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1996 Country Reports On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1997.

1/ January­September, seasonally adjusted, annualized
2/ January­September, year­over­year
3/ January­September, non­seasonally adjusted average
4/ January­September, non­seasonally adjusted
5/ Japanese customs basis
6/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996.
7/ End of September

1. General Policy Framework

Japan's economy, the world's second largest at roughly $4.7 trillion, has grown at 3.7 percent in real terms in the first three quarters of 1996, after registering less than two percent growth for four years from 1992 to 1995. The government, however, officially projects 1.9 percent growth for fiscal year 1997, the lowest official forecast for growth in the postwar era.

The current economic slowdown, which began in mid­1991, is one of the longest in Japan's postwar history. (Until 1992­3, Japan had never experienced two consecutive years of less than 3 percent real growth in the postwar period.) The surge in asset prices to unsustainable levels and high rates of capital investment and hiring in the late 1980s gave way by 1991 to sharply slower growth, corporate restructuring, and balance sheet adjustment by businesses and consumers.

In recent years, the Japanese government has used public spending to offset weak or negative private demand growth. Six fiscal stimulus packages between August 1992 and September 1995 have boosted public investment spending substantially, while temporary tax cuts have supported private demand.

Japan's 1995 external accounts posted global trade and current account surpluses of $132 billion (BOP basis) and $111 billion, respectively. Through the first eight months of 1996, import volume grew at a double digit rate in spite of sluggish domestic demand growth, while exports rose at a more moderate pace. The current account surplus through the first eight months of 1996 fell to an annualized level of approximately $66 billion.

In order to ease credit conditions to support the economy, the Bank of Japan lowered the official discount rate nine times between mid­1991 and September 1995, from 6.0 percent per year to 0.5 percent. Nominal interest rates have set new record lows during 1996; still, bank lending has remained sluggish.

2. Exchange Rate Policy

The yen has generally depreciated against the dollar in 1996. The average exchange rate through the first nine months of 1996 was 107 yen per dollar, versus 94 yen per dollar in 1995. The U.S.­Japan financial services agreement of February 1995 resulted in significant relaxation of foreign exchange controls, and Japanese authorities are considering adopting additional decontrols in the near future.

3. Structural Policies

Pricing policy: Japan is a market economy, with prices generally set in accordance with supply and demand. However, with very high gross retail margins (needed to cover high fixed and personnel costs) and a complex distribution system, Japan's retail prices exhibit greater downward stickiness than in other large market economies. Moreover, some sectors such as construction are susceptible to cartel­like pricing arrangements, and in many key sectors heavily regulated by the government (i.e. transport, energy) some prices are still set by government policy.

Tax policy: Japanese corporate taxes are generally high by OECD standards. Income tax levels vary by income bracket; the scale is highly progressive. Temporary income tax cuts totaling 2 trillion yen per year expired at the end of 1996, while the current 3 percent consumption tax is scheduled to be increased to 5 percent in April 1997.

Regulatory Policy: Japan's economy remains highly regulated, and the Japanese government and business community recognize that deregulation is a high priority issue. Still, opposition to change remains strong among vested interest groups and the economy remains burdened by numerous national and local government regulations, which have the effect of impeding market access by foreign firms. Official regulations also reinforce traditional Japanese business practices that restrict competition, help block new entrants (domestic or foreign) and raise costs.

Deregulation: In April 1995 the government issued a three year action plan aimed at deregulation. The plan was revised in March 1996, and the final revision will take place in March 1997. To date deregulation efforts have made limited progress, inadequately addressing important issues in a wide range of sectors including distribution, transportation, legal services and labor. Examples of regulations that act as impediments include: the large scale retail store law, designed to protect local merchants from large retail competition; highly restrictive harbor practices; severe restrictions on foreign lawyers; and the Japanese government's tight regulation of all nongovernmental employment services, including job placement, executive search, recruitment, personnel counseling and training, and temporary worker services.

4. Debt Management Policies

Japan is the world's largest net creditor. It is an active participant together with the United States in international discussions of developing country indebtedness issues in a variety of fora.

5. Significant Barriers to U.S. Exports

Telecom and Broadcast: Access to the telecommunications and broadcasting services market remains constrained by both regulatory barriers and monopoly practices. NTT's exploitation of its monopoly power has severely restricted domestic competition and hinders U.S. firms' efforts to enter this market. A 33 percent foreign investment limit in cable TV significantly restricts access to a market where U.S. companies excel. Similar investment restrictions, and a primitive regulatory regime, hinder access to the direct­to­home satellite broadcasting market. Japan's deviance from international standards for telecommunications equipment hampers foreign equipment makers' efforts to sell in Japan.

Foreign direct investment (FDI): FDI into Japan has remained extremely small in scale relative to the size of the economy. In 1995, FDI totalled $2 billion, or 0.02 percent of GDP, as compared to $60 billion, or 1.0 percent, in the United States. The low level of FDI reflects the high costs of doing business, formerly explicit investment barriers, and a continuing environment of structural impediments to greater foreign investment. The challenges facing foreign investors seeking to establish or enhance a presence in Japan include laws and regulations that directly or indirectly restrict the establishment of business facilities, close ties between government and industry, informal exclusive buyer­supplier networks and alliances, and a difficult regulatory and opinion environment for foreign or domestic acquisitions of existing Japanese firms.

Recently, the Japanese government has implemented some potentially useful measures from the perspective of increasing foreign direct investment, including easing restrictions on foreign capital entry. Still, most Japanese government investment promotion measures to date have been dictated by domestic priorities, or grafted onto programs designed for regional economic development, restructuring of ailing industries, foreign technology acquisition, and other purposes. In addition, the acquisition of Japanese companies is difficult, due in part to crossholding of shares between allied companies and a resulting small publicly traded percentage of shares. This practice hinders the efforts of foreign firms wishing to acquire distribution or service networks through mergers or acquisitions.

Insurance: In 1996, Japan and the United States resolved a dispute regarding domestic market opening efforts by Japanese regulators and implementation of the 1994 bilateral insurance agreement.

Standards, Testing, Labeling, and Certification: Standards, testing, labeling and certification problems hamper market access in Japan. In some cases, advances in technology, products or processing make Japanese standards outdated and restrictive. Domestic industry often supports standards that are unique and restrict competition, although in some areas external pressure has brought about the simplification or harmonization of standards to comply with international practices. Fresh agricultural products continue to be subject to extensive restrictions including phytosanitary restraints, required overseas production site inspections, fumigation requirements and tariff rate or import quotas.

Government Procurement Practices: Japan is a WTO member and a party to the WTO Government Procurement Agreement (GPA). While government procurement in Japan generally conforms to the letter of the WTO agreement, certain practices cause concern. For example, some government entities appear to be shielding some procurement from open bidding through questionable interpretation of existing WTO and bilateral agreements. Some local governments covered by GPA procedures do not yet appear to be fully complying with GPA procedures.

Customs Procedures: Slow import clearance into Japan hinders access by Japanese companies and consumers to competitive U.S. products. U.S. air cargo companies incur high costs in handling and processing imports into Japan and face clearance bottlenecks as well. For many commodities import clearance requires approval from agencies in addition to customs. While Japanese customs has made progress in automating its own clearing procedures, and efforts are underway to integrate the procedures of other Japanese government agencies over the next several years, the speed of import clearance is still determined by the agency with the slowest procedures.

6. Export Subsidies Policies

Japan conforms to the OECD export credit arrangement, including the agreement on the use of tied aid credit. The Japanese government subsidizes exports as permitted by the arrangement, which allows softer terms for export financing to developing nations. Of the $14.49 billion that Japan allotted for official development assistance in 1995, approximately 28.4 percent was earmarked for loan aid.

Japan has eliminated tied aid credits and now extends about 98 percent of its loan aid under officially untied terms. But U.S. exporters continue to face difficulties in competing due to the use of less developed country untied aid where bidding is restricted to Japanese and local firms and tied feasibility studies (funded by grant aid) for untied loan aid projects where specifications are targeted to Japanese bidders. Japan exempts exports from the three percent consumption tax in force since 1989.

7. Protection of U.S. Intellectual Property Rights

Japan is a party to the Berne and Universal Copyright Conventions, the Paris Convention on industrial property, and the Patent Cooperation Treaty. Japan's intellectual property rights (IPR) regime affords national treatment to U.S. entities. Average patent pendency in Japan is one of the longest among developed countries, averaging over five years from application to grant. This long period coupled with a practice of opening all patent applications to public inspection 18 months after filing exposes applications to lengthy public scrutiny with the potential of limited legal protection. Bilateral talks on this lengthy pendency period have led to some reduction, and efforts for a further reduction continue.

Many Japanese companies use the patent filing system as a tool of corporate strategy, making many applications to cover slight variations in technology. The rights of U.S. subscribers in Japan can be circumscribed by filings of applications for similar inventions or processes.

A United States­Japan IPR agreement, signed in August 1994, has provided some relief from problems posed by the lengthy pendency period and the practice of multiple opposition filing. In December 1994, the Japanese Diet passed legislation introduced by the Japanese Patent Office to revise the system effective January 1, 1996. The revised system allows opposition filings only after a patent is granted. Multiple opposition filings are consolidated and addressed in a single proceeding, minimizing time and costs. In addition, revised guidelines for patent examiners were introduced. These new guidelines directed them to grant patents based on prophetic as well as working examples (similar to U.S. and most other countries' practice) and, importantly, applied these guidelines to the substantial backlog of outstanding applications.

Trademark applications are also processed slowly, averaging two years and three months but sometime stretching to three or four years. Unauthorized use of a trademark carries no penalty until an application is approved. Service marks were included in trademark law in 1992. End user software primacy remains a major concern of U.S. software producers. A campaign has been undertaken by these companies to help ensure compliance in licensing arrangements. The process has met with limited success in the Japanese courts.

In the area of copyright protection for sound recordings, the Japanese Government amended its copyright law in December, 1996, to extend protection of sound recordings to 50 years. This will comply with its WTO TRIPs obligations.

8. Worker Rights

a. The Right of Association: The Constitution of Japan provides for the right of workers to associate freely in unions. Approximately 24 percent of the work force belongs to unions, which are free from government control and influence. However, members of the armed forces, police and firefighters are not permitted to form unions or to strike.

b. The Right to Organize and Bargain Collectively: The constitution provides unions with the right to organize, bargain, and act collectively. These rights are exercised freely, and collective bargaining is practiced widely. The right to strike is implicitly assumed by the constitution and is exercised freely, if infrequently. As noted above, the collective bargaining rights of public employees are limited. Government employee pay raises are determined by the government, based on the recommendation of the Independent National Personnel Authority.

c. Prohibition of Forced or Compulsory Labor: The Labor Standards Law prohibits the use of forced labor, and there are no known cases of forced or compulsory labor.

d. Minimum Age for Employment of Children: Under the 1987 Revised Labor Standards Law, minors under the age of 15 may not be employed, and those under the age of 18 may not be employed in dangerous or harmful work. The Ministry of Labor rigorously enforces child labor laws.

e. Acceptable Conditions of Work: Minimum wages are set on a regional (prefecture) and industry basis, with the input of tripartite (labor, management, public interest) advisory councils. Employer compliance with minimum wages is considered widespread. The Ministry of Labor effectively administers various laws and regulations on hours of work and workplace health and safety.

f. Rights in Sectors with U.S. Investments: Internationally recognized worker rights, as described above, are incorporated into the constitution and laws of Japan and apply to all workers. They do not differ in firms or sectors with U.S. investments from rights in other sectors of the economy.

Source: U.S. Department of Commerce, Bureau of Economic Analysis

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