In 1995, the United States trade deficit with Japan was $59.3 billion; this
represents a decrease of $6.4 billion or 20 percent from that in 1994. U.S.
merchandise exports to Japan were $64.3 billion, $10.8 billion or 20.2 percent
more than in 1994. Japan was the United States' second largest export market in
1995. U.S. imports from Japan totaled $123.6 billion in 1995, a 3.7 percent
increase over those in 1994.
The value of new U.S. foreign direct investment (FDI) into Japan totaled $37
billion in 1994, up 19 percent over 1993. U.S. direct investment in Japan is
concentrated largely in manufacturing, wholesale and finance.
When President Clinton took office in 1993, he pledged to take a new
results-oriented approach to dealing with trade with Japan. Whereas previous
Administrations had reached bilateral and multilateral agreements with Japan,
long term access to Japan's market for foreign goods and services has remained
elusive. While Japan has reduced its formal tariff rates on imports to very low
levels, invisible, non-tariff barriers -- such as non-transparency,
discriminatory standards, and exclusionary business practices -- maintain a
business environment protective of domestic companies and restrictive of the
free flow of competitive foreign goods into the Japanese domestic market.
Determined to crack the unique structural obstacles to market access in
Japan, President Clinton and then- Prime Minister Miyazawa signed in July 1993
the U.S.-Japan Framework for a New Economic Partnership (Framework), a new
vehicle for addressing the myriad of barriers that foreign companies encounter
when doing business in Japan. Under the Framework, the Administration has sought
agreements with distinctly defined commitments from Japan that can be measured
using quantitative and qualitative objective criteria.
This approach, which assesses the implementation and success of agreements
through "tangible progress," has been successful in creating more avenues for
entry into Japan's market. Under the Framework, Japan has committed to address
major barriers in five sectoral and structural "baskets":
- Government Procurement: Japan committed to establishing and
implementing measures to significantly expand Japanese Government procurement of
competitive foreign goods and services. Agreements were reached in the
telecommunications and medical technology sectors in 1994. The medical
technology agreement is yeilding results in demonstrably increased sales of U.S.
medical technology exports.
- Japanese Regulatory Reform and Competitiveness: To reduce the
overwhelming regulations that both burden foreign and domestic firms and
minimize competitiveness, Japan pledged to reform its regulatory regime and make
it more compatible to foreign goods and services. Such reform measures are
included in the financial services and insurance agreements, which were
under this basket. Additionally, the Deregulation and Competition Policy
Working Group is addressing a number of key structural issues within the context
of this basket, including: deregulation, administrative reform, competition
policy, and distribution.
- Other Major Sectors: In 1995, the United States and Japan completed
negotiations in the automotive sector -- the key sector under this basket -- and
reached an agreement which is beginning to substantially open Japan's market to
foreign autos and auto parts.
- Economic Harmonization: To correct the outstanding macroeconomoic
imbalances in Japan's marketplace, especially Japan's low receptivity to foreign
direct investment, negotiations under this basket concentrating on investment
and long-term buyer-supplier relationships resulted in the conclusion of a
bilateral investment agreement in 1995. In addition, two intellectual property
agreements were reached in 1994 under this basket.
- Implementation of Existing Arrangements and Measures: Under this
basket, all existing bilateral agreements are being monitored -- or have been
renegotiated, as in the case of flat glass -- to ensure full implementation and
market access for U.S. companies. This basket is an essential part of monitoring
the numerous existing arrangements, negotiated by previous Administrations, and
achieving the tangible results that this Administration seeks.
In addition to these sectoral and structural initiatives, under the Framework
Japan also committed to make the necessary adjustments to the fundamental
economic asymmetries that have afflicted Japan's international economic
relations. In particular, Japan agreed to work toward reducing its current
account surplus as a percentage of its GDP. While in 1992 Japan's current
account surplus was 3.2 percent of GDP, in 1995 it had dropped noticeably to 2.5
percent despite minimal economic growth in Japan over the past three years.
Additionally, in 1995, U.S. exports to Japan reached an historic high of $64
billion, nearly 20 percent greater than in 1994 and 34 percent more than in
1992. More specifically, in those sectors covered by recent trade agreements
with Japan, exports have grown by more than 80 percent since President Clinton
took office, and 2.5 times as fast as other U.S. exports to Japan.
1995 in Review
After nearly two years of negotiations, the United States concluded an accord
with Japan in June 1995 to provide greater access to Japan's market for foreign
autos and autos parts. This agreement includes broad deregulatory measures that
will eliminate unnecessary and burdensome regulations placed on foreign auto
parts, and contains detailed provisions for measuring anticipated sales
increases of American autos and auto parts in Japan.
In January 1995, the United States also reached a market opening agreement
with Japan on flat glass. Implementation of the provisions of this agreement has
begun to break up the oligopolistic market share held by the major Japanese
glass producers, thereby enabling American glass manufacturers to gain a solid,
long- term market presence in Japan.
The United States and Japan signed a financial services agreement on February
13, 1995,allowing foreign investment advisory companies (IACs) to compete in
Japan, for the first time, for the management of public pension assets and for
larger shares of corporate pension assets. Japan also liberalized its corporate
securities market and cross-border financial transactions. The U.S. and Japan
assessed implementation of the agreement in a review meeting on February 6,
1996, and both sides agreed that the implementation was progressing
In July 1995, the U.S. and Japan signed an agreement on inward direct
investment and buyer-supplier relations. It promotes increased foreign business
presence in Japan and encourages stronger links between Japanese buyers and
foreign suppliers. It also details policies and measures the Government of Japan
instituted during the course of the negotiations, as well as further actions
Japan is taking to promote foreign direct investment.
In September 1995, USTR identified Japanese market practices in both the wood
and wood products sector, and the paper and paper products sector under Super
301 as practices which could warrant future action under Section 301 of U.S.
trade law. Market access barriers in these two sectors continue to restrain
competitive U.S. manufacturers and protect the Japanese industry from
international competitive forces.
In addition, serious problems have arisen in the interpretation and
implementation of the U.S.-Japan insurance agreement. Japan's failure to
meaningfully deregulate its primary life and non-life insurance sectors before
allowing Japan's insurance providers to expand entry into the "third sector" is
inconsistent with the terms of the bilateral insurance agreement.
In 1995, USTR also initiated a section 301 investigation into Japan's
consumer color photographic film and paper sectors in response to allegations
that Japanese Government policies have encouraged the creation and toleration of
an anticompetitive market structure that restricts the sale of U.S. photographic
film and paper in Japan. This case is a fundamental example of the difficulties
that many U.S. companies face in trying to compete in Japan against established
exclusionary relationships between manufacturers, distributors and
In the Uruguay Round, Japan agreed to "zero for zero" tariffs on
pharmaceuticals, paper, beer, whisky and brandy, agricultural equipment, medical
equipment, construction equipment, furniture, steel and toys. Japan also adopted
the Chemical Harmonization Initiative. Japan cut tariffs on copper and on
aluminum, with the top rate reduced from 12.8 percent to 7.5 percent. Most of
Japan's remaining high tariffs affect agricultural and food products --
including white distilled spirits, corn grits, wood and wood products, and
leather and leather products.
General Food Products
In the Uruguay Round, Japan agreed to bind tariffs on all agricultural
products and to reduce the bound rate by an average of 36 percent during the
six-year period 1995-2000, with a minimum 15 percent reduction on each tariff
line. Japan also agreed to gradually reduce tariffs on imports of beef, pork,
fresh oranges, cheese, confectionery products, and vegetable oils. Imports of
many intermediate and consumer-oriented food products are still accorded
relatively high tariff protection.
Japan agreed to convert all import bans and quotas (with a delayed conversion
for rice) to tariffs, which would be reduced gradually during the period
1995-2000. Strict import quotas for wheat, barley, starches, peanuts, dairy
products and pulses were replaced by tariff rate quotas. However, Japan retains
state trading authority and price stabilization schemes.
The U.S. is closely monitoring Japan's implementation of the Uruguay Round
measures for agriculture, including safeguard measures for beef and pork, and is
continuing bilateral efforts to counter any technical or food safety-related
measures that threaten to impede imports.
Leather and Leather Footwear
In March 1991, Japan liberalized treatment of footwear imports, setting a
footwear quota of 2.4 million pairs per year. In JFY 1993, the quota was set at
6.955 million pairs and raised to 8.34 million pairs in JFY 1994. The JFY 1995
quota was just over 10 million pairs. MITI will not confirm that it will
continue to expand the quota in the future, but U.S. industry expects continued
quota increases of about 20 percent per year. The U.S. Government and U.S.
leather and leather footwear industries have been pushing for elimination or
further liberalization of the quotas.
In the Uruguay Round, Japan undertook to reduce over an eight-year period
tariffs: on under-quota leather footwear (from 27 percent to 21.6 percent); on
the tariff category that includes crust leather (from 20 percent to 13 percent);
and on other leather categories (from 20 percent to 16 percent). Footwear
imported above tariff rate quota levels faces a tariff of 52.3 percent or 4,675
yen, whichever is higher. By 2002, this will drop to 30 percent or 4,300 yen,
whichever is higher. In principle, the over-quota tariff rate was reduced 50
percent from the 1994 rate, but the operative tariff is the yen minimum
alternative rate. This was reduced by 10 percent over the eight-year period.
The quota has resulted in high quality and high fashion manufacturers in
France and Italy taking a large percentage of Japan's leather shoe import
market. The American share of the leather shoe market has fallen. Leather shoe
manufacturing continues to slowly decline in Japan, while imports of leather
uppers grew by 31 percent to 14 million pairs in 1994. Finally, it should be
noted that 50 million pairs of non-leather, athletic shoes were imported into
Japan in 1994. Most of these were American-branded products manufactured in
Japan is the United States' largest export market for wood products. U.S.
exports to Japan totaled $3.25 billion in 1995, up 4.3 percent from 1994. Raw
logs and chips accounted for 68 percent of the trade flow.
The 1990 U.S.-Japan Wood Products Agreement addresses: tariff reduction,
tariff reclassification, consistency of Japanese subsidies with international
agreements, improvements in product standards and Japanese certification
procedures, and liberalization of building codes/standards -- particularly for
regulations that are not performance-based. Japan has implemented most of the
agreement's specific obligations, but a range of barriers still impede import
access and wider use of wood products in the market. Therefore, the agreement
has not fully realized its broad objectives of increasing Japanese imports of
value- added products and of the use of wood.
Wood tariffs are being reduced under Japan's Uruguay Round commitments, but
continue to pose a significant access barrier. The U.S. Government continues to
seek further reductions.
Subsidies to the Japanese forest product industries warrant continued
scrutiny to ensure that U.S. access gains are not diminished unfairly. Progress
has been made toward the adoption of performance-based codes and standards in
Japan, but more steps are needed to allow greater use of wood building materials
and construction systems.
Japan's restrictions on market access for wood products were identified in
1994 and again in 1995 as a practice that may warrant future identification as a
priority foreign country practice under Super 301. There have been several
rounds of discussions with the Japanese Government, at both policy and technical
levels, to monitor implementation of the 1990 measures and to identify areas for
improvement. Some progress toward resolution of standards-based barriers was
made in the February 1996 talks. The United States continues to make elimination
of market access barriers and increased importation of value-added wood products
in Japan a priority.
An imported housing initiative announced by Japanese Prime Minister Hashimoto
in February 1996, if fully implemented, will create new and expanded
opportunities in Japan for U.S. building materials. The initiative includes
promotion of wooden materials and North American construction methods, including
expanded construction of wooden three-story apartment buildings, a renewed
effort to move toward performance-based standards, and recognition of U.S.
Fresh Agricultural Products
Japan continues to restrict, for phytosanitary reasons, the entry of numerous
U.S. fresh fruits, vegetables and other horticultural products. Some products
like tomatoes, potatoes, and plums are banned outright due to Japanese concerns
about entry of pests or plant diseases. In other cases, such as apples,
cherries, and nectarines, phytosanitary protocols may include only specific
limited product varieties, while excluding other almost identical varieties.
This has occurred despite presentation of evidence that treatments that are
effective against pests attacking one variety can easily be extended to new
varieties. Under the current system, new varieties must undergo costly and
time-consuming additional scientific research and testing to be allowed entry
under a phytosanitary protocol.
For some products, Japan requires production site inspection by Japanese
Government inspectors, even if the Agriculture Ministry cannot provide enough
inspectors to do the job expeditiously. In annual bilateral discussions and
under the auspices of Government of Japan deregulation initiatives, the United
States has requested that Japan allow U.G. Government personnel to do some of
the work under Japanese Government supervision. Shortages of inspectors and
overly restrictive procedures in certain cases are serious restraints to
Japan's often excessive fumigation requirements are also a concern. Japanese
plant quarantine regulations require fumigation of imported fresh fruits and
vegetables if, upon inspection, a shipment is found to be infested with live
insects, regardless of whether or not such insects (such as scales and aphids)
are already present in Japan. This has proved particularly detrimental to
imports of more delicate fresh produce such as lettuce, strawberries, and
The U.S. Government continues to give high priority to removing unwarranted
restrictions to imports of U.S. fresh produce in Japan, with particular emphasis
on improving access for items such as tomatoes, potatoes, peppers, additional
apple varieties, eggplant, and fresh plums.
Japanese potato starch production is protected by tariff-rate quotas (with
high over-quota tariffs for starch), limitations on imports of corn for use in
the starch industry, and a blending requirement for imported starch and domestic
potato starch. These protective measures make starch and its secondary products,
such as organic acids, inordinately expensive for industries which use them as
inputs, and make these industries less competitive. The Uruguay Round
established an import quota for corn to be used to produce starch for "new
uses;" a part of this corn is exempt from the blending requirement. About 90
percent of the "new uses" import quota was used in JFY 1995. The portion of the
"new uses" quota that was allocated to the production of biodegradable plastics
was not used.
Corn imported for livestock feed use is subjected to an elaborate control
system to ensure that it does not enter the starch production stream. Import
control measures make feed more expensive than necessary for livestock
producers, and make it difficult for Japanese animal growers to compete with
imported meat. In recent years, Japan has taken several steps that have
liberalized the feed control system somewhat. In 1995, Japan established a
tariff quota system for whole shelled corn for feed, and proposed a new system
for whole grain barley imports for feed. About 30,000 MT of whole shelled corn
was imported under the new tariff- rate-quota (TRQ) in JFY 1995. Japanese
farmers have been less than enthusiastic about using the new corn TRQ because of
the lack of transparency in pricing and payment terms, requirements for
submission of detailed documentation, and costly grain inspections.
Japan maintains seven global and two bilateral import quotas on fish
products. U.S. fishery exports to Japan subject to import quotas include:
pollock surimi, pollock roe, herring, cod, mackerel, whiting, squid, and several
other fish products. These quota-controlled imports into Japan accounted for
more than $600 million in sales in 1995, approximately one-fourth of total
fishery exports to Japan. In the past several years, there has been a downward
trend in sales of these import quota-controlled items, largely a result of which
reflects the economic recession in Japan and stagnant markets and prices.
In the Uruguay Round, Japan agreed to cut tariffs by about one-third on a
number of fishery items, but avoided commitments to modify or eliminate import
quotas. (Because the Uruguay Round agricultural negotiations did not require
commitments on fish, Japan has no obligation to convert non-tariff measures to
tariff-rate quotas.) While Japan has taken steps to improve its administration
of the import quotas, especially the application procedures, the lack of
transparency still causes concerns for U.S. exporters. At the January, 1996
session of the annual fishery trade consultations, the United States and Japan
agreed to continue formal discussions to identify solutions to these import
quota issues, and to exchange papers on these issues.
In 1987, a GATT panel found that Japan's excise tax system unfairly
discriminates against imported distilled spirits in favor of the domestic
distilled spirit shochu. Afterward, Japan reduced the extent of
discrimination, but Japan still maintained taxes on shochu far below
those on imported whisky, brandy and white spirits. Imported distilled spirits
are significantly disadvantaged on the retail level. Industry comments and
market surveys demonstrate that the excise tax discrimination is the number one
remaining market access barrier for U.S. exports to Japan of Bourbon, Tennessee
whiskey, rum, gin, vodka and other brown and white spirits. Japan is the
second-largest market for U.S. distilled spirits exports. Elimination of the
discrimination is particularly important in view of Japan's agreement to
eliminate tariffs on brown spirits, and the high growth potential of this
Meetings between foreign industry representatives and Japanese officials, and
bilateral government-to-government contacts on the subject, have proved
unfruitful. In September 1995, the United States joined the EU and Canada in
initiating WTO dispute settlement proceedings. The panel has met with the
disputing parties twice, and its report is expected in July 1996. Under WTO
rules, Japan will not be able to block adoption of the panel report.
The Japan Racing Association (JRA) is permitted by the Government of Japan to
restrict participation of foreign horses in Japanese races. In addition, only
Japanese residents may register with the JRA as racehorse owners in Japan. The
United States and other countries have pressed Japan to liberalize access for
foreign horses, with some modest success. In 1995, six JRA races were opened to
foreign racehorses with race experience outside Japan. The JRA has announced
that it will increase this number to twelve by 1999. The U.S. Government will
continue to press Japan for further liberalization.
Under the minimum access agreement of the Uruguay Round, Japan committed to
import four percent (379,000 tons, milled rice basis, or 426,000 tons, brown
rice basis) of Japan's total domestic rice consumption in JFY 1995. Within this
import commitment, Japan also has established a Simultaneous Buy- Sell (SBS)
system for some imported rice, allowing importers and exporters to set quality
and other requirements, subject to Food Agency (Ministry of Agriculture,
Forestry and Fisheries (MAFF)) approval. In addition, Japan has agreed to double
the amount of imported rice to eight percent of domestic consumption by JFY
During JFY 1995, Japan imported 408,794 tons of rice (actual tonnage basis).
Of this amount, 193,715 tons (47.4 percent) originated in the United States. Of
the total, 188,000 tons of rice entered under the Food Agency's "ordinary
import" system (U.S. share: 47.2 percent), and 5,715 tons were imported under
the SBS system (U.S. share: 53.4 percent). Japan also imported 3,000 tons of
rice flour for use in textile dyeing, and 1,200 tons of bumped rice for the
manufacture of breakfast cereal.
The U.S. Government has worked closely this year with the Food Agency, as
well as other agencies of the MAFF, to assure that the Japanese rice tender
system does not operate in a way that is prejudicial against U.S. growers. Both
the U.S. Government and U.S. industry expect to continue to work closely with
Japanese importers and the MAFF during JFY 1996 to obtain the maximum possible
access for U.S. rice
Import Clearance Barriers
Slow import clearance into Japan hinders access by Japanese companies and
consumers to competitive U.S. products. U.S. air cargo companies incur high
costs in processing imports into Japan and face bottlenecks in clearance
procedures as well. The problem has become increasingly important as more U.S.
exporters try to become "just in time" suppliers to Japanese companies and as
more U.S. mail-order companies market aggressively in Japan. In 1990, a joint
U.S.-Japan working group reviewed U.S. and Japanese import procedures and issued
a final report stating that Japan would make efforts to promote pre-arrival
processing and reduce import clearance time to 24 hours.
Results have been disappointing. While Japan now accepts electronic
submission of customs data prior to the arrival of cargo, importers that submit
their data early receive no benefit in faster processing or clearance. U.S.
Customs encourages importers to file their documents prior to arrival of the
cargo and, prior to arrival, advises the importers when no physical examination
will be required. Japan also committed to reduce import clearance time to 24
hours. While the time required to process customs paperwork has dropped to less
than one day, overall import processing time (from arrival of merchandise at
port to release by Japanese Customs) remains 2.9 days (4.8 days for sea cargo
and 1.7 days for air cargo). U.S. Customs clears over 90 percent of air cargo
within 30 minutes of arrival.
For many commodities, import clearance requires approval from other agencies
in addition to customs. The Japanese cargo clearance system has made progress in
automating customs procedures, but there has been little progress to integrate
the requirements of other agencies. The speed of import clearance is controlled
by the agency with the slowest procedures. The United States continues to
request that all import clearance procedures be coordinated to assure
STANDARDS, TESTING, LABELING AND CERTIFICATION
Standards, testing, labeling and certification problems hamper market access
in Japan. In some cases, advances in technology make Japanese standards outdated
and restrictive. Japanese industry often supports safety and other standards
that are unique and restrict competition. In some areas, the Government of Japan
has simplified, harmonized and eliminated restrictive standards to follow
The principal organization that adjudicates standards and certification
disputes between foreign companies and the Government of Japan is the Office of
the Trade and Investment Ombudsman (OTO). In 1994, the OTO chairmanship was
transferred to the Prime Minister's office, and the OTO was authorized to
recommend actions to appropriate ministries. Because the OTO's recommendations
do not have the power of law and the OTO has no enforcement authority, these
recommendations have not resulted in greater success for U.S. firms taking cases
to the OTO.
The American Chamber of Commerce in Japan raised six issues with the OTO:
liberalization for sales promotion; higher weight allowances for sea containers;
acceptance of clinical data by independent research organizations; fewer
restrictions on herbal ingredients; reforms in Japan's drug control and
licensing system; and changes in biodegradation tests for new chemicals. The OTO
Advisory Committee has agreed to investigate all six issues, and in early 1995,
the OTO met with foreign interests and relevant ministries on the first three
issues. The United States has raised some two dozen issues with the OTO.
The results from the OTO process generally have been unsatisfactory.
Since OTO recommendations do not have the force of law, Japanese Government
agencies frequently ignore or reject them, as in the case of large-class,
foreign-made motorcycles. The OTO has made most progress in technical areas
where complainants made strong cases and where Japanese Government bureaucratic
resistance to change was light.
The Administration continues to actively pursue improved medical and
pharmaceutical product market access in the context of the Market-Oriented
Sector-Selective (MOSS) Medical Equipment and Pharmaceutical talks. One issue
under regular discussion in the MOSS is reimbursement rates under Japan's
national health insurance system for U.S. medical equipment and pharmaceutical
products. The United States is concerned that reimbursement prices in Japan
often do not adequately compensate firms for the costs inherent in developing
and marketing new, innovative medical equipment and pharmaceutical products in
Japan. Japan is currently in the midst of a biannual price revision which will
affect reimbursement prices for a wide range of U.S. products. This project
should be completed by April 1, 1996. The United States is carefully monitoring
this process through consultations with industry and through the MOSS.
At a recent MOSS meeting, Japan announced its intention to reduce the
"R-Zone" for medical devices from the current 15 percent to a lower level. If
implemented, this action will make it even more difficult for U.S. firms to sell
their products in Japan at reasonable prices. Japan did not adequately consult
with U.S. industry or the U.S. Government prior to making this announcement. At
present, the U.S. Government is working to resolve this issue. In addition, the
U.S. Government is concerned with a wide variety of other obstacles faced by
U.S. pharmaceutical and medical equipment manufacturers when they seek to market
their products in Japan. These range from a slow and sometimes non-transparent
approvals process to regulations that prevent certain products from being sold
in hard gelatin capsules in Japan.
The U.S. medical products industry continues to support Japan's deregulation
initiatives. For the second year in a row, it provided Japan with a list of
regulations that inhibit the ability of foreign firms to do business in Japan.
The U.S. Government also included extensive deregulation suggestions in this
section in the November 1995 U.S. deregulation submission to the Government of
Japan. Several of these issues have also been raised in the MOSS process.
Processed food product imports are often hampered by rigid and restrictive
"use" standards that are applied to additives that are generally recognized as
safe in every other part of the world. As part of the first general revision of
the Food Sanitation Law in 23 years, Japan is moving to bring its positive list
for food additives in line with WTO Sanitary and Phytosanitary (SPS) measures,
but regulation of chemically-synthesized food additives remains unusually
strict. The U.S. Government encourages U.S. firms and industry associations to
file applications with Japan's Ministry of Health & Welfare in order to
initiate approval processes for new food additive approvals.
The Ministry of Health & Welfare continues to establish new residue
standards for pesticides, including full notification to the WTO and provision
for comment and review. The U.S. Government is providing scientific data
pertaining to relevant U.S. and international standards for the chemicals
Japan is currently in the process of adding residue standards for an
additional thirty chemicals to its pesticide registration list. Once these
chemicals are subjected to the WTO notification/comment procedures, they are
expected to be finalized in Japan later this year and become effective in early
While the the Government of Japan has made some progress in establishing
residue standards in line with internationally recognized tolerance levels, more
government action remains necessary to help counter misleading information
regarding the safety of imported food and agricultural products.
Fresh Fruits and Vegetables
Japan restricts, for phytosanitary reasons, the entry of numerous U.S. fresh
fruits and vegetables, such as pears and tomatoes. Japan currently has
phytosanitary barriers on the following U.S. agricultural products: cabbage,
eggplant, pears, peppers, stone fruit, sweet potatoes and tomatoes. Some
products, like potatoes, are banned outright due to Government of Japan concerns
about the golden nematode and potato wart disease.
In the cases of cherries, nectarines and apples, phytosanitary protocols
include only specific limited product varieties, while excluding other, almost
identical varieties. This occurs despite evidence that treatment effective
against pests for one variety can easily be extended to new varieties. Under the
current system, new varieties must undergo costly and time consuming additional
scientific research and testing to be allowed entry under a phytosanitary
For some products, Japan requires inspection at the U.S. growing site by
Japanese Government inspectors, even though the Agriculture Ministry does not
provide enough inspectors to do the job. The United States is pressing the
Government of Japan to add more inspectors or to allow U.S. Government personnel
to do some inspections under Japanese Government supervision. The insufficient
number of Japanese inspectors restrains increased trade.
In many cases, instead of basing phytosanitary policies on sound science,
Japan simply maintains a policy of "zero tolerance" for many products. Japan
requires fumigation of imported fresh fruits and vegetables if, upon import
inspection, a shipment is found to be infested with live insects, regardless of
whether such insects, such as scales and aphids, are already present in Japan.
California avocados with Latania scale are sprayed with hydrogen cyanide upon
entry into Japan, even if the pest is dead. Periodic technical discussions are
held between U.S. Government and Japanse Government plant quarantine authorities
to establish safeguard measures that will facilitate exports of restricted items
to Japan. Progress has been slow.
Japan increased efforts to open its government procurement markets to
imported goods and services with action plans in the mid-1980s, and "voluntary
measures" in 1991 and 1994. The 1994 initiative improved bid notification and
information dissemination, and included specific procedural reforms for
procuring medical technology and telecommunications products and services.
The United States has negotiated bilateral agreements with Japan to help
improve foreign firms' access to six Japanese public sector markets for
computers, telecommunications equipment and services, medical equipment,
satellites, major construction projects, and supercomputers. Structural problems
and an entrenched legacy of restrictive "Buy Japanese" purchasing practices,
especially at the local level, still hamper foreign firms seeking market access.
Barriers also affect purchases subject to formerly GATT and now WTO Government
Procurement Agreement requirements.
Lack of uniform, centralized procurement processes and difficulty in
establishing long-term relationships with Japanese government procurement
officials hurt foreign firms in Japan. Japanese law specifies general government
contracting procedures, but details are governed by internal notices, which
differ by ministry and entity. The Government of Japan is developing a
standardized bid format for all ministries. While Japan reports procurement to
the WTO, there is no monitoring of Japan's "voluntary" changes or their impact
on public sector markets outside of the areas covered by bilateral
The WTO Government Procurement Code took effect January 1, 1996. With recent
government procurement agreements, the United States and Japan have extended
Code coverage bilaterally for central governments, subcentral governments
(including prefectures) and government-owned enterprises. Local and prefectural
government procurements have posed major difficulties for foreign firms as they
lack uniform procurement procedures, limit access to information on planned
projects, and hinder foreign firms' participation in early development of
systems. The implementation of the WTO Government Procurement Agreement by
prefectures and the twelve designated cities in 1996 should improve the
procurement environment at the subcentral and local level. This also raises the
value of goods and services procurements that Japan will cover under the WTO,
especially for public works. In addition, under the 1994 agreements, the
Japanese Government has agreed to urge local and prefectural governments to
adopt more transparent procedures and to give full consideration to foreign
Because Japan has not included its National Space Development Agency and its
electrical power generation entities in this coverage, the United States has not
covered NASA and U.S. government-owned power generation entities with respect to
Quasi-governmental entities and third sector projects (Japanese government
and private sector joint ventures) are not covered by Japan's WTO Procurement
Code commitments or Action Plans, but they increasingly purchase services and
goods that formerly were the responsibility of national and local governments.
Official Japanese data show that there are 6,659 quasi-government entities with
more than 25 percent local government equity. (The figure would be higher if
entities with central government equity were included.) Without coverage under
the WTO Government Procurement Code, bilateral agreements, and Japanese Action
Plans, the United States is concerned that a large amount of potential
procurements of U.S. goods and services by quasi-governmental entities and third
sector projects will be lost.
The United States and Japan signed a government procurement agreement on
computers January 22, 1992, which commits Japan to adopt non-discriminatory and
transparent measures in order to expand government purchases of competitive
foreign computer products and services. The agreement makes procedural
improvements in Japan's public sector computer products and services procurement
regime and calls for an annual review to assess implementation.
The agreement commits Japan to assess its implementation of the measures
based on hard data -- including annual purchasing data for all Japanese public
sector procurements -- broken down by foreign computer manufacturers and
domestic computer manufacturers, and the level of participation of foreign
computer firms in Japan's public and private sectors.
The most recent U.S. industry survey revealed that total foreign share of the
Japanese public sector computer market grew from nine percent in 1993 to 14
percent in 1994. Foreign share of the public sector market, however, still falls
far below the foreign share of Japan's private sector computer market, which
reached 37 percent in 1994.
With regard to specific segments of the market, foreign share of the Japanese
national government procurement market doubled from 6 percent in 1993 to 12
percent in 1994. This segment of the market accounts for almost 40 percent of
the total Japanese public sector computer market. Foreign share in Japan's
quasi-government computer procurement market declined, however, from 33 percent
in 1993 to 21 percent in 1994. Foreign share grew slowly in the local government
computer market. The United States placed Japan on the Title VII Government
Procurement "watch list" in 1995 due to continued discriminatory practices in
the computer sector. The two Governments held consultations in February 1996 to
discuss these data and other implementation issues.
In particular, at these consultations the United States raised the
potentially serious implementation problem of deep discounting of prices on
personal computers and related equipment by Japanese computer companies in their
sales to Japanese public sector entities covered under the agreement. The
agreement provides detailed rules on procedures entities must follow should they
suspect that companies are submitting "unfair bids." These procedures include
voiding the bid, preventing the bidder from resubmitting a bid on that
procurement, publicly announcing the name of the bidder, and providing
information to the Japan Fair Trade Commission. At the 1996 consultations, the
Government of Japan agreed to look into this matter and provide a detailed
response. The U.S. Government will continue to monitor closely the situation
with regard to pricing and take steps as necessary to ensure Japanese compliance
with the Agreement.
Major Projects Arrangement
The United States-Japan Major Projects Arrangement (MPA), signed in 1991, is
discussed under the title "Construction, Architectural, and Engineering
The United States concluded a medical technology agreement with Japan on
October 1, 1994, under the Framework in order to improve representation of U.S.
medical device manufacturers in Japan, and to increase sales of U.S.-made
medical technology products in the Japanese market, particularly in the
government procurement market. U.S. firms are highly competitive in medical
technology throughout the world, and hold a global market share of 52 percent.
In Japan, however, the market share of U.S. industry is at the relatively low
level of about 21 percent, reflecting the existence of substantial market access
barriers in this sector. The nontransparent nature of Japanese government
procurement of foreign medical technologies has been a significant obstacle to
increased market access by foreign firms.
The 1994 agreement calls for the Framework goal of a "substantial" increase
in access and sales of foreign competitive products and services. In accordance
with the Framework, the medical technology agreement includes a set of five
quantitative and five qualitative criteria to assess the implementation of this
agreement, including: yearly measurement of the number of Japanese entities
procuring foreign products and services; the number and value of contracts
awarded each year as a result of a decrease in single tendering; and the results
of reviews conducted by the Procurement Review Board.
The medical technology agreement and accompanying exchange of letters
represent an important step forward in the ability of foreign firms to sell
medical technology products and services to Japan's public sector. The agreement
is designed to give foreign medical technology companies improved access to
Japan's $2.6 billion government procurement market. The agreement also provides
for the head of each entity to encourage its procuring officials to consider
positively the procurement of foreign medical technology products and
Another key element of the agreement is the requirement that Japanese medical
technology procurement decisions for purchases above a threshold be made on the
basis of overall greatest value, instead of the current minimum price system.
The threshold will be reduced in value over a four-year period from 800,000 SDRs
to 385,000 SDRs. For the first time, equipment cost of these items will be
calculated on a life-cycle basis. This means that the highly sophisticated
medical technology products manufactured by foreign firms will not be excluded
automatically because of initial price. The technical excellence of those
products, and the value they provide over the long term, will now be taken into
Also for the first time, the agreement requires government hospitals in Japan
to make procurement information public, regardless of value. Each hospital will
publish, on an annual basis, information on the top ten medical technology
products it plans to purchase during the upcoming year. Previously, this
important information had not been readily available.
The agreement also contains both a comprehensive complaint mechanism and
procedures for dealing with unfair bids. In the accompanying exchange of
letters, the U.S. Government has received assurances from the Government of
Japan that it will provide adequate budgets -- and therefore sales opportunities
-- for the purchase of foreign medical technology products and services.
The agreement went into effect on November 1, 1994. A review of the agreement
was held in July 1995 to assess preliminary market share data and progress in
the implementation of procedures to establish more transparent tendering
practices. Because the review was held less than nine months after the signing
of the agreement, only preliminary data were available to assess the foreign
share of Japan's public sector medical equipment market. The Japanese Government
calculated a foreign equipment market share of 42.5 percent. This figure
includes sales of foreign products by Japanese distributors, all imports,
including those from overseas Japanese production facilities, and all products
sold under foreign brand-name regardless of location of manufacture or capital
affiliation. The U.S. Government could clearly identify only 18 percent of the
market as being held by foreign firms, although this figure almost certainly
undercounts the foreign share since sales of U.S. products by Japanese
distributors are particularly difficult to track. The next review should allow
for more precise examination of market shares and will be held in the summer of
The review also found that the Japanese Government had made good progress
toward implementing the transparent and open procurement procedures called for
in the agreement. Few procedural concerns were identified by U.S. firms and the
issues that were raised were satisfactorily addressed during the review.
The U.S.-Japan satellite procurement agreement was signed June 15, 1990. The
agreement was negotiated under the Super 301 provisions of U.S. trade law. It
binds the Japanese Government to open non-R&D satellite procurements to
foreign satellite makers. It also enables foreign suppliers to compete in
procurement for broadcast satellites by the government-owned television/radio
service (NHK) and NTT. To continue encouraging Japan to open this market, the
U.S. Government requested in its November 1995 deregulation submission that the
Government of Japan bring restrictions regarding earth stations into accordance
with international standards.
Since the agreement went into force, U.S. firms have been awarded a number of
contracts. In December 1991, a U.S. firm won its first open satellite contract
for two geostationary communication satellites valued at $600 million. A second
contract with NHK, valued at $70 million, also was awarded to a U.S. firm in
September, 1992. In addition, another U.S. firm was selected to build NHK's BS-4
series follow-on broadcast satellite. In 1993, NTT awarded a $350 million
contract for two INSTAR communications satellites to a U.S. firm for launch in
A potential issue of concern has been raised regarding procurement of two
mission demonstration satellites by Japan's National Space Development Agency.
The U.S. Government is currently looking into this matter.
Japan's public sector supercomputer market has been the focus of extensive
bilateral negotiations. Japan failed to live up to its obligations under the
1987 Supercomputer Arrangement, prompting the U.S. in 1989 to cite Japan under
U.S. Super 301 provisions for effectively denying access to its public sector
Subsequent negotiations produced the June 1990 U.S.-Japan Supercomputer
Arrangement, which contains detailed procedures for an open, transparent, and
non-discriminatory public procurement process and requires Japanese Government
procurements to be based on competitive factors. The 1990 arrangement had little
success in its first three years: U.S. firms won only 3 of 11 Japanese
Government supercomputer procurements. All three U.S. machines were selected in
uncontested bidding and did not appear to be based on application of the
arrangement's procedures. In particular, the United States had concerns about
bid specifications, benchmark testing, and the setting of bid prices. There also
were concerns about the arrangement's protest mechanism, which in 1992 in the
first and only bid challenge, failed to demonstrate adequately that the system
in question met all the bid requirements.
In April 1993, the U.S. Government began a special review of Japan's
compliance with the arrangement under section 306 of the 1974 Trade Act.
Subsequently, U.S. supercomputer sales in Japan's public sector market began to
improve. In the JFY 1993 procurement cycle, the Japanese Government bought six
U.S. supercomputers out of a total of 14 awards, all in uncontested bids. In the
JFY 1994 cycle, the Japanese Government purchased six U.S. supercomputers out of
13 awards. The U.S. also won for the first time in head-to-head competition with
a Japanese competitor. Nonetheless, concerns over Japan's conduct of the
procurement process persisted and the section 306 review, which has no statutory
limitation, was extended in April 1994 and again in April 1995.
The positive trend in Japanese Government supercomputer procurement witnessed
in JFY 1993 and 1994 was reversed in JFY 1995, during which U.S. firms won only
one of 11 Japanese Government procurements. Moreover, the United States has
serious concerns about the conduct of the procurement process in two specific
U.S. Government officials raised these concerns at the latest review of the
U.S.-Japan Supercomputer Arrangement held in February 1996. In particular, the
U.S. Government posed questions on bid specifications, the conduct of benchmark
testing, and the ability of the winning supplier to deliver the machine by the
delivery deadline. Additionally, the United States raised concerns over
discounting of prices by Japanese companies in their sale of supercomputers to
Japanese public sector entities covered by the arrangement.
The arrangement provides detailed procedures that entities must follow with
regard to each of these procedures. On "unfair bids," these procedures include
voiding the bid, preventing the bidder from resubmitting a bid on that
procurement, publicly announcing the name of the bidder, and providing
information to the Japan Fair Trade Commission. On benchmarking, the procedures
require the supplier with the winning bid to deliver the machine by the
announced delivery date or the entire procurement must be rebid. At the February
1996 consultations, the Japanese Government agreed to look into these matters
and to provide a response to the United States. In addition, the Government of
Japan agreed to work with the U.S. Government to confirm delivery of two JFY
1995 procurements of concern to the United States. The U.S. Government will
continue vigorously monitoring this Arrangement and, as necessary, take steps to
ensure Japanese compliance with its measures.
NTT Arrangement: The 1994 Improvement Measures of NTT Procurement
Procedures, the fifth renewal of the NTT Procurement Agreement will be in force
until September 30, 1997. Under this latest renewal, NTT agreed to improve its
procurement procedures to provide greater transparency and more timely notice
for foreign suppliers. The improved measures are intended to increase reliance
on international standards and to improve the impartiality of the process by
reducing single-tender sourcing and incorporating a number of objective criteria
for assessing progress under the measures. In addition, three NTT subsidiaries
-- NTT Data Communications Systems Corporation (NTT Data), NTT Mobile
Communications Network, Inc. (NTT DoCoMo) and NTT Power and Building Facilities,
Inc. (NTT Facilities) -- have agreed voluntarily to adopt these procedural
Foreign firms' share of NTT purchases of telecom products was about 10
percent in JFY 1994 (about $1.01 billion, at the then-current exchange rate of
Yen 100 to $1). Foreign share of NTT's telecom product procurement increased by
only one percentage point, from approximately nine percent in JFY 1993.
With increases of only one percent per year, there is still significant room
for removing obstacles in the NTT procurement process, the single, largest
purchaser in Japan's public and private telecommunications equipment markets.
U.S. industry continues to report: anticompetitive preferences shown to
traditional NTT suppliers; continued NTT reliance on Japan-specific and
NTT-specific standards, as opposed to international standards; use of
inadequately documented product specifications; lack of access to critical pre-
solicitation phases of major NTT procurements; and the absence of clearly
defined criteria for bid evaluations. The relatively low level of U.S. firms'
sales to NTT, considering U.S. firms' global competitiveness and approximately
25 percent share of the world market, is indicative of these problems. The
United States continues to monitor this sector closely and will hold a bilateral
review of the improved measures in mid-1996 with the Government of Japan.
Public Sector Procurement Agreement on Telecommunications Products and
Services: The 1994 U.S.-Japan Public Sector Procurement Agreement on
Telecommunications Products and Services was intended to improve access and
sales for foreign telecommunications firms selling to Japan's public sector.
Pursuant to the agreement, Japan has introduced procedures to eliminate barriers
such as: obstacles to participation in pre-solicitation and
specification-drafting for large-scale telecommunications procurements;
ambiguous award criteria that do not use greatest overall value in making
procurement decisions; excessive sole sourcing; and the absence of an effective
bid protest mechanism. The public sector procurement agreement also has
quantitative and qualitative criteria for measuring progress: annual value and
share of foreign products; annual numbers of entities buying foreign products
and services; annual numbers and values for contracts awarded as a result of
single tendering; and new subcontracting opportunities for foreign
U.S. firms expect these provisions to improve their access to Japan's public
sector telecommunications market but continue to have concerns about
implementation, notably Japan's weak commitment to award bids in line with
international standards and on the basis of function rather than design.
Concerns also remain about inadequate access to advance information on bids and
agencies' long-term procurement plans, as well as early participation in
designing bid specifications.
The agreement was reviewed for the first time in July 1995. At that time,
preliminary data showed a welcome decline in sole-source bids, but little
improvement in foreign market share. U.S. data, based on announcements in the
government publication Kampo, showed that foreign firms had approximately
a three percent share of central government procurements in 1994, a low figure
considering U.S. firms' competitiveness in the global telecommunications
PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
Since 1989, Japan has been placed on the Special 301 "priority watch list" of
countries from which the United States sought stronger intellectual property
rights (IPR) protection. IPR has been the focus of U.S.-Japan discussions in a
number of fora, bilaterally and multilaterally. The United States' most recent
concern is Japan's failure to implement its WTO obligation to provide protection
for pre-existing sound recordings produced between 1946 and 1971. As a result,
USTR initiated WTO dispute settlement proceedings against Japan on February 9,
1996. Another major concern is the practice of Japanese courts interpreting
patents very narrowly, allowing competitors to conduct activity that would be
considered infringing in the United States and in most other countries.
In 1995, the U.S. became aware that Japan, in implementing its Uruguay Round
obligations, had failed to adequately address the protection of pre-existing
sound recordings. Japan is willing to protect under its copyright law
pre-existing foreign sound recordings only from 1971 onward. This appears to be
in violation of Japan's obligations under TRIPs Article 14.6, which applies the
provisions of Berne Article 18 to the protection of sound recordings. Berne
Article 18 generally requires that a country must protect the pre- existing
works originating of other Berne member-countries if those works have not fallen
into the public domain in the country of origin -- in this case the United
States -- and have not enjoyed a full term of protection in the country
providing the retroactive protection -- in the case Japan. These TRIPs
obligations for Japan (and other for other developed countries) became effective
on January 1, 1996.
The U.S. Government consulted extensively with Japan in 1995 to address this
issue. Unable to reach a solution, on February 9, 1996, the United States
initiated proceedings under the WTO Dispute Settlement Understanding against
Japan for its failure to adequately protect sound recording copyrights of
Other Copyright Issues
U.S. computer software groups are very concerned about the significant
problem of end-user piracy in the computer software industry in Japan. The
Government of Japan's failure to initiate investigations of those responsible,
or to prosecuting pirates vigorously, acts as a barrier to trade.
The Japanese patent philosophy historically has encouraged technology sharing
over proprietary use. As an outgrowth of this philosophy, foreign companies face
a series of obstacles in trying to obtain patent rights in Japan, including:
narrow claims and patent interpretation; patent-flooding; a difficult and very
slow judicial appeals process; pre-grant opposition to a lengthy review process;
and a Japanese language filing requirement. These specific problems have been of
particular concern to U.S. applicants for patent rights in Japan, some of which
are addressed by two agreements signed during 1994.
IPR Agreements: During 1994, two bilateral agreements on IPR were
concluded under the Framework. The first agreement, signed on January 20, 1994,
addressed a number of outstanding issues: including permission to file patent
applications with the JPO in English; correction of translation errors after
patent issuance; and changes in the U.S. patent term from 17 to 20 years.
On August 16, 1994 a second agreement was signed with specific provisions to
revise the Japanese patent "opposition" system. Under this agreement, the JPO
agreed to: by April 1, 1995 introduce legislation to end the practice of
allowing third parties to oppose a competitor's patent before it is granted and
to hear all opposition claims at the same time; by January 1, 1996 establish an
accelerated patent examination procedure that will enable applicants to obtain
disposition of their patent applications within 36 months, upon request; and by
July 1, 1995 end the practice of awarding dependent patent compulsory licenses
in cases other than where anticompetitive practices have been found. Compulsory
licensing has been used in the past to force patent holders to license the use
of their technology to competitors, thus limiting their exclusive rights in
The agreement also requires the United States PTO to publish pending patent
applications 18 months after filing and expand reexamination proceedings to
allow greater participation by third parties. Legislation implementing these
provisions in the United States has not yet been enacted.
Remaining Problems: There are some very significant problems with
the Japanese patent system not covered by the above agreements. Two important
examples are narrow patent claiminterpretation before the Japan Patent Office
and narrow patent claim interpretation in the courts, both of which have caused
serious problems for U.S. innovators in Japan.
During 1995, Japan modified its patent examination guidelines in a manner
that may alleviate some U.S. concerns about narrow patent issuances by the JPO.
In the past, Japan limited the scope of patent claims to cover only what had
been specifically "reduced to practice" and described in the application; i.e.,
a claim could be no broader than the specific examples actually made and listed
in the application. In contrast, the U.S. and most other countries permit claims
to be broader than the actual examples provided: (1) the applicant clearly
describes how one skilled in the art can make the products described by the
"prophetic example;" and (2) that these examples are not otherwise known to the
public. The ability to base claims on prophetic examples is particularly
important in the chemical area, where thousands of variations are possible and
listing each is impractical.
The Government of Japan has confirmed: (1) the issuance of revised guidelines
to JPO examiners directing them to grant patents based on prophetic as well as
working examples; and, importantly, (2) application of the new guidelines to
outstanding patent applications, some of which have been pending for many years.
Some U.S. companies have hundreds of such pending applications.
Concerns remain about the narrow patent interpretation practices in Japanese
courts. As a general practice, Japanese courts consider only literal
infringement of patents; competitors can avoid liability for infringement in
Japan by slightly changing an element of the invention -- even if the resulting
product is substantially similar to the patented product. In contrast, courts in
the United States and in most other countries as general practice will find
infringement if the defendant has either literally infringed the patent or has
done essentially what is claimed by the patent -- that is, infringement will be
found even if the infringer has deviated from the patent in certain marginal and
unimportant ways. This latter practice is known as the "doctrine of
This doctrine has been used by Japanese courts, but only in limited instances
and rarely in the chemicals industry. Three recent instances of narrow patent
claim interpretation in the courts in Japan were cited by biotechnology industry
spokespersons as responsible for losses of $500 million per year per product. In
each of the cited instances, U.S. companies were unable to assert the degree of
exclusivity that they have asserted in the United States for claims of similar
scope, and their Japanese competitors were able to continue marketing their
Another problem has been the prevalence of "patent-flooding" in which
companies in Japan will flood the patent office with applications that deviate
marginally from a particular invention, thereby threatening potential claims of
that invention with infringement and scaring off potential competitors.
The history of the "Kilby" patent illustrates many of these problems. The
patent, which relates to the invention of the integrated circuit, took almost 30
years to issue because of delays in the JPO. The patent finally was issued in
1989. In 1994, the Tokyo District Court held in effect that the patent covers
only a laboratory prototype of the invention. Under that extremely narrow
interpretation, the patent is unenforceable against any past or present
commercial product. The case calls into question whether U.S. companies can
enforce their Japanese patents (particularly those relating to pioneer
inventions) even if the patent-issuance process is improved.
The trademark registration process remains slow, requiring over three years
to register a trademark in Japan versus slightly more than one year in the U.S.
Protection of well-known marks remains weak.
Japan's protection of trade secrets is inadequate because Japanese courts
require disclosure of trade secrets when a case is brought to them. This puts
the owner of a trade secret in the untenable position of being unable to protect
the trade secret without disclosing it publicly. An amendment to Japan's Civil
Procedures Act, which should be enacted by the Diet later this year, should
improve the protection of trade secrets in Japanese courts by excluding court
records containing trade secrets from public access. However, this legislation
does not adequately address the problem. Court discussions of trade secrets will
remain open to the public and there are no confidentiality obligations on the
part of parties to the case or their attorneys. Thus protection of trade secrets
in Japan's courts will continue to be considerably weaker than in the courts of
the United States and other countries.
Construction, Architectural, and Engineering Services
For the past two years, the Government of Japan has made efforts to reform
its public works bidding system in accordance with its 1994 "Action Plan on
Reform of the Bidding and Contracting Procedures for Public Works." This Action
Plan, coupled with additional understandings contained in an exchange of letters
between Commerce Secretary Ron Brown and Japanese Ambassador Takazu Kuriyama,
constitutes the 1994 U.S.-Japan Public Works Agreement.
Under the 1994 agreement, Japan must utilize open and competitive procurement
procedures when making construction-related procurements that are valued at or
above the WTO government procurement thresholds. Prior to this agreement, Japan
had utilized a designated bidding system which unfairly favored Japanese
domestic companies and effectively closed Japan's public works market to any
foreign participation. As of April 1, 1995, central and quasi-governmental
entities in Japan began utilizing the new open and competitive procedures.
In late July 1995, at the first annual review of the agreement to assess the
impact of the reform measures on Japan's public works market, the U.S.
Government acknowledged that 1994 had been a transition period, but expressed
dissatisfaction with the limited business awarded to U.S. firms and voiced an
expectation of increased future business for U.S. and other foreign firms. In
addition, the United States offered a number of procedural recommendations with
the aim of facilitating greater foreign participation in Japan's public works
market at both the central and the local government levels.
Since this review, U.S. firms have enjoyed some success, but overall there
has been little improvement in the participation of foreign firms in the
Japanese public works market. The U.S. Government continues to be concerned over
the implementation of the agreement. It is monitoring Japan's efforts
intensively and pursuing aggressively U.S. interests in cases where
implementation may be improved.
The existing Major Projects Arrangement (MPA) -- first negotiated in 1988 and
broadened in 1991 -- will remain in effect until all 36 projects covered by the
MPA are completed. The U.S. Government has followed closely the progress on
these MPA projects, with special emphasis on up-coming procurements for the
Chubu New International Airport and the Kansai International Airport. The Chubu
New International Airport is an "if and when" MPA project. This obligates Japan
to promptly designate the Chubu New International Airport as a full-fledged MPA
project as soon as the Government of Japan decides to proceed with the
development of the project. By doing so, both foreign and domestic companies
will benefit from the use of open and competitive procedures on procurements of
goods and services that meet the MPA thesholds.
The U.S. Government is very concerned about indications that Japanese airport
authorities may be proceeding with airport development plans without first
properly designating the Chubu New International Airport as an MPA project.
Already four contracts have been awarded to Japanese companies through the use
of the designated bidding system. It is at this early stage of planning that
critical decisions affecting the final outcome of the project are made. By
continuing to delay the designation of the Chubu New International Airport as an
MPA project, Japan has severely limited the ability of foreign firms to make a
contribution at the early planning stages of the airport project and,
consequently, has handicapped foreign firms' ability to take on a meaningful
role in the design and construction of the airport.
The U.S. Government is insisting that Japan honor its commitments under the
MPA to designate the Chubu New International Airport as an MPA project as soon
as it proceeds with airport development plans and to open procurements to
foreign firms. The United States will continue to actively support U.S. firms
and to maintain vigilance to ensure that U.S. and other foreign firms have ready
access to market opportunities afforded by this agreement.
Japanese financial markets traditionally have been highly segmented and
strictly regulated, and as such, have restricted the entry of foreign financial
services firms and discouraged the introduction of innovative products, in which
foreign firms may have enjoyed a competitive advantage. Some of the restrictions
that have impeded access include the use of administrative guidance, keiretsu
relationships, lack of transparency, inadequate disclosure, the use of a
positive list to define a security, and lengthy processing of applications for
new products. These restrictions have hindered the emergence of a fully
competitive market for financial services in Japan.
With a view to eliminating or reducing these barriers, the United States and
Japan on February 13, 1995, concluded a comprehensive financial services
agreement, "Measures by the Government of Japan and the Government of the United
States Regarding Financial Services." This agreement features an extensive
package of market-opening actions in the key areas of asset management,
corporate securities, and cross-border financial transactions.
In the area of asset management, Japan agreed to:
- Provide complete, unrestricted access to the $200 billion public pension
fund market for investment advisory companies (IACs) and to expand access to the
private pension fund market substantially. Recently, Japan announced that it
will increase market access for IACs to the $375 billion Employee Pension Fund
market by lifting the ceiling on market access from 1/3 to 1/2 on April 1, 1996.
The ceiling will be removed altogether in 1999;
- Eliminate the balanced fund requirements on the bulk of pension assets open
to management by IACs, thus enabling both IACs and trust banks to sell
specialized fund management services;
- Move toward market value accounting for pension liabilities and disclosure
of fund manager performance on a market value basis, which will allow fund
managers to compete for management mandates on the basis of relative performance
and not affiliation; and
- Permit dual licensing of an investment trust business and a discretionary
investment management business to operate as one entity.
In the area of corporate securities underwriting and sales, the agreement
creates greater opportunities for foreign financial firms to participate in
underwriting domestic securities issues for Japanese issuers. In this regard,
Japan has committed to:
- Liberalize restrictions on the introduction of new financial instruments;
- Introduce a domestic asset-backed securities market in Japan; and
- Eliminate restrictions on the offshore securitization of Japanese assets.
With respect to cross-border financial transactions, the agreement promotes
further integration of Japan's capital market with global capital markets by
creating virtually unlimited opportunities for qualifying Japanese corporate
investors to invest abroad, and for Japanese issuers of securities to tap
foreign capital markets without restriction on either the size or type of
instrument being issued. Specific commitments include the elimination of
restrictions on securities offerings by residents and non-residents, and the
elimination of seasoning requirements on non-resident offers of euro-yen
The agreement also features comprehensive obligations, building on the new
Japanese Administrative Procedure Law, to provide transparency in financial
regulations and protection from administrative abuse.
In the year since the agreement was signed, the Japanese Government has
implemented the vast majority of the commitments made within the specified
timeframe. In some instances, the timetable for implementation was accelerated.
In a few other areas, additional actions either have been taken or announced for
future implementation by the Japanese Government to improve the liberalization
of Japanese financial markets.
The U.S. Government is currently monitoring the agreement to ensure that
implementation remains on schedule and assessing the impact of the actions
undertaken, using the qualitative and quantitative criteria included in the
agreement. The U.S. and Japanese Governments have held two review meetings (in
May 1995 and in February 1996) since the agreement was signed. At the most
recent follow-up meeting in February 1996, the U.S. Government emphasized the
need for further improvements in financial disclosure and transparency.
Japan is the world's second largest market for insurance with more than $382
billion in total premiums in JFY 1994. While foreign share of other G-7
countries' domestic insurance markets ranges from 10 to 33 percent, foreign
firms' share in Japan was only 3.3 percent. More specifically, foreign share in
Japan was roughly 3.1 percent of life insurance premiums and 4.2 percent of
non-life premiums. Unable to compete freely in the primary life and non-life
sectors of the Japanese insurance market largely due to restrictive government
regulations, foreign firms have developed a presence in the so-called "third
sector" (e.g., personal accident, sickness, and nursing care insurance) which
comprises only 4.7 percent of Japan's overall insurance market. Foreign share of
the third sector market was 35.7 percent in JFY 1994. (The vast amount of
insurance sold by the Japanese Ministry of Post and Telecommunications is not
included in the calculation of these figures. Including premiums collected by
Japan's postal service would significantly lower foreign market share.)
In consideration of the low market penetration by foreign firms and the
Ministry of Finance's (MOF) plans to implement the first major reform of Japan's
insurance business law in over 50 years, insurance was designated as a priority
sector under the Framework in 1993. On October 11, 1994, U.S. and Japanese
officials concluded the U.S.-Japan insurance agreement. The agreement commits
Japan to enhance regulatory transparency, strengthen antitrust enforcement and
undertake specific liberalization measures. With regard to the third sector,
Japan agreed not to allow radical change in the business environment of the
third sector until foreign, medium and small insurers were first given a
reasonable period to fully compete in a deregulated environment in the primary
life and non-life sectors. In addition, the agreement calls for the completion
by March, 1995 of a study of insurance purchasing practices among
keiretsu-affiliated firms and the role of case agents in these purchases. The
agreement also sets forth MOF's intention to allow insurance brokers to operate
in Japan and its commitment to institute a notification system for certain
The Japanese Diet passed the new Insurance Business Law (IBL) in June, 1995.
The IBL will likely come into force on April 1, 1996 and grants MOF sufficient
authority to fully implement the measures contained in the insurance agreement,
including measures relating to the third sector. MOF is currently in the final
stages of drafting ordinances required to implement the IBL.
The first review of the insurance agreement was held in September 1995 at
which the United States raised a number of concerns relating to MOF's
implementation of the agreement. In particular, U.S. Government officials called
for MOF to fully and faithfully implement the measures relating to the third
sector and transparency, and to make utmost efforts to conclude the keiretsu
Despite receiving repeated assurances from MOF on these issues, the United
States remains seriously concerned about MOF's implementation of this agreement.
MOF does not appear to have fully and equally informed foreign insurers and
intermediaries of planned actions, some of which will negatively impact foreign
firms. Furthermore, the keiretsu study called for in the agreement has not begun
despite its March 1995 deadline.
Finally, the U.S. is gravely concerned about MOF's intentions to permit
certain activities of Japanese insurance subsidiaries in the third sector,
without first fulfilling the conditions established in the agreement with
respect to deregulation of the primary life and non-life sectors. This linkage,
i.e., the implementation of meaningful broad-based deregulation of the primary
sectors prior to allowing expanded entry into the third sector by the Japanese
insurance subsidiaries, is a fundamental aspect of the insurance agreement. This
linkage was agreed to by both governments to prevent immediate, discriminatory
and selective deregulation of the third sector, while retaining protections for
large Japanese insurance firms in the primary life and non- life sectors, which
constitute roughly 90 percent of Japan's insurance market.
The U.S. Government believes that properly implemented deregulation of
Japan's insurance markets will introduce much needed competition, and result in
a costs savings and greater product choice for Japanese business and consumers.
The U.S. Government spelled out in concrete terms a detailed vision, to be
implemented in phases, of substantial deregulation of the Japan's primary life
and non-life sectors. Specifically, the U.S. called on MOF to initially
implement meaningful deregulation of Japan's large and sophisticated commercial
fire market, and to allow for innovation in the marketing of automobile
insurance. Later deregulation would eventually result in broad application of a
Despite our efforts, MOF has yet to put forward concrete and meaningful
proposals for deregulation of the primary sectors. In fact, MOF appears
determined to resist timely and meaningful deregulation. For example, a February
29 Kampo announcement sets forth a threshold of yen 30 billion insured
risk for commercial fire insurance above which firms will be allowed to
innovative based on price. Unfortunately, this "market opening" on the part of
MOF applies to less than two percent of this important market segment.
U.S. and Japanese officials have met on numerous occasions, and at various
levels, to ensure the Japanese Government's full implementation of the
provisions of the agreement. The U.S. places resolution of these outstanding
issues at the top of our trade agenda with Japan.
The United States remains concerned about a number of issues affecting the
ability of foreign lawyers to practice law in Japan, including: (1) the
prohibition against foreign lawyers employing or entering into partnerships or
other fee-sharing arrangements with Japanese lawyers and quasi-legal
professionals; (2) restrictions on the legal experience that is counted toward
satisfying the five-year requirement; and (3) restrictions on foreign lawyers'
ability to represent parties in arbitration proceedings under Japanese law.
Japanese commitments under the General Agreement on Trade in Services (GATS)
and revisions to the Special Measures Law permitting limited forms of "joint
enterprises" do not fully address these concerns. The Japanese Government has
indicated that it will submit legislation to the Diet in the spring of 1996 that
would permit foreign lawyers to represent parties without restrictions in
international arbitration proceedings conducted in Japan.
Legal services was raised in January and February 1995, as well as during
February 1996 deregulation and competition policy consultations with Japan.
Legal services was also included in the 1995 U.S. Government deregulation
submission to the Japanese Government.
Several U.S. firms are preparing to enter the local telephone service market
in conjunction with offering cable TV services (cable telephony). These firms
face a major obstacle in obtaining fair interconnection to NTT's local network
that would permit these new entrants to effectively serve cable telephony
subscribers. NTT, the monopoly provider, has little incentive to negotiate
competitive interconnection rates. The Japanese Ministry of Posts and
Telecommunications (MPT) has limited authority over interconnection. The United
States has urged MPT to facilitate expeditious, transparent, non-discriminatory
and cost-based market entry by requiring NTT to adopt pro-competitive
interconnection rules. MPT plans to introduce new rules by 1997.
The United States is currently negotiating with Japan and about 70 other
countries to liberalize basic telecommunications services through the World
Trade Organization's Negotiating Group on Basic Telecommunications (NGBT). In
bilateral discussions in conjunction with both the NGBT and Japan's deregulation
measures, the United States has requested that Japan permit 100 percent foreign
investment in basic services. To date, Japan has offered 33 percent foreign
investment in new common carriers, and 20 percent foreign investment in NTT and
KDD. The NGBT oversees a drafting group preparing a text on regulatory
principles in which the U.S. and Japan participate. In this drafting group, fair
and economical interconnection, along with other competitive regulatory
principles providing for transparent, cost-based and non-discriminatory access
to the basic services market, is treated as a critical component for effective
competition in basic services.
In addition, in bilateral discussions on deregulation of the Japanese
telecommunications market, the United States has urged that Japan clarify and
streamline licensing procedures for new telecommunications service entrants,
such as through eliminating the requirement for new entrants to submit detailed
business plans in their applications to the Ministry of Post and
Telecommunications and eliminating MPT's role in granting or denying
applications based on its estimates of market demand. Rather, MPT should rely on
competitors to determine what, when and at what prices to bring services to the
Japan's stock of inward foreign direct investment (FDI), relative to the
overall Japanese economy, remains minuscule compared to that of other
industrialized countries. As recently as 1991, the OECD estimated Japan's share
in the total inward foreign direct investment in 1991 to be under 1.5 percent
compared to 36 percent hosted by the United States. Moreover, Japan's outward
investment flows dwarf investment into Japan: the ratio has been around ten to
one throughout the 1990s. Investment flows are far more balanced in other OECD
countries: the ratio of outward to inward investment is below two in every case,
and substantially so in most. In 1994, Japanese overseas FDI was $41 billion;
Japan's inward FDI was only one-tenth of that amount, $4.2 billion. Japan's lack
of receptivity to foreign investment is a major trade barrier.
Acknowledging that its inward investment lags far behind that of other
industrialized economies, Japan has taken some steps to address the problem. In
July 1994, the Government of Japan established the Japan Investment Council
(JIC), chaired by the Prime Minister and charged with: promoting measures to
improve Japan's investment climate; coordinating policies of ministries and
agencies concerned with investment; and disseminating information on
investment-related measures. In June 1995, the JIC released a statement on
investment that provided a positive orientation toward FDI and listed useful
policy measures. The Japan External Trade Organization (JETRO), in a 1995 White
Paper, urged the Japanese Government to offer foreign firms improved tax breaks
in order to encourage foreign direct investment. The JETRO report noted that
"whereas Japan has 15.4 times as much cumulative direct investment abroad as
foreign investment at home, U.S. external investment is just 1.2 times the
foreign investment within the country and the figure for Britain is 1.3."
Although most direct legal restrictions on foreign direct investment have
been eliminated, considerable bureaucratic obstacles remain. Japan's low FDI
level reflects longstanding exclusionary business practices, extraordinarily
high market entry costs, discriminatory use of bureaucratic discretion, and the
cumulative effect of years of formal restrictions on inward investment. While
Japan's foreign exchange laws have shifted to ex-post notification of planned
investment in most cases, numerous sectors (e.g. agriculture, mining, forestry,
fishing) still require prior notification to Government of Japan Ministries.
Most foreign firms feel compelled to engage in extensive consultations before
undertaking investments in these sectors.
Difficulty in acquiring existing Japanese firms and doubt as to whether
firms, once acquired, can continue normal business patterns with other Japanese
companies, make market access through mergers and acquisitions -- an approach
favored by U.S. and European companies -- much more difficult in Japan than in
other countries. Ties between government and industry, reluctance to break
long-term buyer-supplier relationships, cross-shareholding among allied
companies, low percentages of publicly-traded common stock relative to total
capital in many companies, unwillingness of other members of a keiretsu to allow
a member to come under foreign control, and difficulties foreign firms encounter
in hiring and retaining employees, all inhibit direct foreign investment.
Investment agreement: In July 1995, the U.S. and Japan signed an
agreement on the "Policies and Measures Regarding Inward Direct Investment and
Buyer-Supplier Relationships." The agreement contains inward FDI-related
policies the Japanese Government has instituted during the course of the
investment negotiations and commits Japan to take the following additional
actions to promote FDI in Japan:
- to expand efforts to inform foreign firms about FDI-related financial and
tax incentives and to broaden lending and eligibility criteria under these
- to extend the 1992 "Inward Investment Law" and to make its multi-billion
dollar Private Participation Promotion ("minkatsu") programs, including low
interest loans and tax incentives, available to foreign investors;
- to analyze the barriers to foreign participation in mergers and
acquisitions, and propose measures to improve the climate for this
- to strengthen the FDI promotion roles of such organizations as the Japan
Investment Council, Office of the Trade Ombudsman, JETRO, and the Foreign
Investment in Japan Development Corporation.
The agreement will be reviewed semi-annually over the next two years, or at
any time upon request of either Government.
In late 1995, in response to U.S. concerns raised during follow-up investment
consultations, the Japanese Government extended the "Inward Investment Law" from
May 1996 to May 2006. In addition, MITI lowered the interest rate charged by the
Japan Development Bank (JDB) to foreign investors in high- technology projects.
Furthermore, effective April 1, 1996, the eligibility for "designated inward
investor- status" (which foreign firms need to obtain tax incentives) will be
extended from the first five years to the first eight years of operation of a
foreign firm in Japan. Also effective April 1, the JDB will be allowed to lend
to foreign affiliated firms for M&A related expenses. Finally, the
Government of Japan recommended to the Diet that
foreign affiliates be allowed to carry-over investment-related losses made in
the first five years of operation, not just the first three, and that these
losses may be carried forward 10 years. The Diet will make a determination on
the loss carry forward by the end of March 1996.
Japan Fair Trade Commission Scrutiny of International Contracts
Japan's Antimonopoly Act provides that "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." The
Antimonopoly Act also allows the JFTC to require that it be notified of and
review certain types of international contracts. The term "international
contract" generally refers to a contract between a foreign party and a Japanese
party. These provisions have been used in the past to challenge terms in
international contracts in a manner that disadvantages the foreign parties.
These provisions in the Antimonopoly Act also have led to greater JFTC scrutiny
of contracts involving foreign parties than of contracts solely between Japanese
In 1992, the JFTC revised regulations specifying types of international
contracts subject to notification. This resulted in substantial decreases in the
numbers of notifications, although not complete elimination of the requirement,
as requested by the United States. The JFTC has assured the United States that
enforcement of the Act's international contract notification provisions will not
discriminate against U.S. parties to such contracts. The United States continues
to monitor this area closely. The United States is particularly concerned about
the continued notification requirement for certain international joint venture
contracts, and called for elimination of this requirement during the Framework
Japan's competition law -- the 1947 Antimonopoly Act (AMA) -- prohibits
price-fixing, bid rigging, market allocations and group boycotts, as well as a
range of other unfair trade practices. The Japan Fair Trade Commission (JFTC)
enforces the AMA.
JFTC antimonopoly enforcement historically has been weak. There have been
some recent improvements due to U.S. efforts under the 1989-91 Structural
Impediments Initiative, the Framework, and annual bilateral antitrust
consultations. However, Japanese legal remedies and antimonopoly enforcement
efforts still fall far short of that needed to ensure that Japanese markets are
open to competition from U.S. and other foreign competitors. Criminal
prosecution of antimonopoly violations, for example, is sporadic and inadequate.
Few cases have been prosecuted in the last five years, and no individuals
actually have been imprisoned. Infrequent use of the Antimonopoly Act's criminal
provisions undermines its potential as a deterrent.
In 1991, the JFTC issued antimonopoly guidelines on unlawful distribution and
corporate business practices, which it followed up with surveys on automobile
distribution, auto parts procurements, flat glass and paper, among others. These
surveys uncovered numerous business practices that the JFTC judged to impede
competition. Despite the guidelines, JFTC surveys, and anecdotal and structural
evidence of uncompetitive markets and exclusionary practices, the JFTC has not
used its enforcement powers aggressively to eliminate anticompetitive practices
that exclude foreign goods and services from Japanese markets.
On March 1, 1995, the JFTC created a "Task Force on Import Restrictions and
Internal-External Price Gaps" which is responsible for investigating and taking
enforcement action against anticompetitive practices that restrict imports, such
as import cartels and group boycott activities. However, this Task Force has yet
to take any visible concrete actions to address these problems.
In October 1995, the JFTC published updated guidelines concerning the
activities of Japanese trade associations. These are intended to clarify
antimonopoly rules in this area so as to prevent industry associations from
engaging in ant-icompetitive business activities that impede foreign companies
from competing successfully in Japan.
The Government of Japan is considering submitting legislation to the Diet
this spring that would eliminate the AMA's ban on holding companies. This
provision was included in the original AMA to prevent the re-emergence of the
pre-war zaibatsu. Change in this area that is too permissive could lead
to a strengthening of Japan's keiretsu groups and an increase in the
barriers faced by U.S. and other foreign firms in Japan.
In February 1996, the Japanese Government submitted legislation to the Diet
that would upgrade and strengthen the JFTC's organization and bureaucratic
status in the Japanese Government. The proposed legislation, if enacted, would
be a positive development but will not adequately strengthen Japan's
antimonopoly system unless supplemented by a substantial increase in the number
of JFTC investigators and by significant additional measures to strengthen the
JFTC's ability and willingness to enforce the AMA in an aggressive manner.
(For further description of competition policy concerns in particular
sectors, see the discussion of autos, auto parts, film, paper, and glass. See
also the discussion of distribution, marketing practice restrictions and JFTC
scrutiny of international contracts.)
The Government of Japan offers Japanese firms incentives, such as interest
rate subsidies and preferential loans, for aircraft and engine development.
Policy and regulations allow MITI to nurture the Japanese aerospace industry by
importing, developing, and distributing new technology and by apportioning work
among Japanese manufacturers. Despite the focus on development, however, long
term prospects for Japan's aerospace industry are far from certain. In 1995,
Japan announced that a domestically designed and produced mid-size passenger jet
(the YSX project) was being put on hold indefinitely.
The lack of a dynamic and aggressive domestic aviation industry severely
restricts development of aviation-related infrastructure or any kind of business
or general (i.e., "non-airline") aviation in Japan. Sales of U.S. business jets,
light aircraft, air traffic technology and equipment, airport-use equipment, and
services remain far below that generally expected in a nation with an economy as
developed as Japan's. Japanese demand for helicopters is also stifled by
restrictive flight rules and lack of heliports. Nonetheless, Japan has become a
major supplier to foreign aircraft assemblers by supplying fuselage sections for
large civil aircraft and is increasing emphasis on electronics, composites and
other high value-added components.
The United States continues to monitor implementation of the 1977 Bilateral
Airworthiness Agreement, which facilitates the mutual acceptance of aircraft
airworthiness certificates. Japan still requires a Japanese airworthiness
certificate for any aircraft imported into Japan (although inspection may be
done in Japan or in the United States). Japan is still reviewing certification
procedures and may submit a deregulation proposal to the national legislature in
The U.S. also continues to push for increased access to Japan's major
airports for business jets.
The September 1990 U.S.-Japan Amorphous Metals Agreement addresses market
barriers and unfair trade practices hindering U.S. firms from marketing
amorphous metals technology in Japan's $100 million utilities market. Pursuant
to the agreement, Japanese steelmakers have implemented a stay on the domestic
production and sales of amorphous metals until 1997, and Japanese utility
companies have field-tested U.S.-made transformers with amorphous metal cores to
verify performance. The United States is monitoring closely implementation of a
key remaining element of the agreement: Japanese utility companies' commitment
to make purchasing decisions based on the Edison Electrical Institute's "total
life cycle levelized annual cost" evaluation method.
Automobiles and Auto Parts
Japan's domestic motor vehicle sales were approximately 6.87 million units in
1995, valued at about 12.7 trillion yen. Imported motor vehicle sales reached a
record 388,162 units in 1995, up 28.8 percent from 1994. This growth can be
attributed to the strong yen, the popularity of newly introduced small cars and
recreational vehicles, and significant imports from Japanese transplants in the
Although sales of imported autos have increased three years in a row and set
records during the last two years, import penetration is still only 5.6 percent
of total auto sales. Total U.S. imports to Japan were 143,232 vehicles, or 2.1
percent of the market. If Japanese transplant figures are subtracted, the figure
decreases to 0.85 percent. Sales in Japan of Big Three vehicles originating in
North America were only 58,469 units.
In 1995, the share of imported cars -- excluding minicars (engines less than
660 cc) -- in the overall Japanese auto market was 7.5 percent, and in the
imported passenger car market was 10.2 percent, according to the Japan
Automobile Importers Association (JAIA). Although this level is still
considerably below the level of foreign penetration in Europe and the U.S., it
remains highly significant: imported passenger cars were less than five percent
of the total market as late as the early 1990s, and topped ten percent for the
first time in 1995.
U.S. access to the motor vehicle market is restricted primarily through
Japanese auto manufacturers' control over dealer networks. Japanese auto
manufacturers maintain their control through financial ties (equity, loans,
rebates, personnel transfers to dealerships), by allocating the most desirable
models, and through other forms of cooperation and technical support. In many
respects, dealers function as captive distributors of vehicle manufacturers
rather than independent businesses. This system tends to keep dealers marginally
profitable and highly dependent on a single manufacturer. The U.S. and Japanese
governments discussed this issue during the U.S.-Japan auto and auto parts
talks, and signed an agreement in August 1995.
The United States is closely monitoring implementation of the agreement,
structural characteristics of the distribution system, and certification and
homologation costs (which drive up the unit cost of imported autos). Despite
U.S. auto makers'substantial investments in improving their local distribution
system as well as in marketing right-hand-drive models suitable for the Japanese
market, the growth of foreign controlled franchised dealerships since the
signature of the automotive agreement has been slower than expected.
Auto parts: In 1995, Japan's automotive parts market was valued at
about $141 billion; of which, the parts aftermarket accounted for about $53
billion. The U.S. share of the total Japanese parts market was estimated to have
been about 1.3 percent, while sales to the aftermarket were well under 0.5
percent. Close Japanese intercorporate relations make it difficult for foreign
automotive parts suppliers to compete with Japanese- owned suppliers for
business from Japanese motor vehicle makers. Complex, strict and often obscure
regulations governing vehicle inspection, modification and repair have in the
past sharply restricted and to a large extent continue to limit foreign
suppliers' access to the replacement parts aftermarket and encourage consumers
to have vehicles repaired at auto dealerships or certified garages that use
almost exclusively manufacturer-origin "genuine" replacement (OE) parts. Because
parts distributors/wholesalers seldom stock non-OE parts, dealers and garages
have no choice but to use genuine parts. Since parts price surveys have shown
that these OE parts cost almost three times as much as similar parts sold in the
United States, this creates windfall profits for OE parts suppliers at an
enormous cost to Japanese consumers.
Regulations limiting where and by whom repairs may be made further restrict
creation of a competitive, independent parts aftermarket. For example, parts
deemed essential to vehicle safety ("critical parts") cannot be replaced without
inspection by a Transport Ministry (MOT) official, unless repairs are done at a
certified garage. Consumers may replace critical parts themselves, but must then
take the vehicle to a MOT Land Office for a costly inspection. Non-certified
garages are prohibited from replacing any part that involves disassembly of
These regulations create strong incentives for consumers to use only
certified garages, simply for convenience's sake. Certified garages depend
heavily on vehicle manufacturers and OE suppliers for their business and, as a
rule, do not stock foreign aftermarket parts. In addition, in order to sell in
OE manufacturers' channels, a foreign supplier must be accepted by each Japanese
vehicle manufacturer as a potential supplier for a given vehicle model, and then
must go through an expensive and lengthy approval process.
Market-opening negotiations: Market-Oriented Sector-Selective (MOSS)
auto talks began in 1986. The U.S. and Japan agreed in 1990 to a Market-Oriented
Cooperation Plan (MOCP) to develop long-term business relations between Japanese
vehicle makers and U.S. auto parts suppliers. Japanese auto makers periodically
update and issue import expansion and U.S. supplier outreach programs. In 1992,
Japanese vehicle makers announced voluntary plans to expand U.S. auto parts
purchases to $19 billion by JFY 1994: $15 billion for use in Japanese-owned
plants in the United States and $4 billion for use in Japan. Japanese automakers
exceeded the goals for purchases in the U.S. by $2.0 billion, but fell $1.0
billion short for parts used in Japan..
In 1993, the United States and Japan agreed to include motor vehicles and
parts under the Framework talks. In August 1995, after nearly two years of
negotiations, the U.S. and Japan signed a market opening agreement with the
- Japanese vehicle manufacturers will increase production in the U.S.,
including efforts to build transmission and engine parts, and increase local
content for vehicles made in the United States.
- Japanese Government and industry will help develop dealer networks for
aftermarket parts in Japan by promoting business connections among dealers and
manufacturers, by publicly informing dealers of their options, and by
establishing key contacts in both government and industry for problem
- Japan will relax regulations on personnel, space and tool requirements for
certified garages; let garages pool resources to do inspection services; allow
specialized garages, like brake shops, to operate outside the inspection system;
reduce and more narrowly define the number of critical parts; and provide a
review and complaint system to remove specific parts from regulation.
- Japan will deregulate sixteen standards and certification barriers and
streamline the Type Designation System.
- Equal access to data registration information will allow U.S. vehicle makers
to analyze competitors' customer bases and, thus, expand their marketing
As a result of the automotive agreement with Japan, in the fall of 1995 the
Japanese Ministry of Transportation eliminated most restrictions on external
modification of vehicles (e.g., the addition of side mirrors), and eliminated
the following four parts from the "critical parts lists" (i.e., parts whose
replacement had to be certified by an agent of the MOT): shock absorbers,
struts, power steering equipment, and trailer hitches. This action by MOT was an
important beginning to substantial deregulation in the auto parts
The Agreement indicates that MOT will undertake a year long study of further
deregulation of "critical parts" -- a study due to be completed in September of
1996. The regulation by MOT of critical parts items such as brake parts and
clutch assemblies continues to constitute an important barrier to the sale of
American auto parts in Japan. Deregulation of these and other critical parts in
September will be very important for expanded participation of American
suppliers in the Japanese aftermarket.
Equally significant to American auto parts suppliers will be the conditions
under which the Japanese garage system is opened to independent participation.
By limiting the authorizations for compulsory inspections to garages that are
closely linked to Japanese automobile manufacturers, MOT regulations have been
an important deterrent to foreign participation in the huge Japanese replacement
parts market. Substantial liberalization of the garage system is due under the
U.S.-Japan Automotive Agreement in early 1997. The U.S. Government will be
working closely with MOT during the year to ensure that this deregulation is
meaningful and complete.
Extensive Japanese trade promotion programs, including a 39 billion yen
dealership program, extended loans to importers, and tax breaks for imports are
also expected to improve the overall import climate. A public MOT commitment to
guard against discrimination against U.S. products and to help introduce
imported products into repair garages may give imports an extra boost. As of
mid-March 1996, thirteen pending standards and certification issues had been
Beginning with the MOSS talks in 1985, the United States and Japan have
signed a series of telecommunications trade agreements. The 1989 Third-Party
Radio and Cellular Telephone Agreement, negotiated pursuant to a 1988 Trade Act
Section 1377 review, addresses market access to the cellular telephone and
third-party radio communications markets. Not withstanding this agreement,
problems preventing U.S. cellular systems' technology from entering Japan's
cellular service market emerged in 1992 and 1993. In March 1994, the two
Governments reached agreement to provide U.S. technology access to, and
opportunities to compete in, the Japanese cellular telephone market in the
Tokyo-Nagoya area comparable to those opportunities enjoyed by Japanese
competitors. The agreement includes a highly detailed schedule of commitments on
infrastructure deployment and marketing efforts designed to ensure full
implementation. In addition, the Japanese Government committed to monitor and
oversee completion of the system and to confirm compliance.
At the last quarterly review in late 1995, implementation of the 1994
agreement was determined to be complete. Subscribers to the U.S. technology
system exceeded estimates, resulting in an outcome under the agreement that has
thus far benefited all parties concerned. Specifically, subscribers to the North
America TACs system have grown dramatically: when the agreement was signed in
February 1994, there were only 22,000 subscribers to this system; by the end of
1995, subscribership had jumped to over 600,000.
International Value-Added Network Services/Network Channeling Termination
A 1990 agreement largely resolved issues involving liberalized trade
treatment for suppliers of digital network channel terminating equipment (NCTE)
and liberalized regulation for providers of international value-added network
services (IVANS). Supplemental accords were signed in April and June, 1991. The
results of the NCTE agreement and the IVANS accords have generally been
satisfactory. Of late, foreign value-added service providers and closed-user
group operators doing business in Japan have complained of overly burdensome
regulation for Special Type II carriers. The U.S. raised this issue in a recent
deregulation submission to the Government of Japan. The regulatory treatment of
Special and General Type II carriers (those providing services by leasing lines
from Type I carriers (facilities-based) is being reviewed by the Government of
Japan in the process of its deregulation measures.
U.S. carriers have the lion's share of the passenger sector of the U.S.-Japan
civil aviation market -- a result of their greater competitiveness compared to
Japanese carriers. U.S. carriers also are highly competitive in the cargo
sector, holding a market share of 55 percent. With nearly 40 percent of U.S.
exports to Japan moving by air, Japan is by far the largest bilateral air
freight market for U.S. carriers. Seeking to revise the 1952 bilateral
agreement, Japan advocates restraints on growth of U.S. carriers' services, both
in the bilateral market and to Asia-Pacific destinations "beyond" Japan, in
addition to expansion of rights for Japanese carriers to and beyond the U.S.
While U.S. incumbent carriers (Northwest, United and Federal Express) have been
allowed limited expansion of services to and beyond Kansai International Airport
after it opened in September 1994, the Japanese Government, seeking to open
talks on passenger services, has not allowed other U.S. carriers to serve the
In July 1995, the U.S. and Japan agreed to begin all-cargo negotiations with
the aim of reaching a new agreement, by March 1996, that effects further
liberalization and equality through expansion of opportunities for both sides.
Those discussions began in September 1995. The United States has emphasized that
U.S. carriers should be allowed to exercise fully their rights under the
existing bilateral aviation agreement. The United States has pursued expansion,
rather than restriction, of opportunities for U.S. and Japanese carriers alike.
The Japanese have sought to restrict the rights of Northwest, United and Federal
Express to operate cargo services to Japan and beyond to other Asian countries.
The Japanese also have been reluctant to provide new rights to other U.S.
carriers to expand their existing services or initiate services in the
Reducing and eliminating restrictive or outdated regulations in Japan can
improve market-driven competition, leading to greater access by foreign firms,
lower costs for Japanese consumers, and increased efficiency throughout the
Japanese economy. A timely elimination of regulatory barriers, more vigorous and
consistent competition policy enforcement, and greater transparency of
administrative procedures are needed to address Japan's broad structural
problems which impede the sales of foreign goods and services and discourage
foreign direct investment.
The Framework established the Deregulation and Competition Policy Working
Group as the overarching forum for addressing these issues. In 1994 and again on
November 21, 1995, the United States presented Japan with lengthy and detailed
submissions containing specific deregulation, competition policy and
administrative reform recommendations. Also in November 1995, the American
Chamber of Commerce in Japan and the European Union submitted detailed
deregulation recommendations to the Japanese Government. The U.S. and EU have
held discussions on our respective approaches on this issue.
The timing of these submissions was tied to the Japanese Government's efforts
to draft and revise a government-wide deregulation action plan. The Government
of Japan originally announced a 5-year deregulation action plan in March, 1995;
implementation of this plan was subsequently shortened to three years. The
Japanese Government is expected to announce the first annual revisions to the
action plan in March 1996.
The latest U.S. proposal included recommendations regarding basic principles
and processes, deregulation in specific sectors, requests for implementation of
significant administrative reforms, and greater competition policy enforcement.
In December 1995 and February 1996, the U.S. Government held working level
consultations with the Japanese Government to discuss the U.S. submission.
The United States urged Japan to adopt deregulatory principles advocated by
the U.S. and major Japanese private sector organizations and advisory groups,
and to implement a deregulation program based on certain fundamental principles.
Such principles include broad and continuous review; "freedom from regulation in
principle, with regulation as the exception" (a commitment urged in Japan as
early as 1985 by the government-sponsored Maekawa Commission); enhanced
transparency and accountability; prohibition of informal delegation of
government authority; and promotion of market mechanisms. The United States also
urged Japan to provide for domestic and foreign private sector participation and
solicitation of public comments in revising its deregulation action plan. To
support monitoring of the action plan, the United States urged Japan to issue an
annual report which evaluates progress achieved.
The United States also urged Japan to undertake aggressive administrative
reforms to enhance the openness of government practices, including reducing and
making more transparent Government of Japan administrative guidance. Such
informal measures -- often having the same weight as law -- are a major
contributing factor in the Japanese Government's interference in the private
sector in a discriminatory and unaccountable fashion. The United States urged
Japan to undertake a number of reforms including: adoption of an information
disclosure law, adoption of rule making procedures, enhanced transparency of
advisory committees, and promotion of the use of the Administrative Procedures
Japan is scheduled to complete a revised action plan for deregulation
measures by March 31, 1996. As of February 1996, Japan indicated that it has
achieved over half of the deregulation goals stipulated in its original action
plan. In fact, Japan has implemented deregulation selectively, frontloading easy
to implement changes but reserving the most difficult measures for the last two
years of the 3-year plan. Many of the achievements consist of review of
regulations with no action proposed other than vague statements of intent to
reform with no timetables for concrete action Moreover, Japan has accelerated
deregulation that may be problematic to U.S. interests -- such as a proposed
lifting of a ban on holding companies discussed above.
Also in February, Japan announced a new imported housing initiative which
includes a substantial deregulatory component. To be effective in reducing
housing costs in Japan, and in allowing increased import of building materials
and techniques, this initiative must be broadly defined. The United States
Government expects it to encompass all aspects of housing-related regulations,
including, but not limited to, those listed in the construction and wood
sections of this report. Announcement of a detailed implementation program and
timetable by Japanese Government is expected.
In bilateral meetings on February 1996, the United States expressed its
disappointment with the interim ministerial reports issued in January. These
reports, which will form the basis for revisions to the action plan, are
generally vague and lack significant new deregulation measures. Furthermore, the
interim reports did not address many of the U.S. requests, in particular, with
respect to administration reform. The United States also urged the Government of
Japan to establish firm time lines for implementation of concrete deregulatory
actions. The United States will continue to urge Japan to undertake significant
deregulation through periodic bilateral consultations.
Japan's multi-tiered and highly regulated distribution system serves as a
significant barrier to increasing imports and investment in Japan. The
complexity and rigidity of the system, with its numerous, small, and vertically
integrated retailers and wholesalers, raises the cost of market entry and limits
access by U.S. and other foreign firms.
Market entrants seeking to sell both producer and consumer goods face
obstacles in Japan due to exclusive relationships among retailers, wholesalers,
and producers. Introduction of emerging technologies and services by new
companies is stifled by the difficulty companies face in breaking into the
market. For example, distribution barriers severely limit access in autos and
auto parts, fabricated aluminum, soda ash, flat glass, steel, paper products and
Despite improvements, the Large Scale Retail Store Law, which protects small,
inefficient retailers, remains a major impediment to consumer imports. MITI
eased restrictions in 1994, but the law still limits store hours and days of
operation and allows local commercial interests to reduce floor space for new
competing retail outlets. While administrative delays have been shortened, the
law burdens retailers with a costly and time- consuming application process. The
United States continues to press Japan to ease restrictions on the operation of
large scale retail stores. Distribution issues are addressed under the
Framework's Deregulation and Competition Policy Working Group. In these
discussions, the United States has emphasized the importance of a more efficient
import processing and distribution system. The United States continues to pursue
distribution issues in specific sectoral negotiations and agreements.
Electric Utility Companies' Procurement
Japan's electric utilities are among the largest and most profitable
companies in Japan, accounting for ten percent of Japan's total industrial
investment. Their annual non-fuel procurement requirements represent a
significant market, estimated at about $25 billion. Purchases from foreign firms
comprise only a small percentage of total procurement. MITI's Natural Resources
and Energy Agency tightly regulates Japan's ten big electric utilities, each of
which functions as a monopoly in its respective service area, through the
authority provided under the Electric Utilities Industry Law.
Recent regulatory developments include a revision of the Electric Utilities
Industry Law, effective December 1, 1995, which introduced limited competition
in the power generation market by establishing a framework for independent
producers (IPPs). An average 4.21 percent reduction in electricity tariffs took
effect January 1, 1996. To cope with cost pressures resulting from these
changes, several electric utilities have sent missions abroad to investigate
potential suppliers and increase imports.
While these preliminary efforts are encouraging, the following additional
steps must be taken to improve openness and transparency in utility company
procurement and to help increase electric utilities' imports:
- Sharply increase the number of foreign companies on the product category
lists from which utilities solicit estimates under the "competitive quotations
- Increase the proportion of procurements done under a "competitive cost
- Standardize equipment specifications, which currently differ among
- Harmonize MITI technical standards with international standards.
- Shorten the time required for type approval of equipment.
- Increase procurements of non-fuel, non-power related foreign goods and
In July 1995, the Japanese utility industry took a positive step toward
international cooperation by agreeing to participate with foreign suppliers in
the New Orleans Association (NOA). NOA provides a forum for U.S. suppliers of
power generation, transmission and distribution equipment to develop a greater
awareness of American products among the Japanese utilities, and to develop a
greater awareness of Japanese procurement procedures and business practices
among American suppliers.
Improved dialogue with Japanese utilities is important, but tangible results
are the real test. When individual utility companies' procurement practices are
evaluated, extreme disparities emerge. Some Japanese electric utilities have
large integrated procurement divisions that actively seek substantial quantities
of foreign products; other utilities lag far behind.
The United States will monitor closely individual utilities' efforts to
achieve fair and open access and evaluate progress in providing real
opportunities to foreign suppliers.
Japan's $4.5 billion flat glass market, the second largest in the world, is a
virtual oligopoly dominated by three manufacturers: Asahi Glass, which controls
about 50 percent of the market, Nippon Sheet Glass, which controls about 30
percent, and Central Glass, with about 20 percent. Foreign suppliers account for
only approximately three percent of the Japanese market.
With few exceptions, wholesalers and distributors in Japan have represented
only one Japanese glass manufacturer, thereby significantly restricting
competition. Japanese flat glass makers also have controlled many of the 15,000
retail glass stores in Japan, which has allowed them to pressure retailers to
curtail their business in imported goods.
In January 1995, the United States and Japan signed an agreement to open the
Japanese flat glass market to foreign suppliers. Pursuant to the agreement,
Japanese glass distributors publicly stated that they will diversify supply
sources to include competitive foreign glass suppliers and that they will not
discriminate among suppliers based on capital affiliation. Japanese glass makers
also voiced support for diversifying their de facto exclusive
distribution networks. The Government of Japan committed to promote increased
competition in glass procurement for construction projects based on
nondiscriminatory technical and performance specifications and competitive
The agreement includes qualitative and quantitative criteria for measuring
progress. The United States is monitoring implementation of all phases of the
agreement, especially to ensure that Japanese distributors begin to procure
glass from several different manufacturers. Consultations to assess
implementation of the agreement are planned at six month intervals. The two
Governments conducted the first review of the glass agreement in the Fall of
1995 and will hold the annual review in April 1996.
Thus far, no solid information has been available to indicate the extent of
progress under the agreement. Trade statistics have indicated significant
increases in imports from the U.S. and some other sources. In connection with
the first annual review of the agreement, the Government of Japan is providing
new survey data on recent trends in the flat glass market.
However, it is likely that this data will show that much remains to be done
to open up the retail/wholesale distribution system to handle competitive
foreign glass products; improve access for IJS glass products such as mirrors
and automotive glass; and promote the use of energy-efficient insulating glass,
where foreign glass companies have a strong competitive advantage. Access to
Government of Japan public sector procurement is also a key part of the
Agreement, which the U.S. Government is closely monitoring.
Marketing Practice Restrictions
JFTC regulations restrict premiums, sweepstakes and other sales promotions
offered to consumers. The regulations cap values for premiums and for prizes in
sweepstakes, prize competitions or lotteries.
The JFTC also can authorize establishment of Industry Fair Competition Codes,
under which domestic industries agree on sales promotion rules that are even
more restrictive than the JFTC's own regulations. At least 52 such Codes in 29
industries have been authorized. These Codes can act as collusive and
anticompetitive restrictions on competition in the Japanese market.
These restrictions on prizes, promotionals and other marketing practices
restrict legitimate competition, maintain market positions of entranced Japanese
firms and impair the ability of foreign firms to enter and compete successfully
in the Japanese market.
The U.S. Government has continuously raised this issue in the Framework
discussions. In response to calls from the U.S. Government and the American
business community, the JFTC announced in June 1995 proposed revisions to its
rules on premiums and sales promotions. Specifically, the JFTC announced that it
intended to increase ten-fold the maximum prize in open lotteries (not requiring
a purchase to enter) and sweepstakes, repeal the special restrictions on premium
offers by department stores, repeal the JFTC's special regulations on premium
offers by manufacturers to distributors and retailers, eliminate the maximum yen
limit on consumer premiums (while retaining the percentage of sales price caps)
and clarify a number of other rules.
In August 1995, the U.S. Government submitted written comments to the JFTC on
its proposed revisions, calling on the JFTC to go farther in deregulating
restrictions on premiums and other sales promotions. The U.S. Government again
called for substantial deregulation of these rules in its November 1995
submission to the Government of Japan. However, in February 1996, the JFTC
finalized its proposed revisions without change.
Paper and Paper Products
The 1992 U.S.-Japan paper agreement aims at substantially increasing access
by competitive foreign producers to Japan's $28 billion paper products market,
the world's second largest. Barriers to access include a multi-tiered
distribution system which is effectively closed to foreign products and numerous
non-market- oriented practices, such as a lack of transparent, written purchase
Under the 1992 agreement, Japan committed to undertake efforts to encourage
use of competitive foreign paper products and establish productive
buyer-supplier relationships between foreign paper producers and Japanese
consumers. In particular, Japan committed to encourage Japanese consumers in
four key end-user segments: pharmaceuticals, cosmetics, publishing, and food
processing and packaging. Other provisions called for establishing Antimonopoly
Act compliance programs and written purchasing plans throughout the Japanese
paper distribution and consumer sector.
The market share of foreign products in the Japanese market was 3.7 percent
before the agreement. In October 1994, despite vigorous efforts by U.S. and
foreign firms, foreign market share remained stagnant at 3.9 percent. (The 1995
figure will not become available until May.) Strong demand for paper products in
the United States and weak demand and low prices in Japan may be contributing
factors, but the United States remains concerned about the lack of progress in
increasing market access for foreign firms. The United States is particularly
concerned by the lack of direct encouragement in the four key end-user sectors.
U.S. firms remain skeptical, despite MITI statements that after-transaction
price adjustments have been eliminated, and seek GOJ vigilance in enforcing the
On October 3, 1994, U.S. concerns about Japanese practices in this sector
prompted the identification of market access for paper and paper products as a
practice that may warrant future identification as a "priority" foreign country
practice under the provisions of "Super 301." The U.S. and Japan met in October
1994, and July and September 1995, to discuss how to address problems in this
sector. There was no meaningful progress towards resolving our concerns, despite
the U.S. having put forward concrete suggestions for enhancing implementation of
the paper agreement. Thus, on September 27, 1995 the United States extended the
inclusion of Japanese paper practices on the watch list. The United States will
continue discussions with Japan aimed at reinvigorating the current
Consumer Photographic Film and Photographic Paper
Despite the absence of formal barriers, foreign film manufacturers face a
variety of informal barriers that restrict access and sale of foreign-produced
film and photographic paper in the Japanese market, the second largest film
market in the world. These include barriers that prevent foreign firms from
obtaining adequate access to the Japanese film distribution network and retail
Status of the 301 Case: On July 2, 1995, in response to a petition
filed by Eastman Kodak, USTR initiated a section 301 investigation of barriers
to access to the Japanese market for consumer photographic film and paper. The
petition alleges that during the past 25 years, the Japanese Government has
instituted and maintained counterliberalization measures adversely affecting the
distribution and sale of foreign-produced film and paper in Japan. The petition
also alleges that the Japanese Government not only tolerated, but also actively
encouraged and reinforced, systematic anticompetitive practices and that this
toleration continues to block foreign access to Japan's market for consumer
photographic film and paper. The petition alleges that these barriers have
resulted in a cumulative revenue loss of $5.6 billion since 1975.
Japan has refused to consult with the U.S. on this issue subsequent to
preliminary discussions held on October 3, arguing that all of the allegations
concern private anticompetitive activity and should be handled by the JFTC. On
February 21, 1996, the JFTC announced that it would initiate an economic survey
of the film sector. The United States is continuing to seek consultations with
the Government of Japan, having made it clear that the film issue cannot be
resolved unless the full range of market access issues, as well as the
anticompetitive practices involved in this case, are addressed.
The U.S. Government is continuing its section 301 investigation and
considering its options for resolving this case. USTR must make a determination
of whether the Japanese practices are unreasonable, unjustifiable, or
discriminatory by July 2, 1996.
Wholesale Distribution: The structure of Japan's film market makes a
strong distribution network critical to film manufacturers seeking to operate in
the Japanese market. Primary wholesalers or subsidiaries of film manufacturers
deliver most of the film that is distributed to the 279,000 outlets that sell
film in Japan. About half of all film sales in Japan are made through
photospecialty stores (as compared with 3 percent in the U.S.). Another 23
percent are sold through supermarkets and department stores, 8 percent at
tourist resorts and parks, 7 percent at convenience stores, 2 percent at drug
stores, and the rest through kiosks and other channels.
Japan's four largest film wholesalers have distributed only one brand of
Japanese film exclusively since 1975. The Japanese manufacturer maintains close
ties to these distributors, known as tokuyakuten, through a variety of
means. Because foreign manufacturers have been unable to gain access to this
channel, they have attempted to develop parallel distribution networks, but with
only limited success. Foreign manufacturers use secondary wholesalers to
distribute 15 percent or less of their film, but these wholesalers do not have
the national coverage of the tokuyakuten. Moreover, establishing a
parallel distribution system is extremely expensive -- Japan is often cited as
among the countries with the highest distribution costs in the world. To the
extent that foreign manufacturers have maintained or increased their market
share over the last ten years, it has been principally as a result of their
direct sales -- often of double branded or private-branded film -- to discount
Retail Sales: At the retail level, foreign film is available in only
about 36 percent of all outlets and only about half the photospecialty stores.
Moreover, even where foreign film is available, consumer choice on types (brand,
film speed, number of rolls per package) of foreign film is limited. Foreign
film is more readily available in large discount stores, but these stores are
located mainly in major metropolitan areas and their number, size, and hours of
operation are limited by the Large Scale Retail Store Law.
Limited price competition at the retail level also impedes foreign film
sales. While foreign film manufacturers may discount their film at the wholesale
level, that discount is not necessarily reflected in the final retail price.
Japanese industry journals describe discussions among Japanese retailers of
cameras and photospecialty products on ways to stabilize prices and counteract
discounting among ostensible competitors.
Liberalization Countermeasures: When the Japanese Government
withdrew its formal restrictions on imports and inward investment following
international pressure, it simultaneously implemented liberalization
countermeasures designed to restrict foreign producers' access to the Japanese
market. The liberalization countermeasures were implemented between 1967 and
1984 and included: measures to block or limit foreign direct investment in both
new and established enterprises, and restructuring of the distribution sector to
prevent foreign products from making inroads into the Japanese market. Because
of the perceived need to protect the Japanese film industry from foreign firms,
principally Kodak, the film sector was among the very last to be liberalized --
restrictions on foreign investment in existing enterprises remained in effect
until 1984. MITI's past protection of this sector continues to have a lingering
effect today in the distribution structure for consumer photographic materials.
The U.S.-Japan Semiconductor Arrangement came into effect on August 1, 1991,
replacing the 1986 Semiconductor Arrangement. The current arrangement expires on
July 31, 1996.
The arrangement was negotiated to address persistent problems of access to
the Japanese semiconductor market. The arrangement calls for increased access
for foreign semiconductor suppliers to Japan's semiconductor market under
conditions of free and fair competition. It also deters dumping by Japanese
suppliers in the U.S. and in third country markets. The arrangement calls for
"steady and gradual" improvement in market access over the duration of the
arrangement. The arrangement contains the U.S. industry's expectation of foreign
market share reaching more than 20 percent by the end of 1992. The 20 percent
figure is explicitly recognized by the Japanese Government in the
Progress in improving market share under the 1986 semiconductor agreement was
insufficient, with foreign market share rising only from 8.6 percent in the
third quarter of 1986 to 13.9 percent in the second quarter of 1991. Progress
also was slow during the first five quarters of the 1991 arrangement, before
market share jumped more than four percentage points to 20.2 percent in the
fourth quarter of 1992.
More recently, the steady improvement in the market performance of foreign
semiconductors has demonstrated the effectiveness of the efforts being made by
all parties under the arrangement. Foreign market share reached 20.7 percent in
the fourth quarter of 1993 and the first quarter of 1994 and has steadily
increased since then, averaging 22.4 percent in 1994 and 25.4 percent in 1995.
Regularly scheduled government and joint government/industry consultations
took place in March and September 1995 and February 1996. Among the areas where
the United States suggested that market access for foreign semiconductors could
be further improved were: (1) increased foreign participation in the automotive,
telecommunications, electronic game, and multimedia semiconductor markets; (2)
increase in the number of quality design-ins of foreign semiconductors in key
Japanese end-products; and (3) greater usage of foreign semiconductors by small
and medium-sized companies.
The United States has made clear that we believe a government agreement in
semiconductors must continue in order to preserve and advance the improvements
made in market access and industry cooperation. Although progress has been made
under the arrangement, more remains to be done. The foreign share of the
Japanese market remains relatively low compared to the situation in other
markets. For example, Japanese firms held about 78 percent of the Japanese
market as compared with only 24 percent in the world market outside of Japan. In
the United States, now the world's leading producer of semiconductors, the
foreign market share totaled 39 percent in 1995. Moreover, the arrangement is
now working well and provides many mutual benefits. Trade tensions have
diminished under the arrangement, commercial relations are flourishing, industry
relations are harmonious, and cooperation has replaced confrontation. We are
concerned that, if the arrangement is not continued, progress might stall or
even backslide, and the tensions and frictions that characterized this sector in
the past would reemerge.
The issue of extension or continuation is now under discussion with Japan.
Thus far, the Government of Japan has opposed any continuation.
Shipbuilding Industry Support
Historically, Japan has provided its shipbuilding and repair industry with
extensive subsidies and other forms of assistance, including subsidized
restructuring of the shipbuilding industry, Japan Development Bank (JDB)
preferential financing for Japanese ship operators (which acquire ships almost
exclusively from Japanese shipbuilders), and acceptance of formation of cartels
among ship owners.
U.S. shipbuilders have operated without U.S. government subsidies since 1981.
On June 8, 1989 the Shipbuilders Council of America filed a section 301
petition, seeking the elimination of subsidies and trade distorting measures for
the foreign commercial shipbuilding and repair industry. In response, USTR
undertook to negotiate a multilateral agreement in the OECD to eliminate foreign
subsidies and injurious pricing practices.
In December 1994, an ad referendum Agreement with Respect to Normal
Competitive Conditions in the Shipbuilding and Repair Industry was reached by
the Republic of Korea, Japan, the European Union, Finland, Sweden, Norway, and
the United States. Negotiated under OECD auspices, the so-called Shipbuilding
Agreement requires signatories to align terms and conditions of home credit
schemes --such as that of the JDB -- with the OECD Shipbuilding Agreement. The
Agreement also requires the elimination of all direct and indirect subsidies for
shipbuilding and extends antidumping rules to the industry. The Parties to the
Agreement -- the European Union, Japan, Korea, Norway and the United States --
account for approximately 80 percent of global shipbuilding.
The OECD Shipbuilding Agreement originally was scheduled to enter into force
on January 1, 1996, after all Parties to the Agreement had ratified it. However,
this did not happen because Japan and the United States failed to complete their
respective ratification processes. The other Parties to the Agreement (the
European Union, Korea and Norway) formally ratified it on December 12, 1995. The
Government of Japan has indicated that its delay in ratification was entirely
procedural and has expressed full confidence that its process will be completed
in the first half of 1996. Consequently, the Parties to the Agreement agreed to
extend the ratification date to June 15, 1996, and entry into force to July 15,
Sea Transport and Freight
Shipping lines in Japan must apply to the quasi-public Japan Harbor Transport
Association (JHTA) for permission to schedule port activities. The JHTA controls
harbor labor practices. Shipping lines have no JHTA representation.
The "prior consultation system" requires shipping lines to seek JHTA approval
for all scheduling and terminal operation changes. Shipping lines can neither
change stevedores, which the JHTA assigns in perpetuity, nor request new tenders
or open bids. Initially limited to changes that might affect waterfront jobs,
prior consultation was expanded to include changes such as vessel replacements,
opening new ports and consortia formation.
The JHTA requires all cargo leaving Japan be weighed and measured -- even
standardized containers and cargo -- a practice that deviates from the
international norm. The JHTA also limits Sunday work. All other countries in
Asia, Europe and North America allow Sunday work in ports, particularly for
container vessels. These practices result in underutilized facilities,
scheduling changes that raise costs, and duplicated work.
Direct Broadcast Satellite Services
U.S. firms seek to serve Japan through Direct Broadcast Satellite (DBS)
services using digital communication satellites. These firms have benefited from
a partial relaxation of restrictions on broadcasting multiple channels, but the
potential for DBS providers remains constrained. A further relaxation of
restrictions, which Japan is considering, would permit DBS providers to serve
customers with the full range of channels and services available through DBS
technology, and would further stimulate the Japanese multimedia and electronics