
objectives, and were not intended to work together.
4.26 In summary, the United States alleges:
a. The distribution countermeasures, Large Stores Law and related measures, and promotion
countermeasures in combination nullify or impair benefits within the meaning of
Article XXIII:1(b).
b. The distribution countermeasures, as a set, also
i. violate Article III:4 and
ii. nullify or impair benefits within the meaning of Article XXIII:1(b).
c. The Large Stores Law and related measures also nullify or impair benefits within the
meaning of Article XXIII:1(b), in the context of the restrictive distribution structure in Japan.
d. The promotionscountermeasures, as a set, nullifyorimpair benefitswithinthe meaning
of Article XXIII:1(b), in the context of the restrictive distribution structure in Japan.
e. The specific failures to publish the fair trade councils' and JFTC enforcement actions
as well as guidance by MITI, prefectural and local authorities under the Large Stores Law

or related local regulations, that establish or modify criteria applicable in future cases, each
constitute a violation of Article X:1.
4.27 Japan rejects all these US claims with respect to the various individual allegations since, in
its view, none of the alleged measures individually adversely affect imported products or alter the
conditions of competition facing imported products. Japan emphasizes that even when the distribution
policies, large store laws and the promotion measures are considered as "sets of measures" with combined
effects, they do not in any way disadvantage imports because combining nothing with nothing still
produces nothing.
4.28 For a detailed discussion of the parties' arguments with respect to the allegations concerning
the three sets of measures acting in combination, see Section VI.F. below.

V. FACTUAL ARGUMENTS OF THE PARTIES
A. DISTRIBUTION "COUNTERMEASURES"
1. OVERVIEW
5.1 The United States argues that at the beginning of the Kennedy Round in 1963, foreign and
domestic manufacturers distributed photographic film and paper through Japan's primary wholesalers
who, in turn, sold to other wholesalers or retailers. Photographic material manufacturers competed
against one another to market their products to the same wholesalers. Like Japanese manufacturers,
foreign manufacturers did business with many of Japan's distributors. By the mid-1970's, however,
when many formal market barriers had fallen, the Japanese Government had fundamentally altered
relationships between manufacturers and wholesalers. By then, all of the leading wholesalers in Japan
exclusively handled Japanese products. The US conclusion is that to this day, no foreign firm has
succeeded in penetrating these closed distribution channels.
5.2 The United States claims that, starting with the Kennedy Round tariff concessions, Japan imposed
laws, regulations and administrative actions to strengthen the dominant position of domestic consumer
photographic materials manufactures and curtail opportunities for imports that would otherwise be
available. While many of these measures do not bear the typical characteristics of protection, i.e. the
measures are not facially discriminatory against imports, when they are seen in their totality they reflect
a unique system of distribution and marketing management that has pervasivelydisadvantaged imported
photographic materials.
5.3 In particular, the United States argues that as trade and investment liberalization approached
in the late 1960's, the Japanese Government and industry began to work together to create the distribution
structurethatremains inplace today. The US argument isthatthissituationinthe Japanese photographic
materials market is not as a result of market forces, but by deliberate manipulation by the Japanese
government. This was done to offset the possible effects of liberalization and the resultant competition
from foreign firms with better expertise in distribution and marketing. As a result, MITI and Japanese
manufacturers jointly began streamlining Japan's distribution system and at the same time bringing
it under the control of domestic producers - a policy which became known as "systemization of
distribution". Japan accomplished this in three ways -
(i) MITI promoted the use of transaction terms that would result in a distributor selling
products of just one domestic manufacturer - volume discounts, rebates, and standardized
shortened payment terms. Discounts and rebates encouraged wholesalers to purchase
greater volume from fewer suppliers. Standardized and shortened payment terms limited
the opportunity for wholesalers to seek better credit rates from other suppliers.
(ii) MITI urged the photographic materials industry to rely upon shared facilities, and the
government offered subsidies, expertise, and other benefits to induce businesses to
enter into more cooperative arrangements.
(iii) MITI determined that common information and computer links would forge closer
relationships among a particular Japanese manufacturer and its own downline wholesalers
and retailers.
5.4 Japan responds that the aim of MITI's distribution policies was not to block imports but to
modernize the Japanese distribution industry and help it to meet the foreign competitive challenge that
would be unleashed by liberalization. Nothing in MITI's distribution policies or any other so-called
"liberalization countermeasures" did anything to encourage or facilitate the creation of an exclusionary

market structure that discriminates against imported film or paper. Since the MITI policies in question
actually say nothing about encouraging single-brand distribution of film, the United States struggles
to establish some connection between MITI's policies and the market structure that is the main target
of its complaints. Japan asserts that when confronted with the actual facts of this market, however,
the US arguments about "distribution countermeasures" collapse.
5.5 Japan notes that MITI's concern with modernizing the Japanese distribution sector has existed
continuously for over 30 years, including the periods before and after capital liberalization. Throughout
this period, MITI has had diverse rationales for encouraging distribution modernization. Originally,
MITI sought to improve the relatively low productivity of the distribution sector, thereby alleviating
a growing labour shortage and the continuing increase in consumer prices. These policy goals had
nothing to do with alleged efforts to block imports.
5.6 Japan argues that concerns with capital liberalization were simply added to the broader set of
preexisting policy concerns about the need for modernization in the late 1960's. To the extent that
MITI's distribution modernization policies were a response to capital liberalization, MITI's concern
was to improve the efficiency and competitiveness of a relatively backward distribution sector, not
to hinder imports' access to this sector. The objective was to compete more effectively with new foreign
entrants. MITI was not trying to prevent imports from enjoying the allegedly unique advantages of
traditional distribution channels. To the contrary, MITI viewed traditional distribution channels as
competitively disadvantaged and sought to remedy their defects. Japan further argues that MITI's
distribution policies in the 1960's and 1970's pursued modernization through both rationalization and
systemization policies. As to the rationalization policies, the objective was to eliminate traditional
outmoded business practices considered to be economically irrational.
5.7 The United States provides three rebuttals to Japan’ s argument that the purpose of the distribution
countermeasures was not to block imports but rather to modernize the distribution sector. First, the
MITI measures at issue clearly and repeatedly distinguish between the goal of efficiency and the goal
of responding to liberalization. Indeed, the Seventh Interim Report emphasized that to the extent fostering
efficiency became inconsistent with protection against foreign competition, the latter goal should win
out: "the Japanese Government should instead emphasize preventing the immense impact that would
be felt if foreign capital took the lead in systemizing Japan’ s distribution activities, and quickly develop
a system sufficiently capable of resisting the rational systems introduced by foreign capital."105 Second,
these same MITI documents repeatedly note the threat that foreign access to distribution would have
on Japanese producers. The policy concern was not, therefore, purely the effect of foreign competition
on the distributors themselves but included concerns over the effect on the domestic producers’ market
share.106 Third, the United States notes that Japan itself acknowledges that Japan was concerned about
Kodak’ s competitive strength and therefore implemented policies to ensure that Japan’ s domestic
manufacturers were not exposed to full competition from Kodak.
2. DEVELOPMENT OF THE JAPANESE FILM MARKET
5.8 Accordingto the United States, inthe early 1960's, Japanese film manufacturers operated under
protection from foreign competition. Japan imposed quantitative restrictions and 40 percent tariffs
on film imports. The Japanese Government also tightly restricted investment through the 1949 Foreign
Exchange and Foreign Trade Control Law, which allowed the Ministry of Finance to control virtually
all foreign exchange transactions, and the 1950 Foreign Investment Law, which gave the Japanese
Government authority to regulate all equity investment and technology transfer. As a result of these
105Seventh Interim Report, p. 7, US Ex. 69-4.
106See the 1967 Cabinet Decision, p. 6 (para 2.9 above; US Ex. 67-6), the Sixth Interim Report (para. 2.14 above; US
Ex. 68-8), the Seventh Interim Report (para. 2.15 above; US Ex. 69-4), the Basic Plan, p. 10 (para. 2.20-2.22 above; US
Ex. 71-10), the 1975 Manual, pp. 121-122 (para. 2.23-2.25 above; US Ex. 75-5).

laws, the Government of Japan substantially limited foreign investment in manufacturing, distribution,
and retail facilities in Japan.
5.9 The United States argues that, using these investment laws, the Government of Japan pressured
Kodak into abandoning its corporate charter in Japan in 1957, forcing Kodak to abandon its own
distribution facilities. Afterwards, Kodak shifted to relying on 15 Japanese wholesalers to import and
distribute its products in Japan. In 1960, to ease implementation of its film import quantitative
restrictions, the Japanese Government required Kodak to select one Japanese firm to serve as its sole
import agent. Kodak selected Nagase Industries, an import-export trading company that specialized
in chemical products, with which Kodak had ties dating back to 1923. As a result of the Japanese
requirement, all wholesalersdistributingKodak products had topurchase them from Nagase, and Kodak
had to rely on Nagase to establish and maintain its commercial network in Japan.
5.10 The United States further argues that, after joining the Organization of Economic Cooperation
and Development (OECD) in 1964, Japan slowly liberalized its investment restrictions. Foreign
photographic materials manufacturers were prohibited from forming a limited or equal partnership
(50-50) joint venture until 1971. However, a like-industry clause adopted in 1971 limited such
investments except in ventures between direct competitors (e.g. Kodak or Agfa investment in Fuji or
Konica). Photographic materials manufacturers were not permitted to own 100 percent of a new
enterprise until 1976. Not until 1979 were foreign photographic materials manufacturers finally permitted
to acquire a controlling interest in existing Japanese enterprises. However, foreign firms in the
photographic materials sector continued to be subject to MITI and Ministry of Finance notification
requirements for investments in existing Japanese enterprises until July 1, 1985. In short, although
investment restrictions in the photographic materials sector have been lifted, foreign film producers
continue to suffer the after-effects of their hitherto existence. Delays in capital liberalization in the
film sector prevented foreign firms from making investments until it was too late.
5.11 Japan counters by arguing that it is not correct that capital restrictions prevented all investment
in securing better distribution channels for imported products. According to Japan, during the period
before capital liberalization, if Kodak had wanted to use investments to establish and build relationships
with any single-brand primary wholesalers it could have done so. Moreover, Kodak’ s exclusive importer
Nagase could and did invest in distribution by buying two primary wholesalers; it could legally have
made equity investments in Fujifilm’ s primary wholesalers if it had wanted to. The fact that Kodak
did not exercise all its legal options -- indeed, Kodak itself exercised virtually none of its legal options
-- demonstrates that the presence of capital restrictions was not interfering with any Kodak business
plans at the time. Secondly, for Japan the US argument makes no sense in light of the actual record
of foreign investments in the Japanese market after capital investments were lifted. According to Japan,
Kodak instead of investing did nothing but use the fear of direct investment to create pressure to
accelerate cuts in tariff rates. In Japan's view, Kodak opted to treat Japan as an export market rather
than as a target for investment.
5.12 Further, Japan argues that the US argument is at odds with assessment by industry experts,
including Kodak officials, to move faster in establishing its own distribution channels. Even Kodak
executives recognized their error. In a 1988 interview, the then President of Kodak Japan, Mr. Albert
Sieg, stated:
"The glaring mistake was waiting so long to take aggressive action in this market.
We should have been here with this approach ten years ago. Clearly, the momentum
of our local competitors got a strong forward thrust, and our task will be much, much
more difficult."107
107Taking on Japan (Look Japan Ltd., ed.) (1988), p. 38, Japan Ex. B-45.

Japan concludes, therefore, that the timing of capital liberalization for photographic materials had
absolutely no impact on Kodak's investment plans during the 1970's for the simple reason that Kodak
had no investment plans.108
5.13 The United States responds that Kodak could not have had investment plans prior to 1976,
because investment was barred by statute. Less than a year after these statutory restrictions were lifted,
Kodak established a sales subsidiary.
5.14 AccordingtoJapan,the so-called "likeindustries"clausedidnotpreventjointventuresbetween
manufacturers and distributors. This clause simply required that joint venture partners in Japan were
in the same industry as the joint venture itself. This requirement was not applied to foreign companies
which formed such a joint venture. Thus, a 50-50 joint venture such as Kodak Nagase in 1986 could
have been established as early as 1971. Moreover, a 100 percent wholly-owned subsidiary in the
wholesalingsector couldhave been establishedafter 1973. For whatever reason, Kodak made a decision
not to take advantage of these options, and had no intention of exploiting the opportunities it had to
developnew distributionchannels. Moreover, from1976until1979,aforeignenterprisecouldpurchase
existing enterprises outright with the consent of the enterprise being purchased. Such a purchase could
occur in the wholesaling sector beginning in 1973 and the photographic materials manufacturing sector
beginning in 1976.
5.15 According to the United States, Fuji, under the guidance and support of MITI, developed
exclusive relationships with its four primary photospecialty wholesalers by 1975 and pressed its exclusive
control further down the distribution chain. Fuji, which currently holds a 68-percent market share
in Japan, also undertook a successful program, supported by the Japanese Government, to build exclusive
relationships with a vast network of photofinishing laboratories. The other Japanese manufacturer,
Konica, had exclusive relationshipswith four long- establishedprimary wholesalerssince 1967. Konica
"internalized" these wholesalers through acquisition completed in 1987. Konica currently holds a
19-percent market share in Japan.
5.16 The United States argues that, before 1975, Kodak relied heavily on the primary photospecialty
wholesalers to distribute its products. In 1975, however, Kodak lost the last of its relationships with
a primary wholesaler, leaving Kodak to find other channels into the market outside those used by the
Japanese photographic goods manufacturers. As a result, Kodak, which currently holds a 10-percent
market share, sells nearly two-thirds of its film in Japan directly to retailers, one-quarter through affiliated
photofinishing laboratories, and the rest to secondary wholesalers. Agfa re-entered the Japanese film
market in 1990, after an absence of 15 years. The United States alleges that Agfa had left the Japanese
market in 1975 in large part because of its inability to recover from its loss of access to the primary
wholesale channels in 1968. Unable to use the primary wholesalers when it re-entered the Japanese
market, Agfa adopted a strategy of selling directly to retailers, in particular large-scale retailers, in
some cases allowing the retailers to market the film under the retailer's brand name (so-called "private
brand"). Agfa resorted to private brand sales in an attempt to increase its sales to a limited segment
of the market. Because retailers assume the cost of sales promotion for private brand film, Agfa also
hoped to lower its distribution costs. Agfa, which currently holds a 3-percent market share - down
108Japan cites Professor Scherer who noted: "What is striking to this observer, but not pointed out explicitly, is that the
events of 1973-75 reflected a colossal failure of intelligence (in the military sense) of Kodak. Kodak apparently had no employee
in Japan at the time who could read contemporary Japanese trade press accounts of the Nagase-Asanuma dispute, understand
the importance of securing Asanuma as a primary Kodak wholesaler, and intervene to override Nagase's self-serving actions.
Not until 1977 did Kodak open a liaison office in Japan staffed by Kodak employees to oversee, inter alia, the activities
of Nagase. In sharp contrast were the marketopening efforts of Volkswagen and Toyota, who sent their own English-speaking
personnel to the United States, first to assess market opportunities and then to implement their entry decisions." F.M. Scherer,
Retail Distribution Channel Barriers to International Trade, October 1995, (working paper presented at a Columbia University
Conference entitled "The Multilateral Trading System of the 21st Century"), Japan Ex. A-19.

from its 1995 peak of 4 percent - sells 90 percent of its film directly to several large retailers and the
remainder through secondary wholesalers.
5.17 Japan notes the United States cites no support for its claim that Agfa had left the Japanese
market in 1975 largely because of its inability to recover from its loss of access to the primary wholesale
channel in 1968. Kodak had introduced a new colour negative process technology, and since Kodak
has historically set industry standards, all rivals had to make a choice. Soon thereafter, the two Japanese
manufacturers Fujifilm and Konica had matched Kodak’ s developing standard. Agfa, in contrast, chose
tocontinue withits ownstandard. Withthree of the four major manufacturers operatingoff a compatible
standard, Agfa’ s market position quickly became untenable. This story is well known in the industry.
At the time Agfa reentered the market in 1987, the story was reported in the business press.109
5.18 According to the United States, the Japanese market structure was the result of actions by
the Government of Japan. Following the 1967 Cabinet Decision discussed below, MITI concentrated
its efforts, renewing its call for use of standardized trading terms, promoting the use of shared distribution
facilitiesandcomputer tiesamong Japaneseproducersanddistributors,andfacilitatingthesystemization
of photofinishing laboratories under domestic manufacturers. Japan's leading photographic material
producers, Fuji and Konica, soon adopted such standardized terms with wholesalers. As intended by
MITI, the resulting lack of competition among Japan's leading film and paper suppliers resulted in
the financial deterioration of the photospecialty wholesalers. Eventually, all of the primary wholesalers
agreed to handle products of domestic manufacturers on an exclusive basis.
5.19 The United States argues that before MITI's intervention, foreign manufacturers, though
encumbered by quotas and high tariffs, had access to nearly all of Japan's photospecialty wholesalers.
Under MITI's direction wholesale operators in the photographic materials sector were consolidated,
creating narrow distribution channels under the control of domestic manufacturers. As a result, by
the mid-1970'sthe leadingphotospecialty wholesalershandledonlydomestic film and paper, effectively
excludingimportsfromthe distributionsystem. Thus,byearly 1975,however, thecompetitivesituation
in Japan's consumer photographic materials market had been completely transformed. As of that time,
not one major distributor carried imported products. In the span of little more than a decade, foreign
film and paper manufacturers had been excluded from the primary avenues of distribution.
5.20 The United States concludes that the result of this manipulation of the market is that today,
Japan's materials market is supplied by four manufactures, two domestic and two foreign. The two
domestic manufacturers, Fuji and Konica sell almost all their film through "primary" photospecialty
wholesalers,whicharespread throughoutJapan. Theprimary wholesalersinturndistributefilmdirectly
to retail outlets, or through affiliated "secondary" wholesalers, which are smaller and regionally based.
Unlike their domestic competitors, the two foreign manufacturers, Kodak and Agfa sell most of their
film directly toretail outlets. For the lasttwenty-two years noprimary wholesalerhas distributed Kodak
or Agfa film.
5.21 Japan responds that in these proceedings all that matters is whether there are government-imposed
barriers that prevent that market penetration from improving. Japan maintains that there are no such
barriers in Japan.
5.22 Japan emphasizes that the aim of MITI’ s distribution policies was not to block imports, but
to modernize the Japanese distribution industry and help it to meet the foreign competitive challenge
that wouldbe unleashed byliberalization. Nothingin MITI’ s distribution policiesorany other so-called
"liberalization countermeasures" did anything to encourage or facilitate the creation of an exclusionary
109See, Japan Agfa Gevaert, Advances Into The Japanese Market After An Interval of 15 Years, Takes The Offensive
Against Oligopolistic Film Market With Its Low Price, Nikkei Business, 5 December 1988; Top Three Film Makers Move
to Cut Prices, Japan Economic Journal, April 16, 1988, p. 21, Japan Ex. B-33.

market structure that discriminates against imported film or paper. Since the MITI policies in question
actually say nothing about encouraging single-brand distribution of film, the United States struggles
to establish some connection between MITI’ s policies and the market structure that is the main target
of its complaints. When confronted with the actual facts of this market, however, the US arguments
about "distribution countermeasures" collapse.
5.23 Japan argues that in the end, the US claim boils down to an assertion that the current Japanese
market structure for consumer photographic film and paper is exclusionary and closed, and that this
abnormal situation must somehow be the result of government intervention. The fundamental premise
of this argument is simply wrong. At the root of the US complaints is the fact that the various primary
wholesalers in Japan each carry only a single brand of film. But single-brand wholesale distribution
is a normal business practice; for film, this business practice is the norm in every major market in
the world, including the United States. The Japanese market for consumer photographic film and paper
reflects the outcome of normal market forces.
5.24 Furthermore, Japan asserts that the premise of the US argument that there are barriers, the
so-called "distribution bottleneck," in the Japanese film market is wrong. Japan argues that a survey
of the primary wholesalers’ customers reveals that imports have already thoroughly penetrated these
key accounts. Thus, customers accounting for 87.3 percent of the primary wholesalers’ combined
surveyedsales volume eitheralready carry Kodakorelse have ready access toKodak throughestablished
business relationships.110 In particular, the primary wholesalers’ survey highlights imports’ ability
to distribute through multibrand secondary wholesalers in Japan. Of the 278 resellers included in the
survey, 52.2 percent -- accounting for 66.4 percent of total surveyed sales volume to those customers
-- already carry Kodak film.111 Thus foreign brands of colour film are already present at the key levels
of the distributionsystem. The US "distributionbottleneck"argument thusfailsthe mostbasic threshold
empirical test. Since most of the primary wholesalers’ customers already purchase Kodak film from
other sources, the "distribution bottleneck" clearly does not exist.
5.25 Japan notes that if the Panel adopts the view that a key factor is the degree of imports’ market
penetration, foreign market share in fact increased after the introduction of the alleged measures that
created the so-called bottleneck. According to Japan, itis clear that subsequent to 1975, when according
to the United States the competitive situation in the Japanese film market had been completely
transformed, the market share of foreign colour film actually continued to increase to a record 20.0
per cent in 1981. The market share for foreign black and white film increased even more dramatically,
peaking at a record 41.4 per cent in 1985. This trend in foreign film market share directly undermines
the US "bottleneck" theory.
5.26 On Japan’ s argument concerning market shares for black and white film, the United States
responds that Japan’ s liberalization countermeasures were and are directed at consumer photographic
film and paper, whether black and white, or colour. Until 1970-1972, black and white was the
predominant consumer film (and paper) used in Japan, thereafter it was colour.112 Accordingly, Japan’ s
focus on recent market share data on black and white products is not relevant. Given that black and
white film (and paper) was the dominant product at the time the Government of Japan began pursuing
liberalization countermeasures, and that the Government recognized that colour would surpass black
and white at some time in the near future, the Government directed the liberalization countermeasures
at obstructing the distribution and sale of consumer photographic film and paper, whether black and
white, or colour.
110Fujifilm’ s Rebuttal Regarding the Alleged "Distribution Bottleneck," 21 December 1995, p. 5, 7, Japan Ex. A-16.
111Ibid., p. 25, Japan Ex. A-16.
112Until 1970-72, black and white film and paper were the predominant products used in Japan. Thereafter, the dominant
products were colour film and paper. Today, colour film and paper account for 97 percent of Japan's total market for consumer
photographic materials, with black and white film and paper accounting for only 3 percent.

5.27 Japan asserts that even at the current market share level of roughly 15 per cent for colour
film, there is nothing unusual about the foreign market share for this industry. Japan notes that in
markets outside the United States and Japan, Kodak and Fuji have comparable market shares but each
has an almost equal and large share of its home market. In its view, ultimately, market shares reflect
consumer preferences. Fuji's survey show that consumers perceive Fuji brand film to be of a higher
quality, ranking it higher than Kodak on most qualitative measures.113 Consequently, Fuji film enjoys
very strong brand loyalty among Japanese consumers. Among American consumers the same general
perceptions apply to Kodak film. In other words, the resulting market situation is not a result of any
Japanese government policies. Finally, Japan notes that the domestic brands overwhelmingly outspend
foreign brands in advertising expenditures in the Japanese market, another factor which has a significant
impact on consumer and retailer preferences.
5.28 The United States responds that Japan's argument that Japanese domestic brands overwhelmingly
outspend foreign brands in advertising expenses is flawed in three respects: (a) Japan adds Fuji’ s and
Konica’ s expenditures, suggesting that Kodak should have outspent twocompanies combined; (b) Japan
bases its calculations on total advertising figures, not weighted by sales, suggesting that a company
with 10 percent of the market should match, yen-for-yen, the combined expenditures of two firms holding
87 percent of the market; and (c) Japan compares the advertising expenditures made by Fuji and Konica
for all products to Kodak’ s advertising expenditures for film only. The Economist magazine estimates
that Kodak’ s advertising expenditures were triple those of the Japanese manufacturers during the period
cited by Japan.
5.29 Japan points out that the United States fails to take note of key distinctions between black and
white and colour products. According to Japan, the foreign share of black and white film has been
quite high, and has been growing over time. Over the past ten years, on a volume basis the foreign
market share of black and white film has averaged 24 percent, ranging from 19 percent to 37 percent.
Japan further contends that the foreign market share for black and white paper has also been quite high,
ranging between 31 and 55 percent. Japan, therefore, argues that it is hard to reconcile this market
reality with the United States' allegations. According to Japan, Japanese manufacturers sell their colour
film and black and white film through the same primary wholesalers that comprise the supposed
"bottleneck" facility for colour film. The alleged "bottleneck" apparently has not affected the ability
of foreign brands to sell their black and white film, a factor which Japan contends fundamentally calls
into question whether there is really any "bottleneck" at all.
5.30 The United States contends that the net effect of the liberalization countermeasures has been,
as was intended, the creation of a market structure that impedes the sale of imports. The structure
remains in place today. The United States further asserts that despite the elimination of quotas, tariffs,
and investment restrictions, as well as significant efforts by foreign enterprises to compete in Japan,
the market share for imported film and paper has been stagnant for the past decade. A succession
oftechnologicalinnovationsandmajor investmentsbyforeignmanufacturershas yieldedlimitedresults.
For example, Kodak has reduced its prices in the Japanese market by 56 percent since 1986 and has
substantially undercut domestic wholesale prices, with virtually no effect on the market.
5.31 According to Japan, if Kodak in fact dropped its wholesale price by such large margins, with
no appreciable effect on its market share, Kodak obviously has severe brand image problems in Japan.
Japan asserts that retailers must believe that Japanese consumers are completely indifferent to Kodak;
otherwise, such a huge gap in wholesale prices would give retailers an enormous incentive to cut the
price of Kodak tostimulatedemand, and increase the volume theywouldsellof the much more profitable
product. In addition, Japan asserts that the United States must believe that Japanese consumers are
completely irrational. In addition, for Japan it is noteworthy that for the past several years, Kodak's
113Annual Report on Consumer Image Survey, Japan Marketing Research, Japan Ex. A-3.

manufacturer's suggestedretail prices for ISO 100and ISO 400consumers have generallybeen identical
to Fuji's (on occasion they have been higher). Thus, for the past several years Kodak has been telling
retailers that it would like Kodak film to have exactly the same price as Fuji film. This fact is
inconsistent with the United States claim that Kodak has been stymied in its attempts to underprice
Fuji film. Indeed, according to Japan, Kodak has publicly stated in the late 1980's and early 1990's
that it does not want to compete on prices in Japan.
5.32 The United States counters that Kodak and retailers carrying Kodak products have been under
pressure from the JFTC and JFTC-sanctioned councils to maintain stable retail prices. Discount
initiatives have been suppressed.
3. NEED FOR PRIMARY WHOLESALERS IN THE JAPANESE FILM MARKET
(a) The US allegations about the market situation in the film distribution sector
5.33 Accordingtothe United States, there are 280,000retailerssellingphotographic materials across
Japan. This large number of retail outlets that sell film makes it difficult for any manufacturer to
distribute film without access to the primary wholesalers. Direct sales to retailers can provide only
limited access to a small portion of the market.
5.34 The United States assertsthatone-half of all retailfilm sales by volume are throughsome 30,000
traditionalphotospecialtystores, whoseprimary, if notonly, lineof businessisthe sale of film, cameras,
and accessories. Most of these photospecialty stores, which range from small "mom and pop" stores
to somewhat larger stores with multiple outlets, do not carry imported film. The same primary
wholesalers that distribute film to these specialty stores also supply them with cameras and other
photographic products. Photospecialty retailers have close and longstanding relationships with the
photospecialty wholesalers. Because these primary wholesalers do not carry imported film, the
photospecialty stores cannot purchase imported film from these traditional suppliers. Nor are the
photospecialty stores inclined to purchase imported film from an alternative source. Photospecialty
retailers rely on the primary wholesalers for timely delivery of virtually all the store's products and
are not likely to jeopardize that relationship by purchasing imported film from another distributor.
The United States accordingly concludes that access to the primary wholesalers is critical for selling
imported film to the photospecialty retailers.
5.35 The United States indicates that another third of film sales are through 70,000 general
merchandise stores, including supermarkets and discount, department, drug, and convenience stores.
It is the US view that the larger types of these stores are more likely than small stores to carry competing
brands of film. Some of the largest of these retail outlets have their own distribution facilities, which
reduces their dependence on wholesalers and allows them to deal directly with manufacturers.
5.36 The United States also notes that there are approximately 180,000 other retail outlets for film
in Japan, including kiosks, tourist resorts, parks, and other small outlets. Their small size and geographic
dispersion makes it highly inefficient to attempt to reach them except through the wholesalers currently
serving them.
5.37 The UnitedStates argues thatonlythe photospecialtywholesalershave the geographicpresence,
distribution infrastructure, sales networks, and personnel to reach and provide service to Japan's
numerous retail outlets. In addition, because primary wholesalers carry a wide range of complementary
products, they have high economies of scale in marketing and delivery functions. These wholesalers
perform more than a logistical distribution function for manufacturers. The United States concludes
that Fuji's exclusive access to Japan's largest primary photospecialty wholesalers provides it with an
unfair edge over its foreign competitors.

5.38 The United States further argues that Japan's "secondary" photospecialty wholesalers are much
smaller than the primary wholesalers and operate on a local or regional scale, and can, therefore, only
provide limited geographic reach. Even if such wholesalers represented viable alternative distribution
channels for film, many are not commercially independent from domestic photographic materials
manufacturers. Several of the top secondary wholesalers have joint physical distribution and affiliated
photofinishing laboratory operations with Japanese manufacturers or manufacturer-dominated primary
wholesalers. These ties have impeded foreign manufacturers from gaining access to secondary-wholesaler
channels as an alternative to primary wholesale channels.
5.39 According to the United States, photofinishing laboratories provide only a limited alternative
to the primary wholesalers. Laboratories are, in the first instance, the primary market for photographic
paper and photofinishing chemicals. However, they also can act as wholesalers for film and other
products because they frequently and regularly make rounds to retailers in order to pick up exposed
film and deliver processed prints. In the process of making these regular stops, the photoprocessing
laboratories can distribute film and other photographic supplies to the retailers. In Japan, however,
84 percent114 of the 1,700 photoprocessing laboratories deal exclusively in the film and paper of a
Japanese producer.115
5.40 The United States alleges that experts on distribution and competition policy in Japan agree
on the importance of access to the wholesale system for access to the market.116 The leading history
of Fuji also emphasizes that Fuji sees its four primary wholesalers not simply as a vehicle for delivering
products to market, but as "a mechanism that would maintain high market shares".117
(b) No government obstacles to use or creation of primary wholesalers
5.41 Japan's response is that in the first place, if a foreign manufacturer is dissatisfied with the
quality of its distribution system for film and paper in Japan, there is nothing that would prevent it
from takingsteps to improve matters. There are no current government measures preventing the foreign
manufacturer from hiring more sales people, offering lower prices, or spending more on advertising.
Further, there are no current government measures preventing a foreign manufacturer from acquiring
other distributors or photofinishing laboratories if they were for sale. And further, there are no current
government measures of any kind that would in any way stop a foreign manufacturer from expanding
or improving its distribution network.
5.42 Japan emphasizes that, in particular, there are no government measures that prevent foreign
manufacturers from attempting to establish relationships with independent primary wholesalers that
currently choose to carry only a single brand. According to Japan, the United States has not even
attempted to identify any such government measures. In fact, there is no legal obstacle blocking such
relationships. Japan asserts that Fuji's contracts with its primary wholesalers do not contain any
provisions that prohibit or discourage the carrying of other brands.118 Japan further asserts that some
114Japan challenges the conclusion that 84 percent of laboratories in Japan fall under the umbrella of a Japanese producer.
According to the data given in Photo Market 1996, of the 753 amateur laboratories in the Japanese market, 292 laboratories
(38.8 percent) are affiliated withFuji, 124laboratories (16.5 percent) are affiliated withKodak, 216laboratories(28.7 percent)
are affiliated with Konica, and 121 laboratories (16.1 percent) have other affiliations.
115Photo Market 1996, US Ex. 96-1.
116TajimaYoshihiro, Japan's MarketandDistributionSystem: JapaneseDistributionChannels, editedbyKikuchiTakeshi,
(London: Hawath Press, 1994), p. 3, US Ex. 94-3.
117Arai Toru, Shisi No Honryo: Fuji Film (Characteristics of a Lion: Fuji Film), (Tokyo: BNT Books, Nikkan Kogyo
Co., 27 January 1995), US Ex. 95-8.
118According to Japan, the contracts between Fuji and its primary wholesalers previously contained provisions requiring
the wholesalers to seek Fuji's permission before carrying other brands. In 1981, Fuji voluntarily removed these provisions.
Affidavit of Tanaka Takeshi, p. 3, Japan Ex. A-10.

of Fuji's primary wholesalers do currently sell Kodak products.119 Those wholesalers decide to carry
only Fuji film not because they are forced to do so by the Government of Japan, or even by Fuji, but
because they believe a single-brand strategy serves their business interest. One of Fuji's four primary
wholesalers, Asanuma, became a single-brand distributor after Kodak explicitly refused to deal with
it directly.
5.43 In response, the United States explains that Japan has taken several recent steps to reinforce
its distribution countermeasures. Some of these steps include "administrative guidance," and some
include more formal measures. Moreover, the administrative guidance issued in the past remains in
effect because Japan has not revoked or counteracted it, and Japanese industry continues to act in
accordance with it. Specifically, Japan has not revoked or attempted to counteract its administrative
guidance in favour of short payment terms, standardized transaction terms, rebates and volume discounts,
and vertical information links between manufacturers, wholesalers, and retailers. To the contrary,
Japan has issued recent administrative guidance making clear that its policies remain in place regarding
each of these. Japan also has continued toapplyformal measures to supportthe oligopolistic distribution
system in the photographic film and paper industry.
5.44 In Japan’ s view, Kodak has never seriously approached the single-brand primary wholesalers
with a serious business proposal. Japan submitted affidavits from each of the four major primary
wholesalers attesting that Kodak has not made serious business proposals.120
5.45 The United States argues that on several occasions in 1987-1991, 1995, and 1997 (in addition
to earlier decades), Kodak approached the four primary wholesalers to seek a distribution arrangement,
and was rebuffed. The United States understands that Agfa approached these wholesalers in recent
years and was rebuffed as well. Japan's distribution countermeasures have limited the wholesalers'
incentives and freedom to deal in foreign products. In addition, Kodak has also repeatedly approached
secondary wholesalers to deal in its products, but frequently has been rebuffed. The secondary
wholesalers do not have the scale or market coverage of the primary wholesalers, but full access to
one or more of them would still increase the access to retail of imported film and reduce the relative
cost of distributing it. However, the countermeasures have increased control or influence over the
secondary wholesalers by the manufacturers/primary wholesalers and helped prevent the development
of a significant relationship with Kodak or Agfa. Kodak has aggressively sought to expand film sales
through the photofinishing laboratory channel, but is able to sell only about one-quarter of its film
through this channel. Kodak faces constraints in further expanding its sales of paper to laboratories
and distribution of film through laboratories because many laboratories have exclusive relationships
with Japanese manufacturers.121
5.46 In considering Japan’ s recent formal and informal actions, the United States points out that
it is important to recognize that the distribution structure set up by the measures beginning in the 1960s
and 1970s is, to a large extent, self-sustaining. Once Japanese manufacturers achieved domination
over the distribution system through implementation of short payment terms, rebates and discounts,
verticalinformationlinks,and othermeasures advocated and implemented bythe Japanese Government,
the manufacturers’ power allows them to maintain such domination, through the continuing use of these
transaction terms and other mechanisms, with less need for support from the Japanese Government.
A reduced need for support does not mean that the Government reversed its policy. To the contrary,
119Japan asserts that both Asanuma and Kashimura carry Kodak slide products. In addition, Japan asserts that Asanuma
has a retail subsidiary in Tokyo that sells Kodak film. Affidavit of Takenosuke Katsuoka, p. 4, Japan Ex. A-11; Affidavit
of Tomihiko Asada, p. 3, Japan Ex. A-12.
120See Affidavit of Takenosuke Katsuoka, Japan Ex. A-11; Affidavit of Tomihiko Asada, Japan Ex. A-12; Affidavit
of Yukiyoshi Noro, Japan Ex. A-14; Affidavit of Kaoru Konno, Japan Ex. A-15. Japan also notes that Kodak film has
actual access to secondary wholesalers and retailers. See Section V.A.3.(d), paras. 5.57-5.59.
121See Affidavits of Sumi Hiromichi, US Ex. 96-10, and William Jack, US Ex. 97-2.

Japan has continued to advocate short payment terms, rebates and discounts, and vertical information
links, and Japanese manufacturers and wholesalers have continued to apply these practices to maintain
the oligopolistic distribution system. Moreover, the Government of Japan has continued to suppress
alternative channels and potential challenges to this system, such as large stores and independent
photoprocessing laboratory networks, thereby shielding the oligopolistic distribution system from
competitive pressures that could undermine it.
5.47 With this context in mind, the United States notes continuing actions by the Japanese Government
to implement its transaction terms and vertical information links policies. For example, in the 1980's,
Japan, inter alia: developed new business assistance programs to bolster the systemization of laboratories
and exclude imports of both film and paper from this alternative channel; pressed forward with
strengthening the informationalties between manufacturers and wholesalers; and continued torely upon
chambers of commerce in ongoing application of standard transaction terms. More recently, MITI's
1990 Guidelines affirmatively advocated the use of rebates: "[w]hen there are clear payment standards
on rebates, this practice of rebate payment has its merit. ..."122 Similarly, in 1993, MITI's Small and
Medium Enterprise Agency (SMEA) and a confederation of wholesalers trade associations, including
the photospecialty wholesalers association, jointly conducted a study and published a report addressing
issues raised in MITI's 1990 Distribution Guidelines.123 Based on the report, SMEA drafted a model
wholesaler's contract.124 The 1993 SMEA Report notes that such practices "have been formed to facilitate
the transaction relationship between businesses ... and are thought to go on for a certain economic
reason among the transacting parties and the industry that they belong to."125 Nowhere does the report
or the model contract mention any elimination of the use of rebates, or provide any instruction to follow
uporimplement the 1990Guidelines’ cautionagainstthe use of rebatesfor "maintainingakeiretsu-based
relationship." Instead, only the 1990 Guidelines’ favourable mention of rebates is reflected in 1993
SMEA Report and contract.
5.48 In addition, the United States points out that the 1993 SMEA Report and model contract
demonstrate thatJapan continuestosupportthe standardizationoftransactionterms amongphotographic
materials wholesalers which help maintain exclusive vertical relationships in the distribution system,
established as a result of the liberalization countermeasures program. The report noted with approval
that "retail industry associations and all industries are working in various ways to standardize business
practices."126 The report admonished, however, that "problems still remain unchanged" and "[t]he
need for improvement is becoming stronger."127 Later the report again stressed, "ways to clarify and
122Guidelines for Improving Business Practices, p. 2, US Ex. 90-5.
123MITI, Small and Medium Enterprise Agency, Wholesale Industry - Current Status and Future Issues 1993, 20 September
1993 (1993 SMEA Report). Second Panel Questions and US Answers, US Ex. 1. The Confederation of Small- and Medium-
Sized Wholesale Industry Related Trade Associations (SMEA Wholesalers' Confederation) was established in August 1990
as an informal advisory body to the Director-General of the Guidance Department of SMEA. Ibid., p. 6. The Federation
of Photo Wholesalers (Shashoren) is a member of the confederation. Ibid., p. 8, see Tab 1. This process followed MITI’ s
classic public-private sector cooperation method (Kanmin kyocho taisei) in which the government and industry jointly develop
measures based on the concerted adjustment process. The United States points out that the government-private sector cooperation
method establishes incentives and disincentives to ensure industry compliance with MITI’ s policy.
124The model contract calls for cash payment on a monthly basis. Article 8 of the SMEA Model Contract, reprinted
in 1993 SMEA Report, p. 78. Second Panel Questions and US Answers, US Ex. 1. The model contract provides that in
those cases where cash payment is not possible, notes should have a limited term and interest should be charged for late
payment. This model contract demonstrates that MITI's policies and guidance remain unchanged regarding payment terms.
SMEA drafted the model contract working with the Institute of Distribution Research (which drafted the March 1969 Survey
of transaction terms, which provided the basis for the 1970 MITI Guidelines) and the Distribution System Development Center
(which has played a critical role in the implementation of MITI's systemization policy). 1993 SMEA Report, p. 75. Second
Panel Questions and US Answers, US Ex. 1.
1251993 SMEA Report, p. 4. Second Panel Questions and US Answers, US Ex. 1.
126Ibid., p. 5.
127Ibid.

standardize transaction terms should be studied. ..."128 In addition to these calls for standardization,
the act of preparing and publishing a standard contract was in itself an act promoting standardization.
5.49 The United States also presents evidence to document that MITI, throughout the late 1970s
and the entire 1980s, has continued to promote and resolve technological issues related to vertical
information links. When Japan overcame the remaining technical hurdles in 1989, Fuji immediately
created technical links up with its distributors. Japan has never revoked or worked to counteract its
administrative guidance in favour of vertical information links between manufacturers, wholesalers,
and retailers. Moreover, since 1989, Japan has continued to make clear that vertical electronic integration
of distribution is official policy. For example, MITI's 1990 Guidelines advocated vertical information
links between manufacturers, wholesalers, and retailers.129 Fuji continues to be electronically linked
to distributors, giving Fuji a wide variety of information over the distributors’ activities and increasing
Fuji's efficiency and its control of distribution. None of Fuji's competitors has access to the information
network among the supposedly independent distributors in this chain.
5.50 According to the United States, in addition to maintaining its administrative guidance concerning
transaction terms and information link policies, Japan also has continued to support the oligopolistic
distribution structure in the photographic materials industry with formal measures. The most important
of these is the Large Stores Law. Similarly, Japanese manufacturers continue to be the principal
beneficiaries of SMEA subsidy programs for photoprocessing laboratories, because the bulk of such
subsidies are provided to photoprocessing laboratories affiliated with domestic manufacturers.130 Finally,
the 1995 Business Reform Law opened the door for continued active government assistance to buttress
the oligopolistic distribution structure in the photographic materials industry by providing Japan with
a broad legal framework to assist "domestic production activities" and to implement MITI distribution
policy.131
(c) The role of Nagase and Kodak Japan
5.51 Japan further asserts that the US argument ignores the existence of Kodak's primary wholesaler,
Kodak Japan (formerly Nagase and then Kodak-Nagase). Japan argues that by collapsing Kodak, the
manufacturer, with its wholesaler subsidiary, the United States creates the impression that the domestic
manufacturers have access to a distribution channel (i.e., primary wholesalers) that imports lack. This
impression,however, isnot supported bythe facts. Long ago Nagase, thenKodak's exclusive importer,
sold film to some of the domestic manufacturers' primary wholesalers. However, Nagase also acted
as a primary wholesaler itself, thereby competing with its own customers. This conflict intensified
in 1967, when Nagase acquired a multibrand primary wholesaler, Kuwada, and transformed it into
a single-brand Kodak distributor.
5.52 The United States responds that Kodak does business through its wholly-owned subsidiary,
Kodak Japan, Ltd., which performs technical support, product development and marketing tasks. Lacking
access to wholesale channels, Kodak Japan necessarily sells Kodak film directly to retail outlets. That
fact does not render it a "wholesaler"; were that the case, arguably any subsidiary of a foreign company
in Japan could be transformed into a "wholesaler" merely by excluding it from distribution channels.
128Ibid., p. 73.
129Guidelines for Improving Business Practices, p. 9, US Ex. 90-5.
130MITI Industrial Structure Division, Special Measures Law to Promote Business Reform for Specified Industrialists,
Law No. 61 of 1995, Article 2, US Ex. 95-1.
131Ibid., Article 1, US Ex. 95-1.

5.53 Japan responds that Kodak itself has pointed out in other contexts132 that Kodak Japan performs
essentially the same functions as the primary wholesalers. Indeed, Kodak Japan sells to the same
customers as Fujifilm’ s primary wholesalers and performs the same services for these customers as
do the primary wholesalers. The history of Kodak’ s distribution in Japan also demonstrates Kodak
Japan’ s role as a primary wholesaler. From the 1960s until 1977, Kodak relied exclusively on its import
agent Nagase for distribution functions. Kodak clearly believed that Nagase, particularly after its
acquisition of a primary wholesaler, Kuwada, was its wholesaler in Japan, and that Nagase was fully
capable of performing the wholesaling function.133
(d) Single brand distribution does not impede access of imports
5.54 According to Japan, the US case rests critically on a false assumption about the distribution
structure in Japan, i.e., that domestic manufacturers' relationships with primary wholesalers have created
a "distribution bottleneck" that hinders imports' access to Japanese retailers. Japan argues that the
United States assumes that because there are nearly 280,000 retail outlets that sell film in Japan, then
it necessarily follows that direct distribution to all of these retailers is impractical and that access to
these primary wholesalers' comprehensive distribution networks is, therefore, allegedly essential if
imported film is to penetrate the Japanese market fully. Japan retorts that the US argument completely
misunderstands how film is distributed in Japan, particularly the role of primary wholesalers. Moreover,
the United States incorrectly calculates the availability of imported film at Japanese retailers.
5.55 Japan notes that since each of the three brands is sold by the manufacturer to single-brand primary
wholesalers, it follows of necessity that the brands do not share primary wholesalers. This does not
mean that imports lack access to the primary wholesaler distribution channel. Rather, the different
brands simply utilize different primary wholesalers. Japan further asserts that in addition to ignoring
import's access to the primary wholesale channel, the United States exaggerates the role of primary
wholesalers. Although it is true that there are 280,000 retail outlets that sell film in Japan, all but
13,445 of the outlets buy their Fuji brand film not from the primary wholesalers, but from secondary
wholesalers or laboratories. Fewer than 5,000 accounts collectively cover virtually the entire Japanese
market. The United States offers no reason why Kodak's single-brand primary wholesaler, Kodak
Japan, would be incapable of servicing these 5,000 key accounts.
5.56 The United States replies that even if this number were correct, Fuji needs four large primary
wholesalers to service these 5,000 accounts. Because the foreign manufacturers have no access to
the primary photospecialty wholesalers or to many of the secondary wholesalers that service these
accounts for Fuji, they have to service these accounts directly. Direct distribution or other alternative
channels created by foreign firms provide them with access to only a limited segment of the market,
specifically in central neighbourhoods or large cities - areas where photospecialty outlets are relatively
large and densely located.
5.57 Japan also notes that the same survey of the primary wholesalers' customers reveals that imports
have already thoroughly penetrated these key accounts. Of all the accounts surveyed, 62.0 percent
-- accounting for 77.3 percent of the primary wholesalers’ combined surveyed sales volume -- currently
carry Kodak brand film. Another 16 percent -- accounting for 10.0 percent of surveyed volume --
either buy other non-film products from Kodak or else conduct regular business with secondary
wholesalers or photofinishers that sell Kodak products. Thus, customers accounting for 87.3 percent
of the primary wholesalers' combined surveyed sales volume either already carry Kodak or else have
132See Exhibit 1 of Japan’ s June 1997 Presentation Materials for the second substantive meeting with the Panel (providing
chart from Dewey Ballantine for Eastman Kodak Company, "Privatizing Protection," May 1995.)
133Japan notes the United States confuses Kodak Japan and Eastman Kodak Japan. Eastman Kodak Japan was originally
established as "Kodak Japan" in 1977, but was later renamed in 1989. Although Eastman Kodak Japan performs both marketing
and technical services, and is not a wholesaler, Kodak Japan functions as a primary wholesaler in the Japanese market.

ready access toKodak throughestablished businessrelationships. According to Japan, the UnitedStates
concedes that Fuji and its primary wholesalers have more sales people than Kodak Japan. If Kodak
wants to improve its distribution, however, there is no legal obstacle to hiring more sales people.
The relative strength of Kodak's sales effort is entirely up to Kodak. Furthermore, Japan asserts that
the United States has overstated the number of sales people at Fuji's primary wholesalers by
approximately 50 percent.
5.58 Japan asserts that Kodak's own data prove the point. Japan points out that according to a survey
of Japanese retailers commissioned by Kodak for the US Section 301 investigation, approximately 50
percent of photo shops surveyed carry Kodak.134 Japan's position is that photo shops, which presently
accountfor almosthalf oftotalfilm salesinJapan,135 are the"traditionaldistributionchannel" supposedly
dominated by domestic manufacturers' primary wholesalers.
5.59 Japan therefore argues that the US "distribution bottleneck" argument thus fails the most basic
threshold empirical test - if most of the retailers and secondary wholesalers that purchase film from
Fujifilm's primary wholesalers did not carry imported film, then there would at least be an argument
that the lack of a relationship between foreignmanufacturers and those primary wholesalers was causing
imports to lose sales. But since most of the primary wholesalers' customers already purchase Kodak
film from other sources, the "distribution bottleneck" clearly does not exist. Kodak's own primary
wholesaler, Kodak Japan, can and does sell film directly to the largest retail accounts. Kodak Japan
can and does sell film to secondary wholesalers - not to mention its own affiliated photofinishing
laboratories - which thendistribute to smaller retailers. Therefore, there is no market barrier preventing
imports' access to retailers.
5.60 The United States responds that an analysis of the survey from which the 90 percent figure
is allegedly derived shows discrepancies between the actual survey results and the figures reported
in Japan's submission. Inspection of the survey also reveals that it used biased survey and sampling
techniques. Therefore, the United States urges the Panel to accept the Kodak survey, which shows
that Kodak film is actually available in about 40 percent of the stores in Japan.
5.61 The United States argues that Japan’ s survey is flawed because the determination of whether
a retailer carries foreign film is based on asking Fuji’ s four primary wholesalers to ask their customers
whether they had access to foreign film. The United States points out that about one-third percent
of the primary wholesalers’ film sales are to other secondary wholesalers. Some of these wholesalers
deal with a very large number of retail customers. According to the United States, Japan’ s own
submissions to the Panel report that 278 of the secondary wholesalers sell to tens of thousands of retail
customers. Accordingly, under Japan’ s survey, if one of those secondary wholesalers had purchased
one roll of foreign film to sell to just one of those tens of thousands of retailers, Japan would conclude
that foreign film had access to all of those tens of thousands of retailers. The United States argues
that this methodology severely distorts the view of the market access situation.
5.62 The United States further points out that the above example of token dealings by wholesalers
in Japan should not be considered an exaggeration. The GATT itself found, in its Trade Policy Review
of Japan, that keiretsu manufacturers tend to discourage, but not always prevent, their wholesalers
from dealing in a competitor’ s products.136 Consistent with this finding, the four primary wholesalers
have been known to occasionally engage in token dealings of foreign film. For example, in 1995,
the four primary wholesalers together sold 295 rolls of Kodak film. The total sales of these four primary
wholesalers that year were approximately 25 million rolls. Applying Japan’ s survey methodology,
134Japan Market Access Survey for Photographic Film, 20 March 1996, p. 2, Japan Ex. A-20. The same conclusion
can be found in the Hester affidavit provided by the United States in this proceeding. US Ex. 97-9.
135Photo Market 1996, p. 130, Japan Ex. A-1.
136C/RM/S/57 p. 93.

it could be concluded that foreign film had access to 100 percent of Japan’ s retailers in 1995 because
the four primary wholesalers reach 100 percent of the retail customers in Japan. Clearly, however,
295 rolls out of 25 million does not constitute access to the distribution system.
5.63 In the US view, the important question is how many retailers in Japan in fact carry foreign
film, since it is the retailers who ultimately sell to the end users. According to the United States, Japan,
however, did not analyze access to the retail market for the Panel. Responding to a question from
the United States at the first Panel hearing, Japan did provide the raw data for one of its market access
surveys. These data reveal that foreign film is available in 43 percent of the retail outlets in Japan.
The United States believes this figure is high, since the sample of the survey was biased heavily toward
major cities, where foreign film is more prevalent, and the study was otherwise infected with other
sampling and methodological errors. Still, the 43 percent figure reveals substantially less market access
than Japan claimed, and is close to the 40 percent figure found in the US study.
5.64 Japan responds that the United States attacks the survey sampling methodology, yet apparently
forgets that the survey of wholesaler customers was not a sampling at all. Rather, over 95 percent
of the customers, virtually the entire customer base, were surveyed. There can be no issue of "sampling
bias" when the entire universe is surveyed.
(e) The market for paper
5.65 According to Japan, the United States claims that MITI's distribution policies served to encourage
and facilitate primary wholesalers' switch from multibrand to single-brand wholesale distributors, thereby
supposedly creating a distribution bottleneck and excluding imported film and photographic paper from
access to the hundreds of thousands of Japanese film retailers. Japan asserts that this theory does not
even address photographic paper. Japan maintains that although the US complaint supposedly pertains
to photographic film and paper, the US theory has nothing to do with consumer photographic paper.
5.66 Japan further argues, that in addition, photographic paper is distributed through very different
channels from those used for film. In particular, the domestic film manufacturers' primary wholesalers
are not significant dealers of photographic paper.137 Domestic manufacturers distribute their photographic
paper through sales subsidiaries or other affiliated companies; these subsidiaries or affiliated companies
inturnsellthephotographicpaper eitherdirectlyor, inlimitedamounts, throughsecondary wholesalers,
to the photofinishing laboratories and minilaboratories that use photographic paper to make prints.
Accordingly, Japan concludes that, the US theory that the domestic manufacturers' primary film
wholesalers create a "distribution bottleneck" is inapplicable to paper.
5.67 Japan further notes that, since the "distribution bottleneck" theory is inapplicable, the only
United States argument with respect to paper is that domestic manufacturers' affiliations (through
contracts or equity investments) with photofinishing laboratories have created a captive market that
foreignpaper producersare unable topenetrate. Japan pointsoutthat,however, Kodak operates through
the same kinds of distribution channels as those used by domestic manufacturers. Japan's position
isthatthedomestic papermanufacturers -Fujifilm,Konica,Mitsubishi, andOriental-have longstanding
networks of affiliated photofinishers that began back in the early 1960's, while Kodak has had a
photofinishing presence in Japan for over 40 years: Toyo Genzosyo, an affiliate of Nagase, first began
developing Kodak consumer photographic film in Japan in 1952. Until the 1980's, Kodak relied on
Toyo's(later renamed Imagica) networkof laboratoriesbyestablishinga jointventurecompany, Kodak-
Imagica, with Imagica in 1987. According to Japan, today Kodak has affiliations with 124 amateur
laboratories,138 located all over Japan. Japan explains that in addition to affiliated laboratories, there
137Japan's assertion is that Fuji's primary wholesalers account for less than 10 percent of Fuji's total colour photographic
paper sales. Affidavit of Tanaka Takeshi, p. 2, Japan Ex. A-10.
138Photo Market 1996, p. 198, Japan Ex. A-1.

are a number of non-affiliated minilaboratories. The minilaboratory sector occupies a large portion
of the paper market: approximately 60 percent of total paper sales in Japan are to minilaboratories.139
As is the case with film, Kodak sells paper through exactly the same distribution channels as domestic
manufacturers. There is no "distribution bottleneck" for paper, either.
5.68 The United States responds that MITI recognized that foreign manufacturers could circumvent
the distribution bottleneck for photographic materials through photoprocessing laboratories. The 1969
MITI-commissioned survey of transaction terms in the photographic sector notes as potential threats
"if the oligopoly of the two domestic manufacturers is broken up by a foreign company," and "if a
new [distribution] route emerges to compete against the route of photographic material dealers, which
is the core existing route in the distribution market."140 The survey further warned that "foreign
companies have already provided financial assistance to the processing industry" and advocated taking
steps "to minimize the anticipated disorder in the distribution market."
5.69 The United States further notes that among the recommended measures were, "subsidize the
processing industry."141 Subsidies would help tie the laboratories into exclusive relationships with the
domestic Japanese photographic film and paper manufacturers and consequently impede the sale of
imported paper.142 A laboratory with one company’ s photoprocessing equipment is likely to purchase
photoprocessing paper and chemicals from that same company, as well as its film, to ensure compatibility
and to meet consumer expectations for consistency between the brand of film and paper used. Therefore,
a laboratory that uses Fuji equipment often will use Fuji paper and chemicals, and if it distributes film,
it likely will be Fuji, which in turn impeded the sale of imported paper.
5.70 According to the United States, in the late 1960s and early 1970s, SMEA provided approximately
160 million yen to assist Japanese film manufacturers in converting black and white to colour photo
processing laboratories.143 In July 1967, SMEA approved "colour film development and printing
laboratories" as one of four sectors deemed eligible that year for subsidized loans. The Chairman of
the All Japan Federation of Colour Laboratories Association, who also was the president of Fuji Colour
Service,144 stated that "the main purposes of the laboratory industry becoming designated industry are
... as capital liberalization countermeasures, to modernize facilities and thereby solidify the foundations
of businesses."145 In 1968 the director of MITI’ s Small and Medium Enterprise Agency (SMEA) called
for applying SMEA programs to improve the structure of medium and small businesses in light of
"advancing capital liberalization" and as "protective countermeasures against the selling of oneself to
foreign capital."146 When the laboratories were designated as eligible for another SMEA subsidy program
in 1973, the chairman of the laboratories association again stressed the need to respond to trade
liberalization.147
139Ibid., p. 173.
140Institute of Distribution Research, Fact-Finding Survey Report Pertaining to Transaction Terms: Actual Conditions
of Transaction Practices in the Wholesale Industry, March 1969, pp. 1-21, 287-319, US Ex. 15.
141Ibid.
142Ibid.
143SMEA played a leading role in providing company-specific financing, consulting, guidance, and monitoring in support
of Industrial Structure Council Distribution Committee's liberalization countermeasures. White Paper on Small and Medium
Enterprises by the SMEA 1967, US Ex. 67-1.
144The United States notes that all chairmen of the All Japan Federation of Colour Lab Association (Lab Association)
have been Fuji employees: Murakami Eiji (1965-1978), Koseki Yasuo (1978-1988), Takeuchi Hiroshi (1988-1992), and Miyata
Hidenobu (1992-present).
145Murakami Eiji, The Decision on Joseiho [Assistant] Designated Industry, JCFA News, Special Issue, 1967, p. 4, US
Ex. 9.
146Otsutake Kenzo, Main Points of Fiscal 1968 MITI Policy; New Policy Dealing With Capital Liberalization; Approach
to Policy on Small and Medium Enterprises, Tsusan Journal, December 1967, Vol. 2 No. 2, pp. 10-15, US Ex. 12.
147Murakami Eiji, A Year of Trial, JCFA News, 1 January 1973, No. 34, p. 2, US Ex. 27.

(f) Other film markets
5.71 Japan argues that in other specialty film products, Kodak itself has experienced significant
market success in spite of its reliance on single-brand distribution. In X-ray film, for example, Kodak
has an approximately 20 percent share of the market, yet almost all its major wholesalers are exclusively
single-brand distributors (the exception, Suzuken, will handle other brands upon request).148 Fuji sells
through Fuji Medical Systems to several distributors, in two of which Fuji has equity stakes. All of
Fuji's major wholesalers are basically single-brand distributors, though they will occasionally sell other
brands upon customer request. Konica sells through its affiliate, Konica Medical. As to the other
major suppliers, Agfa's and DuPont's major wholesalers carry primarily the Agfa and DuPont brands.
There is thus no significant sharing of distributors among the major producers.
5.72 Japan also argues that Kodak has a very strong position in the Japanese motion picture film
market. In negative film, Kodak has an approximately 70 percent share, and Fuji has the remaining
30 percent.149 In positive film, the situation is basically reversed: Fuji has a 60 percent share, and
Kodak has around 40 percent. Agfa rounds out the market as a marginal supplier. Kodak has achieved
its success by selling directly to users; Fuji employs independent single-brand distributors. Agfa,
meanwhile,usesasingle-brandwholesaler. Thus,the marketrealitiesforotherfilm productsare sharply
at odds with the US theory of a distribution bottleneck in consumer film.
5.73 The United States explains that the US complaint specifically excludes various specialized
filmsusedbyprofessionalphotographersforresaleand variousotherspecialtyfilms(x-film,microfilm).
4. THE RESTRUCTURING OF THE JAPANESE FILM DISTRIBUTION SECTOR
(a) The origin of MITI's distribution policies in the early 1960s
5.74 According to Japan, MITI had many reasons to be encouraging greater efficiency in the
distribution system during the 1960's and 1970's. The concern with distribution modernization arose
initially from the productivity lag of the Japanese distribution sector relative to other sectors of the
Japanese economy, and the implications of this inefficiency. Historically, the distribution sector in
Japan was characterized by small "mom and pop" enterprises and traditional, personalized business
practices. The service sector was viewed largely as a place to employ those people who could not
find employment in the manufacturing sector.150 Accordingly, while Japanese manufacturers had recorded
greatsuccesses inrecentyears,the distributionsectorlaggedbehindinproductivityandcompetitiveness.
In Japan’ s view, the United States thus completely mischaracterizes the origin of MITI distribution
policies. The objective was not helping Japanese manufacturers, as the United States claims. Rather,
the foundation was coping with distribution inefficiency itself, and the interrelated problems of inflation
and labour shortages.
5.75 The United Statesargues thatthe transformationof the open and competitivedistributionsystem
of the early 1960's into the vertically-integrated, domestic manufacturer dominated system was not
accidental. It was the result of the direct intervention in the market by the Government of Japan.
TheGovernmentofJapandiscernedthatreorganizingdistributionalongvertically-integratedlineswould
protect domestic manufacturers from foreign competition after liberalization. The United States alleges
that MITI was the nerve center for formulating and implementing distribution countermeasures policy.
148Affidavit of Tanaka Takeshi, p. 5, Japan Ex. A-10.
149Ibid.
150See, Fumitake Kishida, The Direction of Commercial Structure Improvement in The New Development Of Distribution
Policy, International Trade and Industry Study No. 142 (December 1966), p. 32, Japan Ex. B-8; see also, Shintaro Hayashi,
Thinking and Dealing with Distribution Issues in The New Development of Distribution Policy, International Trade and Industry
Study No. 142 (December 1966), p. 4, Japan Ex. B-9.

Tothis end MITI formed a DistributionCommittee thatpublished12"interim reports"from 1964-1977,
covering every aspect of the distribution system. Each interim report reflected a progressively deeper
recognition of the inefficiencies of the Japanese distribution system, its vulnerabilities to foreign
investment, and the impact that foreign penetration of the distribution system would have on Japanese
manufacturers.
5.76 According to the United States, the First Interim Report identified a central theme that would
underlie MITI's distribution policy: the need to limit competition in distribution in order to create stability
and high prices for the benefit of domestic manufacturers.151 The Report described the Japanese
distribution system as "extremely fractionalized" and characterized by "excess" competition, weak
financial conditions, and inadequate management capability. The Report noted a trend toward vertical
integrationof distributorsunderthe controlof manufacturers, and observedthatwhere there was vertical
integration, it had improved the distribution structure and served to "secure and expand the [market]
share of individual manufacturers."152 Later reports and government policies would continue to stress
the benefits to domestic manufacturers of vertical alignment of distribution.
5.77 The United States further notes that the Third and Fifth Interim Reports153 developed another
theme that would become important for reorganizing the distribution system: horizontal business
cooperation. The Third Interim Report specifically advocated providing financing and tax incentives
for retailers to strengthen their ties with each other and with wholesalers through the development of
joint physical distribution facilities.154 The Fifth Interim Report advocated greater horizontal cooperation
among wholesalers and retailers through the formation of, for example, joint wholesale centres, as
well as greater vertical cooperation between manufacturers, the wholesalers, and retailers.
5.78 The United States argues that the Second and Fifth Interim Reports sowed still another seed
that would become instrumental in reorganizing distribution: revising transaction practices between
manufacturers and wholesalers in a way that would facilitate "rational" business relations between
manufacturers and wholesalers.155 Such "rational" transaction terms became a means to encourage
the alignmentof distributorsintoexclusive, long-termrelationshipswitha singledomestic manufacturer
and a means to help resist foreign penetration of the distribution sector.
5.79 The United States further argues that along with examining the distribution structure generally
in the Distribution Committee, MITI worked closely with individual sectors to begin discussing their
specific structural issues. In the photographic sector in 1963, MITI urged the four domestic photographic
film and paper manufacturers toband togetherto discussways tomeet foreigncompetition. In response,
the companies formed the Natural Colour Photography Promotion Council (NCPPC). MITI officials,
including the official responsible for the photosensitive materials sector, attended the Council's meetings,
and MITI officials recommended specific policies to help the Council achieve its objectives. The primary
focus of the NCPPC was on the steps the photosensitive materials sector needed to take to prepare
to meet foreign competition, concentrating particularly on distribution and sales network.
151Japan disagrees with this US interpretation of the First Interim Report. See translation issue 2.
152Industrial Structure Council Distribution Committee, Current Status and Problems of Distribution Mechanisms (First
Interim Report), December 1964, reprinted in Tsubansho Koho, 8 January 1965. Japan disagrees with the US translation
of keiretsuka in the US translation of the First Interim Report, US Ex. 64-6. See translation issue 4.
153Industrial Structure Council Distribution Committee, Concerning Improvement in Material Distribution (Fifth Interim
Report), 19 October 1966, US Ex. 66-3.
154Industrial Structure Council Distribution Committee, The Promotion of Chain Stores - Industrial Structure Council
(Third Interim Report), reprinted in Tsusansho Koho, 14 September 1965, US Ex. 65-4.
155Industrial Structure Council Distribution Committee, The Basic Direction of Policies on Distribution (Second Interim
Report), reprinted in Tsusansho Koho, 24 April 1965. Japan disagrees with the translation of keiretsuka in the US translation
of the Second Interim Report, US Ex. 65-2. See translation issue 4. Fifth Interim Report, US Ex. 66-3.

5.80 Japan admits that modernization of the distribution system has been an ongoing concern of
the Government for more than three decades, including the periods both before and after the debate
over capital liberalization. It notes, however, that the interim reports of the Distribution Committee
are not official statements of the Government of Japan, and their issuance does not constitute
"administrative guidance." Like the United States and other countries, the Government of Japan
frequently organizes advisory bodies with members drawn from industry, academia, consumers, and
the media, and charges them to study issues of public concern and issue recommendations for the
Ministers.
5.81 Japan argues, however, that the aim of MITI's distribution policies was not to block imports
but to modernize the Japanese distribution industry and help it to meet the foreign competitive challenge
that would be unleashed byliberalization. Nothing in MITI's distribution policies or any other so-called
"liberalization countermeasures" did anything to encourage or facilitate the creation of an exclusionary
market structure that discriminates against imported film or paper. Japan's position is that since the
MITI policies in question actually say nothing about encouraging single-brand distribution of film,
the United States struggles to establish some connection between MITI's policies and the market structure
that is the main target of its complaints. When confronted with the actual facts of this market, however,
the United States' arguments about "distribution countermeasures" collapse.
5.82 Japan further argues that, in the end, the US claim boils down to an assertion that the current
Japanese market structure for consumer photographic film and paper is exclusionary and closed, and
that this abnormal situation must somehow be the result of government intervention. In Japan's view,
the fundamental premise of this argument - that there is something abnormal about the distribution
of film and paper in Japan - is simply wrong. At the root of the United States' complaints, Japan argues,
is the fact that the various primary wholesalers in Japan each carry only a single brand of film.
However, single-brand wholesale distribution is a normal business practice. In fact for film, this business
practice is the norm in every major market in the world, including the United States. Consequently,
the Japanese market for consumer photographic film and paper reflects the outcome of normal market
forces.
5.83 Japan recalls the US argument that MITI's distribution policies during the 1960's and 1970's,
i.e.,theso-called "systemization"policies,formedthe centrepieceofitsallegedstrategytoblockimports
of consumer photographic film and paper and to assist Japanese film manufacturers in gaining exclusive
control over the "traditional" distribution channels for film, leaving imports without access to those
channels. Japan argues that the US theory has nothing to do with the actual record of MITI's past
or present distribution policies. MITI's policies sought more generally to rationalize and systemize
Japan's wholesaling and retailing sectors, which were beset by low productivity. In particular, MITI
encouraged the elimination of traditional outmoded business practices, the adoption of standardized
forms and procedures, and the increased use of computer technology. Drawing onmodels from Western
business practice, those business reforms were recommended across the board throughout the distribution
sector, and were by no means specific to photographic film and paper.
5.84 The United States responds that contrary to Japan’ s assertions, the contents of the interim
reports were implemented as administrative guidance. The United States recalls that in many instances,
the Government of Japan directs the quasi-governmental policy entities such as the Distribution
Committee of the Industrial Structure Council to undertake an investigation or survey, and the entity
in response would complete that task and return a report to the Japanese Government. That report
in turn is adopted, affirmed, or utilized by the Japanese Government as administrative guidance to
direct the industry to alter its behaviour, thereby converting the "report" to measures.
5.85 TheUnitedStatesalsocontendsthatsingle-brandwholesalingof filmisnotcommon worldwide.
Most photospecialty wholesalers in Europe and North America carry multiple brands of film as well
as a wide range of other photographic products. Japan is confusing "single brand distribution" by

wholesalers with the common practices in Europe and North America of "direct-to-retail" sales by
manufacturers.
5.86 In the US view, Japan’ s argument thatits objectivewas onlyto modernize distribution channels,
not block foreign entry, is undercut by its own submission to the Panel, which suggests that it held
off foreign investment in the distribution sector in order to ensure that foreign manufacturers could
not establish their own distribution networks in Japan until Japanese manufacturers had restructured
their own distribution networks and made them more efficient. Moreover, if Japan intended only to
promotedistributionefficiencyandnotprotectdomesticmanufacturers,itshouldhavewelcomedforeign
investmentinthedistributionsector, because foreigndistributorswere four toseven times more efficient
than domestic distributors.
(b) The 1967 Cabinet Decision
5.87 The United States notes that in 1966, MITI completed a survey that examined various problems
domestic industries were likely to face because of liberalization. MITI identified Kodak and Agfa as
foreign companies that were likely to enter the Japanese market for camera and photosensitive materials
after capital liberalization. As a result of its survey, the United States asserts that MITI issued a policy
statement on 17 April 1967, indicating that "liberalization countermeasures" were needed to defend
the domestic firms from competition.156
5.88 The United States asserts that the 1967 Cabinet Decision was a watershed in the Government
of Japan's efforts to restructure Japanese industry to resist imminent foreign competition.157 This
Decision formally endorsed the use of countermeasures to offset the effects of liberalization, making
the protection of Japanese markets from foreign a competition a high national priority. The Decision
emphasized that the distribution sector was a key area for renovation and improvement to support the
production sector, using the concerted industry-government approach:
"Modernization lags behind most in the distribution sector. Here the power of resistance
against the inroad of foreign capital is weak, and the impact of foreign capital advancing
into this sector will also pose significant impact on the production sector. It is
necessary, therefore, toimplement countermeasures insupportof the efforts of industry
with the objectives of modernizing the distribution structure, fundamentally strengthening
the enterprises in this sector, and establishing a mass sales system."158
The United States argues that the language of the Cabinet Decision established a clear national priority
to pursue distribution policies aimed at protecting domestic manufacturers from foreign competition.
5.89 Japan counters that as it began to dismantle trade and investment barriers in the 1960's, it
was concerned generally about the ability of domestic industries to compete with foreign rivals in the
new, less regulated business environment. The Cabinet Decision, which implemented the first stage
of capital liberalization,was quitedirect inexpressing this concern. The United States, however, quotes
selectively from this document to create a distorted impression of the Cabinet Decision. Contrary to
US arguments, Japan sought to promote the efficiency and competitiveness of domestic industries,
not block imports. In urging modernization of the distribution sector in anticipation of capital
liberalization, the Cabinet Decision was simply applying to one sector a basic general policy for coping
with liberalization:
156MITI, Regarding Capital Liberalization, 17 April 1967, reprinted in Yoshido Fujio, Capital Liberalization and Foreign
Investment Law, 30 October 1967, US Ex. 67-3.
157US Ex. 67-6.
1581967 Cabinet Decision, p. 6, US Ex. 67-6.

"to guide and complement efforts by the private sector for example, bolstering future
technological development, increasing owned capital and lowering interest rates,
especially long-term interest rates, in order to create the basis on which our enterprises
can compete against foreign capital on equal terms."159
Japan argues that distribution modernization, which initially served to promote efficiency and to cope
withinflationarypressureswouldalsohelptheJapanese distributionsectorcompete withforeigncapital.
The purposewas tosecureeffective competitioninthe domesticmarket throughimprovingthe efficiency
of the domestic distribution sector.
5.90 According to Japan, the sweeping US assertion about a "clear national priority" of achieving
protection from foreign competition has no support in the text of the Cabinet Decision. The Cabinet
Decision notes only that foreign capital in the distribution sector will have a "significant impact" on
the manufacturing sector, but that statement simply recognizes the obvious relationship between
distribution and manufacturing in the economy, which would be affected by capital liberalization.160
Japan argues that so long as foreign producers were competing in Japan by exporting, the backwardness
of the distribution system was not a problem. Tariff reductions might make imported products more
price-competitive, but they would provide no other marketing advantage. On the other hand, once
foreign producers were allowed to establish their own sales subsidiaries in Japan, the relative
backwardness of the distribution systems upon which the domestic producers had been relying would
become a potentially acute disadvantage.
5.91 In Japan's view, there is no discussion in the Cabinet Decision of protecting domestic
manufacturers from foreign competition at all, let alone a discussion of using distribution policies to
protect manufacturing companies. The Cabinet Decision refers only to ways in which the government
can help Japanese companies -- in both the distribution and manufacturing sectors -- prepare for the
intensified competition that capital liberalization will bring.
(c) The 1968 Sixth Interim Report
5.92 The United States argues that it was the Distribution Committee that was charged with the
taskof determininghowtoconverttheCabinet's generaldecisionintospecific policies. The Distribution
Committee came up with a policy to achieve the twin goals of enhancing efficiency and protecting
against foreign competition - "systemization" of distribution.161 The premise of distribution systemization
was that even though foreign investment in distribution might enhance efficiency in the distribution
sector, it would threaten Japanese manufacturers. The Sixth Interim Report analyzed ways that foreign
manufacturers might gain control of Japan's distribution system,162 and highlighted the concerns of
such control:
"1. There is a risk that growth sectors will fall under the monopolistic control of
foreign capital, resulting from the difference in capital resources and the like.
2. There is a risk that the process of sales expansion by foreign capital affiliated
distribution enterprises will aggravate excessive competition and hinder the smooth
implementation of distributionmodernizationplans, and the [established]order of trade
will be disrupted.
159Ibid., p. 4, US Ex. 67-6.
160Ibid., p. 6, US Ex. 67-6.
161Japan notes that MITI distinguishes rationalization and systemization policies. The United States uses the single term,
"systemization" to cover both concepts.
162Sixth Interim Report, p. 6, US Ex. 68-8.

3. There is a risk that the manufacturing sector will be dominated by controlling
the sales routes, bringing about the international subcontracting of Japanese industry."163
5.93 According to Japan, in light of the 1967 Cabinet Decision, MITI and the various advisory
committees renewed their focus on distribution modernization. The Sixth Interim Report indicated:
"Today, the delay in modernizing distribution activities is often seen to prevent the
effectiveness of economy and improvement of people's living. The necessity of
improvingthe structureof the distribution industryisgraduallyincreasing. In addition,
the modernization of distribution activities is pressed by the following two viewpoints.
First, liberalization of direct investment by foreign capital is drawing near. It is
necessary to quickly establish [market] conditions in which domestic capital could
compete with foreign capital. Second, improving productivity of distribution activities
is considered an effective way to solve the consumer price issue."164
5.94 Japan further argues that the basic need for distribution modernization arose from the need
for efficiency to improve the standard of living. A further rationale for distribution modernization
continued to be concern about inflation. Coping with capital liberalization was added to these other
rationales, but the report is clear in stating that coping meant competing more effectively with the new
foreign entrants. This goal was to be achieved by promoting efficiency in the distribution sector.
5.95 In Japan's view, the US claims are untenable. MITI hardly regarded the existing distribution
system as some sort of strategic "crown jewels" that imports must not be allowed to use. On the
contrary, MITI saw the backwardness of the distribution system as an "Achilles' heel" thatwould render
domestic manufacturers unable to compete with foreign producers. The concern was that domestic
manufacturers would be stuck with existing distribution channels while foreign producers, freed from
capital restrictions, would be able to construct their own modern (and exclusive) distribution channels.
Japan cites the 1968 Sixth Interim Report which stated:
"In the case of penetration for the purpose of selling the foreign manufacturers' own
brand of products ... (including cases in which foreigner producers actually control
distribution), when the goods are superior, [the manufacturer] has highly developed
sales techniques or large marketing funds, there probably will be a considerable impact
on rival Japanese producers and the businesses that serve as distribution channels for
domestic products."165
5.96 Japan's position is that while foreign producers would be able to choose between using existing
Japanese distribution channels or importing their own systems, Japanese producers would have to sink
or swim with their domestic distributors. Consequently, the purpose of MITI's distribution policies
was to encourage the modernization of Japanese distribution practices, and thereby serve various policy
goals including improving the competitiveness of Japanese industry.
(d) The 1969 Seventh Interim Report and the Distribution Systemization Promotion Council
5.97 The United States argues that the Japanese preoccupation with protection is further evidenced
by the Seventh Interim Report of the Distribution Committee166, which it asserts states that to the extent
163Ibid., p. 8.
164Sixth Interim Report, Japan Ex. B-7.
165Ibid., p. 22.
166Industrial Structure Council Distribution Committee, Systemization of Distribution Activities (Seventh Interim Report),
22 July 1969, p. 6, US Ex. 69-4.

that fostering efficiency became inconsistent with protection against foreign competition, the latter goal
should prevail. The relevant language in the Seventh Interim Report reads:
"Today, amidst calls for the active promotionof capital liberalization inthe distribution
sector, we thinkthatefforts to systemize distributionhave a vitalimportance instrategic
significance. ... [T]he systems gap [between Japan and America] is expected to have
a decisive effect on distribution activities in particular, the concerted efforts of the
government and the private sector must be directed at systemization from the point
of view of a capital liberalization countermeasure.
[I]t istrue that one effect of systemizingJapan's distribution systemis the simplification
of entry [into Japan's market] by foreign capital, [enterprises] which are more adept
at systems methodology. [But] to make inroads, we should instead emphasize preventing
the immense impact that would be felt if foreign capital took the lead in systemizing
Japan's distribution activities, and quickly develop a system sufficiently capable of
countering the rational systems introduced by foreign capital."167
5.98 The UnitedStates furtherargues thatthe premise of distributionsystemizationwas toreorganize
the Japanese distribution system along vertical and horizontal lines by -
(i) the formation and strengthening of product-specific vertical distribution ties between
a Japanese manufacturer and various wholesalers, and between these wholesalers and
retailers;
(ii) the creation of linkages among horizontal elements of the distribution system, which
could be brought more easily into the "systemized" vertical arrangement.
5.99 According to the United States, under the Government of Japan's systemization plan, the nature
of the links between companies in a "system" would include commercial transaction ties, physical ties,
and informational ties. Each of these ties would become essential to ensuring that the system operated
as a single and exclusive whole. Horizontal business cooperation among small retailers and other small
scale entities inthe distributionsystemwould be "the mostefficient way to realize profit from economies
of scale."168 Horizontal cooperation also would make the system more difficult for foreign firms to
penetrate because many of the individual actors in the system would be bound together in a common
distribution channel tied to and dominated by domestic manufacturers.
5.100 Japan responds that the Seventh Interim Report169 outlined the basic direction of desirable
systemization in all aspects of distribution, from management planning to business transactions to
managing merchandise to finance:
(i) Management Planning: the report encouraged the use of computers to track sales trends
to share information with suppliers and customers.
(ii) Business Transactions: the report encouraged the automation of materials handling,
scheduled deliveries along set routes, and the establishment of distribution centers for
joint use.
167Seventh Interim Report, p. 4, US Ex. 69-4.
168Sixth Interim Report, p. 11, US Ex. 68-8.
169Seventh Interim Report, US Ex. 69-4.

(iii) Managing Merchandise: the report encouraged the use of computers to maintain
inventory at appropriate levels, the taking of orders by telephone using order books,
and the use of automated ordering systems.
(iv) Finance: the report encouraged the use of computers to manage accounts receivable
and accounts payable, automated invoicing and bank settlements, and computerized
credit research.
5.101 The United States points to a recent book on distribution by a Japanese academic that
summarized the objectives of the Japanese government's distribution systemization policies as
liberalization approached. Commenting specifically on the Seventh Interim Report, he wrote that its
basic purpose was to create vertically integrated systems:
"Its intent was to build a huge pipe connecting production with consumption and to
improve the effectiveness and efficiency of distribution by achieving effectiveness and
efficiency in vertical operations. ... [T]he distribution systemization ultimately
encouraged vertical integration of distribution and caused giant enterprises' control
over distribution to become even stronger."170
He emphasized that the Seventh Interim Report represented a transformation inthe Government's policy
from merely improving efficiency to ensuring manufacturer control of the market:
"We must keep in mind that [Japan's] national distribution policy, aimed at building
a mass distribution system sought by giant enterprises to be compatible with a mass
production system, had been transformed into a reinforcement of marketing activities
by giant enterprises whose goals were to control distribution and the market ... . This
characteristic of the distribution policy was further strengthened by the promotion of
distribution systemization policy."171
AnotherJapaneseacademic expert,writingin1974,alsocharacterizedthe MITI-led distributionreforms
of the period as aiming at excluding foreign companies:
"[T]he major reasons why this type of distribution systemization has been particularly
emphasized during the Showa 40's [1965-1974], especially the latter part of Showa
40's, [1970-1974] are because of the following:
... while coping with capital liberalization and pushing forward the delayed
rationalization of Japan's distribution industry,at the same time, the nationas one [will]
build barriers to entry into the distribution system; which leave no margin for foreign
companies to penetrate Japan's economy."172
5.102 The United States argues that the Seventh Interim Report called for joint government-industry
cooperation to implement systemization, along with tax and financial incentives for projects that would
promote systemization. To foster coordination between government and industry, the Report proposed
the formationof anothergovernment-industrybody,the DistributionSystemizationPromotionCouncil,
to promote and build consensus for systemization. The Report also cited the need for research and
guidance for specific industries to carry out systemization according to their specific needs and
circumstances.
170Sasaki Yasuyuki, Distribution Policies in Japan and the West, 16 June 1995, US Ex. 95-12.
171Ibid.
172Shirahige Takeshi, Chapter 1, Development of Distribution Policies, Current Distribution Issues in Modern Japan
[Gendai Nihon no Ryutsu], Ooya Junichiro (Publisher), Tokyo, 26 February 1974, p. 9, US Ex. 74-1.

5.103 TheUnitedStatesindicatesthatMITI formed theDistributionSystemizationPromotionCouncil
in 1970. The head of the Council described its efforts as uniting government and the private sector
in a common purpose:
"The Distribution Systemization Promotion Council was established ... as a forum for
promoting the systemization of distribution through the joint efforts of government
and the private sector. ... [O]ver a period of ten months, over 100 people from industry,
academia and government have worked literally as one united body."173
(e) The 1971 Basic Plan
5.104 The United States further indicates that in 1971, the Council published its "Basic Plan for
Distribution Systemization." Upon its publication, the chief of MITI's Business Bureau stated that
the Plan was "urgent from the standpoint of ... capital liberalization countermeasures," and that "[w]ith
this plan, the Ministry of International Trade and Industry has decided to make every effort toward
the fulfilment of distribution systemization policies."174 The United States further indicates that the
plan's authors expressed the intention that "government and private sector, working as one, will pursue
concrete implementation [from now] until 1975, based on this policy"175 and reiterated the view of
systemization as vertical and horizontal integration:
"The decisive approach here is to regard the entire process of distribution from
production to consumption as a single system. ... In particular, such systemization
of distribution must be realized through various stages: vertically from the intra-firm
level tothe inter-firm level, horizontallyon the inter-firm level tothe nationaleconomic
level ... ."176
5.105 The United States notes that in dividing responsibility between government and industry for
implementingsystemization,thePlanstatedthatthemanufacturersshouldassumeprimaryresponsibility
for accomplishing vertical integration, with "positive support and guidance" from the government.
In the area of horizontal cooperation, the government would "take positive action."177
5.106 Japan asserts that the 1971 Systemization report also determined that broad-based standardization
was necessary for such goals to be achieved. Specifically, the report encouraged standardization of
merchandise and trade codes, of invoice forms and accounting records, and of shipping containers.
Accordingto Japan, none of these ideas were particularlynovel. Indeed, Japanese academics introduced
ideas of systemizationborrowedfrom the west, and the variousinterimreportsnotedthe fact thatforeign
companies were already aggressively pursuing systemization to improve efficiency.
(f) Vertical integration
5.107 The United States argues that Japan's intent to promote vertical keiretsu in its systemization
policy comes out clearly in the Seventh Interim Report178, as well as in the Basic Plan for the
173Distribution Systemization Promotion Council, The Basic Plan for Distribution Systemization, 28 July 1971, p. 3,
US Ex. 71-10. Japan disagrees with the translation of keiretsuka in the US translation of the 1971 Basic Plan, Japan Ex.
B-18.
174Ibid., Introduction, US Ex. 71-10.
175Ibid., Preface.
176Ibid., Foreword.
177Ibid., p. 9.
178Seventh Interim Report, p. 7, US Ex. 69-4.

Systemization of Distribution179 in which it allegedly admitted the need to regard the entire process
of distribution from production to consumption as a single system.
5.108 With respect to the US argument that both the rationalization polices and the systemization
polices were intended to encourage vertical integration, Japan contends that the United States is
compelled to make this argument because otherwise the actual terms of the various distribution policies
are completely unexceptional, and have nothing to do with the US theory about a government-created
"distribution bottleneck." According to Japan, vertical integration is the missing link in the US
"bottleneck" theory.
5.109 In Japan's view, the US attempt to develop a logical link between MITI distribution policies
and incentives to vertically integrate stems from a simple reason - the documents themselves do not
talk directly about any intent to encourage vertical integration. According to Japan, there are no
statements - either by MITI or by the various advisory councils - directly calling for vertical integration.
To the contrary, to the extent there is any discussion of vertical integration at all, one finds in the various
advisory council reports ambivalence at best and often hostility towards excessive vertical integration.
5.110 Japan contends that as mass manufacturing had emerged in Japan more swiftly than mass
distribution, some manufacturers were integrating forward into distribution to facilitate the marketing
of their products. Although this process may have been economically rational for manufacturing, those
studying the distribution sector regarded it with concern. Japan concludes that this ambivalence about
vertical integration goes back to the very beginning of systematic thinking about distribution policies.
This explicit concern about the problem of vertical integration into distribution started before the debate
over capital liberalization and continued after the debate began. As an example, Japan cites the Sixth
Interim Report in 1968, which saw vertical integration as a problem.180
(g) Single-brand distribution
5.111 Japan suggests that in effect the United States is asking the Panel to infer government involvement
in the Japanese photographic materials market because the market structure in this sector is so abnormal
that it could not possibly be the result of private business decisions and market forces. However,
according to Japan, single-brand distribution occurred as an industry trend before the alleged measures
were implemented. Single-brand wholesale distribution is a common business practice and its advantages
are quite familiar to economists and business people. Likewise, affiliations between photographic
materials manufacturers and photofinishing laboratories also prevail worldwide. The consistent
prevalence of these market structures around the world is due to market factors, not government
measures. Japan argues that there are strong economic incentives that lead to vertical integration in
this industry.
5.112 According to Japan, the economic efficiencies of integrating manufacturing and distribution -
whether through outright ownership or contractual relationships - are well known. Integration is said
to facilitate greater flexibility in responding to changing market conditions; it reduces incentives for
opportunistic behaviour between manufacturer and distributor; it allows for better information flows
through the distribution pipeline; and it generally ensures greater focus and effort on behalf of the
manufacturer's brand. In Japan's view, it was a recognition of these advantages that led to the strong
criticism of Kodak's long delay in establishing directly controlled distributors in the Japanese market.
Therefore, there was simply no causal connection between MITI's systemization policies and the decisions
by the primary wholesalers about which film brands to carry. Japan asserts that, there is nothing at
all unusualabout the Japanese market structures for film and paper. Single-brand wholesaledistribution
isa common businesspractice. AccordingtoJapan, single-brandwholesaledistribution of film prevails
1791971 Basic Plan, p. 6, US Ex. 71-10.
180Sixth Interim Report, p. 10-11, Japan Ex. B-7.

in every major market in the world. Likewise, affiliations between photosensitive materials manufacturers
and photofinishing laboratories prevail worldwide. Thus, concludes Japan, the consistent prevalence
of these market structures around the world is due to market factors, not government measures.
5.113 Japan further shows that in the Japanese market, vertical integration by manufacturers into
distribution resulted naturally from the fact that the production sector developed and modernized faster
than the distribution sector. In light of this, it was a natural reaction by manufacturers to integrate
forward into distribution to apply their superior resources to marketing their products.
5.114 Consequently, Japan is of the view that decisions by Fuji's wholesalers to become single-brand
film distributors occurred in the context of a larger industry trend towards single-brand wholesale
distribution. This trend was guided by market forces not government policy. Japan asserts that the
United States tries to avoid this unavoidable conclusion by elevating deliberations of the Industrial
Structure Council's Distribution Committee to the level of Japanese Government policy. In reality,
Japan maintains that the United States had nothing to link actions taken by Fuji and Konica, regarding
either single-brand distribution or transaction terms, to government action.
5.115 According to Japan, the US interpretation of events is at odds with the timing of Fujifilm’ s
and Konica’ s evolving relationships with their primary wholesalers. Of the four major primary
wholesalers that currently are single brand Fujifilm wholesalers, two of them, i.e., Kashimura and
Ohmiya, have never carried Kodak film products since World War II. Both once carried Konica
products; Kashimura terminated that relationship in 1963, and Ohmiya did the same the following year.
Thus, these two distributors have been single-brand Fujifilm wholesalers for over three decades -- well
before capital liberalization even began, and before MITI began to formulate and articulate its distribution
modernization policies.
5.116 Japan notes that a third primary wholesaler, Misuzu, carried multiple brands, including Fujifilm,
Kodak, Konica, Agfa, and the English brand Ilford, until 1968, when it became a single-brand Fujifilm
distributor and withdrew from all other film brands. Actually, Misuzu terminated dealings with Kodak
in April 1967, even earlier than its final decision to become a single-brand distributor. Here again,
the move to single-brand wholesale distribution occurred before MITI issued its 1970 Guidelines for
film and the termination of Kodak preceded both the 1967 Cabinet Decision and the 1970 Guidelines.
5.117 Japan further notesthatonly one of the major primary wholesalers, Asanuma, made the decision
to carry only Fuji brand film after MITI’ s distribution policies had been developed and articulated.
In 1973, Asanuma travelled to Rochester, New York to meet with top Kodak officials. Asanuma,
which prior to 1960 had imported directly from Kodak, requested a resumption of direct dealings.
Kodak refused, saying that it was satisfied with the job being done by Nagase, its exclusive importer
and primary wholesaler.181 If Asanuma wanted to carry Kodak film, it would have to continue to go
through Nagase.182 Two years later, Asanuma gave up on a product line in which it was forced to
buy from a competing distributor, and announced that it would carry only Fuji brand film.183 Government
measures played no role in pressuring Asanuma into dropping Kodak. Japan argues that the US claims
about the alleged effects of governmental policies are simply not credible.
5.118 According to Japan, even Kodak has built highly effective single-brand distribution networks
all over the world. Japan argues that Kodak's marketing strategy in Japan during the 1960's and 1970's
181Japan notes that the United States provided affidavits from Albert Sieg and William Jack to respond to this inconvenient
history. Japan argues that a close reading of the affidavits, however, reveals that neither person denies the claims made
by Asanuma. See US Ex. 97-1 and US Ex. 97-2.
182Affidavit of Takenosuke Katsuoka, p. 2-4, Japan Ex. A-11.
183According to Japan, although Asanuma does not carry Kodak film, it does carry Kodak slide projectors, CCD cameras
and digital lab tools. See Affidavit of Takenosuke Katsuoka, p. 4, Japan Ex. A-11.

became increasingly oriented toward single-brand wholesale distribution. Prior to 1960, Kodak exported
directly to several Japanese importers, including Asanuma. In 1960, however, Kodak made Nagase
its exclusive importer. Nagase then resold film to multibrand wholesalers, who in turn distributed
Kodak products directly to both retailers and through secondary wholesalers. Japan also alleges that
in the 1960's Nagase began to build up its own direct distribution capacity through acquisition. Thus,
according to Japan, Kodak based its marketing strategy in Japan during the 1960's and 1970's on its
exclusive relationship with Nagase. Nagase in turn began to acquire primary wholesalers to develop
its own single-brand wholesale distribution system for Kodak products.
5.119 Japan alleges that Kodak's exclusive reliance on Nagase and its single-brand wholesale distribution
network continued in the 1980's, when Kodak after long delay decided to increase its commitment
to the Japanese market. In 1986, Nagase's Kodak products division was spun off into a 50-50 joint
venture between Kodak and Nagase. A few years later Kodak increased its stake to 70 percent, and
in 1996 finally bought out Nagase's remaining interest. In fact, Japan argues that Kodak is more
vertically integrated into distribution than Fuji, in the sense that Kodak owns its primary wholesaler.
5.120 The United States argues that the Japanese film and photographic paper market is not identical
to other markets around the world, but is completely unique. Nowhere else has the government
engineered the distributionsystem to thwart foreign competitors. In addition, the United States disputes
Japan’ s assertion that single-brand wholesale distribution of film "prevails in every major market in
the world." In fact, most wholesalers in North America and Europe carry multiple film brands. Japan
appears to be confusing manufacturers’ "direct-to-retail" film distribution, which is common outside
Japan, with Japanese wholesalers’ exclusive dealing relationships with the domestic manufacturers.
Prior to 1960, Kodak exported directly to several Japanese importers, including Asanuma, but in 1960
itmade Nagase itsexclusiveimporter. This actionwas undertaken notas a strategicdecision butbecause
in 1960, at the request of the Japanese Government, Kodak was required to select one import firm
asitssoleimportagent, thusfacilitatingthe implementationofJapan’ squantitativeimportrestrictions.184
Kodak Japan, a wholly-owned subsidiary of Eastman Kodak, is not a wholesaler. It distributes directly
to Japanese retailers because of its inability to gain access to the main Japanese distribution channels
for photographic products.
5.121 The United States notes that the European Communities also disputes Japan’ s position with
respect to single-brand distribution. It states that it is standard practice all over the world for
photographic producers to have one subsidiary per country representing their interests in selling their
products to wholesalers, retailers, dealers or consumers. The extraordinary situation in Japan, which
has no known parallel anywhere else, is the existence of four tokuyakuten distributing exclusively the
same productsof onlyone company, the major domestic producer. A subsidiary of a European company
in Japan is in the same situation as the Japanese producers themselves. It must find means to enter
the market, which includes the four tokuyakuten, already serving the large majority of retailers. As
long as these four refuse to purchase any film other than that produced by Fuji, market access for
imported film will be impaired.
5. THE STANDARDIZATION OF TRANSACTION TERMS
(a) Introduction
5.122 In the view of the United States, the implementation of rational transaction terms was a central
focus of the plan towards vertical integration. The transaction terms requiring rationalization included
such terms as discounts, rebates, delivery conditions, price, and dispatched employees. The
rationalization of transaction terms was designed to -
184Ueno Akira, The Story of Kodak (Kodakku Monogatari), 1989, p. 152, US Ex. 89-2, and Affidavit of Albert Sieg,
US Ex. 97-1.

(i) foster the commercial alignment of wholesalers with a particular domestic manufacturer,
and of retailers with a particular wholesaler;
(ii) limit the ability of foreign firms to use their competitive strength to attract distributors
away from domestic suppliers.
5.123 The United States argues that to this end MITI established the Transaction Terms Standardization
Committee to determine on a sector-by-sector basis, the transaction terms among manufacturers and
distributors that were needed to "systemize" distribution and prevent foreign penetration of the market.
The committee specifically called for the use of cumulative rebates and tightened payment terms, which
wouldmake retailersmoredependent ondomesticmanufacturers, totheexclusionofforeignenterprises:
"The standards for standardizing transaction terms considered desirable by MITI are
as follows:
2) In order to promote high-volume sales, volume discounts and cash
discounts should be given. In addition, rebates should be progressive rebates.
3) To reduce finance costs, the following principles should be applied:
5 percent discount for cash settlement, nodiscount providedif paid with 60-day
notes, and appropriate interest charged for notes over 60-days."185
5.124 The United States notes that the Transaction Terms Standardization Committee correctly
recognized that these transaction terms would tend to exclude foreign companies in industries like film
and photographic paper where domestic firms already enjoyed dominant market shares and foreign
firms' access was strictly limited by tariffs and quotas. Using volume discounts and cumulative rebates
would promote systemization by encouraging exclusive relationships between a manufacturer and its
distributors and retailers. Volume discounts and cumulative rebates reduce the average price of a
manufacturer's product to the distributor if the distributor purchases a certain quantity of that product.
These savings encourage the distributor to purchase as much of that product as possible from a single
manufacturer. The same holds true with respect to rebates from the wholesaler to the retailer.
5.125 According to the United States, a government-coordinated effort to shorten the payment terms
would successfully shift the financing burden from manufacturers to distributors or retailers. Wholesalers
throughout the film sector typically carried large cash balances and paid for their goods over extended
periods. Therefore, shortening payment terms meant that wholesalers would no longer benefit from
what amounted to easy credit from the manufacturers, a change that would substantially erode their
bottom lines and, by weakening them, open them to greater control from the dominant domestic
manufacturers. Among other things, in a weakened financial state, the wholesaler or retailer became
more dependent upon obtaining the rebate to make the difference between profit and loss.
5.126 In the US view, prior to standardization, wholesalers were able to "shop around" different
manufacturers for the best transaction terms, and extended credits were a common business practice.
MITI reduced such competition in the distribution sector by limiting opportunities for the wholesalers
to "shop around". The result was to offer stable, long-term relationships among the players in the
distribution system.
5.127 Japan respondsthat,MITI has consistentlybeen concernedwithrationalizationof tradingterms
in the distribution sector since the 1960's. In Japan'sview, concerns in the late 1960'sinitiated a process
of encouraging ongoing rationalization to improve the efficiency of the distribution sector. Japan points
185Film Purchases from Manufacturers: Supermarket and Chain Store Trade Terms, Zenren Tsuho, November 1969,
US Ex. 69-5.

out that although the initial efforts were in the 1960's and 1970's, this push for rationalization later
received a new impetusin the 1990'sas part of the United States-Japan Structural Impediments Initiative
("SII") talks.
5.128 In Japan's view, this concern with "irrational" traditional business practices goes back to at
least 1965 and the Second Interim Report, more than two years prior to the 1967 Cabinet Decision
announcing the first stage of capital liberalization. The common problem underlying these various
traditional business practices is that they all interfere with the swift and transparent transmission of
market information up and down the distribution chain. Thus, with long payment terms and liberal
return policies, there need not be tight coordination between what a retailer is buying and what it is
actually selling; a manufacturer might think it had sold 100 units, only to find at the end of a period
that 25 units were being returned. Unclear discounts and rebates make it impossible for a retailer to
know its true costs and whether particular retail prices are actually profitable.
5.129 According to Japan, the Sixth Interim Report concluded that such business practices are
"economically irrational" and that they "harm the stability of enterprise management, increase[s]
distribution cost, and lead to the shifting of the burden to consumers."186 Accordingly, Japan argues,
the report concluded that "it is necessary to establish standard transactions terms in the direction that
will contribute to the improvement of distribution functions, and to strive for their widespread
adoption."187 By recommending the adoption of new standard practices to replace traditional terms
of trade, the report sought to rationalize the distribution sector's coordination of supply and demand
by improving information flows.
5.130 Japan notes that as a follow-up to the Sixth Interim Report, MITI commissioned surveys of
the actual trading conditions in a number of different industries, including one on photographic film.
These surveys, conducted by the Institute of Distribution Research, sought to understand how these
general problems affected specific industries. The surveys examined business practices in the following
areas: (1) sales contracts, including discount and rebate policies; (2) deliveries and returns; (3) settlement
of accounts; and (4) promotional practices, including dispatched employees and rebates.
5.131 Japan argues that, having identified problems in various industrial sectors, MITI began the
process of issuing guidelines to address these problems. Over the 1970 to 1972 period, MITI issued
rationalization guidelines to 15 different industries that had been surveyed earlier: cotton and chemical
textiles, stationery and paper products, glassware, umbrellas, rubber footwear, photographic film, instant
coffee, household cleaners, small tools, publications, kimono fabrics, pharmaceuticals, knitted underwear,
cameras, and ceramics. The guidelines issued by MITI to each of the 15 industries addressed the same
issues and made basically the same suggestions.188 According to Japan, for industry after industry,189
MITI:
(i) suggested greater use of cash discounts;
(ii) suggested greater use of volume discounts;
186Sixth Interim Report, p. 17, Japan Ex. B-7.
187Ibid., p. 17.
188Japan argues that these guidelines were offered to some industries for which import competition was irrelevant and
was therefore not even mentioned in the underlying survey, such as kimono fabrics and publications. This fact, together
with the similarity of the suggestions in the guidelines, confirms that the purpose of the rationalization guidelines -- for film
as well as other guidelines -- was in fact modernization, not import protection.
189Torihiki Jouken no Tekiseika Shishin (Guidelines for Rationalizing Terms of Trade), Tsusansho Kouhou, June 14,
1972, Section 2, pp. 11-30, Japan Ex. B-21.

(iii) suggested the disclosure of the basis or conditions upon which cash and volume discounts
were granted;
(iv) suggested the use of rebates to be minimized;
(v) suggested that the frequency of deliveries be reduced to improve efficiency;
(vi) suggested the adoption of minimum orders;
(vii) suggested that the merchandise be returned only if it was defective or damaged
(viii) suggested that accounts be settled in full either by cash or by promissory note and that
interest be charged on notes with exceedingly long periods;
(ix) suggested the elimination of the practice of dispatching employees with the exception
of when the sale of a product requires specialized knowledge.
In Japan's view, none of the measures above indicate any anti-foreign bias.
5.132 According to the United States, it was also a central focus of the 1971 Basic Plan to implement
rational transaction terms in the distribution sector "in order to prevent disruption of the [established]
order by foreign capital-affiliated firms, which have enormous capital strength."190
5.133 Japan responds that the United States takes a single sentence from this report and then jumps
to the conclusion that "a central focus" of the plan was to prevent foreign firms from disrupting the
"order of trade." This sentence is but one of four reasons for rationalizing such traditional trade
practices. More importantly,Japan notesthat the United States takes this sentence out of propercontext.
This sentence refers back to the introductory paragraph of this section, which identifies traditional
"irrational" practices. There is nothing at all improper about a concern that dominant firms -- whether
they are domestic or foreign firms expected to enter the market -- not abuse their market power. The
Foreword makes clear that the overall thrust of the report was:
"an urgent need to improve distribution functions in response to the shift toward an
information society and a consumer-oriented economy, and also to save labour and
improve productivity in response to the worsening labour shortages."191
For Japan, it is clear that the push for systemization served a number of policy objectives. In fact,
the vast bulk of the report focuses on a broad range of issues completely unrelated to this quotation
cited by the United States out of context.
(b) 1970 Guidelines
5.134 The United States argues that in 1970, the Japanese Government cemented its efforts on
transaction terms by issuing the "Guidelines for Standardization of Transaction Terms for Photographic
Film".192 The Guidelines strengthened the transaction terms, and the net effect was to shift the financial
burden from wholesalers to retailers, making the latter vulnerable to control from dominant suppliers.
The Guidelines noted potential concerns with rebates under the Antimonopoly Law but at the same
time recognized their value. The Guidelines reiterated the call for toughened transaction terms. They
noted that wholesalers generally had been repaying outstanding balances in full within 60 days (whereas
1901971 Basic Plan, p. 10, US Ex. 71-10.
1911971 Basic Plan, p. 4, Japan Ex. B-18.
192US Ex. 70-4.

previously payment terms had been 210 days), but that problems still existed with the retailers.
Specifically, retailers continued to rely heavily on credit and enjoyed unusually long payment terms.
The United States asserts that the Guidelines called for strict tightening of these terms, stating that
accounts should be settled in full in cash or promissory notes with appropriate interest. This tightening
of transaction terms amounted to again shifting the financial burden, this time from wholesalers onto
retailers, making the latter vulnerable to control from dominant supplies through such means as the
use of rebates.
5.135 According to the United States, the domestic photographic industry understood that MITI viewed
the use of rebates as a means to systemize distribution in the face of foreign competition. The United
States points to an article on liberalization in a leading photo industry journal, which stated that "MITI's
guidelines for standardizing transaction terms are what might be called an ‘ immunization'." The article
noted that it was important to "clarify and rationalize transaction terms . . . out of concern that, as
liberalization moves forward, the trading system would be disrupted." The article elaborated that "the
Guidelines themselves may be described as an attempt to equalize the conditions of competition." For
instance, rebates were adopted so that once they become common practice in the industry, "the influx
of foreign capital may be checked by the application of the Antimonopoly Law."193
5.136 Japan argues that the 1970 Guidelines were simply general suggestions and lacked any legal
force. Japan maintains that the recommendations contained in the Guidelines were completely
unremarkable. Significantly, Japan points out that the recommendations in the 1970 Guidelines did
not in any way distinguish between imported and domestic products. Japan argues that there is nothing
in the Guidelines that can be construed as encouraging the creation of an exclusionary market structure.
Further, the relationship between manufacturers and wholesalers was not even the focus of the 1970
Guidelines. In Japan's view, the recommendations in the 1970 Guidelines concentrated on transaction
terms between wholesalers and retailers.
5.137 In response to Japan's assertion that its only measure regarding transaction terms was the 1970
MITI Guidelines which in Japan's view were merely suggestions, the United States alleges that MITI
made it clear that it expected that the photographic film industry would implement the Guidelines with
veiled threats of possible legislative action if industry did not respond, along with the demand for industry
to follow up with a report to MITI on progress on implementing the transaction terms. The United
States notes that MITI published the final Guidelines in March 1970 in an industry journal and requested
industry associations to formulate and implement more specific transaction terms based on the Guidelines.
In response to MITI's demand, the photospecialty wholesalers association in November 1970 promptly
published a "Transaction Outline" to implement the associations own transaction terms, and the
association reported the outline to MITI.
5.138 The United States argues that the 1970 Guidelines were preceded and followed by a "near
continuous series of measures", and the monitoring by MITI of the implementation of its Guidelines.
This extended interaction between government and the private sector regarding transaction terms
demonstrates the extent to which the Government of Japan went to ensure that its policies were followed
by the industry. Repeated advocacy and monitoring built peer pressure and served to as a constant
reminder thattheGovernment was constantlywatching. The UnitedStates alsoassertsthatMITI applied
pressure through the Chamber of Commerce. The Chamber has at its disposal a great deal of authority
to influence the dispensing or withholding of government benefits, and also acts as an information
gatheringarm forMITI. Consequently,medium and small scale enterpriseswouldhave second thoughts
before ignoring the Chamber's guidance on transaction terms.
193Draft a Standard Contract for Film and Criteria for Standardization of Transaction Terms, Zenren Tsuho, August 1971,
US Ex. 71-11. Japan disagrees with the US translation of this quote from the 1971 Standard Contract. See translation issue 8.

5.139 The United States further argues that to further promote standardization of transaction terms,
MITI in1971commissionedthe Japan Chamber of Commerce todraft standardcontractsfor 14different
products, including photographic film. This was followed by the publication by the Chamber in 1972
of the standard transactioncontract for photographic film. The United States concedes that the Chamber
standard contract did not mention standardization of transaction terms but asserts that the very publication
of a standard contract by Japanese industry amounts to an exercise in standardization. Moreover, MITI
continued its efforts to underlie the importance of standardized transaction terms. In 1973, MITI
compiled and published under its name materials by the quasi-governmental Transaction Terms
Stabilization Committee. This Committee's findings emphasized the importance of standardization
of transaction terms as essential for systemization of distribution activities as well as being a
countermeasure against foreign capital.
(i) Impact of the Guidelines
5.140 The United States further argues that in response to the direction given by MITI, Fuji and
Konica implemented tough new transaction terms that increased their control over wholesalers and
retailers. The Japanese photographic materials industry instituted an aggressive program of volume-based
rebates and tightened payment terms for their distributors.
5.141 According to the United States, the new standardized trade terms had precisely the effect the
Japanese Government intended. Volume rebates encouraged wholesalers to purchase from a single
source (to achieve the rebate target) rather than from multiple sources, thereby promoting exclusivity.
According to photo industry press and studies, the new transaction terms were instrumental in turning
the wholesalers into exclusive agents of the Japanese manufacturers and in vertically integrating
distributors.194 The United States cites as an example, a Japanese study of the competition between
Fuji and Konica published in 1980 which examined the factors behind distributors becoming Fuji's
exclusive agents -- and pointed to progressive volume rebates as the main factor.195 The United States
furtherargues thatthe manufacturers' coordinatedpolicyof tighteningpayment terms (payment rebates)
strengthened the manufacturers, often at the expense of wholesalers.196
5.142 The United States further asserts that the smaller wholesalers and retailers at first resisted these
standardized terms, but were eventually pressured into submission. Another turning point, in the US
view, was the 1968 bankruptcy of Chuo Shashin, a relatively large photo industry wholesaler.
Consequently, wholesalers and retailers considered how best to avoid a similar fate and concluded that
making independent business decisions entailed greater risk than following the dictates of the industry.
The United States cites the following passage in support of their contention:
Tokuyakuten [primary wholesalers or special contract agents] realized the need to correct their
sales posturesafter the[financial] failureof Chuo Shashin. If certaintokuyakutentakeadvantage
of this opportunity and offer lower prices or long term, sight credit, customers will probably
lean towards those with looser transaction terms. However, such tokuyakuten will have the
same problem that Chuo Shashin had. That is why primary wholesalers should have tougher
collection standards.197
5.143 Japan responds that the bankruptcy of Chuo represented a dramatic example of the underlying
business rationality of having reasonable payment terms. Thus, observers in this industry had a
194Wholesale: So-called Keiretsu-ka Problem -- Course Unclear, Nihon Shashin Tsushin, 1 November 1967, US Ex. 67-14.
195Niizu Sgigeyuki, Fuji Photo Film vs. Konishiroku, 1980, US Ex. 80-1.
196Fuji Film's Result of Stricter Policy on Receivables, Zenren Tsuho, March 1968, US Ex. 68-2. Japan disagrees with
certain US translations contained in Ex. 68-2. See translation issue 9.
197Get ready for Breakthrough; Trade Normalization Further Advanced; Proposed to Increase Profit; Concern About
Impact on Retailers, Camera Times, 19 March, US Ex. 68-3.

compelling business lesson of the importance of rational payment terms, a lesson that predated both
the 1969 Survey in this industry and the 1970 Guidelines that formalized MITI guidance on this issue.
This industry had no need to wait for MITI guidance before considering and taking action in accordance
with individual economic self-interest. Indeed, the United States itself goes on to explain, that the
Fujifilm primary wholesalers began tightening their payment terms to retailers, after the Chuo bankruptcy
but before the 1970 Guidelines.
5.144 The United States argues that the pressure put on the primary wholesalers by the new transaction
terms turned into an immediate loss for foreign manufacturers because once progressive rebates were
introduced, the wholesalers had a strong incentive to deal only with the leading manufacturers - the
Japanese producers. In addition, Fuji and Konica pressed their systemization efforts beyond the
wholesalers down to the retailers. Despite initial resistance from retailers, MITI pressed forward with
the Guidelines because of their importance as a liberalization countermeasure. This was strengthened
further by the formulation of the 1971 Basic Plan.
5.145 Japan argues that the US allegations completely mischaracterize the 1970 Guidelines. According
to Japan, the 1970 Guidelines explicitly discouraged the use of rebates and did not call for shorter
payment terms. It is quite clear, in Japan's view, from what was actually written in the 1970 Guidelines,
that they were unrelated and even inimical to the establishment of single-brand distribution.
5.146 Japan further argues this effort by the United States to avoid the text of the 1970 Guidelines
overlooks several key points. First, the 1970 Guidelines say nothing about "progressive" rebates, and
in fact discourage rebates generally. Second, although the 1970 Guidelines do encourage volume
discounts,the statedrationale isfor greater efficiency, notencouraging "channel exclusiveness." Third,
even if one of the consequences of volume discounts is some tendency toward larger volume purchases
from fewer suppliers, that business decision rests with the wholesaler. Regardless of the MITI
recommendations, all of the actions -- either manufacturers deciding to offer discounts or wholesalers
deciding to accept them -- are purely private business decisions.
5.147 According to Japan, as to payment terms, MITI’ s recommendations were also completely
unexceptional. The 1970 Guidelines did not call for shorter payment terms.198 MITI was merely
stating that, after a certain period, suppliers should charge their customers interest for late payment.
Late payment charges are not novel or unusual; rather they are a completely normal term of credit
arrangement. It is simply not credible to contend that the institution of late payment charges is a
draconian assertion of control by suppliers over their customers.
5.148 According to Japan, the United States argues that "wholesalers would no longer benefit from
what amounted to easy credit from the manufacturers." Japan believes the US position would require
the Panel to believe that a MITI statement simply that "[for promissory notes with unusually long sight],
appropriate interest should be charged ..." set in motion the following chain of events: (1) all
manufacturers will in fact change their policy; (2) the policy change will be so dramatic as to materially
affect the wholesaler; (3) the wholesaler will be driven to financial desperation; (4) all suppliers but
one will ignore its financial plight and insist on tighter terms; (5) a single supplier will craftily offer
more flexible terms, and finally, (6) that wholesaler then will have no choice but to abandon all other
suppliers’ brands and instead reluctantly become dependent on a single supplier.
198According to Japan, it should also be noted that, contrary to US assertions, the 1970 Guidelines do not call for uniform
or rigid standard payment terms. In fact, the 1969 Survey, which led to the 1970 Guidelines, notes "Many wholesalers point
to the period of payment collection, especially the period of draft site as an important issue of terms of trade. However,
the draft site highly depends on the financial circumstances and the policies of individual enterprises at the time of each payment.
Therefore, it is not appropriate to establish standards indicating that 90 days or 120 days are appropriate." 1969 Survey,
p. 14, Japan Ex. B-1.

5.149 The United States requests the Panel not to place undue emphasis on a single phrase in the
1970 Guidelinesthat rebates "shouldbe keptto a minimum". Instead, the Guidelines' recommendations
should be considered in their entirety:
"Rebates are generally awarded at the discretion of the sellers. Therefore, rebates
are widely used as a means of controlling the distribution process. However, their
excessive use may constitute an unfair trade practice under the Antimonopoly Law.
Even when it does not constitute a violation of law, the distribution process can in effect
be controlled. Also, it may make it difficult for recipients [of the rebates] to formulate
a clear management plan, and the final price may not fully reflect the merits derived
from rebates. In addition, the rebate system has become very complicated in recent
years, and the administrative burden of rebates has increased. In principle, discounts
should be used as a means to reward consumers for the benefits of large quantity
transactions. The use of rebates will be allowed as a supplementary means to achieve
other price policies. However, the use of rebates should be kept to a minimum."199
5.150 According to Japan, relationships between manufacturers and wholesalers were not even the
focus of the 1970 Guidelines. MITI's 1969 Survey, which led to the issuance of the 1970 Guidelines,
stated clearly that its analysis and recommendations were concentrating on transaction terms between
wholesalers and retailers. Japan further asserts that the imposition of unfavourable terms by any
manufacturer would have created incentives to switch suppliers, or at least add other suppliers so as
to play them off against each other and thereby secure more favourable arrangements. Thus even
accepting the United States' characterization of the 1970 Guidelines, in Japan's view, their effect logically
would have been the opposite of what the United States contends.
5.151 Japan believes the starting point for analysis should be the Guidelines themselves, and what
they said and did not say. Specifically, the Guidelines did not either mandate uniform transaction terms
or provide specific transaction terms to be followed by manufacturers, wholesalers, secondary dealers,
and retailers. The Guidelinesdid nothingmore thanmake general suggestions related to payment terms,
volume discounts and rebates. The United States has made no effort to establish that these payment
terms are at all remarkable. In fact, the payment terms cited by the United States are common in many
industries throughout the world. Moreover, payment terms are not the reason that the distributors
chose to become single-brand or remain single-brand. Payment terms, even the unremarkable ones
at issue here, are simply one element of the cost to the buyer.
5.152 Japan rejects the US argument that the wholesalers became more dependent on the manufacturers
and, in particular, on volume discounts and rebates. First, it should be noted that the 1970 Guidelines
did not encourage the use of volume discounts without reservation, and did it never encouraged rebates.
The Guidelines encouraged transparency if volume discounts were given, and discouraged the use of
rebates. Obviously, the more transparent the volume discount, the easier it would be for a competitor
to provide the buyer an offsetting incentive (e.g., lower price) to purchase its product rather than the
product of the manufacturer offering the volume discount. Thus, if anything, the encouragement of
transparency in granting volume discounts improved the position of competitors with a customer.
5.153 The United States responds that the Japanese Government effectively ensured that wholesalers
could not turn to alternative suppliers for more competitive transaction terms. The Japanese
Government’ sadvocacyandmonitoringofstandardizedtransactionterms--bothbetweenmanufacturers
and wholesalers and between wholesalers and secondary wholesalers and retailers -- helped create the
discipline to achieve standardization.
199US Ex. 70-4.

(ii) Timing
5.154 Japan arguesthat,according tothe UnitedStates, MITI's distributionpoliciesduringthe 1960's
and 1970's, i.e., the so-called "systemization" policies, formed the centrepiece of its alleged strategy
to block imports of consumer photographic film and paper. Japan recalls that the United States argues
that MITI encouraged and facilitated the creation of a closed and exclusionary market structure for
consumer photographicfilm and paper. In Japan's view, however, there is nocausal connectionbetween
the policies that were being followed by the Government of Japan and the resultant market structure.
5.155 Japan argues that the US theory has intractable timing problems. According to Japan, domestic
manufacturers had begun to reform their payment and rebate policies in the early 1960's, long before
the 1970Guidelines. Fujifilm revisedits existing volume rebate policy over a year earlier on 21October
1966. This policy remained unchanged from 1966 until 1974.200 Fujifilm’ s volume discount policy
therefore precedes both the 1970 Guidelines and the 1967 Cabinet Decision.201 In addition, Fujifilm
made no change in its policy in response to the 1967 Cabinet Decision. Fujifilm had already tightened
payment terms in April 1966.202 In fact, the average number of days required for Fujifilm to receive
payment from its primary wholesalers had already dropped during the first half of fiscal year 1966,
which began on 21 October 1965.203 Indeed, Konica began tightening its payment terms as early as
1962.204 In addition, three of Fuji's four major primary wholesalers were already single-brand
distributors by 1968, two years before the guidelines were issued. While Fuji's fourth primary
wholesaler, Asanuma, did not become a single-brand distributor until after the issuance of the Guidelines,
it only made this private business decision after Kodak explicitly refused to deal with it directly. Japan
goes on to state that, as to the other domestic manufacturer, Konica, all of its primary wholesalers
had been single-brand distributors by 1955. According to Japan, therefore, there was no causal
connection between the 1970 Guidelines and the development of single-brand wholesale distribution
inthe film sector. In Japan'sview, the Japanese manufacturers had perfectly rationalbusinessincentives
for taking these actions.
5.156 The United States responds that the Japanese photographic materials manufacturers instituted
an aggressive program of volume-based rebates and tightened payment terms for their distributors in
October and November of 1967, just a few months after the June 1967 Cabinet Decision's call for
the industry to modernize distribution to resist foreign competition. Their move to implement these
transaction terms was also consistent with the Second and Fifth Interim Reports' call for the greater
use of "volume discounts" and a move away from long payment terms.205 The new terms included
volume based rebates, in which wholesalers received rebates for reaching target sales volumes. They
also included "payment rebates," in which the wholesalers received a rebate if they made prompt
payment, but the amount of the rebate was reduced for each additional time period that payment was
200See Affidavit of Tanaka Takeshi, p. 3, Japan Ex. A-10.
201According to Japan, while the United States claims that Japanese film manufacturers tightened payment terms in November
1967, it has misunderstood the article it cites to support this assertion. Manufacturers in fact tightened payment terms much
earlier. Fujifilm, for example, tightened payment terms in April 1966. See Fujifilm’ s Result of Stricter Policy on Receivables,
Zenren Tsuho, March 1968, US Ex. 68-2; Affidavit of Tanaka Takeshi, p. 3, Japan Ex. A-10. Japan argues that even if
the date cited by the United States were correct, however, the fact remains that payment terms were tightened prior to the
1970 Guidelines.
202See Fuji Film’ s Result of Stricter Policy on Receivables, Zenren Tsuho, March 1968, US Ex. 68-2.
203Based on these average statistics, Japan notes that Fujifilm estimates that payment terms were tightened around 20
October 1965 Affidavit of Tanaka Takeshi, p. 3, Japan Ex. A-10. An article appearing in the Zenren Tsuho supports this
assertion. Fujifilm’ s Result of Stricter Policy on Receivables, Zenren Tsuho, March 1968, p. 5-7, US Ex. 68-2. ("It is
now clear that it was two years back, just before 20 April 1966 ... that Fujifilm started to try to improve its receivables
and related shipments.")
204Affidavit of Haruyoshi Okuyama, p. 3, Japan Ex. A-18.
205Second Interim Report, US Ex.65-2; Fifth Interim Report, US Ex. 66-3.

delayed, and after the potential payment rebate reached zero, the volume rebate was reduced as payment
delays continued. According to the US, these rebates were tantamount to tightened payment terms.
5.157 The United States continues that Japan actively pressed for standardized transaction terms in
the 1968-75timeframe preciselyasJapan was loweringitstariffs and movingtowardthisfirstsignificant
liberalization of capital investment. MITI's repeated and active efforts to standardize the terms (including
through publicizing the particular terms applied by individual wholesalers) served to standardize those
terms at this time when standardization was most needed to resist the imminent threat of foreign
competition. Japan's timingwas rightonthe mark regardingthe second goalas well. AlthoughJapanese
manufacturers had implemented rebates, volume discounts, and shortened payment terms before the
1970 Guidelines, the 1969 survey and the 1970 Guidelines themselves noted that rebates and volume
discounts were less widely used between primary wholesalers and secondary wholesalers and retailers.
5.158 According to the United States, Japan admits it held off foreign investment in the distribution
sector in order to ensure that foreign manufacturers could not establish their own distribution networks
in Japan until Japanese manufacturers had restructured their own distribution networks and made them
more efficient. The pressure put on the primary wholesalers by the new transaction terms turned into
an immediate loss for foreign manufacturers. Prior to the institution of the Government-directed new
transaction terms, two primary wholesalers served as major marketing and distribution channels for
imported film: Asanuma, Japan's dominant photospecialty wholesaler, and Misuzu, another large
nationwide wholesaler. However, once the progressive rebates were implemented, these wholesalers
had a strong incentive to deal with only the leading manufacturers -- the Japanese producers. The
shortened payment terms also weakened the wholesalers' financial condition, making them more
vulnerable to control from the Japanese manufacturers.
(c) 1990 Guidelines
5.159 Japan points out that efforts towards distribution rationalization did not end in the 1970s.
In 1990, MITI issued the "Guidelines for Improving Trade Practices".206 Not surprisingly, these
Guidelines addressed many of the same traditional irrational business practices targeted by the various
industry-specifictrade rationalizationguidelines 20years earlier. Thisis proofthatJapan didnotchange
its basic policies. The objective of reforming traditional but outmoded distribution practices made
sense in 1970 and it still made sense in 1990. Japan stresses that in recent years the United States
has pressured Japan to be more aggressive in encouraging its industries to follow these policies.
5.160 Japan notes that the 1990 Guidelines emerged from an inquiry by the Minister of International
Trade and Industry, who requested the Distribution Committee of the Industrial Structure Council to
revisit the issue of distribution rationalization during the US-Japan Structural Impediments Initiative
("SII") talks. Japan indicates that after receiving the Distribution Committee's interim report, MITI
sent the 1990 Guidelines, which constituted one part of the interim report, to 141 different industrial
associations.
5.161 The United States concedes that the 1990 Guidelines arose out of international pressure on
Japan to increase market access, includingthe SII talksbetween Japan and the United States. In response
to that pressure, Japan introduced guidelines indicating that "international harmony is required" and
businesses "must give consideration so as not to have their business practices become obstacles to others
[including foreign suppliers]."207 This statement contrasts with the repeated calls to take countermeasures
206Shoukankou Kaizen No Kihonteki Houkou Ni Tsuite (Basic Direction for the Improvement of Commercial Practices),
20 June 1990, [hereinafter "1990 Guidelines"], US Ex. 90-5, Japan Ex. B-22.
2071990 Guidelines, p. 2, US Ex. 90-5.

"in order to prevent disorder arising from"208 the incursion of foreign capital enterprises, stated in many
of the key documents from the late 1960's and early 1970's.
5.162 The United States contends that based on these positive statements, in various exchanges with
the Government of Japan, it has taken the view that the 1990 Guidelines have the potential to help
improve market access in the distribution sector (as Japan promised), if Japan in fact implements the
policies indicated in these positive statements. According to the United States, however, Japan has
not implemented these policies in the photographic materials sector (or indeed any other sector, as
far as the United States is aware). Japan's failure to implement these policies led the United States
to state, in its November 1996 submission to the Government of Japan on deregulation matters, that
Japan should implement what these Guidelines provide for. Moreover, this failure of implementation
led the United States to conclude that Japan in fact has not changed its basic policies on distribution,
and in fact has not implemented the positions stated in the 1990 Guidelines to correct the restrictive
structures in the distribution system for photographic film and paper.
5.163 The United States emphasizes that in considering the implementation of the 1990 Guidelines,
it is important to bear in mind that Japan implemented its distribution policies, beginning in the 1960's
and 1970's, not by a mere announcement of Guidelines in 1970, but based on the back-and-forth process
of "concerted adjustment" between government and industry. That process spanned years and involved
near-constant government surveying and consulting with the domestic industry, building consensus,
issuing reports and guidelines, following up with more surveys and guidance to industry. It was the
combination of these actions -- the leadership, monitoring, and close follow-up by the Government -
-- that made effective the Japan's policies to limit foreign access to the its distribution system. Thus,
it would take even greater efforts by MITI to undo what it has done, particularly because the formation
of this system in the first instance was in the interest of Japanese manufacturers, whereas its dismantling
would pose a direct challenge to the two-company oligopoly of Fuji and Konica.
5.164 The United States argues that as far as it is aware, Japan has undertaken no actions in the
photographic film and paper sector to follow-up on the 1990 Guidelines. Specifically, MITI has not
pursued any meaningful actions to reverse its policies on transaction terms or to address the restricted
structure of the distribution system for photographic film and paper in Japan. Moreover, the exclusionary
distribution system remains in force in the form it existed in 1990, and an elaborate system of rebates
and discounts continues at various levels of the distribution system in this sector.
5.165 The United States further argues that in addition, nothing in the 1990 Guidelines indicates that
MITI no longer favours standardized transaction terms as a means to blunt competition from foreign
manufacturers. Japan's interpretation of the Antimonopoly Law continues to provide that the use of
transaction terms departing from standard industry terms can be an unfair trade practice, and the
Antimonopoly Law continues to require reporting of all contracts between foreign manufacturers and
Japanese distributors.
5.166 According to Japan, the 1990 Guidelines address many of the same traditional irrational business
practices targeted by the various industry-specific trade rationalization guidelines 20 years earlier.
For example, the 1990 Guidelines note that many of the rebates paid by wholesalers and manufacturers
are based on complex or unclear criteria, that unsold merchandise is often returned, that frequent small
deliveries are required at the suppliers' expense, and that suppliers often dispatch employees to expand
the sales force of retailers.209 Just as in the various industry specific guidelines of the 1970's, the 1990
Guidelines suggest as "directions for improvement" that rebate conditions be clarified and that the use
of rebates be kept to a minimum, that returns should not be allowed except in cases where the
merchandise has been damaged or is defective, that the cost burden for deliveries be shared equitably
2081970 Guidelines, US Ex. 70-4.
2091990 Guidelines, pp. 2-4, 5, 8-9, Japan Ex. B-22.

between suppliers and retailers, and that the practice of dispatching employees be limited to cases in
which the supplier has something to gain and is not being coerced by the retailer.
5.167 Japan argues that the close similarities of the 1970 Guidelines and the 1990 Guidelines are
not at all surprising from its perspective, but they possess a serious problem for the US claims. From
a Japanese perspective, both sets of guidelines pursue the same basic policy agenda, i.e., eliminating
"irrational" business practices to modernize the Japanese distribution industry. From the US perspective,
there must be some reason why the 1970 Guidelines are a problem while the 1990 Guidelines are sound
policy that should be encouraged. Japan argues that as recently as in November 1996 the official US
position was that MITI should "monitor and report" on the Japanese industry's compliance with the
1990 Guidelines "in order to promote a free, transparent, and competitive distribution system."210
This US Government request is completely consistent with the Japanese Government's view of its
distribution modernization policies, but it is at odds with the theories presented by the US to this Panel.
5.168 The United States counters, however, that with respect to rebates, the 1990 Guidelines depart
in an important respect from the many policy documents of the late 1970's addressing transaction terms.
Specifically, regarding rebates, the United States stresses that the 1990 Guidelines emphasize that:
Itisdesirablefor manufacturerstovoluntarilyrefrainfrom offeringrebates aimedatmaintaining
a keiretsu-based relationship in order to prevent manufacturers from exercising excessive
influence over the business of retailers.211
5.169 In Japan's view, the major difference between the 1990 Guidelines and the earlier ones is
that now modernization is specifically identified as necessary for (among other things) improving imports'
access to the Japanese market.212 Therefore, opaque rebates were criticizedbecause new foreignentrants
would have trouble knowing what terms they would have to offer to be competitive.213 Requirements
for frequent small deliveries were also characterized as hindering the entry of imported products into
the marketplace.214
6. OTHER DISTRIBUTION "COUNTERMEASURES"
5.170 According to the United States, Japan took additional steps to ensure that foreign firms could
not utilize their capital strength to attract wholesalers by providing more favourable transaction terms
than those offered by domestic firms. Two mechanisms for accomplishing this were (1) to severely
limit foreign firms' ability to offer financial inducements to distributors, and (2) to subject foreign
firms toanti-monopolyscrutinyif theydeparted from the standardtransaction terms thatthe government
had mandated.
(a) JFTC Notification 17
5.171 The United States notes that on 20 May 1967, the JFTC issued Notification 17, "Restrictions
on Premium Offers to Businesses."215 Notification 17 essentially prohibits a consumer goods
manufacturer from offering cash or other "premiums" to wholesalers or retailers as an inducement
for the wholesaler or retailer to begin handling the manufacturer's products, or to reach a certain level
210Submissionby theGovernmentof theUnited Statesto theGovernment of Japan RegardingDeregulation, Administrative
Reform and Competition Policy in Japan, 15 November 1996, p. 7, Japan Ex. B-23.
2111990 Guidelines p. 8, US Ex. 90-5.
2121990 Guidelines, p. 2, Japan Ex. B-22.
213Ibid., p. 2.
214Ibid., p. 8.
215US Ex. 67-4.

of sales of a manufacturer's product. Notification 17 took away an important means a foreign
manufacturer could otherwise have used to attract customers.
5.172 The United States asserts that Item 2-4 of Notification 17 contained an exception to its prohibition
on inducements to distributors that allowed a manufacturer to offer premiums to employees of distributors
and retailers who were in exclusive, vertically-integrated relationships with the manufacturers. The
Japanese manufacturers who had achieved exclusivedealing arrangements withwholesalers orretailers,
could offer unlimited premiums (including cash) to the employees of those wholesalers and manufacturers.
Foreign manufacturers, which had no direct relationships with Japanese wholesalers because of Japan's
requirement that they deal with a sole import agent, were prohibited from offering such inducements.
The United States further asserts that the JFTC described this Notification as "a breakwater before
liberalization."216
5.173 Japan responds that low price offers, rebates and offers of goods to assist the other parties'
promotional activities were outside the scope of the Notification. Although the United States would
like to give the impression that "photographic materials" were expressly singled out as one of the
industries covered by the Notification, almost all the industries producing goods consumed or used
in every day life - more than 100 industries ranging from automobiles to soap - were covered. In any
event, the regulation restricted only excessive premium offers - not normal promotional activities -
to distributors. The rationale was that such offers could impair fair and free price competition in the
distribution and could increase the distribution cost to the detriment of consumer interests.
5.174 Japan further argues that the US argument concerning Item 2-4 of the Notification contains
a fundamental misunderstanding. 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 operations within a single entity.
Fuji and its primary wholesalers were not eligible for the exception because they were not in a special
relationship.
5.175 Japan indicates that as price competition intensified at the distribution level due to changes
in the Japanese economy since 1967, distributors tend 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 in April 1996 in the course of the review of the Premiums
Law. In Japan's view, it should fall outside the scope of the present proceedings.
5.176 While the United States concedes that Notification 17 has been repealed, it maintains that there
are other provisions that make that repeal meaningless. According to the United States, premiums
from manufacturers to wholesalers are still subject to JFTC Designation 9 of JFTC Notification 15
of 1982. This provision governs the use of "unjust inducements" under the Antimonopoly Law and
prohibits premium offers in excess of "normal business practice".
5.177 Japan responds that JFTC Designation 9 of JFTC Notification 15 of 1982 does not violate
the WTO Agreements. Moreover, Japan emphasizes that Designation 9 has not been specifically
identified in the US panel request and thus is outside the Panel's terms of reference.
(b) International contract notification
5.178 The United States argues that through the TransactionTerms Standardization Committee report
and the 1970Guidelines, MITI workedto developstandardtransactionterms and toensure thatdomestic
216Severe Restrictions Placed on Business for Premium Offers: Shatokuren Hears JFTC Explanation at Jyosui Kaikan
on the 12th. Nihon Shashin Kogyo Tsushin, 20 June 1967, US Ex. 67-8.

industry would follow them. Japan found an effective tool to achieve this objective through the use
of the international contract notification provision of the Antimonopoly Law. Article 6 of this Law
requires parties entering into an "international agreement" or "international contract" to submit a copy
of the contract to the JFTC. Contracts between domestic firms are not subject to similar notification
requirements. The discriminatory reporting requirement, coupled with the use of administrative guidance,
formed an effective combination of tools for discovering and preventing the use of transaction terms
that were not in accord with the systemization policy.
5.179 AccordingtotheUnitedStates, therefore, althoughdomestic manufacturers werefree toexecute
distribution agreements without the notification to an examination by the JFTC, contracts involving
foreign manufacturers were subject to the international contract notification to, and examination by,
the JFTC. In addition, the responsibility to notify rested with the domestic distributors. The result
is that if a foreign producer had offered a wholesaler more favourable terms than those called for by
the Japanese Government, the wholesaler would have had to submit a copy of an international contract
that blatantly revealed that the company was challenging Japanese Government policy and measures.
For the United States it follows, therefore, that if foreign manufacturers offered wholesalers more
favourable terms than domestic manufacturers, those contracts would be brought to the attention of
the Japanese Government.
5.180 Japan responds that the provision of the Antimonopoly Law concerning international contracts
has its basis in the prohibition of participation in any international cartel under the 1947 Imperial Decree
issued during the Allied Occupation. The notification requirement serves to ensure compliance with
the prohibition, and has existed since 1947. In Japan's view, it is very obvious that the mechanism
was not designed as part of "countermeasures" for rationalization of the distribution against foreign
investments. The review by the JFTC is concerned only with competition policy, and does not examine
whether or not the conditions were favourable to Japanese distributors nor does it serve as a guide
for applicants to modify contracts in favour of Japanese distributors.
5.181 The United States points out that the JFTC’ s 1971 annual report shows that the international
contracts of foreign manufacturers were scrutinized by the JFTC.217 According to the report, the JFTC
took action to ensure that import agents complied with the international contract notification requirement,
received 484 notifications from import agents, and gave particular attention to film import agents.218
This scrutiny inhibited foreign firms from offering attractive terms to wholesalers while the systemization
program was being put in place. The JFTC’ s report indicates that the JFTC’ s purpose was to solve
"problems resulting from liberalization of the Japanese economy involving international transactions,"
and that Rule No. 1 of 1971 was a "first step" toward addressing these "problems."
5.182 The United States notes that Japan argued that US manufacturers' activities in Japan were
not subject to this international contract notification provision. In fact, Rule No. 1 made clear that
international contract notification applies to contracts "between a domestic business and a foreign business
... for the purpose of conducting continuous sales ... in which the purchaser is [re]selling to a third
party."219 Thus, sales from Kodak to its import agent, Nagase, were covered by this provision.
Moreover, any relationship between Kodak and Japanese wholesalers would be subject to this provision
as well. Equally important, the United States pointed out that the JFTC has relied extensively on
informal guidance in taking action under the international contract notification provision. The United
States referred to the explanation of a Japanese scholar that the JFTC may legally apply guidance under
the contract notification provision even if the JFTC does not have enough evidence to conclude that
an Antimonopoly Law violation exists. The expert noted that "in Japan, corrective (administrative)
guidance, in the context of the notification system, has ensured the effectiveness of restrictions on
217JFTC Annual Report 1971, US Ex. 71-4.
218Ibid.
219Ibid.

internationalcontracts."220 Thisuseof informalguidance, combinedwiththeneed toreportinternational
contracts, has chilled the ability of foreign manufacturers to offer more competitive terms.
5.183 Japan responds that the JFTC Annual Report of 1971 merely notes that the JFTC urged various
industries (e.g., western liquor, lemon, fountain pens) to notify international contracts, and that it did
not exercise any guidance with respect to film products. Only 13 cases of guidance were given to
all industries and no guidance was given to the photographic industry. Moreover, not all international
contracts had been required to be notified, and the contracts between Kodak Japan Limited and Japanese
distributors were not required to be notified under the Antimonopoly Law.
5.184 Japan emphasizes that, while the requirement for international contract notification was technically
still in effect at the initiation of this Panel proceeding, a bill to repeal the international contract
notification requirement was passed by the Japanese Diet in June 1997 which amended Article 6(2)
of the Antimonopoly Law and simultaneously abolished JFTC Rule No. 1.
7. SYSTEMIZATION: PHYSICAL AND INFORMATION LINKS
5.185 The United States argues that simultaneously with MITI's policy to standardize transaction
terms, MITI promoted two other types of linkages between manufacturers and distributors. First, MITI
provided financial and managerial support to encourage "physical" ties, particularly joint distribution
centers, for which Japanese manufacturers and distributors would share control, operations, and often
ownership. Second, MITI provided support for the development of inter-company computer ties to
specific sectors attempting to systemize distribution channels. In the US view, such "informational"
ties bind distributors together under the dominance of manufacturers.
(a) Physical links and the 1975 Manual
5.186 The United States alleges that an important element of the systemization program was the
regulation of the physical movement of goods through the distribution system in such a way as to
encourage the vertical alignment of wholesalers and retailers under individual Japanese manufacturers.
Japan used guidance and financial incentives to persuade manufacturers, wholesalers and retailers to
cooperate in the establishment and use of centralized joint delivery and processing centers. A
government-coordinated effort assured that this interweaving of a Japanese manufacturer with multiple
wholesalers and retailers would tighten the bonds between the firms in a vertically integrated system,
enhancing the manufacturers' control over its distributors. It is alleged that the Sixth and Seventh Interim
Reports of the Distribution Committee introduced this policy.
5.187 According to the United States, the Seventh Interim Report called for distribution "to progress
from a basis of centralized processing of physical distribution control at distribution centers ... established
jointly by multiple companies or the entire industry".221 It indicated that as part of the process of
physically integrating distribution operations, the manufacturers, wholesalers and retailers would need
to (i) unify product codes or transaction codes, (ii) standardize business forms and (iii) standardize
packing types. The United States argues that these steps would tie participating companies closer together
and make it more cumbersome to transact business with companies that did not operate in accordance
with these standards.
5.188 In Japan'sview, as theIndustrialStructureCouncil's DistributionCommittee itselfrecognized,
standardization of distribution practices should make the Japanese market more permeable by imports,
not less. Specifically, its Seventh Interim Report in 1969 recognized that "one effect of systemizing
Japan's distribution system is the simplification of entry [into Japan's market] by foreign capital, which
220Murakami Masahiro, Dokusenkinshiho [Antimonopoly Law], 15 March 1996, p. 19, US Ex. 96-4.
221Seventh Interim Report, p. 7, US Ex. 69-4.

are more adept at systems methodology."222 Standardization would alleviate the burden of having to
adjust to hundreds or thousands of individualized ways of doing business, and thus should facilitate
market penetration by outsiders.
5.189 The United States notes that Japan selectively quotes only the first half of a sentence in the
Seventh Interim Report. The second half of the sentence makes clear that allowing foreign enterprises
to lead systemization was the last thing Japan wanted:
"While it is true that one effect of systematizing Japan’ s distribution system is the
simplification of entry [into Japan’ s market] by foreign capital, ... we should instead
emphasize preventing the immense impact that would be felt if foreign capital took
the lead in systematizing Japan’ s distribution activities, and quickly develop a system
sufficiently capable of resisting the rational systems introduced by foreign capital."223
5.190 The United States further submits that Japan continued to direct physical linkages among
manufacturers, wholesalers, and retailers in the 1971 Basic Plan for the Systemization of Distribution
and the 1975 Manual for the Systemization of Distribution by Industry (Camera and Film). The
PhotosensitiveMaterials Committee, whichwas establishedfollowingarecommendationinthe Manual,
produced the Distribution Center Facilities Basic Plan. The Plan described as its purpose, according
to the United States, to improve distribution in response to "liberalization" in the photographic film
and paper sector. The Plan set forth a blueprint for establishing joint distribution facilities between
manufacturers and distributors. The United States also alleges that the Government of Japan provided
financing to help Konica form a joint distribution center with the four large photospecialty wholesalers
through which it had been marketing and distributing its products. The Photosensitive Materials
Committee recommended to MITI that the project be funded by the Japan Development Bank.
5.191 The United States further asserts that in 1975, the Distribution System Development Center
(DSDC), another MITI creation, and a photography industry "working group" produced a detailed
Manual224 for the systemization of distribution in the film and camera industries. According to the
United States, the Manual made clear that it was prepared as part of MITI's policy on systemization.
The Manual emphasized thatsystemizationmeant integration among firms. The Manual allegedlynoted
that Japan had lifted quotas on film imports in 1971 and reduced tariffs. As a result, the Manual
indicated that Kodak had been able to lower its prices to within a few yen of domestic producers' prices
and that imports of Kodak film and paper were rising. The Manual stressed the need "to improve
the structure of manufacturers to a capacity that will resist foreign-capital affiliated firms".225 The
Center expressed hopes for widespread adoption of the Manual by the industry.
5.192 The United States further argues that to ensure continued government-industry cooperation
toadvance systemization,the Manual called for the establishmentof anothergovernment-industrybody,
the Distribution Systemization Promotion Conference in the Camera and Film Industry. This organization
was supposed to promote systemization of distribution through surveys, information processing activities,
research and development, and standardization activities.
5.193 Japan responds that the information and recommendations contained in the 1975 Manual were
directed toward MITI for internal use, not private industry. According to Japan, therefore, the 1975
Manual can in no way be considered to have had a binding effect on private industry. The 1975 Manual
does, however, contain a few suggested recommendations in its final six pages including that:
222Ibid., p. 4.
223Seventh Interim Report, p. 4, US Ex. 69-4.
224Distribution System Development Center, Manualfor the Systemization of Distribution by Industry (Camera and Film),
March 1975, [hereinafter "Manual"], US Ex. 75-5.
225Ibid., pp. 27 and 122.

(i) transaction terms (such as payment terms, rebates, ordering practices) be improved
and standardized;
(ii) the various document forms and codes used in the camera and film industries be
standardized and unified;
(iii) the efficiency of the distribution of cameras and film be improved (through measures
such as the standardization of units, the standardization of pallet sizes, and a reduction
in the frequency of deliveries); and
(iv) the quality of information management be improved through the introduction of
computers.
5.194 Japan emphasizes that the Manual was submitted to MITI by the Distribution Systems Research
Institute for the internal use of MITI and not the other way around. The 1975 Manual was never released
outside the government.
5.195 According to Japan, there is no basis for assuming that MITI's systemization policies had any
exclusionary impact. MITI's policies recognized and addressed all distribution channels for film,
including distribution channels used by imports. Nagase's subsidiary Kuwada, a single-brand primary
wholesaler for Kodak, was a member of the wholesalers' trade association ("Shashoren") at the time
MITI's 1975 Manual was prepared,226 and Kodak was thus in a position to access information contained
in the Manual. Imports were not left out of the process. There is thus no reason to think that imports
would have encountered difficulties because they did not share the same standardized forms and practices.
5.196 Japan's position is that the objective of these policies was to foster computerization and
standardization of business forms and practices so as to improve information flow through the distribution
system. Accordingly, the subject matter of these policies was often very dense and technical: e.g.,
uniform invoice forms, standard pallet sizes, and other very specific recommendations. There was
not a hint of anti-import conspiracy.
5.197 The United States respondsthat however innocent these policies may seem, theyhad an indirect
effect of fostering vertical integration by encouraging closer coordination, greater sharing of information,
and standardization of forms and practices between manufacturers and wholesalers. According to the
United States, systemization made it harder for foreign producers to convince domestic distributors
to carry their products, since they were already so closely linked with domestic manufacturers.
5.198 Japan further asserts that the United States presents no evidence of any business changes
implemented pursuant to MITI recommendations that actually had the effect of making wholesalers
less likely to carry imported brands of film. In Japan's view, the United States has the burden of proving
its allegation that these facially neutral policies serving valid domestic policy objectives had the effect
of hindering imports; it is not up to Japan to prove the negative.
(b) Information links
5.199 The United States argues that related to the physical integration of distribution, Japan's
systemization policy also encouraged computer linkages among Japanese manufacturers and their
wholesalers. It was envisaged by the Japanese Government that information links would enhance
efficiency in distribution, and would also allow the manufacturer to know if any of the "systemized"
wholesalers dealt in significant quantities of a competitors' products. Japan recognized that such
2261975 Manual, at the list of "Collaborators in Study," US Ex. 75-5.

computer ties would foster ties between a Japanese photographic materials producer and its distributors
byraisingthe transactioncostsofdealingwithoutsiders. Inaddition,Japanese manufacturerscommonly
use such systems to "stabilize" or control distribution channels through the monitoring of distribution
systems. The United States indicates that a 1996 JFTC227 study concluded that such manufacturer-
distributor computer ties increased efficiency and also gave rise to three significant challenges for
competition:
(i) preventing competitors' entry into distribution;
(ii) maintaining prices; and
(iii) stabilizing transaction relationships between manufacturers and distributors.
5.200 The United States argues that MITI saw the development of information links as an integral
part of its distribution systemization efforts and, therefore, advocated computer linkages to cement
the vertical distribution system. After identifying the importance of information links, MITI created
beginning in the mid-1970's, a series of government-industry entities to facilitate the creation of computer
networks between Japanese manufacturers and Japanese distributor. The United States asserts that
the Japanese Government also worked closely together with private companies to develop computer
ties and address the variety of obstacles they faced in achieving this goal, including through low-interest
financing.
5.201 According to the United States, Japan was well aware that creating information links between
manufacturers and their distributors entails the risk of enforcing oligopolistic distribution structures
and limiting competition. The United States points to a JFTC study as evidence of this.228 In addition,
it cites the Distribution Committee's Ninth Interim Report229, which it alleges reiterates the importance
of strengthening information ties necessary to strengthen horizontal and vertical linkages:
"The basic plan for the method of advancing information of the distribution sector is
as follows. ... Second, is to offer guideposts on the ways individual or multiple
companies through cooperation can engage in information activities. One can think
of many situations with respect to the latter, in particular, such as a cooperative type
thatworkshorizontallyamong thebusinesses;a typethatclustersclientretailersaround
a powerful wholesaler that serves as its nucleus; a type where the fulcrum is an
organized system of integrated wholesale centers and the wholesale business districts,
etc. Guidelines should be established for each of these ... ."230
5.202 The United States further argues that the 1971 Basic Plan for Distribution Systemization231
called for the strengthening of information ties as a key element of distribution systemization. The
United States asserts that the plan specifically called for the creation at the national economic level
of distributioninformationnetworks,the implementationof jointinformationactivities,and the creation
of special organizations to promote the provision of distribution information. The plan stated "such
systemization of distribution must be realized through various stages: vertically from the intra-firm
level, horizontally on the inter-firm level to the national economic level. Furthermore, in seeking to
implement this, sufficient attention must be paid to the introduction of computers as an effective means
of achieving [such systemization]."232
227JFTC Investigation Division Information Management Office (Yamamoto Takeshi, Distribution 3 Problems and the
Antimonopoly Law, 2 June 1996), US Ex. 96-6.
228US Ex. 65-5.
229Industrial Structure Council Distribution Committee, Distribution for the 1970's (Ninth Interim Report), 22 July 1971,
US Ex. 71-9.
230Ibid. pp. 80-81 (emphasis added).
2311971 Basic Plan, US Ex. 71-10.
232Ibid., p. 4.

5.203 Japan responds that the United States presents no causal connection between the alleged guidance
and support of the Distribution Systemization Development Center as given in the 1975 Manual, and
the establishment by Japanese film manufacturers of on-line computer links with their primary
wholesalers. In fact, according to Japan, Fuji, the leading domestic manufacturer, did not establish
its first on-line connection with a primary wholesaler until 1989.233 Thus, Japan contends that, the
alleged systemization guidance that the United States claims was so effective in creating an exclusionary
market structure was in reality ignored for at least fourteen years.
5.204 The United States responds by citing a series of MITI actions to implement the integration
of distributors’ and domestic manufacturers’ computer systems that began with the 1975 Manual. The
key developments in MITI’ s assistance to this sector occurred in 1975, 1976, 1985, 1986, 1987, 1988,
and 1989 (the year that Japan claims Fuji’ s system was completed). The US arguments concerning
the assistance by the Japanese Governments in creating electronic information links during the period
between the publication of the 1975 Manual and the establishment of on-line connections between Fuji
and primary wholesalers in 1989 are described in more detail in section VI.D.3.(f) on "Electronic
information links".
(c) MITI/SMEA support for systemization
5.205 The United States alleges that with the growth of colour photography in the late 1960's and
1970's, the importance of photoprocessing laboratories grew. However, the technology and capital
equipment necessary to process colour film were beyond the reach of most small photo retailers. With
the Japanese Government's financial support, the manufacturers stepped in, establishing colour
laboratories and providing photographic paper and developing and processing services. These laboratories
were an important distribution channel for film because of the laboratories' strong ties to its retail
customers and its daily deliveries to them.
5.206 The United States further argues that the Japanese Government's support to domestic
manufacturers solidifiedtheircontrolof thisdistributionchannel. Japan providedfundingunder MITI's
Small and Medium-Sized Enterprises Act (SMEA). During the 1967-70 period, SMEA provided at
least 160 million yen to the effort of laboratory conversion. Aided by this government funding to the
laboratories, Fuji and Konica allegedly rapidly developed strong networks of affiliated laboratories,
which used their photoprocessing equipment, chemicals, and paper. Accordingly, foreign firms were
put at a strong disadvantage since they were unable to obtain this assistance. Approximately 84 percent
of the nearly 1,700 laboratories fall under the umbrella of one of the Japanese manufacturers and are
commonly affiliated with retail outlets.
5.207 The United States submits that in 1973 the photoprocessing laboratories were designated as
eligible for another SMEA subsidy program. The United States notes that the laboratories are a service
business. Consequently, lowered tariffs on photoprocessing equipment and a strengthened yen would
decrease the cost of imported photoprocessing equipment and materials, and therefore improve the
laboratories' bottom line. Liberalization would be a threat to the laboratories only if they were tied
in relationships with Fuji or Konica and did not feel free to purchase cheaper imported equipment and
materials. In this situation, concessionary government financing could help reduce the comparative
cost of purchasing domestic equipment and materials, and therefore help form or continue the bonds
between laboratories and domestic film and paper manufacturers.
5.208 The United States asserts that the administration of the SMEA financing programs helps ensure
that loans are dispensed in conformity with MITI industrial policy. Loans are approved on a case-by-case
basis, at the discretion of a MITI certified management consultant. These policies have contributed
233Affidavit of Tanaka Takeshi, pp. 3-4, Japan Ex. A-10.

to Fuji's strong and excessive ties with photoprocessing laboratories in Japan, and it is these ties that
have reinforced Fuji's dominant position in the market. Kodak has extended substantial efforts to develop
a laboratory network in Japan, and has been disadvantaged by the extensive ties between Fuji and the
laboratories fostered by Japanese Government subsidies.
5.209 Japan disagrees with the conclusion that 84 percent of the laboratories in Japan fall under the
umbrella of Fuji. According to the data given in Photo Market 1996, of the 753 amateur laboratories
in the Japanese market, 292 laboratories (38.8 percent) are affiliated with Fuji, 124 laboratories (16.5
percent) are affiliated with Kodak, 216 laboratories (28.7 percent) are affiliated with Konica, and 121
laboratories (16.1 percent) have other affiliations.
5.210 Japan further contendsthat the US arguments are unpersuasive for a number of reasons. Firstly,
the financing was designed to help small laboratories, not the major manufacturers. Laboratories
receiving the financing were free to choose the type and brand of all the equipment they acquired with
the help of these loans. Once the laboratories obtained the new equipment, they were available as
customers toanyone whocould supplythem the colourpaper theywouldneed touse the new technology.
Therefore, this independent source of financing actually reduced any dependence the laboratories would
have on the manufacturers. Japan points out that the United States does not even offer any argument
as to why SMEA financing would favour Japanese manufacturers rather than any other supplier with
a competitive product. Japan also points out that SMEA loans continue to be made and are available
to laboratories affiliated with both foreign and domestic manufacturers. According to Japan, the trend
toward affiliation with manufacturers actually began long before any of the alleged government efforts
to integrate the photofinishing laboratories came into effect. Both Fuji and Konica were beginning
to develop affiliations with its laboratories by the early 1960's.234
5.211 Japan points out that the US argument implies that affiliations between photosensitive materials
manufacturers and photofinishing laboratories in the Japanese market are somewhat unusual and
exclusionary. In Japan's view, such affiliations are common throughout the world. Strong market
incentives favour forward integration by manufacturers into photofinishing. The demand for photographic
paper is ultimately a function of the demand for photographic prints. Consequently, manufacturers
have a strong incentive to participate in the downstream photofinishing market. Thus, the structure
of the Japanese paper market is a reflection of rational business decisions, not government measures.
5.212 With respect toUS allegationsaboutMITI's financial supportfor systemization,Japan responds
that the United States cites only a single example where Konica was able to receive funding from the
Japan Development Bank (JDB) to develop a distribution facility. This JDB loan came too late to
encourage vertical integration as Konica and its wholesalers were already affiliated.235 Therefore, for
Japan, it is misleading to suggest that cooperation between Konica and its primary wholesalers and
their joint development of a distribution facility is the result of some government plan to strengthen
the relationship between these primary wholesalers and Konica. Japan further emphasizes that in any
event JDB does not evaluate applications from foreign enterprises or from enterprises that carry foreign
products any differently than it evaluates applications from enterprises that carry domestic products.
In fact, since 1984, JDB has been promoting imports by providing loans for the construction of
distribution facilities and services for imported products.236
5.213 The United States contends that while Japan argues the JDB would provide the same type
of loan for establishing joint distribution facilities to a foreign manufacturer, the fact remains that the
only manufacturer who received such a loan was Japanese.
234Affidavit of Tanaka Takeshi, p. 5, Japan Ex. A-10.
235See Affidavit of Haruyoshi Okuyama, p. 1, Japan Ex. A-18.
236JDB Annual Report 1995, pp. 26-27, Japan Ex. B-36.

8. POST-1975 DEVELOPMENTS
5.214 The United States argues that with the vertically integrated, exclusive distribution system in
place, the Government of Japan turned its attention to measures that have helped maintain the structure.
In its efforts to suppress the clearest challenge to the vertically integrated system, Japan has focused
on new or strengthened measures to ensure that foreign manufacturers could not use their financial
or marketing strengths to increase their foothold in the Japanese market.
5.215 The United States asserts that the Government of Japan has continued its close coordination
with Japanese industry to implement industrial policy favouring Japanese manufacturers. It cites as
an example, the 1990 MITI issued Guidance for Improving Business Practices, which it contends
indirectly affirmed the continued use of rebates. It also cites Japan's 1995 enactment of the Special
Measures Law to Promote Business Reform for Specified Industrialists (Business Reform Law), which
allegedly establishes a broad legal framework for MITI's continued intervention to strengthen and protect
domestic industries. This law allows for the designation of specified industries, and by ministerial
order, MITI has designated"camera and related productsmanufacturers" and "camera and photographic
materials industry" as specified industries.237 The United States further refers to a 1994 Japanese industry
journal article that noted changes in the Japanese film distribution system, such as a revision of the
rebate schemes and the opening of more discount stores, but concluded that "a limit to the expansion
of sales channels seems to be appearing" and that "the actual network has not changed much."238 Other
Japanese analysts have concluded that distributors remain highly dependent on manufacturers.239
5.216 Japan denies any coordination with industry designed to favour Japanese manufactures. Japan
specifically notes that the 1990 Guidelines suggest that rebate conditions be clarified and that the use
of rebates be kept to a minimum. Japan also rebuts that the US description of the "Business Innovation
Law"240 is misleading, noting that the law treats foreign-affiliated firms and domestic ones on an equal
basis. Japan asserts that the government has discouraged exclusionary practices in the photographic
film industry. Japan claims that distribution practices in the film industry have been closely scrutinized
by the JFTC to guard against possible anti-competitive practices.
5.217 Japan cites as an example situations when "parallel price increase" have been reviewed. Although
these industry wide surveys - which have included Fuji, Konica, and Kodak - found no violation of
the Antimonopoly Law, the fact that the surveys were conducted confirms that the JFTC has been
particularly vigilant in monitoring developments in this industry. Japan, therefore, concludes that the
US theory of a government conspiracy to create an exclusionary market structure is not supported by
the facts.
5.218 The United States emphasizes, that in considering Japan's recent formal and informal actions,
it is important to recognize that the distribution structure set up by the measures beginning in the 1960's
and 1970's is, to a large extent, self-sustaining. Once Japanese manufacturers achieved domination
over the distribution system through implementation of short payment terms, rebates and discounts,
verticalinformationlinks,and othermeasures advocated and implementedbythe Japanese Government,
the manufacturers' power allows them to maintain such domination, through the continuing use of these
transaction terms and other mechanisms, with less need for support from the Government. However,
237MITI Ministerial Ordinance No. 31 of 1995, Items 123 and 164, US Ex. 95-5.
238Distributors in Tough Environment; The Distribution Structures Continue to Change, Nihon Shashin Kogyo Tsushin,
1 May 1994, US Ex. 94-10. Japan disagrees with the US translation of the quote from the above-mentioned article. See
translation issue 3.
239Four Fuji-Group Distributors Reported Unimpressive Results in Spite of Low Interest Rates, Shukan Shashin Sokuho,
24 June 1994, US Ex. 94-11. Japan disagrees with the US interpretation of this article. See translation issue 10.
240Japan notes that the proper translation should be the "Business Innovation Law" rather than the "Business Reform
Law". Japan’ s further explanation about this law is discussed below in section VI.D.3.(h)(ii).

a reduced need for support does not mean that the Japanese Government reversed its policy. To the
contrary, the United States asserts, Japan has continued to advocate short payment terms, rebates and
discounts, and vertical information links, and Japanese manufacturers and wholesalers have continued
to apply these practices to maintain the oligopolistic distribution system. The United States concludes
that, moreover, Japan has continued to suppress alternative channels and potential challenges to this
system, such as large stores and independent photoprocessing laboratory networks, thereby shielding
the oligopolistic distribution system from competitive pressures that could undermine it.