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Economic Minister Michalak's Remarks before the Council for Regulatory Reform

Cabinet Office, October 1, 2001

Chairman Miyauchi, members of the council, I am deeply grateful for this opportunity to address you today on behalf of Ambassador Baker and the US government. The Ambassador asked me to convey his apologies for not being with you. He wanted to emphasize that the US government views regulatory reform and the work of the Council as a major pillar of the US-Japan Economic Partnership for Growth forged between Prime Minister Koizumi and President Bush in June. He asked me to assure you that the US government, through the Embassy, hopes to be fully involved with the council as it works to implement the Three-Year Regulatory Reform Promotion Program.

At about this time last year I accompanied Ambassador Foley to hearings you chaired with the old Regulatory Reform Committee. At that time you were preparing your final report on the Three-Year Program for the Promotion of Deregulation. In that report you referred to the nineties as Japan's "Lost Decade" voicing your frustration with Japan's reluctance to bite the bullet of reform and the debilitating effect this inaction has had on the economy.

A lot has happened since then. Prime Minister Koizumi's administration has enthusiastically embraced the cause of regulatory reform and the council has been established within the Cabinet Office giving it greater authority to implement the current three-year reform plan. And of course you have once again accepted the call to lead the regulatory reform movement as Chairman of this important and influential council. There is no doubt that the regulatory reform movement will be well-served with you continuing as its leader.

As you know, the US government has been involved with the reform movement in Japan for a number of years because we share your view that a strong Japanese economy is a prerequisite for a strong global economy. One is not possible without the other. In these uncertain times it is important that the two major pillars of the global economy, Japan and the US take whatever measures are available to them to allow their economies to grow. You and the council know that deregulation is a major engine of Japanese economic growth.

We will therefore continue to work with the council to support the Japanese government's reform efforts. As one practical manifestation of our wish to cooperate with you Ambassador Baker has given you the names of experts from the American business community in Japan for you to consider for appointment to the council's various Working Groups. I understand the American Chamber of Commerce is also seeking to participate in the hearings scheduled by the Working Groups. We hope the council will take these opportunities to draw on American private sector knowledge and experience when this can assist it in its work.

In the last few days we have been studying with interest the administration's Reform Work Schedule (kaikaku kouteihyou) announced on September 21. The centerpiece of this is Prime Minister Koizumi's Reform Priority Program which incorporates the deregulation issues identified in the council's Interim Report of July 24. In this report you recommended urgent reform of six "special" social sectors - Medical, Welfare, Human Resources, Education, the Environment and Urban Renewal. Reform in these sectors is essential for improving the quality of life of the citizens of Japan and we encourage you in your endeavors.

However we hope that at the same time the council will continue its efforts to promote regulatory reform in the other important areas identified in the Three Year Regulatory Reform Plan. I would like to highlight some of our proposals for these sectors for your consideration.

The three-year regulatory reform program adopted by Cabinet on March 30 adopted a sensible crosscutting approach to deregulation identifying common goals and common themes. This was also the approach agreed by Prime Minister Koizumi and President Bush when they established the bilateral Regulatory Reform and Competition Policy Initiative within the Economic Partnership for Growth in June.

Today I would like to talk to you about some important cross-cutting or structural areas of reform - the need for a stronger competition policy, greater transparency, revision of the commercial code, legal reform, insurance, distribution and transportation. But before that I want to present our ideas about other sectors covered in the three-year plan - telecommunications, IT, the medical sector and energy. I should mention that we are working with the Government of Japan on other reform issues too. For example we want to address the need for a more welcoming and more transparent regulatory environment for foreign investment and the need to further deregulate the Financial Services sector. However our discussions on these topics are being conducted elsewhere and I do not want to take up your time to talk about them in detail here.


If we could start by looking at the telecommunications sector. We agree with the findings of the IT Strategy Council last year that an efficient and competitive telecommunications sector is critical if Japan is to continue to grow as a strong economy and if Japanese citizens and companies are to have access to the goods and services essential to participation in a world dominated by information technology. The Telecommunications Business Law enacted in June is a step forward, but we are awaiting the issuance of the implementing ordinances to see how this proceeds. Experience in other markets has shown clearly that certain steps are key to creating a competitive environment for telecom, steps which we have been and continue to call on Japan to take. For example, we want Japan to create an independent regulatory authority with the power and the tools to enforce pro-competitive regulation. We again urge the Government of Japan to free new market entrants from unnecessary regulation for example by shifting towards a notification rather than approval system. We also urge Japan to implement strong dominant carrier regulations that ensure competition safeguards.

Information Technology

Adopting Information Technologies increases productivity, creates jobs and spurs growth both in the IT sector and throughout the economy. IT has also led to a growing shift among firms from vertically integrated structures towards more horizontal organizational structures. Moreover, firms that face competition are more likely to adopt new technologies than firms with protected market positions.

We applaud Japan's efforts to implement the e-Japan action plan and to examine how to adjust Japan's legal and regulatory framework for the digital age. In doing so, it is important to establish technology neutral frameworks to create an environment where e-commerce and the development of new IT products and services including content can flourish. As Japan implements its e-Japan action plan, we look forward to continuing our dialogue with Japan on issues of common concern in the borderless Internet world. These issues include protecting personal data, balancing the interests and protecting the rights of Internet Service Providers and right holders through the establishment of clear-cut ISP liability rules, continuing the shift to paperless transactions, and examining existing laws to ensure that new IT-based business models can thrive.

Medical Sector

Turning now to one of the "special" sectors identified by the council and given priority treatment in the Government's Reform Work Schedule - the medical sector - we welcome the emphasis your Interim Report gives to introducing competition and pursuing structural reform to improve the healthcare system. We have long maintained that such approaches are critical to providing higher quality care and to encouraging the development of innovative and cost effective drugs and devices. The council's recommendations to strengthen financial accountability and to enhance patient access to information, including deregulating advertising, are also important steps.

In addition to supporting the council's proposals to enhance efficiency within the healthcare system, we continue to encourage expedited approval of medical devices; creation of transparent rules for the prompt establishment of reimbursement levels for new medical devices; and meaningful industry input into deliberations on pharmaceutical and device pricing and reform issues.

However, the special attention the council has given to "resolution of the medical device equipment price gap between Japan and overseas" raises serious concerns. If Japan is to contain healthcare costs it must address key cost-drivers by introducing competition and structural reform as the council's report generally recommends. Arbitrarily targeting foreign products is not an acceptable or productive approach.


If we could look now at one final sectoral issue I would like to talk briefly about energy. We welcome Japan's continued liberalization measures in the electricity and gas sectors. These measures are critical for promoting economic growth, a stable energy supply through competition in the energy sector, and reducing energy costs. Liberalization of the energy sector will contribute to one of Prime Minister Koizumi's key areas for reform, urban renewal, by lowering electricity costs to internationally competitive levels and reducing costs of commercial users and consumers.

Although steps have been taken to liberalize the energy sector, both foreign and Japanese new entrants still find the market relatively closed and non-transparent. The establishment of an independent regulatory authority is a basic measure to promote competition and fairness in the sector. We encourage the Government of Japan to ensure that the Electricity Market and Gas Market Divisions of METI have the resources and means to have effective, independent authority.

We welcome a clearer indication from the Japanese government of a timetable for implementation of future policies and study groups and request that private sector interests and the USG be able to contribute in meaningful ways to the development of future policies and studies through public comments, participation in study groups etc.

In the energy sector too, we encourage more transparency in a range of areas, including information on price and availability of transmission services and pricing of gas transport services. Another key element is the need to promote a more competitive environment through enhanced activities of the JFTC and to promote more non-discriminatory electric transmission network access and open and non-discriminatory access to gas pipelines and LNG terminals.

Competition Policy

Turning now to the "cross-cutting" issues identified in your Three-Year Program I would like to highlight the need for more effective Competition Policy. We strongly support the proposal in the Reform Work Schedule announced September 21 to upgrade the status of the Japan Fair Trade Commission. This could be achieved, for example by establishing it as an independent agency under the Cabinet Office (naikaku-fu). The JFTC's staff also needs to be substantially increased, and its investigative authority strengthened, to cope with the rapid changes in the marketplace that have serious competition implications. We favor providing the JFTC with the legal flexibility to adopt a cooperation leniency program as a powerful tool for investigating cartels and bid rigging, as well as strengthening the surcharge payment system to better deter violations and provide an incentive to cooperate in return for leniency. Strong new measures are also needed to deal with bid-rigging (dango), including legislation to address bureaucratic-led bid-rigging (kansei dango), pro-active measures by MLIT and other procuring agencies and extension of the citizen-suit provisions (242) of the Local Autonomy Law to the national government.


A major crosscutting theme of the three-year plan was the need for greater transparency in every sector to ensure fairness, predictability and accountability in the regulatory process. We agree with this goal wholeheartedly. If ordinary citizens, companies and potential investors do not know how the rules and regulations affecting their lives or their business are going to be interpreted or administered they will be reluctant to start any new enterprise or to invest in the economy.

We note that your Interim Report does not deal with the need for greater transparency as a separate item but we hope it can be taken up again by your council as it proceeds to implement the three-year plan since it is an issue that has an impact on every sector of the economy. In particular we note that the Administrative Procedure Law has been in existence since 1994 and the Public Comment Procedures since 1999. Both of these measures were intended to introduce more transparency into government but in our view neither is working satisfactorily. A recent report by Somusho on the effectiveness of the Public Comment Procedures certainly supports this view. At this hearing I will mention the need for greater transparency in a number of specific sectors.

Commercial Code

We applaud progress made by the Japanese Government toward amending the Commercial Code and improving the transparency and efficiency of the legal regime for structuring and organizing corporations, as well as for facilitating domestic mergers and acquisitions (M&As). By contrast, some serious impediments to cross-border M&As have not been addressed, with the result that Japan is falling behind the rest of the world in this area. We strongly recommend that the Commercial and Tax Codes be revised to accord foreign companies the same treatment that Japanese companies receive in tax-free share exchanges.

Corporate governance is another important area of commercial law reform that has received special attention from the Japanese Government. The impetus for this is clear: intensifying global competition requires more management speed, flexibility, and accountability. In order to accomplish these goals while protecting shareholder interests we support the recent proposal to offer companies a choice between either using the existing kansayaku system or, alternatively establishing audit committees (as well as other committees) composed of at least a majority of outside directors. On the other hand, if Japan decides to require certain companies to have at least one outside director, it seems reasonable that only publicly listed companies - not all "large companies" - should be obligated to implement such a system since the management of a privately held company is by definition already wholly bound to the interest of its owners.

Finally, we encourage transparency in the commercial law reform process and we urge that all companies - both foreign and domestic - be allowed maximum access and input into the reform deliberations of government bodies and other groups. This will allow reforms to be closely tailored to the needs of those they are meant to benefit.

Legal Reform

We applaud the efforts of the Judicial Reform Council in issuing its report entitled "Recommendations of the Judicial Reform Council - For a judicial System to Support Japan in the 21st Century". At the same time, we recognize that only decisive action can push through the timely, effective legislation needed to improve Japan's judicial system and to help revitalize the country's economy.

Both foreign and Japanese companies are finding it increasingly difficult to obtain fully integrated legal services in Japan, and Japan's efforts to become a recognized international financial center remain impeded. One of the most problematic structural deficiencies in Japan's legal services sector is the severely limited system of permitted relationships among Japanese lawyers (bengoshi) and registered foreign lawyers (gaiben). We strongly urge the speedy elimination of all restrictions on freedom of association between bengoshi and gaiben. This is the guiding principle in other advanced economies such as Germany, France, England, Belgium, and the United States.


Regarding Postal Insurance or Kampo, as MPHPT proceeds with its discussions on the postal services agency's transition to a public corporation, we urge that the process be transparent and that any draft guidelines or administrative procedures be made available for public comment.


In reviewing the distribution sector there is only one important point I would like to make here. We urge Japan to continue modernizing and streamlining Customs clearance procedures. The new global economy brings with it new technologies and the need to move information and products rapidly from business to business and from country to country. The exponential growth of the express package delivery business in recent years is a manifestation of this phenomenon. In many ways this business is an essential cog in the evolution of the global economy. We believe there is a need for Customs clearance regulations to be adapted to accommodate the rapidly growing express carrier business.


Similarly I have one point to make about the transportation sector. We believe the National Police Agency should move rapidly to support repeal of Japan's ban on tandem riding of motorcycles on motorways. Japan is the only country in the world that has such a ban, and its repeal is now widely supported in Japan. Repeal would not only end a market restriction, but would improve safety by allowing motorcycles with passengers to use motorways, which are safer than ordinary roads.

In closing let me once again congratulate the council and you chairman Miyauchi for your dedication to economic recovery through deregulation. Within a few days we will be making a formal submission to the Government of Japan identifying those areas where we believe Japanese economic recovery would benefit from deregulation. We will of course make sure the council receives copies of this submission. We will also send copies to all Diet members. Embassy staff members will subsequently contact the relevant working groups of the council to explain more fully the specific interests we have that may coincide with yours and to explore ways we may further work together.

Thank you very much.

Council for Regulatory Reform