Cablegate: Japan -- 2009 Draft National Trade Estimates Report

DE RUEHKO #3137/01 3160842
R 110842Z NOV 08



E.O. 12958: N/A


REF: STATE 88685

1. (U) Per reftel instructions, the following is the Post's draft
chapter on Japan for the 2008 National Trade Estimate Report. We
understand Washington agencies will update the trade and investment
data in the first three paragraphs of the report as they have done
in the past. Embassy Econ Section is also emailing the text of the
draft report to USTR, in MS Word format and showing changes from
last year's version.

2. (SBU) Begin text of the draft 2009 National Trade Estimate:


The U.S. goods trade deficit with Japan was $82.8 billion in 2007, a
decrease of $5.8 billion from $88.6 billion in 2006. U.S. goods
exports in 2007 were $62.7 billion, up 5.1 percent from the previous
year. Corresponding U.S. imports from Japan were $145.5 billion,
down 1.8 percent. Japan is currently the fourth largest export
market for U.S. goods.

U.S. exports of private commercial services (i.e., excluding
military and government) to Japan were $41.3 billion in 2006 (latest
data available), and U.S. imports were $23.9 billion. Sales of
services in Japan by majority U.S. owned affiliates were $53.5
billion in 2005 (latest data available), while sales of services in
the United States by majority Japan owned firms were $28.4 billion.

The stock of U.S. foreign direct investment (FDI) in Japan was $91.8
billion in 2006 (latest data available), up from $79.3 billion in
2005. U.S. FDI in Japan is concentrated largely in the finance,
manufacturing, wholesale trade, and the professional, scientific,
and technical services sectors.


The United States-Japan Regulatory Reform and Competition Policy

Through the United States-Japan Regulatory Reform and Competition
Policy Initiative (Regulatory Reform Initiative), the U.S.
Government seeks changes to regulations and practices in Japan that
limit competition, prevent development of innovative products and
services, and hinder access for U.S. products and services to
Japan's market. The U.S. Government addresses a wide range of
issues through this Regulatory Reform Initiative in specific
industry sectors includings information technologies,
telecommunications, and pharmaceuticals/medical devices, as well as
in other areas that affect multiple sectors such as competition
policy and insufficient transparency in government rule-making.

The governments of the United States and Japan concluded the
Regulatory Reform Initiative's seventh annual Report to the Leaders
in June 2008, which documented progress made under the Regulatory
Reform Initiative since late 2007. Continuing work under the
Initiative, the U.S. Government presented further, detailed
recommendations to Japan in October 2008. After several months of
working- and high-level talks, the next Report documenting progress
is expected to be completed in the summer of 2009.

The following sections on Sectoral Regulatory Reform and Structural
Regulatory Reform outline some of the key reform and market access
issues that the U.S. Government continues to seek progress on by
Japan under this Regulatory Reform Initiative.



In its 2008 recommendations to Japan under the Regulatory Reform
Initiative, the U.S. Government continued to urge that Japan ensure
fair market opportunities for emerging technologies and business
models, develop a regulatory framework for converged and
Internet-enabled services, and strengthen competitive safeguards on
dominant carriers. The U.S. Government also continues to request
that Japan improve transparency in rulemaking and ensure the
impartiality of its regulatory decision making, including by
abolishing the legal requirement that the government own one-third
of the dominant carrier, Nippon Telegraph and Telephone (NTT).

Interconnection: Japanese laws and regulations do not prevent NTT's
regional carriers from imposing high rates and onerous conditions on
their competitors for interconnection. Japan's Ministry of Internal
Affairs and Communications (MIC) made further revisions to its Rules

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for Interconnection Charges, resulting in modest reductions in
interconnection rates, which fell another 3.4 percent in April 2008.
On NTT's fiber optic infrastructure, which is not regulated like
traditional infrastructure, NTT introduced interconnection rates
that are high by international standards and almost four times those
applied to traffic on other fixed-line networks regulated by MIC.
Moreover, NTT's fiber optic infrastructure is not regulated in a
manner transparent to consumers. The U.S. Government looks to MIC
to ensure reasonable interconnection terms and conditions and
competitive rates are established, particularly as NTT continues
deployment of its Internet Protocol (IP) based Next Generation
Network replacing the analog network that all carriers currently use
to reach subscribers in Japan.

Dominant Carrier Regulation: NTT continues to dominate
overwhelmingly Japan's fixed line market. Japan sought to promote
competition in the telecommunications market through its Competition
Promotion Program. However, as Japan's broadband users turn from
digital subscriber line (DSL) to optical fiber, NTT's competitors
fear NTT might expand its dominant position through control of the
fiber-to-the-home (FTTH) market and by bundling NTT fixed services
with those of NTT DoCoMo, the dominant wireless operator. In
October 2007, MIC issued a revised "New Competition Promotion
Program 2010" in an effort to address competition concerns as
suppliers increasingly offer telecommunications services over IP
based networks. The U.S. Government has urged Japan to speed the
plan's implementation and will continue to monitor MIC's
implementation of the program.

Universal Service Program: Japan approved a system, beginning in
January 2007, for NTT East and West and its competitors to collect a
seven yen per month universal service fee from voice services
subscribers. Based on a periodic review, MIC approved a 25 percent
increase in the fee, from six to eight yen per month per number,
effective January 2009. NTT regional carriers (the only carriers
able to benefit from the fund) then receive these fees through the
universal service fund to offset the costs of providing services in
rural areas. The U.S. Government has urged Japan to broaden the
base of this fund's potential beneficiaries and ensure it is
implemented in a competitively neutral manner. Cross-subsidization
of NTT West by NTT East using interconnection revenue (ostensibly to
address NTT West's higher network costs resulting from the higher
number of rural subscribers) further undercuts arguments for the
program's need.

Mobile Termination: Like most countries, Japan uses the "Calling
Party Pays" system, imposing the entire cost of termination on the
calling party (enabling mobile subscribers to benefit from free
incoming calls). Although NTT DoCoMo, the dominant mobile incumbent
carrier, has lowered its termination rates over the past 10 years,
rates remain high. Despite recognizing DoCoMo as a dominant carrier
in 2002, MIC does not require DoCoMo to explain how its rates are
calculated. With new entrants now in the mobile sector, the U.S.
Government will closely monitor actions both by DoCoMo and MIC to
address such rates to ensure the possibility of effective

New Mobile Wireless Licenses: Starting in 2005, MIC began opening
the market to new mobile providers beyond the three main incumbents
by auctioning blocks of spectrum to a limited number of new wireless
entrants. In December 2007, MIC awarded two additional licenses for
wireless broadband services. However, the complexity of factors MIC
chose in determining how to evaluate applications raises questions
about whether it achieved its stated goal of awarding these licenses
based on objective criteria. Given the scarcity of spectrum and
high demand for new technologies, the U.S. Government has urged MIC
to consider alternative means, including auctions, to assign
commercial spectrum in a timely, transparent, objective, and
nondiscriminatory manner that adheres to principles of technology
neutrality. The U.S. Government has also stressed to Japan the
importance of ensuring reasonable "roaming" rates for competitors
and Mobile Virtual Network Operators (MVNOs), an issue where MIC is
making noticeable progress through policies and dispute mediation,
as evidenced by an increase in service offerings launched by new
entrants in 2007.

Information Technologies (IT)

Through its October 2008 Regulatory Reform Initiative
recommendations, the U.S. Government continues to urge that Japan
ensures its regulatory framework for IT and electronic commerce
promotes competition and innovation, enhances transparency, and
protects users, in addition to taking new steps to protect
intellectual property rights (IPR) in the face of challenges posed
by globalization and new technologies in a digital era.

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IT and Electronic Commerce Policymaking: To augment measures Japan
has taken to promote and support the use of IT and electronic
commerce, the U.S. Government has urged Japan to take steps to
ensure transparent policy and rule-making processes are applied in
order to provide interested parties with opportunities to express
their views and to be aware of and participate in the work of
related government-appointed advisory groups; implement laws,
regulations, and guidelines to promote choice and competitive market
conditions by ensuring technology providers and users have the
flexibility to choose preferred technologies; work cooperatively
with the private sector on international standards development and,
when appropriate, use established international standards in
formulating IT and electronic commerce guidelines and regulations;
and ensure its IT and electronic commerce policies and laws are
compatible with international practices.

Privacy: With Japan's Law on the Protection of Personal Information
(Privacy Law) entry into effect in April 2005, Japan's ministries
and agencies formulated implementation guidelines to ensure its
effectiveness. The Cabinet Office reviewed the Privacy Law's
implementation and released a report in June 2007. The U.S.
Government stressed that clear, consistent, and predictable privacy
guidelines should be developed across ministries, with separate
guideline provisions added as necessary for individual business
sectors, and that any recommendations regarding cross-border
transfers provide effective protection for individuals' personal
information without unduly restricting the international flow of

IPR Protection: The U.S. Government continued to urge Japan to
adopt a number of new measures to strengthen IPR protection. These
measures include extending the term of copyright for sound recording
and all other subject matter protected under Japan's Copyright Law;
adopting a statutory damages system that would deter infringing
activities; improving the efficacy of the patent application
process; and actively working with the United States to develop ways
to promote greater protection of IPR worldwide, especially in Asia.
(See also "Intellectual Property Rights Protection" in this

Government IT Procurement: In order to increase the transparency
and fairness of Japan's IT procurements and to stimulate innovation
and competition in those procurement activities, the U.S. Government
has urged Japan to ensure all procuring entities comply with Japan's
Basic Policy for the Public Procurement of Computer Systems; improve
communications with suppliers interested in the implementation of
Japan's government IT procurement policy; apply a new Japanese
system, comparable to the U.S. Bayh-Dole system to allow companies
to control the intellectual property of inventions they develop
under government contracts to all government procurement; allow IT
vendors to limit their liability to a level proportionate to the
risks they take in government procurement transactions; reduce the
use of sole source contracting in IT procurements, including by
applying rules on competitive bidding to independent administrative
legal entities, government-sponsored private companies, and local
governments; and ensure contracts are swiftly concluded after
winning bidders are chosen and are not backdated.

Medical Devices and Pharmaceuticals
The U.S. Government continues to urge Japan to reform its
reimbursement pricing and regulatory systems for pharmaceuticals and
medical devices in order to foster industry's development of
innovative products and to improve the access of patients in Japan
to such products. The Ministry of Health, Labor and Welfare (MHLW),
in its 2007-2008 "Vision" policy paper, called for eliminating lag
times for drug and device approvals, developing an internationally
competitive industry, and making Japan an attractive investment
destination. The U.S. Government supports Japan's goal of ending
the device and drug lags by increasing the number of reviewers to
expedite product approvals and by reforming the pricing system to
improve incentives for research and development of advanced medical
Japan is the largest foreign market for U.S. medical devices and
pharmaceuticals. The U.S. Government, in its 2008 Regulatory Reform
Initiative recommendations, urged Japan to take measures to improve
its regulatory system in order to eliminate the lag in the
introduction in Japan of innovative pharmaceuticals and medical
devices. The U.S. Government urged Japan to foster simultaneous
global drug development, cut drug approval times by reforming review
and clinical-trial consultation systems, and to improve vaccine
reviews. The U.S. Government urged Japan to reduce device approval
times by, inter alia, setting and attaining performance goals and
hiring more reviewers, expediting approvals of minor changes in
devices, and streamlining IVD approvals. The U.S. Government
expects Japan's new goals of improving its regulatory system will
prove effective, including plans to cut drug approval times by 2.5

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years by 2012; more than double the drug review staff by 2010; and
to increase the device review staff by 30 percent by 2009.
In its April 1, 2008 biennial price revision, Japan adopted
reimbursement pricing policies that are inconsistent with the
Government of Japan's goal of rewarding innovation and developing an
internationally competitive drug and device industry. Those 2008
policies include broadening the repricing rule based on market
expansion to cover a wider range of drugs, regardless of whether the
drugs experienced increased market share. The U.S. Government
continues to urge Japan to abolish repricing based on market
expansion because the rule reduces incentives for introducing
innovative medicines in Japan. Japan also adopted policies that
imposed a stricter application of the "Foreign Average Price" (FAP)
rule for medical devices, even though the rule has already
significantly reduced the price of devices in Japan. The U.S.
continues strongly urging Japan to refrain from implementing
reimbursement pricing policies that hinder development and
introduction of innovative medical devices and pharmaceuticals.
Such Japanese policies not only discourage companies from
efficiently introducing advanced medical products to the Japanese
market, a particular concern due to Japan's aging population, but
also harm the competitiveness of the industry and serve as a
disincentive to investment in research and development. In its 2008
price revision, MHLW continued to adhere to the use of biennial,
instead of annual, reimbursement rate reviews. The U.S. Government
continues strongly urging Japan to avoid any reimbursement
changes that undermine the introduction of innovative products.
In an effort to improve its drug reimbursement policies, MHLW in the
2008 Report to the Leaders noted it has agreed to provide
opportunities for industry to comment on recommendations for
pharmaceutical pricing reform, and for industry to make proposals to
improve economic returns for patented drugs. With regard to
reimbursement for medical devices, MHLW adopted measures in its 2008
price revision to reward innovative medical technologies. These
measures include revising reimbursement price adjustment premiums,
shortening the reimbursement listing procedure for category (C1)
medical devices, and properly evaluating advanced diagnostic imaging
equipment and techniques.
Japan's 2002 Blood Law established a principle of "self-sufficiency"
and includes a Supply and Demand Plan for the government to manage
the blood market. The U.S. Government continues to urge Japan to
not restrict imports of plasma protein products so as to increase
patient access to life-saving blood plasma therapies. In
particular, the U.S. Government urges Japan to allow labeling of
blood products to reflect country of origin rather than a
"voluntary" or "non-voluntary" designation, and to increase the
efficiency of product reviews. The U.S. Government also urges Japan
to develop a separate reimbursement pricing system for blood
products that accounts for the unique nature of plasma protein
therapy characteristics (Japan currently maintains a single
reimbursement system for both drugs and blood products).
Nutritional Supplements: Japan has taken steps to streamline import
procedures and to open its $10 billion nutritional supplements
market. However, many market access barriers remain. Unusual
restrictions on health and nutrition claims are a major concern.
Japan classifies nutritional supplements as food. Only those
products approved as Foods for Specific Health Uses (FOSHU) or Foods
with Nutritional Function Claims (FNFC) are allowed to have health
or structure/function claims. However, producers are unable to
obtain FOSHU or FNFC approval for most nutritional supplements due
to FOSHU's costly and time consuming approval process and the
limited range of vitamins and minerals that qualify for FNFC. Other
concerns include excessively long lead times for food additive
applications; high levels of import duties for nutritional
supplements compared to duties on pharmaceuticals containing the
same ingredient(s); stopping of shipments at quarantine stations due
to naturally occurring traces of substances such as benzoic acid and
sorbic acid, which Japan classifies as food additives; and the
potential for opaque development of health food safety regulations.

Cosmetics and Quasi-Drugs: Japan is the world's second-largest
market for cosmetics after the United States, yet regulatory
barriers continue to limit consumer access to safe and innovative
products. Unlike the U.S. over the counter drug monograph system,
Japan requires premarket approval for products such as medicated
cosmetics that are classified as quasi-drugs under the
Pharmaceutical Affairs Law. The approval process includes
requirements that are burdensome, lack transparency, and do not
appear to enhance product safety, quality or efficacy. In addition,
many types of advertising claims for cosmetics and quasi-drugs are
prohibited, even if scientifically verifiable, denying consumers
relevant and important information to help them make sound choices.
Other concerns related to cosmetics and quasi-drugs include
burdensome paperwork and long lead times for the approval of
imported products. The U.S. Government continues to recommend Japan

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address these and other issues under the Regulatory Reform

Financial Services

The Japanese government has stated repeatedly its goal of improving
the international competitiveness of Japan's financial sector. In
December 2007, the Financial Services Agency (FSA) unveiled its
"Plan for Strengthening the Competitiveness of Japan's Financial and
Capital Markets," and submitted amendments to the Financial
Instruments and Exchange Law (FIEL) in March 2008. The 2006 FIEL
amended 89 financial laws and consolidated the remainder into a
cohesive text. The FIEL sought to enhance investor protection and
promote the movement of financial assets into securities markets
through cross-sectoral rules for investment product sales,
management, and disclosure. However, given the hundreds of pages of
statutes comprising the FIEL and that implementation of the law
began September 30, 2007, the FIEL's overall effect is still not
discernable. Partners are looking to see that FIEL implementing
regulations, interpretation, and enforcement are evident,
consistent, and predictable. As part of its principles-based
supervisory initiative, FSA announced a new code of conduct for
financial institutions April 18, 2008 after a series of
consultations with business associations.

Japan has improved the transparency and predictability of the
financial regulatory system, but further progress is needed. In
particular, FSA could expand the body of written interpretations of
Japan's financial laws. While FSA has enhanced supervision and
disclosure, it must continue to move forward to establish
transparency in regulation and supervision of financial institutions
to bring them in line with international standards and best
practices in order to help realize the government's goal of
improving Japan's global competitiveness as a financial services

No-Action Letters and Written Interpretations: The FSA has made
some efforts to enhance the effectiveness of Japan's no-action
letter system, including by soliciting input from U.S. and other
foreign firms on how best to improve the system. Use of the system,
however, has not materially increased. The U.S. Government
continues to recommend FSA explore ways to expand use of the
no-action letter system. The U.S. Government has also encouraged
FSA to expand the written interpretations it provides, including
through greater use of its "interpretive letter" system and
increasing the number of "reference cases" published on the FSA
Internet site.


Japan maintains many tariff and nontariff barriers against trade in
the agricultural sector. The U.S. Government's October 2008
submission to Japan under the Regulatory Reform Initiative includes
several recommendations to enhance the efficiency of the trading
environment for agricultural products and the transparency of
trade-related rules and regulations. These include implementing a
Maximum Residue Limits (MRL) regime that ensures any mitigating
measures are the least trade restrictive possible; providing
national treatment to imports and that are in accordance with
international practices; allowing additional substances in organic
crop production and modifying current pesticide residue policy to
enhance organic trade; completing the review of widely used food
additives that are recognized as safe by the Joint FAO/WHO
Evaluation Committee on Food Additives; implementing a plant
quarantine system that harmonizes the classification of plant pests
and diseases based on the International Plant Protection Convention
standards for official control and risk analysis; and following
international standards for the treatment of post-harvest
fungicides. The United States also continues to call on Japan to
apply science-based standards in accordance with World Organization
for Animal Health (OIE) protocols on the trade in beef. (See also
Standards, Testing, Labeling, and Certification in this chapter.)

Plant Quarantine Issues: Japan maintains a restrictive plant
quarantine system, which includes measures that are not always based
on science. A key impediment to trade is Japan's frequent use of
nationwide bans on imported products in response to narrowly focused
quarantines imposed by exporting countries in their home markets.
Japan's practice runs counter to recognized international standards,
which support targeted, regional bans (e.g., states or counties)
limited to affected geographic areas. For example, when a disease
or pest outbreak is reported in a contained area of the United
States, Japan tends to ban imports of all associated U.S. plant
products regardless of their region of origin. Such steps are
unnecessarily trade restrictive. Through the Regulatory Reform
Initiative, the U.S. Government continues to urge Japan to use pest

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risk analysis that is based on international standards, and to
provide a scientific justification for its responses and to clearly
articulate how adopted quarantine measures accurately reflect the
level of phytosanitary protection Japan has determined to be

Japan's Ministry of Agriculture, Forestry, and Fisheries (MAFF)
prohibits the entry of various fresh plant products due to the
presence of pests, even though some of these pests are also present
in Japan. Japan has a pest forecast system that monitors certain
domestic pests and alerts producers to potential increased pest
damage. For decades, the Japanese government has contended this
system constitutes official control under the International Plant
Protection Convention (IPPC), the international standard setting
body for plant protection. According to the Japanese government, it
must impose a similar system for imported commodities. Japan more
recently took initial steps to harmonize with international
standards. In December 2004, Japan notified the WTO of its intent
to relax quarantine measures for several plant pests and diseases.
In May 2006, five additional cosmopolitan pests were added to the
list of pests subject to relaxed quarantine measures. Although the
U.S. Government welcomes these actions, Japan continues to impose
measures related to many other pests that are more restrictive than
those provided for in international standards and adversely affect
U.S. exporters.


Antimonopoly Law and Competition Policy

Although Japan has made significant positive steps in recent years
to bolster its competition regime, cartel activity and bid rigging
persist with deleterious effects for the country's economy and
government finances. Additional measures to combat anticompetitive
behavior would improve the business environment. Further attention
must also be given to ensuring antimonopoly enforcement procedures
are perceived to be fair and transparent.

Establishing More Effective Deterrence to Anticompetitive Behavior:
The Antimonopoly Act (AMA), Japan's primary competition legislation,
provides for both administrative and criminal sanctions against
violators. However, criminal prosecutions, which would more
effectively deter anticompetitive behavior, have been few. From
1990 through October 2007, the Japan Fair Trade Committee (JFTC)
initiated 12 criminal prosecutions of alleged AMA violators. While
Japanese courts have imposed substantial financial penalties on
companies and prison sentences on individuals convicted of violating
the AMA, they have consistently suspended prison sentences on
individuals, even in the case of repeat offenders. The U.S.
Government continues to urge Japan to take steps to maximize the
effectiveness of enforcement against hard-core violations of the
AMA, including by increasing the number of criminal prosecutions,
strengthening criminal sentences of convicted individuals, and
maintaining a system that imposes both administrative surcharges and
criminal sanctions on corporate participants in cartel and bid
rigging conspiracies.

The JFTC's ability to enforce the AMA effectively is also hindered
by the lack of sufficient personnel. JFTC staff totaled 765,
including 409 assigned to the Investigation Bureau, as of March 31,
2008, with an additional 30 additional staff anticipated by March
2009 The JFTC remains relatively weak, however, in the number of
employees with post-graduate economics training, a factor that
undermines JFTC ability to engage in the careful economic analysis
necessary to properly evaluate non-cartel behavior. The U.S.
Government continues to urge the JFTC to improve its economic
analysis capabilities.

Improving Fairness and Transparency of JFTC Procedures: The JFTC
introduced a system in January 2006 to allow companies subject to a
proposed cease-and-desist or surcharge payment order to review the
evidence relied upon by JFTC staff and to submit evidence and make
arguments in their defense prior to an order being issued. The JFTC
implemented a similar system for proposed recipients of public
warnings for suspected violations of the AMA or the Premiums and
Misrepresentations Act. To ensure further the credibility and
transparency of JFTC hearing procedures, however, the U.S.
Government has asked the Japanese government to lengthen
significantly the two week period during which a company may respond
to a draft cease-and-desist or surcharge order from the JFTC;
increase the number of JFTC hearing examiners who are outside legal
professionals; and strengthen conflict of interest rules with
respect to hearing examiners. The U.S. Government has also
requested clarification of conditions under which the JFTC might
return to an ex-ante hearing system, improved regulations for the
standards and procedures used by the JFTC to issue warnings, and

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recognition of attorney-client privilege in JFTC investigation and
hearing procedures.

Broadening Measures to Combat Bid Rigging: Japanese authorities
have implemented a series of measures to address the problem of
frequent and persistent bid rigging. Apart from several cases of
invocation by the JFTC of the 2003 law against bureaucrat-led bid
rigging (so-called kansei dango), the Ministry of Land,
Infrastructure, Transport and Tourism (MLIT) has strengthened
administrative sanctions against companies found by JFTC to have
engaged in unlawful bid rigging. MLIT also introduced an
administrative leniency program to complement the JFTC leniency
program (designed to help encourage individuals and companies to
report anticompetitive acts) and put in place a series of measures
aimed at ensuring a competitive bidding process for project
contracts tendered by the Ministry. In June 2007, the Japanese Diet
passed new legislation aimed at controlling post-retirement
employment by Japanese government officials in companies they
previously helped regulate or were otherwise involved with while in
government service, the so-called "descent from Heaven" (amakudari),
which has been a factor in many bid rigging conspiracies. The U.S.
Government has recommended that Japan increase the standard minimum
period of suspension from bidding for companies involved in bid
rigging conspiracies; work to prevent conflicts of interest in
government procurement; strengthen efforts to eliminate involvement
in bid rigging by government officials; and expand the existing
administrative leniency programs.


Transparency issues continue to be a top concern of U.S. companies
that operate in the Japanese market. The U.S. Government has
strongly urged Japan to adopt a number of new measures to achieve a
higher degree of transparency in governmental regulatory and policy
making processes -- a critical ingredient necessary to further
improve the business and trade environment.

Advisory Groups: Although advisory councils and other government
commissioned study groups are accorded a significant role in the
development of regulations and policies in Japan, the process of
forming these councils and study groups often remains opaque and
nonmembers are not uniformly offered meaningful opportunities to
provide input into these groups' decision-making processes. The
U.S. Government continues to urge Japan to ensure transparency of
advisory councils and other government sponsored working groups
through new requirements, including those that will ensure ample and
meaningful opportunities are provided for all interested parties, as
appropriate, to participate in and directly provide input to these

Public Comment Procedures (PCP): U.S. companies are frustrated by
the inadequate degree to which Japanese ministries and agencies
implement public comment procedures. In particular, concern remains
that comment periods are unnecessarily short and comments provided
are not adequately taken into consideration before final decisions
are made. The U.S. Government has stressed the need for Japan to
ensure its PCP all being fully implemented and to make additional
revisions to the system so that truly meaningful opportunities are
made available for public input into policy-making and regulatory
processes. In addition, the U.S. Government continues to encourage
Japan's ministries and agencies to accelerate the voluntary practice
of providing greater opportunities for the public to comment on
legislation in the early stages of its formation.

Transparency in Regulation and Regulatory Enforcement: To ensure
the private sector has sufficient information about regulations,
including interpretations of those regulations, and the information
necessary to comply, the U.S. Government has requested Japan
specifically require its ministries and agencies to make public
their regulations and any statements of policy of generally
applicable interpretation of those regulations.


The Japanese government's effort to privatize the Japan Post Group
has made important progress. The U.S. Government recognizes that
reform in this area, if implemented in a fully market-oriented
manner, can have an important positive effect on the Japanese
economy by stimulating competition and leading to a more productive
use of resources.

The U.S. Government welcomes the ongoing privatization of Japan
Post, which has multi-billion dollar banking and insurance
businesses in addition to its mail and parcel delivery operations.
The U.S. Government monitors carefully the implementation of the
Japanese Government's reform efforts, and continues to call on the

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Japanese Government to ensure all necessary measures are taken to
achieve a level playing field between the Japan Post companies and
private sector participants in Japan's banking, insurance, and
express delivery markets.

In the area of express carrier services, the U.S. Government remains
concerned by unequal conditions of competition between Japan Post
Service and U.S. international express delivery providers. The U.S.
Government is strongly urging Japan to enhance fair and equal
competition, including by ensuring Japan Post Service is subject to
similar customs clearance procedures and costs for international
express delivery services and that subsidization of Japan Post
Service's international express service by revenue from
noncompetitive postal services is prevented.

The U.S. Government also has continued to urge the Japanese
government to ensure that the process by which this reform proceeds
is made fully transparent, including by full and meaningful use of
Public Comment Procedures and through opportunities for interested
parties to express views to related officials and advisory bodies
before decisions are made. The U.S. Government is additionally
asking Japan to ensure the triennial review of postal privatization
is open and addresses the equivalence of competition in the banking,
insurance, and express delivery sectors. (For detailed discussion
of Japan Post privatization and the postal insurance corporation,
see "Insurance" under the Services Barriers section.)

Commercial Law

Japan undertook a major reform of its commercial law by enacting a
new Corporate Code, which entered into force May 1, 2006. Among
other provisions, the code permits the use of modern merger
techniques, including domestic and cross-border triangular mergers.
After significant public controversy, however, the Japanese
government in April 2007 finalized tax and public disclosure rules
for cross border triangular mergers that substantially limit the use
of these techniques. Under the new rules, in order for shareholders
to defer capital gains on the transaction, the foreign acquiring
company, at a minimum, must establish a subsidiary with an office,
an employee/executive, and some "business activity" in the Japanese
market before the merger. As of December 2007, only one transaction
has taken place using these provisions.
Through the Regulatory Reform Initiative, the U.S. Government
continues to urge Japan to improve further its commercial law and
corporate governance systems to reflect international best
practices, promote efficient corporate restructuring and increases
in shareholder value. Specifically, the U.S. Government is urging
Japan to review impediments to the use of modern merger techniques
now available to investors, including whether tax rules unduly
impede the ability of foreign investors to use triangular merger

The U.S. Government also continues to encourage Japan to strengthen
further corporate governance mechanisms, including by facilitating
and encouraging active proxy voting by institutional investors such
as pension and mutual funds; requiring authorization of antitakeover
measures by a company committee composed of a majority of truly
independent directors; ensuring sufficient protection of minority
shareholders in management buy-out and take-over bid situations; and
encouraging the major Japanese stock exchanges to adopt listing
rules or guidelines that encourage best corporate governance

Article 821 of the new Company Law still has the potential to create
burdens for foreign corporations that conduct their primary business
in Japan through Japanese branch offices. The U.S. Government has
recommended that Japan adopt a simple re-domestication procedure
that allows foreign companies to merge or convert into a Japanese
corporation, and continues to request that Japan amend Article 821
to prevent adverse effects on the legitimate operation of foreign
companies in Japan.

Legal System Reform

Japan imposes restrictions on the ability of foreign lawyers to
provide international legal services in Japan in an efficient
manner. The U.S. Government is urging Japan to further liberalize
the legal services market by allowing foreign lawyers to form
professional corporations and establish multiple branch offices in
Japan whether or not they have established a professional
corporation, and by counting all of the time foreign lawyers spend
practicing law in Japan toward the 3 year experience requirement for
licensure as a foreign legal consultant. The U.S. Government has
also requested that Japanese lawyers may become members of
international legal partnerships with lawyers outside Japan without
restriction. Japan has agreed to continue to examine these issues,

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including by holding further hearings with both the Japanese Bar
Association and registered foreign lawyers practicing in Japan. The
U.S. Government is urging Japan to promote arbitration and other
alternative dispute resolution (ADR) procedures, including by
amending the Foreign Lawyers Law to explicitly permit foreign
lawyers to act as neutrals and to represent parties in any
international ADR proceedings taking place in Japan.

Distribution and Customs Clearance

The U.S. Government welcomes Japan's efforts to formulate an
Authorized Economic Operator (AEO) system in Japan, which allows
exporters with good compliance records to process goods more
expeditiously through Customs. However, Japan Customs currently
does not allow post-mortem declarations, and requires brokers to
declare express items at specific Customs offices, which limits
flexibility and potentially increases processing costs. To further
facilitate trade, the U.S. Government continues urging Japan under
the Regulatory Reform Initiative to allow customs brokers to make
post-mortem declarations for items valued at less than 250,000 yen
(about $2,500), and for those brokers using the Japan Customs'
Nippon Automated Cargo Clearance System (NACCS) automated database
to declare express items at any Customs office.

To facilitate more efficient cargo flows, the United States
recommends Japan exempt AEO exporters from paying the five percent
consumption tax for cleared cargo. Currently, Japan Customs refunds
this tax, but exemption would reduce the administrative burden of
filing for a refund.

In line with international best practice to reduce workloads and
maximize efficiency, the U.S. Government also recommends Japan raise
the Customs Law de minimis ceiling from 10,000 yen (about $100) to
at least 20,000 yen or higher.


Rice Import System: Japan's highly regulated and nontransparent
importation and distribution system for imported rice limits
meaningful access to Japanese consumers. In 1999, Japan established
a tariff-rate quota (TRQ) of approximately 682,000 metric tons
(milled basis) for imported rice. The Japan Food Department (JFD)
of the Ministry of Agriculture, Forestry, and Fisheries (MAFF)
manages imports of rice within the TRQ through periodic minimum
access (MMA) tenders and through the simultaneous buy-sell (SBS)
tenders. Imports of U.S. rice under the MMA tenders are destined
almost exclusively for government stocks. MAFF releases these
stocks solely for non-table rice users in the industrial food
processing or feed sector, and for re-export as food aid.

Japan failed to fulfill its import obligation for rice in Japan
Fiscal Year 2007, which ran from April 1, 2007 to March 31, 2008.
The unique conditions in 2007 that led to higher global rice prices
exposed several weaknesses in Japan's administration of its MMA
trade quota system for rice. Japan subsequently committed to
implementing several improvements to prevent future non-fulfillment
of the MMA rice TRQ system, including earlier and more frequent

U.S. rice exports to Japan in calendar year 2007 were valued at $206
million, representing approximately 322,000 metric tons of rice or
52.4 percent of Japan's minimum access requirement (on a JFY07
basis). However, only a small fraction of rice imported from the
United States reaches Japanese consumers identified as U.S. rice,
despite industry research showing Japanese consumers would buy U.S.
high-quality rice if it were more readily available.

Excessive testing requirements for rice imports have hampered trade
in U.S. rice to Japan. In December 2005, MAFF began imposing strict
testing requirements on rice imports, ostensibly to ensure
compliance with the Japanese Government's new Maximum Residue Limits
policy. Rice and wheat, however, are the only commodities for which
Japan requires multiple testing, including a separate test by the
rice industry. This testing has resulted in a disproportionate
increase in the cost of bringing U.S. rice to market, particularly
for SBS rice because of its smaller import lot size.

Wheat Import System: Japan requires wheat to be imported through
MAFF's Food Department, which then resells wheat to Japanese flour
millers at prices substantially above import prices. These high
prices discourage wheat consumption by increasing the cost of
wheat-based foods in Japan. In 2007, MAFF revised the wheat import
regime to allow more frequent modification to the resale price based
on international price movements. As a result, the resale price to
flour millers has increased 55 percent. The U.S. Government remains
concerned by Japan's operation of a state trading entity for wheat

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and its potential to distort trade. For example, MAFF suspended
tenders for wheat imports in September 2008 due to concerns over
MAFF's own contracting and management of imports.

Pork Import Regime: Japan is the world's largest importer of pork,
and also the number one export market for U.S. pork -- $1.4 billion
in 2007. Japan's pork import system includes a gate price and a
safeguard negotiated during the Uruguay Round, which automatically
raises the gate price if imports are 119 percent or more of the
average level of imports relative to a corresponding period that
covers the previous 3 years. The U.S. Government continues to raise
concerns that Japan's complicated "gate price" system distorts trade
and is vulnerable to invoice fraud.

Beef Safeguard: Japan negotiated a beef safeguard during the
Uruguay Round to protect domestic producers in the event of an
import surge. The safeguard is triggered when imports increase by
more than 17 percent from the previous Japanese fiscal year on a
cumulative quarterly basis. Once triggered, the safeguard remains
in place for the rest of the fiscal year. If triggered, beef
tariffs will rise to 50 percent from 38.5 percent. The U.S.
Government is seeking a change in the beef safeguard in the Doha
Development Agenda negotiations. The U.S. Government remains
concerned that once Japan fully opens its market to U.S. beef and
beef products, the resulting increase in imports might trigger
Japan's safeguards, which could hamper the U.S. beef producers'
ability to regain historical export levels in the near future (see
the section on "Beef" under the "Standards" heading for context).

Fish Products: Japan has been the most important export market for
U.S. fish and seafood products for over 30 years; as recently as
1988, 73 percent of U.S. seafood exports went to Japan. In 2006,
however, the European Union surpassed Japan as the most important
export market for fisheries products, with only 23 percent of U.S.
seafood exports going to Japan. These data should be viewed,
however, against the growing trend of U.S. origin seafood being
routed through China and Korea for value added processing and/or
cold storage holding before being imported into Japan, making actual
trade flows harder to follow.

Tariffs on Japanese seafood imports are generally low, but market
access is not seamless for some products. Japan maintains several
species and product-specific import quotas on fish products,
including pollock, surimi, pollack and cod roe, herring, Pacific
cod, mackerel, Pacific whiting, squid, and sardines. Administration
of the system has improved considerably over the years and it is
expected that obstacles to Japanese importers and processors will
continue to be reduced. While Japan cut tariffs as a result of the
Uruguay Round, it did not change its import quotas. As part of
ongoing WTO Doha negotiations, Members including the United States
and Japan have committed to clarify and improve rules on fisheries

High Tariffs on Beef, Citrus, Dairy, and Processed Food Products:
Japan maintains high tariffs on a number of food products that are
important exports for the United States, including red meat, citrus,
wine, and a variety of processed foods. Examples of double digit
import tariffs include 38.5 percent on beef, 32 percent on oranges,
40 percent on processed cheese, 29.8 percent on natural cheese, 17
percent on apples, and a 15 to 29.8 percent on wine depending on the
HTS classification. These high tariffs generally apply to food
products where Japan is protecting domestic producers. Tariff
reductions are a high priority for the U.S. Government in the Doha
Development Agenda agriculture negotiations.

Wood Products and Building Materials: Japan continues to restrict
imports of certain manufactured wood products through tariff
escalation (i.e., progressively higher tariffs based on the level of
processing of the wood product). The elimination of tariffs on wood
products remains a long standing U.S. Government objective.

Leather/Footwear: Japan continues to apply a TRQ on leather footwear
that substantially limits imports into Japan's market, and
establishes these quotas in a nontransparent manner. The U.S.
Government continues to seek elimination of these quotas.


Japan's enforcement of national standards hinders trade in certain
farm, forest, and industrial products. U.S. industry has raised
concerns that Japan's stringent testing methods and low tolerances
for regulated substances such as pesticides and food additives make
it difficult to satisfy import requirements for many products. The
U.S. Government is urging Japan to use science based standards and
implement risk-based enforcement policies, which are the least trade
restrictive measures that also satisfy consumer safety concerns.

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Beef: On July 27, 2006, Japan partially reopened its market to U.S.
beef. Except for approximately one month from December 2005 to
January 2006, Japan's market had been effectively closed since the
December 2003 detection of a cow with Bovine Spongiform
Encephalopathy (BSE) in Washington State.

Japan allows imports of U.S. beef and beef products from animals
aged 20 months or younger. However, this limited reopening has
prevented the United States from regaining all but a small portion
of its historic level of exports to the Japanese market. Before the
ban, Japan was the largest export market for U.S. beef and beef
products, totaling roughly $1.4 billion annually.

The U.S. Government has repeatedly urged Japan to bring its BSE
measures in line with international guidelines set by the World
Organization for Animal Health (OIE) by allowing imports of all U.S.
beef and beef products derived from animals of all ages deemed safe
under OIE guidelines. In May 2007, the OIE determined that the
United States is a "Controlled Risk" country for BSE, a
determination based on science. The U.S. Government remains highly
concerned by Japan's unwillingness to adopt science-based,
international guidelines under which beef and beef products can be
safely traded and will continue to work vigorously bilaterally and
multilaterally toward achieving a full reopening of Japan's market
to U.S. beef in line with OIE guidelines.

Enforcement of Maximum Residue Limits (MRLs): In May 2006, Japan's
Ministry of Health, Labor, and Welfare (MHLW) implemented a new
system of regulations governing agrochemical residues in food.
Under this system, foods containing residues in excess of
established MRL levels will not be allowed on the Japanese market.
Prior to implementation of this positive list, the U.S. Government
worked closely with MHLW to address potentially trade restrictive
measures. However, several outstanding issues remain, including
Japan's MRL enforcement policy. For example, a single MRL violation
may result in MHLW placing sanctions on the entire industry rather
than on just the company with the violation. In the case of
multiple violations, MHLW can implement an "inspection order," i.e.,
100 percent test-and-hold requirements. The possible delays due to
this sanction can lead to major losses for perishable goods. These
sanctions can severely affect trade regardless of the level of the
violation or the degree of the threat to health. Furthermore,
domestic violations may be treated more favorably than import
violations. To address these concerns, the U.S. Government is
urging MHLW, through the Regulatory Reform Initiative, to implement
a regime that is as minimally trade restrictive as possible,
provides national treatment to imports, and accords with
international best practices.

Restrictive Food Additive List: Japan's list of food additives
restricts imports of several U.S. food products, especially
processed foods. The list, which limits the use of specific food
additives on a product-by-product basis, is more restrictive than
accepted international standards and is without sufficient
scientific evidence. For example, the list effectively prohibits
imports of light mayonnaise, creamy mustard or figs containing
potassium sorbate, a food additive evaluated and accepted by
numerous national and international standard setting organizations,
including the Joint FAO/WHO Expert Committee on Food Additives.
Despite this prohibition on imports, Japan allows the use of
potassium sorbate in 36 other foods, most of which are traditional
Japanese food products not normally produced outside Japan.

U.S. manufacturers have complained about the slow and opaque
approval process for indirect food additives (i.e., additives that
do not remain on food, such as solvents).

In 2002, Japan created a list of 46 food additives for expedited
review. The U.S. Government and many of Japan's other trading
partners have been disappointed by the lack of progress by the MHLW
and the Food Safety Commission in finalizing reviews and approving
many of these additives, notwithstanding the availability of
extensive safety data. In addition, Japan classifies post-harvest
fungicides as food additives requiring registration and approval,
while the international community, including Codex, classifies them
as pesticides. As a result, a chemical that is approved for use as
a pesticide under Japan's system would be prohibited from
post-harvest use unless it has also been approved as a food
additive. The U.S. Government has urged Japan through the
Regulatory Reform Initiative to complete an expedited review of the
remaining food additives.

Microbial Content Standards: Japan's standards under the Food

TOKYO 00003137 012 OF 020

Sanitation Law for microbial content on frozen foods are, in certain
instances, impractical and overly restrictive, particularly for
foods that require cooking before consumption.

Poultry: Since 2002, Japan has imposed several national and
statewide bans on the import of U.S. poultry, poultry-meat, and eggs
due to the detection of notifiable avian influenza (NAI) in U.S.
poultry, both high pathogenic notifiable avian influenza (HPNAI) and
low pathogenic notifiable avian influenza (LPNAI). These bans are
not consistent with international guidelines and have disrupted
millions of dollars of U.S. poultry trade. According to
international guidelines recently revised by the OIE, countries must
report to the OIE any findings of NAI in domestic poultry,
regardless of its pathogenicity. These guidelines, as well as the
WTO SPS agreement, provide for importing countries to impose bans on
imports only from affected regions (zones) of the exporting country.
While the guidelines support banning certain poultry meat from
regions affected by HPNAI, they do not support banning poultry meat
from regions affected by LPNAI. As a result of bans based on the
reporting of high and low pathogenic avian influenza, as well as
other factors, U.S. poultry meat exports to Japan have decreased
substantially, from roughly $148 million in 2001 to $29 million in

Organics: U.S. organic exports to Japan continue to be limited by
Japan's ban on alkali extracted humic acid, a production substance
that is allowed for use on U.S. organic crops. In addition, Japan's
zero tolerance policy for pesticide residues on organic products is
not consistent with international standards, and is, in practice,
more thoroughly enforced for imported organic products.

Marine Craft: Although Japan continues to maintain an inspection
regime for new boats and marine engines that is unique in the world
in its severity and complexity, Japan's regulatory agencies, MLIT
and the Japan Craft Inspection (JCI) Organization, have made a
significant shift towards adoption and acceptance of ISO standards,
when these ISO standards are determined to provide equivalent or
improved safety. The U.S. Government looks to accelerate progress
with Japan as quickly as possible to also address Japanese
requirements that no other country considers necessary, such as
requiring that each imported boat be individually inspected. These
unusual rules place an enormous burden on Japanese importers and
American boat manufacturers. The U.S. Government will continue to
work with relevant organizations and agencies in Japan to urge
Japan's acceptance of acceptance of third-party tests of Japanese
ISO based standards.

Building Size, Designs, and Wood Products

Japan has adopted and implemented regulations with respect to indoor
air quality and chemical emissions, and may be considering
additional steps. The U.S. Government will continue to monitor
regulatory developments in this area and urge that Japan ensures
transparency in any resulting rule making process. In addition,
Japan's fire testing of wood frame assemblies also is subject to
standards that are open to interpretation by testing facilities,
thereby affecting predictability in meeting Japan's fire testing


Japan is the world's largest per capita importer of bioengineered
grains and annually imports about 516 million metric tons of U.S.
corn and 3.3 million metric tons of U.S. soybeans. In 2007, exports
of these commodities alone were worth $3.7 billion. To both secure
bilateral trade in grains and to increase global food security, the
United States and Japan share a common interest in promoting
effective biotechnology approval and regulatory policies.

Japan's regulatory system, however, is complex and compliance is
costly. Japan's independent Food Safety Commission conducts risk
assessments in support of product evaluations by the Ministry of
Health, Labor and Welfare and Ministry of Agriculture, Forestry and
Fisheries. The regulatory burden is such that only large
multinational companies or governments can afford to complete the
approval process, even for bioengineered traits that are relatively
well known. Furthermore, the continued growth in the number and
complexity of new biotechnology applications in coming years could
strain the regulatory system. There is also the real possibility of
trade disruptions from an unapproved bioengineered variety showing
up in trace amounts in imported grain or processed foods. To avoid
disrupting trade, the U.S. Government is working with Japan's
regulatory agencies to encourage a risk based, case-by-case approach
when dealing with unapproved varieties.

In addition to Japan's national regulatory system, 12 prefectural

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and local governments maintain rules, generally not based on
science, which further limit cultivation of bioengineered crops.
These rules, combined with local regulations and public pressure on
research institutions, have made it increasingly difficult for
technology companies to secure sites for field trials, mandated
under the national government's approval process.

Although Japan is the largest per capita importer of bioengineered
crops, no consumer-ready foods with recognizable bioengineered
ingredients are sold in Japan. One factor that keeps bioengineered
foods out of the supermarket is Japan's labeling requirement. As
yet, no Japanese food manufacturer or retailer has been willing to
test the market for a genetically modified organism labeled,
consumer-ready food.

The U.S. Government will continue to encourage Japan to address
these issues and continue to participate in discussions on
biotechnology policy advancement and regulation in international
fora (i.e., the WTO, the Codex Alimentarius Commission, the OECD,
and the APEC forum) and through international agreements dealing
with international movement of bioengineered crops.


Proprietary Ingredient Information Disclosure Requirement for
Import: As part of its product classification process for
new-to-market food and dietary supplement products, Japan mandates
that all ingredients and food additives be listed by name, along
with content percentages, and include a description of the
manufacturing process. In addition to being overly burdensome, this
process runs the risk that proprietary information may be obtained
by competitors.

Labeling of Beef: In 2007, the Ministry of Agriculture, Forestry,
and Fisheries adopted labeling guidelines for "wagyu" beef.
Although presented as voluntary standards, the guidelines bar use of
the term "wagyu" on cattle not born and raised in Japan. The U.S.
Government is concerned by the regulation and is monitoring this
situation closely.


Japan is a Signatory to the WTO Agreement on Government Procurement
(GPA). For procurement of construction services by sub-central and
government enterprises covered under the GPA, Japan applies a
threshold of approximately $22 million, which is three times the
threshold applied by the United States.

Construction, Architecture, and Engineering

Even though Japan has the second largest public works market in the
world ($149 billion in 2007), U.S. companies annually obtain far
less than 1 percent of projects awarded. Two bilateral public works
agreements are in effect: the 1988 United States-Japan Major
Projects Arrangements (MPA) (updated in 1991); and the 1994 United
States.-Japan Public Works Agreement, which includes the Action Plan
on Reform of the Bidding and Contracting Procedures for Public Works
(Action Plan). The MPA included a list of 42 projects in which
international participation is encouraged. Under the Action Plan,
Japan must use open and competitive procedures for procurements
valued at or above the thresholds established in the GPA. Public
works issues are raised in the Expert-Level Meeting on Public Works
under the United States-Japan Trade Forum.

Problematic practices continue to limit the participation of U.S.
design/consulting and construction firms in Japan's public works
sector, including bid rigging (dango), under which companies consult
and prearrange a bid winner. The prevalence of dango is evidenced
by the recent Defense Facility Agency procurement, in which 58 major
construction companies were implicated in dango. The U.S.
Government continues to stress the need for Japan to effectively
address this pervasive problem.

Another concern is Japan's use of excessively narrow Japan-specific
qualification and evaluation criteria that preclude U.S. firms from
competing for projects. The U.S. Government has asked Japan to
develop procedures to simplify the qualification process for foreign
firms that have relevant experience outside of Japan, as well as to
ensure that all project-related qualification requirements are made
public, as required by the GPA and the bilateral agreements. Other
concerns with Japan's procurement practices include the imposition
of unreasonable restrictions on the formation of joint ventures,
extremely low design fees, and excessive and costly documentation
requirements for design bids.

The U.S. Government has urged Japan to increase the use of

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Construction Management and Project Management in its public works
to create greater opportunities for U.S. firms, which have extensive
expertise in these areas. Construction and Project Management
involve advanced project delivery and management systems that
maximize project efficiency.

The U.S. Government is paying special attention to several major
projects covered by the public works agreements of particular
interest to U.S. companies with the expectation that they will
provide important opportunities for U.S. firms. These projects
include the Okinawa Institute of Science and Technology; Haneda
Airport development and expansion; Kansai International Airport;
Central Japan International Airport; Kyushu University Relocation
Project; Gaikan Expressway Project; Metropolitan Expressway
Shinagawa Route Projects; Japan Post's Post Office Projects; major
public buildings, large-scale hospital building projects, urban
development and redevelopment projects; major PFI projects; and the
MPA projects still to be undertaken or completed.


The U.S. Government continues to pursue its IPR protection agenda
with Japan through bilateral consultations and cooperation, as well
as in multilateral and regional fora. For its part, Japan continues
to make progress in improving the protection of IPR. In addition to
increasing our bilateral cooperation, the U.S. Government has
identified several areas in Japan's IPR protection regime where
further action by Japan is needed.


The U.S. Government continues to urge Japan to adopt a 12-month
patent application filing grace period, similar to that provided
under U.S. law, to harmonize the two systems and enhance U.S.
innovators' protection against a possible loss of patent rights in
Japan. The U.S. Government also continues to urge Japan to
implement procedures to avoid a piecemeal approach to patent
examinations that results in unnecessarily lengthy delays in
granting patents.

In 2005, Japan established an Intellectual Property High Court
staffed with judges and judicial research officials conversant with
IPR cases, which the Japanese government reports has reduced the
average length of litigation. The U.S. Government welcomes this
reduction in the average length of litigation and will continue to
monitor the implementation and effect of Japan's reforms on the
cost, length, and effectiveness of IPR-related litigation.


Adequate protection of intellectual property, including copyrights
and neighboring rights, is critical for the continued development
and competitiveness of content-related industries such as
entertainment software, music, film, literary works, and software,
and is a vital component to advancing electronic commerce and a
well-functioning digital economy. The U.S. Government remains
concerned that Japan's Internet service provider liability law does
not provide adequate protection for the works of right holders on
the Internet or the appropriate and necessary balance of interests
among telecommunications carriers, service providers, rights
holders, and website owners. The law could be improved by including
a requirement for more expeditious notification to right holders in
the "notice and takedown" system.

The U.S. Government continues to monitor Japan's efforts to promote
digital content distribution and urges that Japan work to preserve
and support the international framework governing the exclusive
rights of authorship and the incentives to create in order to keep
pace with advances in distribution-related technologies.

The U.S. Government is also urging Japan to continue efforts to
reduce piracy rates, including piracy on the Internet, and has
recommended Japan amend its Civil Procedures Act to provide for the
availability of statutory damages for infringement, at the election
of the right holder, as an alternative to actual damages. Police
and prosecutors should be given ex officio authority to enable them
to investigate and prosecute IPR crimes on their own initiative,
without the requirement of right holder consent. To develop Japan's
digital communication networks, Japan's Copyright Law should better
protect the technological adjuncts to copyright protection such as
strengthening the remedies for trafficking in the tools used to
circumvent access controls. Japan also does not forbid copyright
infringement in government operations through a public decree or the
issuance of regulations.

The U.S. Government is also concerned about the scope of the

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personal use exception, both as it applies to the Internet and to
book piracy in the educational context, and is encouraging Japan to
make clear in its law that the otherwise infringing use of
copyrighted works over peer-to-peer networks is not excused by the
personal use exemption; and to address loopholes in Japan's personal
use exception that appears to allow copies of entire textbooks to be

The U.S. Government also continues strongly urging Japan to extend
the term of protection for all the subject matter of copyright and
neighboring rights to life plus 70 years, or where the term of
protection of a work (including a photographic work), performance,
or phonogram is calculated on a basis other than the life of a
natural person, to 95 years.

Japan's government is coordinating an ongoing discussion among
stakeholders of these and other related issues and plans to revise
Japanese laws in the near term. The U.S. Government welcomes this
process and encourages Japan to ensure it is open, inclusive, and
transparent, and offers all stakeholders fair opportunities to
express views.

Border Enforcement

Border enforcement is a critical component of effective IPR
protection. The U.S. Government notes steps taken by Japan to
strengthen its own border enforcement as well as to provide
assistance to improve the border enforcement of key trading
partners. The U.S. Government also welcomes revisions to the
Customs Tariff Law, which went into force in 2007, including
expanding the list of prohibited goods for export to include items
that infringe copyrights and neighboring rights, and strengthening
the penalty clauses for customs offences. It is important for Japan
to continue its aggressive interdiction of infringing articles and
to vigorously apply new provisions of the Customs Tariff Law. The
U.S. Government also welcomes Japan's international efforts to
enhance IPR enforcement in fora such as the G-8, APEC, and the WTO
TRIPS Council, as well as in the ad hoc Japan-China-Korea trilateral
Customs dialogue.



Japan's private insurance market is the second-largest in the world,
after that of the United States, with direct net premiums of an
estimated 35.8 trillion yen (over $300 billion) in Japan fiscal year
(FY) 2007. In addition to the offerings of Japanese and foreign
private insurers, substantial amounts of insurance are also provided
to Japanese consumers by a web of insurance cooperatives (kyosai),
and the Kampo life insurance company (a wholly government-owned
entity of the Japan Post Group). Given the size and importance of
Japan's private insurance market as well as the scope of the
obstacles that remain, the U.S. Government continues to place a high
priority on ensuring that the Japanese government's regulatory
framework fosters an open and competitive insurance market.

Kampo Insurance: The Japan Post Group's insurance business, Kampo,
continues to be the largest player in Japan's insurance market. At
the end of Japan's FY 2007, there were approximately 62 million life
and annuities insurance policies issued by Kampo in force compared
to 127 million issued by all private life insurance companies
combined. (Note: only 651,000 of those policies were issued by the
"new" Kampo after the commencement of privatization on October 1,
2007; the rest are now assets of the Successor Corporation created
as part of the privatization transition.) The U.S. Government has
long standing concerns about Kampo's impact on competition in
Japan's insurance market. It remains vital that Japan create a
level playing field between Kampo and private sector insurers to
cultivate competition, encourage more efficient allocation of
resources, and stimulate economic growth.

The U.S. Government is closely monitoring the privatization of Japan
Post and implementation of related reforms. The Japan Post reform
framework established by Japan's Diet in 2005 includes a number of
key measures that, if implemented fully, will represent long awaited
progress in areas of concern to U.S. and insurers in the market.
Importantly, the legislation also included establishment of
equivalent conditions of competition between the Japan Post
companies and the private sector as a basic principle of the

In addition to ensuring equal supervisory treatment between Kampo
and private sector companies, the U.S. Government continues to seek
that Japan take the steps necessary to achieve a level playing
field. Among those steps, the U.S. Government urges that adequate

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measures are implemented to ensure that cross-subsidization does not
take place among the newly created Japan Post businesses and related
entities, including by ensuring the Japan Post companies' strict
compliance with the Insurance Business Law's arms-length rule and
requiring adequate financial disclosures to demonstrate that
cross-subsidization is in fact not occurring. The U.S. Government
also continues to emphasize the importance of ensuring the company
established to manage Japan's post office network will transparently
and without discrimination select insurance products of private
providers for distribution throughout the network.

The U.S. Government continues to call on Japan to ensure a level
playing field between the postal insurance company and private
insurers. Approval of new products by the new postal insurance
company has shifted to a process whereby decisions are made by the
Prime Minister (with the Commissioner of the Financial Services
Agency acting as proxy) and Minister of Internal Affairs and
Communications, after hearing the opinion of an appointed government
advisory body. This process should be transparent and open to all
parties. It is also critical that the process include careful
analysis of, and full consideration given to, actual competitive
conditions in the market and that private sector views are actively
solicited and considered before decisions are made.

As modifications to the postal financial system could have serious
ramifications to competition in Japan's insurance market, adequate
transparency in implementation of the reforms passed by the Diet is
essential. The U.S. Government has urged Japan to continue to take
a variety of steps that ensure transparency, including providing
meaningful opportunities for interested parties to exchange views
with related government officials as well as members of
government-commissioned advisory committees and groups before
decisions, including those on new products, are made; and fully
utilizing public comment procedures with respect to drafting and
implementing regulations, guidelines, Cabinet Orders, and other

Kyosai: Insurance businesses run by cooperatives, or kyosai, hold a
substantial market share of insurance business in Japan. Some
kyosai are regulated by their respective agencies of jurisdiction
(the Ministry of Agriculture, Forestry and Fisheries, or the
Ministry of Health, Labor and Welfare, for example) instead of by
the FSA, while others have been allowed to operate without any
regulatory supervision at all. These separate regulatory schemes
undermine the ability of the Japanese government to provide
companies and policyholders a sound, transparent, regulatory
environment, and afford kyosai critical business, regulatory, and
tax advantages over their private sector competitors. The U.S.
Government believes all kyosai must be subject to the same
regulatory standards and oversight as their private sector
counterparts to ensure a level playing field and to protect

The Japanese government took some important steps in 2006 to bring
more oversight scrutiny to unregulated kyosai. Under these
regulatory reforms, previously unregulated kyosai were required by
April 2008 to apply to the FSA for new legal status. Some of the
cooperatives, which elected to become full-fledged insurance
companies, have been held to the same regulatory standards as
private sector insurers. Others opted to become "Small Amount Short
Term Insurance Providers," which limits their product range and size
and holds the firms to different requirements than those applied to
private sector insurance companies. The remaining unregulated
kyosai are expected to wind down their business in 2009.
With respect to kyosai regulated by ministries and agencies other
than the FSA, the U.S. Government remains concerned by their
continued expansion in Japan's insurance market and continues to
call on Japan to bring these kyosai under FSA supervision.
Policyholder Protection Corporations: The Life and Non-life
Policyholder Protection Corporations (PPCs) are mandatory
policyholder protection systems created in 1998 to provide capital
and management support to insolvent insurers. Japan's Diet passed
legislation in 2005 to renew the PPC system and is preparing to
renew the legislation prior to April 2009. While some improvements
have been made, the PPC system continues to rely on pre-funding by
its members, instead of adopting a system of funding to follow an
insolvency that results in a draw of funds from the PPC
(post-funding). The U.S. Government continues to urge Japan to
adopt more fundamental changes in the PPC systems, including the
post-funding approach.

Bank Sales: The Japanese government decided in December 2007 to
liberalize fully the range of products eligible to be sold through
the bank sales channel. As a follow-up to that change, the United
States asked Japan promptly to conduct a review of market conduct
rules, including the limits on sales of first and third sector

TOKYO 00003137 017 OF 020

products and treatment of customer data (including Insurance
Business Law Enforcement Rules, Article 212), to ensure they do not
limit the bank sales channel's effectiveness or impede consumer

Professional Services

U.S. and other foreign firms and individuals are hampered in
providing professional services in Japan by a complex network of
legal, regulatory, and commercial practice barriers. U.S.
professional services providers are highly competitive. Their
services also help facilitate access for U.S. exporters of other
services and goods, and contribute valuable expertise to the
economies they serve. The availability of such services can be a
key factor in U.S. firms' decisions whether to invest and thus is
central to improving the environment for foreign direct investment
in Japan.

Accounting and Auditing Services: U.S. providers of accounting and
auditing services face regulatory and market access barriers in
Japan. Only Certified Public Accountants (CPAs) or Audit
Corporations (made up of five or more Japanese CPAs) can offer
accounting services. Foreigners must pass a national examination to
qualify and this examination is offered annually. The U.S.
Government will continue to urge Japan to remove restrictions on
accounting services.

Medical Services: Restrictive regulation limits foreign access to
the medical services market. The U.S. Government has recommended in
the bilateral Regulatory Reform Initiative that Japan allow
commercial entities to provide full service, for-profit hospitals in
Japan's special economic zones as a first step to opening this
sector to foreign capital affiliated providers.

Educational Services: Excessive regulation has discouraged foreign
universities from operating branch campuses in Japan, presenting
obstacles related to both administrative requirements and
restrictions on pedagogical choices. Under the United States-Japan
Investment Initiative, the Japanese government established a new
category of "Foreign University - Japan Campus" for foreign
accredited institutions of higher education. This designation
provides these campuses with benefits similar to those accorded
Japanese educational institutions (e.g., student eligibility for
student rail passes and student visas), but does not confer tax
benefits enjoyed by Japanese institutions and their students. The
U.S. Government continues to urge Japan's Ministry of Education,
Culture, Sports, Science and Technology to work with these foreign
universities to find a nationwide solution that grants tax benefits
comparable to Japanese schools and allows them to continue to
provide their unique contributions to Japan's educational


Despite being the world's second-largest economy, Japan continues to
have the lowest inward foreign direct investment (FDI) as a
proportion of total output of any major OECD country. Inward
foreign mergers and acquisitions (M&A) activity, which accounts for
up to 80 percent of FDI in other OECD countries, also lags in Japan,
even though it is on an upward trend.

The Japanese government has recognized the importance of FDI to
revitalizing the country's economy. In September 2006, the Japanese
government set a goal of doubling the stock of FDI in Japan by 2010
to the equivalent of 5 percent of Gross Domestic Product (GDP).
Japan has also taken several recent steps to improve the FDI
environment, including revision of the Corporate Code to permit the
use of triangular stock swaps for international M&A deals. However,
with only one cross-border stock transaction occurring under the new
rules as of October 2007, the long term effect of the liberalization
of M&A rules remains unclear.

Cross-border M&A is more difficult in Japan than in other countries,
partly because of attitudes toward outside investors and partly
because of differing management techniques and the relative lack of
financial transparency and disclosure. There is also growing
concern among foreign investors about the effect of recent court
rulings related to allowable defensive measures by listed companies
against unsolicited takeover bids.

The United States-Japan Investment Initiative, initiated in 2001 and
co-chaired by the U.S. Department of State and Japan's Ministry of
Economy, Trade and Industry (METI), has worked to promote policy
changes that improve the overall environment for foreign (and
domestic) investment and to focus on specific barriers in certain
sectors, including educational and medical services.

TOKYO 00003137 018.3 OF 020

Anticompetitive Practices

Law against Unjustified Premiums and Misleading Representations:
Despite nominal changes to the Law against Unjustified Premiums and
Misleading Representations over the past two decades, the law itself
and the Japan Fair Trade Committee's (JFTC) enforcement of its
provisions block many common sales techniques such as product
giveaways and lotteries. In March 2007, however, the JFTC did
revise the maximum amount that a business may offer as a non-prize
premium from one-tenth to two-tenths of the purchase price.
Nevertheless, fair trade councils (essentially, private trade
associations) set their promotion standards through self-imposed
fair competition codes that are recognized by the JFTC. These codes
frequently impose additional standards that effectively protect
vested manufacturing and retailing interests to the detriment of new
entrants to the market. As of November 2007, there were still 38
JFTC authorized premium codes.

(For detailed discussion on other anticompetitive practices and
Antimonopoly Act enforcement, see the section above titled
"Structural Regulatory Reform.")


Autos and Automotive Parts

A variety of nontariff barriers have long impeded access to the
autos and automotive parts market and overall sales of North
American made vehicles and parts in Japan remain low. Even as U.S.
automakers have invested in Japanese automobile manufacturers, there
has not been a corresponding level of increase in sales in Japan's
market. The Japan Automobile Importers Association (JAIA) reports
that sales of U.S. produced motor vehicles in Japan decreased in
2006 to 16,290 units.

Through the Regulatory Reform Initiative, the U.S. Government
continues to address crosscutting structural and regulatory reform
issues with Japan that affect the automotive sector, including
urging Japan to take steps that help expand the opportunities for
foreign investment, strengthen competition policy, and increase
transparency in rule making.


Japan is among the largest foreign markets for U.S. civil aerospace
products. The civil aerospace market in Japan is generally open to
foreign firms and some Japanese firms have entered into long-term
relationships with American aerospace firms. The U.S. Government
continues to monitor Japan's development of indigenous civil

Military procurement by the Ministry of Defense (MOD) accounts for
over half of the domestic production of aircraft and aircraft parts
and continues to offer the largest source of demand in the aircraft
industry. Although U.S. firms have frequently won contracts to
supply defense equipment to Japan (over 90 percent of the annual
foreign defense procurement is from the United States), the MOD has
a general preference for domestic production or the licensing of
U.S. technology for production in Japan to support the domestic
defense industry.

Although Japan has considered its main space launch vehicle programs
as indigenous for many years, U.S. firms continue to participate
actively in those space systems, including Japan's primary space
launch vehicle, the HII-A. The U.S. Government has welcomed Japan's
plans to develop a supplementary GPS navigation satellite
constellation known as the "quasi-zenith" system. The U.S.
Government is working closely at the technical level with Japanese
counterparts to ensure the Japanese and U.S. systems remain
compatible and anticipates U.S. companies will have the opportunity
to supply major components.

Business Aviation

Japan's regulatory framework coupled with infrastructure shortages
impedes the development of business aviation in Japan. Due to the
lack of business aviation-specific guidelines, regulations for
commercial airline safety, maintenance, and repair issues
administered by the Japan Civil Aviation Bureau (JCAB) of the
Ministry of Land, Infrastructure, Transport and Tourism (MLIT) also
apply to business aircraft. This situation in turn raises the costs
of qualification, operation, and maintenance of business aircraft to
uneconomical levels. As a result, most business aircraft in Japan
are registered in the United States.

TOKYO 00003137 019 OF 020

Landing rights for business aircraft in Japan are also difficult to
obtain due to rules that hamper flexible scheduling, especially in
the Tokyo area. The current regulatory environment, furthermore,
frustrates Japanese companies, foreign companies in Japan, and
foreign companies interested in doing business with Japan. U.S.
aircraft manufacturers also express concern that the regulatory
situation has greatly limited sales of their airplanes to potential
Japanese clients.

Recognizing the potential of business aviation in Japan (and hoping
to compensate for the absence or insufficient number of scheduled
commercial routes), certain airports in the Chubu and Kansai regions
have begun to attract business aircraft, although results thus far
are modest. Regional airports are attempting to provide many of the
same services business aircraft operators receive in the United
States and Europe. However, severely restricted hours for landings
and take-offs at Japan's preferred business destination - Haneda
Airport in Tokyo - and the lack of services at both Narita and
Haneda, continue to significantly limit travel to and within Japan.

Based on the growing needs of business aircraft owners and
operators, the U.S. Government has continued urging JCAB to
reexamine the application of airline-specific civil aviation
regulations to business aviation and develop appropriate regulations
specific to the business aviation industry. These regulations
should, to the greatest degree possible, reflect a regulatory
approach consistent with the treatment of business aviation in North
America, Europe, and other developed world economies. The U.S.
Government urges Japan to make immediate improvements in the overall
regulatory framework for business aviation in advance of the opening
of an additional runway at Haneda planned for 2010.

In the past year, JCAB has taken some initial and positive steps to
address these concerns, including regular participation in business
aviation events in the United States and Japan, frequent dialogues
with the U.S. Government, the industry, and U.S. and Japanese
business aviation associations, and taking preliminary positions
aimed at deregulation. The JCAB released a report on business
aviation in May 2008, which concluded the use of business jets in
Japan constitutes an important part of Japan's aviation future and
that the country lags noticeably behind other countries in the
development of business aviation.

The JCAB recently laid out a road map for a new policy entitled,
"The Four 'F's to Develop Japan's Business Aviation Tomorrow." The
"Four F's" call for improvements in facilitation, (regulatory)
framework, facilities, and fields (in the Tokyo area). In July
2008, in its first actual deregulation involving business aviation,
JCAB extended its ETOPS (Extended-range Twin-engine Operational
Performance Standard) requirement from 60 minutes to 180 minutes.
This means that JA (Japan) registered aircraft with two engines are
now permitted to fly routes far longer than they could previously.
As a result, greater market opportunities are now open for business
jets with sufficient range.

Civil Aviation

Consistent with its longstanding policy to promote competition and
market access in civil aviation, the U.S. Government continues to
press Japan for further liberalization.

Market access for U.S. air carriers in Japan improved significantly
with a 1998 bilateral agreement and additionally with a new
bilateral agreement reached in September 2007 (pursuant to comity
and reciprocity pending formal conclusion). U.S. carriers, however,
remain constrained by restrictions on traffic rights, operational
flexibility, change-of-gauge, and pricing. Other key concerns
include the continuing disparity between the rights of "incumbent"
and "non-incumbent" airlines, and some of the world's highest
airport costs.

The September 2007 agreement provides non-incumbent cargo carriers
the ability to serve additional points in Japan and beyond. It also
removes most restrictions and limitations on same country
code-sharing arrangements, but these remain more limited than the
open code-sharing framework in U.S. agreements with most other
countries. The agreement also relaxed the pricing regime from
"double approval" to "country of origin." It fell short, however,
of the standard "double disapproval" regime for pricing
liberalization. U.S. industry has expressed concern that Japan
requires cumbersome and time-consuming filings for fare changes.

Tokyo's Narita International Airport operates below its potential
capacity. The U.S. Government continues to encourage Japan to take
steps to increase capacity and reduce congestion at one of the
world's most important airports. An extension of Narita's second

TOKYO 00003137 020 OF 020

runway that will facilitate more long haul flights is currently
underway, although concerns remain about the project's financing --
specifically that already high user fees might be increased.
Recently lowered landing fees at Narita were offset in part by the
imposition of other new or increased fees. The U.S. Government
continues to raise the issue of high landing fees at Narita, Kansai,
and Central Japan International Airport (Centrair) airports in the
Regulatory Reform Initiative and other bilateral discussions.

Both Narita and Haneda Airports are undergoing ambitious expansion
projects set to be completed by 2010. However, the planning process
for both these projects has not been fully transparent. The U.S.
Government has raised with Japan concerns about how new slots at
Narita Airport will be allocated, and prospective rules at Haneda
that could adversely affect the competitiveness of U.S. carrier
operations in the long term. The U.S. Government urges Japan to
ensure that, through a timely and transparent consultative process,
non-Japanese carriers have meaningful opportunities to comment.
Connections between airports in the Tokyo metropolitan area remain
difficult and time-consuming. The weak connectivity undermines the
efficiency of the airports and carriers serving Tokyo. The U.S.
Government encourages Japan to improve transit access between Haneda
and Narita Airports.


The U.S. Government continues to raise longstanding concerns about
barriers to entry to, and the competitiveness of, Japanese ports.
Foreign shippers servicing Japan are locked into long-term
relationships with specific Japanese stevedoring companies, which
reportedly collude within the industry association to keep newcomers
out and costs high. Foreign companies are concerned that a lack of
transparency in Japanese laws and regulations related to ports
creates a barrier to entry. Foreign owned and run stevedoring
businesses do not exist at major Japanese ports, and even major
Japanese companies have been prevented from directly involvement in
the stevedoring business. As part of the Regulatory Reform
Initiative, the U.S. Government has made recommendations on
transparency that are applicable to the rulemaking process.
Japanese laws and regulations could be reviewed with an eye to
facilitating new entrants and outside competition in the stevedoring

Japan amended its Port Transportation Business Law (effective
November 2000) to eliminate the need for new entrants to prove the
existence of surplus demand. Charges for harbor services in nine
large ports are subject to a prior notification requirement, and
there is an approval requirement for other ports by the MLIT.

Since 1999, the U.S. Government has continued to express concern
that reforms have not lessened the Japan Harbor Transportation
Association (JHTA)'s ability to deter new entry and restructuring in
the ports sector. The Port Transportation Business Law introduced
requirements that run counter to the need for efficient port
operations and discriminate against new entrants wishing to offer
port services. In addition, MLIT has not addressed concerns about
the prior consultation process conducted by the JHTA nor about the
apparent threat of illegal strikes against foreign carriers who
obtain permission to operate their own container terminals. The
U.S. Government has raised with the Japanese government its failure
to implement important aspects of the wide-ranging port deregulation
promised in 1997.

End text.


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