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Cablegate: Japan - 2010 National Trade Estimates Report

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RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #2813/01 3430812
ZNR UUUUU ZZH
R 090812Z DEC 09
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8071
RUEHFK/AMCONSUL FUKUOKA 7813
RUEHNAG/AMCONSUL NAGOYA 4960
RUEHNH/AMCONSUL NAHA 0162
RUEHOK/AMCONSUL OSAKA KOBE 1624
RUEHKSO/AMCONSUL SAPPORO 8319

UNCLAS SECTION 01 OF 15 TOKYO 002813

SENSITIVE
SIPDIS
STATE FOR EAP/J, STATE FOR EB/TPP/BTA, USDOC FOR JBAKER, STATE PASS
USTR FOR AUSTR WEISEL, JJENSEN, DLEE AND GBLUE
E.O. 12958: N/A
TAGS: ECON ETRD EFIN EINV KIPR ECPS SN
SUBJECT: JAPAN - 2010 NATIONAL TRADE ESTIMATES REPORT

SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY.

REF: STATE 105978

1. Per reftel instructions, post submits it draft chapter on Japan
for the 2010 National Trade Estimate Report. We assume Washington
agencies will update the trade and investment data in the first five
paragraphs of the report as they have done in the past.
Additionally, we have excluded the middle sections on Technical
Barriers to Trade and Sanitary and Phytosanitary Standards, which
are stand alone reports this year, because those sections were
previously sent to Washington agencies and because additional work
and modifications are ongoing. Per reftel instructions, Embassy
Econ Section also emailed the text of the draft report to USTR, in
MS Word format with tracked changes frpm last year's version.

2. Begin text of the 2010 National Trade Estimate

TRADE SUMMARY

The U.S. goods trade deficit with Japan was $72.7 billion in 2008, a
decrease of $10.1 billion from $82.8 billion in 2007. U.S. goods
exports in 2008 were $66.6 billion, up 6.2 percent from the previous
year. Corresponding U.S. imports from Japan were $139.2 billion,
down 4.3 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 $40.2 billion in 2007 (latest
data available), and U.S. imports were $24.5 billion. Sales of
services in Japan by majority U.S.-owned affiliates were $54.3
billion in 2006 (latest data available), while sales of services in
the United States by majority Japan-owned firms were $83.5 billion.

The stock of U.S. foreign direct investment (FDI) in Japan was
$101.6 billion in 2007 (latest data available), up from $92.4
billion in 2006. U.S. FDI in Japan is concentrated largely in the
finance/insurance, manufacturing, and nonbank holding companies
sectors.

REGULATORY REFORM OVERVIEW

The United States-Japan Regulatory Reform and Competition Policy
Initiative

Through the United States-Japan Regulatory Reform and Competition
Policy Initiative (Regulatory Reform Initiative), the U.S.
Government has continued to urge Japan to address a number of
regulatory and other business environment issues that have served to
unnecessarily limit competition, stymie the introduction of
innovative products and services, or otherwise hinder access for
U.S. products and services in Japan's market. The U.S. Government
put forward a comprehensive list of reform recommendations to Japan
in October 2008 to begin engagement with Japan under the
Initiative's eighth annual cycle of work. This list included
comprehensive recommendations relating to specific industry sectors
as well as those addressing cross-cutting business environment
issues.

A summary of some of the key sectoral and structural regulatory
reform recommendations made to Japan is presented in the following
two sections.

SECTORAL REGULATORY REFORM

Telecommunications

In its 2008 Regulatory Reform Initiative recommendations, 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: Japan revised rules in July and November 2008
including Next-Generation Networks of NTT East and West as Category
I Designated Telecommunications Facilities, creating a requirement
interconnection rates are cost-oriented and non-discriminatory. In
March 2009, Japan's Ministry of Internal Affairs and Communications
(MIC) authorized rates for the termination of VoIP onto NTT East and
West fiber optic networks. While interconnection rates are still
high by international standards, MIC continues pushing NTT to lower
interconnection rates.

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Dominant Carrier Regulation: NTT continues to dominate Japan's
fixed line market through its control over almost all "last-mile"
connections. As Japan's broadband users turn from digital
subscriber line (DSL) (where competition, based on regulation, was
vibrant) to optical fiber, NTT's competitors fear NTT will 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. While NTT and the Japanese
government have argued there is adequate competition in FTTH
service, NTT's share of that market has steadily increased over the
past few years. The U.S. Government has urged Japan to remain
committed to ensuring competition in the telecommunications market.

Universal Service Program: Japan approved a system, beginning in
January 2007, for NTT East and NTT West and their competitors to
collect a universal service fee from voice services subscribers.
MIC has undertaken periodic reviews to determine whether this amount
should be adjusted to more accurately reflect costs, and has
endorsed a proposal to increase significantly the universal service
fees. 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. Current 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) appears redundant given the existence
of the fund, and the U.S. Government has urged the abolition of this
cross-subsidy.

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). NTT DoCoMo, the dominant incumbent mobile carrier,
announced March 2, 2009, that it would lower its termination rates
by over 10 percent, continuing incremental rate reductions
implemented over the past 10 years. Mobile interconnection rates,
however, still remain high by international standards and also
compared to fixed line rates in Japan. Despite recognizing DoCoMo
as a dominant carrier in 2002, MIC does not require DoCoMo to
publish its costs or 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 ensure the possibility of
effective competition.

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)

Health IT: Government policies that fail to encourage
interoperability, technology neutrality, and international
harmonization, in addition to insufficient reimbursement incentives,
are inhibiting the expansion of Japan's health IT services sector,
an important market for U.S. companies. The U.S. Government has
been urging Japan to foster interoperability and technology
neutrality, facilitate vendor participation in government-sponsored
projects that develop health IT systems, and implement reimbursement
systems that reward use of innovative IT.

IT-Related Financial Reform: The U.S. Government welcomes passage by
the Diet of the "Payment Services Act," in June 2009, providing that
non-banking entities will be allowed to provide fund transfer
services without a banking license provided they are registered, and
clarifying their financial liabilities. As the Government of Japan
continues to develop and implement regulation covering online
payments, it should continue efforts to consider private sector
views, and ensure rules are consistent, clear and workable.


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Privacy: Separate and inconsistent privacy guidelines among
Japanese ministries have created an unnecessarily burdensome
regulatory environment for U.S. business with regard to the storage
and general treatment of personally identifiable information in
Japan. The U.S. Government welcomes a Japanese government
announcement in July 2008 of 37 guidelines and a subsequent review
by ministries and agencies concerning rules for protecting personal
information, as well as continued engagement on these topics in
international fora.

IPR Protection: The U.S. Government continued to urge Japan to
adopt a number of new measures to improve and strengthen IPR
protection. These include: improving copyright protection and
enforcement; 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
chapter.)

Government IT Procurement: The lack of transparency, excessive
reliance on sole-source contracting, and restrictions on
intellectual property ownership among other factors hinder the
participation of U.S. companies in Japan's government IT
procurement. The U.S. Government therefore has urged Japan to:
expand disclosure of procurement information; broaden participation
in evaluation committees; make it easier for companies to own
intellectual property they develop through government contracts;
apply competitive bidding rules to independent administrative
entities and government-sponsored firms; and ensure contracts are
swiftly concluded after bidders are chosen and are not backdated.

IT and Electronic Commerce Policymaking: Insufficient transparency
in Japan's policymaking process for IT and electronic commerce has
constrained U.S. company access. The U.S. Government has urged
Japan to improve its policymaking process by seeking and considering
industry input at all stages of policymaking. This will foster
development of standards that promote technology neutrality,
facilitate private sector participation in government-appointed
advisory groups, and provide companies with adequate time to offer
public comments and adjust to rule changes.

Healthcare Innovation

Japan's market for medical devices and pharmaceuticals continues to
be one of the worlds largest. In 2007, the Japanese market for
medical devices and materials was just over $18 billion, with total
imports by Japan of U.S. medical devices exceeding $5 billion, or
27% market share. The pharmaceuticals market in Japan is valued at
$60 billion and American pharmaceutical firms have achieved a market
share approaching 20%, or total sales worth $12 billion. Despite
the size of these markets, many globally available pharmaceuticals
and medical devices have not yet been introduced in Japan. For
example, there is an average lag time of over four years when
introducing pharmaceuticals into Japan compared to the United
States. Similarly with medical devices, only about half of all
European and American medical devices are available in Japan. The
Japanese authorities have recognized that Japan suffers from a
pharmaceutical and medical device "lag" and "gap" which prevent
timely patient access to innovative and life-saving technologies.
As a result, Japan has issued policy papers that propose measures to
improve access to innovative pharmaceuticals and medical devices.
The U.S. Government continues to urge Japan to ensure that its
policies foster the private sector's development of innovative
products and improve patients' access to such products. Moreover,
The U.S. Government supports Japan's efforts to improve the overall
regulatory environment for these industries through the bilateral
government talks and other fora.

Although changes implemented by Japan are expected to lead to
improvements in the regulatory environment, its reimbursement
pricing policies continue to hinder the introduction of innovative
medical technology to the market.

In its April 1, 2008, biennial price revision, the Japanese
government broadened application of reimbursement pricing rules,
which exposed a wider range of pharmaceuticals to downward price
revisions. Japan also adopted policies that imposed a stricter
application of the "Foreign Average Price" (FAP) rule for medical
devices. In the next biennial price revision to be implemented in
April 2010, the Japanese government is expected to continue using
pricing rules to reduce the prices of pharmaceuticals and medical
devices in order to meet budgetary limits on healthcare spending.
The rapid aging of Japan's population has underscored the need to
control growth of the nation's medical expenditures. While the
Government of Japan has pledged to increase healthcare spending in
FY2010, much of increase is expected to fund higher medical fees for
doctors, which may put further downward pressure on pharmaceutical

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and medical device reimbursement prices.

The U.S. Government continues to urge Japan to refrain from
implementing reimbursement policies that hinder the development and
introduction of innovative medical devices and pharmaceuticals.
Such 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 serve
as a disincentive to investment in research and development.
Transparency of drug and medical device reimbursement decision
making processes, including on potential further systemic changes,
continues to be a major concern. The U.S. Government has been
urging Japan to build further on recent improvements in this area to
foster a more open, predictable market.

Blood Products: 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 has been
urging Japan to not restrict imports of plasma protein products so
as to increase patient access to life-saving blood plasma therapies,
eliminate labeling that implies U.S. products are not as safe as
Japanese products, and increase the efficiency of product reviews.
The U.S. Government also urges Japan to develop a reimbursement
system for blood products that accounts for the unique nature of
plasma protein therapy characteristics.

Nutritional Supplements: Japan has taken steps to streamline import
procedures and to open its $10 billion nutritional supplements
market, although many significant market access barriers remain.
Unusually burdensome restrictions on health and nutrition claims are
a major concern. Only those products approved as Foods for
Specified Health Uses (FOSHU) or Foods with Nutrient Function Claims
(FNFC) are allowed to have health or structure/function claims.
Producers of most nutritional supplements, however, are unable to
obtain FOSHU or FNFC approval due to FOSHU's costly and time
consuming approval process and to the limited range of vitamins and
minerals that qualify for FNFC. Other concerns include: 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; lack of transparency in new ingredient classification;
and a lack of transparency in the development of health food
-regulations.

Cosmetics and Quasi-Drugs: Japan is the world's second largest
market for cosmetics and "quasi-drugs" after the United States. In
2008, U.S. exports of cosmetics and personal care products to Japan
were estimated at $350 million, second only to France at $549
million. Despite a successful U.S. market presence, 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 certain products 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 in addition to redundant
paperwork for importing products. The U.S. Government continues to
urge Japan to address these and other issues.

Financial Services

Japanese banks were able to avoid the direct impact from the global
financial crisis due to their limited exposure to foreign toxic
assets, the domestic regulatory framework, and limited
securitization. However, the sharp reduction in output, and fall in
equity prices did weaken profits in the banking sector.

The authorities implemented fiscal, monetary, and financial policies
to boost the economy and support financial markets. Along with
cutting the policy rate to close to zero, the Bank of Japan took a
range of measures to stabilize financial markets and facilitate
corporate financing, including asset purchases. Given the severity
of the recession and limits on monetary policy from the zero
interest rate boundaries, the government enacted sizeable fiscal
stimulus packages. With the resulting increase in public debt, the
International Monetary Fund (IMF) has recommended the government
develop a plan to secure medium-term debt sustainability. Monetary
and fiscal policy action was supplemented by financial measures to
safeguard the banking system and maintain the flow of credit,
especially to distressed Small- and Medium-Sized Enterprises. To
limit distortions, these emergency measures are being phased out
with the beginning signs of recovery.

The Japanese Financial Services Agency (FSA) has noted in the

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aftermath of the global financial crisis that Japan is in a
relatively unique position among industrial countries in that Japan
needs to deregulate parts of its financial sector even as it
strengthens regulation in other parts. Japan's FSA remains
committed to its Better Markets Initiative to improve the
attractiveness of Tokyo as a financial center. Much of the work to
strengthen regulation is expected to take place in the broader
multilateral context of the G-20 and Financial Stability Board.

Agriculture

Japan maintains many tariff and nontariff barriers against trade in
the agricultural sector. The U.S. Government's recent submissions
to Japan under the Regulatory Reform Initiative include 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 Limit (MRL) regime that ensures that any enforcement actions
taken when a violation occurs are no more trade restrictive than
necessary; ensuring that Japan's pesticide residue policies to
enhance organic trade are in compliance with international
standards; completing the review of widely used food additives that
are recognized as safe by the Food and Agriculture Organization
(FAO) and World Health Organization (WHO) Joint FAO/WHO Evaluation
Committee on Food Additives; and following international standards
for the treatment of post-harvest fungicides.

Plant Quarantine Issues: Japan's plant quarantine system includes
measures that are not always based on internationally recognized
science or standards. Japan turns to nationwide bans on imported
products in response to narrowly focused quarantines imposed by
exporting countries in their home markets. 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 as they reflect Japan's policy of
zero-risk tolerance. Through the Regulatory Reform Initiative, the
U.S. Government continues to encourage Japan to use pest risk
analysis that is based on international standards, and to provide a
scientific basis for its responses, as well as articulate how
adopted quarantine measures accurately reflect the level of
phytosanitary protection Japan has determined to be appropriate.

Japan's Ministry of Agriculture, Forestry, and Fisheries (MAFF)
prohibits the entry of various fresh plant products due to the
presence of pests, despite the presence of some of these pests in
Japan. Japan has a pest forecast system that monitors certain
domestic pests and alerts producers to potential increased pest
damage. The Japanese government has contended this system allows
for official import 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 has made progress to
harmonize legislation and standards with international standards,
but recognizes that more work is needed to harmonize practices on
other pests that may adversely impact U.S. exporters.

STRUCTURAL REGULATORY REFORM

Antimonopoly Law and Competition Policy

Although Japan has taken significant positive steps in recent years
to bolster its competition regime, cartel activity and bid rigging
persist. Additional measures to combat anticompetitive behavior
would improve the business environment and further attention is
needed to ensuring enforcement procedures are fair and transparent.

Improving Antimonopoly Compliance and Deterrence: Japan's
Antimonopoly Act (AMA) provides for both administrative and criminal
sanctions against cartel violators. Administrative penalty
("surcharge") levels remain too low, however, and criminal
prosecutions, which should have the strongest deterrent effect
against anticompetitive behavior, have been few and penalties
against convicted company officials have been weak. 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 augmenting administrative and criminal penalties,
extending the statute of limitations, and strengthening the
effectiveness of the Japan Fair Trade Commission's (JFTC) leniency
program (which eliminates or reduces penalties for whistle blowing
companies). The GOJ has taken certain steps to address these
concerns, particularly the AMA amendments enacted on June 3, 2009.
These amendments increased surcharge rates for enterprises that
played a leading role in unreasonable restraint of trade by 50
percent, extended the statute of limitations for both cease and
desist orders and surcharge payment orders to five years, increased
maximum prison sentences under Article 89 to five years, and revised

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the leniency program to allow two or more enterprises within the
same group, under certain conditions, to jointly file a leniency
application. The amended AMA also subjects to surcharges
enterprises that engage in exclusionary type of private
monopolization or abuse of superior bargaining position. The latter
amendments regarding exclusionary private monopolization are
scheduled to become effective in January 2010; the JFTC issued the
relevant guidelines on October 28, 2009, after considering public
comments received. The JFTC's ability to enforce the AMA
effectively continues to be hindered by a lack 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: Japan
introduced a system in January 2006 that empowered the JFTC to make
determinations of AMA violations without a formal administrative
hearing, with respondents being afforded the right to seek
administrative review of the decision only after the decision was
put into place. Although the JFTC allows 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, questions
have been raised as to whether this system provides sufficient due
process protections. To ensure further credibility and transparency
of JFTC hearing procedures, the U.S. Government has asked Japan to
review the ex post hearing system and take necessary measures to
ensure that respondents are afforded procedural fairness in the JFTC
decision making and appeals process, as well as to ensure that JFTC
investigatory processes are conducted in accordance with generally
accepted notions of fundamental procedural fairness.

Broadening Measures to Combat Bid Rigging: Japanese officials have
implemented a series of measures to address the problem of frequent
and persistent bid rigging. Apart from several cases in which the
JFTC invoked 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 and nine other central government
entities have also introduced an administrative leniency program to
complement the JFTC leniency program (designed to help encourage
individuals and companies to report anticompetitive acts), and Japan
has put in place a series of measures aimed at ensuring a
competitive bidding process for project contracts tendered at the
central and local government levels. In June 2007, the Japanese
Diet passed legislation, which became effective on December 31,
2009, 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 strengthen measures to: prevent conflicts of
interest in government procurement; improve efforts to eliminate
involvement in bid rigging by government officials; expand
administrative leniency programs; and further improve procurement
practices to ensure open and competitive bidding.

Transparency

Transparency issues remain a top concern of U.S. companies operating
in Japan's market. The U.S. Government has strongly urged Japan to
adopt new measures to achieve a higher degree of transparency in
governmental regulatory and policy making processes.

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 groups can be opaque and nonmembers are too often
not uniformly offered meaningful opportunities to provide input into
these groups' deliberations. The U.S. Government continues to urge
Japan to ensure transparency of advisory councils and other groups
convened by the government by adopting new requirements to ensure
ample and meaningful opportunities are provided for all interested
parties, as appropriate, to participate in and directly provide
input to these councils and groups.

Public Comment Procedures (PCP): Many U.S. companies remain
concerned by inadequate implementation of the PCP by Japanese
ministries and agencies. Examples include cases where comment
periods appear unnecessarily short, as well as cases suggesting
comments are not adequately considered given the brief time between
the end of the comment period and the issuance of a final rule or
policy. The U.S. Government has stressed the need for Japan to
ensure its existing PCP is being fully implemented and to make

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additional revisions to further improve the system.

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

Privatization

The U.S. Government continues to carefully monitor the
implementation of the Japanese government's postal reform efforts
and to call on the Japanese government to ensure that 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 international express delivery providers. The U.S.
Government urges Japan to enhance fair competition, including by
ensuring Japan Post Service is subject to similar customs clearance
procedures and costs for competitive services such as international
express delivery services, and that subsidization of Japan Post
Service's international express service by revenue from
noncompetitive postal services is also prevented.

The U.S. Government also continues to emphasize the importance of
transparency and disclosure for the successful implementation of the
postal reform process. The U.S. Government has continued to urge
the Japanese government to ensure that the process by which postal
reforms proceed 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. Timely and
accurate disclosure of financial statements and related notes serves
a key function in the privatization process, as does the continued
public release of meeting agendas, meeting minutes, and other
documents relevant to the process.

The Democratic Party of Japan (DPJ)-led coalition government, which
took office in September 2009, has taken steps to implement major
changes to the course of postal privatization. The "Basic Policy on
Postal Reform", endorsed by the Cabinet on October 20, called for
drastically reviewing the on-going process of privatizing the postal
services. Also, a bill to freeze the planned stock-sale of the
Japan Post Holdings Company and the two postal financial companies
and to stop the transfer of various postal facilities, such as the
"Kampo-no-yado" hotels, passed the Extraordinary Diet session in
early December. The Basic Policy also calls for replacing the
existing Postal Privatization Laws with new legislation, and the
government is making preparations to submit a bill in that regard to
the ordinary Diet session in the early part of 2010. The U.S.
Government continues to closely monitor the changes regarding postal
reform and will continue to advocate for transparency and for
ensuring a level playing field with the private sector. (For
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 now permits the use of certain modern
merger techniques, including domestic and cross-border triangular
mergers. These new provisions, however, have not yet been as
effective as had been hoped in facilitating foreign investment into
Japan. This may reflect the limited range of tax-advantaged merger
tools and corporate governance systems that do not adequately
reflect the interests of shareholders.

Through the Regulatory Reform Initiative, the U.S. Government
continues to urge Japan to improve further its commercial law and
corporate governance systems to promote efficient business practices
and management accountability to shareholders in accordance with
international best practices. Specifically, the U.S. Government is
urging Japan to identify and eliminate impediments to cross-border
mergers and acquisition, including the availability of reasonable
qualifying rules for tax-deferred treatment for many such
transactions, and to take measures to ensure that shareholder
interests are adequately protected when Japanese companies adopt
anti-takeover measures or engage in cross-shareholding
arrangements.

The U.S. Government also continues to encourage Japan to identify

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legislation and other measures necessary to strengthen corporate
governance mechanisms, including by: facilitating and encouraging
active proxy voting by institutional investors such as pension and
mutual funds; tightening the definition of outside directors;
allowing the boards of directors of Japanese corporations to
delegate certain decision making functions to committees composed
solely of independent directors; and encouraging the stock exchanges
to adopt listing rules and guidelines that will improve the
corporate governance of listed companies and ensure that the
interests of minority shareholders are protected when the board of
directors decides to issues new shares, conduct a reverse stock
split or allocate shares to third parties. The GOJ has convened
study groups to consider such measures, including the METI-sponsored
Corporate Governance Study Group, which issued a report in June 2009
urging regulatory changes to Japanese systems of corporate
governance. The Tokyo Stock Exchange strengthened its rules
concerning private placements to third parties, effective August 24,
2009. The U.S. Government also continues to request that Japan
amend Article 821 of the Company Law to prevent adverse effects on
U.S. companies seeking to legitimately conduct their primary
business in Japan through Japanese branch offices.

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 continues to urge 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, counting all of the time foreign lawyers spend
practicing law in Japan toward the three year experience requirement
for licensure as a foreign legal consultant, and speeding up the
registration process for new foreign legal consultants. The U.S.
Government has also requested that Japan take measures to ensure
that no legal or Bar Association impediments exist to Japanese
lawyers becoming members of international legal partnerships with
lawyers outside Japan without restriction, and to ensure that
foreign legal consultants can legally provide alternative dispute
resolution (ADR) services and represent parties in any international
ADR proceedings taking place in Japan.

In order to encourage victims of trade secret theft to cooperate
with prosecutors in bringing criminal charges against the
wrongdoers, the U.S. Government is urging Japan to adopt necessary
procedures that will ensure that the content of a trade secret will
not be disclosed to the public in the criminal trial.

Distribution and Customs Clearance

The U.S. Government welcomes Japan's work to formulate an Authorized
Economic Operator (AEO) system, which allows exporters with good
compliance records to process goods more expeditiously through
Customs.

IMPORT POLICIES

Rice Import System: Japan's highly regulated and non-transparent
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 Staple Food Department (SFD)
of MAFF manages imports of rice within the TRQ through periodic
ordinary minimum access (OMA) tenders and through the simultaneous
buy-sell (SBS) tenders. Imports of U.S. rice under the OMA tenders
are destined almost exclusively for government stocks. MAFF
releases these stocks exclusively for non-table rice users in the
industrial food processing or feed sector and for re-export as food
aid. In calendar year 2008, U.S. rice exports to Japan were valued
at $250 million, representing approximately 318,000 metric tons.
Only a small fraction of this rice 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. The United States expects Japan to continue meeting its
WTO import-volume commitments.

Wheat Import System: Japan requires wheat to be imported through
MAFF's Food Department, which then resells the 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 adjustment to the resale price and
therefore more closely reflect international price movements.
However, the U.S. Government remains concerned by Japan's operation
of a state trading entity for wheat and its potential to distort
trade.


TOKYO 00002813 009 OF 015


Pork Import Regime: Japan is the largest export market for U.S.
pork on both a volume and a value basis (importing 425,000 metric
tons in 2008, worth $1.5 billion). The import tariff for pork is
established by a gate price system that applies a 4.3 percent ad
valorem tariff when the import value is equal to or higher than the
administratively established reference price. Imports that fall
below the reference price pay an additional duty equal to the
difference between the import value and the reference price.

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 the import volume
increases by more than 17 percent from the level of 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.

Fish and Seafood Products: While U.S. fish and seafood exports to
Japan have decreased since 1999; Japan remains an important export
market for U.S. products, representing 18 percent of total U.S.
seafood exports in 2008. An overall decrease in Japanese seafood
consumption and therefore imports, as well as the growing seafood
demand in the United States, the EU, and other countries, help to
explain the downturn in U.S. fish and seafood exports.

Japan's tariffs on seafood imports are generally low, although
tariffs on certain products remain an impediment to U.S. exports,
making the products too expensive for Japanese importers in an
increasingly competitive global marketplace. However, some market
access issues remain. For example, Japan maintains import quotas on
Alaska Pollock, Pacific Cod, Pacific Whiting, mackerel, sardines,
squid and herring. Japan also maintains quotas on specific products
such as pollock and cod roe, and surimi. Administration of Japan's
import quota system has improved considerably over the years and it
is expected that obstacles to U.S. exports of fish and seafood
products 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 subsidies.

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, 20.4 percent on cookies, up to 17 percent on
table grapes depending on the season of the year, and 15 percent to
29.8 percent on wine depending on the Harmonized Tariff System (HTS)
classification. These high tariffs generally apply to food products
where Japan has domestic production. Tariff reductions continue to
be 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.

Proprietary Ingredient Disclosure Requirement for Food and Dietary
Supplements: 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.

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.

(TECHNICAL BARRIERS TO TRADE and SANITARY AND PHYTOSANITARY
STANDARDS excluded per para. 1)

GOVERNMENT PROCUREMENT

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.


TOKYO 00002813 010 OF 015


Construction, Architecture, and Engineering

U.S. companies annually obtain far less than 1 percent of projects
awarded in Japan's massive public works market, valued at $163
billion in 2008. 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. The United States raises
public works issues in the annual Expert-Level Meetings 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 U.S. Government continues to
stress the need for Japan to take more effective action to address
this pervasive problem. The U.S. Government also asked Japan to
take measures to address excessive low-bidding and recognizes that
Japan is attempting to do so through the increased use of Overall
Greatest Value Method procurements and other measures.

The U.S. Government has raised its concerns with 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 also asked Japan to: (1) 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; (2) address
problems related to the treatment of joint venture members,
extremely low design fees, lack of clarity in design fee structures,
and excessive and costly documentation requirements for design bids;
and (3) rectify the excessive use of the GPA operational safety
exemption for railroad procurements.

The U.S. Government is paying special attention to several major
projects covered by the public works agreements that are of
particular interest to U.S. companies; these projects should provide
important opportunities for U.S. firms. These projects include: the
Haneda Airport development and expansion; the second phase of Kansai
International Airport; the Central Japan International Airport; the
Kyushu University Relocation Project; major expressway projects,
including the Gaikan Expressway Project and Metropolitan Expressway
Shinagawa Route Project; Japan Post Projects; major public
buildings, railroad procurements, urban development and
redevelopment projects; major Private Finance Initiative (PFI)
projects; and the MPA projects still to be undertaken or completed.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

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. The U.S.
Government, however, has identified several areas in Japan's IPR
protection regime where further action by Japan is needed.

Patents

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.

Copyrights

Adequate protection of intellectual property is critical for the
continued development and competitiveness of content-related
industries, and is a vital component to advancing electronic
commerce and a well-functioning digital economy. The U.S.
Government encourages Japan to consider ways of improving its
Internet service provider liability law to ensure it provides
adequate protection for the works of rights holders on the Internet
or the appropriate and necessary balance of interests among
telecommunications carriers, service providers, rights holders, and
website owners. 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

TOKYO 00002813 011 OF 015


the exclusive rights of authorship and the incentives to create in
order to keep pace with distribution-related technologies.

The U.S. Government is urging Japan to continue efforts to reduce
piracy rates, including methods to protect against piracy on the
Internet and other digital environments. Police and prosecutors
should be given ex officio authority to enable them to prosecute IPR
crimes on their own initiative, without the requirement of rights
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 copy and access
controls.

The U.S. Government is also encouraging Japan to consider clarifying
the scope of the personal use exception, both as it applies to the
Internet and to book piracy in the educational context.

The U.S. Government also continues to strongly urge Japan to extend
the term of protection for all the subject matter of copyright and
related 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.

The U.S. Government notes the Japanese Diet passed a bill revising
the Copyright Law on June 12, 2009, to go into effect January 1,
2010. The bill seeks to address piracy issues, promote distribution
of digital content, and assure better access to those with
disabilities. The U.S. Government welcomes efforts by the Japanese
government to bring laws up to date and urges continuing efforts to
modernize IPR protections in an open, inclusive, and transparent
process.

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 an
expanded list of prohibited goods for export to include items that
infringe copyrights and related rights, and strengthened penalty
clauses for customs offences. It is important for the Japanese
government to continue its aggressive interdiction of infringing
articles and to vigorously apply new provisions of the Customs
Tariff Law. Japan has positively contributed to the enhancement of
IPR enforcement in fora such as the G-8, APEC, and the WTO TRIPS
Council, and through border enforcement capacity building work in
the Asia-Pacific region.

SERVICES BARRIERS

Insurance

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 34.7trillion yen (approximately $335 billion) in Japan
fiscal year (FY) 2008. In addition to the offerings of Japanese and
foreign private insurers, substantial amounts of insurance are also
provided to Japanese consumers by insurance cooperatives (kyosai),
and the Japan Post Insurance Co., Ltd. (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.

Postal Insurance: Japan's postal life insurance system remains a
dominant force in Japan's insurance market. At the end of Japan
FY2008, there were approximately 52 million postal life and postal
annuity insurance policies in force, with approximately 2.7 million
having been issued by the new Japan Post Insurance Co., Ltd., after
it began operations on October 1, 2007, and the remainder held as
assets of the Public Successor Corporation. In comparison, 128
million life and annuity policies were in force with all other life
insurance companies combined. The U.S. Government has long-standing
concerns about the postal insurance company's impact on competition
in Japan's insurance market and is continuing to closely monitor the
implementation of reforms. This includes the expectation that the
principle of establishing equivalent conditions of competition
between the Japan Post companies and the private sector, as outlined
in Japan's basic postal reform law, will be fully achieved. A level
playing field between the postal insurance company and private
sector insurers is critical to cultivate competition, enhance
consumer choices, encourage more efficient resource allocation, and

TOKYO 00002813 012 OF 015


stimulate economic growth.

The U.S. Government continues to urge Japan to take a number of
steps to ensure equivalent treatment, including but not limited to:
(1) ensuring equal supervisory treatment between Japan Post's
financial institutions, including Japan Post Insurance, and private
sector companies; (2) implementing adequate measures to prevent
cross-subsidization 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 arm's
length rule and requiring adequate financial disclosures to
demonstrate that cross-subsidization is in fact not occurring; and
(3) ensuring the company established to manage Japan's post office
network will transparently and without discrimination select
financial products, including 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 before the introduction of new or altered insurance
products by the postal insurance company. 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 institutions and network
subsidiary could have serious ramifications to competition in
Japan's financial 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 to 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 measures. Timely and accurate disclosure
provides important information as well as independent means to track
and validate the privatization process.

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 Financial Services Agency (FSA), which regulates all other
private sector insurance companies. 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 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 consumers.

The Japanese government has taken some important steps since 2006 to
bring more oversight to unregulated kyosai. Under these regulatory
reforms, previously unregulated kyosai were required to apply to the
FSA for new legal status by April 2008. 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
(SASTIP)," 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 that were
required to close their businesses by the end of March 2009 have
done so. The FSA is to review the SASTIP system within five years
from the date of its enforcement (before April 2011), and in doing
so, the FSA will, as necessary, provide information on the review
and meaningful opportunities for input from insurance companies,
including foreign insurance companies, and other parties concerned
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 to provide capital and
management support to insolvent insurers. Legislation was

TOKYO 00002813 013 OF 015


introduced in Japan's Diet in late 2008 to renew the life insurance
PPC system prior to its scheduled expiration in April 2009. The new
legislation, which passed the Diet in December 2008, will renew the
protection system for three additional years. It was passed without
full deliberations on the effectiveness of the current system, which
continues to rely on pre-funding of the PPC by its members and a
government "fiscal commitment" in case industry funding is
insufficient, instead of adopting a system where an insolvency would
result in members contributing funds to the PPC as needed
(post-funding). The U.S. Government continues to urge Japan to
consider more fundamental changes in the PPC systems, including
through full and meaningful deliberations with interested parties
before renewal legislation is required.

Bank Sales: In December 2007, the Japanese government fully
liberalized the range of insurance products eligible for sale
through banks. As a follow-up, the U.S. Government promptly asked
Japan to review market conduct rules, including the limits on sales
of first and third sector products and treatment of customer data
(including Insurance Business Law Enforcement Rules, Article 212),
to ensure they do not limit the effectiveness of bank sales of
insurance or impede consumer convenience and choice. While the FSA
has committed to conduct a review of market conduct rules within
three years, the U.S. Government has called for a more expedited
review.

Domestication of Foreign Insurance Operations: The U.S. Government
has recommended that Japan take measures to ensure foreign
incorporated companies operating branches in Japan that wish to
transfer business operations to a Japan-incorporated entity can do
so in a seamless manner that protects policyholders and creditors
while ensuring business continuity. The U.S. Government urged that
the portfolio and transfer provisions of the Insurance Business Law
be revised accordingly.

Professional Services

Medical Services: Restrictive regulation limits foreign access to
the medical services market. The U.S. Government has continued to
urge Japan to open new opportunities for commercial entities to
provide full-service, for profit hospitals, including through
Japan's special economic zones, in order to open this sector to
foreign affiliated providers.

Educational Services: Unnecessary regulation related to both
administrative requirements and restrictions on pedagogical choices
has been one of the factors that discouraged foreign universities
from operating branch campuses in Japan. 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), it does not confer the 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
environment.

INVESTMENT BARRIERS

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 has been 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. With
only one cross-border stock transaction occurring under the new
rules, however, the adequacy of measures taken to date to promote
cross-border 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, inadequate corporate governance
mechanisms that protect entrenched management over the interest of
shareholders, and a relative lack of financial transparency and
disclosure.


TOKYO 00002813 014 OF 015


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, 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.

OTHER BARRIERS

Automobiles and Automotive Parts

A variety of nontariff barriers have traditionally impeded access to
Japan's automobile and automotive parts market, and overall sales of
North American made vehicles and parts in Japan remain low. Japan
Automobile Importers Association (JAIA) data indicates reports that
registrations in Japan of motor vehicles produced by of U.S.
companies were 13,987 in 2008 compared to 15,341 units in 2007.
Japan instituted a Green Vehicle Purchasing Promotion Measure
Program, launched April 1, 2009 and scheduled to end March 31, 2009
with the possibility of being extended. The program provides
rebates to customers who purchase a new vehicle that exceeds a
certain fuel mileage standard but has been developed in such a way
that a much lower proportion of imported vehicles qualify for the
incentive compared to Japanese models.

Through the Regulatory Reform Initiative, the U.S. Government has
continued to address crosscutting structural and regulatory reform
issues with Japan that affect the automotive sector, including
urging Japan to take steps that strengthen competition policy and
increase transparency in rule making. It is also important for
Japan to take into full consideration global harmonization efforts
as it develops and implements regulations.

Aerospace

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
aircraft.

Military procurement by the Ministry of Defense (MOD) accounts for
approximately 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. Because of
the lack of guidelines specific to business aviation, 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 and leads to most business aircraft operating in
Japan being registered in the United States. In addition to the
regulatory environment, landing rights for business aircraft in
Japan are difficult to obtain because of rules that hamper flexible
scheduling, especially in the Tokyo area. These factors greatly
limit business opportunities in this sector for sales of U.S.
aircraft in Japan.

Certain Chubu and Kansai region airports have begun to attract
business aircraft, although with modest results thus far. Regional
airports are attempting to provide many of the same services
business aircraft operators receive in the United States and Europe.
Severely restricted hours for landings and take-offs at Haneda
Airport in Tokyo, a preferred business destination, and the lack of

TOKYO 00002813 015 OF 015


services for private business aircraft at both Narita and Haneda
continue to significantly limit travel to and within Japan.

The U.S. Government has continued to urge JCAB to reexamine the
application of airline-specific commercial civil aviation
regulations to business aviation and develop appropriate regulations
specific to the business aviation industry that are consistent with
the treatment of business aviation in North America, Europe, and
other developed economies. Immediate improvements in the overall
regulatory framework for business aviation are needed in advance of
an additional runway opening at Haneda planned for 2010.

During 2008, the JCAB took some initial and positive steps,
including engaging in greater dialogue with the U.S. Government and
other stakeholders. A May 2008 JCAB report highlighted the
importance of business jets in Japan's aviation future and noted
that Japan lags noticeably behind other countries in business
aviation development. The JCAB also laid out a road map for a new
business aviation policy, calling for improvements in facilitation,
regulatory framework, facilities, and air fields. 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,
which permits JA (Japan) registered aircraft with two engines to fly
routes far longer than they could previously.

In the spring of 2009, the JCAB conducted follow-up research on
business aviation, but the result and any responding measures have
not been announced (as of November 30).

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 On traffic rights,
operational flexibility, change of gauge, pricing, and other issues,
the Government of Japan has made strides toward aviation
liberalization with its statements in favor of a comprehensive Open
Skies agreement, and bilateral civil aviation negotiations continue
toward this goal.

The U.S. Government commends the Japanese government for its
expansion of Tokyo's Narita International Airport as well as the
opening of Tokyo's Haneda Airport to international flights. The
U.S. Government continues to encourage Japan to take steps to
increase capacity and reduce overall congestion Ambitious expansion
projects are set to be completed at both airports in 2010. However,
the planning process for both these projects has not been fully
transparent. U.S. carriers have expressed serious concerns about
how new slots at Narita Airport will be allocated and with the
unfair advantage that Japanese carriers would enjoy if slots at
Haneda were allocated for service to the United States in the
restricted night hours that MLIT's most recent plans envision.
These issues are properly addressed in bilateral air transport
negotiations. Separately, the U.S. Government notes that
connections between airports in the Tokyo metropolitan area remain
difficult and time-consuming, and that the weak connectivity
undermines the efficiency of the airports and carriers serving
Tokyo. The U.S. Government is encouraged by improvements that are
now under consideration within MLIT to improve transit access
between Haneda and Narita airports.

Recently lowered landing fees at Narita were offset in part by the
imposition of other new or increased fees.

Roos

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UN Report: Myanmar Approaching Point Of Economic Collapse

The turmoil following the military coup in Myanmar, coupled with the impact of COVID-19 could result in up to 25 million people – nearly half of the country’s population, living in poverty by early next year, a United Nations report said on Friday. That ... More>>

World Vision: India’s Second Wave Shows The Global Fight Against COVID-19 Is Far From Won

As India’s COVID-19 daily infection rates reach devastating levels, international aid agency World Vision has warned that the world is nowhere near defeating this virus and some nations are yet to face their worst days. Andrew Morley, World Vision ... More>>

Focus On: UN SDGs

Study: Cut Methane Emissions To Avert Global Temperature Rise

6 May 2021 Methane emissions caused by human activity can be reduced by up to 45 per cent this decade, thus helping to keep global temperature rise to 1.5 degrees Celsius in line with the Paris Agreement on climate change, according to a UN-backed ... More>>

UN: Learning From COVID-19, Forum To Highlight Critical Role Of Science, Technology And Innovation In Global Challenges

New York, 4 May —To build on the bold innovations in science, technology and innovations that produced life-saving solutions during the COVID-19 pandemic, the UN will bring together experts to highlight measures that can broaden the development and deployment ... More>>

What COVID-19 Has Taught Us: “Healthcare Can No Longer Exist Without Technology”

A grandmother in a village in the Gambia should have the same quality of life and access to healthcare they deserve as in New York or London. Photo: InnovaRx Global Health Start-up Works To Bridge Healthcare Gap In The Gambia By: Pavithra Rao As ... More>>