Japan's Changing FDI and Corporate Environment

A Report to the President on Foreign Direct Investment in Japan
"Japan's Changing FDI and Corporate Environment"
Transmitted by Alan P. Larson, Under Secretary of State for Economic, Business, and Agricultural Affairs

I. Overview

Reform, New Opportunities Continue to Drive Foreign Investment
On April 25, 2001, a select audience of over 200 gathered in New York to hear the views of senior Japanese government officials and American and Japanese private sector representatives on Japan's changing investment climate. The symposium, jointly sponsored by the Department of State, the Ministry of Economy, Trade and Industry of Japan (METI), the Japan External Trade Organization and the Conference Board, provided a unique opportunity for experts from the corporate and government sectors of both countries to discuss Japan's recent economic reforms and areas for further progress during a time of exciting political transition in the country.

Policy makers from the five key Japanese ministries and agencies (Ministry of Justice, Ministry of Health, Labor and Welfare, Ministry of Finance, Financial Service Agency, and Ministry of Economy, Trade and Industry) related to FDI policy participated in the symposium as panelists, and outlined recent reforms that have improved the environment for FDI in Japan to the audience in New York. This provided a valuable opportunity for the New York business community to become more informed about the impact of the Japanese government's recent policy measures to encourage FDI and promote the structural reform of the economy, as well as the future policy agenda.

Recent statistics on Japan's direct investment flows indicate that the heartening upswing in foreign direct investment (FDI) is continuing: While annual FDI to Japan ranged from only $1-3 billion in the early 1990s, foreign investment surged in the latter half of the decade. Over the past 3 years, Japan's investment grew from $10.9 billion in 1998 to $21 billion in 1999, and is estimated to have reached approximately $25 billion in JFY 2000. M&A transactions have also grown dramatically during that same period.

Japan's Economy Has Reached a Turning Point
Japan's economy is undergoing a dramatic transition and has many challenges ahead of it -- ranging from restoring fiscal discipline to stimulating a shift of private savings into the equity markets. METI's Vice Minister for International Affairs Hidehiro Konno described in his welcoming remarks the changes taking place in the economy -- for example, the unwinding of cross-shareholding and introduction of global accounting standards -- but emphasized that there is a growing realization that Japan's post-war economic system "has outlived its usefulness." He stressed that the Japanese Government is committed to economic structural reform, which aims at making Japan's business environment more attractive internationally as well as domestically.

AT&T Chairman and CEO C. Michael Armstrong in his keynote speech also referred to this transition as Japan's reaching an "inflection point" in its economy where it must change in order to become more competitive. Japan's policy makers and private sector are seeking to implement meaningful reforms in order to restore Japan's economic health. At the same time, there is a growing realization that foreign direct investment plays a critical role in Japan's recovery, spurring economic growth by introducing fresh capital, new technology and innovative management. However, more economic reforms are needed, not only to promote more FDI, but equally important, to promote domestic restructuring.

Under Secretary for Economic Affairs Alan Larson of the Department of State in his welcoming remarks underscored that the United States and Japan share the objective of increasing flows of FDI to Japan. The Government of Japan (GOJ) has undertaken some positive measures to open more opportunities for foreign investors, and these efforts have had a significant impact. U.S. retailer Toys R Us has gone from zero to over 100 stores in a decade. U.S. investors are reorganizing failed banks and insurance companies, preserving jobs for their Japanese employees while introducing new products and services for the Japanese consumer. The U.S. is engaged with Japan on improving its investment climate for two reasons. First, because trade follows investment. When U.S. firms can easily invest in Japan and expand existing operations, exports of U.S. goods and services will follow. Second, increasing FDI promotes economic strength in Japan, and an economically strong and stable Japan is in the U.S. national interest.

Both governments recognize the significant role the U.S. and Japanese private sectors have in helping policy makers define the investment agenda and identify remaining problems. American and Japanese business share the same goals -- they both need an open, transparent economy to operate efficiently. "Let investors help show the way," urged Under Secretary Larson and Vice Minister Konno, welcoming the exchange of views between government officials and private sector representatives at the New York symposium, stressing that it was "essential" that the two governments receive input from the market players.

Structural Reforms: "Leading the Way out of the Lost Decade"
AT&T Chairman Armstrong and Mitsubishi Corporation Chairman Minoru Makihara in their keynote speeches highlighted issues the GOJ needs to address and outlined measures that Japan needs to implement to strengthen its economy and promote growth. In their view, further deregulation and promotion of competition will be necessary to increase Japanese consumers and foreign investors' confidence. Although there is encouraging progress, both Makihara and Armstrong urged policymakers to accelerate bank and corporate restructuring, especially the disposal of non-performing loans.

These economic changes, Makihara emphasized, produce opportunities for new ideas, synergies, and business relationships. These business relationships are the underpinning of the global economy, and mutual foreign direct investment is an optimal method of fostering such business ties.

Armstrong pointed out that boosting investor confidence is necessary in order to increase FDI. Noting the disparity in investment flows between the U.S. and Japan, he commented that in the telecommunications sector, the U.S. attracted $80 billion in 1999, while Japan drew in only $3 billion. He underscored that Japan has the means to improve its economy -- a strong technological base, educated citizens, world-class companies -- but, quoting Harvard Professor Michael Porter, Armstrong commented that the problem is the "Japanese system" -- and that systemic challenges must be met with systemic changes.

The issue of the importance of Boards Of Directors drew lively debate from the panelists. In his remarks, AT&T Chairman Armstrong commented that global investors are paying close attention to Japan's Commercial Code revisions. He described the Board of Directors as the "steering wheel" of a company and underscored that no single group has more power to guide a company down the right or wrong path. Drawing on his own experiences at AT&T, he championed the benefits of outside directors -- on AT&T's board, ten out of 15 directors were from outside the company and their experience and independence benefits customers, shareholders and employees.

Armstrong encouraged the GOJ to build investor confidence by further deregulating its markets, eliminating barriers to restructuring and taking steps to improve corporate governance. Mitsubishi Chairman Makihara also believed that structural reforms, although painful and likely to cause unemployment, are essential to strengthen Japan's stock market, reverse deflation and "lead way out of the lost decade."

Makihara described in his keynote speech some of the changes in Japan's economy that have led to increased competition and investment opportunities for foreign firms. The "Big Bang" policies introduced by former Prime Minister Hashimoto in 1996 resulted in competition in the financial sector, leading to such unprecedented transactions as Ripplewood's takeover of the Long Term Credit Bank and Lone Star's acquisition of Sowa Bank. The revised law governing large-scale retail stores has allowed new companies like Carrefour and Costco to prosper in Japan. The introduction of no-action letters should increase transparency and facilitate business decision-making. In addition, barriers to investment such as the high cost of real estate and difficulties in hiring talented workers have been significantly reduced as a result of the economic slowdown during much of the 1990s.

Makihara agreed that corporate governance was important. He stated that board systems in Japan were undergoing revaluation in order to create a new "Japan" model of corporate responsibility based on experiences from Western systems of corporate governance. In Mr. Makihara's view, this process would enhance transparency and increase the accountability of management to investors.

Despite Progress, Further Reform is Needed
Japan is moving ahead on deregulation policies, which are helping to create a competitive environment and eliminating impediments to market access. METI Deputy Director General of the Trade Policy Bureau Yoshinobu Nisaka described past measures under the GOJ's Three-Year Plan for Regulatory Reform, which removed restrictions to FDI in the areas of broadcasting and communication, transportation, energy and finance. Other factors that led to increased FDI include Big Bang financial reforms and falling real estate prices. However, some symposium panelists noted that in spite of these encouraging steps, Japan's FDI still lags behind other industrialized countries and contributed only 0.5 percent to its GDP in 1999 as compared to the U.S., where it contributed six percent.

Panelists discussed the corporate environment in Japan, which, although improving, still contained uncertainties and difficulties for the interested investor. President of the American Chamber of Commerce in Japan (ACCJ) and partner of the international law firm White and Case, LLP, Robert Grondine commented that the process of entering the Japanese market via mergers and acquisitions (M&A) had improved noticeably from just five years ago, but in general the process still takes twice as long as compared to the U.S. or Europe. The lengthy process was caused not only by government regulations, but other factors including the difficulty in doing due diligence and the limited availability of experienced advisors such as auditors, accountants, lawyers also contributed to making the M&A process in Japan difficult. For green field start-ups, he added, the process has become simpler and streamlined, noting that the government is much more proactive and even regional governments, for example Osaka, are offering some incentives in order to attract FDI.

Mr. W. Bowman Cutter, Managing Director of Warburg Pincus, commented that there was indeed "vast improvement" in current GOJ responsiveness to foreign business as compared to the 1980s. He described the investment environment from the perspective of private equity investment funds like Warburg Pincus. There was first the issue of a small supply of potential deals in Japan, partly due to "Big Japan" not yet beginning to restructure and shed non-core businesses. The lack of pressure from the financial markets contributes to the lag in restructuring. Eighty percent of the FDI into Japan was "strategic investment" made by companies like GE and AIG, which invest for the long term and are interested in expanding their presence and market share. On the other hand, private equity investors, like Warburg Pincus, have an exclusively financial orientation. Consequently, issues like exit strategy, the financial structure of their deals and corporate governance were very critical.

II. Panel Discussions
In two separate panel discussions, senior Japanese government officials and Japanese and American business representatives discussed in depth many of the themes touched upon by the keynote speakers. Their discussions centered broadly on the topic of corporate governance and transparency and the mechanisms needed to improve corporate revitalization and restructuring.

Panel 1: Corporate Governance and Transparency
Panel moderator and partner and head of the Japan Practice Group at the international law firm Coudert Brothers Arthur M. Mitchell provided a backdrop for the symposium's discussion on corporate governance and transparency. The changes in Japanese political leadership had indeed raised expectations that Japan was truly on the reform path. Among the most pressing issues Japan's corporate structure faces today is the importance of good corporate governance to a company's efficiency and profitability. This issue is being addressed today in Japan in the Ministry of Justice's review of Japan's Commercial Code.

Proposed Commercial Code Revisions
Mr. Masamitsu Shiseki, the Counselor in the Civil Affairs Bureau of the Ministry of Justice, described the unprecedented ongoing review of Japan's Commercial Code which will affect, among other business structures and mechanisms, Japan's system of corporate governance. Since September 2000, the Ministry of Justice's Legislative Council has held deliberations on a number of issues affecting the Commercial Code, including corporate governance. The Legislative Council released in April 2001, its "Tentative Proposals" which contain some 30 measures for further deliberation. Major items of the interim proposal affect the future of corporate governance in Japan.

Counselor Shiseki commented that as international competition grows more intense, Japanese business needs to improve the efficiency of its corporate management in order to stay competitive. Japan's system of corporate governance needs to be "harmonized" with those of other countries. Accordingly, the Legislative Council was reviewing major proposals such as:

• Large companies will be given the option to choose a U.S.-style of corporate governance (which would include specialized board committees of audit, nomination, and remuneration with a majority of outside directors, rather than being required to have statutory auditors (kansayaku).

• Computerization of corporate management system such as creating and disseminating companies' documents electronically, adopting e-voting system for shareholders' meetings, etc.

• The Legislative Council will review and finalize the Tentative Proposals based on public comments. The Ministry hopes to submit a bill on the computerization system to the National Diet this autumn; a bill containing other revisions of the Commercial Code will be submitted in next spring's ordinary legislative session.

The Legislative Council will review and finalize the Tentative Proposals based on public comments. The Ministry hopes to submit a bill on the computerization system to the National Diet this autumn; a bill containing other revisions of the Commercial Code will be submitted in next spring's ordinary legislative session.

Counselor Shiseki noted in his remarks that Keidanren was opposed to proposed changes concerning the inclusion of outsiders on Boards of Directors. Chairman Makihara clarified that Keidanren's position was not opposition to the introduction of outside directors per se but that the issue of shareholder litigation needed to be reviewed before the issue of outside directors could be taken up. (To date, shareholder derivative lawsuits have been a rare occurrence in Japan; however the recent spate of high-level corporate failures have brought about several cases of shareholders' suing company management for malfeasance or poor management.) Shiseki noted that the Ministry's Legislative Council has discussed the issue of litigation by shareholder representatives and that the degree of liability of outside directors would be relaxed in order to attract qualified people.

There are 10,000 companies in Japan that fit the definition of a "large" company, and there are concerns in Japanese business circles over the proposed requirement that "large" companies appoint an outside director. President of the American Chamber of Commerce in Japan (ACCJ) and partner of the international law firm White and Case, LLP, Robert Grondine addressed this concern by noting that from ACCJ perspective, the requirement of outside directors should be tied to whether the company is publicly listed, as is the practice in other countries.

Pointing out that in Japan, only 3,000 of the largest companies are listed, Mr. Grondine contended that it would be unnecessary and wasteful to require outside directors for privately-held companies. As an example, the Delaware corporation law does not require privately-held companies to appoint outside directors; that is a requirement to be met if a company wishes to be listed on the stock exchange. Mr. Grondine encouraged the Ministry of Justice to draw the same distinction as does the ACCJ.

Accounting and Auditing Standards
Keynote speakers and panelists referred to the importance of transparency in the economy in order for investors to make sound business decisions. Chief Economist and General Manager of the Research Office of the Bank of Tokyo-Mitsubishi, Ltd., Hidefumi Yamagami described an improving economic environment for FDI but called for more policies that would encourage transparency and openness between companies and its customers, underscoring that more transparency would translate into more FDI.

Several panelists pointed out that a critical factor for investors was the understanding of the risk and liabilities of a business deal. AT&T Chairman Armstrong applauded the introduction of international accounting standards which help clarify liabilities and facilitate accurate evaluation of a company but urged that strict and full implementation of international accounting standards was still necessary.

The Financial Services Agency (FSA), which is the Japanese government's regulatory and supervisory body over financial institutions, has been concentrating on three areas from the perspective of international harmonization. Mr. Toshiyuki Ohto, Director for Corporate Accounting and Disclosure of the FSA, provided a status report to Japan's introduction of international accounting and auditing standards and efforts to enhance disclosure:

• Enhancing accounting standards: Japan has introduced new accounting standards including consolidated accounting, accounting for financial instruments, and retirement and benefits accounting. Japan is participating in international efforts to improve coordination of international accounting standards.

• Strengthening auditing standards: The GOJ clearly recognizes the need to strengthen auditing standards. The Japan Institute of Certified Public Accountants is working on this issue to enhance the quality and to review accounting disclosure systems.

• Disclosure: As Japan's securities market is liberalized, investors need more access to corporate financial information. A system similar to the U.S. "Edgar" system of electronic disclosure will start in Japan in June 2001. Japan's "Edinet" will initially handle companies' financial documents.

Regulatory Transparency
In addition to the introduction and implementation of strengthened accounting standards, panelists pointed out that the utilization of other mechanisms to enhance transparency and predictability in the economy, mainly the formalization of administrative guidance, public comment procedures, and no-action letters.

Administrative Guidance
METI Deputy Director-General Nisaka commented on the issue of formal administrative guidance, which was first introduced in 1994 under the Administrative Procedure Law, encouraging more responsibility on the part of the ministries. This law provides that administrative guidance should be submitted in writing and by name of the official to improve accountability.

Public Comment Period
Moderator Arthur Mitchell asked the panelists about the effectiveness of the public comment mechanism, mentioning that the period offered for comment was often very short, in some cases only 7 days. Asking if this was "reform without reality," Mr. Mitchell argued that increasing the length of the public comment period would enable firms to respond more fully to proposed regulatory or legal changes. Mr. Grondine added that the adoption of the public comment period by the Japanese government was a very positive step forward and coupled with no-action letters has tremendous impact on improving transparency as both mechanisms become more commonly used. Mr. Grondine agreed that more time to comment would be welcome as the ACCJ organizes submissions frequently. Although the lack of professional advisors makes it difficult to respond quickly, overall this procedure is a good step towards improved transparency.

No-Action Letters
The Japanese government is reviewing the broader adoption of the no-action letter system, which would require the government to respond in 30 days. Mr. Grondine urged that all ministries adopt no-action letters procedures, not just the Financial Services Agency, and that all governmental replies be posted on the Internet within 30-60 days in order to disseminate information to new entrants and domestic business.

The Changing Environment for Corporate Restructuring
Many different aspects of structural reforms are at work as Japan's corporate world strives to restructure efficiently to regain global competitiveness. Panel moderator and Senior Editor of The Oriental Economist Richard Katz described the structural reform process as a process comprised of a vast number of regulatory and corporate changes. Panelists first described the recent changes in the corporate environment and then discussed a number of factors, both positive and negative, which are affecting the pace of restructuring in Japan.

As compared to 15 years ago, when Warburg Pincus founded the first western-style private equity venture capital fund in Japan, Mr. Cutter noted that the Japanese government cooperation has substantially improved. He did feel that remaining restrictions on how deals are structured vastly limit flexibility -- rules were extensive and complex and regulators needed to gain more experience in how deals can be structured. Particularly, non-performing loans and the extensive practice of cross-shareholding increase an investor's risk -- as long as these were unknowns, investors cannot determine "the bottom of the market" and investors' capacity to do due diligence is greatly impaired. Mr. Cutter asserted that high cross-shareholding rates create a serious barrier to both strategic and equity-type foreign direct investment.

FSA Director Ohto commented that major accounting changes, such as mark-to-market accounting, have helped change the attitudes of Japan's corporate managers. Many enterprises realize they cannot hold unprofitable shares and as a consequence, we are now seeing a decrease in cross-shareholding among companies. Tokyo-Mitsubishi Bank Chief Economist Yamagami agreed that the trend is towards less cross-shareholding, but he asserted that deadlines for unwinding cross-shareholding cannot be placed on banks or businesses as they need to make their own decisions. He also underscored the need for more investment instruments to move the estimated 1,400 trillion yen from personal savings to the equity market. In that regard, the postal savings system ("yucho") needs to be reformed.

Regulatory Reforms: Bankruptcy, Corporate Divestiture and Stock-Swaps
METI Deputy Director General Nisaka recognized the critical need to improve the regulatory infrastructure to allow efficient deal-transactions and corporate reorganization and promote more unwinding of cross-held shares. The GOJ was currently deliberating how to resolve the issue of non-performing loans and corporate debt. Reforms in the areas of bankruptcy laws have helped speed up the reorganization process, which creates foreign investment opportunities.

In response to a question whether with the adoption of international accounting rules, there would be a short-term increase in bankruptcies, Nisaka acknowledged that to write off non-performing loans could mean letting indebted companies fail, which could have a ripple effect to other distressed companies. In the Government's recently announced emergency measures package, the GOJ will allow failures if necessary for the future revitalization of the economy. The government intends to work cooperatively with viable companies to encourage restructuring.

With regard to corporate restructuring, Ministry of Justice Counselor Shiseki provided the audience an update on Japan's efforts to reform and simplify corporate reorganization proceedings. Measures included:

• Revision of the Commercial Code for simplification and rationalization of corporate mergers (in effect October 1997);

• Revision of the Commercial Code to introduce stock-for-stock transactions (in effect October 1999);

• Revision of the Commercial Code to introduce legal framework for corporate divestitures, including spin-offs and split-ups (in effect October 2000);

• Bankruptcy reforms, modeled on Chapter 11 procedures of the U.S. Bankruptcy Reform Act of 1978, have helped in the rehabilitation of viable companies and speeded the exit of non-viable enterprises. In April 2000, the new Civil Rehabilitation Law came into effect. The law was revised to allow special procedures for individual debtors (modeled on Chapter 13 of the U.S. Bankruptcy Reform Act of 1978), in effect April 2001. Additionally, there are now procedures in compliance with UNCITRAL international bankruptcy model law to address overseas bankruptcy cases, meaning in the case of bankruptcy of a U.S. corporation with branches or other assets in Japan, U.S. bankruptcy procedures can be applied in Japan and the company's assets in Japan can be handled together with its assets in the United States. Additional proposals to revise the bankruptcy laws of Japan are now scheduled to be submitted to the National Diet in spring 2004.

Regarding the stock-for-stock or "stock-swap" mechanism, MOJ Counselor Shiseki elaborated that this new legal framework frees companies from the time-consuming and costly transfer of goodwill in order to achieve a split-up. Companies can now move forward in stock-for-stock transactions through special resolution or decision of the shareholders and that opposing shareholders can have their shares purchased at market price. ACCJ President Grondine pointed out that this mechanism allows stock-swap provisions on a cross-border basis with favorable tax treatment but only between Japanese companies. Mr. Grondine strongly recommended that the stock swap mechanism should be further liberalized to assist not only M&A by foreign firms in Japan, but also to facilitate overseas acquisitions by Japanese firms seeking to enhance their global competitiveness.

ACCJ President Grondine commented that from the foreign business perspective, the law allowing corporate spin-offs was a very positive development and allows rationalization of non-core assets. Assisted by this law, Japanese companies can now examine non-core assets and make them available for leveraged buy-outs and other foreign acquisitions. METI Deputy Director General Nisaka added that there were concerns that companies will just simply abandon the non-core operations; hence, the need to improve the overall regulatory infrastructure to allow bankruptcy and reorganization. Coudert Brothers' Arthur Mitchell agreed that the corporate spin-off law should allow the splitting up of high and low-valued operations and for different compensation systems for different operations (e.g., performance versus lifelong employment) to be instituted. He also asked about the role labor law and unions will play in the restructuring efforts.

Establishing Flexible Labor Markets
Turning to labor, Ms. Noriko Iki, Director of the Business Guidance Department, Employment Security Bureau Union of the Ministry of Health, Labor and Welfare (MHLW) welcomed investment for its contribution in creating employment opportunities in Japan and reviewed key initiatives designed to promote a more fluid labor market, including:

• The improvement and liberalization of regulations affecting dispatched (temporary) workers; more employment fields are open to temporary workers and it is now possible to make employment contracts permanent upon completion of a temporary work period;

• The development of the "Hello Work" Internet job bank. The system was first introduced March 1999, but only for the Tokyo area. Currently the program is nationwide and offers 180,000 job listings. In July, the Ministry plans to launch a network similar to the USG's American Job Bank;

• The development of measures to promote human resource training, such as training workers in information technologies;

• The development of new laws to promote prompt settlement of labor-management disputes.

Director Iki added that legal measures, effective April 2001, ensure that labor concerns are taken under consideration when a company is undergoing reorganization. The measures obligate the company to notify all workers of impending company split-offs and affect the succession of labor contracts to the future company.

Stock Options
Panelists focused on the importance of stock options as a tool to attract talented personnel to companies. METI Deputy Director General Nisaka provided background on the current stock option system, established in October 2000, which broadens employees' access to stock options. In the past, the system had been too restrictive. There are now efforts underway to draft legislation that will allow companies to use stock options more freely to come into effect in 2002. MOJ Counselor Shiseki explained that of the two systems of stock options --warrants and shareholding the share type is currently being discussed by the Ministry of Justice's Legislative Council and is included in the draft "Interim Proposals". In the past, only board members and a limited number of employees were eligible for stock options. The new legislation intends to widen the scope and allow shareholders at their general meetings to adopt the stock option system.

ACCJ President Grondine agreed that stock options were more efficient as compared to the use of warrants for "global employees." Stock option plans, which are approved by shareholders, also promote disclosure and transparency. Foreign companies want to give talented Japanese employees the benefit of global stock option plans but in Japan, such plans are at a serious tax disadvantage with respect to the stock option plans of Japanese companies. Mr. Grondine recommended that all restrictions, including percentage limits, be removed and that foreign broad-based stock option plans receive equal treatment in Japan.

Panel moderator Richard Katz noted that under the current system, stock options were not available to consultants, adding that in the U.S., stock options play an important role in promoting entrepreneurial activity, especially in the area of information technology. Warburg Pincus Managing Director Cutter agreed that stock options should be made available to consultants, pointing out that in the U.S., 45% of IT workers were outside contactors. He also encouraged the GOJ to make the stock option system as unrestricted as possible to encourage entrepreneurs and allow companies flexibility, rather than "trying to define what can and what cannot be done." MOJ Counselor Shiseki responded by noting that if current proposed revisions to the Commercial Code are approved, stock options would be available to consultants and the self-employed. MHLW Director Iki observed however that although more companies have been providing stock options as means of remuneration, employees were not benefiting from the system, due to the fall in stock prices, commenting that "people only feel the benefit when stocks go up."

Portable Pensions
In addition to stock options, another important tool to promote labor mobility and flexibility in the labor market is the pending introduction of the Defined Contribution Pension Plan. Mr. Hideyuki Suzuki, General Manager of the Planning and Development Department of the Pension Fund Association of the Ministry of Health, Labor, and Welfare, provided an overview of the draft law on Defined Contribution Pension Plans, which subsequently passed the Diet in June 2001.

Major pension reforms were underway to introduce a Japanese-style "401(k)" pension plan to supplement public pensions. One of the important aspects of the proposed Defined Contribution Pension Plan is its portability -- if a participant changes jobs, he can carry his pension assets to his new job. The individual will also be responsible for selecting his asset manager. General Manager Suzuki stressed the importance of pension portability to Japan's future international competitiveness. Mr. Suzuki added that tax systems must be supportive in order for the new pension plans to be effective.

Panelists discussed the possibility of a major shift in assets from various public pension plans to private asset funds, similar to the boom in U.S. 401(k) activity and mutual fund growth. Mr. Suzuki commented that Japan will experience such a shift, but contribution limits will affect the magnitude of the shift in assets. He was concerned that investors will need more education on the types and benefits of funds and that with the introduction of individual pension plans, there may result an information gap among white and blue collar workers. Mr. Suzuki added that since individuals will be subject to some risk in contributing to individual plans, the Ministry would be interested in data on the performance of defined contribution plans in the U.S.

ACCJ President Grondine responded by noting that one of the benefits of the 401(k) plans is that it offers the possibility of diversification of risk or hedging, which is not the case with the current pension plans, which are invested in the company itself. An employee working with a professionally managed mutual fund can spread risk and have more control over a balanced portfolio. Mr. Cutter added that a 401(k) plan can emulate any set of risk and return preferences the market has to offer. U.S. companies are offering employees a 401(k) option based on the company's Defined Benefit plan. Therefore, the employee does not have to construct for himself a whole new system.

Tax Issues
Panelists noted that while it is evident that regulatory and corporate changes are underway, without tax reforms, these reforms will lose their effectiveness. Financial Minister of the Japanese Embassy Kiyoto Ido reviewed several tax reforms, including the lowering of the corporate tax rate from 46 percent to 40 percent in 1999, and the deferral of taxes resulting from corporate reorganization and divestiture effective April 2001. On consolidated taxation, Minister Ido stated there was a range of views in the government and political parties on how and when the system should be introduced. Several panelists urged that consolidated taxation be introduced in 2002 as planned. ACCJ President Grondine emphasized that consolidated taxation was key to spurring both mergers and acquisition activity and corporate restructuring and that American and Japanese business were in favor of its speedy introduction. Mr. Cutter believed that until consolidated taxation was introduced and implemented, the full impact of the accounting changes will not be felt on corporate management, as it will not know the profitability of its divisions and shareholder value.

ACCJ President Grondine added that the U.S.-Japan Tax Treaty needs to be updated. Other tax issues to be addressed are registration taxes and asset-based taxes, which need to be reduced to facilitate reorganization. Reduced mortgage taxes and registration fees would also help the development of real estate securitization and other financial products. He reiterated US business interest in equal tax treatment for employee stock options and for favorable tax treatment for cross-border stock swaps.

Conclusion
At the April 2001, Investment-in-Japan Symposium in New York, there was a growing sense of the potential for economic growth and recovery in Japan, with one of the keys being foreign direct investment. There were many "success stories" to point to as evidence that Japan's investment environment has changed, such as the dramatic growth of retail stores such as Toys R Us and Costco, the tie-ups between foreign and Japanese auto firms (Ford-Mazda, General Motors and Isuzu and Suzuki), and the acquisitions of former major insurance and financial flagships by US firms like AIG, Prudential and Ripplewood.

The increase in foreign direct investment reflects the changes in management and governmental attitudes and practices towards investment, but compared to other industrialized countries, Japan's inward investment still lags behind. The focus of the symposium was not only on the reforms which have taken hold and helped spur dramatic growth over the last several years but also on the types of reforms needed to quicken the pace of restructuring and to create an efficient, functioning economy. There was a cooperative spirit among the participants at the symposium -- American and Japanese private sector representatives and U.S. and Japanese government officials were seeking together the measures needed to stimulate Japan's investment climate. In his concluding remarks, Chairman of Japan External Trade Organization (JETRO) Noboru Hatakeyama reflected on how JETRO's own mission has changed over time, from an emphasis on export promotion to an emphasis on inward investment and that JETRO is commissioning a study to help identify impediments to investment to be published in June.

Reforms which reinforce an open and transparent investment climate are also reforms which promote overall economic restructuring. The governments of Japan and the United States with their private sectors intend to continue the cooperative and constructive dialogue on investment and economic restructuring. This symposium was another step forward in this ongoing dialogue, which aims to help Japan realize its investment and economic potential to the ultimate benefit of both of our economies, our markets, our companies and our workers.

Opening Remarks
Ambassador Alan P. Larson, Under Secretary for Economic, Business and Agricultural Affairs, U.S. Department of State
Mr. Hidehiro Konno, Vice Minister for International Affairs, Ministry of Economy, Trade and Industry

Keynote Speakers
Mr. C. Michael Armstrong, Chairman and CEO, AT&T Chairman, U.S.-Japan Business Council
Mr. Minoru Makihara, Chairman, Mitsubishi Corporation Chairman, Japan-U.S. Business Council

Moderators
Mr. Arthur M. Mitchell, Partner, Coudert Brothers, LLP
Mr. Richard Katz, Senior Editor, The Oriental Economist Report

Japanese Government Representatives
Mr. Yoshinobu Nisaka, Deputy Director General, Trade Policy Bureau, Ministry of Economy, Trade and Industry
Mr. Masamitsu Shiseki, Counsellor, Civil Affairs Bureau, Ministry of Justice
Mr. Toshiyuki Ohto, Director for Corporate Accounting and Disclosure, Planning and Coordination Bureau, Financial Services Agency
Mr. Hideyuki Suzuki, General Manager, Planning and Development Department, Pension Fund Association, Ministry of Health, Labor and Welfare
Ms. Noriko Iki, Director, Public Employment Service Division, Employment Security Bureau, Ministry of Health, Labor and Welfare
Mr. Kiyoto Ido, Financial Minister at the Embassy of Japan in Washington

U.S. and Japan Business Representatives
Mr. W. Bowman Cutter, Managing Director, Warburg Pincus
Mr. Robert Grondine, Partner, White and Case LLP, President of American Chamber of Commerce in Japan
Mr. Hidefumi Yamagami, Chief Economist and General Manager, Research Office, The Bank of Tokyo-Mitsubishi, Ltd.

Concluding Remarks
Mr. Noboru Hatakeyama, Chairman and CEO, JETRO