JAPAN -- 2009 DRAFT NATIONAL TRADE ESTIMATES REPORT

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1. (U) Per reftel instructions, the following is the Post's draft

chapter on Japan for the 2008 National Trade Estimate Report. We

understand Washington agencies will update the trade and investment

data in the first three paragraphs of the report as they have done

in the past. Embassy Econ Section is also emailing the text of the

draft report to USTR, in MS Word format and showing changes from

last year's version.



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



TRADE SUMMARY



The U.S. goods trade deficit with Japan was $82.8 billion in 2007, a

decrease of $5.8 billion from $88.6 billion in 2006. U.S. goods

exports in 2007 were $62.7 billion, up 5.1 percent from the previous

year. Corresponding U.S. imports from Japan were $145.5 billion,

down 1.8 percent. Japan is currently the fourth largest export

market for U.S. goods.



U.S. exports of private commercial services (i.e., excluding

military and government) to Japan were $41.3 billion in 2006 (latest

data available),and U.S. imports were $23.9 billion. Sales of

services in Japan by majority U.S. owned affiliates were $53.5

billion in 2005 (latest data available),while sales of services in

the United States by majority Japan owned firms were $28.4 billion.



The stock of U.S. foreign direct investment (FDI) in Japan was $91.8

billion in 2006 (latest data available),up from $79.3 billion in

2005. U.S. FDI in Japan is concentrated largely in the finance,

manufacturing, wholesale trade, and the professional, scientific,

and technical services sectors.



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 seeks changes to regulations and practices in Japan that

limit competition, prevent development of innovative products and

services, and hinder access for U.S. products and services to

Japan's market. The U.S. Government addresses a wide range of

issues through this Regulatory Reform Initiative in specific

industry sectors includings information technologies,

telecommunications, and pharmaceuticals/medical devices, as well as

in other areas that affect multiple sectors such as competition

policy and insufficient transparency in government rule-making.



The governments of the United States and Japan concluded the

Regulatory Reform Initiative's seventh annual Report to the Leaders

in June 2008, which documented progress made under the Regulatory

Reform Initiative since late 2007. Continuing work under the

Initiative, the U.S. Government presented further, detailed

recommendations to Japan in October 2008. After several months of

working- and high-level talks, the next Report documenting progress

is expected to be completed in the summer of 2009.



The following sections on Sectoral Regulatory Reform and Structural

Regulatory Reform outline some of the key reform and market access

issues that the U.S. Government continues to seek progress on by

Japan under this Regulatory Reform Initiative.



SECTORAL REGULATORY REFORM



Telecommunications



In its 2008 recommendations to Japan under the Regulatory Reform

Initiative, the U.S. Government continued to urge that Japan ensure

fair market opportunities for emerging technologies and business

models, develop a regulatory framework for converged and

Internet-enabled services, and strengthen competitive safeguards on

dominant carriers. The U.S. Government also continues to request

that Japan improve transparency in rulemaking and ensure the

impartiality of its regulatory decision making, including by

abolishing the legal requirement that the government own one-third

of the dominant carrier, Nippon Telegraph and Telephone (NTT).



Interconnection: Japanese laws and regulations do not prevent NTT's

regional carriers from imposing high rates and onerous conditions on

their competitors for interconnection. Japan's Ministry of Internal

Affairs and Communications (MIC) made further revisions to its Rules



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for Interconnection Charges, resulting in modest reductions in

interconnection rates, which fell another 3.4 percent in April 2008.

On NTT's fiber optic infrastructure, which is not regulated like

traditional infrastructure, NTT introduced interconnection rates

that are high by international standards and almost four times those

applied to traffic on other fixed-line networks regulated by MIC.

Moreover, NTT's fiber optic infrastructure is not regulated in a

manner transparent to consumers. The U.S. Government looks to MIC

to ensure reasonable interconnection terms and conditions and

competitive rates are established, particularly as NTT continues

deployment of its Internet Protocol (IP) based Next Generation

Network replacing the analog network that all carriers currently use

to reach subscribers in Japan.



Dominant Carrier Regulation: NTT continues to dominate

overwhelmingly Japan's fixed line market. Japan sought to promote

competition in the telecommunications market through its Competition

Promotion Program. However, as Japan's broadband users turn from

digital subscriber line (DSL) to optical fiber, NTT's competitors

fear NTT might expand its dominant position through control of the

fiber-to-the-home (FTTH) market and by bundling NTT fixed services

with those of NTT DoCoMo, the dominant wireless operator. In

October 2007, MIC issued a revised "New Competition Promotion

Program 2010" in an effort to address competition concerns as

suppliers increasingly offer telecommunications services over IP

based networks. The U.S. Government has urged Japan to speed the

plan's implementation and will continue to monitor MIC's

implementation of the program.



Universal Service Program: Japan approved a system, beginning in

January 2007, for NTT East and West and its competitors to collect a

seven yen per month universal service fee from voice services

subscribers. Based on a periodic review, MIC approved a 25 percent

increase in the fee, from six to eight yen per month per number,

effective January 2009. NTT regional carriers (the only carriers

able to benefit from the fund) then receive these fees through the

universal service fund to offset the costs of providing services in

rural areas. The U.S. Government has urged Japan to broaden the

base of this fund's potential beneficiaries and ensure it is

implemented in a competitively neutral manner. Cross-subsidization

of NTT West by NTT East using interconnection revenue (ostensibly to

address NTT West's higher network costs resulting from the higher

number of rural subscribers) further undercuts arguments for the

program's need.



Mobile Termination: Like most countries, Japan uses the "Calling

Party Pays" system, imposing the entire cost of termination on the

calling party (enabling mobile subscribers to benefit from free

incoming calls). Although NTT DoCoMo, the dominant mobile incumbent

carrier, has lowered its termination rates over the past 10 years,

rates remain high. Despite recognizing DoCoMo as a dominant carrier

in 2002, MIC does not require DoCoMo to explain how its rates are

calculated. With new entrants now in the mobile sector, the U.S.

Government will closely monitor actions both by DoCoMo and MIC to

address such rates to ensure the possibility of effective

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)



Through its October 2008 Regulatory Reform Initiative

recommendations, the U.S. Government continues to urge that Japan

ensures its regulatory framework for IT and electronic commerce

promotes competition and innovation, enhances transparency, and

protects users, in addition to taking new steps to protect

intellectual property rights (IPR) in the face of challenges posed

by globalization and new technologies in a digital era.





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IT and Electronic Commerce Policymaking: To augment measures Japan

has taken to promote and support the use of IT and electronic

commerce, the U.S. Government has urged Japan to take steps to

ensure transparent policy and rule-making processes are applied in

order to provide interested parties with opportunities to express

their views and to be aware of and participate in the work of

related government-appointed advisory groups; implement laws,

regulations, and guidelines to promote choice and competitive market

conditions by ensuring technology providers and users have the

flexibility to choose preferred technologies; work cooperatively

with the private sector on international standards development and,

when appropriate, use established international standards in

formulating IT and electronic commerce guidelines and regulations;

and ensure its IT and electronic commerce policies and laws are

compatible with international practices.



Privacy: With Japan's Law on the Protection of Personal Information

(Privacy Law) entry into effect in April 2005, Japan's ministries

and agencies formulated implementation guidelines to ensure its

effectiveness. The Cabinet Office reviewed the Privacy Law's

implementation and released a report in June 2007. The U.S.

Government stressed that clear, consistent, and predictable privacy

guidelines should be developed across ministries, with separate

guideline provisions added as necessary for individual business

sectors, and that any recommendations regarding cross-border

transfers provide effective protection for individuals' personal

information without unduly restricting the international flow of

data.



IPR Protection: The U.S. Government continued to urge Japan to

adopt a number of new measures to strengthen IPR protection. These

measures include extending the term of copyright for sound recording

and all other subject matter protected under Japan's Copyright Law;

adopting a statutory damages system that would deter infringing

activities; improving the efficacy of the patent application

process; and actively working with the United States to develop ways

to promote greater protection of IPR worldwide, especially in Asia.

(See also "Intellectual Property Rights Protection" in this

chapter.)



Government IT Procurement: In order to increase the transparency

and fairness of Japan's IT procurements and to stimulate innovation

and competition in those procurement activities, the U.S. Government

has urged Japan to ensure all procuring entities comply with Japan's

Basic Policy for the Public Procurement of Computer Systems; improve

communications with suppliers interested in the implementation of

Japan's government IT procurement policy; apply a new Japanese

system, comparable to the U.S. Bayh-Dole system to allow companies

to control the intellectual property of inventions they develop

under government contracts to all government procurement; allow IT

vendors to limit their liability to a level proportionate to the

risks they take in government procurement transactions; reduce the

use of sole source contracting in IT procurements, including by

applying rules on competitive bidding to independent administrative

legal entities, government-sponsored private companies, and local

governments; and ensure contracts are swiftly concluded after

winning bidders are chosen and are not backdated.



Medical Devices and Pharmaceuticals

The U.S. Government continues to urge Japan to reform its

reimbursement pricing and regulatory systems for pharmaceuticals and

medical devices in order to foster industry's development of

innovative products and to improve the access of patients in Japan

to such products. The Ministry of Health, Labor and Welfare (MHLW),

in its 2007-2008 "Vision" policy paper, called for eliminating lag

times for drug and device approvals, developing an internationally

competitive industry, and making Japan an attractive investment

destination. The U.S. Government supports Japan's goal of ending

the device and drug lags by increasing the number of reviewers to

expedite product approvals and by reforming the pricing system to

improve incentives for research and development of advanced medical

products.

Japan is the largest foreign market for U.S. medical devices and

pharmaceuticals. The U.S. Government, in its 2008 Regulatory Reform

Initiative recommendations, urged Japan to take measures to improve

its regulatory system in order to eliminate the lag in the

introduction in Japan of innovative pharmaceuticals and medical

devices. The U.S. Government urged Japan to foster simultaneous

global drug development, cut drug approval times by reforming review

and clinical-trial consultation systems, and to improve vaccine

reviews. The U.S. Government urged Japan to reduce device approval

times by, inter alia, setting and attaining performance goals and

hiring more reviewers, expediting approvals of minor changes in

devices, and streamlining IVD approvals. The U.S. Government

expects Japan's new goals of improving its regulatory system will

prove effective, including plans to cut drug approval times by 2.5



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years by 2012; more than double the drug review staff by 2010; and

to increase the device review staff by 30 percent by 2009.

In its April 1, 2008 biennial price revision, Japan adopted

reimbursement pricing policies that are inconsistent with the

Government of Japan's goal of rewarding innovation and developing an

internationally competitive drug and device industry. Those 2008

policies include broadening the repricing rule based on market

expansion to cover a wider range of drugs, regardless of whether the

drugs experienced increased market share. The U.S. Government

continues to urge Japan to abolish repricing based on market

expansion because the rule reduces incentives for introducing

innovative medicines in Japan. Japan also adopted policies that

imposed a stricter application of the "Foreign Average Price" (FAP)

rule for medical devices, even though the rule has already

significantly reduced the price of devices in Japan. The U.S.

continues strongly urging Japan to refrain from implementing

reimbursement pricing policies that hinder development and

introduction of innovative medical devices and pharmaceuticals.

Such Japanese policies not only discourage companies from

efficiently introducing advanced medical products to the Japanese

market, a particular concern due to Japan's aging population, but

also harm the competitiveness of the industry and serve as a

disincentive to investment in research and development. In its 2008

price revision, MHLW continued to adhere to the use of biennial,

instead of annual, reimbursement rate reviews. The U.S. Government

continues strongly urging Japan to avoid any reimbursement

changes that undermine the introduction of innovative products.

In an effort to improve its drug reimbursement policies, MHLW in the

2008 Report to the Leaders noted it has agreed to provide

opportunities for industry to comment on recommendations for

pharmaceutical pricing reform, and for industry to make proposals to

improve economic returns for patented drugs. With regard to

reimbursement for medical devices, MHLW adopted measures in its 2008

price revision to reward innovative medical technologies. These

measures include revising reimbursement price adjustment premiums,

shortening the reimbursement listing procedure for category (C1)

medical devices, and properly evaluating advanced diagnostic imaging

equipment and techniques.

Japan's 2002 Blood Law established a principle of "self-sufficiency"

and includes a Supply and Demand Plan for the government to manage

the blood market. The U.S. Government continues to urge Japan to

not restrict imports of plasma protein products so as to increase

patient access to life-saving blood plasma therapies. In

particular, the U.S. Government urges Japan to allow labeling of

blood products to reflect country of origin rather than a

"voluntary" or "non-voluntary" designation, and to increase the

efficiency of product reviews. The U.S. Government also urges Japan

to develop a separate reimbursement pricing system for blood

products that accounts for the unique nature of plasma protein

therapy characteristics (Japan currently maintains a single

reimbursement system for both drugs and blood products).

Nutritional Supplements: Japan has taken steps to streamline import

procedures and to open its $10 billion nutritional supplements

market. However, many market access barriers remain. Unusual

restrictions on health and nutrition claims are a major concern.

Japan classifies nutritional supplements as food. Only those

products approved as Foods for Specific Health Uses (FOSHU) or Foods

with Nutritional Function Claims (FNFC) are allowed to have health

or structure/function claims. However, producers are unable to

obtain FOSHU or FNFC approval for most nutritional supplements due

to FOSHU's costly and time consuming approval process and the

limited range of vitamins and minerals that qualify for FNFC. Other

concerns include excessively long lead times for food additive

applications; high levels of import duties for nutritional

supplements compared to duties on pharmaceuticals containing the

same ingredient(s); stopping of shipments at quarantine stations due

to naturally occurring traces of substances such as benzoic acid and

sorbic acid, which Japan classifies as food additives; and the

potential for opaque development of health food safety regulations.





Cosmetics and Quasi-Drugs: Japan is the world's second-largest

market for cosmetics after the United States, yet regulatory

barriers continue to limit consumer access to safe and innovative

products. Unlike the U.S. over the counter drug monograph system,

Japan requires premarket approval for products such as medicated

cosmetics that are classified as quasi-drugs under the

Pharmaceutical Affairs Law. The approval process includes

requirements that are burdensome, lack transparency, and do not

appear to enhance product safety, quality or efficacy. In addition,

many types of advertising claims for cosmetics and quasi-drugs are

prohibited, even if scientifically verifiable, denying consumers

relevant and important information to help them make sound choices.

Other concerns related to cosmetics and quasi-drugs include

burdensome paperwork and long lead times for the approval of

imported products. The U.S. Government continues to recommend Japan



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address these and other issues under the Regulatory Reform

Initiative.



Financial Services



The Japanese government has stated repeatedly its goal of improving

the international competitiveness of Japan's financial sector. In

December 2007, the Financial Services Agency (FSA) unveiled its

"Plan for Strengthening the Competitiveness of Japan's Financial and

Capital Markets," and submitted amendments to the Financial

Instruments and Exchange Law (FIEL) in March 2008. The 2006 FIEL

amended 89 financial laws and consolidated the remainder into a

cohesive text. The FIEL sought to enhance investor protection and

promote the movement of financial assets into securities markets

through cross-sectoral rules for investment product sales,

management, and disclosure. However, given the hundreds of pages of

statutes comprising the FIEL and that implementation of the law

began September 30, 2007, the FIEL's overall effect is still not

discernable. Partners are looking to see that FIEL implementing

regulations, interpretation, and enforcement are evident,

consistent, and predictable. As part of its principles-based

supervisory initiative, FSA announced a new code of conduct for

financial institutions April 18, 2008 after a series of

consultations with business associations.



Japan has improved the transparency and predictability of the

financial regulatory system, but further progress is needed. In

particular, FSA could expand the body of written interpretations of

Japan's financial laws. While FSA has enhanced supervision and

disclosure, it must continue to move forward to establish

transparency in regulation and supervision of financial institutions

to bring them in line with international standards and best

practices in order to help realize the government's goal of

improving Japan's global competitiveness as a financial services

center.



No-Action Letters and Written Interpretations: The FSA has made

some efforts to enhance the effectiveness of Japan's no-action

letter system, including by soliciting input from U.S. and other

foreign firms on how best to improve the system. Use of the system,

however, has not materially increased. The U.S. Government

continues to recommend FSA explore ways to expand use of the

no-action letter system. The U.S. Government has also encouraged

FSA to expand the written interpretations it provides, including

through greater use of its "interpretive letter" system and

increasing the number of "reference cases" published on the FSA

Internet site.



Agriculture



Japan maintains many tariff and nontariff barriers against trade in

the agricultural sector. The U.S. Government's October 2008

submission to Japan under the Regulatory Reform Initiative includes

several recommendations to enhance the efficiency of the trading

environment for agricultural products and the transparency of

trade-related rules and regulations. These include implementing a

Maximum Residue Limits (MRL) regime that ensures any mitigating

measures are the least trade restrictive possible; providing

national treatment to imports and that are in accordance with

international practices; allowing additional substances in organic

crop production and modifying current pesticide residue policy to

enhance organic trade; completing the review of widely used food

additives that are recognized as safe by the Joint FAO/WHO

Evaluation Committee on Food Additives; implementing a plant

quarantine system that harmonizes the classification of plant pests

and diseases based on the International Plant Protection Convention

standards for official control and risk analysis; and following

international standards for the treatment of post-harvest

fungicides. The United States also continues to call on Japan to

apply science-based standards in accordance with World Organization

for Animal Health (OIE) protocols on the trade in beef. (See also

Standards, Testing, Labeling, and Certification in this chapter.)



Plant Quarantine Issues: Japan maintains a restrictive plant

quarantine system, which includes measures that are not always based

on science. A key impediment to trade is Japan's frequent use of

nationwide bans on imported products in response to narrowly focused

quarantines imposed by exporting countries in their home markets.

Japan's practice runs counter to recognized international standards,

which support targeted, regional bans (e.g., states or counties)

limited to affected geographic areas. For example, when a disease

or pest outbreak is reported in a contained area of the United

States, Japan tends to ban imports of all associated U.S. plant

products regardless of their region of origin. Such steps are

unnecessarily trade restrictive. Through the Regulatory Reform

Initiative, the U.S. Government continues to urge Japan to use pest



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risk analysis that is based on international standards, and to

provide a scientific justification for its responses and to clearly

articulate how adopted quarantine measures accurately reflect the

level of phytosanitary protection Japan has determined to be

appropriate.



Japan's Ministry of Agriculture, Forestry, and Fisheries (MAFF)

prohibits the entry of various fresh plant products due to the

presence of pests, even though some of these pests are also present

in Japan. Japan has a pest forecast system that monitors certain

domestic pests and alerts producers to potential increased pest

damage. For decades, the Japanese government has contended this

system constitutes official control under the International Plant

Protection Convention (IPPC),the international standard setting

body for plant protection. According to the Japanese government, it

must impose a similar system for imported commodities. Japan more

recently took initial steps to harmonize with international

standards. In December 2004, Japan notified the WTO of its intent

to relax quarantine measures for several plant pests and diseases.

In May 2006, five additional cosmopolitan pests were added to the

list of pests subject to relaxed quarantine measures. Although the

U.S. Government welcomes these actions, Japan continues to impose

measures related to many other pests that are more restrictive than

those provided for in international standards and adversely affect

U.S. exporters.



STRUCTURAL REGULATORY REFORM



Antimonopoly Law and Competition Policy



Although Japan has made significant positive steps in recent years

to bolster its competition regime, cartel activity and bid rigging

persist with deleterious effects for the country's economy and

government finances. Additional measures to combat anticompetitive

behavior would improve the business environment. Further attention

must also be given to ensuring antimonopoly enforcement procedures

are perceived to be fair and transparent.



Establishing More Effective Deterrence to Anticompetitive Behavior:

The Antimonopoly Act (AMA),Japan's primary competition legislation,

provides for both administrative and criminal sanctions against

violators. However, criminal prosecutions, which would more

effectively deter anticompetitive behavior, have been few. From

1990 through October 2007, the Japan Fair Trade Committee (JFTC)

initiated 12 criminal prosecutions of alleged AMA violators. While

Japanese courts have imposed substantial financial penalties on

companies and prison sentences on individuals convicted of violating

the AMA, they have consistently suspended prison sentences on

individuals, even in the case of repeat offenders. The U.S.

Government continues to urge Japan to take steps to maximize the

effectiveness of enforcement against hard-core violations of the

AMA, including by increasing the number of criminal prosecutions,

strengthening criminal sentences of convicted individuals, and

maintaining a system that imposes both administrative surcharges and

criminal sanctions on corporate participants in cartel and bid

rigging conspiracies.



The JFTC's ability to enforce the AMA effectively is also hindered

by the lack of sufficient personnel. JFTC staff totaled 765,

including 409 assigned to the Investigation Bureau, as of March 31,

2008, with an additional 30 additional staff anticipated by March

2009 The JFTC remains relatively weak, however, in the number of

employees with post-graduate economics training, a factor that

undermines JFTC ability to engage in the careful economic analysis

necessary to properly evaluate non-cartel behavior. The U.S.

Government continues to urge the JFTC to improve its economic

analysis capabilities.



Improving Fairness and Transparency of JFTC Procedures: The JFTC

introduced a system in January 2006 to allow companies subject to a

proposed cease-and-desist or surcharge payment order to review the

evidence relied upon by JFTC staff and to submit evidence and make

arguments in their defense prior to an order being issued. The JFTC

implemented a similar system for proposed recipients of public

warnings for suspected violations of the AMA or the Premiums and

Misrepresentations Act. To ensure further the credibility and

transparency of JFTC hearing procedures, however, the U.S.

Government has asked the Japanese government to lengthen

significantly the two week period during which a company may respond

to a draft cease-and-desist or surcharge order from the JFTC;

increase the number of JFTC hearing examiners who are outside legal

professionals; and strengthen conflict of interest rules with

respect to hearing examiners. The U.S. Government has also

requested clarification of conditions under which the JFTC might

return to an ex-ante hearing system, improved regulations for the

standards and procedures used by the JFTC to issue warnings, and



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recognition of attorney-client privilege in JFTC investigation and

hearing procedures.



Broadening Measures to Combat Bid Rigging: Japanese authorities

have implemented a series of measures to address the problem of

frequent and persistent bid rigging. Apart from several cases of

invocation by the JFTC of the 2003 law against bureaucrat-led bid

rigging (so-called kansei dango),the Ministry of Land,

Infrastructure, Transport and Tourism (MLIT) has strengthened

administrative sanctions against companies found by JFTC to have

engaged in unlawful bid rigging. MLIT also introduced an

administrative leniency program to complement the JFTC leniency

program (designed to help encourage individuals and companies to

report anticompetitive acts) and put in place a series of measures

aimed at ensuring a competitive bidding process for project

contracts tendered by the Ministry. In June 2007, the Japanese Diet

passed new legislation aimed at controlling post-retirement

employment by Japanese government officials in companies they

previously helped regulate or were otherwise involved with while in

government service, the so-called "descent from Heaven" (amakudari),

which has been a factor in many bid rigging conspiracies. The U.S.

Government has recommended that Japan increase the standard minimum

period of suspension from bidding for companies involved in bid

rigging conspiracies; work to prevent conflicts of interest in

government procurement; strengthen efforts to eliminate involvement

in bid rigging by government officials; and expand the existing

administrative leniency programs.



Transparency



Transparency issues continue to be a top concern of U.S. companies

that operate in the Japanese market. The U.S. Government has

strongly urged Japan to adopt a number of new measures to achieve a

higher degree of transparency in governmental regulatory and policy

making processes -- a critical ingredient necessary to further

improve the business and trade environment.



Advisory Groups: Although advisory councils and other government

commissioned study groups are accorded a significant role in the

development of regulations and policies in Japan, the process of

forming these councils and study groups often remains opaque and

nonmembers are not uniformly offered meaningful opportunities to

provide input into these groups' decision-making processes. The

U.S. Government continues to urge Japan to ensure transparency of

advisory councils and other government sponsored working groups

through new requirements, including those that will ensure ample and

meaningful opportunities are provided for all interested parties, as

appropriate, to participate in and directly provide input to these

councils.



Public Comment Procedures (PCP): U.S. companies are frustrated by

the inadequate degree to which Japanese ministries and agencies

implement public comment procedures. In particular, concern remains

that comment periods are unnecessarily short and comments provided

are not adequately taken into consideration before final decisions

are made. The U.S. Government has stressed the need for Japan to

ensure its PCP all being fully implemented and to make additional

revisions to the system so that truly meaningful opportunities are

made available for public input into policy-making and regulatory

processes. In addition, the U.S. Government continues to encourage

Japan's ministries and agencies to accelerate the voluntary practice

of providing greater opportunities for the public to comment on

legislation in the early stages of its formation.



Transparency in Regulation and Regulatory Enforcement: To ensure

the private sector has sufficient information about regulations,

including interpretations of those regulations, and the information

necessary to comply, the U.S. Government has requested Japan

specifically require its ministries and agencies to make public

their regulations and any statements of policy of generally

applicable interpretation of those regulations.



Privatization



The Japanese government's effort to privatize the Japan Post Group

has made important progress. The U.S. Government recognizes that

reform in this area, if implemented in a fully market-oriented

manner, can have an important positive effect on the Japanese

economy by stimulating competition and leading to a more productive

use of resources.



The U.S. Government welcomes the ongoing privatization of Japan

Post, which has multi-billion dollar banking and insurance

businesses in addition to its mail and parcel delivery operations.

The U.S. Government monitors carefully the implementation of the

Japanese Government's reform efforts, and continues to call on the



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Japanese Government to ensure all necessary measures are taken to

achieve a level playing field between the Japan Post companies and

private sector participants in Japan's banking, insurance, and

express delivery markets.



In the area of express carrier services, the U.S. Government remains

concerned by unequal conditions of competition between Japan Post

Service and U.S. international express delivery providers. The U.S.

Government is strongly urging Japan to enhance fair and equal

competition, including by ensuring Japan Post Service is subject to

similar customs clearance procedures and costs for international

express delivery services and that subsidization of Japan Post

Service's international express service by revenue from

noncompetitive postal services is prevented.



The U.S. Government also has continued to urge the Japanese

government to ensure that the process by which this reform proceeds

is made fully transparent, including by full and meaningful use of

Public Comment Procedures and through opportunities for interested

parties to express views to related officials and advisory bodies

before decisions are made. The U.S. Government is additionally

asking Japan to ensure the triennial review of postal privatization

is open and addresses the equivalence of competition in the banking,

insurance, and express delivery sectors. (For detailed discussion

of Japan Post privatization and the postal insurance corporation,

see "Insurance" under the Services Barriers section.)



Commercial Law



Japan undertook a major reform of its commercial law by enacting a

new Corporate Code, which entered into force May 1, 2006. Among

other provisions, the code permits the use of modern merger

techniques, including domestic and cross-border triangular mergers.

After significant public controversy, however, the Japanese

government in April 2007 finalized tax and public disclosure rules

for cross border triangular mergers that substantially limit the use

of these techniques. Under the new rules, in order for shareholders

to defer capital gains on the transaction, the foreign acquiring

company, at a minimum, must establish a subsidiary with an office,

an employee/executive, and some "business activity" in the Japanese

market before the merger. As of December 2007, only one transaction

has taken place using these provisions.

Through the Regulatory Reform Initiative, the U.S. Government

continues to urge Japan to improve further its commercial law and

corporate governance systems to reflect international best

practices, promote efficient corporate restructuring and increases

in shareholder value. Specifically, the U.S. Government is urging

Japan to review impediments to the use of modern merger techniques

now available to investors, including whether tax rules unduly

impede the ability of foreign investors to use triangular merger

mechanisms.



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

further corporate governance mechanisms, including by facilitating

and encouraging active proxy voting by institutional investors such

as pension and mutual funds; requiring authorization of antitakeover

measures by a company committee composed of a majority of truly

independent directors; ensuring sufficient protection of minority

shareholders in management buy-out and take-over bid situations; and

encouraging the major Japanese stock exchanges to adopt listing

rules or guidelines that encourage best corporate governance

practices.



Article 821 of the new Company Law still has the potential to create

burdens for foreign corporations that conduct their primary business

in Japan through Japanese branch offices. The U.S. Government has

recommended that Japan adopt a simple re-domestication procedure

that allows foreign companies to merge or convert into a Japanese

corporation, and continues to request that Japan amend Article 821

to prevent adverse effects on the legitimate operation of foreign

companies in Japan.



Legal System Reform



Japan imposes restrictions on the ability of foreign lawyers to

provide international legal services in Japan in an efficient

manner. The U.S. Government is urging Japan to further liberalize

the legal services market by allowing foreign lawyers to form

professional corporations and establish multiple branch offices in

Japan whether or not they have established a professional

corporation, and by counting all of the time foreign lawyers spend

practicing law in Japan toward the 3 year experience requirement for

licensure as a foreign legal consultant. The U.S. Government has

also requested that Japanese lawyers may become members of

international legal partnerships with lawyers outside Japan without

restriction. Japan has agreed to continue to examine these issues,



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including by holding further hearings with both the Japanese Bar

Association and registered foreign lawyers practicing in Japan. The

U.S. Government is urging Japan to promote arbitration and other

alternative dispute resolution (ADR) procedures, including by

amending the Foreign Lawyers Law to explicitly permit foreign

lawyers to act as neutrals and to represent parties in any

international ADR proceedings taking place in Japan.



Distribution and Customs Clearance



The U.S. Government welcomes Japan's efforts to formulate an

Authorized Economic Operator (AEO) system in Japan, which allows

exporters with good compliance records to process goods more

expeditiously through Customs. However, Japan Customs currently

does not allow post-mortem declarations, and requires brokers to

declare express items at specific Customs offices, which limits

flexibility and potentially increases processing costs. To further

facilitate trade, the U.S. Government continues urging Japan under

the Regulatory Reform Initiative to allow customs brokers to make

post-mortem declarations for items valued at less than 250,000 yen

(about $2,500),and for those brokers using the Japan Customs'

Nippon Automated Cargo Clearance System (NACCS) automated database

to declare express items at any Customs office.



To facilitate more efficient cargo flows, the United States

recommends Japan exempt AEO exporters from paying the five percent

consumption tax for cleared cargo. Currently, Japan Customs refunds

this tax, but exemption would reduce the administrative burden of

filing for a refund.



In line with international best practice to reduce workloads and

maximize efficiency, the U.S. Government also recommends Japan raise

the Customs Law de minimis ceiling from 10,000 yen (about $100) to

at least 20,000 yen or higher.



IMPORT POLICIES



Rice Import System: Japan's highly regulated and nontransparent

importation and distribution system for imported rice limits

meaningful access to Japanese consumers. In 1999, Japan established

a tariff-rate quota (TRQ) of approximately 682,000 metric tons

(milled basis) for imported rice. The Japan Food Department (JFD)

of the Ministry of Agriculture, Forestry, and Fisheries (MAFF)

manages imports of rice within the TRQ through periodic minimum

access (MMA) tenders and through the simultaneous buy-sell (SBS)

tenders. Imports of U.S. rice under the MMA tenders are destined

almost exclusively for government stocks. MAFF releases these

stocks solely for non-table rice users in the industrial food

processing or feed sector, and for re-export as food aid.



Japan failed to fulfill its import obligation for rice in Japan

Fiscal Year 2007, which ran from April 1, 2007 to March 31, 2008.

The unique conditions in 2007 that led to higher global rice prices

exposed several weaknesses in Japan's administration of its MMA

trade quota system for rice. Japan subsequently committed to

implementing several improvements to prevent future non-fulfillment

of the MMA rice TRQ system, including earlier and more frequent

tenders.



U.S. rice exports to Japan in calendar year 2007 were valued at $206

million, representing approximately 322,000 metric tons of rice or

52.4 percent of Japan's minimum access requirement (on a JFY07

basis). However, only a small fraction of rice imported from the

United States reaches Japanese consumers identified as U.S. rice,

despite industry research showing Japanese consumers would buy U.S.

high-quality rice if it were more readily available.



Excessive testing requirements for rice imports have hampered trade

in U.S. rice to Japan. In December 2005, MAFF began imposing strict

testing requirements on rice imports, ostensibly to ensure

compliance with the Japanese Government's new Maximum Residue Limits

policy. Rice and wheat, however, are the only commodities for which

Japan requires multiple testing, including a separate test by the

rice industry. This testing has resulted in a disproportionate

increase in the cost of bringing U.S. rice to market, particularly

for SBS rice because of its smaller import lot size.



Wheat Import System: Japan requires wheat to be imported through

MAFF's Food Department, which then resells wheat to Japanese flour

millers at prices substantially above import prices. These high

prices discourage wheat consumption by increasing the cost of

wheat-based foods in Japan. In 2007, MAFF revised the wheat import

regime to allow more frequent modification to the resale price based

on international price movements. As a result, the resale price to

flour millers has increased 55 percent. The U.S. Government remains

concerned by Japan's operation of a state trading entity for wheat



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and its potential to distort trade. For example, MAFF suspended

tenders for wheat imports in September 2008 due to concerns over

MAFF's own contracting and management of imports.



Pork Import Regime: Japan is the world's largest importer of pork,

and also the number one export market for U.S. pork -- $1.4 billion

in 2007. Japan's pork import system includes a gate price and a

safeguard negotiated during the Uruguay Round, which automatically

raises the gate price if imports are 119 percent or more of the

average level of imports relative to a corresponding period that

covers the previous 3 years. The U.S. Government continues to raise

concerns that Japan's complicated "gate price" system distorts trade

and is vulnerable to invoice fraud.



Beef Safeguard: Japan negotiated a beef safeguard during the

Uruguay Round to protect domestic producers in the event of an

import surge. The safeguard is triggered when imports increase by

more than 17 percent from the previous Japanese fiscal year on a

cumulative quarterly basis. Once triggered, the safeguard remains

in place for the rest of the fiscal year. If triggered, beef

tariffs will rise to 50 percent from 38.5 percent. The U.S.

Government is seeking a change in the beef safeguard in the Doha

Development Agenda negotiations. The U.S. Government remains

concerned that once Japan fully opens its market to U.S. beef and

beef products, the resulting increase in imports might trigger

Japan's safeguards, which could hamper the U.S. beef producers'

ability to regain historical export levels in the near future (see

the section on "Beef" under the "Standards" heading for context).



Fish Products: Japan has been the most important export market for

U.S. fish and seafood products for over 30 years; as recently as

1988, 73 percent of U.S. seafood exports went to Japan. In 2006,

however, the European Union surpassed Japan as the most important

export market for fisheries products, with only 23 percent of U.S.

seafood exports going to Japan. These data should be viewed,

however, against the growing trend of U.S. origin seafood being

routed through China and Korea for value added processing and/or

cold storage holding before being imported into Japan, making actual

trade flows harder to follow.



Tariffs on Japanese seafood imports are generally low, but market

access is not seamless for some products. Japan maintains several

species and product-specific import quotas on fish products,

including pollock, surimi, pollack and cod roe, herring, Pacific

cod, mackerel, Pacific whiting, squid, and sardines. Administration

of the system has improved considerably over the years and it is

expected that obstacles to Japanese importers and processors will

continue to be reduced. While Japan cut tariffs as a result of the

Uruguay Round, it did not change its import quotas. As part of

ongoing WTO Doha negotiations, Members including the United States

and Japan have committed to clarify and improve rules on fisheries

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, and a 15 to 29.8 percent on wine depending on the

HTS classification. These high tariffs generally apply to food

products where Japan is protecting domestic producers. Tariff

reductions are a high priority for the U.S. Government in the Doha

Development Agenda agriculture negotiations.



Wood Products and Building Materials: Japan continues to restrict

imports of certain manufactured wood products through tariff

escalation (i.e., progressively higher tariffs based on the level of

processing of the wood product). The elimination of tariffs on wood

products remains a long standing U.S. Government objective.



Leather/Footwear: Japan continues to apply a TRQ on leather footwear

that substantially limits imports into Japan's market, and

establishes these quotas in a nontransparent manner. The U.S.

Government continues to seek elimination of these quotas.



STANDARDS, TESTING, LABELING, AND CERTIFICATION



Japan's enforcement of national standards hinders trade in certain

farm, forest, and industrial products. U.S. industry has raised

concerns that Japan's stringent testing methods and low tolerances

for regulated substances such as pesticides and food additives make

it difficult to satisfy import requirements for many products. The

U.S. Government is urging Japan to use science based standards and

implement risk-based enforcement policies, which are the least trade

restrictive measures that also satisfy consumer safety concerns.



TOKYO 00003137 011 OF 020







Standards



Beef: On July 27, 2006, Japan partially reopened its market to U.S.

beef. Except for approximately one month from December 2005 to

January 2006, Japan's market had been effectively closed since the

December 2003 detection of a cow with Bovine Spongiform

Encephalopathy (BSE) in Washington State.



Japan allows imports of U.S. beef and beef products from animals

aged 20 months or younger. However, this limited reopening has

prevented the United States from regaining all but a small portion

of its historic level of exports to the Japanese market. Before the

ban, Japan was the largest export market for U.S. beef and beef

products, totaling roughly $1.4 billion annually.



The U.S. Government has repeatedly urged Japan to bring its BSE

measures in line with international guidelines set by the World

Organization for Animal Health (OIE) by allowing imports of all U.S.

beef and beef products derived from animals of all ages deemed safe

under OIE guidelines. In May 2007, the OIE determined that the

United States is a "Controlled Risk" country for BSE, a

determination based on science. The U.S. Government remains highly

concerned by Japan's unwillingness to adopt science-based,

international guidelines under which beef and beef products can be

safely traded and will continue to work vigorously bilaterally and

multilaterally toward achieving a full reopening of Japan's market

to U.S. beef in line with OIE guidelines.



Enforcement of Maximum Residue Limits (MRLs): In May 2006, Japan's

Ministry of Health, Labor, and Welfare (MHLW) implemented a new

system of regulations governing agrochemical residues in food.

Under this system, foods containing residues in excess of

established MRL levels will not be allowed on the Japanese market.

Prior to implementation of this positive list, the U.S. Government

worked closely with MHLW to address potentially trade restrictive

measures. However, several outstanding issues remain, including

Japan's MRL enforcement policy. For example, a single MRL violation

may result in MHLW placing sanctions on the entire industry rather

than on just the company with the violation. In the case of

multiple violations, MHLW can implement an "inspection order," i.e.,

100 percent test-and-hold requirements. The possible delays due to

this sanction can lead to major losses for perishable goods. These

sanctions can severely affect trade regardless of the level of the

violation or the degree of the threat to health. Furthermore,

domestic violations may be treated more favorably than import

violations. To address these concerns, the U.S. Government is

urging MHLW, through the Regulatory Reform Initiative, to implement

a regime that is as minimally trade restrictive as possible,

provides national treatment to imports, and accords with

international best practices.



Restrictive Food Additive List: Japan's list of food additives

restricts imports of several U.S. food products, especially

processed foods. The list, which limits the use of specific food

additives on a product-by-product basis, is more restrictive than

accepted international standards and is without sufficient

scientific evidence. For example, the list effectively prohibits

imports of light mayonnaise, creamy mustard or figs containing

potassium sorbate, a food additive evaluated and accepted by

numerous national and international standard setting organizations,

including the Joint FAO/WHO Expert Committee on Food Additives.

Despite this prohibition on imports, Japan allows the use of

potassium sorbate in 36 other foods, most of which are traditional

Japanese food products not normally produced outside Japan.



U.S. manufacturers have complained about the slow and opaque

approval process for indirect food additives (i.e., additives that

do not remain on food, such as solvents).



In 2002, Japan created a list of 46 food additives for expedited

review. The U.S. Government and many of Japan's other trading

partners have been disappointed by the lack of progress by the MHLW

and the Food Safety Commission in finalizing reviews and approving

many of these additives, notwithstanding the availability of

extensive safety data. In addition, Japan classifies post-harvest

fungicides as food additives requiring registration and approval,

while the international community, including Codex, classifies them

as pesticides. As a result, a chemical that is approved for use as

a pesticide under Japan's system would be prohibited from

post-harvest use unless it has also been approved as a food

additive. The U.S. Government has urged Japan through the

Regulatory Reform Initiative to complete an expedited review of the

remaining food additives.



Microbial Content Standards: Japan's standards under the Food



TOKYO 00003137 012 OF 020





Sanitation Law for microbial content on frozen foods are, in certain

instances, impractical and overly restrictive, particularly for

foods that require cooking before consumption.



Poultry: Since 2002, Japan has imposed several national and

statewide bans on the import of U.S. poultry, poultry-meat, and eggs

due to the detection of notifiable avian influenza (NAI) in U.S.

poultry, both high pathogenic notifiable avian influenza (HPNAI) and

low pathogenic notifiable avian influenza (LPNAI). These bans are

not consistent with international guidelines and have disrupted

millions of dollars of U.S. poultry trade. According to

international guidelines recently revised by the OIE, countries must

report to the OIE any findings of NAI in domestic poultry,

regardless of its pathogenicity. These guidelines, as well as the

WTO SPS agreement, provide for importing countries to impose bans on

imports only from affected regions (zones) of the exporting country.

While the guidelines support banning certain poultry meat from

regions affected by HPNAI, they do not support banning poultry meat

from regions affected by LPNAI. As a result of bans based on the

reporting of high and low pathogenic avian influenza, as well as

other factors, U.S. poultry meat exports to Japan have decreased

substantially, from roughly $148 million in 2001 to $29 million in

2007.



Organics: U.S. organic exports to Japan continue to be limited by

Japan's ban on alkali extracted humic acid, a production substance

that is allowed for use on U.S. organic crops. In addition, Japan's

zero tolerance policy for pesticide residues on organic products is

not consistent with international standards, and is, in practice,

more thoroughly enforced for imported organic products.



Marine Craft: Although Japan continues to maintain an inspection

regime for new boats and marine engines that is unique in the world

in its severity and complexity, Japan's regulatory agencies, MLIT

and the Japan Craft Inspection (JCI) Organization, have made a

significant shift towards adoption and acceptance of ISO standards,

when these ISO standards are determined to provide equivalent or

improved safety. The U.S. Government looks to accelerate progress

with Japan as quickly as possible to also address Japanese

requirements that no other country considers necessary, such as

requiring that each imported boat be individually inspected. These

unusual rules place an enormous burden on Japanese importers and

American boat manufacturers. The U.S. Government will continue to

work with relevant organizations and agencies in Japan to urge

Japan's acceptance of acceptance of third-party tests of Japanese

ISO based standards.



Building Size, Designs, and Wood Products



Japan has adopted and implemented regulations with respect to indoor

air quality and chemical emissions, and may be considering

additional steps. The U.S. Government will continue to monitor

regulatory developments in this area and urge that Japan ensures

transparency in any resulting rule making process. In addition,

Japan's fire testing of wood frame assemblies also is subject to

standards that are open to interpretation by testing facilities,

thereby affecting predictability in meeting Japan's fire testing

requirements.



Biotechnology



Japan is the world's largest per capita importer of bioengineered

grains and annually imports about 516 million metric tons of U.S.

corn and 3.3 million metric tons of U.S. soybeans. In 2007, exports

of these commodities alone were worth $3.7 billion. To both secure

bilateral trade in grains and to increase global food security, the

United States and Japan share a common interest in promoting

effective biotechnology approval and regulatory policies.



Japan's regulatory system, however, is complex and compliance is

costly. Japan's independent Food Safety Commission conducts risk

assessments in support of product evaluations by the Ministry of

Health, Labor and Welfare and Ministry of Agriculture, Forestry and

Fisheries. The regulatory burden is such that only large

multinational companies or governments can afford to complete the

approval process, even for bioengineered traits that are relatively

well known. Furthermore, the continued growth in the number and

complexity of new biotechnology applications in coming years could

strain the regulatory system. There is also the real possibility of

trade disruptions from an unapproved bioengineered variety showing

up in trace amounts in imported grain or processed foods. To avoid

disrupting trade, the U.S. Government is working with Japan's

regulatory agencies to encourage a risk based, case-by-case approach

when dealing with unapproved varieties.



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



TOKYO 00003137 013 OF 020





and local governments maintain rules, generally not based on

science, which further limit cultivation of bioengineered crops.

These rules, combined with local regulations and public pressure on

research institutions, have made it increasingly difficult for

technology companies to secure sites for field trials, mandated

under the national government's approval process.



Although Japan is the largest per capita importer of bioengineered

crops, no consumer-ready foods with recognizable bioengineered

ingredients are sold in Japan. One factor that keeps bioengineered

foods out of the supermarket is Japan's labeling requirement. As

yet, no Japanese food manufacturer or retailer has been willing to

test the market for a genetically modified organism labeled,

consumer-ready food.



The U.S. Government will continue to encourage Japan to address

these issues and continue to participate in discussions on

biotechnology policy advancement and regulation in international

fora (i.e., the WTO, the Codex Alimentarius Commission, the OECD,

and the APEC forum) and through international agreements dealing

with international movement of bioengineered crops.



Labeling



Proprietary Ingredient Information Disclosure Requirement for

Import: As part of its product classification process for

new-to-market food and dietary supplement products, Japan mandates

that all ingredients and food additives be listed by name, along

with content percentages, and include a description of the

manufacturing process. In addition to being overly burdensome, this

process runs the risk that proprietary information may be obtained

by competitors.



Labeling of Beef: In 2007, the Ministry of Agriculture, Forestry,

and Fisheries adopted labeling guidelines for "wagyu" beef.

Although presented as voluntary standards, the guidelines bar use of

the term "wagyu" on cattle not born and raised in Japan. The U.S.

Government is concerned by the regulation and is monitoring this

situation closely.



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.



Construction, Architecture, and Engineering



Even though Japan has the second largest public works market in the

world ($149 billion in 2007),U.S. companies annually obtain far

less than 1 percent of projects awarded. Two bilateral public works

agreements are in effect: the 1988 United States-Japan Major

Projects Arrangements (MPA) (updated in 1991); and the 1994 United

States.-Japan Public Works Agreement, which includes the Action Plan

on Reform of the Bidding and Contracting Procedures for Public Works

(Action Plan). The MPA included a list of 42 projects in which

international participation is encouraged. Under the Action Plan,

Japan must use open and competitive procedures for procurements

valued at or above the thresholds established in the GPA. Public

works issues are raised in the Expert-Level Meeting on Public Works

under the United States-Japan Trade Forum.



Problematic practices continue to limit the participation of U.S.

design/consulting and construction firms in Japan's public works

sector, including bid rigging (dango),under which companies consult

and prearrange a bid winner. The prevalence of dango is evidenced

by the recent Defense Facility Agency procurement, in which 58 major

construction companies were implicated in dango. The U.S.

Government continues to stress the need for Japan to effectively

address this pervasive problem.



Another concern is Japan's use of excessively narrow Japan-specific

qualification and evaluation criteria that preclude U.S. firms from

competing for projects. The U.S. Government has asked Japan to

develop procedures to simplify the qualification process for foreign

firms that have relevant experience outside of Japan, as well as to

ensure that all project-related qualification requirements are made

public, as required by the GPA and the bilateral agreements. Other

concerns with Japan's procurement practices include the imposition

of unreasonable restrictions on the formation of joint ventures,

extremely low design fees, and excessive and costly documentation

requirements for design bids.



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



TOKYO 00003137 014 OF 020





Construction Management and Project Management in its public works

to create greater opportunities for U.S. firms, which have extensive

expertise in these areas. Construction and Project Management

involve advanced project delivery and management systems that

maximize project efficiency.



The U.S. Government is paying special attention to several major

projects covered by the public works agreements of particular

interest to U.S. companies with the expectation that they will

provide important opportunities for U.S. firms. These projects

include the Okinawa Institute of Science and Technology; Haneda

Airport development and expansion; Kansai International Airport;

Central Japan International Airport; Kyushu University Relocation

Project; Gaikan Expressway Project; Metropolitan Expressway

Shinagawa Route Projects; Japan Post's Post Office Projects; major

public buildings, large-scale hospital building projects, urban

development and redevelopment projects; major PFI projects; and the

MPA projects still to be undertaken or completed.



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. In addition to

increasing our bilateral cooperation, the U.S. Government has

identified several areas in Japan's IPR protection regime where

further action by Japan is needed.



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.



In 2005, Japan established an Intellectual Property High Court

staffed with judges and judicial research officials conversant with

IPR cases, which the Japanese government reports has reduced the

average length of litigation. The U.S. Government welcomes this

reduction in the average length of litigation and will continue to

monitor the implementation and effect of Japan's reforms on the

cost, length, and effectiveness of IPR-related litigation.



Copyrights



Adequate protection of intellectual property, including copyrights

and neighboring rights, is critical for the continued development

and competitiveness of content-related industries such as

entertainment software, music, film, literary works, and software,

and is a vital component to advancing electronic commerce and a

well-functioning digital economy. The U.S. Government remains

concerned that Japan's Internet service provider liability law does

not provide adequate protection for the works of right holders on

the Internet or the appropriate and necessary balance of interests

among telecommunications carriers, service providers, rights

holders, and website owners. The law could be improved by including

a requirement for more expeditious notification to right holders in

the "notice and takedown" system.



The U.S. Government continues to monitor Japan's efforts to promote

digital content distribution and urges that Japan work to preserve

and support the international framework governing the exclusive

rights of authorship and the incentives to create in order to keep

pace with advances in distribution-related technologies.



The U.S. Government is also urging Japan to continue efforts to

reduce piracy rates, including piracy on the Internet, and has

recommended Japan amend its Civil Procedures Act to provide for the

availability of statutory damages for infringement, at the election

of the right holder, as an alternative to actual damages. Police

and prosecutors should be given ex officio authority to enable them

to investigate and prosecute IPR crimes on their own initiative,

without the requirement of right holder consent. To develop Japan's

digital communication networks, Japan's Copyright Law should better

protect the technological adjuncts to copyright protection such as

strengthening the remedies for trafficking in the tools used to

circumvent access controls. Japan also does not forbid copyright

infringement in government operations through a public decree or the

issuance of regulations.



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



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personal use exception, both as it applies to the Internet and to

book piracy in the educational context, and is encouraging Japan to

make clear in its law that the otherwise infringing use of

copyrighted works over peer-to-peer networks is not excused by the

personal use exemption; and to address loopholes in Japan's personal

use exception that appears to allow copies of entire textbooks to be

made.



The U.S. Government also continues strongly urging Japan to extend

the term of protection for all the subject matter of copyright and

neighboring rights to life plus 70 years, or where the term of

protection of a work (including a photographic work),performance,

or phonogram is calculated on a basis other than the life of a

natural person, to 95 years.



Japan's government is coordinating an ongoing discussion among

stakeholders of these and other related issues and plans to revise

Japanese laws in the near term. The U.S. Government welcomes this

process and encourages Japan to ensure it is open, inclusive, and

transparent, and offers all stakeholders fair opportunities to

express views.



Border Enforcement



Border enforcement is a critical component of effective IPR

protection. The U.S. Government notes steps taken by Japan to

strengthen its own border enforcement as well as to provide

assistance to improve the border enforcement of key trading

partners. The U.S. Government also welcomes revisions to the

Customs Tariff Law, which went into force in 2007, including

expanding the list of prohibited goods for export to include items

that infringe copyrights and neighboring rights, and strengthening

the penalty clauses for customs offences. It is important for Japan

to continue its aggressive interdiction of infringing articles and

to vigorously apply new provisions of the Customs Tariff Law. The

U.S. Government also welcomes Japan's international efforts to

enhance IPR enforcement in fora such as the G-8, APEC, and the WTO

TRIPS Council, as well as in the ad hoc Japan-China-Korea trilateral

Customs dialogue.



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 35.8 trillion yen (over $300 billion) in Japan fiscal year

(FY) 2007. In addition to the offerings of Japanese and foreign

private insurers, substantial amounts of insurance are also provided

to Japanese consumers by a web of insurance cooperatives (kyosai),

and the Kampo life insurance company (a wholly government-owned

entity of the Japan Post Group). Given the size and importance of

Japan's private insurance market as well as the scope of the

obstacles that remain, the U.S. Government continues to place a high

priority on ensuring that the Japanese government's regulatory

framework fosters an open and competitive insurance market.



Kampo Insurance: The Japan Post Group's insurance business, Kampo,

continues to be the largest player in Japan's insurance market. At

the end of Japan's FY 2007, there were approximately 62 million life

and annuities insurance policies issued by Kampo in force compared

to 127 million issued by all private life insurance companies

combined. (Note: only 651,000 of those policies were issued by the

"new" Kampo after the commencement of privatization on October 1,

2007; the rest are now assets of the Successor Corporation created

as part of the privatization transition.) The U.S. Government has

long standing concerns about Kampo's impact on competition in

Japan's insurance market. It remains vital that Japan create a

level playing field between Kampo and private sector insurers to

cultivate competition, encourage more efficient allocation of

resources, and stimulate economic growth.



The U.S. Government is closely monitoring the privatization of Japan

Post and implementation of related reforms. The Japan Post reform

framework established by Japan's Diet in 2005 includes a number of

key measures that, if implemented fully, will represent long awaited

progress in areas of concern to U.S. and insurers in the market.

Importantly, the legislation also included establishment of

equivalent conditions of competition between the Japan Post

companies and the private sector as a basic principle of the

reforms.



In addition to ensuring equal supervisory treatment between Kampo

and private sector companies, the U.S. Government continues to seek

that Japan take the steps necessary to achieve a level playing

field. Among those steps, the U.S. Government urges that adequate



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measures are implemented to ensure that cross-subsidization does not

take place among the newly created Japan Post businesses and related

entities, including by ensuring the Japan Post companies' strict

compliance with the Insurance Business Law's arms-length rule and

requiring adequate financial disclosures to demonstrate that

cross-subsidization is in fact not occurring. The U.S. Government

also continues to emphasize the importance of ensuring the company

established to manage Japan's post office network will transparently

and without discrimination select insurance products of private

providers for distribution throughout the network.



The U.S. Government continues to call on Japan to ensure a level

playing field between the postal insurance company and private

insurers. Approval of new products by the new postal insurance

company has shifted to a process whereby decisions are made by the

Prime Minister (with the Commissioner of the Financial Services

Agency acting as proxy) and Minister of Internal Affairs and

Communications, after hearing the opinion of an appointed government

advisory body. This process should be transparent and open to all

parties. It is also critical that the process include careful

analysis of, and full consideration given to, actual competitive

conditions in the market and that private sector views are actively

solicited and considered before decisions are made.



As modifications to the postal financial system could have serious

ramifications to competition in Japan's insurance market, adequate

transparency in implementation of the reforms passed by the Diet is

essential. The U.S. Government has urged Japan to continue to take

a variety of steps that ensure transparency, including providing

meaningful opportunities for interested parties to exchange views

with related government officials as well as members of

government-commissioned advisory committees and groups before

decisions, including those on new products, are made; and fully

utilizing public comment procedures with respect to drafting and

implementing regulations, guidelines, Cabinet Orders, and other

measures.



Kyosai: Insurance businesses run by cooperatives, or kyosai, hold a

substantial market share of insurance business in Japan. Some

kyosai are regulated by their respective agencies of jurisdiction

(the Ministry of Agriculture, Forestry and Fisheries, or the

Ministry of Health, Labor and Welfare, for example) instead of by

the FSA, while others have been allowed to operate without any

regulatory supervision at all. These separate regulatory schemes

undermine the ability of the Japanese government to provide

companies and policyholders a sound, transparent, regulatory

environment, and afford kyosai critical business, regulatory, and

tax advantages over their private sector competitors. The U.S.

Government believes all kyosai must be subject to the same

regulatory standards and oversight as their private sector

counterparts to ensure a level playing field and to protect

consumers.



The Japanese government took some important steps in 2006 to bring

more oversight scrutiny to unregulated kyosai. Under these

regulatory reforms, previously unregulated kyosai were required by

April 2008 to apply to the FSA for new legal status. Some of the

cooperatives, which elected to become full-fledged insurance

companies, have been held to the same regulatory standards as

private sector insurers. Others opted to become "Small Amount Short

Term Insurance Providers," which limits their product range and size

and holds the firms to different requirements than those applied to

private sector insurance companies. The remaining unregulated

kyosai are expected to wind down their business in 2009.

With respect to kyosai regulated by ministries and agencies other

than the FSA, the U.S. Government remains concerned by their

continued expansion in Japan's insurance market and continues to

call on Japan to bring these kyosai under FSA supervision.

Policyholder Protection Corporations: The Life and Non-life

Policyholder Protection Corporations (PPCs) are mandatory

policyholder protection systems created in 1998 to provide capital

and management support to insolvent insurers. Japan's Diet passed

legislation in 2005 to renew the PPC system and is preparing to

renew the legislation prior to April 2009. While some improvements

have been made, the PPC system continues to rely on pre-funding by

its members, instead of adopting a system of funding to follow an

insolvency that results in a draw of funds from the PPC

(post-funding). The U.S. Government continues to urge Japan to

adopt more fundamental changes in the PPC systems, including the

post-funding approach.



Bank Sales: The Japanese government decided in December 2007 to

liberalize fully the range of products eligible to be sold through

the bank sales channel. As a follow-up to that change, the United

States asked Japan promptly to conduct a review of market conduct

rules, including the limits on sales of first and third sector



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products and treatment of customer data (including Insurance

Business Law Enforcement Rules, Article 212),to ensure they do not

limit the bank sales channel's effectiveness or impede consumer

convenience.



Professional Services



U.S. and other foreign firms and individuals are hampered in

providing professional services in Japan by a complex network of

legal, regulatory, and commercial practice barriers. U.S.

professional services providers are highly competitive. Their

services also help facilitate access for U.S. exporters of other

services and goods, and contribute valuable expertise to the

economies they serve. The availability of such services can be a

key factor in U.S. firms' decisions whether to invest and thus is

central to improving the environment for foreign direct investment

in Japan.



Accounting and Auditing Services: U.S. providers of accounting and

auditing services face regulatory and market access barriers in

Japan. Only Certified Public Accountants (CPAs) or Audit

Corporations (made up of five or more Japanese CPAs) can offer

accounting services. Foreigners must pass a national examination to

qualify and this examination is offered annually. The U.S.

Government will continue to urge Japan to remove restrictions on

accounting services.



Medical Services: Restrictive regulation limits foreign access to

the medical services market. The U.S. Government has recommended in

the bilateral Regulatory Reform Initiative that Japan allow

commercial entities to provide full service, for-profit hospitals in

Japan's special economic zones as a first step to opening this

sector to foreign capital affiliated providers.



Educational Services: Excessive regulation has discouraged foreign

universities from operating branch campuses in Japan, presenting

obstacles related to both administrative requirements and

restrictions on pedagogical choices. Under the United States-Japan

Investment Initiative, the Japanese government established a new

category of "Foreign University - Japan Campus" for foreign

accredited institutions of higher education. This designation

provides these campuses with benefits similar to those accorded

Japanese educational institutions (e.g., student eligibility for

student rail passes and student visas),but does not confer tax

benefits enjoyed by Japanese institutions and their students. The

U.S. Government continues to urge Japan's Ministry of Education,

Culture, Sports, Science and Technology to work with these foreign

universities to find a nationwide solution that grants tax benefits

comparable to Japanese schools and allows them to continue to

provide their unique contributions to Japan's educational

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 is on an upward trend.



The Japanese government has recognized the importance of FDI to

revitalizing the country's economy. In September 2006, the Japanese

government set a goal of doubling the stock of FDI in Japan by 2010

to the equivalent of 5 percent of Gross Domestic Product (GDP).

Japan has also taken several recent steps to improve the FDI

environment, including revision of the Corporate Code to permit the

use of triangular stock swaps for international M&A deals. However,

with only one cross-border stock transaction occurring under the new

rules as of October 2007, the long term effect of the liberalization

of M&A rules remains unclear.



Cross-border M&A is more difficult in Japan than in other countries,

partly because of attitudes toward outside investors and partly

because of differing management techniques and the relative lack of

financial transparency and disclosure. There is also growing

concern among foreign investors about the effect of recent court

rulings related to allowable defensive measures by listed companies

against unsolicited takeover bids.



The United States-Japan Investment Initiative, initiated in 2001 and

co-chaired by the U.S. Department of State and Japan's Ministry of

Economy, Trade and Industry (METI),has worked to promote policy

changes that improve the overall environment for foreign (and

domestic) investment and to focus on specific barriers in certain

sectors, including educational and medical services.



TOKYO 00003137 018.3 OF 020







Anticompetitive Practices



Law against Unjustified Premiums and Misleading Representations:

Despite nominal changes to the Law against Unjustified Premiums and

Misleading Representations over the past two decades, the law itself

and the Japan Fair Trade Committee's (JFTC) enforcement of its

provisions block many common sales techniques such as product

giveaways and lotteries. In March 2007, however, the JFTC did

revise the maximum amount that a business may offer as a non-prize

premium from one-tenth to two-tenths of the purchase price.

Nevertheless, fair trade councils (essentially, private trade

associations) set their promotion standards through self-imposed

fair competition codes that are recognized by the JFTC. These codes

frequently impose additional standards that effectively protect

vested manufacturing and retailing interests to the detriment of new

entrants to the market. As of November 2007, there were still 38

JFTC authorized premium codes.



(For detailed discussion on other anticompetitive practices and

Antimonopoly Act enforcement, see the section above titled

"Structural Regulatory Reform.")



OTHER BARRIERS



Autos and Automotive Parts



A variety of nontariff barriers have long impeded access to the

autos and automotive parts market and overall sales of North

American made vehicles and parts in Japan remain low. Even as U.S.

automakers have invested in Japanese automobile manufacturers, there

has not been a corresponding level of increase in sales in Japan's

market. The Japan Automobile Importers Association (JAIA) reports

that sales of U.S. produced motor vehicles in Japan decreased in

2006 to 16,290 units.



Through the Regulatory Reform Initiative, the U.S. Government

continues to address crosscutting structural and regulatory reform

issues with Japan that affect the automotive sector, including

urging Japan to take steps that help expand the opportunities for

foreign investment, strengthen competition policy, and increase

transparency in rule making.



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

over half of the domestic production of aircraft and aircraft parts

and continues to offer the largest source of demand in the aircraft

industry. Although U.S. firms have frequently won contracts to

supply defense equipment to Japan (over 90 percent of the annual

foreign defense procurement is from the United States),the MOD has

a general preference for domestic production or the licensing of

U.S. technology for production in Japan to support the domestic

defense industry.



Although Japan has considered its main space launch vehicle programs

as indigenous for many years, U.S. firms continue to participate

actively in those space systems, including Japan's primary space

launch vehicle, the HII-A. The U.S. Government has welcomed Japan's

plans to develop a supplementary GPS navigation satellite

constellation known as the "quasi-zenith" system. The U.S.

Government is working closely at the technical level with Japanese

counterparts to ensure the Japanese and U.S. systems remain

compatible and anticipates U.S. companies will have the opportunity

to supply major components.



Business Aviation



Japan's regulatory framework coupled with infrastructure shortages

impedes the development of business aviation in Japan. Due to the

lack of business aviation-specific guidelines, regulations for

commercial airline safety, maintenance, and repair issues

administered by the Japan Civil Aviation Bureau (JCAB) of the

Ministry of Land, Infrastructure, Transport and Tourism (MLIT) also

apply to business aircraft. This situation in turn raises the costs

of qualification, operation, and maintenance of business aircraft to

uneconomical levels. As a result, most business aircraft in Japan

are registered in the United States.





TOKYO 00003137 019 OF 020





Landing rights for business aircraft in Japan are also difficult to

obtain due to rules that hamper flexible scheduling, especially in

the Tokyo area. The current regulatory environment, furthermore,

frustrates Japanese companies, foreign companies in Japan, and

foreign companies interested in doing business with Japan. U.S.

aircraft manufacturers also express concern that the regulatory

situation has greatly limited sales of their airplanes to potential

Japanese clients.



Recognizing the potential of business aviation in Japan (and hoping

to compensate for the absence or insufficient number of scheduled

commercial routes),certain airports in the Chubu and Kansai regions

have begun to attract business aircraft, although results thus far

are modest. Regional airports are attempting to provide many of the

same services business aircraft operators receive in the United

States and Europe. However, severely restricted hours for landings

and take-offs at Japan's preferred business destination - Haneda

Airport in Tokyo - and the lack of services at both Narita and

Haneda, continue to significantly limit travel to and within Japan.



Based on the growing needs of business aircraft owners and

operators, the U.S. Government has continued urging JCAB to

reexamine the application of airline-specific civil aviation

regulations to business aviation and develop appropriate regulations

specific to the business aviation industry. These regulations

should, to the greatest degree possible, reflect a regulatory

approach consistent with the treatment of business aviation in North

America, Europe, and other developed world economies. The U.S.

Government urges Japan to make immediate improvements in the overall

regulatory framework for business aviation in advance of the opening

of an additional runway at Haneda planned for 2010.



In the past year, JCAB has taken some initial and positive steps to

address these concerns, including regular participation in business

aviation events in the United States and Japan, frequent dialogues

with the U.S. Government, the industry, and U.S. and Japanese

business aviation associations, and taking preliminary positions

aimed at deregulation. The JCAB released a report on business

aviation in May 2008, which concluded the use of business jets in

Japan constitutes an important part of Japan's aviation future and

that the country lags noticeably behind other countries in the

development of business aviation.



The JCAB recently laid out a road map for a new policy entitled,

"The Four 'F's to Develop Japan's Business Aviation Tomorrow." The

"Four F's" call for improvements in facilitation, (regulatory)

framework, facilities, and fields (in the Tokyo area). In July

2008, in its first actual deregulation involving business aviation,

JCAB extended its ETOPS (Extended-range Twin-engine Operational

Performance Standard) requirement from 60 minutes to 180 minutes.

This means that JA (Japan) registered aircraft with two engines are

now permitted to fly routes far longer than they could previously.

As a result, greater market opportunities are now open for business

jets with sufficient range.



Civil Aviation



Consistent with its longstanding policy to promote competition and

market access in civil aviation, the U.S. Government continues to

press Japan for further liberalization.



Market access for U.S. air carriers in Japan improved significantly

with a 1998 bilateral agreement and additionally with a new

bilateral agreement reached in September 2007 (pursuant to comity

and reciprocity pending formal conclusion). U.S. carriers, however,

remain constrained by restrictions on traffic rights, operational

flexibility, change-of-gauge, and pricing. Other key concerns

include the continuing disparity between the rights of "incumbent"

and "non-incumbent" airlines, and some of the world's highest

airport costs.



The September 2007 agreement provides non-incumbent cargo carriers

the ability to serve additional points in Japan and beyond. It also

removes most restrictions and limitations on same country

code-sharing arrangements, but these remain more limited than the

open code-sharing framework in U.S. agreements with most other

countries. The agreement also relaxed the pricing regime from

"double approval" to "country of origin." It fell short, however,

of the standard "double disapproval" regime for pricing

liberalization. U.S. industry has expressed concern that Japan

requires cumbersome and time-consuming filings for fare changes.



Tokyo's Narita International Airport operates below its potential

capacity. The U.S. Government continues to encourage Japan to take

steps to increase capacity and reduce congestion at one of the

world's most important airports. An extension of Narita's second



TOKYO 00003137 020 OF 020





runway that will facilitate more long haul flights is currently

underway, although concerns remain about the project's financing --

specifically that already high user fees might be increased.

Recently lowered landing fees at Narita were offset in part by the

imposition of other new or increased fees. The U.S. Government

continues to raise the issue of high landing fees at Narita, Kansai,

and Central Japan International Airport (Centrair) airports in the

Regulatory Reform Initiative and other bilateral discussions.



Both Narita and Haneda Airports are undergoing ambitious expansion

projects set to be completed by 2010. However, the planning process

for both these projects has not been fully transparent. The U.S.

Government has raised with Japan concerns about how new slots at

Narita Airport will be allocated, and prospective rules at Haneda

that could adversely affect the competitiveness of U.S. carrier

operations in the long term. The U.S. Government urges Japan to

ensure that, through a timely and transparent consultative process,

non-Japanese carriers have meaningful opportunities to comment.

Connections between airports in the Tokyo metropolitan area remain

difficult and time-consuming. The weak connectivity undermines the

efficiency of the airports and carriers serving Tokyo. The U.S.

Government encourages Japan to improve transit access between Haneda

and Narita Airports.



Transport/Ports



The U.S. Government continues to raise longstanding concerns about

barriers to entry to, and the competitiveness of, Japanese ports.

Foreign shippers servicing Japan are locked into long-term

relationships with specific Japanese stevedoring companies, which

reportedly collude within the industry association to keep newcomers

out and costs high. Foreign companies are concerned that a lack of

transparency in Japanese laws and regulations related to ports

creates a barrier to entry. Foreign owned and run stevedoring

businesses do not exist at major Japanese ports, and even major

Japanese companies have been prevented from directly involvement in

the stevedoring business. As part of the Regulatory Reform

Initiative, the U.S. Government has made recommendations on

transparency that are applicable to the rulemaking process.

Japanese laws and regulations could be reviewed with an eye to

facilitating new entrants and outside competition in the stevedoring

business.



Japan amended its Port Transportation Business Law (effective

November 2000) to eliminate the need for new entrants to prove the

existence of surplus demand. Charges for harbor services in nine

large ports are subject to a prior notification requirement, and

there is an approval requirement for other ports by the MLIT.



Since 1999, the U.S. Government has continued to express concern

that reforms have not lessened the Japan Harbor Transportation

Association (JHTA)'s ability to deter new entry and restructuring in

the ports sector. The Port Transportation Business Law introduced

requirements that run counter to the need for efficient port

operations and discriminate against new entrants wishing to offer

port services. In addition, MLIT has not addressed concerns about

the prior consultation process conducted by the JHTA nor about the

apparent threat of illegal strikes against foreign carriers who

obtain permission to operate their own container terminals. The

U.S. Government has raised with the Japanese government its failure

to implement important aspects of the wide-ranging port deregulation

promised in 1997.



End text.



SCHIEFFER