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Japan Fair Trade Commission Barks :Yesterday, Today and Tomorrow : Competition Policy of Japan

SHOGO ITODA, Commissioner of Japan Fair Trade Commission
February 22
Presented at Chatham House, London, UK

I feel honored to be here with you in a meeting organized by The Royal Institute of International Affairs to speak about competition policies of Japan.

This evening, I am going to talk about how the Japan Fair Trade Commission (the JFTC) is enforcing the Antimonopoly Act and the direction the JFTC is heading. I will also discuss the roles of the JFTC in deregulation processes now under way in Japan, as well as its future policies.

The job of the JFTC is, of course, to ensure fully market principles and to make more open internationally in the Japanese market. It seems to me, however, that our activities are not well understood by foreign countries.

I hope what I am going to talk today might help you to understand our operations trying to make the Japanese markets more open and fair. I welcome your comments if there are any problems regarding competition in the Japanese market.

Shocking Article of The Economist

Some ten years ago, I was stunned by a feature article of The Economist magazine. I still remember it clearly. It says about JFTC,"The law itself has teeth in plenty; the problem is that its designated watchdog has been trained not to bite."( The Economist September 16,1989) The article says the enforcement by the JFTC is so lukewarm that Antimonopoly Act violators do not care whatever the Commission says. The article was really shocking to me. As a staff member of the JFTCs Secretariat, I was pretty sure that the JFTC had been doing quite good job, enforcing the Antimonopoly Act vigorously and taking a variety of measures to crack down anticompetitive activities. Yet "a-watchdog-that-never-barks-and-bites" has since become a phrase often quoted to tease the JFTC both inside and outside Japan.

However, it was also true that the article had some positive impact on me. I learned two lessons from the article. First, the JFTC was not sufficiently publicized, particularly abroad. Second, what is important is not only a tough enforcement of the Antimonopoly Act, but also amending the law itself to improve its effectiveness.

Therefore, I am here today to do the first task, that is a fair publicity of the JFTC, and talk about how the JFTC operates, which is the second task that we have got to do.

Enactment of the Antimonopoly Act and Establishment of the JFTC

It was in 1947 that the Antimonopoly Act was enacted, followed by the establishment of the JFTC. More than half a century has since passed. In fact, Japan is one of the countries that have a long history of competition law.

Introduction of the JFTC, its growing roles

First of all, I would like to briefly explain about the JFTC. The JFTC is an independent national administrative body to implement competition policy, including the enforcement of the Antimonopoly Act.

The JFTC has the character of an administrative organization under the council system, consisting of a chairman and four commissioners. The chairman and the commissioners are authorized to do their jobs independently. So we cannot be influenced by anyone else in enforcing the Antimonopoly Act.

The JFTC has the General Secretariat that was upgraded organizationally in 1996 from the Secretariat. In fiscal 2000, it has a staff of 564. During the past 10 years, the number of staff members increased by 90.

As you may know, the Japanese government is carrying out a drastic administrative reform, curtailing the number of offices and personnel. However, the JFTC, unlike other offices of the government, is increasing its staff members and its administrative status was elevated. It means that the Japanese government regards fair trade and competition policy very important. However, I as an insider of the JFTC, strongly feel that our organization has to be strengthened further for the sake of the national economy.

Functions of the JFTC

Now, I would like to talk about functions of the JFTC. We have two main jobs in implementing competition policy in Japan.

The first is the enforcement of the law. We vigorously enforce the Antimonopoly Act, the Japanese competition law.

The other job is to plan and implement policies. There are two major roles in this function. First, we are working to amend the Antimonopoly Act, in order to strengthen it, and make bills for submitting to the Diet, or Japanese Parliament. Second, we encourage competition by promoting deregulation and reviewing exemptions from the Antimonopoly Act, thus, trying to eliminate anti-competitive elements in administrative systems. For example, we conduct surveys and researches on public regulations. We also make proposals in an effort to implant or strengthen market principles in the Japanese economy. We are also working out bills to minimize the Antimonopoly Act Exemption System.

The JFTC is not just a law enforcement body, but an organization that is working out national policies to promote competition in the Japanese economy. I would say that there are not so many industrial countries where their competition authoritys work in such a comprehensive manner.

History of Antimonopoly Act

Now I would like to briefly look back the history of the Antimonopoly Act. It was enacted in 1947 after World War II. The establishment of the law was part of the occupation policies of the Allied Powers. In this sense, it is a law given by outside authorities. Before the end of the war, Japanese economy was a kind of controlled economy. Therefore, infusing market economy in Japan caused an upheaval. Moreover, the entire nation was so desperate to rebuild the war-torn economy and to build up production capacity that even policies discouraging competition had to be employed.

Under such circumstances, the Antimonopoly Act was not fully enforced for a while after its enactment. Moreover, quite a few legislations were made to grant business operators exemption from the Antimonopoly Act.

By the mid-60s, remaking of the nation made significant progresses and the Japanese economy was about to enter the high-growth period. It was about this time that the necessity and importance of the Antimonopoly Act drew a national attention. The reason was that anti-competitive measures and behaviours had to pay prices. Consumer prices skyrocketed, giving a hard blow to consumers. Rising consumer prices became a political issue. In addressing the problem, people found how important it is to eliminate regulations and behaviours that discourage competition.

1977 amendment of the Antimonopoly Act

Another landmark event for the Antimonopoly Act came in 1977 when it was drastically amended. It was about the time Japanese economy was recovering from the first oil crisis. It was anticipated that the Japanese economy would enter into a stable-growth period. The amendment was done in order to promote competition under a stable economy.

Distinguished Antimonopoly law in the world

Now, let me compare Japanese Antimonopoly Act with foreign counterparts. As to stipulations regulating cartels and corporate mergers as well as unfair trade practices, the Japanese law is the almost the same as those in United Kingdom and other industrial countries. Business executives in the European Union and the United States often say that the Japanese markets are closed and foreign companies have hard time to get in because discriminatory business practices are allowed in Japan. It is totally false. Discriminatory business practices against foreign or domestic companies violate the Antimonopoly Act and the JFTC takes action to eliminate such practices. Anyway, I am proud of having a competition law that is as good as those in other major countries.

Elimination of the anticompetitive activities by administrative measures

I would like to talk about how the JFTC works against anticompetitive activities. The Commission, based upon its vested authority, conducts investigations, including on-the-spot inspections,into practices that are suspected to be violating the Antimonopoly Act. When the JFTC finds a violation of the Antimonopoly Act, after the investigation, it orders measures to be taken for elimination of such conduct. The accused can file a lawsuit with a court seeking the cancellation of the administrative order when they cannot accept the Commissions decision. In case, when the violators do not comply with the fixed decision, they will face up to two years in prison or a fine of up to 3 million yen (about 17,000 pounds). The JFTC investigates about 200 cases a year and metes out administrative measures to about 30 cases annually.

Penalty to anticompetitive activities: surcharges

In case of price cartels or bid riggings and other price-effected cartels, the JFTC also imposes surcharges on violating companies.

The surcharge system was introduced after the first oil crisis when many Japanese industries formed price cartels. It aims at forcing violators to fork out undue profit from cartels or bid riggings, and achieving social justice based on the crime-does-not-pay idea. It was found very effective to deter possible anticompetitive activities. The surcharge is not a criminal penalty but part of administrative measures. Therefore, the JFTC is able to impose surcharges without resorting to the court procedure. It is quite similar to a fine clause of the EU competition law. The amount of surcharge is calculated by multiplying the sales amount of goods or services for the period of illegal conduct with certain percentages stipulated by the Antimonopoly Act. The annual surcharges total billions of yen or about 30 million pounds. The largest annual total amount was 12.6 billion yen or about 72 million pounds.

The largest amount of surcharge in a single case was imposed to the cement industry. It had to pay as much as 11.2 billion yen or about 64 million pounds for making quotas cartel of their sales volume. In this case, Japan Cement paid 2.3 billion yen or about 13 million pounds,largest surcharge that a single company was imposed. This record might be renewed by Kubota Ltd. that was ordered to pay 7 billion yen or about 40 million pounds for ductile iron pipe market share cartel charges. This case is now under the hearing procedure because of their complaints.

Sanction against illegal practices: criminal penalties

Not only administrative measures but also criminal penalties are meted out to violations of the Antimonopoly Act. For example, cartels or bid riggings might face an imprisonment of up to 3 years or a fine of 5 million yen or about 28,000 pounds, and firms face up to a fine of 100 million yen or 572,000 pounds. Since the basic stance of competition policy in Japan is to restore competition through administrative measures by the JFTC, criminal action will be taken only when the JFTC files cases with the Public Prosecutor General. The JFTC is going to file cases such as price cartels, joint boycott, bid rigging and market allocation agreements which hamper competition and give serious and vicious effect on the people's living.

In the past 10 years, the Commission made accusations against one price cartel case, one market share cartel case, and four bid rigging cases. Two cases are still under trial, the rest were found guilty. Among firms that were found guilty are Mitsui Chemical, Toshiba,Hitachi and Mitsubishi Electric. Companies still under court battle include Kubota and many leading oil distributors such as Nisseki Mitsubishi.

Making surcharges heavier and criminal penalties tougher

In this sense, I would say that Japan's competition law is tougher than U.S. counterpart that stipulates only criminal penalties, and it is also tougher than EU competition law which stipulates only administrative sanctions.

In recent years, in particular, the Antimonopoly Act was amended to further stiffen the sanctions. As to surcharges, the base rate for calculating the surcharge was quadrupled. The upper limit of criminal fine against firms was raised 20 times as much as the previous ceiling.

As these facts have shown, I do not think Japan's competition law is weak. And our records of the Antimonopoly Act enforcement show that the JFTC barks loudly and bites violators hard.

Increasing bid rigging cases by big corporations

One of recent notable anticompetitive activities is bid rigging. Spreading from construction projects to government procurement of goods, bid rigging is prevalent. In bid rigging cases involving government procurement of goods, what we should note was the involvement of leading Japanese corporations. Bid rigging pushes up contract prices, forcing central and local governments to pay higher prices. I would say that bid rigging pushes up contract prices by 20 to 30 percent.

In an effort to keep the economy on track for recovery, the Japanese government has earmarked a huge amount of money for public work projects. But bid riggings in such public projects, pushing up prices,hamper an anticipated economic turnaround. The JFTC, therefore, cracks down bid rigging hard to ensure the appropriate implementation of the budget as well as to prevent the misuse of taxpayer's money.

Illegal practices against market entry

Another recent notable anticompetitive activity is practices against market entry. Newcomers make the existing cartel less effective. Thats why some industries try to block new entries into their markets.

Illegal attempt for maintaining retail prices

Talking about vertical restraint of trade, our cases include some manufacturers attempting to maintain their retail prices and exclusive importers interfering with parallel importing. One notable case involved Shiseido, Japans top cosmetics manufacturer, which maintained suggested retail prices in the market. There was also a case in which cellular phone companies tried to maintain market prices of portable phone devices.

Surveys on major industries and corporate groups

As part of efforts to uncover anticompetitive practices, the JFTC conducts general surveys on market structures, production, distribution and other aspects of business transactions of major industries. The outcomes of the surveys are made public.

When anticompetitive practices are discovered, we of course take legal actions. Even if no violations are found, we suggest, if necessary, companies or trade association to take measures to promote competition. Recent survey covered such industries as photographic film and paper, accident insurance, automobile and flat glass. We also conduct surveys on major corporate groups of Japan regularly. We are always keeping our eyes open on industries and corporations.

Regulations on mergers and acquisitions

Other major part of our business is regulating mergers and acquisitions. The Antimonopoly Act bans any mergers of firms or acquisitions of business and stocks that restrict competition. Therefore, firms are required to make reports on those business practices. As to mergers, they are required to file a report in advance with the JFTC if the size of a planned merger is larger than a certain threshold. Now, foreign companies are also subject to the regulations on mergers as the Antimonopoly Act was amended last year.

Large-scale mergers

Lingering stagnation of the Japanese economy prompts firms to merge or affiliate each other through stock ownership under the name of reorganization or revitalization. The JFTC is looking into those moves to see if they do not violate the Antimonopoly Act. We have not found any serious problems so far.

One of the reasons for fewer problems may be that the Commission publicly releases its guidelines for scrutinizing whether planned mergers and acquisitions could restrain competition, and firms refer to them when they plan mergers and acquisitions. Another reason may be that firms consult with the JFTC while they work out merger or acquisition plans. We advise them if there are any problems in their plans. Following our advice, they revise plans or even cancel them.

I show you one recent example. Top three steel manufacturers of Japan had planned to integrate their export business of seamless pipes. The JFTC thought that their plan would give negative effects not only on abroad market, but also on the Japanese national market. Considering about these situations, the steel manufacturers gave up the plan.

Emergence of mega-banks and efforts to weaken corporate groups

In their efforts to revive an ailing banking sector of Japan, major banks have announced merger plans. The JFTC will soon start probe to see if their plans have any problems, so that I cannot make a clear statement about it now. But I assume that the Antimonopoly Act would not be a major stumbling block in their merger plans.

As major banks play pivotal roles in corporate groups in Japan, some express concerns that mergers of major banks would result in the integration of corporate groups and the emergence of gigantic business empires. Taking those concerns into account, the JFTC, I think, has to ensure that planned mergers of large banks would not hamper competition due to the enlargement of corporate groups. Therefore, the Commission has to effort to weaken the power of corporate groups.

Prevention of illegal practices: making out of guidelines

While actively cracking down business practices violating the Antimonopoly Act, we are also active in taking precautionary measures. First, we make public various kinds of guidelines to help corporations and consumers to better understand clauses of the Act and our stance. We have more than 20 guidelines, including those on mergers and acquisitions, which I mentioned earlier, on public procurement for avoid bid rigging, distribution and business practices, and intellectual property rights. In making out those guidelines, we seek views and opinions of interested parties both in Japan and abroad.

Prevention of illegal practices: consultation and compliance programs

Second, we are actively doing consultation services for firms and trade associations when they seek our advice regarding the Antimonopoly Act. It is another measure to prevent anticompetitive activities. In these several years, we have also been urging firms to work out Antimonopoly Act compliance programs. In a recent survey, we found about 60 percent of the companies whose stocks are listed on the Tokyo Stock Exchange have already worked out such programs.

Policy implementation: the JFTC as a pioneer of deregulation in Japan

Another big task of the JFTC is the policy management. Promotion of deregulation is now a major economic policy of Japan. Deregulation is under way to build up a free, fair and internationally open economy based upon the rules of self-reliance and market principles. Deregulation means respect to the market forces, so, basically it is part of competition policy. As a matter of fact, the JFTC has been addressing this issue for more than 20 years.

State of deregulation

The JFTC conducts fact-finding surveys of various industries that are under the some regulations: transportation such as airlines,trucking and taxi, accident insurance, telecommunications, electric power, to name a few. Through surveys, we examine the following: i)necessity for regulations (for example, with the change of economy by technological innovation, there might be no more reasons for regulation), ii) harmful effects through regulations (for example, we see if they make management inefficient, or if they do not meet consumers needs, or if they serve only to protect vested interests and to block new entries), and iii) consideration in promotion deregulation (ways to relieve friction with deregulation pressures).

Based on findings, the JFTC works out proposals to the public regarding relaxation or elimination of regulations in the governments approval or license systems. The Commission itself is not in a position to carry out deregulation, but we advise that regulatory ministries and agencies take our proposals into consideration while raising questions about our proposals to the public. I am sure that the JFTC contributes greatly to Japans deregulation processes in this fashion.

Working on deregulation of telecommunications sector

The JFTC continues to promote deregulation in various fields. Above all, telecommunications sector is on our top priority list. NTTs interconnection rates are now under fire internationally. We think it necessary to relax regulations and promote competition in Japans telecommunications sector, so that the interconnection rates would move down to the appropriate level.

Making new entries really possible: electric power sector

Only relaxing and eliminating regulations is not enough to achieve true deregulation. We have to create an environment where newcomers can operate effectively, competing on an equal footing with existing players in the market. For this end, what we can do is not only to eliminate business practices that hamper entries of newcomers, but also to allow their access to so called essential facilities of existing companies.

I will show you some examples that the JFTC did recently. Since the electric power industry will be partially deregulated in April this year, it is possible for newcomers to enter this market. Working with the Ministry of International Trade and Industry, the JFTC made out the guidelines to stimulate competition in the electric power sector. It reminds the existing power companies that blocking new entries violates the Antimonopoly Act. Moreover, it asks them not to turn down new entrants requests for using their power transmission lines without justifiable reasons. This measure enables newcomers to have access to the existing power lines. We hope this makes it possible to make entries into the power market effectively and competition will be promoted.

Making sure the new entrants can operate: domestic airline sector

Another example is the domestic airline sector where deregulation has made it possible for new airlines to enter into the market. The domestic airline market used to be dominated by three major airlines,but now two new airlines began flying major domestic routes.

But the start-up airlines faced many problems. First, only three slots a day were allocated to each of them at the airport in Tokyo. Second, although they offered fares almost half of the major airlines to attract travelers, they faced a severe counterattack. The three major airlines also halved their fares of flights that depart in the same time frames as the newcomers flights, keeping the fares of other flights unchanged. Third, the new airlines began operation without aircraft maintenance facilities, relying maintenance checks on existing major airlines. However, majors, once accepted to do maintenance services for the newcomers, became reluctant to renew the maintenance contract.

The JFTC took action against the major airlines. Although there had not been evidence so far showing the violation of the Antimonopoly Act,the Commission asked them to be considerate in fare setting and maintenance services until the start-ups can compete them on an equal footing. Deregulation does not achieve anything if start-ups are forced out of the market immediately by such actions. The basic problem is that start-up airlines were given so few slots by the authority that they cannot compete well. In view of promoting competition, the JFTC will soon ask the ministry concerned to allow start-up airlines to fly more, thereby intending that market principles will function more.

Abolition of the exemption system

Abolition or reduction of exemption systems from the Antimonopoly Act is steadily under way. "The recession cartel system", which was allowed at the time of recession and was regarded as a typical Japanese exemption system under the Antimonopoly Act, was abolished last year.

Resale price maintenance system for newspapers and books

One of the outstanding issues over the exemption is resale price maintenance system for newspapers, books and CDs, which are exempt from the Antimonopoly Act. This particular issue has been under debate for several years. It is quite interesting to see that the Japanese media is advocating the promotion of deregulation in one hand, and on the other hand, they, newspaper companies voice against the abolition of the resale price maintenance system that will greatly affect their business.

Post-deregulation care: surveillance toward administrative guidance

By the way, the JFTC keeps watching markets where regulation is relaxed or Antimonopoly Act exemption systems are eliminated. For instance, the Commission enforces the Antimonopoly Act strictly at the markets that were once placed under regulatory control. As players tended not to be competitive in such markets, we have to tighten our surveillance. We also keep an eye on the deregulated markets to check if de facto regulations are maintained through administrative guidance. The JFTC urges ministries and agencies concerned to improve or abolish administrative guidance that might spoil market principles.

Post-deregulation care: information disclosure and elimination of misinformation

As deregulation requires more self-responsibility, the JFTC promotes firms information disclosures and eliminates false information so that individuals are well informed and can be responsible for themselves.

Introduction of the private remedy system against the Antimonopoly Act violation

In relation to promoting deregulation, it is of course important that the JFTC do its best to eliminate the Antimonopoly Act violations. However another important point is to have a system in which the victims can file suit in court seeking an injunction against the anticompetitive activities. The Commission is now studying an amendment of the Antimonopoly Act and a bill will be soon submitted to the Diet.

Promotion of international cooperation in competition policy

Finally, I would like to talk a little bit about our international efforts in competition policy.

Since Japan joined the OECD in 1964, the JFTC has been working to coordinate competition policy internationally, as a member of CLP (Committee on Competition Law and Policy) and recently at the WTO. Bilaterally, we regularly exchange views and opinions with competition Authorities in United Kingdom, U.S., the European Union and so on. With the globalization of the world economy, international collaboration in competition policy making is more and more needed. I believe such international activities of the JFTC are very significant.

Cooperation agreement on competition policy

Japan concluded a cooperation agreement concerning competition law enforcement with the United States last fall. It is the first time that Japan concluded such an agreement with a foreign government. With this agreement, Japan and the United States help each other the enforcement of competition laws, including information sharing. At the same time,the agreement has positive comity clauses to prevent excessive enforcement of domestic competition laws beyond the territory of the country. I am sure a similar agreement will be studied between Japan and the European Union.

That is all about what I had to say about Japans competition policy and the challenges that the JFTC faces. I hope I was able to help you to remove long years of misunderstanding. Thank you very much for your attention. Now I would like to invite your questions and comments.

Japan Fair Trade Commission:

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