trade policy review japan report by the secretariat · wt/tpr/s/142 trade policy review page vi...

RESTRICTEDWORLD TRADE

ORGANIZATION WT/TPR/S/142 17 December 2004

(04-5483)

Trade Policy Review Body

TRADE POLICY REVIEW

JAPAN

Report by the Secretariat

This report, prepared for the seventh Trade Policy Review of Japan, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from Japan on its trade policies and practices. Any technical questions arising from this report may be addressed to Mr. Masahiro Hayafuji (tel: 022 739 5873), Mrs. Zheng Wang (tel.: 022 739 5288), Mr. Nirat Supthaweethum (tel.: 022 739 5529) and Mr. Michael Daly (tel: 022 739 5077). Document WT/TPR/G/142 contains the policy statement submitted by Japan.

Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on Japan.

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CONTENTS Page

SUMMARY OBSERVATIONS vii

(1) ECONOMIC ENVIRONMENT vii

(2) TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES vii

(3) TRADE POLICIES AND PRACTICES BY MEASURE viii

(4) TRADE POLICIES BY SECTOR ix

(5) OUTLOOK x

I. ECONOMIC ENVIRONMENT 1

(1) MAIN ECONOMIC DEVELOPMENTS 1

(2) MACROECONOMIC POLICIES 4 (i) Monetary and exchange rate policy 4 (ii) Fiscal policy 5

(3) STRUCTURAL POLICIES 6 (i) Financial system and corporate reform 6 (ii) Pension reform 8 (iii) Regulatory reform 8

(4) DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT 9 (i) Composition of merchandise trade 9 (ii) Direction of merchandise trade 9 (iii) Composition of trade in services 9

(iv) Foreign direct investment (FDI) 12

(5) PROSPECTS 12

II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 13

(1) TRADE POLICY OBJECTIVES 13

(2) TRADE POLICY FORMULATION AND EVALUATION 13 (i) Trade policy formulation and implementation 13 (ii) Trade policy evaluation 16

(3) TRADE AGREEMENT AND ARRANGEMENTS 17 (i) WTO 17 (ii) Regional Agreements 17 (iii) Bilateral agreements 19 (iv) Preferential treatment 22

III. TRADE POLICIES AND PRACTICES BY MEASURE 24

(1) INTRODUCTION 24

(2) MEASURES DIRECTLY AFFECTING IMPORTS 25 (i) Procedures and valuation 25 (ii) Tariffs 26 (iii) Non-tariff border measures 32 (iv) Contingency measures 33 (v) Government procurement 34

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Page

(vi) State trading 36 vii) Standards, and sanitary and phytosanitary measures 37

(3) IMPORT AND INWARD INVESTMENT PROMOTION MEASURES 40 (i) Import promotion 40 (ii) Investment regulation and promotion measures 41 (iii) Foreign access zones (FAZs) 43

(4) MEASURES DIRECTLY AFFECTING EXPORTS 44 (i) Export taxes, charges, and levies 44 (ii) Export prohibitions, restrictions, and licensing 44 (iii) Export promotion schemes 45

(5) MEASURES AFFECTING PRODUCTION AND TRADE 45 (i) Taxation and tax-related assistance 45 (ii) Subsidies and other financial assistance 47 (iii) State-owned enterprises, corporatization, and privatization 47 (iv) Trade-related intellectual property rights 47 (v) Regulatory reform 50 (vi) Competition policy 51 (vii) Corporate governance 56

IV. TRADE POLICIES BY SECTOR 58

(1) INTRODUCTION 58

(2) AGRICULTURE 59 (i) Overview 59 (ii) Policy developments 59

(3) MANUFACTURING 64

(4) ENERGY AND UTILITIES 65

(5) SERVICES 66 (i) Overview 66 (ii) Financial services 66 (iii) Telecommunications 71 (iv) Transport 73 (v) Professional services 75 (vi) Construction 76 (vii) Education services 76

REFERENCES 77

APPENDIX TABLES 81

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Page CHARTS

I. ECONOMIC ENVIRONMENT

I.1 Product composition of merchandise trade, 2001 and 2003 10 I.2 Direction of merchandise trade, 2001 and 2003 11

II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES

II.1 Policy evaluation system in Japan 16

III. TRADE POLICIES AND PRACTICES BY MEASURE

III.1 Share of non-ad valorem duties, by HS section, FY 2004 29 III.2 Simple average applied MFN tariff rates, by HS section, FY 2002 and 2004 30

TABLES


I.1 Selected macroeconomic indicators, 2001-04 1 I.2 Shares of GDP and employment by sector, 2001-02 4


II.1 Japan's major trade-related laws and regulations 14 II.2 GSP shares for the ten largest beneficiaries 23


III.1 Structure of MFN tariff in Japan, 2001-04 27 III.2 Preferential tariff rates, FY 2004 31 III.3 Procurement composition by product and by origin, 2002 35 III.4 Major standards and technical regulations in Japan, 2003 37 III.5 Total budget for Japan's import promotion programmes 41 III.6 Measures to promote foreign direct investment into Japan, FY 2004 42 III.7 National government tax revenue, FY 2004 45 III.8 Stockholding by the Government of Japan, as at October 2004 47 III.9 Legislation regarding protection of intellectual property rights in Japan 48 III.10 Suspension of imports likely to infringe intellectual property rights, 2000-04 49 III.11 Exemptions from the Anti-monopoly Act, 2003 52 III.12 Enforcement of competition policy, 2000-03 55

IV. TRADE POLICIES BY SECTOR

IV.1 Applied MFN tariff protection in agriculture, FY 2004 61 IV.2 Special safeguard (SSG) actions in agriculture, FY 2002-04 62 IV.3 Procurement prices for all major crops subject to pricing and/or marketing

arrangements/price controls, 2000-03 63 IV.4 Financial institutions in Japan, 2004 67

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Page APPENDIX TABLES


AI.1 Composition of trade in services, 2001-03 83 AI.2 Inward and outward FDI flows by source and destination, FY 2001-03 84 AI.3 Inward and outward FDI flows by activity, FY 2001-03 86


AII.1 Status of notifications to the WTO, September 2004 87 AII.2 Disputes to which Japan has been a party, 2002 to April 2004 90


AIII.1 Applied tariff escalation and tariff ranges, FY 2002 and FY 2004 93


AIV.1 Tariff quota quantity and in-quota imports, FY 2001-03 96

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SUMMARY OBSERVATIONS

(1) ECONOMIC ENVIRONMENT

1. Since its previous Trade Policy Review, Japan's economic situation has improved, particularly compared with the previous decade of slow growth. After recording negative growth in 2002, Japan's economy grew by 2.4% in real terms in 2003, and continued to achieve similar rates of growth in the first three quarters of 2004. Both domestic demand, notably private non-residential investment and private consumption, and external demand contributed to this growth. Unemployment has been falling and deflationary pressure on prices appears to be easing. Growth has helped Japan with its structural problems, including non-performing loans (NPLs). However, it would appear that growth may have slowed in the fourth quarter of 2004; thus the sustainability of the recovery remains to be seen.

2. During the period under review (2002-04), the Bank of Japan continued to relax its monetary policy; the official discount rate and the short-term call rates have been kept at nearly zero, and the monetary base has been increased. However, with negative rates of inflation, real interest rates have tended to be higher than nominal interest rates. This, together with remaining problems in the banking system, may be an impediment to corporate borrowing and investment. The fiscal deficit and public debt are expected to have been in the order of 7% and 163% of GDP in 2004, respectively; the Government aims to achieve a surplus at its primary balance by the early 2010s (compared with a deficit of 5.3% in 2004).

3. Trade has played an important role in the economy. Although the shares of exports and imports are each around 10% of GDP, external demand has contributed substantially to Japan's economic growth since 2002, due in part to the openness of the multilateral trading system. Japan's trade surplus has increased,

reflecting an increase in the merchandise trade surplus and a decrease in the services deficit. Japan's current account surplus, capital and financial account surplus and its foreign exchange reserves have all increased.

4. A sustained recovery would appear to hinge on continued structural reforms, which the Government continues to emphasize. Progress has been made in particular in the financial and corporate sectors (notably the disposal of NPLs, corporatization of state-owned enterprises, deregulation in network industries and some professional services, and establishment of Special Structural Reform Zones).

(2) TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES

5. Japan's trade policy has remained largely unchanged since its previous Review; the overall aim continues to be to ensure long-term prosperity and growth by promoting business activities in Japan and at the international level. In this regard, Japan has placed high emphasis on supporting the multilateral trading system, and has been participating actively in the Doha Development Agenda. Japan grants at least MFN treatment to all WTO Members.

6. Concurrently, Japan has been intensifying its pursuit of bilateral/regional FTAs with some of its trading partners, including in areas like trade facilitation, investment, competition policy, and improvement of business environment. Japan considers that regional and bilateral trade arrangements complement the multilateral system, and are useful tools for market liberalization and structural reform. Japan has signed bilateral free-trade agreements with Singapore and Mexico, and is currently negotiating agreements with the Republic of Korea, Thailand, the Philippines, and Malaysia, as well as consulting with ASEAN as a whole. Japan also supports the "open regionalism" approach of the Asia-Pacific Economic Cooperation (APEC) forum, and

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participates in various other regional trade fora, such as the Asia-Europe meeting (ASEM) and ASEAN+ 3.

7. During the period under review, Japan granted preferential treatment to products from certain developing and least developed countries under the Generalized System of Preference (GSP) scheme. The main beneficiaries of Japan's GSP include China, Thailand, Indonesia, Malaysia, and the Philippines.

(3) TRADE POLICIES AND PRACTICES BY MEASURE

8. Since its previous Review, Japan has introduced various measures aimed at further liberalizing its trade and investment regimes. Progress has been made in improving the competitive environment, including in telecommunications and financial services; however, the use of contingency measures is somewhat more evident than before, and potentially important distortions to competition remain in some sectors, particularly agriculture. The authorities attach priority to regulatory reform and sound competition policy, which could, inter alia, help create more opportunities for domestic and foreign businesses, including those entailing inward FDI.

9. The tariff is Japan's main trade policy instrument; most imports enter Japan duty free or are subject to low tariff rates. In the fiscal year 2004, the simple average applied MFN tariff was 6.3%. Nearly 99% of tariff lines are bound and most applied rates coincide with bound rates, thereby imparting a high degree of predictability to Japan's tariff. At the same time, non-ad valorem duties are an important feature of the tariff, particularly in agriculture. Such duties, which account for 6.6% of all lines, are indicated clearly in Japan's tariff schedule; they tend to involve high ad valorem equivalents (AVEs). Moreover, bound tariff rates that exceed applied rates pertain mainly to non-ad valorem duties. The simple average of all

specific rates for which AVEs were available was approximately ten times the simple average of purely ad valorem tariff rates.

10. Japan has few non-tariff border measures. Those currently applied involve some import prohibitions and quantitative import restrictions, for example, on certain fish and silk items. Imports of certain goods are subject to licensing requirement in order to ensure national security, safeguard consumer health and well-being, or preserve domestic plant and animal life and the environment. Certain aspects of the import quota system can be intricate.

11. During the period under review, Japan used one anti-dumping measure. Recently, Japan began investigating the case for countervailing measures against imports of dynamic random access memory chips from the Republic of Korea. Japan has not imposed any safeguard measures since its previous Review.

12. Certain export controls are maintained on the grounds of national security and public safety, and to ensure adequate domestic supplies of certain agricultural and other primary products. Japan has not notified any export subsidies to the WTO, thereby indicating the absence of such subsidies as defined in the WTO Agreements. Finance, insurance, guarantees, and drawback schemes are available for exports.

13. Various forms of assistance are provided by central and local governments, particularly for agriculture. The total value of assistance to agriculture exceeds the sector's contribution to GDP; most of the assistance seems to consist of measures that distort production and trade.

14. No preferences are granted to domestic suppliers with regard to government procurement covered by the Agreement on Government Procurement. The share of foreign suppliers in the total value of

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government procurement was 4.2% in 2002 (down from 6.9% in 2000).

15. About 92% of Japan Industrial Standards (JIS) were aligned to their international counterparts as of March 2004. Japan has also taken further steps to ensure acceptance of foreign test data and conformity assessment.

16. Japan has continued to participate in multinational and regional discussions on agreements to promote international harmonization of regimes protecting intellectual property rights (IPRs).

17. A growing awareness that ineffective corporate governance has contributed to the misallocation and perhaps excessive use of capital and labour in the corporate sector has prompted the Government to implement a number of policy measures, such as an amendment to the Commercial Code and the revision of the Certified Public Accountants Law.

18. In March 2004, Japan adopted the new Three-Year Program for Promoting Regulatory Reform (TPPRR), which listed 762 measures envisaged to contribute to creating new opportunities for domestic and foreign businesses. The Council for the Promotion of Regulatory Reform (CPRR) was established in April 2004, to replace the Council for Regulatory Reform (CRR), whose mandate expired on 31 March 2004. In April 2003, a scheme of special zones for structural reform was adopted; exceptions to particular regulations are granted within approved special zones according to the zones' specific circumstances. Moreover, the growing importance of deregulation and competition in the Japanese economy has increased the status and size of the Japan Fair Trade Commission (JFTC), which has hitherto been somewhat weak. To achieve a higher degree of independence for the JFTC, it was transferred from the then Ministry of Public Management, Home Affairs, Posts and

Telecommunications to the Cabinet Office in April 2003.

(4) TRADE POLICIES BY SECTOR

19. Since Japan's previous Review, the Government has continued to promote structural reforms, pertaining especially to the energy and services sectors.

20. During the period under review, the Basic Law on Food, Agriculture and Rural Areas and the Basic Plan that implements the policy stipulated in the law continued to provide the framework and policy direction for agriculture; one of the main objectives of the Basic Law is to secure a stable food supply. The Government is also promoting the consolidation of scattered farmland with a view to raising productivity. The Law on Special Zones for Structural Reform allowed general corporations to lease farmland under certain conditions. The average applied MFN tariff for agriculture (WTO definition) decreased from 20.0% in FY 2002 to 17.7% in FY 2004. Total transfers to agriculture exceed the sector's small contribution to GDP. Japan's food self-sufficiency ratio has remained stable at around 40% since the previous Review, despite efforts to raise it to 45%; it continues to be the world's largest net importer of food.

21. Japanese manufacturing is more exposed to international competition than agriculture and certain services. Tariffs on industrial products are usually low; non-tariff barriers are few and the sector receives relatively little financial or other support from the Government. In 2003 an Industrial Revitalization Law was amended to strengthen Japan's industrial competitiveness, and the Industrial Revitalization Corporation of Japan was established to revitalize Japanese companies with "excessive" debt. Manufacturing's contribution to GDP declined from 20.8% of in 2001, to 20.5% in 2002; the sector employed 17.7% of Japan's total labour force in 2002, down from 18.4% in 2001.

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22. Japan's energy self-sufficiency ratio was about 20% in 2000; achieving a stable supply of energy is one of its major policy objectives. Prices of electricity and gas are relatively high by international standards; however, entry into the electricity and gas market has been partially liberalized.

23. The share of services in Japan's GDP has been growing steadily; services accounted for 71.1% of GDP in 2002, up from 70.6% in 2001. In recognition of the growing importance of services, not just to consumers, but to all kinds of businesses for which services are essential inputs and therefore a significant determinant of their international competitiveness, the Government's attention has been focused increasingly on regulatory reform combined with the strengthening of competition laws and their enforcement. Reforms have continued, especially in financial and telecommunications services.

24. Reforms in Japan's financial system are especially important because of the system's key role in channelling savings into the most profitable investments across various sectors of the economy. Reforms in Japan's financial services sector have focused mainly on the disposal of NPLs, which have been a hindrance to the efficient re-allocation of resources and thus to improved productivity and economic growth. The ratio of NPLs to the total lending of all banks decreased from 8.4% in March 2002 to 5.8% in March 2004.

25. In telecommunications, the Basic Telecommunications Law was revised in July 2003 to abolish approval requirements for basic telecommunication business entry and exit, and to eliminate classification of Type-I and Type-II categories and regulations on prices for certain services.

26. As a result of corporatization of the Postal Services, Postal Savings and Postal Life Insurance, Japan Post was established on 1 April 2003. A Basic Policy on the Privatization of Japan Post, which was adopted by the Government in September 2004, stipulated that privatization would start from 2007 and would be completed by 2017.

(5) OUTLOOK

27. The Government's official forecast predicted further economic recovery in FY 2004, with improved labour market conditions and an easing of downward pressure on prices. The latest quarterly estimates indicate that real GDP grew by 3.9% year on year in the third quarter of 2004, driven largely by domestic demand. But growth may recently have slowed and thus the strength of the recovery remains to be seen, particularly given persistent deflation and seemingly fragile business and consumer confidence. The sustainability of the recovery also depends on external factors such as the pace of economic growth in the world economy, including China, and prices of crude oil. Medium and long-term downside risks include its rapidly aging population and a declining labour force. Structural reforms, including the disposal of NPLs, financial and corporate sector reform, pension reform, strengthening of competition policy, and trade liberalization, particularly in agriculture, are of great importance. If implemented, these reforms would help restore business and consumer confidence, contributing to the sustainability of Japan's economic recovery.

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(1) MAIN ECONOMIC DEVELOPMENTS

1. After recording negative growth in 2002, Japan's economy grew 2.4% in real terms in 2003 (Table I.1), and continued to grow in the first three quarters of 2004, suggesting that Japan may be extricating itself from a protracted period of slow growth and from the recent economic downturn.1 However, the sustainability of the seeming recovery remains to be seen as the strength of growth has apparently been diminishing since the first quarter of 2004 owing to a sharp drop in net exports, hitherto one of the main engines of growth. The growth in 2003 was led by domestic demand, notably private non-residential investment and private consumption, and external demand, notably a substantial growth in exports to China2; the growth has helped Japan to solve its structural problems, including non-performing loans. Since February 2003, seasonally adjusted unemployment in Japan has fallen, reaching 4.6% in September 2004.3 Downward pressure on prices also appears to be easing, with the year-on-year decline in the core CPI (excluding fresh food) becoming smaller.4

Table I.1 Selected macroeconomic indicators, 2001-04 (¥ trillion and per cent)

2001 2002 2003 2004

National accounts (% change, unless otherwise indicated)

Real GDP 0.4 -0.3 2.4 3.9d

Real domestic demand 1.2 -1.0 1.8 3.4d

Private consumption 1.7 0.9 0.8 3.9d

Government consumption 3.0 2.4 1.0 2.0d

Gross fixed investment -1.1 -6.2 3.0 2.8d

Real exports of goods and services -6.1 8.0 10.1 13.9d

Real imports of goods and services 0.1 2.0 5.0 11.5d

Exports of goods and services (% of GDP) 10.4 11.2 11.8 .. Imports of goods and services (% of GDP) 9.8 9.9 10.2 ..

Employment -0.5 -1.3 -0.2 0.4e

Unemployment rate (annual average) 5.0 5.4 5.3 4.6f

Household disposable income (% change) -2.9 -0.5 .. .. Prices and interest rates Consumer prices (CPI) (% change) -0.7 -0.9 -0.3 0.0g

GDP deflator (% change) -1.5 -1.2 -2.5 .. Official discount rate (%) 0.1 0.1 0.1 0.1

Table I.1 (cont'd)

1 For the first time since 2000, the Japanese economy was officially declared to be "recovering

steadily" in January 2004 (Cabinet Office 2004). 2 In 2003, private non-residential investment grew by 9.3% and private consumption 0.8%;

contribution of domestic demand to GDP was 1.7 percentage points, while that of net exports of goods and services was 0.7 percentage points.

3 The unemployment rate (seasonally adjusted) reached a record high of 5.5% in January 2003. It would appear that many regular workers are being replaced by part-timers and contract workers, who account for about one third of the total workforce. (Financial Times, 28 August 2004).

4 For example, while year-on-year changes of the monthly CPI (excluding fresh food) between January 2001 and February 2003 were below -0.7%, those from July 2003 onwards were between -0.3% and 0.1%.

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2001 2002 2003 2004

Money stocka (end of year, % change)

M2 + CDs 2.8 3.3 1.7 2.1h

Exchange rate (¥ per US$) 121.6 125.1 115.9 110.1i

(per cent of GDP, unless otherwise indicated)

Fiscal balanceb

Revenue 31.6 30.3 29.8 29.8 Expenditure 37.7 38.2 37.7 36.9 Balance -6.1 -7.9 -8.0 -7.1 Balance excluding social security -6.2 -8.0 -8.0 -7.1

Government debtc 142.3 149.4 157.3 163.4

Saving and investment National saving (gross) 26.4 25.7 .. .. Domestic investment (gross) 25.8 24.2 .. .. (¥ trillion, unless otherwise indicated) Current account balance

Current account 10.7 14.1 15.8 9.6j

Current account (% of GDP) 2.1 2.8 3.2 .. Goods balance 8.5 11.7 12.3 7.3j

Services balance -5.3 -5.3 -3.9 -1.9j

Income balance 8.4 8.3 8.3 4.7j

Net transfer balance -1.0 -0.6 -0.9 -0.4j

Capital and financial account balance -6.6 -8.5 8.1 7.7j

Financial account -6.2 -8.1 8.6 8.0j

Capital account -0.3 -0.4 -0.5 -0.3j

Changes in reserve assets -4.9 -5.8 -21.5 -16.2j

Statistical discrepancy 0.9 0.1 -2.4 -1.2j

.. Not available.

a Money stock here is measured by M2 + CDs, which include cash currency in circulation, deposit money (demand deposits), quasi-money (time deposits, etc.), and certificate of deposit accounts (CDs).

b General Government basis. c Gross financial liabilities, including the debt of the Japan Railway Settlement Corporation and the National Forest Special

Account from 1998 onwards. d 2nd quarter 2004, % change from the same quarter previous year. e September 2004, % change from the same month previous year. f September 2004, seasonally adjusted figure. g September 2004, % change from same month previous year. h October 2004, % change from same month previous year. i September 2004, period average. j First half of 2004.

Source: Information provided by the Japanese authorities.

2. The Bank of Japan has continued to relax its monetary policy; the monetary base has been increased, and the official discount rate and the short-term call rates have been kept to nearly zero. With continuing negative inflation, real interest rates have tended to be somewhat higher than nominal rates. This, together with remaining problems in the banking system, may be an impediment to corporate borrowing and investment. The fiscal deficit is expected to reach 7.1% of GDP in 2004, and public debt continues to increase, reaching 163.4% of GDP in 2004; the Government's


medium-term target for fiscal consolidation is to achieve a primary surplus (excluding social security) by the early 2010s.5

3. The Government has continued to place emphasis on structural reforms. In this connection, progress has been made, inter alia, in the financial and corporate sectors (notably disposal of non-performing loans (NPLs)), corporatization of state-owned enterprises (such as universities and postal services), and deregulation (particularly in telecommunications and some professional services); Special Structural Reform Zones have also been established, within which exceptions to particular regulations are granted. Against this backdrop, Japan's export competitiveness has apparently increased as shown in a continuing decline in unit labour costs.6 It remains to be seen whether the current recovery is cyclical in nature or more long-term due to structural change.

4. As regards the external sector, Japan's current account surplus has increased; the growing surplus reflects an increasing gap between gross domestic saving and gross domestic investment. The current account surplus was about ¥15.8 trillion (or 3.2% of GDP) in 2003, reflecting an increase in the merchandise trade surplus and a decrease in the services deficit; the merchandise trade surplus amounted to ¥12.3 trillion, while the services account deficit was ¥3.9 trillion. By the end of March 2004, Japan's foreign exchange reserves had risen to about US$827 billion (compared with US$496 billion at the end of March 2003), reflecting Japan's substantial intervention in the foreign exchange market (e.g. purchasing of foreign currencies). After recorded a surplus of around ¥8.1 trillion in 2003, Japan's capital and financial account surplus was ¥7.7 trillion in the first half of 2004 (compared with a deficit in 2002), reflecting largely an increase in portfolio investment and other investment.

5. Trade plays an important role in the economy. Although the shares of exports and imports amount to around 10% of GDP each, external demand has contributed substantially to Japan's economic growth since 2002. The United States and the European Union have continued to be Japan's main trading partners, while China's share in Japan's exports and imports has been rising. Japan's inward and outward FDI flows both decreased in FY 2003. FDI into Japan remains considerably lower than its outward FDI, and, despite a rapid increase in inward FDI over the past decade, the level of inflows remains low compared with other developed economies.

6. The share of services in GDP has continued to grow since 2002, largely at the expense of manufacturing (Table I.2); much of the growth has occurred in financial services and real estate. Services' share of employment increased from 68.5% in 2001 to 69.4% in 2002. Agriculture accounts for a small share of GDP and employment; OECD estimates suggest that total government assistance was greater than the sector's value-added in 2002 (Chapter IV(2)(i)).

5 In 2004, the primary balance of the General Government was estimated to be in deficit of 5.3% of

GDP. The General Government includes the central government, local governments, and social security. Data provided by the authorities indicate that the primary balance of central and local governments combined was estimated to be in deficit of 4.6% of GDP in 2004. The primary balance of the Central Government is national debt service less government bond issues. The primary balance for local governments is debt services + cost of repaying corporate debt included in money transfer to public enterprises - local bonds.

6 The unit labour cost declined by 3.1% in 2002 and 2.3% in 2003 (OECD, 2003b).


Table I.2 Shares of GDP and employment by sector, 2001-02

2001 2002

Share of GDP (per cent) Agriculture, forestry and fishing 1.3 1.3

Mining 0.1 0.1

Manufacturing 20.8 20.5

Services 70.6 71.1

Construction 7.2 6.9

Electricity, gas and water 2.9 2.8

Wholesale and retail trade 13.7 13.7

Financial services and insurance 6.6 6.8

Real estate 13.3 13.7

Transport and communications 6.5 6.3

Other services 20.5 20.8

Government 9.0 9.2

Non-profit services for households 1.9 2.0

Import tax and other 0.6 0.6

Statistical discrepancy 1.4 1.0

Total (¥ trillion) 505.8 498.1

Share of employment (per cent) Agriculture, forestry and fishing 6.2 6.0

Mining 0.1 0.1

Manufacturing 18.4 17.7

Services 68.5 69.4

Construction 10.0 9.9

Electricity, gas and water 0.7 0.7

Wholesale and retail trade 18.1 18.0

Financial services and insurance 2.9 3.0

Real estate 1.4 1.4

Transport and communications 5.9 5.9

Other services 29.5 30.5

Government 5.5 5.4

Total (million) 66.2 65.3

.. Not available.

Note: Total and shares of employment data are based on SNA statistics on "Employed Persons". Available at: http://www.esri.cao.go.jp/en/sna/h16-nenpou/90s3_en.xls.


(2) MACROECONOMIC POLICIES

(i) Monetary and exchange rate policy

7. Monetary policy has been expansionary since Japan's previous Trade Policy Review. The official discount rate has remained unchanged at 0.10%, and the balance of current accounts of financial institutions held at the BOJ, its main target for money market operations since March 2001, has been raised to around ¥30-35 trillion since January 2004 (compared with ¥27-30 trillion


(ii)

previously).7 Against this backdrop, the call rates in the short-term money markets remain around zero. The BOJ maintains that the current procedures for money market operations are to be continued until the core CPI (excluding fresh food) registers a stable zero per cent or an increase year on year for at least a few months. In November 2002, the BOJ also started the purchase of stocks held by banks with a view to reducing market risk pertaining to the shareholdings of these institutions. The question arises as to whether these measures could have artificially raised share prices.8 The BOJ also started the purchase of asset-backed securities in June 2003, with a view to developing a market for these securities and thereby strengthening the transmission mechanism of monetary policy.9 The BOJ is of the view that the low cost of credit resulting from the current monetary policy has supported banks' disposal of NPLs and the restructuring and rehabilitation of debtor companies10; nonetheless, this has permitted inefficient companies to postpone addressing their problems.

8. For the past two years, the nominal exchange rate of the yen has appreciated against the U.S. dollar (for example, from ¥119/US$ at the end of 2002 to around ¥106/US$ at the end of October 2004). According to the authorities, market intervention took place during 2003 and 2004 to smooth excessive short-term volatility in the yen.

Fiscal policy

9. During the period under review, Japan maintained a deficit in its budget; the General Government's fiscal deficit as a percentage of GDP is estimated to be 7.1% in 2004 (compared with 8.0% in 2003).11 Japan's public debt to GDP ratio is expected to increase to 163.4% in 2004 (compared with 157.3% in 2003). Nonetheless, these figures exclude the debts of some public enterprises (outside General Government), whose financial situation tends to be opaque, as well as a variety of contingent liabilities in the pension, state-owned banking, and credit guarantee systems.12 The Government's medium-term fiscal consolidation programme requires it to maintain its expenditure at or below its FY 2002 level until FY 2006, and to achieve a primary surplus by the early 2010s (the actual amount of surplus is unspecified). The FY 2004 budget amounts to ¥82.1 trillion, of which expenditure on public works accounts for 9.5% (¥7.8 trillion), down 3.3% from the FY 2003 budget, while the national debt service amounts to ¥17.6 trillion (21.4% of the budget), up 4.6% from

7 The BOJ is to conduct money market operations targeting the maintenance of the announced range of

current account balances, which may, without such operations, fluctuate according to the demand for money. The BOJ is to provide more liquidity irrespective of the target if it recognizes a risk of financial market instability, such as a surge in liquidity demand. The BOJ has raised the target several times since March 2001, when it was initially set at ¥5 trillion; it was increased to ¥6 trillion in August 2001, ¥10-15 trillion in December 2001, ¥15-20 trillion in October 2002, and ¥27-30 trillion in May 2003.

8 The purchasing of stocks by the Bank of Japan ended on 30 September 2004. Between November 2002 and September 2004, it purchased stocks worth ¥2 trillion.

9 The year-on-year growth rate of the monetary base (i.e. cash in circulation and current accounts of financial institutions held at the BOJ) was 16.4% in 2003, while that of money supply (i.e. the sum of cash currency in circulation, demand deposits, quasi-money (such as time deposits) and negotiable time certificate of deposit) was 1.7% in 2003, suggesting that the increase of the monetary base induced only a small increase in money supply. This may be attributed to weakness in the monetary policy transmission mechanism, against a backdrop of persisting fragility of the financial system (as reflected in NPLs) and weaknesses in corporate balance sheets, and thus lack of investment demand.

10 See, for example, a speech made by a BOJ Policy Board member, 25 March 2004. Available (in Japanese) at: www.boj.or.jp/press/04/press_f.htm.

11 OECD (2004a). Japan's public debt to GDP ratio includes the debt of the Japan Railway Settlement Corporation and the National Forest Special Account.

12 Research Institute of Economy, Trade and Industry, Policy debate. Available at: http://www.rieti.go.jp/en/special/policy-debate/01.html [5 November 2004].


(i)

the FY 2003 budget.13 With a view to increasing fiscal transparency, a study group in the Ministry of Finance began to create a balance sheet of the Japanese Government in 2000; the authorities indicate that each ministry and agency is currently preparing financial statements.14

10. Japan's FY 2004 tax reform measures include: extension of tax cuts for residential mortgages, reduction of taxes on capital gains from land and housing and non-listed stocks, extension of the period for loss carried-forward from five years to seven years for corporations, and reform of taxation on pensions, including the abolition of a tax exemption for elderly and the reduction of the tax deduction in respect of pension income for those aged 65 and over.15 Other changes in the taxation measures since the previous Review include tax cuts for IT or R&D-related investments.

11. The Government has also been considering reforms of the fiscal relationship between the central and local governments. To this end, the Government has decided to transfer about ¥3 trillion from personal income tax revenues to local inhabitants tax accounts by FY 2006. As an intermediate measure, about 3% (¥425 billion) of the expected personal income tax revenue (¥13.8 trillion) in FY 2004 is to be transferred to local governments in proportion to their population.

(3) STRUCTURAL POLICIES

12. Since the previous Review, the Government has continued to emphasize structural reform. The Government's main policy direction for structural reform is described in the "Basic Policies for Economic and Fiscal Management and Structural Reform" formulated annually by the Council on Economic and Fiscal Policy. The 2003 Basic Policies stipulated, inter alia, that Japan would reduce impediments to business activities by eliminating various regulations and government interventions, creating Special Structural Reform Zones (see below) and reforming financial and corporate sectors. In the 2004 Basic Policies, issued in June 2004, the authorities emphasized, as a policy objective for FY 2005 and FY 2006, the construction of a socio-economic system led by the private sector (including privatization of Japan Post); reform in both the public and private sectors, particularly in the financial system; labour market reform; and pension and other areas of social security reform. The Government's concrete measures for regulatory reform are stipulated in the new three-year programme on regulatory reform, adopted in March 2004.

Financial system and corporate reform

13. Non-performing loans (NPLs) and overhanging debts have adversely affected the Japanese economy over the past decade. The Government's main policy agenda has thus included the reform of the financial sector, including disposal of NPLs, in order to improve the efficiency of the capital market. An efficient capital market, through which savings are channelled into profitable investment, is an essential factor in raising the productivity of the corporate sector. Government-led reform of

13 For details of the budget formulating process, see WTO (2003), Chapter I(2)(ii). 14 According to the Government Balance Sheet for FY 2002, the Government's assets totalled

¥765 trillion. According to Kurtzman et. al. (2004), out of 50 countries surveyed, Japan was ranked the 16th "least opaque" country, as measured by their "opacity indices", which aim to indicate the degree to which countries lack "clear, accurate, easily discernible and widely accepted practices governing the relationships among businesses, investors, and governments, which form the basis of most small scale, high frequency risks." Japan's opacity index in 2004 was 28 (100 = complete opacity), while that for Finland was 13, the United States 21, Canada 23, and Germany 25. Opacity indices are available at: http://www.milkeninstitute.org/pdf/opacity_exhibits.pdf.

15 The share of persons aged 65 or above in Japan's total population is estimated to reach 22.5% in 2010, 27.8% in 2020, and 29.6% in 2030.


Japan's financial system included in particular further disposal of NPLs, introduction of limits to the protection of deposits, and corporatizing/privatizing the Postal Savings and Insurance.

14. In October 2002, the Financial Services Agency (FSA) formulated a Program for Financial Revival (PFR), with the aim of, inter alia, halving by end-FY 2004 the ratio of NPLs to total credits held by major banks at the end of March 2002. To this end, the PFR stipulated support measures in case a financial institution falls into distress or faces a capital shortage; these measures include injection of public funds based on the Deposit Insurance Law, provision of liquidity through special loans by the Bank of Japan, and enhanced monitoring of financial institutions to which public support is provided. The disposal of NPLs has apparently progressed; the ratio of NPLs to the total lending of all banks decreased to 5.8% (¥26.6 trillion) in March 2004 (from 8.4% in March 2002).16 Moreover, according to the results of FSA's special inspections of major banks' lending in April 2004, the ratio of loans classified as "in danger of bankruptcy", or below, to total lending declined.17 In accordance with the PFR, the Government has made decisions to inject public funds into some distressed institutions.18

15. Since 1 April 2002, full protection of bank deposits bearing interest has been limited to ¥10 million (and interest therefrom) per depositor per financial institution; previously, the Government had fully protected all deposits. Current deposits, ordinary deposits, and other miscellaneous liquid deposits continue to be fully protected until 31 March 2005; from April 2005, only deposits for payment and settlement purposes bearing no interest and redeemable on demand are to be fully protected.

16. The previous Postal Saving System, the largest financial institution in Japan, was reorganized into a part of a new state-run public corporation, Japan Post, in April 2003.19 It has been argued that the large share of Japan Post in savings and insurance, together with certain privileges it enjoys, may deter competition from the private sector.20 Moreover, the large amount of money supplied by postal savings and insurance to finance public projects may distort the allocation of savings among various investments.21 On 10 September 2004, the Government adopted a Basic Policy on the Privatization of the Japan Post, which stipulates privatization of Japan Post in 2007. The Basic Policy also envisages establishment of four joint-stock corporations, to deal with postal services, postal savings, postal life insurance, and the maintenance of the post office network, with one holding company controlling the

16 The ratio of NPLs to the total lending of major banks decreased to 5.2% (¥13.6 trillion) in

March 2004. In accordance with the Financial Reconstruction Law, the FSA announces the status of NPLs held by all banks every six months.

17 The result of the April 2004 inspection shows that out of total lending of ¥10.5 trillion by 11 major banks to 133 companies, loans of ¥1.8 trillion (17.1% of the total) to 22 companies were classified as "in danger of bankruptcy" or below (i.e. "in de facto bankruptcy" or "in legal bankruptcy"); in the April 2002 inspection, the ratio of loans classified as "in danger of bankruptcy" or below accounted for 28.7% of total lending. These inspections have been carried out since October 2001.

18 In May 2003, public funds were injected into Resona Holdings. In December 2003, the Deposit Insurance Corporation acquired all shares of the Ashikaga Bank, thus bringing it under government control.

19 At the end of June 2004, deposits in Japan Post's postal savings amounted to ¥226 trillion, which is about 16% of Japan's total households financial assets. In addition to the postal savings, deposits with Japan Post's insurance system, Kampo, were ¥119 trillion at end-March 2004. The Law Concerning Correspondence Delivery by Private-Sector Operators, which entered into force in April 2003, also allowed private-sector operators to engage in correspondence delivery business, which was once monopolized by the Government.

20 Japan Post also faces constraints such as universal service obligation, insurance and deposit ceiling regulations, limitations on the scope of products and services, and restrictions on asset management.

21 See MOF 2003, p. 6. Since FY 2001, the compulsory deposit of postal savings funds to the Trust Fund Bureau to finance public projects through the FILP has been abolished.


(ii)

(iii)

four companies. The Government is to retain more than one third of the holding company's shares issued.22

17. A growing awareness that ineffective corporate governance has contributed to the inefficient use of capital and labour in the corporate sector has prompted the Government to implement a number of policy measures since the previous Trade Policy Review of Japan. These include: an amendment to the Commercial Code, which involved the introduction of a new corporate governance structure and the relaxation of restrictions on issuance of stock options; and the revision of the Certified Public Accountants Law, which introduced a revised structure for overseeing auditors and provisions to enhance the independence of auditors from private companies under audit (Chapter III(5)(vii)). Other relevant regulatory changes include the amendment in 2003 to the Law on Special Measures for the Revitalization of Industrial Dynamism (Industrial Revitalization Law), which introduced additional tax measures related to mergers and acquisitions approved under the law; these measures are to expire before the end of March 2008.

Pension reform

18. Responding to the rapid aging of the population, a law concerning Japan's public pension reform was approved by the Diet in June 2004.23 Reforms under the new law include annual increases in the contribution rates until 2017, gradual reduction of the benefit and increase in the government contribution, together with tax reform measures, until 2009. Questions have been raised on possible effects of pension reform on the Japanese economy, including whether the planned raise in contribution rates and the consequent increase in companies' expenditures may affect companies' employment strategies and increase unemployment, and whether the planned raise in contribution rates may reduce households' disposable income and thus reduce consumption.24 The authorities are of the view that pension reform will help improve the financial soundness of the pension system.

Regulatory reform

19. Sustained efforts have been made to gradually reduce regulatory intervention in various sectors, including energy, financial services, telecommunications, legal, and education services (Chapter IV(5)). In March 2004, the Council for the Promotion of Regulatory Reform issued a "Three-Year Program for Promoting Regulatory Reform (TPPRR)", which includes some 760 concrete measures (Chapter III(5)(v)).25 Moreover, under the Special Zone for Structural Reform Act, which entered into force in April 2003, over 320 special zones were established during the first fiscal year of implementation (FY 2003). Within a particular zone, the Act allows relaxation or elimination of specific regulations; these included extending the period foreign researchers are allowed to stay in Japan from three years to five years, round-the-clock opening of the Customs, and permission for joint-stock corporations to engage in agriculture and lease farmland. The question arises as to whether such measures should be applied nationwide in the first place. The Government

22 Privatization of other public enterprises is under consideration. On 2 June 2004 a law to privatize Japan's four public highway corporations was approved by the Diet. According to the law, Japan's expressway public corporations are to be privatized by the end of March 2006.

23 Japan's public pension system has a two-tier structure: the first tier is the national pension plan, which basically covers all Japanese citizens; in the second tier, based on salaries of participants, are employees' pension plans covering workers of private companies, and mutual aid pension plans covering civil servants.

24 See, for example, "Japanese Pension Reform, Don't Grow Old", The Economist, 18 December 2003; and Takayama (2004).

25 After the Council for Regulatory Reform expired at end-March 2004, a Council for the Promotion of Regulatory Reform and Headquarters for the Promotion of Regulatory Reform were established in 2004, with a view to, inter alia, overseeing the progress of the TPPRR.


(i)

(ii)

(iii)

is of the view that special zones are pragmatic solutions to the promotion of regulatory reform, which has often been resisted by local authorities and the private sector (presumably domestic firms), who apparently are in favour of existing regulations. The Headquarters for the Promotion of Special Zones, headed by the Prime Minister, has been discussing which deregulation measures applied to special zones would be beneficial for nationwide application.

(4) DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT

20. In 2003, the share of exports of goods and services in GDP was around 11.8% (11.2% in 2002) and the share of imports around 10.2% (9.9% in 2002). In 2003, Japan was the world's third largest exporter (counting the EU as one) and importer of goods.

Composition of merchandise trade

21. Manufactures accounted for about 93% of Japan's exports in 2003, up slightly from 92.8% in 2001 (Chart I.1). During the period 2001-03, machinery and transport equipment remained Japan's most important merchandise export, accounting for 66.8% of total exports of goods in 2003; the increase of merchandise exports was mainly attributed to the increase in exports of machinery and transport equipment.

22. The share of primary imports increased in 2003, and that of manufactured imports declined slightly. Machinery and transport equipment continue to be Japan's most important merchandise imports, with a share of 27.6% in 2003, down slightly from 2002.

Direction of merchandise trade

23. The United States remains the main destination for Japanese exports, attracting 24.9% of total Japanese exports in 2003, although the share declined by 5.5 percentage points compared with 2001 (Chart I.2). The share of Asia increased to 49.2% in 2003 (up from 43% in 2001); in particular, the share of China has continued to grow since 2001. During 2001-03, the share of the European Union (15 members) in Japan's exports decreased to 15.3% and APEC's share decreased to 75.7%.

24. Since 2002, China has replaced the United States as Japan's main supplier of imports. China's share in Japan's total imports increased to 19.7% in 2003, while the United States' share declined to 15.6%. The share of East Asia as a source of imports continued to increase in 2003; APEC's share declined to 68.2% in 2003.

Composition of trade in services

25. In 2003, Japanese cross-border sales (exports) of services increased, while its purchases (imports) declined (Table AI.1). The services deficit was reduced from ¥5.3 trillion in 2002 to ¥3.9 trillion in 2003. Deficits in both transportation and travel decreased in 2003.


Chart I.1Product composition of merchandise trade, 2001 and 2003

2001 2003

(a) Exports (f.o.b.)

Other 4.2

Manufactures92.8

Total: US$403.4 billion Total: US$472.0 billion

(b) Imports (c.i.f.)

Other 1.9

Fuels20.1

Agriculture16.3

Transport equip.3.7

Mining25.2

Non-electricalmachinery

4.6

Manufactures56.7

Chemicals7.2

Office machines & telecom.

15.1

Other electricalmachines 3.9

Other mining5.1

Other mining4.9

Textiles & clothing6.4

Other electrical machines

4.1

Mining26.1

Other semi-manuf.

5.2

Transport equip.4.7 Fuels

21.2Manufactures

57.0

Chemicals7.7


Per cent

Manufactures93.0

Other 4.3

Other consumer goods9.8

Iron & steel 3.8

Office machines & telecommunication

19.1

Other 1.7

Other consumer goods 10.3

Non-electricalmachinery

4.6


Textiles & clothing 6.9

Office machines & telecommunication

20.5

Automotive products

19.9

Non-electrical machinery

13.7

Agriculture & mining

3.0

Agriculture & mining

2.7

Other semi-manuf. 4.3

Office machines& telecom.

14.2

Non-electrical machinery

13.8

Chemicals 8.3Chemicals 7.6

Other semi-manuf.4.3

Source : UNSD, Comtrade database (SITC Rev.3).


Agriculture15.2

Automotive products

21.8

Other transport equip. 5.6

Other electrical machines6.6

Other transportequip. 5.8

Other electrical machines 7.3

Iron & steel 3.4

Other semi-manuf.

5.0


Chart I.2Direction of merchandise trade, 2001 and 2003

2001 2003

(a) Exports (f.o.b.)Other

3.5

East Asia39.5


(b) Imports (c.i.f.)

Other 2.9

Other America

4.8

United States18.3

Chinese Taipei4.1

China16.6

East Asia41.6

Other Europe 2.8

Korea, Rep. of4.9

Indonesia4.3 EU15

12.8M.E.12.7

EU1512.8

Other East Asia11.4

Indonesia4.3

United Arab Emirates3.7

Chinese Taipei3.7

Other America

4.4

East Asia43.8

Other Europe 2.9


Per cent

East Asia45.5

Oceania2.6

Other East Asia 6.5 United States24.9

Korea, Rep. of7.4

Other 3.2

Chinese Taipei6.0

China19.7

Australia3.9

Other East Asia11.7

EU1516.0

China7.7

Hong Kong, China 5.8

Other East Asia 7.2

Other4.1

EU1515.3

Korea, Rep. of4.7

Middle East2.8

Other America

4.8

United States30.4

Other America5.7

Source : UNSD, Comtrade database (SITC Rev.3).

Australia4.1 United States

15.6

Hong Kong, China6.3

Singapore 3.1

Chinese Taipei6.6

Korea, Rep. of6.3

Middle East2.7

Thailand 2.9

United Arab Emirates

3.7

Oceania 2.3

China12.2

Singapore 3.6

Thailand 3.4

M.E.13.4

Saudi Arabia 3.5

OtherMiddle East

5.8

OtherMiddle East

5.5

Saudi Arabia 3.8


(iv)

Foreign direct investment (FDI)

26. According to data provided by the Ministry of Finance, FDI inflows decreased slightly to ¥2.1 trillion in FY 2003. Investment from the United States and by foreign-owned companies in Japan were the main sources of inward FDI. Japan's outward FDI also declined, to ¥4.1 trillion in FY 2003, reflecting a large decline in Japan's FDI into Europe and, to a lesser extent, into Latin America; on the other hand, Japan's FDI into North America increased (Table AI.2). Sectorally, a 57% increase of inward FDI was observed in financial services in FY 2003, while FDI inflows in telecommunications declined by 65% (Table AI.3). Outward FDI increased in electrical machinery, chemicals, retail and wholesale trade, and mining, while FDI outflows of transport equipment, finance and insurance services declined in FY 2003.

27. Inward FDI remains relatively low by developed-country standards.26 Moreover, FDI into Japan remains lower than its outward FDI, although the gap has narrowed over the past decade, owing to a rapid increase in inward FDI.27 The authorities attribute the low level of FDI into Japan to macroeconomic factors, such as the appreciating trend of the yen, as well as the high costs of business and regulatory barriers, which Japan is taking steps to rectify (Chapter III(3)(ii)).

(5) PROSPECTS

28. The Government's official projection, announced in January 2004, forecast the economy would grow by some 1.8% in FY 2004, with deflation (CPI) of 0.2%, and unemployment at about 5.1%.28 The latest quarterly estimates of GDP indicate that in the third quarter of 2004, real GDP grew by 3.9% year on year, led mainly by domestic demand; however, seasonally adjusted quarterly growth rates have been declining since the first quarter of 2004. The recovery up to the third quarter of 2004 is apparently associated with improving labour market conditions, as observed in a decline in the unemployment rate; the recovery also helped to ease downward pressure on prices and increased private consumption.

29. The Government is optimistic about the sustainability of the current recovery because of strong domestic demand compared with external demand. But the strength of the recovery remains to be seen, given the persistent deflation, seemingly weak business and consumer confidence, and thus the continuing fragility of investment and consumer demand. The sustainability of the recovery will also depend upon external factors, such as the pace of recovery in the world economy, including China, and prices of crude oil, medium- as well as long-term downside risks, such as a rapidly aging population and a decline in the labour force. Of greater importance to Japan's longer-term growth prospects, together with accommodative macroeconomic policy, will be its efforts to implement structural and other economic reforms, including continued disposal of NPLs, financial and corporate sector reform, pension reform, strengthening of competition policy, and trade liberalization, particularly in agriculture, to boost competition. If implemented, these reforms would help restore business and consumer confidence, thereby making an important contribution to sustained growth of the Japanese economy. The Government appears to believe in the need to intensify regulatory and other structural reforms aimed at removing distortions, including state involvement in various sectors, and impediments to competition.

26 According to UNCTAD (2004), FDI inflows into Japan in 2003 amounted to US$6.3 billion, while

those into the United States, the European Union, and China were US$29.8 billion, US$295.2 billion and US$53.5 billion, respectively.

27 The ratio between the outward and inward FDI was about 12:1 in FY 1993, while it was about 2:1 in FY 2003.

28 According to the Cabinet Office forecast in July 2004, the economy would grow by some 3.5% in FY 2004, with deflation (CPI) of 0.1%, and unemployment at about 4.5%.



(1) TRADE POLICY OBJECTIVES

1. Japan's trade policy has remained largely unchanged since its previous Trade Policy Review, in 2002; its overall aim continues to be to ensure long-term prosperity and growth by promoting business activities in Japan and at an international level. In this regard, Japan has placed high emphasis on supporting the multilateral trading system and has been participating actively in the WTO negotiations. With a strong preference for multilateral trade liberalization, Japan grants at least MFN treatment to all countries except Andorra, East Timor, Lebanon, Republic of Equatorial Guinea, Eritrea, and North Korea.

2. Concurrently, Japan has been intensifying its pursuit of bilateral/regional FTAs with some of its trading partners, not just in areas covered by existing WTO Agreements, but also in areas like trade facilitation, investment, competition policy, and improvement of business environment. The authorities consider that regional and bilateral trade arrangements complement the multilateral system, and are useful tools for market liberalization and structural reform. In January 2002, Japan signed its first bilateral free-trade agreement, the Agreement between Japan and the Republic of Singapore for a New-Age Economic Partnership (JSEPA), which entered into force in November 2002. On 17 September 2004, Japan signed the Agreement for the Strengthening of the Economic Partnership with Mexico, and is currently negotiating free-trade agreements with the Republic of Korea, Thailand, the Philippines, and Malaysia, as well as consulting with the ASEAN as a whole. Japan also supports the "open regionalism" approach of the Asia-Pacific Economic Cooperation (APEC) forum, and participates in various other regional trade fora, such as the Asia-Europe meeting (ASEM) and the ASEAN+ 3.

3. Japan grants preferential treatment to products from certain developing and least developed countries under the Generalized System of Preference (GSP) scheme. The current GSP scheme, which is valid until 2011, has been extended to 140 countries and 15 territories; 47 least developed countries qualify for further preferential treatment (e.g. tariff-free and quota-free treatment). The main beneficiaries of Japan's GSP include China, Thailand, Indonesia, Malaysia, and the Philippines.

(2) TRADE POLICY FORMULATION AND EVALUATION

(i) Trade policy formulation and implementation

4. There have been no substantial changes in Japan's trade-related legal and regulatory framework since its previous Review in 2002 (Table II.1). Trade-related issues remain the responsibilities of a number of ministries including the Ministry of Foreign Affairs (MOFA) and the Ministry of Economy, Trade, and Industry (METI). Other ministries and agencies with responsibility for sectoral issues are also involved in trade policy formulation and implementation.1 The overall coordination of trade policies, including ensuring consistency, remains the final responsibility of the Cabinet, with input from advisory councils such as the Council on Economic and Fiscal Policy. On 1 April 2004, the Cabinet established the Council for the Promotion of Regulatory Reform (CPRR), which replaced the Council for Regulatory Reform (CRR), whose mandate expired on 31 March 2004.2 Trade and other policy issues are also debated in various Committees, including

1 See WTO (2003), Chapter II(2)(i). 2 The CPRR has been designated as a central body that promotes regulatory reform, including the

facilitation of private participation in sectors currently operated by the state, improvement of consumer welfare and revitalization of the economy. The CPRR is mandated to monitor the implementation of the Three-Year


standing committees in the Diet and the Japan Investment Council (JIC).3 In March 2003, the JIC announced "the Program for the Promotion of Foreign Direct Investment into Japan", which recommended that the Government implement 74 measures to reduce impediments to inward FDI. These measures included: the dissemination of information on investment opportunities in Japan, improving Japan’s corporate governance and labour market, creating a favourable living environment in Japan, reviewing administrative procedures, and enlarging the role of local governments in attracting FDI. The Government is currently studying ways to revise tax treatment of mergers and acquisitions and plans to submit a bill to the Diet in 2005 (Chapter III(3)(ii)).

Table II.1 Japan's major trade-related laws and regulations

Most recent amendment

Foreign trade and exchange restrictions Foreign Exchange and Foreign Trade Law (1949 Law No. 228) 2004

Export and Import Transaction Law (1952 Law No. 299) 1997

Foreign Exchange Order (1980 Order No. 260) 2003

Cabinet Order on Inward Direct Investment (1980 Order No. 261) 2002

Export Trade Control Order (1949 Order No. 378) 1999

Import Trade Control Order (1949 Order No. 414) 2000

Customs- and tariff-related regulations Customs Law (1954 Law No. 61) 2004

Customs Tariff Law (1910 Law No. 54) 2004

Temporary Tariff Measures Law (1960 Law No. 36) 2004

Cabinet Order Relating to Countervailing Duties (1994 Order No. 415) 2004

Cabinet Order Relating to Anti-Dumping Duties (1994 Order No. 416) 2004

Cabinet Order Relating to Emergency Duties (1994 Order No. 417) 2002

Cabinet Order Relating to Retaliatory Duties (1994 Order No. 418) 2000

Cabinet Order on Tariff Quotas (1961 Order No. 153) 2004

Trade promotion International Trade Insurance Law (1993 Law No. 36) 2004

Law on Extraordinary Measures for the Promotion of Imports and the Facilitation of Foreign Direct Investment in Japan (1992 Law No. 22)

2004

Services and energy Construction Business Law (1949 Law No. 100) 1996

Banking Law (1981 Law No. 59) 2001

Insurance Business Law (1995 Law No. 105) 2003

Securities and Exchange Law (1948 Law No. 25) 2004

Telecommunications Business Law (1984 Law No. 86) 2003

Law Concerning the Measures by Large-Scale Retail Stores for Preservation of Living Environment (1998 Law No. 91)

Employee's Pension Insurance Law (1954 Law No. 115)

Civil Aeronautics Law (1952 Law No. 231) 1999

Marine Transportation Law (1949 Law No. 187) 2002

Table II.1(cont'd)

Program for the Promotion of Regulatory Reform and can require the heads of relevant governmental organizations to submit materials, provide explanations, and extend cooperation to the CPRR.

3 The JIC, established by the Cabinet in July 1994 for the purpose of promoting FDI into Japan, is chaired by the Prime Minister; the Ministers of State for Financial Services and for Economic and Fiscal Policy serve as vice chairpersons.


Most recent amendment

Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers (1986) Law No. 66)

2003

Certified Public Accountants Law (1948 Law No. 103) 2003

Certified Tax Accountant Law (1951 Law No. 237) 1993

Law for Improvement of International Tourist Hotels (1949 Law No. 279) 1999

Travel Agency Law (1952 Law No. 239) 1999

Electricity Utilities Industry Law (1964 Law No. 170) 2003

Gas Utility Industry Law (1954 Law No. 51) 2003

Petroleum Reserve Law (1975 Law No. 96) 2003

Law on the Quality Control of Gasoline and Other Fuels (1976 Law No. 88) 2000

Standards and technical regulations Industrial Standardization Law (1949 Law No. 185) 2000

Law Concerning Standardization and Proper Labelling of Agricultural and Forestry Products (JAS Law) (1950 Law No. 175)

1999

Pharmaceutical Affairs Law (1960 Law No. 145) 2002

Food Sanitation Law (1947 Law No. 233)

Quarantine Law (1951 Law No. 201) 1998

Plant Protection Law (1950 Law No. 151) 1996

Domestic Animal Infectious Diseases Control Law (1951 Law No. 166) 1997

Construction Business Law (1949 Law No. 100) 2004

Building Standard Law (1950 Law No. 201)

Electrical Appliance and Material Control Law (1961 Law No. 234)

Consumer Product Safety Law (1973 Law No. 31) 1996

High Pressure Gas Safety Law (1996 Law No. 14) 2004

Intellectual property rights Patent Law (1959 Law No. 121) 2004

Customs Tariff Law (1910 Law No. 54) 2004

Act Against Unjustifiable Premiums and Misleading Representations (1962 Law No. 134) 1993

Unfair Competition Prevention Law (1934 Law No. 47) 2004

Utility Model Law (1959 Law No. 123) 2004

Design Law (1959 Law No. 125) 2003

Trademark Law (1959 Law No. 127) 2003

Copyright Law (1970 Law No. 48) 2004

Civil Code (1896 Law No. 89) 2004

Penal Code (1907 Law No. 45) 2003

Agriculture The Basic Law on Food, Agriculture and Rural Areas (1999 Law No. 106)

Manufacturing Milk Producer Compensation Temporary Law (1965 Law No. 112) 2002

Cocoon and Raw Silk Price Stabilization Law (1951 Law No. 310) 2002

Others Law Concerning the Organization of Small and Medium Enterprises Organizations

(1957 Law No. 185) 2002

Administrative Procedure Law (1993 Law No. 88) 2003

Act Concerning Prohibition of Private Monopolization and Maintenance of Fair Trade (Anti-Monopoly Act) (1947 Law No. 54)

1999



(ii) Trade policy evaluation

5. In addition to the independent Board of Audit, the Government Policy Evaluations Act (GPEA), enacted, in April 2002, requires the Cabinet Office and Ministries to evaluate their own policies before and after implementation and to publish the results of their evaluations. As well as these self-evaluations, the GPEA obliges the Ministry of Internal Affairs and Communications (MIC)4 to undertake an independent assessments of the policies implemented by other Ministries (Chart II.1). Furthermore, the Commission on Policy Evaluation and Evaluation of Incorporated Administrative Agencies, which consists of independent experts, was established to ensure that the MIC’s policy evaluations are conducted in a "fair and neutral" manner.5 The operation of the GPEA is to be reviewed by the Government after three years.

Chart II.1Policy evaluation system in Japan

MIC (Administrative Evaluation Bureau)Promotion of the policy evaluation system (as a ministry responsible for the system) Implementation of evaluations (as the specialized evaluation organization) (1) Coherence/comprehensiveness-ensuring evaluation (2) Activities to ensure objectivity in policy evaluations

Report

Cabinet Office and Ministries

Diet

Policy Implementation(DO)

Investigation and deliberation

Source : Information provided by the Japanese authorities.

Commission on Policy Evaluation and Evaluation of Incorporated

Administrative Agencies

Prime Ministerial

Request for adviceSubmission of opinions

Citizens

Publication

Policy management cycle

Planning(PLAN)

Evaluation (SEE)

Opinions based on evaluation results

Evaluation documentsLiaison/coordination

Publication

4 On 10 September 2004, English name of the Ministry of Public Management, Home Affairs, Posts

and Telecommunication (MPHPT) was changed to the Ministry of Internal Affairs and Communication (MIC). 5MIC (2002).


(3) TRADE AGREEMENT AND ARRANGEMENTS

(i) WTO

(a) Introduction

6. As a strong supporter of the multilateral trading system, Japan has been participating actively in the WTO, including in the Doha Development Agenda (DDA). In its statement at the Ministerial Conference in Cancún in September 2003, Japan expressed its belief that the expansion of trade had been the principal driving force behind the rapid growth of the world economy and that the WTO ensured that the benefits of trade liberalization would be shared by all; it also called for negotiations to be launched on the "Singapore issues", such as trade facilitation, as it believed that the WTO would be an appropriate forum to develop global rules on such issues.6 Japan also seeks to clarify and improve rules on trade remedies, particularly anti-dumping, in order to complement trade liberalization and safeguard the achievements of previous rounds of trade negotiations; accordingly, together with a number of other WTO members, it has submitted several proposals on clarifying and improving the rules on anti-dumping in the Negotiating Group on Rules. In the agriculture negotiations, Japan aims to establish rules, based on the Doha mandate, what would enable "the coexistence of various type of agriculture" and take into account "non-trade concerns", such as food security, rural development, and environment protection. In the non-agriculture market-access negotiations, Japan has supported substantial tariff reduction and market access improvements. In the negotiations on services, Japan made efforts to facilitate market access negotiations and to improve the disciplines on domestic regulation under the GATS.

(b) Notification

7. Like all members of the WTO, Japan is required to notify its laws and measures under various WTO Agreements. The status of selected notifications as of July 2004 is shown in Table AII.1.

(c) Disputes

8. Japan's use of the WTO Dispute Settlement Mechanism has increased over the years. Since its last Review, Japan has been involved in one dispute as a respondent and four cases as a complainant (Table AII.2). In addition, Japan participated as third party in 23 dispute cases.

(ii) Regional agreements

(a) Asia-Pacific Economic Cooperation (APEC)

9. In keeping with its policy of supporting multilateral trade and investment liberalization, Japan is a strong supporter of APEC's "open regionalism" goals. The Tenth APEC Leaders' Meeting, held in Los Cabos, Mexico in October 2002, reaffirmed the Bogor goals of free and open trade and investment and agreed to support the new round of talks at the WTO.7 The meeting recognized the importance of structural reform, including further liberalization and facilitation of trade and investment, in the APEC region; it also endorsed an APEC Trade Facilitation Action Plan (TFAP), which includes a number of actions and measures in four key areas, i.e., movement of goods, standards, business mobility, and e-commerce.

6 WTO document WT/MIN(03)/ST/23, 11 September 2003. 7 APEC (2002).


10. At the Eleventh APEC Leaders' Meeting, held in Bangkok, Thailand in October 2003, Ministers agreed to re-energize the negotiating process in the Doha Development Agenda (DDA), recognizing that flexibility and political will were urgently needed to move the negotiations toward a successful conclusion. Leaders also agreed to continue APEC’s work on WTO capacity- and confidence-building, in areas such as structural impediments to trade in goods and services, training on competition policy and deregulation, corporate governance and insolvency systems, corporate debt restructuring, and strengthening legal infrastructure related to economic activities, where APEC could best add value. Japan and Canada are the current co-convenors of the WTO Capacity Building group, which reviews WTO-related capacity-building activities in APEC. Ministers of APEC members also expressed determination to accelerate structural reform in their economies in order to ensure sustainable growth and development in the Asia-Pacific region, and adopted an APEC Structural Reform Action Plan as a guiding programme for the APEC Structural Reform Initiative.8

11. In addition, APEC economies aim to reduce business transaction costs by 5% by 2006. Since 1 April 2003, Japan has implemented the APEC Business Travel Card (ABTC) scheme, in which holders of the APEC Business Travel Card are granted streamlined procedures for entry and departure from participating economies.9

(b) ASEM

12. In September 2002, the fourth ASEM Leaders meeting was held in Copenhagen, Denmark, where the leaders agreed to set up an action-oriented taskforce with a view to achieving a closer ASEM economic partnership.10 The taskforce consists of ten Asian and seven European experts; a study on three areas, trade, investment, and finance was apparently conducted by these experts. The taskforce is expected to submit its final report to the fifth ASEM Leaders meeting in 2004. Japan, together with Viet Nam, was appointed as an Asian ASEM coordinator for the fifth meeting.

(c) Japan and ASEAN

13. Although not a member of the Association of South-East Asian Nations (ASEAN), Japan, along with China and the Republic of Korea holds regular meetings with ASEAN under the ASEAN+3 framework of cooperation. High level meetings are held annually; the sixth and seventh ASEAN+3 summits were held in November 2002 and November 2003.

14. On October 2003, Japan and the ASEAN signed a "Framework for a Japan–ASEAN Comprehensive Economic Partnership (CEP)". In this connection, an ASEAN–Japan Committee on Comprehensive Economic Partnership (AJCCEP) was established in November 2003 to carry out the work set out in the Framework. Japan and ASEAN have started consultations on the liberalization and facilitation of trade in goods, trade in services and investment since the beginning of 2004; they expect the implementation of measures for the realization of Japan–ASEAN CEP, including elements of a possible free-trade area, to be completed by 2012.11

8APEC (2003b). 9 An ABTC is issued, in principle, to a passport holder of a participating economy, who is a business

traveller (conducting trade/investment activities) in the region. 10 The first Asia-Europe Meeting (ASEM) was held in March 1996, with ten Asian countries, including

Japan, China, the Republic of Korea, and seven other ASEAN countries, the 15 EU member states and the European Commission. The ASEM aims to create a new Asia-Europe partnership to build greater understanding and strengthen dialogue between the two regions.

11 MOFA (2003f).


(d) Others

15. Japan has also carried out a trilateral cooperation with China and the Republic of Korea, in various areas including trade and investment, information and communication technology industries, environmental protection, and financial cooperation. The leaders of the three countries have held regular informal meetings since 1999. In the Joint Declaration on the Promotion of Tripartite Cooperation, signed on 7 October 2003, they agreed to make joint efforts to push forward the DDA negotiations with a view to improving market access and strengthening the rules on anti-dumping. In addition, they agreed to strengthen dialogue and cooperation on trade facilitation among their customs and transport authorities and to continue exchanges and cooperation between their quality supervision, inspection, and quarantine authorities through existing channels.

(iii) Bilateral agreements

(a) Japan–U.S. bilateral relationship

16. Japan and the United States have continued their dialogue under the Japan–U.S. Economic Partnership for Growth, which was established in June 2001. The Partnership aims to "promote sustainable growth by addressing issues such as sound macroeconomic policies, structural and regulatory reform, financial and corporate restructuring, foreign direct investment and open markets"; the Partnership also provides a structure for cooperation and engagement on bilateral, regional, and global economic and trade issues.

17. No other bilateral arrangement or initiative between Japan and the United States has been launched since 2002. The Partnership also provides fora for trade cooperation, namely, the U.S.–Japan Subcabinet Economic Dialogue, the Private Sector/Government Commission, the Regulatory Reform and Competition Policy Initiative, the Investment Initiative, the Trade Forum, and the Financial Dialogue. The U.S.–Japan regulatory reform and competition policy initiative has provided opportunities for officials of the two countries to discuss reforms in key areas, including telecommunication, information technology, energy, medical devices and pharmaceuticals, competition policy, transparency and other government practices (including special zones for structural reform), legal system reform, commercial law revision, distribution, consular affairs, and trade and investment-related measures.12 Under the Investment Initiative, Japan and the United States have addressed the structure and operation of corporation, corporate governance, corporate transparency, bankruptcy, labour mobility, and land market so as to the improve the environment for foreign investment. The progress made under this initiative is reported annually to the leaders of the two countries.

18. On 30 March 2004, the Japan–U.S. New Tax Treaty entered into force; the treaty was applied to withholding tax on 1 July 2004, and is to be applied to other taxes on 1 January 2005. The treaty exempts from taxation dividends earned by U.S./Japan subsidiaries in which their Japanese/U.S. parent firm has a stake of more than 50%, interest paid to financial institutions, and royalties. On 19 February 2004, Japan signed the Japan–U.S. Social Security Agreement. This agreement is aimed at preventing the double payment of pensions and health insurance premiums as well as adding up the periods for which a person has paid social security contributions in both countries in order for the person to be entitled to pensions in one or both countries.13

12 MOFA (2004e). 13 MOFA (2004c).


(b) Japan–European Union bilateral relationship

19. Since its previous Review, Japan has continued to pursue bilateral cooperation with the European Union. At the Thirteen Summit held in June 2004, three papers were issued: "the Co-operation Framework for Promotion of Japan-EU Two Way Investment," "Japan-EU Joint Initiative for the Enforcement of Intellectual Property Rights in Asia," and "Joint Statement on Cooperation on Information and Communication Technology (ICT)". These papers describe actions for strengthening the strategic economic partnership between Japan and the EU. The Co-operation Framework for the Promotion of Two-Way Investment addresses key issues such as regulatory transparency, standards and conformity assessment, movement of persons across national borders, and conditions for foreign residents. 14 Both parties are also to promote the protection and encourage the enforcement of intellectual property rights.

20. No bilateral arrangement between Japan and the EU has been launched since 2002, except for the agreement concerning cooperation on anti-competitive activities, which was concluded in July 2003, and entered into force in August 2003.

(c) Japan–Singapore Agreement for an Economic Partnership

21. In January 2002, the Prime Ministers of Japan and Singapore signed the "Agreement between Japan and the Republic of Singapore for a New-Age Economic Partnership (JSEPA)". The agreement, which entered into force on 30 November 2002, is aimed at strengthening the economic relationship between the two countries in a wide range of areas, including the liberalization and facilitation of trade and investment, financial services, information and communications technology, science and technology, human resources development, small and medium enterprises, broadcasting, and tourism.15 According to data provided by the authorities, more than 98% of trade between the two countries has been covered by the JSEPA and approximately 94% of Singapore's exports entered into Japan duty free since the agreement entered into force. At the ministerial review meeting on JSEPA held in December 2003, the Ministers of Foreign Affairs and of Trade of the two countries agreed that the JSEPA had laid a foundation for firmer economic linkage; they considered that the JSEPA would create new opportunities for business, promote stability and predictability for business transaction, and enhance the attractiveness and vibrancy of the two markets.

(d) Japan–Mexico bilateral relationship

22. In June 2001, Japan and Mexico established a "Joint Study Group on the Strengthening of Bilateral Economic Relations." The final report of the joint study, published in July 2002, suggested that the two governments start working on an agreement to strengthen their bilateral economic partnership. Subsequently, negotiations on an economic partnership agreement (which involves preferential trade arrangements) began in November 2002, and in March 2004, the two countries reached agreement on its major elements. On 17 September 2004, Japan and Mexico signed the Agreement for the Strengthening of the Economic Partnership.

(e) Japan–Malaysia bilateral relationship

23. In December 2002, Japan and Malaysia agreed to work towards the establishment of a free-trade agreement between the two countries. In May 2003, a working group on Japan–Malaysia Economic Partnership was established, and meetings of a joint study group were convened in September and November 2003 with a view to conducting studies on a wide range of issues, including

14 MOFA (2004d). 15 WTO (2003), Chapter II(iii)(c).


liberalization and facilitation of trade in goods and services, investment and cooperation in various areas. In January 2004, Japan and Malaysia started their first formal negotiations for the possible conclusion of the Japan–Malaysia Economic Partnership Agreement. The fourth round of negotiations was held in July 2004.

(f) Japan–Philippines bilateral relationship

24. In October 2002, Japan and the Philippines agreed to establish a working group to study the possibility of forming a "Japan–Philippines Economic Partnership Agreement"; the agreement was envisaged to cover trade in goods and services, investment, technical cooperation, and capacity building between the two countries. In February 2004, the two governments started their first formal negotiations. The third round of negotiations was held in July 2004.

(g) Japan–Korea bilateral relationship

25. In March 2002, Japan and Korea agreed to launch a joint study group to explore the possibility of establishing a "Japan–Korea Free Trade Agreement". A report by the group was published in October 2003; it contained a study on possible bilateral cooperation in various areas such as liberalization and facilitation of trade, and cooperation in science and technology.16 In November 2003, the two countries decided to start negotiations an "economic partnership agreement" (which involve preferential trade arrangements) with a target of finishing the substance of the negotiations in 2005. The first round of negotiations was held in December 2003 and three further rounds were held in 2004.

(h) Japan–Thailand bilateral relationship

26. Japan and Thailand held working group meetings between September 2002 and May 2003 and three task force meetings between July and November 2003 concerning the possible formulation of a "Japan–Thailand Economic Partnership Agreement (JTEPA)". It is envisaged that the agreement will cover trade in goods and services, investment, and cooperation in various areas such as information and communication technology. The first formal negotiations began in February 2004. The fourth round of the negotiation was held in September 2004.

(i) Other bilateral arrangements

27. Japan and China held the first meeting of a Japan–China Economic Partnership Consultation, at deputy ministerial level, in Beijing on 15 October 2002; a second meeting was held in Tokyo on 31 October 2003. Follow-up meetings, at deputy director general level, were held in Beijing on 11 March 2004 and in Tokyo on 28 June 2004. The Consultation aims to identify bilateral economic issues affecting the two countries at an early stage and to prevent disputes between them, as well as to strengthen bilateral economic relations. Intellectual property rights (including damages resulting from counterfeit goods), difficulties related to investment in China, anti-dumping measures adopted by China, pesticide residue on agricultural products from China, and Japan–China cooperation in the international economy were also discussed in the meetings

28. The Prime Ministers of Japan and Australia signed an Australia–Japan Trade and Economic Framework in July 2003 to explore options for deeper bilateral economic linkages. The Framework is aimed at working towards the liberalization of trade and investment, through various avenues, including a joint study to examine the costs and benefits of the balanced and comprehensive liberalization of trade in goods and services and investment between the two countries.

16 MOFA (2003c).


29. Japan considers a bilateral free-trade agreement with Chile as a medium- to long-term issue. In February 2003, the two countries decided to establish a Japan-Chile Bilateral Economic Consultation to exchange views on various economic matters, such as trade and investment, with a view to strengthening their economic ties. The first meeting was held in Tokyo on 18 November 2003, and the second in Santiago on 13 July 2004.

30. Japan participates in a number of regional initiatives, including cooperation in metrology and measurement standards through the Asia Pacific Metrology Programme and the Asia Pacific Legal Metrology Forum; it also participates in the Asia Pacific Laboratory Accreditation Cooperation (APLAC) with a view to cooperating in the harmonization of laboratory accreditation practices.

31. On 22 March 2004, Japan and Canada held Joint Economic Committee (JEC) meetings at deputy ministerial level to discuss their bilateral economic relationship. Areas for discussion included further promotion of bilateral trade and investment, regulatory reform, and partnership between the two countries at multilateral fora, such as the WTO and APEC. They also exchanged views on their respective free-trade agreement policies and their impact on Asian-Pacific region. Issue-specific consultations have also been held on, for example, telecommunication, tourism, finances, science and technology, and standards.

(iv) Preferential treatment

32. Japan's Generalized System of Preferences (GSP) scheme grants preferential tariff treatment to certain developing countries under the Temporary Tariff Measures Law. The Government has the authority to unilaterally designate, withdraw, suspend, and limit beneficiaries or products that receive preferential treatment under the GSP scheme. 17 In 2001, Japan extended its GSP scheme to 31 March 2011 and introduced various measures, such as expanding the product coverage of tariff-free and quota-free treatment for goods originating in the LDCs. As a result, all textile and clothing products from LDCs are duty free and quota free.

33. In April 2003, Japan added 118 agricultural products at the HS nine-digit level to its GSP preferential tariff. As a result, the current GSP scheme grants preferential tariff treatment to 140 developing countries and 15 territories for 339 agricultural and fishery products at the HS nine-digit level.18 The preferences are granted on almost all industrial products, with the exception of 118 items.19

34. The depth of tariff cuts varies according to the product; for sensitive industrial products, there are 78 product groups (1,264 items at the HS nine-digit level) to which various preferential rates (0%, 20%, 40%, 60%, 80% of MFN rates) apply up to specified ceilings. The ceilings are open for utilization by all beneficiaries. However, preferential treatment is suspended on a monthly basis when ceilings are reached. If preferential imports from one beneficiary exceed one fifth of the total value or volume of the ceiling, the preferential treatment for that beneficiary is suspended. Preferential treatment under the GSP scheme is granted on the condition that goods fulfil Japan's GSP rules of origin. The administration of ceilings and maximum country volumes are managed on a first come first served basis.

17 In order to qualify for preferential treatment under the GSP, the country or territory must: be a

developing economy; have its own tariff and trade system; request preferential tariff treatment; and be prescribed by a Cabinet Order as a country or territory benefiting from GSP treatment.

18 MOFA (2003e). 19 MOFA (2003b).


35. In April 2003, the number of LDCs' agricultural and fishery products eligible for duty-free and quota-free treatment was increased to around 500 items (from around 300 items previously); the additional items included, for example, prawns and frozen fish fillets.20 As a result, duty-free and quota-free coverage for LDCs is expected to rise from 80% to over 90% in terms of total import value from LDCs.

36. Japan removed Slovenia from its list of GSP beneficiaries in 2003.21 As a result of their accession to the European Union on 1 May 2004, eight countries were also excluded from the scope of application of the GSP scheme.22 The main beneficiary of GSP is China, unchanged since the previous Review (Table II.2).

Table II.2 GSP shares for the ten largest beneficiaries (Million yen)

Beneficiaries Import value of preferential treatment Share (%)

People's Republic of China 883,591 56.1

Thailand 138,420 8.8

Indonesia 132,911 8.4

Malaysia 104,288 6.6

Philippines 88,890 5.6

Viet Nam 30,279 1.9

India 23,840 1.5

Brazil 19,999 1.3

Chile 16,064 1.0

Morocco 13,119 0.8

World 1,574,425 100.0


20 For imports of industrial products from LDCs, 99% of items receive duty-free and quota-free

treatment. 21 WTO documents WT/COMTD/N/2/Add.12, 12 May 2003, and WT/COMTD/LDC/M/35,

30 January 2004. 22 WTO document WT/COMTD/N/2/Add.13, 1 June 2004.



(1) INTRODUCTION

1. Since its previous Trade Policy Review in late 2002, Japan has introduced various measures aimed at further liberalizing its trade and investment regimes. Progress has been made in improving the competitive environment, including in telecommunications and financial services; however, the use of contingency measures is somewhat more evident than before, and potentially important distortions to competition remain in some sectors, particularly agriculture. The authorities attach high priority to regulatory reform and sound competition policy, which could, inter alia, help create more opportunities for domestic and foreign businesses, including those entailing inward FDI.

2. The tariff is Japan's main trade policy instrument. Nonetheless, most imports enter Japan duty free or are subject to low tariff rates. In fiscal year 20041, the simple average applied MFN tariff was 6.3%, down from 6.9% in FY 2002. Nearly 99% of tariff lines are bound and most applied rates coincide with bound rates, thereby imparting a high degree of predictability to Japan's tariff schedule. At the same time, non-ad valorem duties are an important feature of the tariff, particularly in agriculture. Such duties, which account for 6.6% of all lines, are indicated clearly in Japan's tariff schedule; they tend to involve high ad valorem equivalents. Preferential tariff rates are offered under the Generalized System of Preference (GSP) to 140 developing countries and 15 territories, including additional preferences for 47 least developed countries (LDCs); Japan also grants preferential access for imports from Singapore under the Japan–Singapore Economic Agreement for a New Age Partnership (JSEPA). The simple average tariff rates under these preferential arrangements (GSP, LDC, and JSEPA) are 5.1%, 3.1% and 4.2%, respectively.

3. Japan has few non-tariff border measures. Those currently applied involve some import prohibitions and quantitative import restrictions (for example, on certain fish and silk). In addition, imports of certain goods are subject to licensing requirements in order to ensure national security, safeguard consumer health and well-being, or preserve domestic plant and animal life and the environment. Certain aspects of the import quota system can be intricate.

4. Since its previous Review, Japan has used one anti-dumping measure (imposed on certain polyester staple fibre). It has not imposed any safeguards measures. Recently, Japan began investigating the case for countervailing measures against imports of dynamic random access memory chips from the Republic of Korea.

5. Japan maintains certain export controls on grounds of national security and public safety and to ensure adequate domestic supplies of certain agricultural and other primary products. Japan has not notified any export subsidies to the WTO, indicating the absence of such subsidies as defined in the WTO Agreements. Export finance, insurance, guarantees, and drawback schemes are available.

6. Various forms of assistance are provided by central and local governments, particularly for agriculture. The total value of assistance to agriculture exceeds the sector's contribution to GDP; most of the assistance seems to consist of measures that distort production and trade.

7. No preferences are granted to domestic suppliers with regard to government procurement covered by the Agreement on Government Procurement. The share of foreign suppliers in the total value of government procurement was 4.2% in 2002 (down from 6.9% in 2000).

1 The fiscal year (FY) runs from April to March.


8. About 92% of Japan Industrial Standards (JIS) (91% in 2003) were aligned to their international counterparts as of March 2004. Japan has also taken further steps to ensure acceptance of foreign test data and conformity assessment, by, for example, concluding mutual recognition agreements.

9. Japan has continued to participate in multinational and regional discussions on agreements to promote international harmonization of regimes protecting intellectual property rights (IPRs).

10. In March 2004, Japan adopted the new Three-Year Program for Promoting Regulatory Reform (TPPRR), which listed 762 measures envisaged to contribute to creating new opportunities for domestic and foreign businesses. The Council for the Promotion of Regulatory Reform (CPRR) was established in April 2004, to replace the Council for Regulatory Reform (CRR), whose mandate expired on 31 March 2004. In April 2003, a scheme of special zones for structural reform was adopted; exceptions to particular regulations are granted within approved special zones according to the zones' specific circumstances.

11. Over the years, the growing importance of deregulation and competition in the Japanese economy has increased the status and size of the Japan Fair Trade Commission (JFTC). Moreover, with a view to achieving a higher degree of independence for the JFTC, it was transferred from the Ministry of Public Management, Home Affairs, Posts and Telecommunications to the Cabinet Office in April 2003.

12. There is growing awareness that ineffective corporate governance has contributed to the misallocation and perhaps excessive use of capital and labour in the corporate sector. This has prompted the Government to implement a number of policy measures, such as an amendment to the Commercial Code and the revision of the Certified Public Accountants Law.

(2) MEASURES DIRECTLY AFFECTING IMPORTS

(i) Procedures and valuation

13. All importers must file a declaration with Customs under the Customs Law. For most goods, the declaration must be made after the goods have been taken into a Hozei area2, or other specially designated place; items requiring approval by the Director-General of Customs must be declared before they are taken to the Hozei area. The declaration must be accompanied by details of the quantity and value of the goods to be imported as well as a packing list, freight account, insurance certificate, and certificate of origin (for preferential rates of tariff), where applicable. Additional documentation may be required, for example for goods requiring an import licence or health certificate. Once the documentation is verified by Customs, an import permit is issued.3 A simplified procedure has been introduced since March 2001, to facilitate passage through Customs; it allows

2 The Hozei area comprises land, buildings or other facilities designated by the Minister of Finance (or

approved by the Director-General of Customs) to store imported goods or goods to be exported; Hozei areas may also be established where processing and exhibition of imported goods take place. In principle, import and export procedures must be completed once the imported goods or goods destined for export are brought into the Hozei area. There are five types of Hozei areas: designated Hozei area, Hozei warehouse, Hozei manufacturing warehouse, Hozei display area, and integrated Hozei area.

3 Customs examination is carried out before the permit is issued; after the permit is issued, an "emphasized examination" may be carried out where there are doubts concerning duty assessment.


release of goods routinely imported by the same importer on a regular basis (continuously imported goods) before customs tax declaration.4 Certain goods are not eligible for simplified declaration.5

14. To streamline customs procedures, Japan introduced a single-window system in July 2003 to enable the completion of all necessary import and export and port procedures through a single submission by linking NACCS (Nippon Automated Cargo Clearance System) and the relevant ministries' and agencies' systems. Overtime handling charges by Customs were also reduced by 50% in April 2003. The latest available data indicate that the average time between import declaration and import permission was 4.3 hours in 2004 for sea cargo (4.9 hours in 2001) and 0.4 hours for air cargo (0.6 hours in 2001). The average time between cargo arrival and the granting of import permission was 2.8 days for sea cargo (3.1 days in 2001) and 0.7 days for air cargo (1.1 days in 2001).

15. Imports are valued on the basis of their c.i.f. value (which is taken to be the transaction value of the imports). Customs duty can be paid through a multi-payment network system introduced on 22 March 2004, which connects teller institutions (government authorities) with financial institutions. This enables payment of customs duty through electronic channels such as personal computers, mobile telephones, and automated teller machines; payments can be made 24 hours a day. No fee is charged by the Government for the use of this system; however, the financial institutions involved may collect variable fees. The system is managed by the Japan Multi-payment Network Management Organization, a non-profit organization established by major financial institutions in Japan; only institutions that participate in the organization can use this system. As at March 2004, no foreign banks participate in the system.

16. Complaints against decisions taken by Customs may be made to the Director-General of Customs, within two months of the date of importation. Further appeals may be lodged with the Minister of Finance within one month of the Director-General of Custom's decision on the complaint. The number of such complaints fell to 11 in 2003 from 25 the previous year; 11 appeals were made in 2002, and only three in 2003. There have been no changes to the complaint and appeal process for Japan's customs procedure since 2002.

(ii) Tariffs

(a) Bound tariff

17. In FY 2004, Japan's bound tariff consisted of 9,075 lines at the HS-9 digit level.6 Japan has bound 98.9% of lines (102 lines are unbound); there are no partially bound rates (Table III.1). The unbound lines relate mainly to fisheries (fish, crustaceans, seaweed), petroleum oils, and wood and articles thereof. Some 8,405 lines (92.6%) have ad valorem rates, 212 lines (2.5%) carry specific rates, 57 lines (0.7%) compound rates, and 299 lines (3.6%) have alternate rates of duty. In FY 2004, the average tariff bound was 6.4%, only slightly higher than the current applied MFN tariff (see

4 Continuously imported goods are goods that the importer has imported 24 times or more during the

past year for each category of goods (as classified under the 9-digit HS code). Under the simplified procedure, the goods are not subject to inspection and examination for the purpose of calculating tax.

5 These include goods requiring physical verification, such as goods subject to preferential duty, goods imported in cases of emergency, and goods being re-imported after assembly and qualifying for duty reductions.

6 The Japanese tariff schedule has three distinct sets of rates: statutory rates (which include both general and temporary rates), WTO bound rates, and preferential rates (those under the GSP and the Japan–Singapore New Age Economic Partnership Agreement). In the case of statutory rates, the "temporary" but apparently open-ended rate is normally used instead of the higher general rate; the lower of the statutory and WTO bound rates are applied to WTO Members on an MFN basis, except when preferential rates are applied. In instances where the temporary, general, or preferential rate is above the WTO bound rate, the latter rate applies to WTO Members.


below), suggesting a great deal of predictability in the tariff. Bound rates exceed MFN rates for, inter alia, live animals and animal products (HS Section 1), vegetables (HS Section 2), prepared foods, beverages and tobacco (HS Section 4), chemicals and products (Section 6), textiles and clothing (Section 11), and base metals (Section 15). The average bound rate for agriculture is considerably higher, at 18.4%, compared with 3.7% for non-agricultural products; this average for agriculture is expected to remain unchanged in 2009, when Japan completes the implementation of its Uruguay Round commitments.7

Table III.1 Structure of MFN tariff in Japan, 2001-04 (Per cent)

FY 2001a FY 2002a FY 2003b FY 2004b U.R.b,c

Bound tariffd

1. Bound tariff lines (% of all tariff lines) 98.9 98.9 98.9 98.9 98.9

2. Simple average bound rate 8.6 8.5 6.4 6.4 6.4

Agricultural products (HS01-24) 27.0 26.6 16.8 16.8 16.8

Industrial products (HS25-97) 4.1 4.1 3.9 3.9 3.9

WTO agricultural products 29.7 28.9 18.4 18.4 18.4

WTO non-agricultural products 4.0 3.9 3.8 3.7 3.7

Textiles and clothing 7.4 7.1 6.7 6.7 6.7

3. Tariff quotas (% of tariff lines) 1.6 1.7 1.6 1.6 1.6

4. Duty free tariff lines (% of tariff lines) 35.5 35.2 40.8 40.9 40.9

5. Non-ad valorem tariffs (% of tariff lines) 6.6 6.5 6.4 6.3 6.3

6. Non-ad valorem tariffs with no AVEs (% of tariff lines) 0.8 0.8 1.6 1.5 1.5

7. Nuisance bound rates (% of tariff lines)e 6.5 6.7 1.0 1.0 1.0

Applied tariff

8. Simple average applied rate 6.9 6.9 6.3 6.3 ..

Agricultural products (HS01-24) 18.8 18.6 16.1 16.1 ..

Industrial products (HS25-97) 4.0 3.9 3.8 3.8 ..

WTO agricultural products 20.4 20.0 17.7 17.7 ..

WTO non-agricultural products 3.9 3.9 3.8 3.7 ..

Textiles and clothing 7.3 7.0 6.7 6.7 ..

9. Domestic tariff "peaks" (% of all tariff lines)f 5.8 6.0 6.5 6.4 ..

10. International tariff "peaks" (% of all tariff lines)g 7.5 7.6 7.4 7.4 ..

11. Overall standard deviation of tariff rates 33.0 32.5 23.2 23.2 ..

12. Coefficient of variation of tariff rates 4.8 4.7 3.7 3.7 ..

13. Tariff quotas (% of all tariff lines) 1.6 1.7 1.6 1.6 ..

14. Duty free tariff lines (% of all tariff lines) 36.8 36.7 41.6 41.6 ..

Table III.1 (cont'd)

7 Japan implemented its tariff reduction commitments for all but one industrial product by

January 1999 and for agricultural products by January 2004. Tariff reduction commitments are yet to be met for one remaining industrial product, menthol (HS 2906), expected by April 2009.


FY 2001a FY 2002a FY 2003b FY 2004b U.R.b,c

15. Non-ad valorem tariffs (% of all tariff lines) 7.3 7.1 6.6 6.6 ..

16. Non-ad valorem tariffs with no AVEs (% of all tariff lines) 1.3 1.2 1.4 1.4 ..

17. Nuisance applied rates (% of all tariff lines)e 5.9 6.1 1.1 1.1 ..

.. Not available.

a Using 2000 AVEs, as available, provided by the Japanese authorities; where unavailable, the ad valorem part is used for compound and alternate rates.

b Using 2003 AVEs, as available, provided by the Japanese authorities; where unavailable, the ad valorem part is used for compound and alternate rates.

c Based on FY 2004 tariff schedule. d Calculations are based only on bound tariff lines (98.9% of total lines). e Nuisance rates are those greater than zero, but less than or equal to 2%. f Domestic tariff peaks are defined as those exceeding three times the overall simple average applied rate (indicator 8). g International tariff peaks are defined as those exceeding 15%.

Note: All tariff calculations exclude in-quota lines. FY 2001 is based on HS96 nomenclature; FY 2002, FY 2003 and FY 2004 are based on HS02 nomenclature. AVEs have been adjusted accordingly (e.g. a specific tariff line's MFN applied rate equals 100 yen/kg in 2001; the given 2001 AVE equals 50%. For the same line the bound rate equals 150 yen/kg in 2001 and in 2002 its applied rate equals 75 yen/kg. Their AVEs become 75% and 37.5%, respectively).

Source: WTO calculations, based on data provided by the Japanese authorities.

(b) MFN tariff

Structure

18. Japan's current applied most-favoured-nation (MFN) tariff consists of 9,075 lines in the HS-9 digit nomenclature. Some 93.4% involve ad valorem rates, with 2.3% of all tariff lines being specific, 3.3% alternate, and 0.6% compound rates; other rates (differential duties and sliding duties) involve 0.4% of MFN tariff lines.8 There are 147 tariff lines (1.6%) for which out-of-quota tariff rates currently apply; 35 of these lines are subject to ad valorem rates of duty. Around 6.6% (601 lines) of the tariff is subject to non-ad valorem rates of duty; these duties are found mainly in fats and oils, footwear, textiles and clothing, prepared foods, live animals and animal products, vegetables, and mineral products (Chart III.1); ad valorem equivalents were provided by the authorities for 469 lines as a result of which the tariff analysis is based on 98.6% of all 9,075 tariff lines.9

8 An alternate duty involves either an ad valorem or specific rate; usually the higher of the two is

applied. A compound duty involves a combination of both ad valorem and specific rates. A differential duty involves a specific rate charged per kg. of imports with the rate varying directly with the difference between the standard import price, set by the authorities, and actual import price. A sliding duty involves a specific tariff rate for imports valued up to a certain threshold; the rate declines as the value exceeds the threshold and becomes zero at certain point. For example, the applied rate on refined lead is ¥2.70/kg. when the value for customs duty does not exceed ¥172/kg., (¥180 minus the value for customs duty)/kg. when the value is more than ¥172/kg. but less than ¥180/kg., and zero when the value exceeds ¥180/kg.

9 Ad valorem equivalents were provided by the authorities for 469 out of 598 non-ad valorem tariff lines. For 22 lines that carry alternate rates of duty, and 29 lines with compound rates, the ad valorem part of the line was used in the tariff analysis, which means that the levels of these alternate and compound rates are underestimated.


(0) (0) (0) (0) (0)

(29)

(74)

(57)

(36)

(121)

(27)

(4) (0) (0) (0) (0)

(223)

(25)

(601)

(0)(2)(0)0

5

10

15

20

25

30

35

40

45

Live

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ared

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l

Chart III.1Share of non-ad valorem duties, by HS section, FY2004Per cent

Note:

Source :

Each bar in the chart depicts the percentage of tariff lines out of the total within each HS section that are non-ad valorem duties. The figures in parentheses show the number of lines involving non-ad valorem rates. In-quota rates are not included.

WTO Secretariat estimates, based on data provided by Japanese authorities.

19. Around 41.6% of Japan's tariff is duty free; around 23.2% is subject to rates greater than zero and less or equal to 5%, and 22.1% to rates greater than 5% and less than or equal to 10%, respectively. Some 1.6% of all tariff lines in Japan's tariff are subject to tariff rate quotas. While 100% of the in-quota rates are ad valorem, only 23.8% of out-of-quota rates are ad valorem. There is also a significant difference between the average rates; the in-quota rate averages 18.9%, compared with 90.8% for the out-of-quota rates.

Tariff averages

20. In FY 2004, Japan's overall simple average applied MFN tariff was 6.3% down from 6.9% in FY 2002. Agriculture receives much higher protection than non-agricultural products, with the simple average for agriculture (Uruguay Round definition) averaging 17.7% compared with 3.7% for non-agricultural products (Chart III.2). Protection for footwear and headgear, prepared foods, vegetables, rice, live animals, hides and skins and textiles and clothing is also relatively high.


0

5

10

15

20

25

30

35

40

Live

ani

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& p

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etab

le p

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cts

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Prep

ared

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, etc

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etc

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l

Chart III.2Simple average applied MFN tariff rates, by HS section, FY2002 and 2004Per cent

Excluding in-quota rates. Including ad valorem equivalents (AVEs) provided by the Japanese authorities, as available. The ad valorem part of compound and alternate rates are taken into account where AVEs are not available.

WTO Secretariat calculations, based on data provided by the Japanese authorities.

Note:

Source :

FY2002FY2004

21. Ad valorem equivalents (AVEs) were provided by the authorities (for 2003) for approximately 78.4% of the non-ad valorem rates.10 The simple average rate for all the AVEs supplied is 39.2%, although the highest rate is 1,124.1%, for konnyaku tubers; 93 of the top 100 tariffs entailed non-ad valorem rates. The overall average for the AVEs is also high compared with the overall simple average tariff of 6.3%, and the simple average of the ad valorem rates of 4.4%.11

22. The data on tariff escalation show no overall consistent pattern other than that the high level of protection granted to agricultural products results in higher overall tariff protection for primary products than for semi-processed products. Tariff escalation from semi-processed to final goods is present in some sectors, notably leather products, and textiles. In other sectors, such as wood and wood products, other food products and animal feeds, and other chemicals, protection for fully processed goods is lower than for semi-processed products, while escalation from primary to semi-

10 According to the authorities, AVEs for the remaining non-ad valorem tariff lines were not available

due to lack of imports of an unspecified number of these items, or because the unit for duty did not correspond to that used for trade statistics.

11 For FY 2002, the simple average of ad valorem rates was 4.5% and the average of the AVEs supplied by the authorities was 44.2%.


processed and final products is evident only for food products, industrial chemicals, and rubber (Table AIII.1).

Tariff reduction and exemptions

23. Customs duty reductions and exemptions for FY 2003 amounted to about ¥193.4 billion, which accounted for about 23% of total tariffs collected.

(c) Preferential rates

24. Preferential rates of tariff are offered under the Generalized System of Preferences (GSP) to 140 developing countries and 15 territories, including additional preferences for 47 least-developed countries (LDCs).12 Japan also grants preferential access for imports from Singapore under the Japan-Singapore Economic Agreement for a New Age Partnership (JSEPA). As of 1 April 2003, Japan has increased the number of agricultural and fishery products for which least-developed countries are granted duty-free and quota-free treatment. GSP preferences for developing countries were also increased13; in addition, the preferential tariff rates for 67 products were reduced.14 Senegal was added to the list of LDCs in April 2002; and Slovenia was graduated out of the GSP on 1 April 2003 (Chapter II(3)(iv)).

25. The simple average tariff rates under all three preferential arrangements (GSP, LDC and JSEPA) are lower than the simple average MFN rate although there are wide variations from one product group to another. In particular, while the overall simple average GSP, LDC and JSEPA rates are, respectively, 5.1%, 3.1% and 4.2%, agriculture is subject to much higher rates, at 16.7%, 15.3% and 17.7% (Table III.2). Tariffs are also high for certain processed and industrial goods, such as leather, rubber, footwear and travel goods, and textiles and clothing imports under the GSP and the JSEPA; items such as dairy products and some footwear and textiles and clothing items are not included in the GSP scheme for developing countries and are therefore subject to MFN rates of duty.

Table III.2 Preferential tariff rates, FY 2004

MFN GSP LDC JSEPA

Per cent ad valorem 93.4 93.8 96.7 96.2

Overall simple average 6.3 5.1 3.1 4.2

Agriculture (WTO definition) 17.7 16.7 15.3 17.7

Dairy products 79.6 79.6 79.6 79.6

Leather, rubber footwear, and travel goods 17.2 15.9 1.7 17.2

Textiles and clothing 6.7 5.0 0.0 0.1

Note: Calculations exclude in-quota rates and include AVEs as available.

Source: WTO calculations, based on data provided by the authorities.

26. Data provided by the authorities show that the value of imports qualifying for preferential treatment from developing countries was ¥4.63 trillion (11% of total imports) in FY 2002 compared

12 Of the countries officially recognized by the United Nations as being least developed, the Comoros

and Djibouti are not eligible for Japan's GSP programme. 13 Industrial products excluded from the GSP include petroleum products, salt, gelatine, some articles

of apparel and clothing, and footwear. 14 The products for which GSP rates were reduced include: some kinds of fruit, nuts, oats, prepared

peas, red or preserved fruit, instant tea, silk yarn, and dolls (WTO document WT/COMTD/N/2/Add.12, 12 May 2003).


with ¥4.54 trillion in FY 2001; some 34%, or ¥1.57 trillion (3.7% of total imports) was actually granted preferential entry into Japan in FY 2002.15 Of this, around 22% of total imports entering under preferential treatment were agricultural products. Imports from LDCs entering Japan under preferential treatment in FY 2002 were valued at ¥31.43 billion (almost 0.1% of total imports in FY 2002), up from to ¥29.87 billion in FY 2001, of which 26% were agricultural products.

27. China is the largest beneficiary of preferential access to the Japanese market; its share rose from almost 53% of imports entering under preferential treatment in FY 2000 to 56% in FY 2002 (Chapter II(3)(iv)).

(iii) Non-tariff border measures

28. The non-tariff border measures (NTMs) currently applied by Japan involve import prohibitions, import licensing, and quantitative restrictions.16 The importation of certain goods, such as narcotics, revolvers and pistols, and articles infringing patents or other intellectual property rights, may be prohibited or subject to import licensing in order to ensure national security, safeguard consumer health and well-being, or to preserve domestic plant and animal life and the environment. Some commodities, including certain fish, silk fabrics, and silk yarn are subject to import quotas or restraints under bilateral trade agreements and arrangements with, for example, China and the Republic of Korea.

29. Since the previous Trade Policy Review of Japan in 2002, there have been no changes in its list of prohibited imports. Under the import licensing procedures, changes in the list of items requiring import approval, in accordance with Japan's international arrangements, include the addition of: bluefin tuna, swordfish and their preparations from Sierra Leone; bigeye tuna and its preparations from Bolivia, Cambodia, Sierra Leone, and Georgia; wood and articles of wood from Liberia; diamonds from Liberia and other countries (except for the countries under the Kimberley Process Certification Scheme)17; controlled substances listed in Annex E and in Annex C, Group III of the Montreal Protocol on Substances that Deplete the Ozone Layer; and cultural property illegally removed from Iraq. Silk yarn from the Republic of Korea, bluefin tuna, swordfish and their preparations from Honduras and Belize, bigeye tuna from Belize and Saint Vincent, wood and articles of wood from Cambodia and all items from Iraq (except for cultural properties) were removed from the import approval list. In addition, frozen bigeye tuna, specified cultural property of Law Concerning Controls on the Illicit Export and Import of Cultural Property, frozen swordfish, and rodents from specified countries of Africa have been added to the list of items requiring prior ministerial approval.18

15 The difference between imports qualifying for preferential treatment and imports actually accorded

such treatment may arise due to imports in excess of the "ceiling" levels, for which the preferential treatment was thus suspended.

16 Prohibited imports are defined under Article 21 of the Customs and Tariff Law. Import licensing procedures are governed by the Foreign Exchange and Foreign Trade Law. Approval from the Minister of Economy, Trade and Industry is required to import goods subject to Japan's international arrangements.

17 The Kimberly Process certification scheme is a joint initiative by governments, international diamond industries, and civil society; it imposes extensive requirements on participants to certify that shipments of rough diamonds are free from "conflict diamonds" (i.e. those used by rebel movements to finance wars).

18 Prior ministerial approval is based on Article 52 of the Foreign Exchange and Foreign Trade Law, which requires confirmation from the competent government minister; import approval concerns designated goods originating in or shipped from certain areas, and items controlled by international convention or agreement.


(a) Import quotas

30. Japan has not changed its import quota system since 2002. Import quotas are imposed on various items, including certain fish products, certain organic chemicals, pharmaceuticals, explosives, rubber adhesives, military equipment and firearms, silk yarn, gauze of silk, and woven fabric of silk shipped from China.19 Since its previous Review, controlled substances listed in the Montreal Protocol on Substances that Deplete the Ozone Layer have been removed from the list of items subject to import quotas, while hydroxybutyrate, methyl-4-methylthiophenetylamine, heptanoic acid, piperazine, benzylpiperrazine and substances listed on the Stockholm Convention on Persistent Organic Pollutants have been added to the list.

(b) Import surveillance

31. Japan maintains a system of prior confirmation to collect data concerning imports, monitor, and confirm that imports are for specific uses, and verify documentation and origin requirements. Prior confirmation is required from the Minister of Economy, Trade and Industry, or other relevant ministers; some items require confirmation at Customs (customs confirmation). Since 2002, silk yarn from the Republic of Korea, fresh or chilled swordfish, rough diamonds, and agricultural chemicals have been added to the list of customs confirmation items, while unbleached woven fabrics of cotton have been removed from the list.

(iv) Contingency measures

(a) Anti-dumping, countervailing, and safeguard measures

32. Japan's current use of anti-dumping, countervailing, and safeguard measures is based on the Customs Tariff Law and the relevant Cabinet Orders, Regulations and Guidelines. In April 2002, amendments were made to the Cabinet Order Relating to Emergency Duties and the Regulations to Govern Emergency Measures to be taken in Response to an Increase in the Importation of Goods; the amendments introduced a public hearing and an opportunity for any interested persons to present or view the information and evidence. Japan has not imposed any safeguard measures since 2002.

33. In March 2004, amendments were made to Article 4 of the Cabinet Order Relating to Anti-Dumping Duty and Article 2 of the Cabinet Order Relating to Countervailing Duty and the Guidelines for Procedures Relating to Countervailing and Anti-dumping Duties.20 The amendments concerned the definition of domestic industry eligible to file complaints against injury.

34. Japan has in place one anti-dumping measure, which was imposed on certain polyester staple fibre from the Republic of Korea and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei) on 26 July 2002. No anti-dumping cases are currently being investigated.

35. On 4 August 2004, Japan took its first countervailing action by initiating an investigation of dynamic random access memories (DRAMs) imported from the Republic of Korea.

36. Under the Japan–Singapore Economic Agreement for a New Age Partnership (JSEPA), an emergency tariff increase on a duty-free item bound in the JSEPA is allowed as long as the resulting tariff rate does not exceed the lesser of: the MFN applied rate in effect at the time the measure is

19 See WTO (2003), p. 82. 20 See WTO document G/ADP/N/1/JPN/2/Suppl.4 and G/SCM/N/1/JPN/2/Suppl.4, 5 April 2004 for

details.


taken, and the MFN applied rate in effect on the day immediately preceding the date of entry into force of the JSEPA.

(v) Government procurement

37. Japan is a signatory to the WTO Agreement on Government Procurement (GPA). Its GPA coverage encompasses all central government entities, all 47 prefectures, 12 designated cities (shitei toshi), and certain public corporations.21 Japan's thresholds for GPA coverage, expressed in yen, have increased since its previous Trade Policy Review, perhaps reflecting the depreciation of the currency; those expressed in Special Drawing Rights (SDRs) have remained unchanged, except for those arising from the classification of Japan Post in Annex 3.22

38. In 2003, Japan notified the WTO Committee on Government Procurement of a number of organizational changes of procuring entities subject to the GPA; the changes included the replacement of the Postal Life Insurance Welfare Corporation with Japan Post; the replacement of the Japan Railway Construction Public Corporation and the Corporation for Advanced Transport and Technology with the Japan Railway Construction, Transport and Technology Agency; the replacement of Metal Mining Agency of Japan and the Japan National Oil Corporation with the Japan Oil, Gas and Metals National Corporation23; and the elimination of the National Aerospace Laboratory of Japan.24

39. In accordance with the memorandum of agreement among ministries, signed in March 2002 (subsequently revised in April 2002 and March 2003), all ministries in Japan agreed to adopt measures to ensure non-discriminatory, transparent and fair procurement of their computer information systems (both products and services). These key measures include publication on ministry web sites of information on bidding results. In October 2002, the Ministry of Public Management, Home Affairs, Posts and Telecommunications (MPHPT) launched an online bidding system for non-public-works procurement that enabled companies to submit bids via the internet; other ministries launched similar online bidding systems by the end of FY 2003.

40. The Government carries out annual reviews of its voluntary measures under, inter alia, the 1994 Action Program on Government Procurement Procedures, as amended.25 A voluntary review meeting under the Action Program is conducted every year to provide domestic and foreign suppliers an opportunity to raise opinions on the implementation of the voluntary measures, to ensure transparency, fairness and competitiveness in procurement procedures, and to facilitate market access for domestic and foreign suppliers. At each annual meeting, an initiative on future management of government procurement is confirmed. The authorities state that government procurement is conducted without restriction on suppliers' nationality or on the origin of products or services, based on the principle of non-discrimination, and that all relevant entities have thoroughly implemented the

21 The designated cities are twelve cities with populations over 500,000, designated by a relevant

Cabinet Order. The Account Law and relevant ordinances specify the procurement procedures for the central government entities, while the Local Autonomy Law stipulates procurement procedures for local governments.

22 WTO documents GPA/W/168/Add.4 and GPA/W/285/Add.5, 18 March 2002 and 4 February 2004. 23 The Japan National Oil Corporation, which it is scheduled to be abolished at the end of March 2005,

remains listed in Annex 3 for the time being. See WTO document GPA/MOD/JPN/1, 4 February 2004. 24 WTO documents GPA/W/255, GPA/W/275, and GPA/W/272/Rev.1, 4 March 2003,

23 September 2003, and 8 October 2003, and GPA/MOD/JPN/1, 4 February 2004. Other changes in Japan's GPA coverage since the previous Review are noted in WTO documents GPA/W/196, 252, 253, 254, 272, 272/Rev.1, 273, 274, 275, 276, 37/Add.1, and GPA/W/285/Add.5.

25 For details of these measures, see WTO (2001), Chapter III(2)(vii).


GPA; no price or other kind of preferences are granted to domestic suppliers in tenders covered by the GPA.26

41. For procurement above the threshold level of SDR 100,000 specified under the 1994 Action Program, excluding procurement involving public works, open tendering accounted for 63.1% of the total procurement value of ¥969 billion in 2002; procurement of overseas goods and services accounted for 13.8% (17.1% for goods only) of the total (Table III.3).27 The share of selective tendering fell to 1.5% in 2002, while that of single tendering rose to 35.4%, compared with 1.6% and 30.8%, respectively, in 2000. Procurement from foreign suppliers, which has always been low, decrease in 2002, to 4.2 % and 2.1% in value and contract terms, compared with 6.9% and 2.7%, respectively, in 2000. The shares of foreign suppliers in contracts resulting from open, selective, and single tenders were 1.3%, zero, and 5.3 % in 2002 (the 2000 ratios were 1.7%, zero, and 3.2%).28 The share of foreign suppliers in the total number of registered suppliers was 0.3% in FY 2002. According to the authorities, no data exist on shares of foreign suppliers in public works contracts; almost all public works projects valued at or above the WTO GPA threshold are subject to open competitive bidding.

Table III.3 Procurement composition by product and by origin, 2002 (¥100 million and per cent)

Share No. Products Total value

Domestic Foreign

1. Products from agriculture, and from agricultural and food processing industries 0.9 100 0

2. Mineral products 185.9 30.6 69.4

3. Products of the chemical and allied industries 31.2 70.5 29.5

4. Medicinal and pharmaceutical products 288.5 69.3 30.7

5. Artificial resins and plastic materials, cellulose esters and ethers, and articles thereof; rubber, synthetic rubber, factice, and articles thereof; raw hides and skins, leather, furskins and articles thereof, other than articles of apparel and clothing accessories of leather, saddlery and harness, articles of animal gut

8.3 96.5 3.5

6. Wood and articles of wood; wood charcoal; cork and articles of cork; paper making material; paper and paperboard and articles thereof; manufactures of straw of esparto and of other planting materials, basketwork and wickerwork

178.2 100 0

7. Textiles and textile articles, footwear, headgear, umbrellas; sunshades; walking sticks, whips, riding crops and parts thereof; travel goods; hand-bags and similar containers; articles of apparel and clothing accessories, of leather or composition leather

96.1 100 0

8. Articles of stone, plaster, asbestos, mica and similar materials; ceramic products, other than sanitary fixtures; glass and glassware, other than illuminating and signalling glassware and optical elements of glass, not optically worked nor of optical glass

2.4 100 0

9. Iron and steel and articles thereof, other than boilers and radiators for central heating, air heaters and hot air distributors not electronically heated

139.1 99.8 0.2

10. Non-ferrous metals and articles, other than lamp and lighting fittings 34.4 98.9 1.1

11. Power generating machinery and equipment 134.7 92.4 7.6

12. Machinery specialized for particular industries 102.8 94.2 5.8

13. General industrial machinery and equipment, and machine parts 54.4 90.3 9.7

14. Office machines and automatic data processing equipment 2,206.2 87.7 12.3

15. Telecommunications and sound recording and reproducing apparatus and equipment 630.3 94.7 5.3


26 WTO (2003), Chapter III(2)(vi). 27 Prime Minister's Office (2003). 28 In order to participate in open or selective tendering procedures, domestic and foreign suppliers are

required to apply for qualification to each procuring entity and be included in the list of registered suppliers.


Share No. Products Total value

Domestic Foreign

16. Electrical machinery, apparatus and appliances, and electrical parts thereof 197.6 87.2 12.8

17. Road vehicles 325.2 99.2 0.8

18. Railway vehicles and associated equipment 66.9 72.1 27.9

19. Aircraft and associated equipment 26.4 37.9 62.1

20. Ships, boats, and floating structures 75.2 98.7 1.3

21. Sanitary, plumbing, and heating equipment 6.6 61.8 38.2

22. Medical, dental, surgical, and veterinary equipment 536.5 57.6 42.4

23. Furniture and parts thereof 58.3 98.2 1.8

24. Professional, scientific and controlling instruments and apparatus 1,114.1 73.8 26.2

25. Photographic apparatus, equipment and optional goods; watches and clocks 120.5 88.8 11.2

26. Miscellaneous articles 253.6 91.9 8.1

Total 6,874.1 82.9 17.1


42. Data provided by the Japanese Fair Trade Commission (JFTC) show that most cases of proven infringement of Japan's Anti-Monopoly Act (AMA) continue to involve bid-rigging related to public works (section (5)(vi)). The Act for Promoting Proper Tendering and Contracting for Public Works defines major policy instruments for preventing bid-rigging and other improper actions, such as notification of improper actions to the JFTC.29 Furthermore, the Act Concerning Elimination and Prevention of Involvement in Bid Rigging, which entered into force in January 2003, inter alia, authorizes the JFTC to formally demand that the heads of ministries and agencies improve their administration measures on bidding and contracts to eliminate bid-rigging; the heads must conduct necessary investigation if requested by the JFTC, take action to eliminate bid-rigging, if its existence becomes evident, and publicize the result of the investigation and actions taken in response to the investigation. According to the authorities, the Act "provides effective means to prevent so-called 'government involved bid rigging' incidents that have occurred in recent years."30 Since January 2003, there have been two cases in which the JFTC demanded the heads of ministries and agencies to take necessary measures on the administration of bidding and contracts to eliminating bid-rigging.

43. The Office of Government Procurement Review (OGPR) headed by the Chief Cabinet Secretary, processes complaints concerning procurement procedures by the Central Government and public corporations. The Government Procurement Review Board, an independent examining body, considers complaints.31 The procuring entity is expected to follow the recommendations voluntarily. Since the previous Review of Japan, one complaint has been filed.32

(vi) State trading

44. There has been no change in Japan's state trading activities since 2002, except that state trading activities of the former Food Agency were taken over by the General Food Policy Bureau of

29 WTO document GPA/61, 18 October 2001. 30 OECD (2003a). 31 WTO (2003), Chapter III(2)(vi). 32 The status of receipt and review of complaints is released every quarter. The "Review Procedures

for Complaints concerning Government Procurement" (a decision by the OGBR on 14 December 1995), encourage consultations between a complainant and a procuring entity before a complaint is filed. The complaint filed concerned a procurement of parking structure construction at the Tokyo International Airport site.


the Ministry of Agriculture, Forestry and Fisheries in July 2003 (Chapter IV(2)(ii)). State trading activities in Japan involve leaf tobacco, opium, alcohol, rice, wheat and barley, milk products, and raw silk. The stated aims of such trading include: stabilizing supplies to consumers; controlling imports to assist domestic producers; and protection of consumers' interests. State-trading activities are generally underpinned by legislated import rights and, in some cases, by specific monopoly rights over domestic production and distribution.33

(vii) Standards, and sanitary and phytosanitary measures

(a) Standards, testing, and conformity assessment

45. Japan has moved toward increased deregulation and international harmonization of its standards and technical regulations and the adoption of mutual recognition arrangements. Japan's voluntary standards, mandatory technical regulations, and sanitary and phytosanitary (SPS) regulations are summarized in Table III.4.

Table III.4 Major standards and technical regulations in Japan, 2003

Number of standards

regulations

Percentage corresponding to international

standardsa

Percentage equivalent to international

standards

Percentage acceptance of overseas

certificationb

Percentage acceptance of overseas test

datab

A. Mandatory technical regulations Pharmaceuticals Affairs Law 3,598 .. .. .. .. Food Sanitation Law 515 .. .. .. .. Electrical Appliance and Materials Safety Law

452 .. .. .. ..

Consumer Product Safety Law 6 0 0 0 .. High Pressure Gas Safety Law 2 .. .. .. 100

Building Standard Lawc .. .. .. .. .. Safety Regulations for Road Vehicles 202 24 0 28 28 Law concerning the Safety Assurance and Quality Improvement of Feedd

157 .. .. .. 100

Law concerning Examination and Regulation of Chemical Substances and Regulation of their Manufacture

5 .. .. .. 100

Telecommunications Business Law .. .. .. .. ..

Radio Lawe .. .. .. .. .. Fertilizer Control Law .. .. .. .. .. B. Voluntary standards Japan Industrial Standards (JIS) 9,293 50 92 .. .. Japan Agricultural Standards (JAS) 243 .. .. .. .. Total .. .. .. .. ..

.. Not available

a Defined as "primary aspects sharing a common scope". b Where applicable. c Building Act Code. d As of December 2003. e According to the authorities, the number of mandatory technical regulations is not available because the scope and definition of

mandatory technical regulations is ambiguous; the technical conditions of radio stations in Japan generally comply with ITU-R Recommendations and Radio Regulations, and international harmonization is given consideration. Regarding the system for the certification of radio equipment the Radio Law was amended to establish the system for accepting foreign test results and foreign certification (promulgated in 1998 and went into effect in 1999).


33 WTO (2003), Chapter III (2)(vii).


Voluntary standards

46. Voluntary standards in Japan comprise Japan Industrial Standards (JIS) and Japan Agricultural Standards (JAS), with 9,293 and 243 standards, respectively, in 2004. Japan continues to bring its standards into line with their international counterparts. About 92% of JIS were aligned with international standards in 2004, up from 91% in 2003 and about 50% in 1997. From April 2003 to March 2004, 364 items of JIS were revised, 70 were withdrawn, and 227 were newly established. Since the previous Trade Policy Review of Japan, 38 items of JAS have been revised, 26 have been withdrawn, and 4 have been newly established.

47. About 12,500 domestic and about 450 foreign factories in 22 countries have received approval to affix JIS marks (as at 31 March 2004). The JIS marking system covers about 532 products.34 The authorities maintain that domestic and foreign factories are treated in the same manner with regard to approval of affixing JIS marks. Six Japanese organizations are accredited as JIS mark certification bodies, and three foreign bodies are accredited, by METI. For the JAS system, foreign producers or manufacturers certified by Registered Certification Organizations (RCOs) or Registered Foreign Certification Organizations (RFCOs) can conduct their own grading and append the JAS symbols to their products.35 Since 2002, 21 RFCOs in eleven countries have been recognized by the Ministry of Agriculture, Forestry, and Fisheries (MAFF).36

Mandatory technical regulations

48. According to the authorities, Japan's mandatory technical regulations under the Electricity Utilities Industry Law and the Electrical Appliance and Material Safety Law are aligned with international standards.37 Since March 2004, the authorization or recognition system under the Consumer Product Safety Law, the Law concerning the Securing of Safety and the Optimization of Transaction of Liquefied Petroleum Gas, the Gas Utility Law, and the Electrical Appliance and Material Safety Law, has shifted to a registration system; correspondingly, the standard of the product certification bodies set by ISO/IEC has been quoted as the standard of registration.

49. Data provided by the authorities indicate that there are currently 202 regulations regarding road vehicle safety standards; 24% are aligned to international standards (compared with 21% of 190 regulations in 2002, and 15% of 271 regulations in 2000).

50. Seventeen inspection bodies, six of which are foreign, are designated by METI for testing based on the major standards and certification systems (Table III.4) under the jurisdiction of METI.38 In 2004, approximately 21% of all JIS were designated in Japanese laws and governments/ministerial ordinances as mandatory technical regulations.

34 JISC, "Outline of JIS Mark". Available at: http://www.jisc.go.jp/jis-mark/index.html. 35 Only the products graded under the JAS system may affix JAS symbols. 36 The 21 newly registered organizations are based in 11 countries: Australia, Netherlands, Germany,

Italy, Austria, France, Belgium, Spain, the United States, Norway, and Indonesia. 37 The authorities indicate that most technical regulations under the Electrical Appliance and Material

Safety Law, and 28 technical regulations under the Electric Utilities Industry Law are aligned with international standards.

38 List of Designated Inspection Bodies (Online). Available at: http://www.jisc.go.jp/eng/jis-mark/spe-insp-body.html [23 April 2004].


Bilateral, regional, and multinational arrangement

51. The Mutual Recognition Agreement (MRA) on conformity assessment procedures between Japan and the European Community, which entered into force on 1 January 2002 as Japan's first bilateral MRA, covers telecommunications terminal equipment and radio equipment, electrical products, good laboratory practice (GLP) for chemicals, and good manufacturing practice (GMP) for medicinal products.39 An MRA between Japan and Republic of Singapore on conformity assessment procedures under a New-Age Economic Partnership (JSEPA) entered into force in November 2002; the MRA covers telecommunications terminal equipment and radio equipment, and electrical products specified in two sectoral annexes to the agreement.40

52. Japan has been holding consultations with the United States with regard to MRAs on GMP and GCP (good clinical practice) for medical devices and pharmaceuticals, and with the United States, Canada, Australia, and New Zealand on building standards. The United States and Japan have also been exchanging views and information on a possible MRA on telecommunications terminal equipment and radio equipment. In addition, Japan has been investigating the possibility of mutual recognition of GMP for pharmaceuticals with Canada.

(b) Sanitary and phytosanitary measures

53. On 16 January 2004, revised regulations entered into force under the Food Sanitation Law. The revision introduced specifications and standards for food and food additives in order to prohibit the use of bovine vertebral column as an ingredient of processed foods if it is derived from cattle originating in a country or zone where BSE has occurred.

54. The Food Safety Basic Law entered into force in July 2003; the law is aimed at protecting the health of the public. Under the Law, the Food Safety Commission was established in the Cabinet Office to perform risk assessments.41 The Commission's primary goals consist of three main components: conducting risk assessments of food in a scientific, independent, and fair manner, and making recommendations to relevant ministries based upon the results; implementing risk communication among stakeholders; and responding to food-borne accidents and emergencies.

55. In December 2003, Japan banned imports of beef from the United States due to the outbreak of bovine spongiform encephalopathy (BSE) disease there. Japan has also banned poultry imports from Cambodia; China; Indonesia; Italy; Lao People's Democratic Republic; Malaysia; Pakistan; South Africa; Thailand; Viet Nam; Hong Kong, China; Macao, China; and from two states of the United States since January 2004 because of the outbreak of avian influenza.

56. Other changes in Japans' SPS measures since its previous Trade Policy Review include the entry into force of amendments to: the Animal Quarantine Measures for BSE on 4 February 200242;

39 The GMP for medicinal products has become applicable since 29 May 2004. The importing party

exempts the importers of medicinal products manufactured in the exporting party from testing. MOFA Announcement on mutual recognition agreement. Available at: http://www.mofa.go.jp/announce/announce/ 2004/4/0428.html.

40 Further information available at: http://www.apec-iap.org/document/JPN_2003_IAP.htm. 41 Risk assessment involves an evaluation of the possible harmful effect resulting from human exposure

to food-borne hazards. The results of risk assessments are provided to relevant ministries for risk management. Food Safety Commission online information. Available at: http://www8.cao.go.jp/shokuhin.

42 In the amendment, the Government lifted the import on suspension steamed hoof and horn meal used for the production of fire extinguishers, bone charcoal used for the production of sugar, and crushed bone to be used for the production of bone charcoal used for the production of sugar (WTO document G/SPS/N/JPN/81, 22 February 2002).


the Pharmaceutical Affair Law on 30 July 200343; the Law concerning Safety Assurance and Quality Improvement of Feed on 1 July 200344; the Enforcement Ordinance of the Standards of Feed and Feed Additives on 1 July 2003 and 1 January 200445; and the Agricultural Chemicals Regulation Law on 10 March 2003.46

(c) Labelling and packaging requirements

57. Under the Food Sanitation Law, food and food additives must be labelled with name of the substance, date of minimum durability, ways of storing, and manufacturer. Any food containing additives must also be labelled with the names of all additives included. The labelling of origin of ingredients is defined in Japan Agricultural Standards (JAS) Law; such labelling is mandatory only for designated food processed in Japan.47 Processed food imported from foreign countries are excluded from the mandatory labelling of place of origin of the ingredients.

58. To label food as "organic", accreditation is needed from an authorized accreditation body that the food meets certain JAS requirements. Only accredited food may carry an organic JAS mark. Mandatory labelling regarding genetically modified organisms (GMOs) is applied to soybeans, corn, potatoes, rapeseed, cotton seed, and some processed foods mainly made of soybeans or corn according to the Genetically Modified Food Labelling Standard. The Ministry of Health, Labour, and Welfare does not permit the importation of GMOs that do not meet its safety requirements. Labelling requirements for rice were also reinforced by the JAS Law. The Agricultural Products Inspection Law requires mandatory inspections of rice, wheat, and barley as well as soybean.48

(3) IMPORT AND INWARD INVESTMENT PROMOTION MEASURES

(i) Import promotion

59. Japan has not introduced any new import promotion measures since its previous Trade Policy Review. Current measures include import activities by the Japan External Trade Organization (JETRO) and a financing programme.49 The total budget for Japan's import promotion programmes was ¥300 million in FY 2004, a considerable decrease from ¥900 million in FY 2003 and ¥1,804 million in FY 2002 (Table III.5).

43 This amendment was to limit manufacturers and/or importers of veterinary drugs to licensees

approved by the Ministry of Agriculture, Forestry, and Fisheries under the Pharmaceutical Affairs Law. 44 The amendment established the GMP system on specific feeds and feed additives, such as

antibiotics, and prohibited the manufacture, import or use by farmers of feeds and feed additives that contained harmful materials. It also designated the Independent Administrative Institution Fertilizer and Feed Inspection Station as the only organization to conduct official examinations (WTO document G/SPS/N/JPN/93, 27 January 2003).

45 WTO document G/SPS/N/JPN/97, 20 March 2003. 46 The amendment was to prevent distribution of unregistered agricultural chemicals. No persons are

allowed to produce, process or import any agricultural chemicals prior to its registration at the Ministry of Agriculture, Forestry, and Fisheries (WTO document G/SPS/N/JPN/87, 27 November 2002).

47 Processed food subject to mandatory labelling include: pickled agricultural products, dried seaweed, salted seaweed, salted and dried fish products (horse mackerel and mackerel), salted fish products (mackerel), processed eel products, shavings of dried bonito, and frozen vegetable food. On September 2004, Japan adopted mandatory labelling requirements for the origin of ingredients in 20 food items, including seasoned meat and dried vegetables.

48 See WTO (2003), Chapter III(2)(vii)(c). 49 The Tax Incentive for Manufactured Imports was abolished at the end March 2002.


Table III.5 Total budget for Japan's import promotion programmes (¥100 million )

Budget Item FY 2002 FY 2003 FY 2004

FAZ related budget 2.8 1.6 1.3

MIPRO related budget 4.3 3.4 1.7

JETRO import related budget 11.3 4.0 0

Total 18.4 9.0 3.0


(ii) Investment regulation and promotion measures

60. In FY 2002, foreign affiliated firms accounted for 2.0% of total sales in Japan (compared with 1.9% in FY 2001), and 0.7% of employment (0.8% in FY 2001).50 The value of inward direct investment in Japan increased slightly, by 0.45% in FY 2002, to ¥2.19 trillion, which is about one half of Japan's outward FDI (up from in FY 1997). In FY 2003, inward FDI in Japan decreased by 3.2%, to ¥2.12 trillion.51 Inward FDI remains relatively low.52 Thus, Japan has decided to take measures to make it an attractive investment destination for foreign firms, with a view to doubling the cumulative amount of inward FDI within the next five years.53

61. Since Japan's previous Trade Policy Review, there has been no change in the regulatory regime concerning inward and outward FDI, which is governed mainly by the Foreign Exchange and Foreign Trade Law, together with relevant cabinet and ministerial ordinances.54 Inward FDI generally requires ex post facto reporting to the Minister of Finance and the Minister in charge of the industry involved within 15 days of executing a foreign investment in Japan. Prior notification is required, in principle, for inward FDI in industries recognized in the OECD Code of Liberalization of Capital Movements, such as agriculture, forestry and fisheries, petroleum, leather and leather products, investment trust management, and air and maritime transport. In addition, some other sectors require prior notification on the grounds of public order and national security.55 Besides the notification requirements, various other laws stipulate specific restrictions on inward FDI in certain sector, such as real estate, fisheries, financial services, telecommunications, and transport.56 The provisions of

50 METI "Survey of Trends in Business Activities of Foreign Affiliates (FY 2002)" (the latest available

data). 51 Ministry of Finance, "Foreign Direct Investment". Available at www.mof.go.jp/English/e1c008.htm 52 According to UNCTAD (2004), FDI inflows into Japan in 2003 amounted to US$6.3 billion, while

those into the United States, the European Union, and China were US$29.8 billion, US$295.2 billion and US$53.5 billion, respectively.

53 Prime Minister Koizumi's statement, of 31 January 2003, showed Japan's recognition of the significance of inward FDI, and demonstrated Japan's firm intention to increase inward FDI, as follows: "Foreign direct investment in Japan will bring new technology and innovative management methods, and will also lead to greater employment opportunities. Rather than seeing foreign investment as a threat, we will take measures to present Japan as an attractive destination for foreign firms in the aim of doubling the cumulative amount of investment in five years."

54 Among the most important ordinances are the Foreign Exchange Order and the Order of Inward Foreign Direct Investment.

55 These include aircraft, arms, explosives, nuclear power, space, electric utilities, gas utilities, water, heat generation, rail transport, passenger transport, vaccine, security guard services, radio, telecommunications (accompanying certain network facilities), television and cable television, and broadcasting sectors.

56 See WTO (2001) for details of the specific restrictions.


bilateral investment treaties (BITs) also regulate investment policy. Since the previous Trade Policy Review, Japan has concluded one additional BIT, with Republic of Korea, bringing its total of ten.57

62. The framework of Japan's promotion measures for inward FDI has remained generally the same since its previous Trade Policy Review. The 1992 Law on Extraordinary Measures for Promotion of Imports and Facilitation of Foreign Direct Investment in Japan, valid until 2006, its related ordinances, and other relevant legislation, outline measures for investment promotion that mainly comprise financial support such as low-interest loans and loan guarantees, and technical support (Table III.6). According to the authorities, these measures apply equally to domestic and foreign companies registered in Japan.

Table III.6 Measures to promote foreign direct investment into Japan, FY 2004

I. Loan guarantees through the Industrial Structural Improvement Fund (ISIF) (a) Relaxation of conditions for obtaining certification as a Designated Inward Investor: A company that has been operating for less

than eight years (currently five years) is eligible for certification.

(b) Relaxation of conditions for obtaining loan guarantees from ISIF: currently, in order to obtain loan guarantees, as a rule, ISIF requires the backing of a capitalized enterprise and a legal representative of the borrower as a backer of guarantees. The condition of requiring a guarantee backer is abolished when the backing of a capitalized enterprise can be obtained.

II. Provision of low-interest financing from the Development Bank of Japan, etc. (a) Expanding eligible projects

Former limitation that required establishment in one of six industrial high-tech fields has been eliminated. Projects establishing facilities (including land) for lease by foreign companies and foreign affiliates with one third foreign ownership or more, or any company establishing office buildings in which the main tenants are non-Japanese businesses are eligible.

(b) Creating new loan programmes

Loan programme for promoting market entry of foreign-affiliated firms: in addition to the capital investment finance, the new programme will finance related working capital needs (e.g. rent for facilities, property tax, insurance premium).

Loan programme for facilitating international cooperation between enterprises: if the foreign share in the company exceeds 1/3 of total equity as a result of M&A, the company can obtain JDB loans for capital investment afterward. Corporate alliances involving transfer of operations are also eligible for this loan programme.

Loan programme for supporting environment-friendly management systems: if the foreign companies pass the bank's evaluating process, they can obtain a low-interest loan and the bank guarantees the company's bonds in order to support the projects.

III. Import promotion measures

(a) Tax reductions, applied to national and local taxes, for foreign access zone (FAZ) related businesses. Businesses undertaking activities to promote distribution of imported cargo (wholesalers, manufacturers, transporters or retailers dealing with imported goods) within specified zones for congregation in FAZ areas designated by the local governments of approved FAZ areas can make use of following tax reduction measures:

Reduction of national taxes (Tax Incentives for the Promotion of Business Congregation within the FAZ Areas): special depreciation with regard to certain machinery, facilities, buildings, etc. acquired for their business use. (The rate of special depreciation is: 22% for machinery and facilities; 10% for buildings.)

Reduction of local taxes: exemption from special landholding tax on the land for the facilities. Also eligible for a reduction or exemption from the real estate acquisition tax and fixed assets tax.

(b) Loan guarantees and exceptional measures provided by the Small Business Credit Insurance for FAZ-related businesses: businesses undertaking activities to promote distribution of imported cargo (wholesalers, manufacturers, transporters or retailers dealing with imported goods) within specified zones for congregation in FAZ areas designated by the local governments of approved FAZ areas can make use of following loan guarantees and exceptional measures related to credit insurance:

Loan guarantees through the (ISIF): loan guarantees are provided by the Industrial Structure Improvement Fund to aid in borrowing necessary funds, including operation funds.

Exceptional measures provided by Small Business Credit Insurance: Exceptional measures are provided by Small Business Credit Insurance to small and medium-sized companies.


57 Japan also has BITs with Bangladesh; China; Egypt; Hong Kong, China; Russia; Sri Lanka;

Turkey; Mongolia; and Pakistan.


(c) Special financing measures for FAZ-related businesses: with regard to the DBJ financing programme for import facilities enhancement and the low-interest loans provided by the Japan Finance Corporation for Small Business to facilitate import sales, import-related businesses within the FAZ areas are able to receive loans with special conditions:

DBJ (Financing Programme for Import Facilities Enhancement). Companies are eligible for this programme regardless of the share of imported goods among their handling. Also, manufacturers and others are able to receive loans not only when they invest in Japan for the first time, but even for second and subsequent investments.

Japan Finance Corporation for Small Business (Loans to Facilitate Import Sales). Wholesalers or retailers selling imported goods through their own offices in the FAZ facilities or contacts with businesses in the FAZ facilities are able to receive up to ¥400 million.

IV. Measures for small and medium-sized enterprises

Training for administrative managers of foreign-affiliated firms: Institute of the Japan Small Business Corporation offers training programmes on personnel management and business practices in Japan, etc. for administrative managers etc; of small and medium-sized foreign-affiliated firms. The participants are subsidized on two thirds of the training fee.

V. Venture support measures

(a) Loan guarantees for loans using collateral of intellectual property rights for venture enterprises: the ISIF provides loan guarantees for up to 80% (usually 70%) of business funds, and does not require a guarantee backer of a capitalized enterprise if the collateral of the loan is intellectual property rights.

(b) Investment for venture enterprises: in addition to a company that has been operating or has submitted an application for a patent less than five years earlier (currently three years), a company that establishes know-how in five years is able to take investments from the New Business Investment Company Limited.

(c) Introducing a stock option system: the Government of Japan expands the term of exercise for the company's executives or employees to accept new stock shares of the company at lower price than others, based on the resolution of a general meeting of stockholders, from six months to within ten years.


63. Based on a Japan Investment Council Expert Committee report and the programme for the promotion of foreign direct investment into Japan, adopted and announced by the Japan Investment Council in 2003, the Government has decided to implement 74 measures under five categories to promote foreign direct investment and eliminate impediments to inward FDI.58 The five categories are: disseminating information on investment opportunities in Japan; reviewing administration procedures with a view to making them clearer, simpler, and faster by, for example, creating a one-stop service for investment-related information; creating favourable employment and living environment (e.g. improving immigration procedures); improving business environment by, for example, improving corporate governance and access to legal and other services that support FDI in Japan, facilitating cross-border mergers and acquisitions, facilitating new business start-ups by, inter alia, providing tax incentives for investment in information technology and research and development59; and assisting local governments in attracting foreign investment by, for example, facilitating the use of the special zones for structural reform.

64. The Japan External Trade Organization established the Invest Japan Business Support Center in May 2003; this is a one-stop service centre that provides information to foreign investors. Information desks have also been established in various ministries as centres for investment information and support for navigating administrative procedures.

(iii) Foreign access zones (FAZs)

65. Foreign access zones (FAZs) are a major component of Japan's import and investment promotion schemes, and serve as centralized locations for import-related operations, as well as for streamlining the internal distribution of imported cargos. Companies located in FAZs may benefit

58 The Japan Investment Council is a ministerial level council established in July 1994. 59 Half of the capital gains obtained by the sale of stocks of qualified ventures are to be taxed. The

amount of investment in qualified ventures is deductible from the amount of capital gains of stocks in the same taxable year. The Government is also studying ways to revise tax treatment of mergers and acquisitions, and plans to submit a bill to the Diet in 2005.


from incentives including loan guarantees, tax breaks, low-interest financing, and credit insurances. In 2002, Japan's imports and exports through FAZs accounted for 32% and 37% of its total imports and exports (compared with 33% and 40% in 1997). Japan has not approved any new zones since 2002; a total of 22 FAZs have been approved.60 Major businesses located in FAZs are manufacturers, wholesalers, retailers, and transport companies.

(4) MEASURES DIRECTLY AFFECTING EXPORTS

(i) Export taxes, charges, and levies

66. Japan has no export taxes or levies.

(ii) Export prohibitions, restrictions, and licensing

67. Export controls implemented in Japan are defined in the Foreign Exchange and Foreign Trade Law and the Export Control Order. Exports requiring permission from the Minister of Economy, Trade and Industry include: certain seeds, endangered animals, and plants specified in international treaties; narcotics; designated art works; counterfeit currencies; and other products associated with criminal offences in Japan. Export controls (prior approval) are maintained to ensure national security and public safety and to ensure adequate domestic supplies of certain agricultural and other primary products.61

68. Since its previous Trade Policy Review, changes to the list of items requiring export permission include the addition of certain equipment and chemical mixtures for the decontamination of objects contaminated with biological agents and radioactive materials, and digital instrumentation data recorders using magnetic disk storage technique. Changes to the list of items requiring export approval, under Article 48 of the Foreign Exchange and Foreign Trade Law, include: the addition of important tangible folk cultural properties, special natural monuments and natural monuments, rough diamonds, radioactive wastes, controlled substances listed in Annex C, Groups I and III, and Annex E of the Montreal Protocol on Substances of Deplete the Ozone Layer, and items that infringe intellectual property rights; and the deletion of all items exported to Iraq, and machinery and vehicles exported to Angola.

(a) Voluntary export restraints

69. The authorities are not aware of any voluntary export restraints that have been implemented in Japan since its previous Trade Policy Review.

(b) Export cartels

70. There are no authorized export cartels in Japan. However, 21 types of cartel are exempted from general prohibition of cartels under Japan's Anti-Monopoly Act (section (5)(vii)).

60 Japan External Trade Organization online information. Available at http://www.jetro.go.jp/

ov/e/faz/merit.html. FAZs are organized by "third sector" companies, which, with public and private funds, establish facilities for distribution, processing, wholesale, business support exhibitions and conventions. FAZs are also intended to facilitate customs clearance of imports. Companies located in FAZs may benefit from incentives including tax breaks and low-interest loans.

61 According to Article 48 of the Foreign Exchange and Foreign Trade Law.


(iii) Export promotion schemes

(a) Subsidies, tax concessions, export finance, insurance, and guarantees

71. Japan has not notified any export subsidies to the WTO, indicating the absence of such subsidies as defined in the WTO Agreements.

(b) Other export promotion schemes

72. Export promotion schemes handled by the Japan External Trade Organization (JETRO) include the provision of information, market and company studies, and support for participation at international trade fairs. Since FY 2002, JETRO has undertaken several export promotion activities for small and medium-sized enterprises (SMEs); these include support for SMEs participation in overseas exhibitions and trade fairs, market research, and advisory services.

(5) MEASURES AFFECTING PRODUCTION AND TRADE

(i) Taxation and tax-related assistance

73. A consumption tax (value-added tax) of 5% is levied on goods and services transactions in Japan.62 Revenues from this and other indirect taxes, including excise taxes applied mainly to liquor, tobacco, gasoline, and automobiles, accounted for 44.1% of total central government tax revenue in the FY 2004 Budget (43.9% in FY 2002).63 Revenue from personal income tax and corporate income tax accounted for 32.1% and 21.3% (30.7% and 22.3% in FY 2003), respectively (Table III.7). In FY 2004, the highest personal income tax rate, including local taxes, is 50% and the corporate tax rate (including local taxes) 39.54%.64

Table III.7 National government tax revenue, FY 2004 (¥ billion)

FY 2004 Budget Tax Item

Amount Per cent of total

Direct taxes 24,285 55.9 Income tax 13,778 32.1

Corporate tax 9,407 21.3

Inheritance tax 1,100 2.5

Land value tax 0 0.0

Indirect taxes 17,462 39.5 Consumption tax 9,563 21.6

Liquor tax 1,588 3.6

Tobacco tax 898 2.0

Gasoline tax 2,129 4.8

Liquefied petroleum gas tax 14 0.0


62 The 5% consists of the national consumption tax (4%) and a local consumption tax (1%). Exempted

transactions include the sale and loan of land, rent for residential buildings, the sale of securities, registration and licensing fees paid to government agencies, money lending, foreign exchange businesses, medical care, welfare and certain educational services, and school textbooks.

63 The consumption tax accounted for about half of the indirect tax revenue. 64 See MOF (2004).


FY 2004 Budget Tax Item

Amount Per cent of total

Aviation fuel tax 90 0.2

Petroleum tax 477 1.1

Motor vehicle tax 751 1.7

Custom duty 795 1.8

Tonnage duty 9 0.0

Other 0 0.0

Stamp tax 1,148 2.6

Special taxes 2,061 4.5

Local road taxa, b 304 0.7

Liquified petroleum gas taxa, b 14 0.0

Aviation fuel taxa, b 16 0.0

Motor vehicle tonnage taxa, b 376 0.8

Special tonnage taxa 11 0.0

Customs duty on oila 38 0.1

Promotion of power resources development taxa 359 0.8

Gasoline taxa 707 1.6

Special tobacco taxa 236 0.5

Total 44,233 100

a Taxes whose revenues are distributed to special accounts. b Taxes whose revenues are distributed to local governments.


(a) Tax incentives

74. In order to achieve various policy objectives, including investment in certain equipment to address environmental concerns and stimulate demand, Japan has a complex system of tax breaks. These are described in the Special Taxation Measures Law, which has been amended annually. The authorities estimate that forgone tax revenues increased to ¥3,117 billion in FY 2003 from ¥1,327 billion in FY 2002; the increase is attributed to the introduction of R&D-related tax cuts in FY 2003. In FY 2004, Japan extended the period for loss carried-forward from five years (currently) to seven years.

(b) Bilateral tax treaties

75. Japan has not signed any tax treaties with additional countries since its previous Review.65 On 6 November 2003, Japan and the United States signed a revised treaty for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income; the revised treaty entered into force on 30 March 2004 (Chapter II(iii)(a)).

65 Japan has tax treaties with Armenia, Australia, Bangladesh, Belarus, Belgium, Brazil, Bulgaria,

Canada, China, Czech Republic, Denmark, Egypt, Fiji, Finland, France, Georgia, Germany, Hungary, India, Indonesia, Ireland, Israel, Italy, Republic of Korea, Kyrgyz, Luxembourg, Malaysia, Mexico, Moldova, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Romania, Russia, Singapore, Slovak Republic, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Turkey, Turkmenistan, Ukraine, the United Kingdom, the United States, Uzbekistan, Viet Nam, and Zambia.


(ii) Subsidies and other financial assistance

76. Japan has notified several direct support programmes to the WTO. Its latest notification, of September 2003, indicated there were 97 subsidy schemes to assist industry, finance, agriculture, forestry, and fisheries, and transport sectors. Energy and mining, agriculture, research, and small and medium-sized enterprises (SMEs) have accounted for the majority of the subsidies notified by Japan since 1998.

(iii) State-owned enterprises, corporatization, and privatization

77. The State retains a stake in major companies in several sectors through which it could directly affect production and trade. These companies are Nippon Telegraph and Telephone Corporation (NTT), Japan Tobacco Inc (JT), Kansai International Airport Co. Ltd, Hokkaido Railway Company, Shikoku Railway Company, Kyushu Railway Company, and Japan Freight Railway Company (Table III.8). The Government also holds shares of commercial banks, such as Resona Bank, apparently for prudential reasons.

Table III.8 Stockholding by the Government of Japan, as at October 2004

Companies Shares of stocks held by the Government (stocks)

Share of stocks held by the Government (%)

Nippon Telegraph and Telephone Corporation (NTT) 7,227,043 45.9

Japan Tobacco Inc. (JT) 1,000,000 50

Kansai International Airport Co. Ltd 13,788,000 100

Hokkaido Railway Company 180,000 100

Shikoku Railway Company 70,000 100

Kyushu Railway Company 320,000 100

Japan Freight Railway Company 380,000 100


78. On 18 December 2001, Japan adopted the Reorganization and Rationalization Plan for Special Public Institutions, with a view to structurally reforming 163 public corporations in activities including highways, housing loans, urban development, and petroleum development. Among them, 17 institutions were to be abolished or merged with other entities, 45 privatized, and 38 reformed into 36 incorporated administrative agencies. To date, reforms have been completed in regard to 133 institutions, for example West and Central Japan Railway Companies. In September 2004, the Council on Economic and Fiscal Policy and subsequently the Cabinet decided the Basic Policy on the Privatization of the Japan Post, which indicated that privatization would begin by April 2007 and be completed by 2017.

(iv) Trade-related intellectual property rights

(a) Scope of IPRs and examination procedures

79. The legal framework pertaining to intellectual property rights in Japan has generally remained unchanged since its previous Trade Policy Review (Table III.9). Regulatory changes in Japan regarding intellectual property rights since 2002 mainly concern amendments to existing laws, for example, the amendment in May 2004 to the Patent Law and other intellectual property laws, which, inter alia, allowed outsourcing of prior art searches to the private sector, applicants performing their own prior art research are accorded reduced application fees. Furthermore, the Basic Law on Intellectual Property was enacted in December 2002; the law stipulated, inter alia, the establishment


of the IP Strategy Headquarters.66 In July 2003, the Headquarters issued a Strategic Program for the Creation, Protection and Exploitation of Intellectual Property; the programme stipulated that Japan would speed up the examination of submissions through measures such as expanding outsourcing and increasing the number of examiners. In 2003, the average period for the "first action" or the completion of the first examination was 25 months for patents; seven months for designs; and nine months for trademarks.

Table III.9 Legislation regarding protection of intellectual property rights in Japan

Specific intellectual property rights Relevant legislation Agencies responsible for the administration of law

Copyright and related rights Copyright Law Agency for Cultural Affairs, MEXT

Trade marks Trademark Law Japanese Patent Office, METI

Patents Patent Law – Utility Model Law Japanese Patent Office, METI

Plant variety rights Seeds & Seedling Law Ministry of Agriculture, Forestry & Fisheries

Patent Law Japanese Patent Office, METI

Designs Design Law Japanese Patent Office, METI

Geographical indications (Wines and spirits) Law concerning Liquor Business Associations and Measures for Securing Revenue from Liquor Tax

National Tax Administration

Layout designs of integrated circuits Law concerning the Circuit Layout of Semiconductor Integrated Circuits

Japanese Patent Office, METI

Protection of undisclosed information Unfair Competition Prevention Law METI

Control of anti-competitive practices Anti-Monopoly Act Fair Trade Commission

Unfair Competition Prevention Law METI

Civil and administrative enforcement remedies

Code of Civil Procedure – Law of Civil Execution Ministry of Justice

Patent Law – Utility Model Law Japanese Patent Office

Design Law Japanese Patent Office

Trademark Law Japanese Patent Office

Law concerning the Circuit Layout of Semiconductor Integrated Circuits

METI

Anti-Monopoly Act Fair Trade Commission

Border measures Customs Tariff Law Ministry of Finance

Export & Import Trading Law METI


80. In addition, with regard to infringement of copyright on the Internet, the Law on Restrictions on the Liability for Damages of Specified Telecommunications Service Providers and the Right to Demand Disclosure of Identity Information of the Sender, entered into force in May 2002. This aims to counter copyright infringement on the Internet, and to clarify the scope of the liability of internet service providers (ISPs), which may or may not delete the infringing information.67 In February 2004,

66 The IP Strategy Headquarters, comprising all ministers and ten experts from academic and industrial sectors, was established in March 2003. Three task forces, i.e. task forces on IP enforcement, patentability of medical treatment invention, and media content business, have been established within the Headquarters.

67 A consortium consisting of ISPs and copyright associations has formulated guidelines related to copyright. These guidelines establish the scheme by which a copyright holder can request ISPs to delete information infringing his/her copyright through the Credibility Confirmation Organization (CCO), which has expertise on copyright and has the competence to conclude whether information on the net is infringing the copyright of right holders.


the National Tax Agency announced, in its Labelling Standard Concerning Geographical Indications, that its Commissioner designated "Iki", "Kuma", and "Ryukyu" as geographical indications of wines and spirits to be protected in the territory of members of the WTO.68 In January 2003, a revision to the Unfair Competition Law entered into force; the revision introduced criminal penalties for misuse and illicit acquisition of trade secrets. The penalty is either imprisonment not exceeding three years or fines not exceeding ¥ 3 million.

(b) International harmonization and cooperation

81. Japan has continued to promote international harmonization of application and examination procedures related to IPRs. For example, Japan has participated in the discussions in the Standing Committee on the Law of Patents (SCP), regarding the Substantive Patent Law Treaty, which aim to reduce applicants' cost of obtaining patents in multiple countries and improve predictability of obtaining patents in each patent office. Japan believes that substantive harmonization of patent laws aiming to obtain the same results from each patent office and maximum exploitation of search and examination results performed by another patent office are important.

82. In May 2003, Japan hosted a meeting in Tokyo with a view to enhancing the mutual cooperation of the Trilateral Offices (the Japanese Patent Office (JPO), the United States Patent and Trademark Office (USPTO), and the Office for Harmonization in the Internal Market of the European Community (OHIM)); topics discussed included the establishment of a Trademark Trilateral Website. Japan has also continued bilateral and trilateral cooperation through programmes involving the exchange of patent examiners and developing the common structure for on-line dossier access system with the USPTO and the European Patent Office (EPO) with a view to addressing common problems.

(c) Enforcement

83. Statistics detailing Japan's efforts to combat violations of intellectual property rights at the border are provided in Table III.10.69 Infringement of IPRs, such as patents, exclusive licences, or trade marks or designs may result in either imprisonment or a fine. The penalty for infringement of patent rights, exclusive licensing, or trade mark rights is either imprisonment not exceeding five years or fines not exceeding ¥5 million or both; infringement by corporations of these rights results in fines not exceeding ¥150 million. Infringement of design rights is penalized either by imprisonment not exceeding three years or fines not exceeding ¥3 million; penalties against false marking by corporations result in fines not exceeding ¥100 million.

Table III.10 Suspension of imports likely to infringe intellectual property rights, 2000-04

Category Main items 2000 2001 2002 2003 2004 (1/1 to 30/6)

(A) Products concerned (1,000 units) Shoes Sports shoes (tennis shoes, sneakers) 0.1 8 4 11 11

Bags Handbags, purses 44 84 161 142 89

Clothing T-shirts, sweatshirts, raincoats, scarfs 414 135 219 260 107

Sports equipment Golf equipment, ski equipment 0 0 0 0 0

Watches Wristwatches, pocket watches 52 48 55 30 29


68 This announcement is based on the 1953 Law Concerning Liquor Business Associations and

Measures for Securing Revenue from Liquor Tax, as amended. 69 Details of Japan's judicial measures regarding IPR enforcement are provided in WTO document

IP/N/P/JPN/1, 18 February 1997 (the latest available notification).


Category Main items 2000 2001 2002 2003 2004 (1/1 to 30/6)

Smoking equipment Lighters 0.1 2 3 2 3

Toys Stuffed animals, mini-cars 274 23 230 43 9

Others Household goods, key holders, cosmetics 315 709 320 283 335

Total 1,099 1,010 993 771 583

(No. of cases) (1,873) (3,685) (9,889) (10,324) ( )

(B) Types of violation (Number of cases) Patent rights 2 1 7 1 33

Utility rights 0 0 0 1 0

Design rights 15 14 13 12 26

Trade mark rights 6,478 2,727 6,859 7,332 4,302

Copyright 108 76 108 80 54

Total 1,603 2,818 6,987 7,426 4,415

.. Not available.


(v) Regulatory reform

84. Since its previous Trade Policy Review, Japan has continued to pursue initiatives to reform its regulatory system, mainly through the Three-Year Program for Promoting Regulatory Reform (TPPRR), adopted on March 2001, and revised twice, in March 2002, and March 2003. The revisions were conducted in the light of opinions and requests from domestic and foreign entities, as well as opinions of the Council for Regulatory Reform. The TPPRR envisages the creation of a free and fair socio-economic system fully open to the international community.

85. In March 2004, the Government adopted the new TPPRR comprising 762 measures. According to the authorities, the new TPPRR is a compilation of measures to further accelerate structural reform of the Japanese economy and society, and contains specific regulatory reform steps that have been identified as the issues to be addressed between FY 2004 and FY 2006. The new measures are aimed at: reducing the Central Government's involvement in sectors of economy that are deemed to function more effectively without government involvement; revitalizing the Japanese economy by spurring new business, increasing demand, and expanding employment; and creating new opportunities for domestic and foreign businesses to build markets in Japan.70 The main sectors and issues covered include medical services, education services, agriculture, housing and construction, employment, movement of natural persons, customs clearance, promotion of FDI, information technology, competition policy, legal system, financial services, energy, and transport. In April, 2004, Japan established the Council for the Promotion of Regulatory Reform (CPRR) to replace the Council for Regulatory Reform (CRR), whose mandate expired on 31 March 2004.71

70 The authorities are of the view that measures significantly affecting trade and FDI include:

promotion of 24-hour operation of main ports; easing of rules on mergers; and initiation of new investment schemes such as the Japanese version of limited partnership and limited liability constitutions.

71 The CPRR is a central body that aims to promote regulatory reform, including the opening of governmental sectors to private sector participation. Four of the CPRR members attend meetings of the Headquarters for the Promotion of Regulatory Reform within the Cabinet, and thus have opportunities to interact directly with the Cabinet to discuss the CPRR's views and recommendations. The CPRR also coordinates closely with the Council on Economic and Fiscal Policy and with the Headquarters for the Promotion of the Special Zones for Structural Reform. The CPRR monitors the implementation of the new


86. In April 2003, the Special Zone for Structural Reform Act entered into force. Under the Act, exceptions to particular regulations are granted within approved "special zones" according to the zone's specific circumstances. In order to obtain approval, voluntary plans must be proposed both by municipal bodies and private sector enterprises. To date, 324 special zones have been approved; the zones have been granted exemptions from regulations governing education, urban renewal, distribution, agriculture, medical care, industry-academic cooperation, and other areas. For example, an international distribution zone has been approved for one major port area, where customs clearance is to operate 24 hours a day, 365-days a year, and private companies are to operate a public container terminal and a bonded area. Not all proposals have been approved; some have been opposed by local authorities and the private sector (presumably domestic firms), who apparently are in favour of existing regulations.

(vi) Competition policy

(a) Recent developments

87. Over the years the growing importance of deregulation and competition in the Japanese economy has apparently raised the status and size of the JFTC; it was transferred from the Ministry of Public Management, Home Affairs, Posts and Telecommunications to the Cabinet Office in April 2003 with a view to ensuring a higher degree of its independence.72 The JFTC has also established a Competition Policy Research Centre (CPRC) within its secretariat to improve its interaction with external intellectual resources, such as academics and the business community.

88. Since 2002, there have been various legislative changes, including an amendment to the Anti-monopoly Act (AMA) in May 2002 to, inter alia, regulate excessive concentration of economic power, to increase maximum penalties against juridical persons, and to extend the scope of violations against which the JFTC can take action even after the violations have ceased.73 In addition, several measures were taken to strengthen enforcement of the AMA by the JFTC, the Act Concerning Elimination and Prevention of Involvement in Bid Rigging entered into force January 2003, authorizing the JFTC to demand improvements by ministries to eliminate any complicity in bid-rigging activities.

89. In response to criticisms about the effectiveness of competition policy, the JFTC established a Study Group on Reviewing the Anti-monopoly Act in October 2002; the main subjects examined by the Study Group included the current system of administrative and criminal penalties for violating the AMA (which are not thought to be high enough to constitute an effective deterrent), as well as a review of current measures against monopolies and cartels. In October 2003, the Study Group issued a report containing its recommendations for an amendment to the AMA; based on the recommendations, the Government adopted a bill to revise the AMA on 5 October 2004. The bill

Three-Year Program and has the mandate to require, when it deems necessary, the heads of relevant governmental organizations to submit materials, provide explanations, and extend cooperation to the CPRR.

72 The annual budget of the JFTC increased by 28% in FY 2003; it decreased by 0.4% in FY 2004. The number of employees of the JFTC rose from 607 in FY 2002 to 672 in FY 2004.

73 The increase of maximum penalties against juridical persons entered into force on 29 May 2002 and regulation of excessive concentration of economic power on 28 November 2002. Japan's main legislation dealing with competition issues is the Anti-monopoly Act (Act Concerning Prohibition of Private Monopolization and Maintenance of Fair Trade) enacted in 1947 and amended most recently in 2002. The Act, which prohibits three types of business practices (unreasonable restraint of trade, private monopolies and unfair trade practices), is administered by the Japan Fair Trade Commission (JFTC). Other legislation administered by the JFTC includes the Act Against Unjustifiable Premiums and Misleading Representations, the Act Against Delays in Payment of Subcontract Proceeds etc. to Subcontractors, and the Act concerning the Elimination and Prevention of Involvement in Bid Rigging.


proposes, inter alia, to increase the surcharge rate from 6% to 10% of sales for large companies and 3% to 4% for small and medium-sized firms. It also aims to introduce a "leniency programme", which provides immunity from surcharge payment order against entrepreneurs that have reported illegal cartels they are involved in.

(b) Exemptions from the AMA prohibition of cartels

90. The AMA contains provisions exempting from the enforcement of intellectual property rights, activities of cooperatives, and resale price maintenance contracts of copyrighted work. In addition, provisions authorizing certain cartels are incorporated into other laws, including the Insurance Business Law and the Export-import Trading Law. As of March 2004, 21 systems, under 15 laws, are exempt under these provisions (Table III.11).

Table III.11 Exemptions from the Anti-monopoly Act, 2003

Relevant ministries and agencies Legislation System

1. Exemptions under the AMA (3 systems) Japan Fair Trade Commission Section 21 Acts under intellectual property rights Section 22 Acts of cooperatives Section 23 Resale price maintenance contracts 2. Exemptions under various individual laws (14 laws, 18 systems) Financial Services Agency Insurance Business Law Insurance cartels Law Concerning Non-Life Insurance Rating

Organizations Exemptions concerning compulsory automobile insurance and earthquake insurance

Ministry of Justice Corporation Reorganization Law Acquisition of shares of companies under reorganization

Ministry of Finance Law Concerning Liquor Business Associations and Measures for Securing Revenue from Liquor Tax

Rationalization cartels

Ministry of Education, Culture, Sports, Science and Technology

Copyright Law Cartels on fees for commercial usage of music records

Ministry of Health, Labour, Welfare Law Concerning Coordination and Improvement of Hygienically Regulated Business

Cartels to prevent excessive competition

Ministry of Agriculture, Forestry and Fisheries of Japan

Agricultural Cooperative Association Law Federation of agricultural co-operatives

Agricultural Association corporation Ministry of Economy, Trade and Industry

Export-import Trading Law Cartels on export

Law on the Cooperative Association of Small and Medium Enterprises

Federation of small business associations

Law on Cooperatives of Small and Medium-Sized Enterprises

Joint economic undertakings

Ministry of Land, Infrastructure and Transport

Marine Transportation Law Maritime transportation cartels (international)

Maritime transportation cartels (coastal service)

Road Transportation Law Transportation cartels Civil Aeronautics Law Aviation cartels (international) Aviation cartels (domestic) Coastal Shipping Association Law Maritime transportation cartels (coastal

service) Joint shipping businesses



(c) Resale price maintenance system

91. Since its previous Trade Policy Review, Japan has not changed the AMA exemption for the resale price maintenance (RPM) system. In 2001, as a result of a review, the JFTC decided to maintain the RPM on copyrighted works (books, magazines, newspapers, records, music cassettes, and CDs) for the present; according to the authorities, many people were against the abolition of the RPM for these works, given their cultural value.

(d) Holding companies, and mergers and acquisitions

92. Chapter 4 of the AMA prohibits mergers and acquisitions if they lead to a substantial restraint on competition.74 All planned mergers and acquisitions that exceed specified thresholds must be notified to the JFTC 30 days before the merger and acquisition takes place. The thresholds for mergers are: ¥10 billion for the sum of the total assets of one company in the transaction concerned; and ¥1 billion for the sum of total assets of any other party to the transaction concerned.75 In case of mergers involving foreign companies, total assets refers to "sales in Japan".76 For acquisitions, the thresholds are, inter alia: ¥10 billion for the sum of total assets of an acquiring company; ¥1 billion for the total assets of an acquired business (from a company in Japan); and ¥1 billion for sales in Japan for an entire or substantial part of business from a foreign company. The JFTC notes that in approximately 10% of proposed merger cases, the parties have voluntarily held prior consultations with the JFTC. With a view to ensuring transparency of such consultations, the JFTC published its "Policies dealing with Prior Consultations regarding Enterprise Combination Plans" in December 2002.

93. Excessive concentration of power through, for example a holding company, is also restricted by the AMA, although holding companies not deemed to constitute an "excessive concentration of economic power" are permitted. Between 1999 and 2003, the number of holding companies notified to the JFTC in accordance with the AMA increased from 1 to 19. The AMA was also amended in 2002, to deal with "excessive concentration of economic power"77, which could result from mergers and acquisitions other than from the creation of a holding company.78 In the amendment, Article 11 restricting shareholding of financial institutions was also revised; now only banks and insurance companies are prohibited from controlling more than 5% (10% for insurance companies) of voting

74 Substantial restraint in competition indicates when a market structure changes as a result of a merger

and specific companies can control the market by influencing variables such as price, quality, and quantity. 75 The "sum of total assets" means the sum of the total assets of the company concerned and its "related

companies". 76 "Sales in Japan" are calculated by adding the sales of the foreign company's business offices in Japan

and sales of other companies in Japan with more than half of their voting rights held by the foreign company. 77 "Excessive concentration of economic power" is defined in Article 9 of the AMA as a situation

where significant effects on the national economy and impediments to the promotion of free and fair competition are observed due to: (1) the overall scale of business of a company, its subsidiaries, and other companies in Japan controlled by the company by means of holding of stock; (2) large influence of these companies on other enterprises due to transactions relating to finance; or (3) the occupancy by these companies of influential positions over a significant number of fields of business.

78 Under the classification of (1) holding companies, (2) financial companies (excluding those classified in (1)), and (3) general business companies (excluding those classified in (1) and (2)), thresholds are established, based on the total amount of assets including the company's subsidiaries. Any company that satisfies the thresholds is subject to mandatory ex post facto submission of its business report or notification of new establishment of the company.


rights of other companies (unless authorization is granted by the JFTC while previously all financial institutions were prohibited).79 The amended AMA entered into force on 28 November 2002.

(e) International arrangement

94. In international fora, Japan is an active participant in the WTO Working Group on the Interaction between Trade and Competition Policy, and in OECD committees and working groups established to increase cooperation in competition policy. On 10 July 2003, Japan and the European Communities signed the Agreement between the Government of Japan and the European Community Concerning Cooperation on Anti-Competitive Activities. The agreement includes notification of enforcement activities in relation to competition laws that may affect important interests of the other party, assistance and coordination of enforcement activities, and "positive and negative comity"80. In addition, under Japan's bilateral FTAs with Singapore and Mexico, the parties agreed to take appropriate measures against anti-competitive activities and cooperate to control anti-competitive activities.81

(f) Enforcement

95. An investigation into possible violations of the AMA may be initiated as a result of a report from the general public, detection by the JFTC itself, or notification by the public prosecutor general. The AMA provides three types of measures to penalize and thereby deter violations of the Act: administrative measures, such as mandatory surcharges, fines, and injunctions on price cartels; criminal penalties82, and private damages actions. Administrative penalties are the main sanction; however, questions have been raised whether mandatory surcharges or administrative fines (imposed for non-compliance with JFTC orders or court injunctions) constitute effective deterrents to AMA violations.

96. Responding to criticism that Japan's enforcement remains weak, several changes have been made in enforcement measures since Japan’s previous Review. These include an amendment to the AMA to raise the upper limit on penalties in monopoly cases to ¥500 million (the provision entered into force on 29 June 2002); an amendment in June 2003 to the Subcontract Act, which extended its coverage to services as well as manufacturing, and raised the upper limit on penalties; and an amendment to the Act Against Unjustifiable Premiums and Misleading Representations in May 2003, which, inter alia, enables the JFTC to regulate unjustified representations claiming superiority of goods or services without sufficient evidence to support these claims.

79 According to the JFTC, it is considered that a financial company other than a bank and insurance

company does not have the funds and financial power to influence other companies or the market. 80 "Negative comity" requires that either country consider the important interests of the other country

throughout its enforcement activities. "Positive comity" is an idea that either country may request the other to initiate enforcement activities concerning conduct that has occurred in the territory of the other and affects the important interests of the requesting country.

81 Chapter 12 of the agreement between Japan and the Republic of Singapore for a New Age Economic Partnership, and Chapter 132 of the Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership.

82 Criminal penalties currently include imprisonment of up to three years or a fine of up to ¥5 million for private monopolies and unreasonable restraint of trade, and imprisonment of up to two years or a fine of up to ¥3 million for international agreements constituting unreasonable restraint of trade and unfair trade practices, restrictions of the number of members of trade associations, and violations of final decisions by the JFTC. Criminal proceedings may be initiated only after an accusation is filed by the JFTC with the Public Prosecutor General. Appeals are available with the High Courts and eventually the Supreme Court.


97. Of the 123 cases processed by the JFTC in FY 2003, legal measures were taken in 25 cases, most of which concerned cartels, followed by collusive tendering (bid-rigging); surcharge payments of a total value of ¥3.87 billion were ordered in 24 cases (Table III.12). There was one criminal accusation in FY 2003.83

Table III.12 Enforcement of competition policy, 2000-03

Fiscal year Details

2000 2001 2002 2003

Cases in which legal measures were taken against acts prohibited by the Anti-monopoly Act

(A) Legal measures

Private monopolization 0 0 0 1

Cartels 12 36 33 16

Price cartels 1 3 2 3

Collusive tendering 10 33 30 14

Other types of cartela 1 0 1 0

Unfair trading practices 6 2 3 7

Others 0 0 1 0

Total 18 38 37 25

(¥ billion)

(B) Surcharge payment orders

Number of cases 16 15 37 2

Number of enterprise operators 708 284 592 507

Surcharge amount (in ¥ billion) 8.52 2.20 4.33 3.87

Decisions to initiate hearings 3 4 6 8

(C) Recently processed investigation cases

Cases investigated

Carry-over from the previous fiscal year 39 34 37 40

New cases begun during the current fiscal year 69 90 111 121

Total 108 124 148 161

Cases processed

Legal measures

Recommendations 18 37 37 25

(Decision to commence hearing)b (1) (3) (8) (9)

Surcharge payment orderc 0 1 0 0

Sub-total 18 38 37 25

Others

Warnings 17 15 17 13

Cautions 36 26 49 75

Discontinued casesd 3 8 5 10


83 The JFTC investigated a bid rigging case concerning water meters purchased by the Tokyo

Metropolitan Government.


Fiscal year Details

2000 2001 2002 2003

Sub-total 56 49 71 98

Total 74 87 108 123

Carry-over to the next fiscal year 34 37 40 38

Criminal accusations 0 0 0 1

.. Not available.

a Other types of cartel include restrictions on sales volume and restrictions on business clients. b Figures in parenthesis are the numbers of cases where the decision to commence hearing procedures was made from recommendations. c Cases in which surcharge payment orders were given without a recommendation. d These were discontinued due to lack of evidence of wrongdoing.

Note: Figures in FY 2003 represent data as of 1 January 2004.


98. Under Section 8−4 of the AMA concerning measures against a monopolistic situation, the JFTC continues to monitor highly oligopolistic markets, and may order measures to restore competition in the event of "undesirable market performance".84 In 2003, 22 industries were subject to such monitoring.85

(g) Distribution measures

99. There has been no change in the legal framework pertaining to the distribution sector, including on the opening and expansion of large-scale retail stores. Since the entry into force in June 2000 of the Law Concerning Measures by Large Scale Retail Stores for the Preservation of the Living Environment, about 2,260 entities have notified their intention to establish large-scale retail stores, in accordance with the law, as at July 2004. In September 2003, the limitation on the number of liquor retail licences based on the population of the particular local area was abolished. Currently the issuance of liquor retail licence is restricted only in "temporary adjustment districts", based on the Temporary Adjustment Law for the Improvement of Business Conditions of Liquor Retailers, which entered into force in July 2003, but will expire in August 2005.86

(vii) Corporate governance

100. A growing awareness that ineffective corporate governance has contributed to the misallocation and perhaps excessive use of capital and labour in the corporate sector has prompted the

84 A monopolistic situation is defined as where the market share of a single enterprise exceeds 50% (or 75% for two enterprises combined in a particular field of business), and where the annual total output of the business exceeds ¥100 billion; new entry into the market is conspicuously difficult and for a considerable period of time, (a) the price structure in the market is rigid or inflexible, and (b) profit or expenditure (e.g. on advertising and marketing) is far in excess of standard levels in the industry. "Undesirable market performance" includes such factors as barriers to entry, extraordinary price increases or extremely high profit rates.

85 The 22 industries were: beer; whisky; brandy; tobacco; photographic colour film; plastic bottles for beverages; sheet glass; tiles; plaster boards; shutters; vending machines for beverages; incandescent light features for automobiles; digital transmission; carrier devices (other than digital transmission); motorcycles; shock absorbers; air-conditioners for transportation machines; TV game devices for family use, railway freight; scheduled domestic passenger flights; domestic basic telecommunications; international basic telecommunications; dust control; and medical office work service.

86 Temporary adjustment districts are designated by District Directors of Tax Offices as districts satisfying certain requirements specified in this law. The issuance of new licences was suspended for one year under the law.


Government to implement a number of policy measures since its previous Trade Policy Review.87 These include an amendment to the Commercial Code, which, inter alia, involved the introduction of a new corporate governance structure88; and the revision of the Certified Public Accountants Law, which introduced a revised structure for overseeing auditors, and provisions to enhance the independence of auditors from private companies under audit, to ensure the reliability of financial information provided by the auditing and accounting profession (the revision entered into force in April 2004).89

101. The authorities maintain that Japan’s Generally Accepted Accounting Practices (GAAP) are equivalent to the International Accounting Standards (IAS) in most areas, such as consolidated accounting, financial instrument accounting, and retirement benefit accounting.

102. The bribing of Japanese official is not allowed under the Criminal Code. Senior officials of the Government must report to their heads of ministries or agencies any gift or hospitality (whose value is beyond ¥5,000) from the private sector. Japan does not allow companies to deduct, for tax purposes, bribes paid to foreign officials.

87 See WTO (2003), pp. 52-53, for some traditional features of Japan's corporate governance. 88 Corporations can now establish three committees (nomination, compensation, and audit) within the

board of directors; a majority of members of each committee must be composed of outside directors; a company adopting the new system may not have statutory auditors. The amendment concerning these changes entered into force on 1 April 2003.

89 Information available online at http://www.moj.go.jp/English/CIAB/jc101-2.html, and http://www.fsa.go.jp/refer//data/crcl.pdf



(1) INTRODUCTION

1. Since Japan's previous Trade Policy Review, the Government has continued to promote structural reforms; these reforms pertain especially to the energy and services sectors. The share of the services sector in Japan's GDP and employment increased in 2002, while the shares of manufacturing, agriculture, forestry and fishing declined.

2. The average applied MFN tariff for agriculture (WTO definition) decreased from 20.0% in FY 2002 to 17.7% in FY 2004. In 2002, total government transfers to agriculture amounted to 1.4% of GDP, exceeding agriculture's 1.0% share in GDP. Japan's food self-sufficiency ratio remains at around 40% on a calories basis; Japan continues to be the world's largest net importer of food.

3. During the period under review, little has changed in the manufacturing sector, which is, by and large, more exposed to international competition than agriculture and certain services. Tariffs on industrial products are usually low (averaging 3.8% in FY 2004), non-tariff barriers are few, and the sector receives relatively little financial or other support from the Government. Manufacturing's contribution to Japan's GDP declined from 20.8% in 2001 to 20.5% in 2002; the sector employed 17.7% of Japan's total labour force in 2002, down from 18.4% in 2001.

4. Achieving a stable supply of energy is one of Japan's major policy objectives; its energy self-sufficiency ratio was about 20% in 2000. Prices of electricity and gas in Japan are relatively high by international standards. However, entry into electricity and gas markets has been partially liberalized to encourage competition in the retail energy sector since the previous Review.

5. In recognition of the growing importance of services, not just to consumers, but to all kinds of businesses for which services are essential inputs and therefore a significant determinant of their international competitiveness, the Government's attention has been focused increasingly on regulatory reform combined with the strengthening of competition laws and their enforcement. Reforms in Japan's financial system are especially important because of the system's key role in channelling savings into the most profitable investments across various sectors of the economy. Such reforms have focused mainly on the disposal of non-performing loans (NPLs), which have been a hindrance to the efficient re-allocation of resources and thus to improved productivity and economic growth.1 There has also been progress in telecommunication services reform. In telecommunications, the average annual growth rate of total factor productivity (TFP) between 1995 and 2001 was 3.6%, substantially higher than the all-sector average, which was 0.2%. The Basic Telecommunications Law was revised in July 2003 to abolish approval requirements for basic telecommunication businesses' entry and exit, and to eliminate classification of Type-I and Type-II categories and

1 For example, Ahearne and Shinada (2004) found that productivity growth was low in industries

reputed to have a heavy concentration of highly inefficient, debt-ridden companies and yet these companies increased their market shares. They also found evidence that poor bank lending practices, notably the continuing supply of loans to low quality borrowers (a practice popularly known as "ever-greening" or "forbearance lending"), may have played a role in sustaining this seemingly perverse re-allocation of market shares, by preventing more productive companies from gaining market shares. Such practices thereby stifled a potentially important source of productivity improvement for the economy as a whole. Similarly, Caballero et al. (2003) concluded that, by rolling over loans they knew would never be repaid and keeping highly inefficient, debt-ridden companies alive, Japanese banks have deterred market entry by potentially more productive firms. Industries dominated by highly inefficient, debt-ridden companies exhibit greater excess capacity, lower productivity, and more depressed job creation.


regulations on prices for certain services. As a result of corporatization of the Postal Services, Postal Savings, and Postal Life Insurance, Japan Post was established on 1 April 2003.

(2) AGRICULTURE

(i) Overview

6. Since Japan's previous Trade Policy Review, its agriculture policy has remained largely unchanged. The sector continues to receive substantial government support; according to the OECD, total transfers to agriculture amounted to 1.4% of GDP in 2002, while the sector's share of GDP was 1.0%.2 In 2003, agricultural products amounted to 1.0% of Japan's total merchandise exports, down from 1.1% in 2002; and 15.2% of total imports, compared with 16.3% in 2002.

7. Data provided by the authorities indicate that average retail food prices in Tokyo in 2002 were approximately 90% to 140% of those in other major cities in the world, compared with 125% to 200% in 2000. The authorities attribute the narrowing of the price gap mainly to the depreciation of the yen. According to the authorities, the persistent high food prices in yen terms in Tokyo reflect high distribution costs, including transportation, costs associated with responding to consumers' buying behaviour, such as a "more-frequent, less-quantity" delivery system, and high land, personnel, and energy costs; high tariffs also undoubtedly contribute to high food prices. Japan's food self-sufficiency ratio on a calories basis was 40% in 2002; despite the Government's objective of raising it, it has remained almost unchanged since FY 1998.3

8. The Basic Law on Food, Agriculture and Rural Areas, and the Basic Plan that implements the policy stipulated in the law, have continued to provide the framework and policy direction for agriculture in Japan since its previous Trade Policy Review; one of the basic objectives stipulated in the law is the securing of a stable food supply.4 Since January 2004, the Council on Food, Agriculture and Rural Areas has been reviewing the Basic Plan, which is to be revised in March 2005. The Government is also promoting the consolidation of scattered farmland with a view to raising productivity. The Law on Special Zone for Structural Reform, which entered into force in April 2003, allowed general corporations such as stock companies to lease farmland under certain conditions.5

9. In April 2004, an amendment to the Law for Stabilization of Supply-Demand and Price of Staple Food entered into force; the law liberalized domestic distribution of rice by, inter alia, replacing the previous registration requirements with notification requirements for wholesale and retail distribution of rice in Japan.

(ii) Policy developments

10. The average applied MFN tariff for agriculture (WTO definition) is 17.7% (FY 2004)6, compared with an overall average of 6.3% (Chapter III(2)(ii)); 15.3% of duties applied to agricultural

2 Agriculture's share in Japan's GDP in 2001 was 1.1%. It should be noted that total transfers are

measured on a gross basis, while GDP is on a value-added basis. According to OECD (2004c), the percentages of total support estimate (TSE), expressed as share of GDP, were 1.37% in 2001 and 2002, and are provisionally estimated at 1.33% in 2003. 3 The Basic Plan for Food, Agriculture and Rural Areas, decided by the Cabinet in March 2000, contains a guideline to achieve a food self-sufficiency ratio of 45% by 2010.

4 MAFF, "The Basic Law on Food, Agriculture and Rural Areas". Available at: http://www.maff.go.jp/soshiki/kambou/kikaku/NewBLaw/BasicLaw.html.

5 According to the former Agricultural Land Law, ownership of farmland was limited to individual farmers and agricultural production legal persons (e.g. agricultural cooperative farms). 6 The average applied MFN tariff for agriculture (HS 1-24) in FY 2004 is 16.1%.


goods are non-ad valorem. Many agricultural subsectors, such as dairy products, products of the milling industry, sugar and sugar products, benefit from relatively high levels of MFN tariff protection (Table IV.1); several of these subsectors are also subject to tariff peaks (defined here as tariff rates exceeding three times the simple applied MFN average). Some of the average tariffs for the subsectors may be underestimated, owing to the lack of estimates for AVEs of some specific duties (which tend to conceal relatively high tariffs).7 For example, the duty rate payable on out-of-quota imports of rice is one of the highest rates in Japan's customs tariff, as high as 407% in terms of ad valorem equivalent.

11. Tariff quotas apply mainly to agricultural products, including dairy products, rice, wheat and barley, silk-worm cocoons and raw silk, starches, prepared edible fat, corn and ground nuts, dried vegetables; they cover some 1.6% of all tariff lines (Chapter III(2)(iii)).8 The extent to which tariff quotas are filled varies by product (Table AIV.1). Eligibility for quota allocations sometimes requires prior approval by the MAFF. The procedure for MAFF approval tends to be intricate; it may require various end-use restrictions, the opinions of other organizations, such as industry associations, and many documents, such as accounts and business plans. In-quota imports of rice, wheat and barley, certain milk products, and raw silk are handled mainly by state-trading entities; however, certain amounts of all products except raw silk may be imported by private entities (e.g. the simultaneous buy-sell system for rice (see below)).9

12. Imports of rice have been subject to tariff quotas since 1 April 1999; the applied out-of-quota duty on rice in FY 2004 was set at ¥341 per kg.; the duty is the sum of a specific duty (temporary rate) of ¥49 per kg., and a levy of ¥292 per kg. collected by the MAFF. Imports of in-quota rice were 679,668 tonnes in FY 2001, 679,875 tonnes in FY 2002, and 673,734 tonnes in FY 2003; out-of-quota imports in the same years were 69 tonnes, 202 tonnes, and 217 tonnes.10 As part of Japan's minimum access commitments, a certain amount of rice can be purchased and marketed directly under the simultaneous buy-and-sell (SBS) system; a total of 50,067 tonnes were imported under the SBS in FY 2002, and 100,000 tonnes in FY 2003.

7 In the interests of transparency, the Japanese authorities have provided the Secretariat with AVE

estimates, where available. The simple average of all non-ad valorem tariff rates for which AVEs were available was 39.2%, roughly nine times the simple average of purely ad valorem tariff rates, which was 4.4%.

8 The latest notifications of tariff quota administration are contained in WTO documents G/AG/N/JPN/91 (10 March 2004), and G/AG/N/JPN/100 (13 September 2004).

9 Rice, wheat, and barley are imported by the Ministry of Agriculture, Forestry and Fisheries; milk products and raw silk by the Agriculture and Livestock Industries Corporation; and leaf tobacco by Japan Tobacco Inc.

10 The rice import system is described in detail in JETRO (2003). Under the Uruguay Round agricultural negotiations WTO Members would replace the import quota system by bound tariff measures, and guarantee minimum access for products with essentially no imports during the reference period (1986-88). Since 1996, Japan's rice imports have been subject to minimum access commitments defined by the Government based on the WTO Agreements.


Table IV.1 Applied MFN tariff protection in agriculture, FY 2004 (Per cent)

HS Chapter/Description Simple average

tariff

Maximum tariff

Tariff peaksa (% of lines)

Non-ad valorem

tariff (% of lines)

01 Live animals 2.0 33.2 2.0 12.0

02 Meat and edible meat offal 11.2 50.0 18.5 19.5

03 Fish and crustaceans, molluscs and other aquatic invertebrates 5.5 15.0 0.0 0.0

04 Dairy produce; birds' eggs; natural honey; edible products of animal origin, not elsewhere specified or included

69.6 539.7 89.0 63.0

05 Products of animal origin, not elsewhere specified or included 0.3 3.5 0.0 0.0

06 Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage

0.4 3.0 0.0 0.0

07 Edible vegetables and certain roots and tubers 11.9 397.3 2.7 8.0

08 Edible fruit and nuts; peel of citrus fruit; melons 7.8 24.0 6.4 0.0

09 Coffee, tea, maté and spices 3.5 17.0 0.0 0.0

10 Cereals 36.7 406.6 22.0 31.7

11 Products of the milling industry; malt; starches; inulin; wheat gluten.

40.3 463.6 50.6 38.0

12 Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal plants; straw and fodder

19.0 1,124.1 2.8 5.6

13 Lac; gums, resins and other vegetable saps and extracts 3.0 17.0 0.0 4.5

14 Vegetable plaiting materials; vegetable products not elsewhere specified or included

3.1 8.5 0.0 0.0

15 Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes

5.5 29.8 3.5 42.4

16 Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates

13.4 50.0 31.7 3.0

17 Sugars and sugar confectionery 26.2 107.4 59.6 55.3

18 Cocoa and cocoa preparations 21.7 69.6 63.0 7.4

19 Preparations of cereals, flour, starch or milk; pastrycooks' products

28.0 262.5 64.4 26.5

20 Preparations of vegetables, fruit, nuts or other parts of plants 17.0 46.8 38.4 6.7

21 Miscellaneous edible preparations 23.7 396.6 49.5 16.1

22 Beverages, spirits and vinegar 15.1 75.2 33.3 35.2

23 Residues and waste from the food industries; prepared animal fodder

1.3 22.4 2.4 9.5

24 Tobacco and manufactured tobacco substitutes 5.1 29.8 9.1 0.0

1-24 Agriculture 16.1 1,124.1 25.3 15.3

a Three times the simple average of overall applied MFN rates.

Note: The simple average applied MFN tariff rate in FY 2004 is calculated by using 2003 AVEs, as available, provided by the Japanese authorities. When the AVEs are unavailable, the ad valorem part is used for compound and alternate rates.

Source: WTO calculations, based on data provided by the Japanese authorities.

13. Special safeguard actions (SSGs) were taken during FY 2002-04 for a number of products, including rice, small red beans, wheat flour, rice flour, starch, inulin, butter, food preparations of flour, meal or starch (Table IV.2). Both price-based and volume-based SSGs have been imposed; these are applicable only to above-quota imports. Japan also invoked separate emergency measures. In response to a surge in imports, tariffs on fresh and chilled beef were raised between 1 August 2003 and 31 March 2004 from 38.5% to 50%, and the gate price levels of pork products were raised between 1 August 2002 and 31 March 2003 and between 1 August 2003 and 31 March 2004; for


example, the price for cut meat was raised from ¥524/kg. to ¥653/kg. and for carcasses from ¥393/kg. to ¥489/kg.11

Table IV.2 Special safeguard (SSG) actions in agriculture, FY 2002-04

Description Type of action Date or period of application

FY 2002

Rice (semi-milled or wholly milled, whether or not polished or glazed)

Price-based 31 May 2002, 23 August 2002

Small red (Adzuki) beans Price-based 23 July 2002

Wheat flour Price-based 1 August 2002, 5 August 2002, 8 October 2002

Rice flour Price-based 5 September 2002

Manioc (cassava) starch Price-based 17 October 2002

Food preparations mostly containing wheat and triticale Price-based 11 November 2002

Butter (of a fat content, by weight, not exceeding 85%) Price-based 24 January 2003

Food preparations containing by weight not less than 30% natural milk constituents on the dry matter

Price-based 26 February 2003, 28 February 2003, 31 March 2003

FY 2003

Food preparations, containing groats, meal, pellets or starch of rice, wheat, triticale, barley, which total weight is more than 85% of the articles and mostly containing starch

Price-based 7 July 2003

Beans other than beans of species Vigna mungo (L.) Hepper or Vigna radiata (L.) Wilczek, small red (Adzuki) beans and kidney beans

Price-based 11 July 2003

Other fats and oils derived from milk of a fat content, by weight, exceeding 85%

Price-based 4 July 2003, 8 October 2003, 26 November 2003

Wheat flour Price-based 4 September 2003, 24 October 2003, 15 March 2004

Rice flour Price-based 12 August 2003, 19 September 2003, 26 January 2004, 29 January 2004

Manioc (cassava) starch Price-based 5 September 2003, 19 January 2004, 18 February 2004

Other starches (excluding sago starches) Price-based 12 August 2003, 25 August 2003, 19 December 2003

Food preparations containing by weight not less than 30% natural milk constituents on the dry matter

Price-based 27 November 2003, 16 March 2004

Kidney beans, including white pea beans (Phaseolus vulgaris), excluding rendered suitable solely for sowing by chemical treatment and certified as seeds for sowing, vegetables in accordance with the provisions of a Cabinet Order, shelled, dried

Price-based 11 March 2004

Milk powder, not containing added sugar or other sweetening matter, of a fat content, by weight, exceeding 5% but not exceeding 30%

Price-based 16 January 2004

Milk and cream, concentrated or containing added sugar or other sweetening matter of a fat content, by weight, exceeding 8%


Tubers of konnyaku (Amorphophalus), whether or not cut, dried or powdered


Food preparations of flour, meal or starch, containing one or more of those groats, meal, pellets of rice, wheat, triticale, barley or starch, which total weight is more than 85% of the articles and mostly containing starch

Volume-based 1 October 2003 to 31 March 2004

Table IV.2 (cont'd)

11 Under Japan's tariff system on pork imports, an ad valorem duty is applied if a c.i.f. price is higher

than the gate price, and a specific duty is applied if the c.i.f. price is lower than the gate price.


Description Type of action Date or period of application

Butter and other fats and oils derived from milk; dairy spreads

Volume-based 1 January 2004 to 31 March 2004

Inulin Volume-based 1 February 2004 to 31 March 2004

Maize (corn) starch Volume-based 1 March 2004 to 31 March 2004

FY 2004

Inulin Volume-based 1 October 2004 to 31 March 2005

Source: WTO notifications.

14. The support received by Japan's farmers and consumer prices of agricultural products remain above the OECD average. Japan's net producer support estimates (PSE) and consumer support estimates (CSE) for 2003 have been provisionally estimated at 58% and 53%, while the OECD averages are 32% and 24%, respectively.12 In the same year, the producer nominal assistance coefficient (NAC) was 2.4, indicating that gross farm receipts were 2.4 times the level they would have been if generated at world prices without support. Likewise the consumer NAC was 2.1, indicating that consumers continue to be implicitly taxed, paying on average more than twice as much as they would have paid without the support. On average, the producer and consumer NACs were both 1.6 times the respective OECD averages. In addition, the producer nominal protection coefficient (NPC) was 2.3 in 2003, meaning that the farm gate price received by producers was on average 2.3 times higher than the price at the border. Data provided by the authorities indicate that the Aggregate Measures of Support (AMS) on price support declined from ¥3.0 trillion in FY 1997 to ¥0.5 trillion in FY 2000, while the AMS on direct income support increased from ¥199 billion in FY 1997 to ¥297 billion in FY 2000.13 Current price support schemes and their levels are tabulated in Table IV.3. According to the OECD, total support to producers has consisted largely of measures that potentially distort production, namely market price support, payments based on output, and input subsidies (such as interest, water, fertilizer, and energy subsidies); the share of such subsidies in Japan's total support was 97.4% in 2003, down slightly from 98.1% in 1999.14

Table IV.3 Procurement prices for all major crops subject to pricing and/or marketing arrangements/price controls, 2000-03 (¥)

2000 2001 2002 2003

Rice, official purchase price (unpolished rice, 60 kg.) 15,104 14,708 14,295 13,820

Wheat, official purchase price (60 kg.) 8,824 8,693 8,693 8,552

Soybeans, standard price (60 kg.) .. .. .. ..

Sweet potatoes, trading guideline price (1 tonne) 31,430 31,430 31,310 31,160

White potatoes, raw material standard price (1 tonne) 13,960 13,960 13,840 13,690

Sugar beets, lowest producer price (1 tonne) 17,040 17,040 16,930 16,840

Sugar cane, lowest producer price (1 tonne) 20,370 20,370 20,330 20,300

Milk for processing, guaranteed price (1 kg.) 72.13 .. .. ..

Calves for beef, guaranteed standard price (black cattle) (per head) 304,000 304,000 304,000 304,000

Table IV.3 (cont'd)

12 OECD (2004c) figures for 2003 are provisional. As noted in WTO (2003), caution is necessary

when interpreting PSEs, CSEs, and NACs, as changes in exchange rates or world prices may produce significant fluctuations in the three indicators, and border prices may be artificially reduced owning to the presence of export subsidies in international agriculture trade.

13 Details of Japan's domestic support commitment are available at WTO document G/AG/N/JPN/98, 19 May 2004.

14 OECD (2004c).


2000 2001 2002 2003

Beef, stable standard price (1 kg.) 785 780 780 780

Pork, stable standard price (1 kg.) 365 365 365 365

Raw silk, stable standard price (1 kg.) .. .. .. ..

.. Not available.


(3) MANUFACTURING

15. In 2002, manufacturing accounted for 20.5% of Japan's GDP and 17.7% of employment (Table I.2). Electrical machinery was the largest subsector in terms of value added, followed by transport equipment. In 2003, manufactured products accounted for 93% of Japan's total merchandise exports and 57% of its total merchandise imports. Automotive products, office machinery, and telecom equipment are Japan's main export items.

16. The simple average applied MFN tariff for imported industrial products (HS 25-97) is 3.8% in FY 2004, compared with 16.1% for agricultural products.15 Simple average tariffs are considerably higher for footwear, headgear, and prepared food than for other manufactured goods (Chart III.2).

17. With a view to strengthening Japan's industrial competitiveness, the Law on Special Measures for the Revitalization of Industrial Dynamism (Industrial Revitalization Law) was amended in 2003. Measures adopted in the amendment include tax cuts for IT or R&D related investments, extension of the loss-carry-forward period to seven years (from five years) for projects approved under the law, provision of low-interest loans by the Development Bank of Japan and other government affiliated financial institutions, and the promotion of debt-equity swaps.16

18. In April 2003, the Industrial Revitalization Corporation of Japan (IRCJ) was established jointly by the public and private sectors to revitalize Japanese companies with "excessive" debt; upon request of a company's major creditors, the IRCJ purchases debts from other creditors of the company.17 The debt purchased by the IRCJ must, in principle, be sold within three years of purchase. By the end of September 2004, the IRCJ had decided to support 25 companies.18

19. Labour productivity in manufacturing increased the most in export-oriented subsectors. After 2002, the capacity utilization ratio increased sharply and the excess capacity index in manufacturing dropped.

15 The simple average applied MFN tariff rate in FY 2004 is calculated by using 2003 AVEs, as available, provided by the Japanese authorities. When the AVEs are unavailable, the ad valorem part is used for compound and alternate rates.

16 The Government also provides sector-specific support. For example, the International Aircraft Development Fund (IADF) of Japan receives grants from the Government and provides financial support, together with loans granted from the Development Bank of Japan, to Japanese companies involved in international collaboration for civil aircraft, such as the project between Boeing company and the Japan Aircraft Development Corporation (JADC). The JADC is a consortium of Japanese Aircraft Industries (IADF online information. Available at: http://www.iadf.or.jp/8361/h/IADF-HP/iadf-hp_katudou--E.htm; and JADC online information. Available at: http://www.jadc.or.jp/outline_jadc_e.htm).

17 According to the authorities, there is no nationality restriction on companies to be supported by the IRCJ.

18 IRCJ online information. Available at: http://www.ircj.co.jp/english/press/index.html.


(4) ENERGY AND UTILITIES

20. A stable energy supply has been one of main objectives of Japan's energy policy, because about 80% of its primary energy (e.g. oil, coal, natural gas, nuclear, hydro, and geothermal energy) was imported in 2000.19 Nonetheless, both electricity and gas prices in Japan are relatively high by international standards. According to the authorities, this is due, inter alia, to Japan's geographical location, its high labour and land costs, and its oligopolistic market structure for electricity and gas supply. Against this background, more emphasis has been placed on economic efficiency in Japan's energy policy, as observed in various deregulation measures implemented since its previous Trade Policy Review.

21. In 2000, the retail electricity market, which had consisted of full regional monopolies regulated by the then Ministry of International Trade and Industry, was partially liberalized; customers consuming over 2,000 kW and taking power at 20,000V or above (mainly enterprise) were allowed to buy from sources other than incumbent regional electric utility companies.20 Under the amendment to the Electric Utility Industry Law in June 2003, this freedom was extended to consumers at or above 500 kW, effective in April 200421; in April 2005, consumers at or above 50 kW are to be included. Data provided by the authorities indicate that in terms of total electricity demand, the share of liberalized market was 26% in 2000 and 40% in 2004. Like in many other countries, electricity prices for industrial use are substantially lower than for household use.22

22. The Gas Utility Law was also amended in June 2003 and entered into force in April 2004; the amendment eliminated certain regulations in the gas industry. For example, since April 2004, customers consuming over 500,000 cubic meters per year have been allowed to buy from sources other than incumbent regional piped-gas suppliers, and third-party access (TPA) has been allowed to all existing pipelines, subject to certain restrictions.

23. Foreign entities wishing to invest in electric and gas utilities must, under the provisions of the Foreign Exchange and Foreign Trade Law, notify their intention to the competent authorities, including the METI. Permission for investment is not denied, except on grounds of national security.

19 Excluding nuclear power, about 96% of its primary fuels were imported. This is because uranium can be utilized for some years after importation. The Government adopted a Basic Plan for Energy Supply and Demand as a Cabinet decision in October 2003. According to the Plan, the Government encourages a shift of Japan's primary energy sources from petroleum to nuclear power, coal, natural gas, and LPG in order to maintain stable energy supply. Measures adopted to this end include promoting the construction of domestic pipeline networks to increase the use of natural gas. In FY 2002, 31.2% and 21.6% of Japan's total electricity supply were generated by nuclear power and natural gas, respectively.

20 Price regulation was also relaxed and a set of rules was introduced regarding the use by new entrants of existing transmission lines. Since October 2003, J-Power, the biggest wholesale electricity supplier, has apparently been corporatized and subsequently privatized. J-Power owns and operates 67 power plants and transmission lines extending over 2,400 km, accounting for 7% of the total capacity of Japan's generating facilities, and sells electricity to Japan's major electric power companies.

21 The amendment also required the establishment of a Neutral System Organization (NSO), which is to issue rules related to construction of network facilities, network access, system operation, and information disclosure with a view to improving the transparency of transmission and distribution of electricity.

22 For example, average electricity prices for household use in 2002 were: US$0.174/kWh in Japan, US$0.136/kWh in Germany, US$0.105/kWh in the United Kingdom, US$0.105/kWh in France, and US$0.085/kWh in the United States; and average electricity prices for industry use were US$0.115/kWh in Japan, US$0.052/kWh in the United Kingdom, US$0.049/kWh in Germany, US$0.048/kWh in the United States, and US$0.037/kWh in France (OECD/IEA (2004)).


(5) SERVICES

(i) Overview

24. The services sector remains the largest contributor to output and employment in Japan, and the sector's importance has continued to grow since Japan's previous Trade Policy Review. In 2002, the sector accounted for 71.1% of Japan's GDP, up from 70.6% in 2001, and 69.4% of the total employment, up from 68.5%.

25. Japan's Schedule of Specific Commitments under the General Agreement on Trade in Services (GATS) has remained unchanged since 2002; it covers 121 of the 160-odd sectors. Japan has not taken any MFN exemptions.

(ii) Financial services

26. The financial services sector in Japan has been undergoing significant changes. A protracted period of low growth, after the bursting of the "bubble" in the early 1990s, has substantially reduced profitability of financial intermediaries, and technology and deregulation have increasingly blurred the traditional distinction between financial products. Globalization and competition across the border is another force driving the structural change in Japan's financial services sector. These forces have encouraged mergers and acquisitions across different types of financial services firms with a view, inter alia, to realizing economies of scale. Government-led financial restructuring, involving reduction of NPLs and privatization of government-affiliated financial institutions, has been aimed at strengthening Japan's financial system and improving the efficiency of the capital market so that savings are channelled into profitable investment; an efficient capital market is, thus, an essential factor in raising productivity in the economy as a whole.

27. There have been no major changes in Japan's regulatory environment for financial services since 2002. The Financial Services Agency (FSA) remains responsible for policy planning, regulatory control, inspection, and supervision as well as for the resolution of failed banks, and capital injections into financial institutions. The responsibility of the Ministry of Finance is restricted, inter alia, to part of financial failure resolution, financial crisis management, management of the Deposit Insurance Corporation, and other public insurance schemes for deposits and investment, as well as exchange rate policies and foreign investment. The Bank of Japan is responsible for the smooth settlement of transactions between banks and other financial institutions with a view to contributing to the maintenance of "an orderly financial system". Under the Foreign Exchange and Foreign Trade Law, cross-border capital transactions are not regulated, and free entry and exit is guaranteed for foreign exchange business.

28. Amendments to the Ordinance of the Insurance Business Law in October 2002 enlarged the scope of insurance products that banks can sell over the counter, and revisions of the Securities and Exchange Law in May 2003 allowed foreign securities companies to engage in direct transactions with Japanese stock exchanges without establishing branches in Japan, provided they obtain authorization of the Prime Minister.

29. Both the imports and exports of Japan's financial services sector (except for insurance) increased in 2003; exports increased from ¥393 billion in 2002 to ¥403 billion in 2003, while imports increased from ¥204 billion to ¥252 billion.


(a) Banking

30. Since Japan's previous Review, reorganization of the banking sector has continued; recent changes, including several mergers, consolidated Japan's largest banks into five major groups.23 The ratio of NPLs to the total lending of all banks decreased to 5.8% (¥26.6 trillion) in March 2004 (from 8.4% in March 2002) (Chapter I(3)(i)).24 As at end-March 2004, there were 225 banks, among which 72 were foreign (Table IV.4). Deposits held by "city banks" accounted for 46.5% of total deposits in all banks, and loans by city banks amounted to 48.0% of the total. As well as commercial banks, there are Government financial institutions, which include Japan Post25, two non-commercial banks26, and six finance corporations. Commercial bank interest rate spreads have generally remained stable at around 1.5 to 2.0 percentage points since 2000 (compared to around 3 percentage points in the 1970s), suggesting a more competitive market reflecting the liberalization of interest rates.27

Table IV.4 Financial institutions in Japan, 2004

1. Banks (end-March 2004)

Number of banks

Total assets (¥ trillion)

Related laws

City banks 6 399.6 Banking Law Long-term credit banks 2 11.6 Banking Law Trust banks 27 69.4 Banking Law,

Law on Concurrent Operation of Trust Business by Financial Institutions

Internet banks 4 1.1 Banking Law Regional banks I 64 206 Banking Law Regional banks II 50 60 Banking Law Foreign banks 72 53.3 Banking Law 2. Cooperative financial institutions (end-March 2004)

Number of organizations

Total assets (¥ trillion)

Related laws

Shinkin Central Bank 1 27 Credit Association Law Shinkin banks (Credit Associations) 306 114 Credit Association Law Shinkumi Federation Bank 1 3 Small and Medium Business, etc.

Cooperatives Law Law on Financial Business by Cooperatives

Credit cooperatives 181 16 Small and Medium Business, etc. Cooperatives Law Law on Financial Business by Cooperatives

Mutual Federation of Labour Credit Association 1 4 Labour Credit Association Law Labour credit associations 13 14 Labour Credit Association Law Shoko-Chukin Bank 1 12 The Shoko Chukin Bank Law Norinchukin Bank 1 62 Norinchukin Bank Law Prefectural Credit Federation of Agricultural Cooperatives 46 53 Agricultural Cooperatives Law

Table IV.4 (cont'd)

23 These are Mizuho Financial Group, Sumitomo Mitsui Financial Group, UFJ Holdings, Resona

Holdings, and Mitsubishi Tokyo Financial Group. 24 As at end-March 2004, there were 64 banks belonging to the Regional Banks Association of Japan

(regional banks I) and 50 banks belonging to the Second Association of Regional Banks (regional banks II); the ratio of NPLs to the total lending of regional banks I was about 6.8% and that of regional banks II was about 7.5%.

25 The previous Postal Saving System was reorganized into a new state-run public corporation, Japan Post, in April 2003.

26 The Development Bank of Japan and the Japan Bank for International Cooperation. 27 Mizuho Research Institute (2003). Interest rates in Japan have been deregulated gradually since

1979; currently no interest rate regulations exist, except on current accounts.


Agricultural cooperatives 952 94 Agricultural Cooperatives Law Prefectural Credit Federation of Fishery Cooperatives 34 2 Fishing Cooperatives Law Fishery cooperatives (including fish processors cooperatives 397 2 Fishing Cooperatives Law National Federation of Credit Guarantee Corporations 1 0.08 Credit Guarantee Corporations Law Credit guarantee corporations 52 35 Credit Guarantee Corporations Law 3. Insurance companies Number of

companies (end-June

2004)

Total assets (¥ trillion, end-March

2004)

Related laws

Life insurance: domestic 23 160 Insurance Business Law foreign 17 24 Insurance Business Law Non-life insurance: domestic 25 32 Insurance Business Law foreign 27 0.3 Insurance Business Law Mutual fire insurance cooperative associations 45 0.07 Small and Medium Business, etc.

Cooperatives Law Ship owner's mutual insurance associations 2 0.03 Small and Medium Business, etc.

Cooperatives Law 4. Non-banks and other

(end-March 2004) Number of registered companies

Number of reported

companies

Related laws

Loan companies 23,708 .. Money-Lending Law Housing loan companies 1 .. Money-Lending Law Money market brokers (number of designated companies) .. 7 Money-Lending Law and Former

Investment Law Mortgage companies 11 .. Investment Advisory Service Law Prepaid voucher issuers 1,465 430 Law on Regulation of Prepaid

Certificates Commodity investment brokers 110 .. Law on Regulation of Commodity

Investment Business Special purpose companies 40 306 Business Asset Securitization Law Real-estate syndications (as of end-April 2004) 92 6 Real Estate Designated Cooperative

Projects Law Financial futures brokers 55 .. Financial Futures Trading Law 5. Government's financial institutions

(end-March 2004) Aggregated balance of loans

(¥ trillion) Related laws

Development Bank of Japan 14.8 Development Bank of Japan Law Japan Bank for International Cooperation 20.4 Japan Bank for International

Cooperation Law National Life Finance Corporation 10.0 National Life Finance Corporation

Law Housing Loan Corporation 60.6 Housing Loan Corporation Law Agriculture, Forestry and Fisheries Finance Corporation 3.4 Agriculture, Forestry and Fisheries

Finance Corporation Law Japan Finance Corporation for Small and Medium Enterprise 7.6 Japan Finance Corporation for Small

and Medium Enterprise Law Japan Finance Corporation for Municipal Enterprise 24.9 Japan Finance Corporation for

Municipal Enterprise Law Okinawa Development Finance Corporation 1.5 The Okinawa Development Finance

Corporation law 6. Other financial institutions

(end-March 2004) Related laws

Bank of Japan 0.141 Article 38 of the Bank of Japan Law Deposit Insurance Corporation .. Deposit Insurance Law

.. Not available.



31. The Financial Services Agency (FSA), attached to the Cabinet Office (whose head is the Prime Minister), is the main authority regulating the banking sector. The centrepiece of legislation governing the operation of banks is the Banking Law; this Law stipulates that a licence issued by the Prime Minister is required to operate a bank in Japan. Foreign banks may enter the Japanese market by establishing branches, agencies, or subsidiaries after obtaining a licence. Under the Banking Law, foreign banks with Japanese branches or agencies are subject to regulations no less favourable than those applied to domestic banks.28 The authorities stated that, since 2002, there have been no changes in prudential regulations; they consider that prudential requirements are no more onerous for nationally licensed subsidiaries of foreign banks than for domestic banks.

32. Based on the 2001 Law for Limitations on Shareholdings by Banks (Shareholding Limitation Law), a Banks' Shareholdings Purchase Corporation (BSPC) was established in January 2002, with a view to supporting the sale of shares held by banks, thereby reducing risks on their balance sheets arising from price fluctuation of shares held. It is not clear whether the BSPC's purchasing activities have effectively supported prices of some stocks.29 In December 2002, the Law was amended to allow the BSPC to purchase banks' shares held by companies other than banks. In August 2003, a further amendment increased the BSPC’s purchase limit of banks' shares held by companies other than banks.

33. In April 2003, a state-run public corporation, Japan Post, was established to take over mail delivery, postal savings, and kampo life insurance services, which had previously been provided by the Postal Services Agency. At the end of June 2004, deposits in Japan Post's postal savings amounted to ¥226 trillion, which is about 16% of Japan's total households financial assets. About 80% of deposits in postal savings are allocated to the purchase of domestic bonds issued, inter alia, by the Government under its Fiscal Loan and Investment Programme and by local governments, including fiscal loan deposits; the remainder is invested in foreign bonds, domestic and foreign stocks, and short-term investments, such as call loans and certificates of deposit. The authorities stated that the postal savings provide small-scale depositors basic financial services throughout the country, including in unprofitable remote areas. Postal savings, except for deposits in postal money transfer accounts, are subject to a ¥10 million deposit-ceiling per person. The Government is currently discussing when and how to privatize Japan Post. In September 2004, the Government adopted a Basic Policy on the Privatization of Japan Post, which stipulated that privatization would start from April 2007 and would be completed by 2017.

(b) Insurance

34. Japan's insurance market comprises three subsectors: non-life, life, and the "third" sector, which includes insurance for accident, medical care, nursing care, and cancer. There are no state-owned insurance companies in Japan, other than the Trade and Investment Insurance operated by the Nippon Export and Investment Insurance, which was established in 2001, and the postal life insurance, operated by Japan Post. Like banking, the insurance sector in Japan has undergone substantial change since 2002; four merger deals among life insurance companies and four among non-life insurance companies have been concluded30, three new reinsurance companies and one life

28 While the Banking Law (Article 4) includes "reciprocity" provisions with regard to licensing, the

authorities maintain that these do not apply to WTO Members, given that Japan has made no MFN exemptions in its GATS Schedule of Commitments.

29 According to the authorities, both the purchase and the sale of shares from and to banks by the BSPC are at market values.

30 For life insurance companies, the Yamato Life Insurance merged with the Azami Life Insurance in April 2002, the GE Edison Life Insurance merged with the Saison Life Insurance in October 2002, the Tokyo Marine Life Insurance merged with the Nichido Life Insurance in October 2003, and the Meiji Life Insurance


insurance company have been established31, and four non-life insurance companies have closed.32 At the end of September 2003, assets held by the top five life insurance companies accounted for 66.5% of the total assets of all life insurance companies; the corresponding ratio for the top five non-life insurance companies during the same period was 74.9%.

35. The Financial Services Agency is the main authority regulating the insurance sector, in accordance with the Insurance Business Law. A licence from the Prime Minister is required to conduct insurance business in Japan, and approval is required both for new insurance products and modifications to existing ones, as well as premium rates. Life and non-life insurance companies may enter each other's markets only by means of subsidiaries. Commercial presence, licensed by the Prime Minister, is normally required in order to offer insurance services in Japan, except for cross-border contracts for reinsurance, commercial aviation insurance, and international marine hull insurance.33 The criteria for granting licences and the requirement of solvency margins are the same for Japanese and foreign insurance providers.

36. The Insurance Business Law and the related regulations of the law have been amended several times since 2002. An amendment in March 2002 included the establishment of a standard timeframe for the approval of simple and standardized insurance products34, and the replacement of the previous approval requirement with a notification requirement in regard to the sale of home fire insurance products. An amendment in October 2002 enlarged the scope of insurance products that banks are allowed to sell over the counter.35 Furthermore, an amendment in 2003 allowed life insurance companies to alter their contract terms through procedures involving their policyholders; these alterations may involve the reduction of returns agreed in existing contracts. The amendment was introduced with a view to resolving "negative spread", i.e. the aggregate gap between investment income earned and investment income originally expected. The 2003 amendment also allowed, inter alia, insurance companies to work as agents for companies that engage in other financial businesses, and lifted the limitation on foreign-currency-based asset management for foreign-currency-based insurance contracts.

37. Functions of the Postal Life Insurance System were also taken over by the Japan Post. The authorities maintain that, the postal life insurance (kampo) provides basic life insurance services to private policyholders with insurance premiums that are as inexpensive as possible, at post offices established throughout the country. According to the authorities, while the Postal Life Insurance is exempted from corporate taxes and deposit insurance premiums, it faces various constraints, such as limited insurance amount per insured, limited product varieties, and restrictions on investment of

merged with the Yasuda Mutual Life Insurance in January 2004. For non-life insurance companies, the Yasuda Fire & Marine Insurance merged with the Dai-ichi Property and Casualty Insurance in April 2002, the Nipponkoa Insurance merged with the Taiyo Fire & Marine Insurance in April 2002, the Yasuda Fire & Marine Insurance merged with the Nissan Fire & Marine Insurance in July 2002, and the Sompo Japan Insurance merged with the Taisei Fire & Marine Insurance in December 2002.

31 The three new reinsurance companies were the Taisei Reinsurance in October 2002, the RGA Reinsurance in November 2003, and the Swiss Reinsurance in December 2003. As regards life insurance, the Mitsui Sumitomo CitiInsurance Life Insurance was established in September 2002.

32 The GAN Incendie Accidents Insurance Company closed in July 2002, the Liberty Mutual Insurance Company in March 2003, the Winterthur Swiss Insurance in October 2003, and the Mitsui Seimei General Insurance in November 2003.

33 For other insurance contracts, prior approval from the Prime Minister is required for foreign insurers without commercial presence in Japan.

34 The authorities are required to make a decision with regard to approval within 60-days after the request is made.

35 The products include individual annuities, zaikei savings (i.e. asset formation) insurance, individual annuity and accident insurance, and zaikei savings personal accident insurance.


funds.36 In the context of the Japan–U.S. regulatory reform dialogues, the Japanese Government confirmed that Japan Post had no plans to introduce any new or altered kampo products.37

(c) Securities

38. In accordance with the Securities and Exchange Law, the Financial Services Agency is the main authority regulating the securities industry. Only joint-stock corporations registered with the Prime Minister may engage in securities business. Under the Law on Foreign Securities Firms, the main office in Japan of a foreign securities firm must be registered with the Prime Minister to operate securities business in Japan; registration is not accepted unless a firm has engaged in the same type of business for no less than three years. Investment trust companies require the authorization of the Prime Minister. There is no foreign ownership restriction in the securities subsector; subsidiaries and branches of foreign securities firms are registered in the same manner as domestic securities firms.

39. In August 2002, the FSA announced a Programme for Promoting Securities Markets Reform. Based on the programme, various measures have been implemented: since September 2002, banks and securities companies may share common space, and cooperative financial institutions may receive written orders, according to FSA's operational guidelines, from investors to buy and sell securities. A "sales agent business for brokerage house" (Shouken-Chukaigyo) was introduced to expand sales channels; the accounting and auditing system was enhanced by reviewing the CPA system and increasing the number of qualified CPAs. The FSA also plans to strengthen functions of Japan's security market surveillance system by, inter alia, introducing a penalty system against insider trading and submission of false financial statements in April 2005.

40. The Securities and Exchange Law was amended in 2003 and 2004. The 2003 amendment, which entered into force in April 2004, allowed foreign securities companies to engage, if authorized by the Prime Minister, in direct transactions with a securities exchange (i.e., without establishing local branches in Japan) and allowed any registered person, other than financial institutions, to engage in securities business as an intermediary. The 2004 amendment allowed financial institutions to engage in securities intermediary services.

(iii) Telecommunications

41. Telecommunications charges have declined considerably during the period under Review38, and the number of telecom carriers increased from 10,521 in April 2002 to 12,522 in April 2004. The authorities state that, the average annual growth rate of total factor productivity (TFP) in telecommunications was 3.6% between 1995 and 2001, while the corresponding rate for all sectors was 0.2%. The higher TFP growth in telecommunication may be attributed to the recent liberalization of Japan's telecom sector, which intensified competition. During the same period, the average annual growth rate of labour productivity in telecommunications was 8.7%, the highest among all industries. Nonetheless, the JFTC continues to maintain that the Japanese market for telecom services is oligopolistic (Chapter III(5)(vi)).

36 For example, the Investment Plan for the Postal Life Insurance Service in FY 2003 recommends the

allocation of 75-95% of investment in domestic bonds. The Investment Plan needs to be authorized by the Government.

37 MOFA (2004e), p. 36. 38 Local fixed-line call charges in Japan have declined to levels comparable with those prevailing in

other OECD member countries, and charges for mobile phone services in the high-volume user category have fallen to the lowest levels among OECD members. However, with regard to international communication charges, Japan was among the highest (OECD, 2003c).


42. Telecommunication services accounted for 1.6% of Japan's GDP in 2002, compared with 1.8% in 2001. With regard to cross-border trade, during 2001-02 exports of telecom services increased from ¥87 billion to ¥93 billion, while imports fell from ¥130 billion to ¥115 billion.

43. The Ministry of Internal Affairs and Communications (MIC) is the main authority regulating Japan's telecommunications, and the Telecommunications Business Law (TBL) is the basis for the main regulatory framework in the sector. Recent regulatory reform initiatives, associated with the amendment of the TBL in 2003, include the abolition of Type-I and Type-II classifications of telecommunications services. 39 The permission requirement on Type-I businesses for entry into and exit from the market was replaced by a notification and registration requirement. Contract terms, which, inter alia, define end-user charges, no longer require prior notification except for certain specified services that are regarded as having significant influence on consumers, and universal telecommunications services.40 In addition, since July 2003, manufacturers of telecommunications equipment have been allowed to self-confirm their products' conformity with technical regulations, provided that notification is submitted to the MIC; previously, only certain designated agencies were allowed to provide conformity assessment.

44. Ownership restrictions on Nippon Telegraph and Telephone (NTT) Corporation's shares are stipulated in the NTT Law; foreign ownership is limited so that the aggregate of the ratios of the voting rights must be less than one third. At least one third of all shares of NTT Corporation must be held by the Government.41 As of September 2003, the Government held about 46% of NTT Corporation's total shares.42 In accordance with the NTT Law, the NTT Corporation and the two NTT regional companies are required to provide universal service. In accordance with the TBL, interconnection rules have been imposed to promote "fair" competition; these include requiring the regional NTT companies to allow other carriers to access their networks on an unbundled basis. The TBL stipulates prohibited actions for dominant carriers as well as orders to improve business activities or modify charges. There are no foreign ownership or management restrictions in telecommunications services, except in the case of the NTT Corporation.

45. In November 2001, the Telecommunications Business Dispute Settlement Commission was established under the MIC for the purpose of settling disputes between telecommunications carriers. Between November 2001 and June 2004, 35 cases were settled by the Commission; these cases covered mainly issues of interconnection, shared use, and wholesale telecommunications services, including co-location for telecommunications facilities, charges between IP (Internet protocol) telephones and the public service telephone network, and setting charges for telephone calls from fixed to mobile phones.

46. In June 2004, the Strategic Headquarters for the Promotion of an Advanced Information and Telecommunications Network Society, which was established within the Cabinet in 2001, adopted an "e-Japan Priority Policy Programme 2004".43 The programme includes measures to formulate advanced information and communications networks, to promote education and human resource

39 See WTO (2003), Chapter IV(4)(ii), for the TBL classification of Type-I and Type-II services.

40 Universal telecommunications services are defined in the Telecommunication Business Law as telecommunications services that are provided nationwide and are indispensable for peoples' daily lives.

41 Article 4 of the NTT Law. In addition, according to Article 10 of the NTT Law, board members and auditors of the NTT Corporation and the two NTT regional companies must be of Japanese nationality. The traffic share of the two regional NTT companies in Japan's local (fixed line) market is about 70% (in 2004).

42 The NTT Corporation must, at all times, hold all stocks issued by the East and West NTT regional companies, according to the NTT Law, Article 5. The issuance of stocks by the regional companies requires ministerial authorization.

43 IT Strategic Headquarters (2004).


development, to facilitate electronic commerce, to promote the use of information technology in public areas, and to promote research and development activities, particularly in seven "leading areas" (i.e. medical services, food, lifestyle, SMEs financing, knowledge, employment and labour, and public service). Since 2003, under the IT Investment Promotion Tax Incentive, companies have been allowed to receive either a 10% tax credit of acquired assets as their IT investment for own use, or depreciation corresponding to 50% of the value of assets acquired as IT investment.

(iv) Transport

(a) Maritime transport

47. The volume of Japan's seaborne cargo trade increased from 881.7 million tonnes in 2002 to 916.7 million tonnes in 2003, accounting for 15.7% of the world's total (5.8 billion tonnes).

48. The authorities state that there have been no changes in legislation related to maritime services since the previous Review of Japan. The Maritime Bureau and the Ports and Harbour Bureau of the Ministry of Land, Infrastructure and Transport (MLIT) are the main authorities regulating Japan's maritime transport. Cabotage restrictions generally allow only Japanese-flag carriers to carry cargo and passengers between Japanese ports; Japan accords limited access to maritime cabotage service to ships flying the flag of particular countries, on a reciprocal basis, pursuant to treaties of friendship, commerce, and navigation with Japan.

49. The authorities maintain that there are no discriminatory measures affecting foreign participation in international maritime services and that Japan's bilateral agreements on passenger or cargo shipping provide national treatment to partners on a reciprocal basis. Japan has bilateral agreements related to maritime transport with: Argentina, Bulgaria, China, Cuba, Denmark, El Salvador, Finland, France, Germany, Greece, Haiti, Hungary, Italy, India, Malaysia, the Netherlands, Norway, the Philippines, Poland, Portugal, Romania, Russian Federation, Serbia and Montenegro, Spain, Sweden, Thailand, Turkey, the United Kingdom, and the United States. Agreements between domestic and foreign operators on freight rates or other conditions of transportation (e.g. routes) are exempt from the Anti-monopoly Act provided such agreements do not involve "unfair transactions" or "adversely affect competition".

50. In order to cope with a decrease in the number of Japanese-flag carriers, the Government provides support for Japanese-flag carriers (the so-called International Ship Regime); this support has been unchanged since Japan's previous Review. The authorities maintain that the Regime has no distortionary effects on trade in maritime transport services; it aims to increase the competitiveness of Japanese vessels against those of other countries that provide preferential tax treatment for their registered ships.44

51. According to the authorities, there are no discriminatory measures preventing foreign participation in the supply of auxiliary services. The Port Transportation Business Law continues to be the regulatory basis for port services in major ports in Japan. Charges for harbour services in nine large harbours are subject to a prior notification requirement45, and there is an approval requirement for other harbours. It is common practice in Japan's ports for carriers to notify the harbour worker's union in advance of any changes (for example, request for stevedore services) that may affect

44 These measures include tax breaks in respect of shipregistration tax and local property tax. As to ships that are registered as 'international ships', ship-registration tax is 0.2% of the price of the ship and the tax base for local property tax is one-fifteenth of the price of the ship.

45 The nine large harbours are: Keihin (i.e. Tokyo, Yokohama and Kawasaki), Chiba, Shimizu, Nagoya, Yokkaichi, Osaka, Kobe, Kanmon (i.e. Shimonoseki and Kitakyushu), and Hakata.


employment (prior consultations).46 New entrants to harbour services are required to guarantee minimum employment of 1.5 times that of existing operators; the Japanese Harbour Transportation Association (JHTA) may be consulted about operations that may reduce employment or adversely affect working conditions.47

(b) Air transport

52. In FY 2002, Japanese airlines accounted for 37.1% of Japan's scheduled international passenger market and 42.7% of international freight market, in terms of passenger numbers and tonnes of freight. Exports of air transport services increased from ¥0.92 trillion in 2001 to ¥0.98 trillion in 2002, while imports fell slightly to ¥1.4 trillion.

53. There have been no changes in Japan's international air transport regulations since 2002. Japan's international air transportation market is regulated mainly by the Civil Aeronautics Law (CAL) and numerous bilateral agreements. The Civil Aviation Bureau of the MLIT administers the entry, pricing, and routes of airlines, as well as safety regulations. As in most other countries, the provision of domestic air services is restricted to Japanese carriers (cabotage restrictions). An ownership restriction prohibits foreign investors from holding more than one third of voting rights in domestic airlines.48

54. Since its previous Trade Policy Review, Japan has concluded one additional air service agreement, with Uzbekistan (promulgated on 26 August 2004). Japan also ratified the 1990 Protocol Relating to an Amendment to the Convention on International Civil Aviation (article 50a) in June 2003; the amendment, which concerned the increase in the membership of the International Civil Aviation Organization Council, was promulgated in June 2003. The Montreal Convention of 1999 was also promulgated in October 2003.49 Japan has not accepted "open skies" air service agreements. The authorities believe that such agreements may entail oligopoly and, as a consequence, have adverse effects on competition in Japan's international air services market. In addition to traffic rights, Japan has concluded many bilateral arrangements allowing code sharing. These and other agreements between airline companies for improving user convenience on international routes from/to Japan are exempted from the Anti-monopoly Act, provided they do not involve "unfair transactions" or adversely affect competition.50 There is no requirement for Japanese civil servants to use Japanese carriers for official travel.

55. Landing fees for the two major international airports, Narita and Kansai, are significantly higher than those at major airports in other developed countries.51 In April 2004, a fully government-owned Narita International Airport Corporation was established, as a result of the corporatization of the Narita Airport Authority.

46 According to the authorities, this practice is based on an agreement among private operators, i.e. the

Japanese Harbour Transportation Association (JHTA), the Japanese Ship-owners' Association, and the Japan Foreign Steamship Association.

47 OECD (2004b), p. 140. 48 Foreign investors that intend to invest in the aircraft manufacturing industry must file prior-

notification to the Minister of Finance and the Minister of Economy, Trade and Investment. 49 Japan ratified the convention, which concerned air carrier liability, on 20 June 2000. 50 Article 110 of the CAL. 51 According to the OECD (2004b), airport charges at Narita International Airport are more than twice

as high as the average of other international airports. According to the MLIT, the landing fee for a Boeing 747-400 aircraft is around ¥950,000 at Narita, ¥830,000 at Kansai, ¥389,075 at Chep Lap Kok (Hong Kong, China), ¥382,369 at JFK (New York), ¥276,046 at Charles de Gaulle (Paris) and ¥133,144 at Bangkok airports. The authorities consider that landing charges in Narita and Kansai Airports reflect costs associated with environmental protection.


56. According to the authorities, Japan's airport slot-allocation system for international civil aviation services is based upon guidelines issued by the IATA (International Air Transport Association). Japan Airlines is the coordinator for Narita and Kansai international airports (as stipulated in the IATA Worldwide Scheduling Guidelines). The allocation of slots takes place twice annually. Data provided by the authorities indicate that, as at end-October 2004, 38% of total slots of Narita and Kansai international airports are allocated to Japanese airlines. In Chubu International Airport, which is to commence operations in 2005, the slot allocation is coordinated by Nagoya Office of Civil Aviation Bureau, in accordance with IATA guidelines.

(v) Professional services

57. In addition to obtaining relevant licences, membership of a professional association is compulsory for: certified public accountants, administrative scriveners, lawyers, judicial scriveners, land and house surveyors, licensed tax accountants, public consultants on social and labour insurance, and patent attorneys.52

(a) Legal services

58. The Ministry of Justice is the regulatory authority for legal services in Japan; there is also self-regulation of legal services by the Japan Federation of Bar Associations, as prescribed in the Practising Attorney Law. Foreign participation in the sector is regulated by this law, and the Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers, which was last amended in 2003. The amendment, which is to enter into force on 1 April 2005, will enable a Gaikokuho-Jimu-Bengoshi (a foreign lawyer qualified under Japanese law) to employ a Bengoshi (a lawyer qualified under Japanese law), and a joint enterprise involving the two.

59. According to the authorities, there have been no changes regarding market access for foreign patent lawyers since 2002; there is no restriction on foreign patent lawyers carrying out their business in Japan for their home country clients. Patent lawyer licences, which are necessary to practice patent law in Japan for Japanese clients, can be obtained by passing the patent lawyer examination, regardless of the applicant's nationality or educational background.

(b) Accounting services

60. To qualify as a certified public accountant (CPA) in Japan, accountants must pass the national examination and finish a specified number of years of practical training. A foreign accountant not qualified as a CPA in Japan may provide certain accounting-related services other than the provision of audit services supplied by a CPA qualified in Japan. In April 2004, an amendment to the Certified Public Accountants Law approved by the Diet (in May 2003) entered into force; the objectives of the amendment were, inter alia, to stipulate explicitly CPAs' duties, increase the number of licences issued each year, and enhance the independence of auditors.53

61. Accounting standards in Japan are apparently based inter alia on the Commercial Code, the Securities and Exchange Law, and the Corporate Income Tax Law (Chapter III(5)(vii)). The FSA may allow the use of foreign accounting standards in financial statements of companies registered in

52 OECD (2004b). Regulation in the two latter services used to be among the most restrictive among

OECD countries. 53 For example, consecutive provision of audit-related services may not exceed seven accounting

periods. Auditors are prohibited from issuing audit reports on clients in which the engagement partners or designated partners of the services or their spouses have material interest/relationship.


Japan, if such use is not considered to undermine the interests of investors.54 The FSA also requires financial statements of companies to be issued in specified format in Japanese.

(vi) Construction

62. The share in Japan's GDP of the construction industry fell from 7.2% in 2001 to 6.9% in 2002, and its share in employment also fell slightly from 10% in 2001 to 9.9% in 2002. These falls reflect recent company closures.55 Labour productivity in the construction industry declined by 3.0% on average annually during 1991-01, while that for the manufacturing sector as a whole grew annually by 2.4% during the same period.56 Against this background, the Ministry of Land, Infrastructure and Transport (MLIT) announced its Basic Guidelines for Revitalising the Construction Industry in December 2002. The MLIT also introduced a new contract clause in 2003 prohibiting bid-rigging; if bid-rigging is found in tenders concerning MLITs projects, the contractors must pay the MLIT 10% of the contract value for the damages caused.

(vii) Education services

63. Faced with a declining youth population, the Japanese authorities consider that competition among universities should be encouraged by allocating funds to better performing universities and by corporatizing national universities, as well as by allowing universities more flexibility in management. Against this background, all national universities were corporatized to become national university corporations on 1 April 2004. As a result of corporatization, foreigners, who could not previously be appointed to certain posts, such as principals of public schools, may now be appointed to any post in national university corporations. The authorities indicate that there are currently no restrictions preventing foreigners from being employed in Japan’s private schools (including elementary, secondary, and high schools). According to the authorities, there are no restrictions on FDI in Japan’s education sector; domestic and foreign educational service suppliers face the same approval requirements.

64. Graduates from international secondary schools and high schools not authorized by the Ministry of Education, Culture, Sports, Science, and Technology are usually required to pass certain examinations in order to apply for admission to Japanese high-schools and universities.

54 The use of foreign accounting standards is determined in accordance with Article 193 of the

Securities and Exchange Law and Article 127 of the Regulation for Terms, Forms and Creation Methods of Financial Statements.

55 Cabinet Office (2004a), p. 9. 56 OECD (2004b).


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APPENDIX TABLES


Table AI.1 Composition of trade in services, 2001-03 (¥ billion and per cent)

2001 2002 2003

Imports

Total (¥ billion) 13,149.0 13,500.0 12,897.0

Transportation 29.9 29.2 30.7

Travel 24.5 24.6 25.9

Communications 1.0 0.9 0.7

Construction 3.5 3.3 3.0

Insurance 2.5 3.0 3.2

Financial services 1.5 1.5 2.0

Computer and information services 2.4 2.0 1.9

Royalties and licence fees 10.3 10.2 9.9

Other business services 22.0 22.9 20.8

Personal cultural and recreational services 1.3 1.1 0.8

Government services, n.i.e. 1.1 1.2 1.1

Exports

Total (¥ billion) 7,834.0 8,235.0 8,992.6


Travel 5.1 5.3 11.4

Communications 1.1 1.1 0.9

Construction 7.4 7.0 5.9

Insurance -0.2 -0.5 0.5

Financial services 4.2 4.8 4.5

Computer and information services 2.2 1.7 1.4

Royalties and licence fees 16.2 15.9 15.8

Other business services 25.2 26.5 23.3

Personal cultural and recreational services 0.2 0.5 0.2

Government services, n.i.e. 1.3 1.2 2.2

Source: Bank of Japan.


Table AI.2 Inward and outward FDI flows by source and destination, FY 2001-03 (¥ billion and per cent)

2001 2002 2003

Inward FDI

Total (¥ billion) 2,177.9 2,186.3 2,116.1

By source (percentage)

North America 31.8 30.0 20.8

United States 29.5 27.2 16.5

Canada 2.3 2.8 4.3

Europe 50.3 32.4 32.7

EU15 49.0 29.3 32.1

Netherlands 37.8 18.0 15.0

Germany 0.6 5.5 6.3

Ireland 0.3 0.0 4.8

Luxembourg 0.6 3.0 2.2

Belgium 1.8 0.5 1.2

United Kingdom 6.7 1.4 1.2

France 0.6 0.5 1.0

Switzerland 1.2 2.9 0.5

Asia 2.6 2.1 7.6

Singapore 1.4 1.0 7.0

Hong Kong, China 0.2 0.8 0.3

Korea, Rep. of 0.1 0.1 0.2

Chinese Taipei 0.9 0.1 0.1

Latin America 3.0 10.2 21.8

Cayman Island 2.1 9.3 13.8

Bermuda 0.1 0.4 7.6

Other 0.2 0.4 0.1

Foreign-owned companies in Japan 12.1 24.9 17.0

Outward FDI

Total (¥ billion) 4,041.3 4,493.0 4,079.5

By destination (percentage)

North America 20.3 22.9 29.6

United States 20.0 22.3 29.3

Canada 0.3 0.6 0.3

Latin America 23.9 15.6 14.6

Cayman Islands 15.5 10.9 5.9

Brazil 4.3 1.1 4.3

Panama 3.1 2.4 3.4

Europe 32.8 41.9 35.0

Table AI.2 (cont'd)


2001 2002 2003

EU15 31.8 40.9 33.3

Netherlands 14.0 8.9 19.0

United Kingdom 12.3 12.0 4.9

France 1.0 9.7 4.3

Germany 1.3 1.0 1.9

Belgium 1.6 4.2 1.2

Luxembourg 0.5 0.7 0.5

Italy 0.1 0.6 0.4

Spain 0.1 0.3 0.4

Sweden 0.0 0.0 0.3

Ireland 0.4 3.2 0.2

Poland 0.0 0.0 0.5

Czech Republic 0.3 0.4 0.5

Hungary 0.1 0.1 0.3

Switzerland 0.2 0.3 0.2

Asia 20.6 15.4 17.7

China 4.5 4.8 8.7

Indonesia 1.9 1.4 1.8

Thailand 2.7 1.4 1.7

Malaysia 0.8 0.2 1.3

Hong Kong, China 1.1 0.6 1.1

Singapore 3.6 2.0 0.9

Korea, Rep. of 1.7 1.7 0.8

Philippines 2.4 1.1 0.5

Chinese Taipei 1.0 1.0 0.4

India 0.4 0.8 0.2

Oceania 1.7 3.6 2.8

Australia 1.6 3.5 2.6

Other 0.7 0.6 0.3

Source: Ministry of Finance.


Table AI.3 Inward and outward FDI flows by activity, FY 2001-03 (¥ billion and per cent)

2001 2002 2003

Inward FDI

Total (¥ billion) 2,177.9 2,186.3 2,116.1

By activity (percentage)

Manufacturing 15.1 37.6 23.0

Machinery 6.4 12.4 13.3

Chemicals 5.3 19.0 5.2

Food 1.6 0.4 2.4

Petroleum 0.4 2.8 0.6

Non-manufacturing 84.9 62.4 77.0

Finance and insurance services 30.3 29.6 48.1

Trading 5.0 11.8 17.4

Telecommunication 38.0 7.9 2.9

Outward FDI

Total (¥ billion) 4,041.3 4,493.0 4,079.5

By activity (percentage)

Manufacturing 44.0 39.9 45.0

Electrical machinery 12.0 10.6 13.9

Chemicals 4.7 5.2 13.2

Transport equipment 13.4 13.3 8.3

Metals 2.0 1.7 3.0

Machinery 3.8 3.5 2.7

Food 2.6 0.6 1.2

Non-manufacturing 55.1 59.3 54.3

Finance and insurance services 33.3 34.7 21.2

Trade 8.4 10.0 12.0

Mining 1.5 1.0 5.3


Real estate 2.1 3.9 4.1

Establishment of branches 0.9 0.8 0.7

Source: Ministry of Finance.


Table AII.1 Status of notifications to the WTO, September 2004

WTO Agreement Description of requirement Document symbol of most recent notification and date

Anti-dumping

Article 16.4 Anti-dumping actions taken G/ADP/N/112/JPN, 26 February 2004

Article 16.5 Domestic procedures and authorities competent to initiate and conduct investigation

G/ADP/N/14/Add.14, 26 April 2002

Article 18.5 Laws and regulations (and changes) G/ADP/N/1/JPN/2/Suppl.3, 19 June 2002

G/ADP/N/1/JPN/2/Suppl.4, 5 April 2004

Agriculture

Articles 10 and 18.2 Export subsidies (outlays and quantities) G/AG/N/JPN/86, 24 October 2003

Article 18.2 Domestic support (DS:1) G/AG/N/JPN/98, 19 May 2004

Article 18.2 Domestic support (DS:2) G/AG/N/JPN/62, 1 March 2001

Article 18.2 Information on tariff quotas administration (MA:1) G/AG/N/JPN/81, 6 June 2003; G/AG/N/JPN/91, 10.March 2004

Article 18.2 Volume of imports under tariff quotas (MA:2) G/AG/N/JPN/82, 6 June 2003; G/AG/N/JPN/92, 10 March 2004

Article 5.7 Volume-based special safeguard (MA:3) G/AG/N/JPN/84, 24 October 2003; G/AG/N/JPN/88, 13 January 2004; G/AG/N/JPN/89, 6 February 2004 G/AG/N/JPN/93, 10 March 2004;

Article 5.7 Price-based special safeguard (MA:4) G/AG/N/JPN/79, 20 September 2002; G/AG/N/JPN/80, 10 January 2003; G/AG/N/JPN/83, 28 July 2003; G/AG/N/JPN/94, 23 March 2004; G/AG/N/JPN/95, 30 March 2004; G/AG/N/JPN/96, 18 May 2004

Article 5.7 and 18.2 Special safeguard (MA:5) G/AG/N/JPN/73/Rev.1, 18 July 2002; G/AG/N/JPN85, 24 October 2003

Article 10 Volume of food aid in the context of export subsidy commitments (ES:3)

G/AG/N/JPN/77, 6 August 2002; G/AG/N/JPN/77/Corr.1, 8 August 2002; G/AG/N/JPN/90, 1 March 2004

Article 16.2 Measures concerning the possible negative effects of the reform programme on least developed and net food importing developing countries

G/AG/N/JPN/87, 4 November 2003

Annex 5 Tariff quotas G/AG/N/JPN/1/Add.1; G/AG/N/JPN/8/Add.1; G/AG/N/JPN/23/Add.2; G/AG/N/JPN/57/Add.1, 27 June 2001

GATT 1994 (Article VI: Customs Valuation)

Checklist of issues G/VAL/N/2/JPN/1, 9 May 2000

GATT 1994 (Art. XVII:4(a) Understanding on the Interpretation of Article XVII)

Notification of products traded by state enterprises G/STR/N/7/JPN, 6 August 2001

Government Procurement (Article XXIV:6)

Modifications to Appendix I GPA/W/196, 28 May 2002; GPA/W/252, 25 February 2003; GPA/W/253, 25 February 2003; GPA/W/254, 25 February 2003; GPA/W/255, 4 March 2003; GPA/W/272/Rev.1, 8 October 2003; GPA/W/273, 23 September 2003; GPA/W/274, 23 September 2003; GPA/W/275, 23 September 2003; GPA/W/276, 8 October 2003

Table AII.1 (cont'd)



Import Licensing Procedures

Articles 1.4(a) and 8.2(b) Laws and regulations relevant to import licensing G/LIC/N/1/JPN/1, 27 February 1996; G/LIC/N/1/JPN/2/Rev.1, 26 February 1997

Article 5.3 Notification of licensing procedures and changes G/LIC/N/2/JPN/3, 27 April 2001

Article 7.3 Questionnaire; rules and information concerning procedures for the submission of applications

G/LIC/N/3/JPN/3, 2 February 2004

Subsidies and Countervailing Measures

Article 32.6 Laws and regulations G/SCM/N/1/JPN/2/Suppl.3, 19 June 2002; G/SCM/N/1/JPN/2/Suppl.4, 5 April 2004, and Corr.1, 16 April 2004

Article. 25.11 Countervailing duty actions taken G/SCM/N/98/Add.1, 20 October 2003; G/SCM/N/106/Add.1, 27 April 2004

Article 25.1 Subsidies programmes G/SCM/N/95/JPN, 4 September 2003

Article 25.12 Notification of domestic procedures and authorities competent to initiate and conduct investigations

G/SCM/N/18/Add.18, 15 April 2004

Safeguards

Article 12.6 Laws and regulations G/SG/N/1/JPN/2/SUPPL.1, 9 October 2002

Article 12.5 Notification of termination of safeguard investigation G/SG/N/9/JPN/1, 10 January 2002

Sanitary and Phytosanitary Measures

Article 6, Annex B Notification of emergency measures No notification

Article 7, Annex B Notification of changes in sanitary and phytosanitary measures

G/SPS/N/JPN/80, 16 January 2002; G/SPS/N/JPN/81, 22 February 2002; G/SPS/N/JPN/85, 18 July 2002; G/SPS/N/JPN/86, 11 September 2002; G/SPS/N/JPN/87, 27 November 2002; G/SPS/N/JPN/88, 2 December 2002; G/SPS/N/JPN/105, 14 July 2003; G/SPS/N/JPN/108, 9 October 2003; G/SPS/N/JPN/110, 24 December 2003; G/SPS/N/JPN/118, 29 June 2004; G/SPS/N/JPN/120, 29 June 2004; G/SPS/N/JPN/124, 22 July 2004

Technical Barriers to Trade

Article 15.2 Laws and regulations (and changes) No notification

Article 10.6 Information about technical regulations, standards and conformity assessment procedures

G/TBT/N/JPN/33, 40, 41, 43, 44, 45, 46, 47, 50, 51, 52, 55, 56, 57, 58, 59, 72, 75, 76, 77, 87, 89, 94, 95, 97, 98, 99, 100, 101, 103, 105, 107, 110, 115, 116, 117, 118, 119, 120, 121, 122, January, 2002 to June 2004

Textiles and Clothing

Articles 2.8 and 2:11 Notification of programmes of integration G/TMB/N/462, 8 January 2004

Article 3.1 Restrictions maintained prior to entry into force of the WTO Agreement

G/TMB/N/425, 15 February 2002 G/TMB/N/425/Add.1, 14 June 2002

Article 3.2(b) Notification of phase out of restrictions maintained G/TMB/N/425/Add.1, 14 June 2002 G/TMB/N/425/Add.2, 18 September 2002

TRIMs

Article 5.1 Investment measures No notification




TRIPS

Article 63.2 Laws and regulations IP/N/1/JPN/2 , 22 March 2004; IP/N/1/JPN/T/2, 25 March 2004; IP/N/1/JPN/P/3, 25 March 2004; IP/N/1/JPN/I/3, 25 March 2004; IP/N/1/JPN/D/2, 25 March 2004; IP/N/1/JPN/I/3, 25 March 2004; IP/N/1/JPN/C/3, 25 March 2004; IP/N/1/JPN/C/2, 25 March 2004; IP/N/1/JPN/3, 3 September 2004; IP/N/1/JPN/C/4, 24 September 2004; IP/N/1/JPN/D/3, 24 September 2004; IP/N/1/JPN/P/4, 24 September 2004; IP/N/1/JPN/T/3, 24 September 2004; IP/N/1/JPN/O/1, 28 September 2004

Article 69 Article 4(d)

Contact points Notification of international agreements related to the protection of intellectual property and which entered into force prior to the entry into force of the WTO Agreement

IP/N/3/Rev.7, 19 August 2003 IP/N/4/JPN/1, 29 February 1996

General Agreement on Trade in Services (GATS)

Article III:3 Changes to laws and regulations affecting services S/C/N/201, 13 November 2002; S/C/N/202, 13 November 2002; S/C/N/203, 13 November 2002; S/C/N/204, 13 November 2002; S/C/N/205, 13 November 2002; S/C/N/234, 28 October 2003

Article VIII:4 Monopolies and exclusive providers of services S/C/N/298, 27 February 2004

Plurilateral Agreement on Government procurement

Article XIX:5 Statistics on government procurement GPA/62/Add.2, 2 October 2002

Article XXIV:5(b) National implementing legislation (and changes) GPA/67, 15 April 2002; GPA/37/Add.1, 7 April 2004

Source: WTO documents.


Table AII.2 Disputes to which Japan has been a party, 2002 to April 2004

Principal complainant/defendant, and issue under dispute

Consultations/Panel Appeals

Japan/United States (WT/DS162) United States Anti-dumping Act 1916

Consultations requested: 10 February 1999 Panel requested: 3 June 1999 Panel established: 26 July 1999 The Panel circulated its Report on 29 May 2000. The Report found that the Anti-dumping Act of 1916 violated Articles VI:1 and VI:2 of the GATT 1994; Articles 1, 4.1, 5.1, 5.2, 5.4, 18.1, and 18.4 of the Anti-Dumping Agreement; and Article XVI:4 of the Agreement Establishing the WTO. The Report then recommended that the DSB request the United States to bring these inconsistencies into conformity with the relevant WTO Agreements.

Notification of appeal by the United States: 29 May 2000 Report of the Appellate Body: 28 August 2000 The Report upheld the basic findings of the Panel and recommended that the DSB request the United States to bring its Anti-dumping Act into conformity with its obligations under Article VI of the GATT and the Agreement on Anti-Dumping. Adoption of the Panel and AB Reports: 26 September 2000 Arbitration under DSU Article 21.3(c) requested by Japan: 17 November 2000 Arbitrator appointed: 19 December 2000 Arbitration Award circulated: 28 February 2001. The reasonable period of time determined by the arbitrator was ten months from the date of the adoption of the Panel and Appellate Body Reports and would expire on 26 July 2001. The DSB extended the period until 31 December 2001. Request for authorization of concession or other obligations by Japan: 7 January 2002 Arbitration under DSU Article 22.6 requested by the United States: 17 January 2002 Arbitrator appointed: 19 February 2002 Suspension of the arbitration proceeding: 27 February 2002

Japan/United States (WT/DS184) Anti-dumping measures on certain hot-rolled steel products from Japan

Consultations requested: 18 November 1999 Panel requested: 11 February 2000 Panel established: 20 March 2000 The Panel circulated its Report on 28 February 2001. The Report found that the United States had acted inconsistently in some regards and recommended that the DSB request the United States to bring these inconsistencies into conformity with the relevant WTO Agreements.

Notification of appeal by the United States: 25 April 2001 Report of the Appellate Body: 24 July 2001 The Report, by the DSB, adopted along with the Panel Report on 23 August 2001, upheld the Panel's overall conclusion that the US measures at issue were inconsistent with the relevant WTO Agreements. Arbitration under DSU Article 21.3(c) requested by Japan: 20 November 2001 Arbitrator appointed: 6 December 2001 Arbitration Award circulated: 19 February 2002 The reasonable period of time determined by the arbitrator was 15 months from 23 August 2001 The DSB extended the period until 31 July 2005.





Japan/United States (WT/DS217) Continued Dumping and Subsidy Offset Act of 2000

Consultations requested (along with Australia, Brazil, Chile, the European Communities, India, Indonesia, Korea, and Thailand): 21 December 2000 Panel requested (along with Australia, Brazil, Chile, the European Communities, India, Indonesia, Korea, and Thailand): 12 July 2001 Panel established: 23 August 2001 The Panel circulated its Report on 16 September 2002. The Report found that the United States had acted inconsistently in some regards and recommended that DSB request the United States to bring these inconsistencies into conformity with the relevant WTO Agreements.

Notification of appeal by the United States: 18 October 2002 Report of the Appellate Body: 16 January 2003 The Report upheld the Panel's findings that the United States Act was in violation of Article 18.1 of Anti-Dumping Agreement and 32.1of the SCM Agreement; the Report reversed the Panel's findings on Article 5.4 of Anti-Dumping Agreement and 11.4 of the SCM Agreement. The Panel and Appellate Body Reports were adopted on 27 January 2003.

Arbitration under DSU Article 21.3(c): requested by Japan and other complainants: 14 March 2003 Arbitrator appointed: 2 April 2003 Arbitrator's Award circulated: 13 June 2003 The reasonable period of time determined by the arbitrator was 11 months from 27 January 2003, which would expire on 27 December 2003. Request for authorization of suspension of concession or other obligation by Japan on 15 January 2004 Arbitration under DSU Article 22.6 requested by the United States: 23 January 2004 Arbitrator appointed: 11 February 2004 Arbitrator's Decision: 31 August 2004 Recourse by Japan to DSU Article 22.7: 10 November 2004

Japan/United States (WT/DS244) Sunset Review of anti-dumping duties on corrosion-resistant carbon steel flat products from Japan

Request for consultations: 30 January 2002 Panel requested: 4 April 2002 Panel established: 22 May 2002 The Panel circulated its Report on 14 August 2002. The Report found that the United States did not act inconsistently with its obligations under Articles 2.2.1, 2.2.2, 2.4, 3.3, 5.6, 5.8, 6.1, 6.2, 6.6, 6.10, 11.1, 11.3, 12.1, 12.3, 18.3 and 18.4 of the Anti-Dumping Agreement, Article X:3(a) of GATT1994, and Article XVI:4 of the Agreement Establishing the WTO. The Panel did not make recommendation under Article 19.1of the DSU.

Notification of appeal by Japan: 15 September 2003 Report of the Appellate Body: 15 December 2003 The Appellate Body Report, although its analysis differs from that of the Panel Report in several respects, found that the US had not acted inconsistently with any relevant WTO Agreements. The Appellate Body thus did not make recommendation to the DSB pursuant to Article 19.1 of the DSU. The Panel and Appellate Body Reports were adopted on 9 January 2004.

United States/Japan (WT/DS245) Measures affecting the importation of apples

Consultations requested by the United States: 1 March 2002 Panel requested: 7 May 2002. Panel established: 3 June 2002 The panel circulated its Report on 15 July 2003. The Report found that Japan had acted inconsistently with its obligations under Articles 2.2, 5.1, and 5.7 of the SPS Agreement and recommended that the DSB request Japan bring the phytosanitary measure into conformity with the relevant under the SPS Agreement.

Notification of appeal by Japan: 28 August 2003 Report of the Appellate Body: 26 November 2003 The Report upheld the Panel's findings and recommended that the DSB request Japan to bring its measure into conformity with its obligations under the SPS Agreement. The Panel and Appellate Body Reports adopted: 10 December 2003 RPT agreed until 30 June 2004 DSU Article 21.5 process: Panel requested 19 July 2004. Panel established 30 July 2004





DSU Article 22 process: Requests for authorization of suspension of concession and other obligations by the U.S. on 19 July 2004. Arbitration under DSU22.6 requested by Japan on 29 July 2004 Arbitrator appointed: 30 July 2004 However, the arbitration was suspended until the Article 21.5 proceeding is finished.

Japan/United States (WT/DS249) Definitive safeguard measures on imports of certain steel products

Request for consultations: 20 March 2002 Panel requested: 21 May 2002 Panel established: 14 June 2002 The panel circulated its Report on 11 July 2003. The Report found that the United States had acted inconsistently in some regards and recommended that DSB request the United States to bring these inconsistencies into conformity with the relevant WTO Agreement.

Notification of appeal by the United States: 11 August 2003 Report of the Appellate Body: 10 November 2003 The Report upheld some of the Panel's findings that the safeguard measures at issue are inconsistent with the relevant provisions of the Safeguard Agreement. The Panel and Appellate Body Reports were adopted on 10 December 2003.

Note: The table excludes disputes in which Japan participated as a third party.

Source: WTO documents.


Table AIII.1 Applied tariff escalation and tariff ranges, FY 2002 and FY 2004 (Per cent)

Tariff FY 2004

Number of linesa

Tariff average (2002)

Average Range Standard deviation

Coefficientof

variation

Total 9,075 6.9 6.3 0-1,124.1 23.2 3.7

- 1st stage of processing 1,105 9.1 7.4 0-1,124.1 46.4 6.3

- semi-processed 3,338 4.9 4.7 0-250.5 8.0 1.7

- fully processed 4,632 7.8 7.2 0-539.7 22.2 3.1

1 Agriculture

- raw materials 592 7.2 7.0 0-1,124.1 50.1 7.2

2 Mining and quarrying

- raw materials 120 0.1 0.1 0-9.7 0.9 9.0

311 Food products

- 1st stage of processing 167 24.8 13.2 0-406.6 55.1 4.2

- semi-processed 139 17.8 19.1 0-250.5 29.8 1.6

- fully processed 767 21.2 18.7 0-539.7 35.1 1.9

312 Food manufacturing


- semi-processed 26 32.3 32.1 2.2-50 16.2 0.5

- fully processed 77 30.4 29.3 0-463.6 54.5 1.9

313 Beverages

- fully processed 57 20.2 16.3 0-75.2 19.5 1.2

314 Tobacco manufactures

- fully processed 8 7.0 7.0 0-29.8 10.6 1.5

321 Textiles


- semi-processed 1,235 6.2 5.9 0-12.5 2.1 0.4

- fully processed 583 7.9 7.5 0-14.2 3.0 0.4

322 Clothing

- fully processed 270 9.9 9.4 3.4-16 2.2 0.2

323 Leather products

- 1st stage of processing 1 3.0 3.0 3-3 0.0 0.0

- semi-processed 99 13.3 13.5 0-30 12.2 0.9

- fully processed 39 11.2 11.5 2.7-20 6.4 0.6

324 Footwear

- fully processed 58 58.9 59.8 3.4-320.8 78 1.3

331 Wood products


- semi-processed 140 4.3 4.3 0-10 2.9 0.7

- fully processed 49 3.3 3.3 0-10 2.5 0.8

332 Furniture except metal

- fully processed 42 0.7 0.8 0-3.8 1.6 2.0

341 Paper products


- semi-processed 83 0.6 0.3 0-2.6 0.8 2.7

- fully processed 32 0.4 0.1 0-2.6 0.5 5.0

Table AIII.1 (cont'd)


Tariff FY 2004

Number of linesa



Coefficientof

variation

342 Printing

- fully processed 31 0.1 0.0 0-0 0.0 0.0

351 Industrial chemicals


- semi-processed 826 2.9 2.9 0-17.1 1.8 0.6

- fully processed 28 3.5 3.5 2.5-4.4 0.6 0.2

352 Other chemicals


- semi-processed 89 2.7 2.7 0-37 4.1 1.5

- fully processed 274 1.2 1.2 0-30.9 3.0 2.5

353 Petroleum refineries


- semi-processed 6 1.1 1.1 0-3.9 1.7 1.5

- fully processed 50 4.5 4.0 0-15.6 3.8 1.0

354 Petroleum and coal products


- semi-processed 6 0.1 0.0 0-0 0.0 0.0

- fully processed 2 0.0 0.0 0-0 0.0 0.0

355 Rubber products


- semi-processed 27 0.4 0.4 0-2.5 0.9 2.3

- fully processed 75 2.2 2.1 0-27 5.1 2.4

356 Plastic products

- fully processed 25 3.9 3.9 0-4.8 0.9 0.2

361 Pottery and china

- fully processed 18 0.6 0.6 0-2.3 1.1 1.8

362 Glass and products

- semi-processed 26 1.3 1.3 0-4.2 1.9 1.5

- fully processed 50 1.3 1.3 0-8 2.1 1.6

369 Non-metallic mineral products


- semi-processed 15 2.1 2.1 0-3.3 1.1 0.5

- fully processed 71 1.1 1.1 0-3.5 1.3 1.2

371 Iron and steel products


- semi-processed 367 0.6 0.2 0-6.3 0.8 4.0

372 Non-ferrous metal


- semi-processed 243 1.8 1.8 0-7.5 2.0 1.1

- fully processed 1 3.0 3.0 3-3 0.0 0.0

381 Metal products

- semi-processed 5 1.8 1.8 0-3 1.6 0.9

- fully processed 228 1.0 1.0 0-3.9 1.5 1.5

Table AIII.1 (cont'd)


Tariff FY 2004

Number of linesa



Coefficientof

variation

382 Non-electrical machinery

- semi-processed 1 0.3 0.0 0-0 0.0 0.0

- fully processed 607 0.2 0.2 0-8.4 1.2 6.0

383 Electrical machinery

- fully processed 381 0.2 0.2 0-5.3 0.9 4.5

384 Transport equipment

- fully processed 167 0.0 0.1 0-8.4 0.7 7.0

385 Professional and scientific equipment

- fully processed 289 0.2 0.2 0-16 1.4 7.0

390 Other manufactured products


- semi-processed 5 0.1 0.0 0-0 0.0 0.0

- fully processed 253 2.7 2.5 0-30 4.3 1.7

a The number of lines corresponds to the FY 2004 tariff.

Note: Excluding in-quota rates. Including AVEs provided by the authorities for specific rates, as available. For FY 2002, 2000 AVEs and for FY 2004, 2003 AVEs are used. The ad valorem part of alternate rates are taken into account for the calculations.

Source: WTO Secretariat calculations, based on data provided by the Japanese authorities.


Table AIV.1 Tariff quota quantity and in-quota imports, FY 2001-03 (Tonnes)

Description Tariff quota and in-quota imports FY 2001 FY 2002 FY 2003

Tariff quota quantity 7,264 7,264 7,264 Skimmed milk powder for school lunch In-quota imports 3,196 2,643 2,907

Tariff quota quantity 85,878 85,878 85,878 Skimmed milk powder for other purposes In-quota imports 38,193 35,525 35,418

Tariff quota quantity 1,585 1,585 1,585 Evaporated milk In-quota imports 1,354 1,498 1,461

Tariff quota quantity 45,000 45,000 45,000 Whey and modified whey for feeding purposes In-quota imports 25,303 22,895 22,774

Tariff quota quantity 25,000 25,000 25,000 Prepared whey for infant formula In-quota imports 12,016 11,880 10,471

Tariff quota quantity 1,873 1,873 1,873 Butter and butter oil In-quota imports 197 199 225

Tariff quota quantity 14,000 14,000 14,000 Mineral concentrated whey In-quota imports 5,193 4,504 3,730

Tariff quota quantity 18,977 18,977 18,977 Prepared edible fat In-quota imports 18,933 18,887 18,909

Tariff quota quantity 133,940 133,940 133,940 Other dairy products for general use (whole milk equivalent) In-quota imports 131,511 132,245 132,040

Tariff quota quantity 137,202 137,202 137,202 Designated dairy products for general use (whole milk equivalent) In-quota imports 135,409 130,065 126,258

Tariff quota quantity 120,000 120,000 120,000 Dried leguminous vegetables In-quota imports 114,432 113,259 94,277

Tariff quota quantity 5,740,000 5,740,000 5,740,000 Wheat, meslin, triticale and their processed products (wheat basis) In-quota imports 5,722,194 5,030,681 5,661,967

Tariff quota quantity 1,369,000 1,369,000 1,369,000 Barley and its processed products (barley basis) In-quota imports 1,367,597 1,449,735 1,392,136

Tariff quota quantity 682,200 682,200 682,200 Rice and its worked and/or prepared products (milled rice basis) In-quota imports 679,668 679,875 673,734

Tariff quota quantity 157,000 157,000 157,000 Starches, inulin and preparations of starches In-quota imports 159,721 136,836 151,003

Tariff quota quantity 75,000 75,000 75,000 Ground nuts In-quota imports 41,385 41,263 47,011

Tariff quota quantity 267 267 267 Tubers of konnyaku (dried slice basis) In-quota imports 152 36 89

Tariff quota quantity 798 798 798 Silk-worm cocoons and raw silk (raw silk basis) In-quota imports 162 156 88

Source: WTO notifications.

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