U.S. Embassy Addresses Regulatory Reform Council

Presentation on behalf of Howard Baker,
Ambassador of the United States of America to Japan,
To the Council for the Promotion of Regulatory Reform

Jim Zumwalt
Economic Minister Counselor
U.S. Embassy, Tokyo, Japan
Nov. 22, 2004

1. Greetings and Thanks

Thank you for providing this opportunity to address the Council for the Promotion of Regulatory Reform. The United States Government has the highest respect for your work, and looks forward to helping you fulfill your important mission. We particularly applaud the decision to renew and strengthen the mandate of this Council, which has been a strong and vocal advocate of wide-ranging regulatory and structural reform. Please let me pass along Ambassador Baker's best wishes and apologies for not making the U.S. presentation himself. I am especially happy to appear today with my colleagues from the European Union and the Federation of Japanese Business Organizations (Keidanren). We all share a common interest in seeing the Japanese economy continue to improve, which can be facilitated through regulatory reform and enhanced transparency. This in turn will improve the climate for consumers, investors, and companies in Japan.

On 14 October, Deputy U.S. Trade Representative Josette Shiner and Deputy Foreign Minister Ichiro Fujisaki exchanged in Washington, D.C. this year's reform recommendations under the U.S.-Japanese Regulatory Reform and Competition Policy Initiative. In addition to the document we are passing out today, the full text of our recommendations is on the Embassy Web site and USTR Web site, in both Japanese and English, if you would like to download and read it yourselves. While the bulk of our bilateral work with Japan on regulatory reform takes place under the Regulatory Reform Initiative, we also raise some regulatory issues within the U.S.-Japan Investment Initiative, which I will also highlight today.

Our recommendations this year include key reform measures to support Japanese economic growth and to further open the Japanese marketplace. Furthermore, the United States has made a concerted effort to focus on issues that Prime Minister Koizumi has identified as important areas for reform, such as regulatory transparency, telecommunications, information technologies, health care, energy, competition policy, and postal privatization.

The United States believes that a strong Japanese economy is a prerequisite for a strong global economy and that structural and regulatory reforms will raise potential growth rates in Japan. The United States also strongly supports Prime Minister Koizumi's bold economic reform agenda and welcomes the recent economic growth in Japan. We believe that recent good news in the economy serves as a good incentive to press ahead with further economic reform, and were happy to hear Prime Minister Koizumi reaffirm this commitment in his October 12, 2004 statement to the Diet that "there can be no rebirth and development for Japan without structural reforms." We urge Japan not to let its recent growth give cause to take a less aggressive approach to economic reform. As you know well, hard choices and hard work have gotten you this far, and hard choices and hard work will ensure your continued success.

2. Regulatory Reform Progress and Prospects

Allow me to comment on some of the progress we have seen on the regulatory reform front in Japan, while highlighting some of our key reform recommendations this year.

The United States continues to support the Special Zones for Structural Reform initiative, which represents an innovative approach to promoting growth through structural reform and deregulation at the local level. These zones have also begun to benefit U.S. and other foreign companies. The international logistics zone at Narita Airport has, for example, significantly improved the business environment for U.S. express delivery companies.

On telecommunications, Japan has made significant progress in this sector in recent years as the Japanese Government's efforts to promote policy and regulatory reform have begun to yield positive results. This is evident in the rollout of innovative technologies and competitively-priced advanced services, including Digital Subscriber Line, Fiber-to-the-Home, and Voice Over Internet Protocol. Revisions to the Telecommunications Business Law (TBL), which came into effect from April 2004, also improved the competitive conditions for this sector.

More, of course, needs to be done in this key sector. We continue to urge Japan to take steps to transfer regulatory functions in the telecommunications sector to an independent agency, increase public participation in regulatory and policy decisions, and to bolster dominant carrier safeguards to prevent abuses by carriers with dominant market power. Structural flaws in the 2003-2004 interconnection rate methodology should be reviewed, with the aim of encouraging cost-oriented and reasonable interconnection rates that promote efficient competition. We are also asking that Japan's spectrum management policies and practices be more transparently administered in a way that promotes greater innovation, competition, and efficient spectrum use.

Japan has also made important progress in removing regulatory barriers to help Japan fulfill its goal of being a world IT leader by 2005, as first envisioned in the e-Japan Strategy plan. This progress has helped transform the landscape in Japan into one where broadband utilization is widespread and can be enjoyed at some of the fastest speeds and lowest costs in the world. Japan has also increased the use of IT and online processes in the private and public sectors and is now one of the largest e-commerce markets in the world.

In our recommendations this year, we have included a number of steps to strengthen protection of intellectual property rights by, for example, recommending that Japan extend the term of protection for sound recordings and other works. We are asking Japan to implement stronger measures to stop online piracy of digital content, remove regulatory barriers to e-commerce, and enhance the security of online transactions. In addition, we are also recommending that Japan reform e-government procurement to improve market access.

More broadly, we are calling on Japan to ensure that new laws and policies meant to encourage IT innovation in the private sector are compatible with international practice, promote private sector self-regulation, and promote technology neutrality.

Japan has set a positive course to expand liberalization of its retail electricity market to about 63 percent (2.4 times the 2003 level) by 2005 and its retail gas market to about 50 percent (1.25 times the 2003 level) by 2007. The United States supports this effort, and is calling on Japan to take additional steps to bring about a fully competitive energy market that is more transparent, reliable, fair, and provides meaningful opportunities for new market entry. For example, we are urging Japan to implement reforms that will ensure meaningful access to liquefied natural gas terminals by third parties. We also agree with this Council's view that steps should be taken to facilitate the connection of co-generation and other such sources of electricity to the grid. These and other steps should help Japan lower energy industry costs to internationally competitive levels and provide access by consumers and commercial users to more economical sources of electricity and natural gas.

In response to fiscal burdens and a rapidly aging society, Japan is, as we all know, endeavoring to reform its healthcare system. Significantly, Japan spends five times as much on healthcare for the average elderly person than for a citizen under 65, and has increased spending on elderly healthcare eight percent annually over the past decade. Improving regulatory and reimbursement pricing systems for medical devices and pharmaceuticals is a key component of Japan's healthcare reform effort.

This year, we are urging Japan to expedite pharmaceutical and medical device reviews and approvals by complying with important goals established by the Pharmaceuticals and Medical Devices Agency (PMDA); develop in consultation with industry effective ways to evaluate if PMDA is successfully expediting product reviews; ensure that overseas audits or factory inspections do not delay approvals of new products; accept third-party inspections of medical device factories; enhance the expertise of product reviewers; and identify and clarify PMDA's appeals processes for reviews and safety-related activities. The United States is also urging Japan to apply pricing premiums more appropriately to reward and stimulate advances in drug research and medical technology, and to reform pricing rules to accurately assess the value of innovative products to Japan's healthcare system.

Under the U.S.-Japan Investment Initiative, we are asking Japan to open the medical services sector to commercial service providers. Allowing joint-stock companies to participate in the ownership and management of medical institutions would increase competition, leading to higher productivity, greater choice for patients and doctors, and more capital to invest in new technologies. As a step in this direction, we urge Japan to expand the scope for hospitals and clinics to outsource specific medical services to commercial firms. Patients, doctors, and hospitals would benefit from extending this management option to other areas where medical tasks are repetitive and the risk to patient safety and privacy is low, such as imaging and routine treatments for chronic conditions.

We also note that Japan's approach to reforming the regulatory framework for medical services has been extremely cautious. A recent change to allow joint-stock companies to operate clinics within Special Zones was limited to a narrow range of high-tech services, which are ineligible for reimbursement under National Health Insurance (NHI). Furthermore, a recent decision on partial NHI reimbursement for mixed treatments was limited to a handful of treatments and restricted to a handful of medical institutions. By lifting the ban on reimbursement for mixed treatment and allowing more flexible use of special zones for medical services, for example to outsource selected hospital services, Japan would expand the market for services with a high potential to attract private investment and accelerate the pace of regulatory reform in the health care sector.

As for financial services, we are asking Japan to: enhance its no-action letter system; allow foreign banks to engage in trust and banking businesses on equal footing with domestic banks; permit lenders to satisfy disclosure requirements under Japan's Money Lending Business Law through e-notification.

The United States welcomes recent efforts to strengthen Japan's Antimonopoly Act. In particular, the proposed introduction of an Antimonopoly Act leniency program, as well as the proposed increase in surcharge levels, are important steps toward strengthening the effectiveness of Antimonopoly Act enforcement in Japan and bringing Japan's antimonopoly system into line with international trends. We urge early enactment of the amendments to this law.

We applaud the CPRR's past efforts to increase transparency and public participation in government rule making, and urge the Council to continue these efforts in the coming year. We are encouraged the Japanese Government is considering improvements to the Public Comment Procedures (PCP). This is long overdue. However, as currently implemented, the PCP has not provided the kind of meaningful public input that it should. Comment periods are often woefully short, and ministries and agencies largely disregard comments they receive from the public. With this in mind, we have made a number of recommendations intended to help remedy some of these problems.

We continue to support Prime Minister Koizumi's pledge to promote inward investment and double the stock of FDI in Japan by 2008. Since 80 percent of FDI in developed economies like Japan occurs in the form of mergers and acquisitions, potential investors in Japan are calling for new tools for cross-border M&A. The Ministry of Justice's most recent proposals to amend the Commercial Code to allow triangular share-swap mergers involving foreign companies is encouraging to our investors. But tax considerations will be crucial; the new M&A tools may rarely be used if the exchange of shares is considered a taxable event. New tax deferral provisions that work will be necessary to promote investment in Japan. In addition, within the US-Japan Investment Initiative, we are focusing on liberalizing the regulatory environment in the areas of educational services in order to respond to Japan's need for a more internationalized educational system.

The creation of a legal environment that can respond to Japan's need for efficient international legal services and quick, inexpensive mechanisms for resolving legal disputes is important to the health of Japan's economy, particularly in ensuring a sound and effective foundation for the conduct of business transactions in the Japanese market. The United States commends Japan for its revisions of the Foreign Lawyers Law in 2003 to enable foreign lawyers and Japanese lawyers to associate freely to the benefit of Japanese consumers. The United States looks forward to the Japan Bar Association's implementation of those revisions in a manner consistent with both the letter and liberalizing spirit in which they were enacted. At the same time, the United States welcomes Japan's commitment to create a flexible and open legal environment that facilitates the development of Alternative Dispute Resolution (ADR) mechanisms and helps the Japanese people resolve conflicts quickly and inexpensively.

The United States welcomes the inclusion of distribution-related issues in Japan's new Three-Year Plan for the Promotion of Regulatory Reform, and looks forward to future efforts by Japan to advance regulatory reform of its distribution sector. The ability of producers to move goods quickly and inexpensively through customs and into consumers' hands is a key measure of economic efficiency. The United States appreciates steps taken by Japan to increase competitiveness at its international ports by streamlining customs clearance procedures and reducing customs charges nationwide, but we encourage them to do more, by continuing to reduce certain customs processing charges to zero nationwide, and change the base for duty calculations on low-value items from Cost of Insurance and Freight (CIF) to Free on Board (FOB).

The Prime Minister has pledged to double the number of foreign visitors to Japan by 2010. One concrete step Japan could take to meet this goal would be to introduce transparency in the calculation of landing fees at Japan's international airports. Landing fees at Narita and Kansai are the world's highest according to the International Air Transport Association (IATA). If lowered - and let me point out that Narita Airport made 23 billion yen in profit last year - the cost for foreign carriers of operating at these two facilities would drop, stimulating growth in the transport industry and ancillary industries such as hotels, shopping, and travel. Additionally, we recommend that Japan abandon enforcement of the IATA 70-percent low band on airline tickets, and give companies greater flexibility to respond to market changes by eliminating the regulatory requirement that airline fares be filed 30 days in advance, and to eliminate double approval pricing. We are also recommending that Japan increase the acceptance and security of credit and debit cards as payment for goods and services to increase economic efficiency and bolster the tourism industry.

Japan has come a long way in restructuring "zombie" corporations. We believe a more fluid labor market, facilitated by such diverse measures as increasing the limits on defined contribution pension plans and expanding childcare to mobilize female workers, will be crucial to revitalizing Japanese businesses. In order to carry out efficient market-driven corporate restructuring, Japan must also address reform of its bankruptcy regulations to speed the legal process and provide greater access to debtor in possession financing.

3. Postal Reform and Agriculture

Perhaps saving the best for last, allow me to highlight an area we have raised before under regulatory reform, but are putting a special focus on this year - postal privatization. Also, allow me to highlight an all new area we are raising this year in the Regulatory Reform Initiative - agriculture.

The complex undertaking of postal privatization has important implications for Japan's economy as well as for bringing about fair competition in Japan's insurance, banking, and express delivery markets. We believe that privatization should be market-oriented and thus should include the complete removal of all advantages that Japan Post has over private sector entities. The United States therefore welcomes the Council for Economic and Fiscal Policy's (CEFP) call for equalizing the competitive conditions between Japan Post and private companies. Achieving this goal in full will require a number of steps, ranging from bringing Japan Post under the same laws, regulations, and obligations as private entities, to taking sufficient steps to ensure that cross-subsidization does not unfairly advantage the four new companies. We urge that these steps be implemented as early as possible in the privatization process, and that no new advantages be created for Japan Post through privatization. Until this level playing field is fully established, the United States continues to call on Japan to implement a moratorium on the introduction of new Japan Post insurance and banking products.

As for agriculture, this is the first year we have included items in this sector (mostly dealing with plant quarantine issues) in our regulatory reform recommendations. The reason for this is that we find Japan is relying increasingly on technical barriers to impede the import of agricultural goods.

4. Closing

Although these points are obvious to the members of this Council, let me take this opportunity to reiterate the two fundamental benefits of regulatory and structural reform: greater market and investor confidence. The United States' experience has been that as we increase transparency and reduce the number of regulations, businesses have flourished in the lower-cost environment. We look forward to continuing to exchange ideas so that both the United States and Japan can benefit from each other's experiences in reducing the regulatory burdens that fetter economic growth.

I would like to thank the Council again for allowing the United States this special opportunity to address your members, and I would like to commend you all for your dedication and commitment to helping Japan strengthen economic recovery through regulatory and structural reform. If there is anything the U.S. Government, the Embassy, or I personally can do to assist you in your efforts, please feel free to contact me.

Thank you very much; I look forward to your questions.