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FY 1997 Country Commercial Guide: Japan

Report prepared by U.S. Embassy Tokyo, released by the Bureau of Economic and Business Affairs, August 1996

I. Executive Summary

This 1997 Country Commercial Guide (CCG) presents a comprehensive look at Japan's commercial environment through economic, political and market analyses. The CCG's were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. Embassies through the combined efforts of several U.S. government agencies.

Business Environment in Japan

U.S. companies interested in doing business in Asia should not overlook the opportunities Japan has to offer their products and services. In business, the Japan of today is in a state of constant change. To what degree and at what pace changes are taking place in Japan are hotly debated issues. However, it is clear that political and economic fluctuations in Japan over the last several years have fostered developments in Japan's economy and society that have opened an indefinite and increasing number of opportunities for U.S. companies to establish themselves or expand their business in Japan. This guide looks at the elements of change in Japan, analyzes the trends, and explains how U.S. companies can position themselves to take advantage of those opportunities.

Japan's trade surplus with the United States in 1995 fell for the first time in five years--a 17 percent drop. Overall Japanese imports from the world were up 23 percent. U.S. exports to Japan, which have grown at an average annual rate of about 14% over the past ten years, were up 20% to more than $64 billion in 1995. By way of comparison, combined U.S. exports to Taiwan, Indonesia, Malaysia, Singapore, Thailand, and the Philippines totaled $58.5 billion in 1995 (a regional market for U.S. exports 10 percent smaller than that of Japan). The $11 billion increase in U.S. exports to Japan alone in 1995 was nearly as large as the total market for U.S. products in China ($11.7 billion).

Notably, U.S. exports to Japan, our largest trading partner after Canada, are growing across all sectors. The success that U.S. exporters had in Japan in 1995--a success that continued through the first half of 1996-- was due in part to the yen's appreciation in recent years, incremental structural liberalization in the Japanese economy, the slow recovery of the Japanese economy, and renewed Japanese interest in U.S. products. It was also due to the increased awareness and aggressive interest of U.S. companies in the Japanese market. Clearly, now is the time to do business in Japan.

II. Economic Trends and Outlook

Major Trends and Outlook

Japan has the world's second largest economy, with gross domestic product (GDP) of about $5 trillion. After several decades of rapid growth, the Japanese economy slowed sharply in the early 1990's. From 1993 to 1995, Japan suffered through three consecutive years of less than 1 percent G.P. growth, following growth of only 1.1 percent in 1992. By early 1996, the economy appeared to be emerging from this protracted slump, however, with strong growth recorded in both the fourth quarter of 1995 and the first quarter of 1996.

Though it has come down in recent months, a combination of a high yen the last two years, and over-investment and over-hiring in the late 1980's forced many Japanese companies to undertake major cost-cutting efforts. Since the implied social contract in Japan still effectively prevents large Japanese companies from massive layoffs, many companies are reducing their payrolls through voluntary retirements, buy outs, freezes on new hiring, or transfers of personnel. The strong yen has also forced some Japanese companies to move production overseas in order to service export markets, a move which resulted in increased exports of parts and machinery from Japan. Faced with the world's highest operating costs domestically, more and more firms established new factories in countries with far lower labor and material costs such as China, Thailand, and Indonesia. They also began to look for lower-cost sub-component supply sources to lower their bottom line.

As the need to cut costs became paramount, long-term keiretsu supplier relationships were reexamined in traditional manufacturing sectors such as automotive and consumer electronics. Japanese manufacturers soon found it difficult to restrict their parts purchases to traditional keiretsu-family suppliers and began to look for ways to bring in high-quality, low cost components and materials from foreign suppliers. Should such developments continue, they can provide overseas suppliers new opportunities in some areas of the Japanese market. However, they can also help to create barriers to market access, as Japanese companies and their traditional suppliers "circle the wagons" to protect domestic jobs. Successful implementation of the Japanese Government's 1994 deregulation program will also strengthen Japanese competitiveness. It is highly possible the Japanese economy could emerge from the current slowdown with many of its traditional strengths intact. Japan's total imports from the world were up 23 percent in 1995, but Japan's exports also grew by 12 percent.

Foreign direct investment into Japan, only one-thirteenth of what Japan invests abroad, may be facing a brighter future as Japanese firms shift production capacity off-shore. As older, more labor-intensive manufacturing facilities close, scarce land becomes available for new uses. Increasing levels of unemployment,now at record highs in Japan, put more highly skilled workers into the marketplace at competitive salaries. On the public side, the government of Japan is also expected to further its efforts to grant tax breaks and other incentives to attract more overseas investors.

In the early 1990's, Japan expressed its intent to reduce consumer prices to levels comparable to other OECD countries. There has been little progress in reaching this goal. Prices in Japan reflect very high costs of land, distribution, labor, and government regulations protecting employment in inefficient sectors. We estimate that Japanese consumer prices are on average 40% higher and prices of U.S. goods in Japan are typically 70% higher than in the United States.

A societal trend taking place in Japan today that will have profound economic and social impact in Japan in the years to come. Japan's population in rapidly aging--a "greying" of society. Because individual health care expenditures in Japan rise rapidly after age 60, this greying effect will force a rapid rise in the cost of providing health care over the next three decades. By the year 2025, the Ministry of Health and Welfare predicts that one of every four Japanese will be 65 or older (up from about one in every seven, today). Japan will have in just twenty years gone from having the fewest elderly as a percentage of its population to having the highest percentage among all industrialized nations. As a result, because fewer workers will be forced to support more retirees, taxes on those employed will increase. Already expensive labor is likely to become increasingly more expensive, probably leading companies to increase their off-shore capacity. Manufacturers will design production to minimize labor inputs and ensure increased demand for capital-intensive, high value-added manufacturing.

Principal Growth Sectors

Following the Framework Agreement, new opportunities developed for U.S. companies to sell to Japanese Government entities, especially in the fields of computers, telecommunications, medical equipment, and construction services.

In recent years, the Government of Japan has taken several measures to increase access for foreign suppliers to the government procurement market. They have voluntarily expanded the number of agencies and lowered the threshold procurement amount covered under GATT rules. In addition they have revised the following procurement activities so that they now: 1) hold annual seminars to provide anticipated procurement information; 2) provide more transparency through public announcements; 3) provide advance notice of single tendering procedures; 4) provide separate announcements for procurement under GATT; 5) provide an on-line system for Internet access to all GOJ procurement announcements; 6) use the overall-greatest-value evaluation method for telecommunications and medical technology products over 800,000 SDR's; and 7) use complaint review procedures. A wide range of construction projects are now open to competitive bidding. Construction tenders are regularly announced in the "Kensetsu Kogyo Shimbun/Kensetsu Tsushin Shimbun". Underthe "WTO" Agreement, which Japan is signatory to, 47 prefectures and 12 government ordinance-designated cities have begun to improve opportunities for motivated U.S. companies to sell to the Japanese local governments.

U.S. exporters have begun to take advantage of what has been coined a "new consumer" society in Japan. In broad terms, excluding food and vegetables, we estimate that U.S. exports of durable and non-durable consumer goods to Japan in 1995 surpassed the $10 billion mark. In a related area, annual sales through Japanese mail orders are estimated to be in the $20 billion range. Direct marketing, which grew at double-digit rates during the early 1990's, is expected to keep booming due to the wide difference between Japanese and foreign prices and increased efforts on the part of U.S. catalog firms. U.S. Embassy-sponsored "American Catalog Houses," showcasing U.S. catalogs in Tokyo and Osaka, have been extremely successful promotional venues for U.S. products. This receptivity is a reflection of the fact that catalog sales, especially of imported products, are cost effective and convenient for the consumer. The numbers of double-income families and working single women are large and increasing in Japan.

Japan is the world's second largest market for information technologies (e.g. computers, high-tech telecommunications, optical devices). The market for these kinds of products in Japan is expected to surpass the trillion dollar mark by the year 2010. The Government of Japan has targeted the year 2010 for all Japanese businesses, government offices, schools, and homes to be connected through a "Fiber to the Home" project. In reality, the expense of this project may require some modification of the plan, but the priority has been set and Japan is investing heavily in multi-media, telecommunications, and on-line services. The Ministry of Industry and Trade, alone, is reported to be spending $5 billion over the next five years on research in this area.

Surveys have shown that Japanese houses are two to three times more expensive than equivalent American houses, and many Japanese people are not satisfied with either the quality or price of their current housing stock. In contrast, imported American-style homes are regarded as offering high quality, low cost, and earthquake resistance. The Japanese Ministry of International Trade and Industry (MITI) and the MITI-affiliated Japan External Trade Organization (JETRO) are now actively promoting the import of high quality, affordable houses from North America and Europe. The Ministry of Construction (MOC) also has a goal of trying to cut the cost of housing 33% by 2000, and is encouraging imported houses and building materials. The Hyogo Prefectural Government has announced a three-year plan to rebuild 125,000 housing units destroyed in the Great Hanshin Earthquake of January 17, 1995. Hundreds of U.S. companies in the building materials, manufactured housing, and home building industries are already starting to work with Japanese companies to build American-style 2x4 platform frame construction homes in Japan, despite the problem of regulatory barriers affecting some materials that will take several years to resolve.

Over the next several years, a multitude of new opportunities will be seen in regional markets outside Tokyo as price-pressured key buyers show increased receptivity to foreign-supplied goods: in infrastructure buildup, as the tremendous economic growth of the late eighties brought a need for airports, information technology infrastructure, and housing; in leisure, as the Japanese worker finds more time and money to spend off the job; in retirement communities and health care with the "greying" of Japanese society, as well as in meeting the needs of the handicapped; and in changing and broadening consumer tastes, as the Japanese consumer has become more cosmopolitan with greater exposure to foreign products. Major regional opportunities are described below.

Tokyo, Japan's sophisticated capital, and the surrounding prefectures of Kanagawa, Saitama, and Chiba, occupy the largest flat area in Japan called the Kanto Plain. Together, these four prefectures have a population of over 31 million, equivalent to the New York and Los Angeles metropolitan areas combined. Tokyo is the governmental, business, higher education, information, media, fashion and cultural center of Japan. Most major Japanese companies, trade associations, and U.S. companies have their headquarters or major branches in Tokyo. Kanagawa, which includes the cities of Yokohama and Kawasaki, is by far the richest prefecture in Japan, with a per-capita income almost 50 percent above the Japanese average. A presence in Japan usually means a presence in Tokyo. Despite high rental costs, most U.S. companies locate in Tokyo because of the need to interface with their Japanese customers, to obtain market information, and in many cases, to handle relations with Japanese Government ministries. Consumers in Tokyo are more likely to come into contact with foreign products, food, and styles than elsewhere in Japan. Also, consumer styles and fashions emanate from Tokyo in avidly read magazines as well as the television networks. In addition to consumer goods, value-added food products, apparel, furniture, and automobiles, good export prospects to the Tokyo area include medical products, computers, telecommunications hardware and software, and business services.

"Kansai" is the seven-prefecture region of west central Japan centering around the cities of Osaka, Kobe, Kyoto and Nara, with a combined population of some 22 million people. The traditional merchant center of Japan, the Kansai is an economic giant with a GRP (gross regional product) of nearly $1 trillion, larger than Korea, Taiwan, Hong Kong, and Thailand combined. Kansai local governments (Hyogo and Osaka Prefectures, and Kobe and Osaka Cities, in particular) have aggressive major development plans of $400 billion in 625 projects (out of a total of 917) for which cost estimates are available. Future projects such as Technoport Osaka and Osaka International Culture Park City, will include continued massive land reclamation and building complexes for commercial, industrial, and research facilities, as well as bridge construction, expected expansion of the new offshore Kansai International Airport, and construction of a new regional airport offshore Kobe. The private sector will continue to invest heavily in the Kobe region to replace homes and commercial buildings destroyed or damaged in the January, 1995, Great Hanshin Earthquake.U.S. companies should have growing opportunities to participate in these projects in coming years. The Kansai offers many advantages to American companies looking to enter the Japanese market: labor and housing costs much lower than Tokyo; superb transportation, communication, and other infra structural support; average office rental prices approximately 80% of Tokyo's; a business orientation (as the home of tens of thousands of companies, and the center of Japan's textiles and apparel, chemicals, pharmaceuticals, and sporting goods industries); and a long history of a willingness to innovate.

Nagoya, capital of Aichi Prefecture and hub of the 8-prefecture, 20-million population Chubu region of central Japan, is Japan's third largest metropolitan area, after Tokyo (225 miles to the east) and Osaka (125 miles to the west). The Chubu is the core of Japan's automotive, aerospace, machine tools, and ceramics industries. Along with neighboring Shizuoka Prefecture, the region has a GDP as large as Canada's and accounts for almost half of Japan's trade surplus with the United States. Aichi Prefecture alone accounts for over 80% of that trade. Top U.S. aerospace/defense firms are active in technical tie-ups and production arrangements. Over ten U.S. auto parts firms have set up Nagoya operations to serve Japanese makers. The Chubu features several major projects, public and private, attractive to U.S. firms including the Japan Railways (JR) Tokai Central Towers and the $8 billion Chubu New International Airport.

The Kyushu/Yamaguchi region, located in the southwestern part of Japan, is the nation's fourth economic center and has witnessed steady growth in the past several years. Regional dynamism lies in the development of high-tech industries--including the production of semiconductors and liquid crystal display panels, and state-of-the-art automobile factories--and in its shipbuilding industry, diversified research facilities, and expanding Asian trade. Japan's commercial and research space-launching facilities are also based in southern Kyushu. Western Japan is also a leading center for cutting-edge research in fields such as nuclear fusion, robotics, ceramic materials, and high speed ocean transport carriers. Kyushu/Yamaguchi accounts for 18 percent of Japan's agricultural production. Particularly good business prospects in the region are found in areas such as electronics and computers, architecture, design and construction, medical equipment, and agricultural products. In addition to Fukuoka city's multi-billion dollar man-made island project due for completion in 2003, plans have been made to obtain funding from the government to start construction of a new Fukuoka international airport withing the next ten years.

Northern Japan is comprised of both Hokkaido and the Tohoku region, with a combined population of almost 16 million. Hokkaido is Japan's northernmost island, with its capital and largest city Sapporo some 700 miles from Tokyo. The Tohoku region consists of six prefectures. Miyagi prefecture's capital city of Sendaiis its economic and commercial center. Northern Japan's imports from the UnitedStates total about $5 billion annually. Home building products, processed foods, personal computer products, and outdoor leisure goods (including recreational vehicles) are especially promising import sectors for northern Japan. The region'stwo major international airports are in the midst of major expansion programs and have large air cargo handling capacities. Reflecting growing capacities with the Russian far east, there are regular flights between Hokkaido and Sakhalin island. Hokkaido is one of Japan's best markets for imported package homes and building materials. Direct import container traffic is increasing in the ports of Tomakomai, Hachinohe, and Sendai, which has a developed a Free Trade Zone to encourage commercial activity.

Okinawa prefecture, population 1.2 million, consists of the sub-tropical Ryukyu Islands 2 hours south of Tokyo by air. Okinawa's economy depends heavily on tourism, government public investment, services and construction. The prefectural government has invested heavily in strengthening the tourism infrastructure, and a number of additional high-quality resort hotels are in the planning and construction stage. Okinawa offers U.S. suppliers potential business opportunities in architecture and interior furnishings for resort hotels, and in related fields. Companies specializing in outdoor/leisure activities, including sporting goods, marinas, boating and fishing equipment, and related services may also find attractive business opportunities in Okinawa. In addition, the southern islands of Miyako and Ishigaki are the sites of large tourism development projects. Okinawans are particularly receptive to the introduction of American products, due in large part to the still-continuing large U.S. military presence.

Japanese agricultural production is steadily contracting on a year-by-year basis, with key sectors seeing decreasing production in most years. Cereals, rice, dairy, beef and pork, and fruits and vegetables are all sharing this decline to greater or lesser degrees. Efficiency is hampered by the small and scattered nature of farm lands, and by inordinately high input costs. Farmers are limited by the government and the cooperative system in their ability to make decisions regarding production, pricing and marketing.

At the same time that local production is poised for a precipitous decline, access for imported agricultural products has never been better. Due to persistent negotiation by the United States and others throughout much of the 1980's and 1990's, Japan has eliminated many of the agricultural market access barriers for which it was once famous. Where earlier quotas and outright bans restricted the market for U.S. beef, citrus, fruit juice, cherries, apples, and ice cream, all of these markets have now been opened. Some problems remain in technical issues concerning food additives and phyto-sanitary barriers on fruits and vegetables. However, contrary to popular belief, the Japanese market is substantially open to U.S. food and agricultural products.

The combination of this radically improved market access and declining domestic production has resulted in phenomenal export growth for American agriculture. Already the largest importer of U.S. agricultural products, Japan may increase its agricultural imports from the U.S. by $1 billion per year each year until the turn of the century. 1995 imports of U.S. agricultural products (not including forest products) reached $13.8 billion, up from $11.8 in 1994. Export stars include beef, pork, ice cream, broccoli, asparagus, frozen vegetables, cherries, and processed snack foods.

Government Role in the Economy

Japan's bureaucracy, created in 1868, predates Japan's first constitution. Power is concentrated in 12 ministries and 10 ministerial-sized agencies located within a 300 meter radius circle in downtown Tokyo. All major policies are decided by the ministries in Tokyo, while prefectures and municipal governments merely implement them. Their power over the Japanese economy comes from the thousands of required licenses, permits and approvals that tightly regulate business activity in Japan, and by informal, but in practice virtually compulsory, edicts called "administrative guidance." The reach of the bureaucracy is further extended by a plethora of organizations that perform semi-regulatory functions.

Business in Japan traditionally has maintained very close relations with the bureaucracy and politicians. Japanese politicians have depended on contributions by big business. Big business also provides lucrative employment for high-level bureaucrats who leave government service. Bureaucratic paternalism blocks new companies from entering the market and pushes up prices. Members of the Japanese National Diet have small staffs and traditionally rely on ministry officials for policy initiatives and the drafting of legislation.

Until 1980, the Japanese Government controlled access to the market by allocating foreign exchange and by allowing foreign investments depending on the amount of technology transfer to Japanese companies. The regulations are largely gone, but the Japanese Government continues to play a significant role. The popular view is that the proper role of a national government is to lead industry into higher value-added manufacturing. The idea that the "market" should lead the people to a higher standard of living through its "invisible hand" is notably lacking. Rather, the view is that the government's role is to remedy the defects of the market which may translate into a "protective attitude" when it comes to foreign competition and the potential introduction of new products from the outside.

Japanese businesses prospered for many years in a tightly regulated environment during Japan's recession. When the "bubble" burst in 1991, and the economy worsened, businesses began to call for deregulation of the economy in order to stimulate growth and to respond to foreign competition. At the same time, in response to a strengthening yen, companies began to move production off-shore in order to cut costs. This stimulated, in effect, a hollowing-out of Japanese industry. Today, with an improving economy and a weakening yen, some companies have begun to move production back to Japan and are positioning themselves to be able to respond quickly to domestic and international market fluctuations. In areas where deregulation effectively took place, such as consumer goods, markets exploded and imports reached previously unheard of highs. However, in areas like industrial goods deregulation efforts have been less visible, and companies have been less able to go beyond their traditional keiretsu relationships for new sources of supply. As the economy improved in recent months, the passion for deregulation seems to have lessened.

While American companies do start at a disadvantage, it is increasingly possible to participate in the market after establishing a presence in Japan. The Japanese Government has removed most of the legal restrictions on exports to and foreign investment in Japan. The U.S. and Japanese governments continue to work on removing anti-competitive and exclusionary business practices through bilateral dialogue.

While the Japanese system is very different from the U.S. system, U.S. companies can be successful in adapting to it and make it work for them. Roughly 220 of the U.S. Fortune 500 companies have a direct commercial presence in Japan, and 45 of the 50 leading U.S. exporters do so, as well. The 700-company, 2500-member American Chamber of Commerce in Japan (ACCJ) is the largest overseas AmCham in the world, and its 40-plus committees and sub-committees are highly visible as lobbyists for U.S. business interests. U.S. Embassy officers are liaison to over 20 of these committees, and work closely with the ACCJ on market access issues. Some knotty regulatory barriers and discrimination do still exist and when a company cannot solve such problems by itself or through its legal advisers in Japan, the U.S. Government stands ready to help.

Balance of Payments Situation

Japan's trade and current account surpluses, the largest in the world, began to decline in 1995 after several years of steady increases. The trade surplus fell from $144 billion in 1994 to $132 billion in 1995, based on U.S. Embassy estimates of official yen data, as rapid import growth out paced strong growth in merchandise exports. The current account surplus fell even more sharply, from $131 billion to $111 billion, as widening services and "invisibles" deficit complemented the decline in the trade deficit. Japan's bilateral trade surplus with the United States also declined last year, from $67 billion to $61 billion. The downtrend in Japan's external surpluses continued in early 1996. The global current account surplus for the first 5 months of the year was down more than 40 percent in dollar terms compared to the same period of 1995.

Infrastructure Situation

Japan has a fully developed physical infrastructure of roads, highways, railroads, airports, harbors, warehouses and telecommunications for distribution of all types of goods and services. Japan is also engaged in a large expansion of public works projects both to enhance the business infrastructure and to help stimulate the economy.

However, there remain major problems with Japan's physical infrastructure which impedes distribution of imports. In part due to over-centralization in the major cities, high land prices, and regulations restricting large stores, Japan's retail stores are small, lacking adequate shelf space. As a result, they require frequent stocking by wholesalers using small trucks that can navigate the narrow streets. Together with the demand by manufacturers of just-in-time parts and components delivery from subcontractors, this results in huge numbers of trucks on inadequate urban roads and highways during daytime business hours, slowing traffic to a crawl in major urban centers. In effect, a substantial portion of Japan's warehouses are the four-wheeled variety, using public land (the roads).

III. Political Environment

Nature of Bilateral Relationship with the US

Japan's political relations with the United States are anchored in the U.S.-Japan Security Treaty and characterized by close cooperation on many important bilateral and multilateral issues. The U.S.-Japan security relationship is widely perceived as contributing to the peace and prosperity of both Japan and the Asia/Pacific region. President Clinton and Prime Minister Hashimoto reconfirmed the importance of our bilateral security relationship at their summit in Tokyo in April, 1996. On many important foreign policy issues, Japan's policies complement those of the United States. For example, Japan and the United States are cooperating closely through the so-called Common Agenda to tackle such global problems as AIDS, population growth, and protection of the environment.

In July, 1993, President Clinton and then Prime Minister Miyazawa signed the "U.S.-Japan Framework for a New Partnership" (Framework) as a new vehicle for addressing the many barriers that foreign companies face when doing business in Japan. Under the Framework, Japan committed to address major barriers in five sectoral and structural "baskets": 1) government procurement, 2) regulatory reform and competitiveness, 3) economic harmonization, 4) other major sectors, and 5) the implementation of existing arrangements and measures. In addition, Japan agreed to make adjustments to the fundamental economic asymmetries that have affected Japan's international economic relations, such as reducing its current account surplus as a percentage of its GNP. Overall, U.S. exports to Japan grew by 20 percent in 1995. Specifically, since 1992, in those sectors under the Framework covered by more than 20 recent trade agreements with Japan, U.S. exports have grown more than 80 percent.

Major Political Issues Affecting the Business Environment

The realignment of the Japanese political system, which began in 1992, is continuing. It will probably take several years before all the consequences of the new electoral system for the Lower House of the National Diet, which was adopted in 1994, make themselves felt. In the meantime, most observers believe that Japan could continue to be governed by coalitions as the political landscape continues to evolve. As a result, difficulties in coalition management could complicate passage and implementation of deregulation initiatives and administrative reform. The first election under the new Lower House election system may be called by the Prime Minister at any time, but it must be held later than the end of chamber's four-year term in the summer of 1997.

Brief Synopsis of Political System, Schedule for Elections, and Orientation of Major Political Parties

Japan is a strong democracy in which basic human rights are well respected. Under the constitution and in practice, the Emperor's role is essentially symbolic. Japan has a parliamentary form of government. The head of government, the prime minister, is elected by Japan's parliament, the National Diet. Elections to the Lower House, the more powerful of the Diet's two chambers, are held at least once very four years. Upper House elections are held every three years, at which time half of the membership is up for election. Most of Japan's political parties espouse moderate or conservative domestic and foreign policies.

IV. Marketing U.S. Products

Distribution and Sales Channels

Difficulties with Japanese distribution are partly socio-cultural in nature. Many Japanese are hesitant to disrupt longstanding relationships with suppliers -- even when a U.S. supplier can offer a vastly superior product at a far lower price. While a retailer or wholesaler may fear retaliation from existing Japanese suppliers, they may also fear that a U.S. supplier will not make timely shipments or may lack after-sales service ability. These doubts stem in part from a traditional lack of willingness to do business with strangers. A presence in Japan and a commitment to develop relationships with Japanese business people is crucial to overcome this hesitancy.

About half of all consumer purchases are made at neighborhood "mom and pop" stores (with five or fewer employees) and these stores rarely carry imported goods: they often have financial, ownership, or exclusive arrangements with major Japanese manufacturers, industrial groupings (keiretsu), or trading companies. They also have insufficient space to maintain large inventories. The number of smaller retailers is declining, however, and the emergence and growth of self-service discount stores and "superstores" is also helping to reduce the layers in the distribution system and make imported goods more price competitive.

Imported consumer goods have been traditionally sold at larger outlets such as department stores and discount houses. Distribution is characterized by close relationships between importers and multiple layers of wholesalers and retailers. Recently, direct importing -- bypassing trading houses and as many other intermediaries as possible -- is increasingly popular as a method of reducing costs.

Direct sales are more common for expensive, high-tech equipment. In some capital goods sectors, Japan has a number of small firms which function as subcontractors for larger manufacturers. For example, in the auto sector most parts are supplied through a tight network of small and medium-sized keiretsu companies that have a long and close 'design in' working relationship with the manufacturer. Small and medium-sized firms supply the majority of manufacturing industries with most of their products. To sell to these firms, it is often necessary to work through several layers of wholesalers and develop relationships with product engineers and designers.

Use of Agents/Distributors; Finding a Partner

Establishing a presence in Japan is the best way to penetrate the Japanese market, but can be a prohibitively expensive strategy to launch. The use of agents/distributors is a more realistic marketing strategy for the small/medium U.S. firm but requires extra care in the beginning.

Distributors in Japan usually cover a specific territory or industry. Import agents are usually appointed as sole agents for the entire country. While exclusivity may be necessary to ensure a strong commitment by the Japanese agent towards expanding sales, a U.S. company should not be pressured into giving up control of the market if there is doubt as to the ability or willingness of the Japanese company to expand sales of the product. A limited term of representation, minimum sales, or qualitative indicators of sales efforts, may be recommended in exclusive agency contracts.

While the Japanese Fair Trade Commission has guidelines applicable to exclusive agency contracts, there are no statutory damages required upon termination of an agency contract. However, replacing a Japanese agent or distributor is difficult in Japan if not handled extremely sensitively given the close-knit nature of business circles and the traditional distrust of foreign suppliers.

A common mistake made by many U.S. firms is to try to use a list of importers as a means of first contact. The Japanese prefer to do business with someone only when they have been properly introduced and meet face-to-face. Instead, introduction by a "go-between" serves to vouch for the reliability of both parties. This will help dispel reluctance on the Japanese side. Appropriate third parties can be other Japanese firms, U.S. companies that have successfully done business in Japan, banks, trade associations, chambers of commerce, the U.S. Department of Commerce and the U.S. Embassy Tokyo (through Commercial Service Tokyo's Agent/Distributor Service), U.S. state representative offices in Japan, JETRO, or even Japanese government ministries.

A U.S. company should be selective in choosing a Japanese business partner. This takes time for credit checks, study of the Japanese company's industry standing and existing relations with Japanese competitors, and building trust. The Japanese party's willingness and ability to abide by contract terms is crucial.

Part of the difficulty in choosing a Japanese agent is assuring that they will devote serious attention to expanding the market share of the U.S. product. A U.S. company should avoid a distributor that targets limited, high-price niches; is compromised by strong ties to an industry group ("keiretsu"); fails to compete directly with established Japanese products; or is not prepared to give the U.S. exporter volume sales.

To attract a Japanese business partner, a U.S. exporter must present an image of company dependability, innovation, superior quality, competitiveness, commitment, and be prepared to build personal relationships. A U.S. company should show that it is well regarded in its industry; that it has researched the market; that it is prepared to respond to cultural requirements (e.g. by preparing high quality brochure in Japanese on the company and its products); and that it promptly responds to all inquiries from Japan in a professional and timely fashion. This will help overcome reluctance to do business with a new foreign supplier. Frequent, even daily, communication by fax or phone is crucial and regular visits to Japan are a must.

Franchising

The franchising industry is a fast-growing, multi-billion dollar business in Japan. Originally developed in the fast food area, it has expanded into a variety of new sectors. U.S. participation in the Japanese franchising industry is highly visible under familiar names such as McDonald's, Kentucky Fried Chicken, Mr. Donuts, Denny's, etc.

Because successful franchises tend to depend heavily on the long-term investment capability and marketing expertise of a Japanese partner, most U.S. franchisors usually do not try to recruit actual shop operators in Japan directly from the United States. Instead, U.S. firms concentrate efforts on finding a master franchisee, usually either a Japanese company, a joint venture between the U.S. franchisor and a Japanese company, or even a wholly-owned subsidiary of the U.S. company. The master franchise holder is then responsible for the actual recruitment of Japanese franchisees.

Special attention should be paid to expectation levels of both parties to avert future problems: terms should be formalized for contractual rights and responsibilities, trade mark protection, and marketing methods.

Direct Marketing

Direct marketing (door-to-door sales, multi-level marketing, mail order, telemarketing, etc.), is an attractive sales channel for suppliers attempting to reach the increasingly affluent Japanese consumer while bypassing traditional distribution channels. U.S.-based companies such as Amway, Avon, and Tupperware enjoy substantial sales of cosmetics, detergents, cleaning supplies, and other home and kitchen items. With more women in the workforce and increasing demands on everyone's time, demand for shopping through the mail or by telephone has grown tremendously in Japan in recent years.

Direct marketing should not be considered an escape from Japanese expectations of customer service. The Japanese customer demands top quality for every product and is meticulous about packaging and the condition of contents on arrival. Returns and complaints can be common.

Mailing lists are relatively scarce and primitive, and organizations that have them are loathe to share. Language and shipping times are also crucial issues to overcome. U.S. companies aiming to enter this market should be prepared to make an investment in service functions -- a representative in Japan can act as a liaison with the U.S. supplier to handle receipt of claims, customs clearance, public relations, and the preparation of a Japanese-language catalog. Warehousing and delivery can also be managed by a local representative.

Joint Ventures/Licensing

Licensing product technology is an alternative with considerable appeal. A firm can immediately contribute to its bottom line with little investment or direct cost. What is often overlooked, however, are the missed opportunities and the indirect costs of licensing.

Licensing is a very limited form of market participation. High potential returns from marketing and manufacturing efficiencies are lost, and very little market information is gained. Often licensing agreements prove to be short-lived as the Japanese licensee improves upon the American product or technology and then exports the improved product back to the United States -- there by becoming a major competitor. Indirect costs of managing and policing the licensing agreement are also often overlooked. There are many cases of licensees under-reporting sales and under-remitting royalty payments. The wisdom of licensing technology depends on the status of a company's patents in Japan, together with the degree to which the company must disclose trade secrets to its licensee. Licensing as a route of market entry into Japan has become increasingly unpopular with American companies in certain industries. However, after considering the aforementioned risks, it may prove a desirable avenue for income generation.

The key to success in a licensing agreement is to have a partner whose goals coincide with those of the U.S. company. The contract should provide for a cross-technology exchange between licensor and licensee. The U.S. company should maintain close contact with the licensee and keep current on the Japanese market by visiting Japan regularly. Royalties paid by the Japanese licensee to the U.S. licensor are subject to a 20 percent withholding tax which may be reduced to 10 percent if the necessary documentation is filed under the U.S.-Japan Tax Treaty.

According to the Foreign Exchange and Foreign Trade Control Law, foreign companies wishing to grant a license to an independent Japanese corporation, its own wholly-owned subsidiary, or joint venture corporation, in order to manufacture in Japan must notify the Ministry of Finance through the Bank of Japan within 15 days of the execution of the licensing agreement. However, notification must be made in advance of the execution of the licensing agreement in those cases involving the transfer of specially regulated and/or designated technologies, in which case a report must be filed with the Ministry of Finance and other appropriate Japanese ministries.

Special restrictions apply to designated technologies. In addition, if the license agreement is exclusive, extends beyond one year, and the licensee is a competitor with a 10 percent or greater market share and/or is ranked third or higher in the respective Japanese industry, notification must also be given to the Japanese Fair Trade Commission (JFTC). Additionally, the export of any form of technical data from the U.S. abroad is subject to U.S. export control law, so a thorough investigation of the Export Administration Regulations should proceed the signing of any licensing agreement.

The advantages of establishing a joint venture in Japan are greater ease in identifying and hiring local personnel and securing immediate access to a distribution system and customers. This entry vehicle will however require a U.S. company to share profits and control with its Japanese partner. As with selecting agents, distributors or licensees in Japan, trust, communication and common interests with the Japanese partner are crucial.

Joint venture partnerships involving technology transfer or license agreements with a Japanese joint venture partner have the same pitfalls as a straight license. The value of a joint venture arrangement may diminish as the Japanese partner improves on or becomes less dependent on the technological innovations the U.S. company developed. Exporting American-madeproducts, as opposed to joint ventures that manufacture in Japan, helps reduce the risk of releasing proprietary know-how which gives the U.S. company a competitive edge.

It is possible to set up a joint venture in Japan through an unincorporated, contractual joint venture; acquiring stock by consent of an existing corporation; or through the incorporation either in the United States, or more commonly in Japan, of a new company in which the Japanese and U.S. corporations mutually decide upon management control and the roles and responsibilities of each party. The Ministry of Finance (through the Bank of Japan) must be notified. If the joint venture is intended to last more than one year, the joint venture agreement must be submitted to the Japanese Fair Trade Commission for review within 30 days after its execution.

Steps to Establishing an Office

Establishing an office in Japan can prove to be an expensive proposition primarily because office space is very costly (Tokyo is 3.4 times as high in New York) and salaries for Japanese nationals are high. Detailed information on the mechanics of setting up and maintaining an office in Japan can be found in the publication "Setting Up an Office in Japan" of the American Chamber of Commerce in Japan (Phone: +81/3/3433-5381, Fax: +81/3/3436-1446) and other sources listed in "Destination Japan."

A U.S. company that wishes to collect information and/or facilitate contacts in Japan should establish a representative office. This liaison office can obtain market data, provide information, and provide necessary promotional and service support. A representative office is not subject to Japanese taxes and it is not necessary to obtain special approval. However, a representative office must not involve itself in commercial transactions or generate income, therefore it can not handle orders directly. The liaison office may provide guidance and support to an agent, and manage all marketing activities except for the actual sale.

A branch office of a U.S. company can engage in trading, manufacturing, retailing, services, or other business. A branch office may take and fill orders and carry out a full marketing program, including arranging for advertising, recruiting a sales force, and performing all necessary promotional activities. A branch is liable for payment of Japanese taxes. The branch must appoint a resident representative in Japan and must register with the Legal Affairs Bureau of the Ministry of Justice. In addition, the establishment of a branch office is considered a direct investment under the Foreign Exchange and Foreign Trade Control Law requiring notification to the Ministry of Finance through the Bank of Japan within 15 days after the establishment of the branch office. As with joint ventures, for certain designated sectors, Ministry of Finance notification must be made prior to the establishment of the branch office; investment in other designated sectors such as broadcasting or telecommunications services may be restricted or prohibited.

An alternative to a branch office is a wholly-owned corporation. As in the above options, certain sectors are restricted. Setting up a wholly-owned subsidiary will involve more time and expense, but it can offer an effective means to guarantee better protection for proprietary information, obtain credit, and penetrate markets which have subtle but substantial barriers to imports. Moreover, there is a perception in Japan that a company with subsidiaries is both more committed and more substantial and this perception can serve as a powerful selling-point for that firm.

A fourth approach is to pool resources of several firms which have complementary product lines. Such a group might establish a marketing association, consortium, or jointly owned export management company, and set up a sales and service branch or subsidiary office in Japan. This operation may take the form of a representative office which handles contacts with agents, distributors, and customers. Considering the importance of brand image in Japan, group members may wish to consider adopting a group logo which would be a universally recognized and accepted identity for their product line.

Lower priced land, lower commercial rents and the severe financial crunch affecting many Japanese companies now provide U.S. companies with excellent opportunities to set up, expand or purchase businesses in Japan. Also, the tightening of credit available to small and medium sized businesses in Japan offers new opportunities for mergers and acquisitions especially of wholesalers which can be the key to product distribution in Japan.

U.S. companies should also carefully examine the Japanese Ministry of International Trade & Industry's new programs for promoting imports and foreign investment into Japan including: loan programs through the Export-Import Bank of Japan and the Japan Development Bank, the entry-level business support programs being provided by JETRO and the Foreign Investment in Japan Development Corporation (FIND). It should be noted that JETRO set up five Business Support Centers in the last two years to offer various assistance to new-to-market foreign firms in their initial market development activities: The Centers are located in Tokyo, Yokohama, Nagoya, Osaka, and Kobe. A total of 67 fully-equipped mini offices are available free of charge on a temporary basis. They provide not only free office space, but counseling, business library, data base terminals, conference halls, etc.

Selling Factors/Techniques

Personal contact with customers is very important. A visiting U.S. representative or resident agent in Japan should accompany a Japanese agent or distributor on visits to existing -- or potential -- Japanese customers. Making sales calls demonstrates commitment to the market and is also an excellent way to obtain market feedback.

Too many Japanese-American business relationships sour after a successful honeymoon period. A common mistake made by U.S. companies in Japan is failure to provide adequate support for their Japanese business partner after initial successes. It is generally important to prevent a distributor from implementing a conservative, low-volume, high-markup marketing strategy that will protect their own interests while leaving the U.S. product's full sales potential badly undeveloped.

Part of selling in Japan is knowing how to negotiate and maintain relationships with Japanese. Japanese language skills can be invaluable, as can a thorough background in Japanese culture and etiquette. It is important to be honest and direct, while avoiding appearing overbearing.

Initial contacts between Japanese firms are usually formal and made at the executive level, while more detailed negotiations are often carried out at the working level. Typically, the first meeting is to get acquainted, establish the broad interest of the calling party, and allow both sides an opportunity to "size each other up." A series of meetings with a large number of Japanese company representatives is common. Business negotiations may proceed slowly, as the Japanese side may prefer no agreement over being criticized later for making a mistake.

While many Japanese business executives speak some English, a skilled and well-briefed interpreter, while expensive, often prevents communication problems. Though some U.S. firms do business in Japan without a signed contract, written contracts between U.S. and Japanese firms have become a universally accepted practice in Japan: they satisfy tax, customs, and other legal requirements. Japanese companies prefer short, general contracts, while U.S. companies prefer to spell out the rights and obligations in detail. A contract should be viewed as part of a greater effort to create an understanding of mutual obligations and expectations, rather than a tool in case of a lawsuit.

Advertising and Trade Promotion

Because many products from the United States fit a cultural or industrial environment which may not yet exist in Japan, consumer education of the product's purpose, use, and quality may be necessary. The most cost effective method of advertising by small to medium size new-to-market U.S. companies in Japan is often to advertise in one of Japan's 2,250 weekly or monthly popular magazines, or in one of Japan's many industrial daily, weekly or monthly newspapers and trade journals. Only large multinational U.S. companies can afford to place ads in Japan's five major national daily newspapers or place commercials on Japanese television (all of which accept advertisements or commercials for either national or regional coverage). Regional and local newspapers and television stations, based in prefectural capitals, and sports daily newspapers, are less expensive. While Japan has relatively few radio stations (Tokyo, for example, has only four AM and six FM commercial stations), radio advertising potential may be worth investigating.

Much of Japan's broadcast and print media do not deal with advertisers directly but go through Japan's top five advertising agencies: Dentsu Inc., Hakuhodo Inc., Tokyu Agency International Inc., Daiko Advertising Inc., and Asatsu Inc. In general, "mood" or "image" advertising are generally thought to sell better in Japan; hard-sell, "wordy" messages and comparative or combative advertising may be considered bad taste.

Another mass advertising option is transit advertising. Railroads are the primary means of transportation for commuters in major cities and carry over 21 billion passengers annually. Transit advertisements are located either inside commuter rail cars or buses or in stations. Ads inside trains and buses include hanging flyers, framed posters, and stickers. The major ad companies control space, as with the other media.

It is key for US exporters of all kinds of goods and services to get into the Japanese trade event circuit -- not only in Tokyo -- but in the huge regional economies and industrial centers, where 65 percent of Japan's over 1,000 international conferences, seminars and trade shows take place. These events are being attended more and more by regulatory officials and decision makers from all throughout the Asian region.

U.S. companies should also consider U.S. Department of Commerce or state- or industry organization-sponsored trade shows and trade missions, as well as use of the U.S. Trade Center in Tokyo and other available U.S. Government facilities such as the U.S. Information Services' American Centers in Osaka, Nagoya, Fukuoka and Sapporo for their individual demonstrations, seminars, meetings and receptions.

Pricing a Product

Until recently, the acceptance of any product in Japan was based on attributes, quality, and related service, price. Japanese consumers remain willing to pay more for superior quality, but today are starting to look for better value.

Distribution mark-ups often cause imported items to be priced at levels uncompetitive with Japanese domestic products, even though the landed price of the imported product was comparable or lower. However, products that compete on the basis of image may be negatively impacted by bargain prices, as this tends to cheapen the image of these products in the minds of Japanese consumers. In setting an export price, it is also important to take into account any costs the exporter will be assuming in the Japanese market.

Japanese manufacturers of consumer goods traditionally set prices for each level of the distribution channel and enforced compliance using complicated rebate systems. Such price maintenance is now under heavy pressure from consumers (wanting lower prices), the Japan Fair Trade Commission (investigating unfair trade practices), and manufacturers themselves (for whom massive rebates are increasingly burdensome). Under a fully open price system, wholesalers and retailers will be able to decide prices independently. The return of unsold goods will tend to reduced in order to offset lower margins by manufacturers. The distributor's role in selecting and purchasing items will become more important, and methods of discounting and advertising are bound to change as well.

Sales Service/Customer Support

All service (before, during, and after the sale) and customer support are critical in Japan and should be considered part of the "product package." Every effort should be made to answer technical questions and make sure that shipments are made on time and handled with the greatest of care. Strict arrangements for quality control (both before and after shipment) should be made by the exporter. If goods are damaged in transit it does not matter who is at "fault:" Japanese importers will simply take their business elsewhere next time. The best way to ensure quality control is for a U.S. exporter to establish an office in Japan. If this is not possible, arrangements for customer support should be made either with a Japanese distributor or an acceptable third party.

Selling to the Government

Japanese government entities purchase a wide range of goods from telecommunications equipment to other, less sophisticated products and supplies. Recent changes in Japanese government procurement as a result of the Framework Negotiations and the GATT Uruguay Round have greatly expanded the scope of contracts that U.S. suppliers can bid on.

In most cases, Japanese government tender solicitation documents are in Japanese only with only brief English-language summaries. Tender documents must be submitted in Japanese only (Nippon Telegraph and Telephone (NTT) tenders may be submitted in English). To facilitate information gathering and applications for tender documents, it is strongly recommended, although not mandatory, that the U.S. supplier appoint an agent or representative in Japan.

To become a qualified supplier, firms and/or their agents must apply for qualification screening. Each Japanese government agency specifies in the Kampo (the Japanese Government's Official Gazette) an open application period prior to the beginning of the Japanese fiscal year which starts April 1.

Specific tender notices are published in the Kampo generally fifty days prior to the time of bid. Under the provisions of the GATT Procurement Code, foreign companies are permitted to bid on specific invitations prior to qualification provided there is sufficient time to complete the qualification procedures.

U.S. Suppliers can find summaries of translated tender announcements on the Economic Bulletin Board (EBB), the Commerce Business Daily, the National Trade Data Bank, and a new JETRO Database which is available on the Internet at "http:/www.jetro.go.jp/". U.S. Department of Commerce district offices can also assist potential U.S. bidders by identifying firms that provide translation services.

Intellectual Property Rights

Protection of intellectual property rights should be an integral part of every U.S. exporter's basic market strategy in Japan. It is necessary to file applications to register patents and trademarks in Japan to obtain protection, but prior filing in the United States can provide certain advantages if applications are filed promptly in Japan. A U.S. patent or trademark attorney can provide advice, but it will be necessary to hire a Japanese attorney (bengoshi) or patent practitioner (benrishi), preferably one with an established relationship with the U.S. exporter's U.S. attorney, to prosecute the patent or trademark application. Except for voluntary registration of computer programs, there is no system of copyright registration, however, and U.S. copyrights and sound recordings are recognized in Japan by international treaty. U.S.-produced semiconductor chip design-layouts are protected under a special law if registered with the Industrial Property Cooperation Center.

Obtaining and protecting patent and trademark rights in Japan can be time-consuming and costly. While the process to safeguard such rights might seem prohibitive, lack of protection would permit competitors both in and outside of Japan to copy your product or production process. Even when intellectual property rights have been acquired, pirating of technology and designs can occur in Japan, as it could in almost any country. Each company in a trading or licensing agreement should understand clearly what its rights and obligations are with respect to the intellectual property rights owned or acquired by the other. Such a clear understanding helps to create a good rapport based on mutual trust, thereby ensuring the success of the trading or licensing agreement.

Unlike U.S. patent law, patents are granted to the first to file an application for a particular invention, rather than to the first to invent. Although in 1995 Japan began accepting filings in English (followed by a translation), companies should ensure that translations of their applications are perfect. Significant negative ramifications may result from errors in translation. Prompt filing in Japan is important because printed publication of a description of the invention anywhere in the world, or knowledge or use of the invention in Japan, prior to the filing date of the Japanese application would preclude the grant of a patent on the application. Also unlike the United States, where examination of patent applications is automatic, an applicant must request examination of his patent application in Japan within seven years of filing.

As is true in many countries of the world, but not in the United States, all patent applications are published 18 months after filing. If, during the examination, the Japanese Patent Office (JPO) finds no impediment to the grant of a patent for a particular invention, it publishes the patent application a second time, including any changes that have been made during the examination. Under a recent amendment to the Patent Law, parties may contest the terms of a patent grant immediately after issuance by the Patent Office, rather than prior to registration as had been the previous practice. The patent is granted and valid for 20 years from the date the application is filed.

It takes a long time to obtain a patent in Japan -- an average of five to six years, compared to 18 months in the United States. An applicant can request accelerated examination; this procedure is infrequently used as it has substantial associated costs. However, companies filing patent applications in several countries may wish to request an accelerated examination. During the examination period, limited effective legal protection exists.

Japan's Trademark Law protects trademarks and service marks. As is the case with patent applications, a resident agent (usually a lawyer or patent agent) must prosecute the trademark application. As with the processing of patent applications, Japan's trademark registration process is very slow. It takes an average of 4 years to process a trademark registration in Japan, compared with an average of 13 months in the United States. Any company planning on doing business in Japan should file for trademark registration as early as practicable.

Japan's Patent Law also allows registration of utility models, a form of minor patent with an 8-year term of protection. A separate Design Law allows protection of designs, giving 15 years of protection.

The only protection available for a trademark in Japan prior to registration is under the Japanese Unfair Competition Law. Under this law, the owner of the mark must demonstrate that the mark is well-known in Japan and that consumers will be confused by the use of an identical or similar mark by the unauthorized user.

Japan enacted amendments to the Unfair Competition Law in 1990 which provide some measure of protection from theft of trade secrets such as know-how, customer lists, sales manuals, and experimental data. The law which was amended completely in 1993, provides for injunctions against wrongful use, acquisition, or disclosure of a trade secret by any person who knew or should have known that the information in question was misappropriated. A problem with judicial procedure remains, and makes enforcement of rights without loss of the trade secret difficult.

Need for a Local Attorney

A U.S. company resident in Japan is not legally required to use a Japanese attorney for filings, registrations, contracts or other legal documents, which can be prepared by in-house staff, but retaining a competent Japanese attorney (bengoshi), patent practitioner (benrishi) or other legal professional is a practical necessity. A U.S. company not resident in Japan should also retain competent Japanese counsel. Patents and trademarks must be filed through a Japanese agent, which should be a licensed attorney or patent practitioner.

V. Leading Sectors for U.S. Exports and Investment

The best prospects for U.S. exporters of U.S. products and services including agricultural products are listed below. Best prospects in industry sectors are ranked according to the estimated two-year growth in imports from the U.S (1995 - 1997). Best prospects in agricultural sectors, which follow the industrial best prospects, are not ranked.

The exchange rate used in the tables throughout this section is 106 Yen per Dollar for 1997.

IV. Trade Regulations and Standards

A. Trade Barriers, Including Tariff, Non-Tariff Barriers and Import Taxes

According to the Japan Tariff Association, the average applied tariff in Japan is now one of the world's lowest. However, import duties on some agricultural items and certain manufactured goods remain relatively high. As part of their import incentive program, the Japanese expanded the list of duty-free manufactured products by 2400 items out of 7000 items listed on the tariff schedule. The total amount of custom duties imposed during 1993 is 3.6% of the value of total imports to Japan. Consequently, almost all machinery imports are now tariff free. Tariffs are administered by the customs Bureau of the Ministry of Finance. As a member of the Harmonized system Convention, Japan shares the same trade classification system as the United States up to six digits. Japan's tariff schedule has four columns of applicable rates: general, GATT, preferential, and temporary. Goods from the United States are charged GATT rates unless a lesser "temporary" rate exists. Japan's preferential system of tariffs grants lower or duty-free rates to products imported from developing countries.

A simplified tariff system for low-value imported freight worth less than 100,000 yen, such as small packages, simplifies determination of tariff rates, eliminating the extra time necessary to determine the type of product and precise value, and minimizing customs brokers' handling charges. Importers can choose either the normal rate or the simple tariff, which could be higher or lower. It is possible to obtain an advance ruling on tariff classification and duty rates from Japanese Customs.

In addition to the customs duty, a 3 percent consumption tax (general excise tax) is levied on all goods sold in Japan and payment is required at the time of import declaration. The consumption tax is assessed on the CIF value of the product plus the import duty.

Duties and consumption tax are payable when making an import declaration at the time of customs clearance by the importer. The Import Declaration Form (Customs Form C 5030) is filled out by the importing company and is used as an import declaration as well as a tax payment declaration form. Packages containing items with a value of 10,000 yen or less are exempt from duty and the consumption tax.

The Japanese Government grants to manufacturers in Japan tax credits of 5 percent of the amount they increase imports of eligible manufactured products in a given year (products that are duty free), and offers importers tax deferral of certain profits.

B. Customs Valuation

Tariff duties are assessed on the CIF value at ad valorem or specific rates, and, in a few instances, are charged a combination of both.

C. Import Licenses

Most goods now qualify as "freely importable" and do not require an import license. The only exception is for those commodities falling under import quotas in which case the Japanese importer must apply for license approval. Rice, wheat, beef, and leather products are among the few remaining products subject to import quotas.

D. Export Controls

Since Japan was a member of the former COCOM export-control organization and is also a member of other multilateral export control regimes, U.S. export controls to Japan are among the least restrictive of any destination in the world. However, Japan may conduct trade with countries that the U.S. has embargoes against requiring vigilance by U.S. exporters against transhipments through Japan contrary to U.S. export control law. Consult the U.S. Export Administration Regulations (15 CFR 730-799) for export licensing guidance for specific transactions or call the Bureau of Export Administration at 202-482-2547.

E. Import/Export Documentation

While customs procedures have been simplified in recent years, a number of documents are still required for clearance. These include: (1) for import quota items, an import license, usually valid for four months from date of issuance; (2) an Import Declaration Form (Customs Form C 5030); (3) shipping documents such as a commercial invoice, packing list, and an original and signed bill of lading, or, if shipped by air, an air waybill; (4) a certificate of origin if the goods are entitled to favorable duty treatment (preferential or GATT rates; in practice, shipments from the United States are routinely assessed using the GATT or "temporary" rates without a certificate or origin); and (5) any additional documents necessary as proof of compliance with relevant Japanese laws and standards regulations, if applicable.

F. Temporary Entry

Japan is a member of the International Convention to Facilitate the Importation of Commercial Samples and Advertising Materials under the ATA Carnet System. Use of a Carnet allows goods such as commercial and exhibition samples, professional equipment, musical instruments, and television cameras to be carried or sent temporarily into a foreign country without paying duties or posting bonds. A Carnet should be arranged for in advance by contacting a local office of the United States Council for International Business or its New York office at (212) 354-4480.

Advertising materials, including brochures, films, and photographs, may enter Japan duty free. Articles intended for display but not for sale at trade fairs and similar events are also permitted to enter duty free in Japan only when the fair/event is held at a bonded exhibition site. These bonded articles are required to be re-exported after the event, or stored at a bonded facility. A commercial invoice for these goods should be marked "no commercial value, customs purposes only" and "these goods are for exhibition and are to be returned after conclusion of the exhibition." It is also important to identify the name of the trade show or exhibition site, including exhibition booth number (if known), on shipping documents.

G. Labeling, Marking Requirements

Straw packing materials are prohibited. The Japanese Measurement Law requires that all imported products and shipping documents show metric weights and measures. For most products there is no requirement for country of origin labeling, however, some categories such as beverages and foods do. However, if labels indicating origin are determined to be false or misleading, the labels must be removed or corrected. False or misleading labels which display the names of countries, regions, or flags other than the country of origin, and/or names of manufacturers or designers outside the country of origin are not permissible.

Items which are required by Japanese law to bear labels cover four product categories: textiles, electrical appliances and apparatuses, plastic products, and miscellaneous household/consumer goods. Because all these regulations apply specifically to individual products, it is important to work with a prospective agent/importer to ensure your product meets requirements, if applicable. For more information, see the section titled "Japanese Regulations, Standards, Quality Marks, and Certification Systems."

In general, most labeling laws are not required at the customs clearance stage, but at the point of sale. Consequently, it is most common for Japanese importers to affix a label before or after clearing customs.

H. Prohibited Imports

Japan strictly prohibits entry of narcotics, obscene materials, counterfeit goods or goods that violate intellectual property rights. The use of chemicals and other additives in foods and cosmetics is severely restricted by regulations that follow a "positive list" approach. Restricted items include certain agricultural and meat products, endangered species and products such as ivory, animal parts and fur whose international trade is banned by international treaty, swords and firearms, and more than 2 months supply of medicines and cosmetics for personal use.

I. Standards

Product requirements in Japan fall into two categories: regulations (or mandatory standards) and non-mandatory voluntary standards. Compliance with regulations and standards is also governed by a certification system, in which inspection results determine whether approval (certification/quality mark) is to be granted. Generally approval is a requirement to sell or display in a trade show; unapproved medical equipment may be displayed if accompanied by a sign indicating that the product is not yet approved for sale. To affix a mandatory quality mark or a voluntary quality marks requires prior product type approval and possibly factory inspections for quality control assessment. Regulated products must bear the appropriate mandatory mark when shipped to Japan in order to clear Japanese Customs. Regulations may apply not only to the product, but also to packaging, marking or labeling requirements, testing, transportation and storage, and installation. Compliance with "voluntary" standards and obtaining of "voluntary" marks of approval may greatly enhance sales potential and winning Japanese consumer acceptance.

Japanese regulations include: the Consumer Product Safety Law, Electrical Appliance and Material Control Law and many others. "Voluntary" standards include: Japanese Industrial Standards (JIS), Japanese Agricultural Standards (JAS) and many others.

The "voluntary" JIS mark, administered by MITI, applies to over 1,000 different industrial products and consists of over 8,600 standards, 90 percent of which are available in English. Adherence to JIS is also an important determinant for companies competing on bids in the Japanese government procurement process. Products that comply with these standards will be given preferential treatment in procurement decisions under Article 26 of the Industrial Standardization Law. JIS covers all industrial products except for those products regulated by specific national laws or for which other standard systems apply (i.e. Pharmaceutical Affairs Law, Japan Agricultural Standards).

The JAS mark is another "voluntary" but widely used product quality and labeling mark. JAS applies to beverages, processed foods, forest products, agricultural commodities, livestock products, oils and fats, products of the fishing industry, and processed goods made from agricultural, forestry, and fishing industry raw materials. Specific JAS marks exist for various types of plywood, paneling, flooring boards, lumber, and timber. The JAS marking system is administered by Japan's Ministry of Agriculture, Forestry and Fisheries (MAFF). Separate mandatory standards for quality labeling of processed foods and beverages are administered by Japan's Ministry of Health and Welfare (MHW). A limited number of testing laboratories in the United States have been designated by Japanese government agencies to test and approve U.S. products for compliance with Japanese mandatory certification systems and laws. Products not covered by these arrangements must be tested and approved by Japanese testing labs before these products can be sold in Japan.

J. Free Trade Zones/Warehouses

Japan has no free trade zones. There are five kinds of bonded areas: (A) designated bonded areas, (B) bonded sheds, (C) bonded warehouses, (D) bondd factories, and (E) bonded exhibition sites.

(A) Designated Bonded Areas: This is public space authorized by Ministry of Finance. In these areas, located near ports of entry, foreign cargo (shipments to be exported, to be imported and in transit) can be unloaded, transported, and stored up to one month. This temporary space is used for customs declaration and handling, and can be used by anybody for a fee.

(B) Bonded Shed: This is space authorized by the Director General of Customs Houses and it performs the same function as a designated bonded area.

(C) Bonded Warehouses: Foreign cargo can be stored at bonded warehouses for up to 2 years (and longer with special permission). As long as cargo is stored in a bonded warehouse, custom duty is not applied.

(D) Bonded Factories: Bonded factories allow manufacturers to produce goods with foreign materials without paying customs duties for those foreign materials.

(E) Bonded Exhibition Sites: This is exhibition space authorized by the Director General of Customs House for an international event. This system is designed to make administration of world-wide expositions and exhibitions by foreign governments easier. Foreign cargo can be exhibited or used with simple declaration. Equipment and materials to be displayed at a bonded exhibition site should be identified as such and arrangements must be made with the freight forwarder prior to shipment.

K. Special Import Provisions

While Japan's average tariff rates on industrial products are among the world's lowest at 2 percent, high tariffs and import quotas still remain on a number of manufactured and agricultural products of interest to U.S. companies.

The Government of Japan has, however, put into place a substantial program to promote imports of manufactured goods into Japan by providing many types of assistance to potential U.S. and other foreign exporters seeking to do business with Japan. The scope of these programs covers tax incentives for import into Japan, financing for exports to Japan, assistance in finding Japanese business partners, market research, export study programs, and the provision of free temporary office space in five Japanese cities.

JETRO's import promotion program includes dispatch of long-term senior trade advisers to 18 U.S. states to advise on exporting to Japan; dispatch of short-term experts to identify products with export potential to Japan; seminar tours to Japan for U.S. business people to better understand the Japanese market; establishment of Business Support Centers in Tokyo, Yokohama, Nagoya, Osaka and Kobe, and the establishment of local import information centers in all 47 prefectures. This budget has also enabled the Government of Japan to offer enhancements for trade events organized with the U.S. Department of Commerce, to publish market research in English, and to support other activities of the Trade Expansion Cooperation Program of the U.S. Department of Commerce and MITI.

JETRO has five Business Support Centers in major cities (Tokyo, Yokohama, Nagoya, Osaka, Kobe) to give foreign companies a temporary office for 2 weeks to 2 months while they are looking for permanent office space in Japan. The BSC's offer rent-free furnished office partitions, consultants, a library, phone message and answering services, meeting, seminar and exhibition rooms, and a room for receptions.

In November 1991, MITI established the Business Global Partnership with 40 of Japan's automobile, electronics, machinery, steel, non-ferrous metal, chemical and trading companies. Another 160 companies in key industries such as machine tools, semiconductor manufacturing equipment and glass, are participating, and all 200 companies will be expected to draw up and implement voluntary import plans. The Partnership has three goals: (1) import expansion--further expansion of imports of all goods including specific efforts to expand imports of parts, components and capital goods; (2) expansion of procurement from local domestic suppliers by Japanese affiliated companies operating abroad; and (3) promotion of inter-corporate cooperation--cooperation with foreign firms in establishing themselves in the Japanese market, including through direct investment.

VII. Investment Climate

A. Openness to Foreign Investment

Japan, the world's second-largest economy, is the largest potential market for U.S. foreign direct investment (FDI). The Government of Japan (GOJ) imposes few formal restrictions on FDI in Japan, and has worked to remove or liberalize many of the legal restrictions that apply to specific economic sectors. The government does not impose export-balancing requirements or other trade-related FDI measures on firms seeking to invest in Japan. Moreover, risks associated with investment in many other countries, such as expropriation and nationalization, are not an issue in Japan.

Despite these attractive characteristics of Japan as a potential investment site, FDI levels in Japan have remained minuscule relative to the size of the economy, reflecting a range of long-standing structural impediments that are endemic to Japan. The challenges facing foreign investors seeking to establish or enhance their presence in Japan include:

--a high overall cost structure that makes market entry and expansion prohibitively expensive for many foreign investors;

--burdensome laws and regulations that directly or indirectly restrict the establishment of business facilities and hinder market access for foreign products, services, and FDI;

--close ties between government and industry, as illustrated by the ministries' issuance of informal "administrative guidance" to Japanese companies, the placement of retired bureaucrats in Japanese companies and trade associations through a practice called "amakudari," and the delegation of quasi-regulatory authority to trade associations, which are often allowed to devise and regulate their own insider rules;

--exclusive buyer-supplier networks and alliances, commonly maintained by Japanese companies belonging to the same business grouping (or "keiretsu"), which limit competition from foreign firms and domestic newcomers; and;

--corporate practices that inhibit foreign acquisitions of Japanese firms (including, nontransparent Japanese accounting and financial disclosure, cross-holding of shares among "keiretsu" member firms, low percentage of publicly traded common stock relative to total capital in many companies, and a widespread aversion to foreign-driven mergers and acquisitions.)

These and other obstacles make Japan's investment environment, at best, costly and difficult to navigate. Not unexpectedly, in JFY 1995, Japan's annual inward FDI totaled 3.8 billion dollars, or only 0.08 percent of GDP. This is by far the smallest share of overall output of any OECD nation. In 1991, the OECD estimated Japan's share of the total stock of inward FDI among OECD countries at under 1.5 percent. As further evidence of the difficulty of local investment conditions, foreign participation in mergers and acquisitions (M&A), which account for some 80 percent of FDI among other OECD countries, is virtually nonexistent in Japan. Meanwhile, Japan continues to run a substantial imbalance between its inward and overseas FDI (see tables 1, 4, and 5). In JFY 1995, Japan reportedly invested 51 billion dollars overseas and attracted less than one-thirteenth that amount in inward direct investment. This lack of receptivity to foreign investment also acts as an

important barrier to imports.

Table 1: Annual New FDI into Japan

(Billions of dollars)

JFY	1990	1991	1992	1993	1994	1995
	2.78	4.34	4.08	3.08	4.16	3.83

Ratio of Japan's inward to outward FDI:

JFY	1990	1991	1992	1993	1994	1995
(Annual new investment)	1:20.5	1:9.6	1:8.4	1:11.7	1:9.9	1:13.4
(Cumulative investment)	1:16.9	1:15.5	1:14.4	1:14.1	1:13.6	1:13.6

(Source: Foreign Investment in Japan Development Corporation, July1996)

Acknowledging that FDI in Japan lags far behind that of other industrialized economies, the GOJ has recently taken some welcome, but small, steps to address these investment-related problems. In 1994, the GOJ established the Japan Investment Council (JIC), chaired by the Prime Minister, and started up cabinet-level discussions on ways to improve Japan's investment climate. Since then, the JIC and other GOJ advisory groups--such as the Prime Minister's Economic Council and various deregulation and administrative reform committees--have issued statements calling for stronger government efforts to promote FDI as a means of ensuring long-term growth and vitality in key industrial sectors. The Japan External Trade Organization (JETRO), in a 1995 white paper, urged the GOJ to offer foreign firms tax breaks in order to encourage FDI. In June 1995, the JIC released a statement that included some positive FDI promotion measures, and then in April 1996, issued a report that, for the first time, specifically endorsed mergers and acquisitions as part of the GOJ's investment policy.

Unfortunately, most of the GOJ's investment measures to date have been comprised of piecemeal items either loosely tied to the GOJ's 1995 (3-year) deregulation plan--most recently revised in March 1996--or grafted onto existing programs designed for regional economic development, restructuring of ailing Japanese industries, foreign technology acquisition, and other purposes not directly related to FDI. As a result, most analysts do not expect these government measures will be effective in increasing FDI levels or in reducing the direct and indirect costs and obstacles faced by foreign investors attempting to enhance their presence in Japan. A few potentially far-reaching GOJ proposals--such as the JIC's April 1996 pledge to study the lifting of the antimonopoly ban on holding companies--explicitly aim to boost competitiveness among Japanese companies and could actually pose new problems for foreign investors over the long term.

Japan has over many years eliminated most of its formal restrictions in its FDI regime. In 1991, the GOJ amended the Foreign Exchange and Foreign Trade Control Law (which also controls foreign investment), replacing the long-standing "prior notification" requirement for all FDI with an "ex post facto notification" requirement for investment in non-restricted industries (effective January 1, 1992). "Prior notification" (and case-by-case approval) is now required only for investment in such restricted sectors as agriculture, forestry, petroleum, electrical/gas/water utilities, aerospace, telecommunications, and leather manufacturing (see appendix a for a list of reserved sectors). Some legal barriers to FDI remain, however, and even where these barriers have been "deregulated," foreign investors must often deal with a closed system that is resistant to foreign penetration. Although U.S. investment has occurred in some restricted sectors, particularly in the petroleum industry, the criteria for defining and controlling these areas are unclear and could potentially inhibit further investment. In sectors that require prior notification, the GOJ retains the right to restrict FDI if it determines that the investment would "seriously and adversely affect the smooth performance of the national economy." Almost all foreign firms still feel compelled to engage in extensive consultations with the involved ministries and industry before undertaking investments.

Several sections of the Japanese Antimonopoly Law (AML) are relevant to FDI. For example, chapter four of the AML includes extensive antitrust provisions pertaining to international contract notification (section 6), stockholding (section 10, 14), interlocking corporate directorates (section 13), mergers (section 15), and acquisitions (section 16). The stated purpose of these sections is to restrict any stockholding, management, joint venture, and m&a activities that constitute unreasonable restraints on competition or involve unfair trade practices. These provisions are not supposed to discriminate against foreign companies or to discourage FDI. In the 1992 report of the U.S.-Japan Structural Impediments Initiatives (SII) talks, the JFTC confirmed that its international contract regulations would not discriminate against foreign firms. However, it could be argued that the current system does, in fact, discriminate against foreigners in that no similar reporting requirements exist for contracts (such as joint ventures) between Japanese firms.

The GOJ continues to restrict industrial/commercial facilities in many areas to prevent urban sprawl in the environs of Tokyo, Osaka, and Nagoya, and also to protect agriculturally-designated lands. Site restrictions in the three cities are applied on a non-discriminatory basis to both foreign and domestic companies alike, and many rural prefectural governments outside these areas actively seek FDI in their industrial parks. However, Japan's zoning laws rigidly restrict commercial and residential development of farmland, and arcane construction regulations give local Japanese officials and residents considerable discretionary authority to screen virtually all aspects of a proposed building, including the amount of sunlight entry into a building and the potential shading effect on adjacent structures. These factors greatly reduce the amount of real estate available for development and often lead to delays in construction and higher building costs.

The Large-Scale Retail Store Law (LRSL), designed in part to protect local merchants from large retail competition, continues to challenge foreign investors by limiting the establishment, expansion, and business operations of large Japanese stores that are most likely to serve as distributors of imported products. Based on agreements made in the Structural Impediments Initiative (SII) talks, the GOJ incrementally amended the large store law three times since 1990, shortening the official large store approval process to one year and reducing the number of mandatory annual closing days to 24 days. Large retailers, however, continue to face serious problems breaking into the domestic distribution network--as evidenced by the 1996 Kodak/WTO case. In June 1996, the U.S. government requested bilateral consultations under WTO auspices, arguing that the large store law, by imposing an economic needs test that aims to limit the supply of large stores, violates the General Agreement on Trade in Services (GATS) and constitutes a barrier to both foreign suppliers and Japanese importers and distributors of foreign consumer products.

Apart from these and other regulations, the often oligopolistic nature of Japanese industry poses problems for foreign investors. For example, in 1996, the Ministry of International Trade and Industry (MITI) "deregulated" independent power production (IPP) and, legally, anyone can now sell electricity to Japanese utilities through an open bidding process. However, in the near future, IPP newcomers will only be allowed to sell power to Japan's big-12 utility companies, which will continue to enjoy their monopolistic position. In addition, regarding foreign participation in IPP joint ventures or the possible foreign acquisition of a "small" utility, the typical Japanese response is that IPP joint ventures can be considered only as part of a domestic consortium and that foreign acquisition of a Japanese utility is unimaginable.

The U.S. business community in Japan cites informal GOJ directives, or "administrative guidance," as a form of restraint on FDI in Japan. In general, business in Japan is more heavily regulated than in the United States, with much of the regulation taking place privately through cooperative consultations--either between the involved industry and government ministry, or between industry and quasi-regulatory public service organizations--which typically keep ministry retirees, or "amakudari" officials, on their payroll as advisers. There currently is no effective counterpart in Japan to the U.S. administrative procedures act requiring that laws and practices be formulated in public. Based on SII agreements in 1992, an administrative procedure law took effect October 1, 1994. It contains some relatively weak provisions intended to promote greater transparency in administrative guidance, but lacks provisions for rule-making procedures and fails to address many of the transparency issues raised by foreign investors. The GOJ is expected to work up draft legislation in the fall of 1996 or later to introduce an information disclosure law, which is supposed to be analogous to the U.S. freedom of information act, but the details of this proposal are still under deliberation.

Local branches of foreign firms are generally taxed only on income derived from within Japan, whereas domestic Japanese corporations are taxed on their worldwide income. Local branches of foreign firms are also subject to a local inhabitants' tax on the same basis as a domestic firm. Calculation of taxable income and allowable deductions, and payments of consumption tax (sales tax) introduced in JFY 1989, and land value tax introduced in JFY 1992 are otherwise the same as those for domestic companies, with national treatment for foreign firms. The corporate tax act classifies corporations as either foreign or domestic depending on the location of the head office, without regard to the place of incorporation. The U.S.-Japan tax treaty provides for the avoidance of double taxation.

Dividends distributed by a domestic Japanese firm are subject to a 20 percent withholding tax; the U.S.-Japan tax treaty reduces this tax to 10 percent for American shareholders. Interest payable to a nonresident is normally subject to withholding of 20 percent, but the tax treaty reduces this to 10 percent, as long as the interest is not attributable to a locally incorporated company. Royalties and fees paid to a foreign licenser by a Japanese licensee are subject to normal withholding of 20 percent, reduced to 10 percent by the tax treaty.

The GOJ has recently taken some positive steps to bolster their FDI promotion efforts. However, U.S. firms that have investigated these programs have generally found that existing Japanese incentive programs are either too minimalist in scope or not well-suited to their needs.

The government-owned Japan Development Bank (JDB) offers foreign-affiliated firms various lending programs--including those for the "promotion of inward FDI" (1984), "import facility enhancement" (1984), and for "international joint research and development projects in Japan" (1993). Under these programs, foreign-owned companies (those in which the ratio of foreign capital is 50 percent or more) are eligible for low interest, long-term loans for capital investment. The loan amount may be up to 60 percent of the total investment amount and the loan period can run as long as 30 years. Interest rates are fixed for the life of the loan and, as of July 1996, were set at 3.0 percent, compared to the 3.3 percent private long-term prime rate. Similar low-interest loan programs for foreign firms have been established by the Okinawa and the Hokkaido-Tohoku development finance corporations as incentives to foreign firms investing in these regions. JDB loans for FDI projects have several limitations, however. They cannot be applied toward the acquisition of Japanese firms. In addition, JDB lending rates are set by the ministry of finance and are not always competitive with commercially available rates--for much of JFY 1995, the JDB's preferential rate was actually higher than the long-term prime rate and, because of this, no new JDB loans for the "promotion of FDI" were made to U.S. firms during this period (see table 2).

Table 2: Japan Development Bank: FDI loans

(Unit: million yen)

Lending Program	JFY 1994	JFY 1995
"Promotion of FDI"
Total loans (cases)	7	2
Total loans (amount)	6,450	1,200
Loans to U.S. firms (cases)	4	0
Loans to U.S. firms (amount)	3,350	0
Import Facility Enhancement"
Total loans (cases)	22	10
Total loans (amount)	8,870	4,205
Loans to U.S. firms (cases)	9	1
Loans to U.S. firms (amount)	3,350	1,900
"International Joint R&D"
Total loans (cases)	1	1
Total loans (amount)	200	10
Loans to U.S. firms (cases)	0	1
Loans to U.S. firms (amount)	0	0
(Source: Japan Development Bank, July 1996)

In March 1992, the GOJ established the "Law on Extraordinary Measures for the Facilitation of Imports and Foreign Direct Investment in Japan," or the "Inward Investment Law." Under this law, eligible foreign investors that are designated as "inward investors" can receive preferential tax treatment. In JFY 1995, the Japanese diet extended the law for ten years, from the original 1996 expiration date until May, 2006. The GOJ also amended the law's provisions for investment-related losses to allow loss carry-over in the first five years of operation, not just the first three, and indicated that losses may be carried forward ten years. A major drawback of the law, however, is that only investors who are in their first eight years of operation in Japan can receive "designated inward investor" status and thus benefit from the program's incentives. According to MITI, as of July 1996, 41 U.S. firms are registered as "inward investors."

The "technopolis" project, sponsored by MITI, is available to both Japanese and foreign firms. Under the "Law for Accelerating Regional Development through High-Tech Industrial Complexes," MITI and prefectural governments provide various types of assistance (e.g., preferential depreciation and land taxes) to companies locating in areas designated for development as a technology-intensive zone, or "technopolis." The aim of this program is to encourage develop ment in relatively underdeveloped rural areas by forming high-tech industrial complexes. As of July 1996, there were 26 areas throughout Japan with the "technopolis' designation.

The GOJ has made some effort to improve the dissemination of FDI-related information and to facilitate investment opportunities through various government support services. The JDB supports foreign companies by supplying market information on Japan (general data on industries, market scale, distribution channels, etc.) and by serving as consultants on specific investment projects. In June 1993, the GOJ established a business information support firm, called the Foreign Investment in Japan Development Corporation (FIND), which (for a fee) advises foreign firms on the many challenges of investing in Japan and facilitates meetings with potential investment partners. "FIND" also publishes annual statistics on FDI in Japan and maintains detailed reference aids on FDI, such as local-level FDI programs. In response to the Japan Investment Council's April 1996 pledge to, in principle, support mergers and acquisitions, "FIND" announced that it will maintain an Internet home-page for M&A.

B. Conversion and Transfer Policies

Under the present law, all foreign exchange transactions--including transfers of profits and dividends, interest, royalties and fees, repatriation of capital, and repayment of principal--are, in principle, authorized unless expressly prohibited. However, most cross-border financial transactions are subject to prior notification or prior approval requirements. In practice, prior notification has generally meant an application for prior approval (i.e., the Finance Ministry can simply refuse to accept the notification form), while prior approval requirements have often meant blanket rejection. These requirements have not been major obstacles to foreign commercial firms' operations in Japan in recent years. Foreign financial firms have complained, however, that the prior notification and prior approval requirements impede their ability to offer their full range of services in Japan. Liberalization measures under the February 1995 Framework Financial Services Agreement eased some of the restrictions on cross-border financial services. There are no restrictions on reinvestments, other than the same restrictions on initial investment outlined above. Netting of settlements is prohibited unless specifically permitted.

C. Expropriation and Compensation

In the post-war period, the GOJ neither expropriated nor nationalized any enterprises. Expropriation or nationalization is unlikely in the foreseeable future.

D. Dispute Settlement

There have been no major bilateral investment disputes since 1990, and there are no outstanding expropriation or nationalization cases in Japan, and no cases of international binding arbitration of investment disputes between foreign investors and the GOJ since 1952. Japan is a member of the 1958 New York convention on the recognition and enforcement of foreign arbitral awards. However, Japan has long been an inhospitable forum for international commercial arbitrations. Prior to the march 1996 revision of the GOJ's deregulation plan, arbitration proceedings were viewed as the exclusive province of Japanese "bengoshi" (barristers) with only limited exceptions. As a result, proceedings were commonly handled in Japanese, and documents had to be translated into Japanese, even though the contract and all negotiations were in English. In step with deregulation, foreign lawyers will be allowed to represent parties in international arbitration proceedings in Japan starting this fiscal year.

There are no legal restrictions on access by foreign investors to Japanese "bengoshi." However, strict limitations on legal practice in Japan by foreign lawyers, the prohibition on Japanese "bengoshi" joining foreign-based law firms, and the small number of Japanese "bengoshi" capable of handling international business transactions all constrain the ability of foreign investors to obtain proper legal advice on doing business in Japan. Foreign lawyers licensed in Japan under the 1986 Foreign Lawyers Law are not allowed to advise foreign investors on investing in Japan, as the law views such advice as the illegal practice of Japanese law. The unnecessarily restrictive provisions of Japanese law and the even more rigid enforcement of these restrictions by the federation of Japanese bar associations ("nichibenren") deprive foreign investors of the opportunity to receive the optimal combination of legal advice that a system more in conformity with current standards of international legal practice would allow. Recent deregulatory changes proposed by the GOJ are unlikely to remedy this situation.

Japan has civil courts for enforcing property and contractual rights, and the courts do not discriminate against foreign investors, but these courts are ill-suited for litigation of investment and business disputes. Japanese courts are horrendously slow; there are virtually no discovery procedures to compel disclosure of evidence from the opposing party; the courts essentially lack contempt powers to compel a witness to testify or a party to comply with an injunction; and timely temporary restraining orders and preliminary injunctions are almost impossible to obtain. While filing fees for large civil cases were reduced in 1992, they are still based on the amount of the claim, rather than being a flat fee as in the United States. A "bengoshi" usually requires an up-front payment before commencing a case; contingency fees, while not unknown, are not common. Since there are insufficient numbers of judges, the courts have high caseloads with witness examinations scheduled one month or more apart--leading to trials typically lasting 2-5 years in the district courts and a total of 5-10 years for all appeals to be settled. The losing party can delay execution of a judgment merely by appealing--no stay or appeal bond is usually necessary. On most appeals to the high courts, additional witnesses and other evidence are allowed. There are no class actions, no jury trials, no treble or punitive damages, and almost no court-awarded payment of attorney's fees to the plaintiff. Courts do have powers to encourage mediated settlements, but are often described as passive and deferential to the governmental administration. Many observers believe this deference is a key deterrent to using the courts to address significant social questions, to challenge the government, or to pursue corporate liability. As a result, and due to the GOJ's current policy of restricting the number of new "bengoshi" to 700 per year, the net effect is to strongly encourage companies to settle out of court. (Note: in step with the March 1996 revised deregulation plan, the Justice Ministry will begin consultations this year with the supreme court and the "nichibenren" to study possible measures to increase the number of lawyers.)

A new Product Liability (PL) Law became effective in July 1995, but to date there have been only a few court cases--one involving an allegedly defective suitcase. However, many companies have modified their design and production processes, as well as provided more detailed instruction and product manuals, in an effort to limit potential liability. Many industry associations have formed "PL Law" study groups to deal with the law.

E. Performance Requirements/Incentives

Japan does not maintain a system of performance requirements. Japan also maintains no formal requirements for local management participation or local control in joint ventures or other forms of direct investment, except in restricted sectors.

F. Right to Private Ownership and Establishment

Japan secures the right for foreign and domestic private enterprises to establish and own business enterprises and engage in all forms of remunerative activity.

G. Regulatory System: Laws and Procedures

Japan's economy remains highly regulated, which perpetuates trade frictions by impeding imports, limiting investment opportunities, raising costs for Japanese businesses and consumers, and hampering employment mobility and business formation. Meaningful deregulation would improve market efficiencies and reduce costs. Combined with stronger antitrust enforcement and administrative reforms to increase the transparency of regulatory regimes, deregulation would help reduce structural problems that impede the sale of foreign goods and services and discourage FDI. The Japanese government and business community have repeatedly stated that deregulation is a high-priority issue, but opposition remains strong to specific proposals from vested interests--from the officials who write the laws and who are loathe to undercut their administrative powers, to managers and workers in protected sectors.

Adding to the uncertainty and unpredictability of the investment regime in Japan is the tendency of Japanese regulators to view their role not simply as neutral arbiters of a rule-based system, but as active players in the control and guidance of their respective industries. Two aspects of this particularly disadvantage new entrants to the market: the high degree of discretionary authority the regulators maintain, and the regulator's tendency to rely on incumbent players to develop consensus on policy or regulatory changes. Faced with this environment, foreign investors often feel compelled to take on local partners who can navigate the regulatory environment and provide bargaining power, as incumbent players, vis-a-vis the regulators. For firms willing to cede partial control of their investments to a local partner, this may be an acceptable price for entering the market. However, for many firms whose investment strategy is based on management control, the perceived need to engage a local partner is clearly a disincentive to invest in Japan.

In April 1995, the GOJ issued a three-year action plan that pledged to "deregulate" the economy, including such areas as land use, construction materials, and medical products, and to strengthen antimonopoly enforcement, which remains weak in Japan. In March 1996, the GOJ revised its action plan, and announced some noteworthy deregulation measures in housing, financial services, and telecommunications:

--a housing promotion initiative, written by the ministries of construction, justice, health and welfare, and MITI, pledged to comprehensively review and amend existing building and building material regulations that limit market access for U.S. construction products and services.

--the revised plan listed a number of actions that went beyond the U.S.-Japan financial services agreement, such as further opening of the private pension fund market and liberalization of foreign exchange controls.

--in addition, the GOJ took some promising steps in the telecommunications arena, pledging to loosen the ministry of posts and telecommunications' control over market entry and to introduce pro-competition interconnection rules.

However, the revised plan made little concrete progress and either postponed or failed to adequately address important issues in many other areas, including: distribution (deregulation of the large retail store law), transportation (deregulation of trucking, freight forwarding, harbor services, and motorcycle licenses), legal services (easing restrictions on foreign lawyers), labor (easing restrictions on fee charging employment services), and administrative reform.

According to the Management and Coordination Agency (MCA), as of April 1996, the GOJ has achieved over 60 percent of the deregulation goals originally set forth in the March 1995 plan and, with the incorporation of 569 "new" items in the revised plan, is scheduled to tackle a total of 1,797 deregulation measures by the end of March 1998. These numbers are misleading, however, because the MCA does not distinguish between partial and full implementation, or between minor and major issues, and because many of the GOJ's original pledges were ambiguously worded. The GOJ could easily claim progress--often based on a "review" of regulations, as opposed to the elimination of excessive regulations.

The revised deregulation plan contained a number of items specifically relating to FDI. These measures are not directly targeted at promoting FDI--rather, they aim to broadly improve domestic business conditions, including the investment environment, through structural economic reforms that the GOJ's major ministries have deemed necessary to ensure the international competitiveness of Japanese firms. The following are items we consider relatively noteworthy:

--easing of restrictions on foreign capital entry: under the Foreign Exchange and Foreign Trade Control Law, the GOJ requires prior notice for certain types of foreign investment that have national security implications. Under the OECD Capital Liberalization Code (CLC), reservations deemed necessary are permitted for certain businesses. As part of its revised deregulation plan, the GOJ pledged to redesignate mining--which currently requires prior notification--to an ex-post facto reporting category. Within JFY 1997, the GOJ will study other non-liberalized categories reserved under the OECD CLC--e.g., agriculture, forestry, petroleum, and leather manufacturing.

--international contract notification requirement: under the antimonopoly law, the Japan Fair Trade Commission (JFTC) is authorized to screen certain notifiable international contracts--including joint ventures involving foreigners--and to prohibit specific contracts that, in the JFTC's judgment, might cause unreasonable restraints on trade or involve the use of unfair trade practices. Any Japanese entrepreneur who enters into an international contract that is notifiable under JFTC rules must file with the commission within 30 days of concluding such an agreement. As part of the revised deregulation plan, the JFTC pledged to make a decision on this issue by the end of JFY 1996 with a view toward abolishing, in principle, the current notification system in the interest of promoting economic globalization and easing the burden on business operators.

--holding companies: for almost 50 years, the antimonopoly law has banned the establishment of pure holding companies. There are historical reasons for this (i.e., the legacy of pre-war and wartime "zaibatsu" conglomerates), as well as economic reasons--namely, the need to prevent excess concentration of economic power in the hands of dominant companies and "keiretsu"-type Japanese industry alliances. Both the revised deregulation plan and the Japan Investment Council's (JIC) April 1996 statement in support of mergers and acquisitions included ideas on lifting this long-standing prohibition. In JFY 1996, the JIC will review regulations pertaining to holding companies in the direction of liberalizing such companies in a manner that does not violate the antimonopoly law.

--JFTC's abolition of 33 antitrust-exempted cartels by the end of JFY 1998. This is a positive step, but most of the industry-related and rationalization cartels targeted for abolition have not been used for many years--these include price cartels for cultured pearls and silk cocoons. Some Japanese firms will benefit from the abolition of cartels in coastal shipping and import-export businesses. However, the revised deregulation plan fails to curb the authority of the ministries to resurrect or create new cartels in the future.

Under the U.S.-Japan Economic Framework, the United States continues to hold bilateral working-level discussions in an effort to encourage the Japanese to promote deregulation, competition policy, and administrative reform measures that would increase imports and foreign direct investment into Japan.

H. Capital Markets and Portfolio Investment

Japan maintains no formal restrictions on inward portfolio investment. However, corporate practices like cross share-holding limit the percentage of shares in individual firms and in the overall market that foreign investors can actually purchase, while informal restrictions on management participation of foreign shareholders limit the attractiveness of Japan's equity market to foreign investors.

Domestic and foreign investors have free access to a variety of credit instruments at market rates. In general, foreign companies in Japan have not experienced significant difficulties in obtaining funding. Most foreign firms secure short-term credit by borrowing from Japanese commercial banks or one of the (as of July 1996) 145 branches of the 93 foreign banks located in Japan. Medium-term loans are available from special long-term credit banks (e.g., the Industrial Bank of Japan) that lend to foreign and domestic companies, as well as from trust banks and life insurance companies. The Japan Development Bank makes long-term loans, but such funding is more difficult for foreign companies to arrange in Japan. Large foreign firms have tended to use foreign sources for long-term financial needs.

I. Political Violence

In general, political violence is rare in Japan, and acts of political violence involving American business interests are virtually unknown.

J. Corruption

Chapter XXV, Articles 193 through 198 of the Penal Code of Japan covers crimes of official corruption. Specifically, Articles 197 and 198 speak to the giving and acceptance of bribes. An individual convicted under these articles is subject, depending on which article, to penal servitude ranging from one to seven years, and possible fines of two and a half million yen or the monetary equivalent of the bribe.

Although the articles do not directly address the issue of bribes to foreign officials, Article Seven of the General Provisions Section of the Penal Code defines the term "public servant" as a government official, a public entity official, and an assemblyman, committee member or other employee in public duties in accordance with laws and ordinances. Article Three of the general provisions states that the Penal Code shall apply to any Japanese national who commits violations of these crimes outside the territory of Japan. Therefore, an inference can be drawn that public servants would include foreign officials.

While corruption usually involves the exchange of moneys, the methods in which business is conducted in Japan can often lead to what some foreign Japan-watchers have described as "institutionalized" corruption. For example, the web of close relationships between Japanese companies, politicians, government organizations, and universities has been said to foster an inwardly- cooperative business climate that is conducive to the awarding of contract, positions, etc., within a tight circle of local players.

"Amakudari" is the practice whereby senior government officials retire into top positions in Japanese companies, usually in industries that they once regulated. These officials then function as in-house consultants on regulatory matters and as lobbyists to their former ministries and agencies. "Amakudari" individuals are particularly common in the financial, construction, transportation, and pharmaceutical industries--which, not coincidentally, are heavily regulated. Foreign companies do not enjoy such pipelines into the bureaucracy, and thus are disadvantaged in their ability to understand and deal with laws, regulations, and informal ministry guidance.

While there have been some high profile exposures of officials having either given or accepted bribes, the Japanese government has not had an aggressive record of criminal prosecution. Those prosecuted have generally received suspended sentences. In addition, until 1993, shareholders were reluctant to bring civil suits against a company and/or its directors for the payment or acceptance of bribes, because the plaintiff had been required to deposit with the court between one-half to one-and-a-half percent of the total amount of the bribe in question. For most consumers of legal services, the cost of bringing suit was prohibitive, and the court system was essentially inaccessible. In 1993, the law was changed and the deposit requirement was abandoned. Currently, a suit can be brought with a filing fee of 8,500 yen. In the past three years, over 200 civil suits have been filed. The law also provides for company directors to be found personally liable for the amount of the bribe, and some judgments have been rendered against company directors. This change will significantly impact the payment of bribes, as individuals are held personally liable without the shield of the company to protect them.

K. Bilateral Investment Agreements

The 1952 U.S.-Japan Treaty of Friendship, Commerce, and Navigation gives national treatment and Most Favored Nation (MFN) treatment to most U.S. investments in Japan. Japan has similar bilateral investment protection treaties with Egypt, Sri Lanka, China, and Turkey. Japan continues to negotiate bilateral investment treaties with Pakistan, five of the six ASEAN countries (Malaysia, Thailand, the Philippines, Singapore, and Indonesia), and five Central and East European countries (Poland, Hungary, Romania, Bulgaria, and the Czech Republic). Slovakia and two Latin American countries (Argentina and Peru) have also been requesting Japan to establish such a treaty.

U.S. concerns regarding barriers to foreign investment in Japan continue to be addressed in the investment sub-basket of the economic harmonization basket of the U.S.-Japan Economic Framework. In July 1995, the U.S. and Japan signed the "Policies and Measures Regarding Inward Direct Investment and Buyer-Supplier Relationships." The agreement codifies inward investment-related policies and promotion programs the GOJ has instituted during the course of past negotiations and details further actions the GOJ intends to take to promote FDI into Japan. Significant measures include GOJ pledges to:

--extend the 1992 "Inward Investment Law" and to make its private participation promotion (or "minkatsu") programs, including low interest loans and tax incentives, available to foreign investors; (this law has been extended and will remain in effect until May 2006)

--earnestly expand efforts to inform foreign firms about existing FDI-related financial and tax incentives, and to broaden eligibility criteria and lending under these pro