A Draft Presentation Paper on Competition Principles for APEC
30 April-1 May 1999, Christchurch, New Zealand
by Iwao Okamoto
Deputy Director-General for Economic Structural Reform,
Ministry of International Trade and Industry (MITI), Japan
As a result of the globalization of the world economy, we have arrived at an age in which there is free movement of people, goods, capital and information, and we are seeing a greater trend of corporations choosing the countries in which they will do business. Furthermore, there is a growing understanding in the international community that the development of competition policy and deregulation contributes to economic growth by ensuring a more efficient allocation of resources. Against this background, in recent years there has been a growing importance internationally of competition policy and deregulation.
Considering such circumstances, Japan recognizes that the work to draft Competition Principles within the Pacific Economic Cooperation Council (PECC) during recent years is indeed timely and significant. The Competition Principles promoted by PECC outline primarily, such "first level" principles as comprehensiveness, transparency, accountability and non-discrimination, and secondly, outline specific items necessary for the promotion of competition policy and deregulation within each member economy based on those fundamental principles. These Principles can serve as a guideline encompassing the basic views of the APEC member economies for promoting competition policy and deregulation.
Japan also believes it to be significant for APEC to deepen the discussions on the PECC Principles and to compile them in the form of the APEC non-binding principle. As such, I would like to introduce Japan's experiences in recent years in the field of competition policy and deregulation, in the hope that they may be of some use in deepening the discussions in this area.
The debate on regulatory reform in Japan during recent years was triggered by concerns that unless the high-cost structure of the Japanese economy were corrected, private sector corporations, both Japanese and foreign, would give up on Japan as a site for business operations, which would lead to a hollowing of Japanese industry and result in greater unemployment.
Furthermore, Japanese society is aging while its birthrate is decreasing at a rate unprecedented in world history, and unless redressed there are extremely grave concerns that Japan's latent economic growth potential will decrease in the 21st century. In addition to this, as a result of increased social welfare benefits stemming from the aging society and the increase in fiscal deficits, we have come to be seized by a feeling of crisis that our economy and society may lose their vitality.
In such a changing environment, recognition has spread that among the economic social systems which supported Japan during the half-century following the Second World War, many are plagued with systemic fatigue and many are simply outdated. The awareness has also spread that many are preventing the development of our national vitality.
In order to conduct a fundamental review of the economic social systems, the Government of Japan has been determined to comprehensively advance reform across the six areas of, administrative reform, fiscal reform, social security reform, financial system reform, education reform and finally, economic structural reform.
Three years ago the then Prime Minister, Mr. Hashimoto, instructed the Ministry of International Trade and Industry (MITI) to work out a total plan for Economic Structural Reform and to be responsible for following-up on its implementation. Economic Structural Reform will be implemented through a policy package consisting of the following three pillars. First of all, an effort will be made to correct the high-cost structure of Japan's economic system, notably in the logistics, energy, telecommunications and financial sectors, and at the same time, reforms will be advanced across various systems related to corporate organizations and employment in order to create a business environment that is appealing enough in international standards. Secondly, by increasing the availability of both capital and people in order to contribute to the creation of new industries, technical innovation will be promoted. Thirdly, the public burden will be curtailed in order to maintain and improve economic vitality.
With a view to the first objective of improving the business environment, efforts will be made to steadily advance all forms of deregulation in order to ensure that by the year 2001, distribution, energy, telecommunications and other sectors will provide services which meet international standards in terms of costs and other factors. For example, with regard to restrictions on market entry in the logistics and transport sectors, provisions on supply-demand adjustment will be abolished with a deadline target of FY1999 to FY2001. According to calculations made by MITI in 1997, if fundamental deregulation is implemented in the five sectors of logistics, energy, information and telecommunications, finance and distribution, the economic effect of economic structural reform would lead to an increase of real GDP by six percent, and an increase of 39 trillion yen in additional capital plant and equipment investment and the creation of new jobs, principally in the information and telecommunications sector, could be expected.
Furthermore, in reforming the corporate organizational system, advances have been made including the relaxation of prohibition against the creation of holding companies, simplification and rationalization of procedures for mergers and the creation of a stock exchange system.
Since the introduction of the Anti-Monopoly Act, there has been a total ban on the establishment of stock-holding companies in order to prevent the excessive concentration of corporate dominance. However, in order to respond to international competition, advance structure reform of the Japanese economy and increase the dynamism of business activity in Japan, the prohibition against the creation of holding companies was relaxed to the extent that their activities do not conflict with the objectives of the Anti-Monopoly Act in 1997.
There had been effectively no revision of the restrictions on procedures for mergers in Japan since 1940, resulting in an excessive burden on corporate activities. In light of the current socio-economic conditions, the legal code was revised in 1997 in order to simplify and rationalize procedures for mergers, such as repealing the practice of holding stockholder's meetings for reporting and for establishment, rationalizing procedures to protect creditors.
A stock exchange system contributes greatly not only to the establishment of stock-holding companies, but is also useful for enabling speedy implementation of mergers and for assisting with strategic re-organization of corporations. Within MITI, a proposal has been put forward by the Commercial Code Study Group to establish a stock exchange system. Consideration was also underway within the Ministry of Justice based on opinions gathered from various sectors of society. Following the above moves, in March 1999, a bill was submitted to the current Ordinary Diet Session to revise the Commercial Code to provide for the creation of a stock exchange system.
Since I touched upon the relaxation of prohibition against the creation of holding companies, I would like to mention about recent developments in competition policy in Japan. By creating market rules based on the principle of competition, and with the aim of creating an environment in which corporations can compete fairly based on highly transparent rules, efforts are being made such as consideration by MITI and the Fair Trade Commission toward the introduction of private remedies against unfair business practices (such a system would enable private parties which suffered damages from unfair business practices to recover their damages through their own initiative and responsibility without relying on government intervention). In addition, a bill was submitted to the Diet Session to abolish Depression and Rationalization Cartels, which hither-to had been granted exemption from the application of the Anti Monopoly Act.
Turning to the second pillar, which aims to foster the creation of new industries, the ministries and agencies concerned with 15 sectors which are expected to enjoy future growth, such as medical and welfare, information and telecommunications, environment and bio-technology, are cooperating to draft by the year 2001 a medium-term plan to comprehensively and intensively implement various measures related to deregulation, technical development, human resource development, intellectual infrastructure development and social development. Indeed, steady implementation is being made along those lines.
Next I would like to mention about Japan's experience in a government-wide approach to deregulation. Since the 1960s Japan has adopted and steadily implemented a number of deregulation plans aiming to simplify and rationalize administrative procedures, stimulate the vitality of the private sector and improve market access. In addition, in March 1995 the Cabinet decided to adopt Japan's first comprehensive plan, the Deregulation Action Plan. This plan laid out a comprehensive approach to deregulation spanning all administrative sectors, and included 1,091 specific items targeted for deregulation across 11 sectors. (When the plan was revised in March 1996 new items were included bringing the total to 1,797. A further revision in March 1997 increased this to 2,823 items spanning 12 sectors).
The Deregulation Action Plan differed from previous plans to advance deregulation in that it incorporated the following particular approaches.
- A “rolling method” was adopted to allow for revisions at the end of each fiscal year, with a view to bring forward and specify implementation dates and put implementation into effect.
- A special organization was established to monitor the state of implementation of the deregulation plan. The monitoring results of the organization are to be fully respected.
- Opinions and requests on the implementation of the plan will be welcomed from both Japan and abroad, which will be reflected in the revision of the plan. In the event that current systems are to be maintained despite of the opinions and the requests, the relevant ministries and agencies are ought to make public notification of the reasons.
- An annual white paper on deregulation will be published to allow for the people to easily grasp the outline of the plan.
In March 1998 a new Three-Year Deregulation Action Plan was adopted by a Cabinet decision. This plan included a total of 624 items targeted for deregulation across 15 sectors such as information and telecommunications and energy. The first revision of this plan has just taken place in March 1999. The revised plan includes a total of 917 items (targeted for deregulation across 15 sectors). As a replacement for the Administrative Reform Committee which oversaw the previous deregulation plan, the Deregulation Committee, composed primarily of representatives from private sector, was established under the Administrative Reform Promotion Headquarters, which is chaired by the Prime Minister and composed of all Cabinet members.
The following perspectives were given priority consideration in the drafting of the new plan.
- Regulations are to be abolished or replaced with more liberal regulations, in accordance with the principle that economic regulations should be liberalized in principle, and social regulations should be kept to the minimum necessary level.
- Rationalization of regulatory methods including adoption of self-confirmation instead of certification by the government authorities.
- The content of regulations should be transparent and clear.
- Regulations should conform with international standards.
- Procedures related to regulations should be made more speedy.
- The procedures for establishing regulations should be transparent.
The new plan also established the following guidelines traversing all administrative sectors.
Reviews are to be conducted with a view to relaxing or abolishing regulations on new market entry. In particular, supply and demand adjustment regulations are to be abolished in principle. For example, supply and demand adjustment is to be abolished in the transport sector in domestic passenger shipping vessels, domestic air cargo transport and railway cargo transport. (A bill to abolish these regulations has already been submitted to the Diet and implementation will take place in the year 2000 for domestic passenger shipping vessels and in the year 1999 for domestic air cargo transport. Railway cargo transport regulations will be abolished when success is achieved in improving operations through the final privatization of Japan Railways and other steps).
Furthermore, by advancing deregulation in sectors in which new market entry by individual corporations has been restricted, such as in the welfare and nursing sectors, efforts will be made to expand job opportunities.
Direct government involvement in standards and conformance systems will be kept to the minimum necessary level, and a transfer to self-confirmation of safety standards by corporations will be effected. Even in cases in which certification by a third party is necessary, the private sector will be used as much as possible in order to promote private sector competition in businesses related to the issuance of standards and conformance. Furthermore, new systems will be established with a view to ensuring conformity with international standards through such measures as promoting mutual recognition of international standards and conformance.
Based on the Procedures for the Submission of Opinions Related to the Establishment and Revision or Abolishment of Regulations adopted on 23 March 1993, drafts of government and ministerial ordinances are to be made public for comments, which will be considered before the ordinances are adopted.
When new regulations are to be established through legislative acts, in principle the relevant laws are to include a clause requiring a review of the relevant regulation after the passage of a set period of time. In other words, new laws should include a so-called “review clause.” The ministries and agencies are considering the establishment of a system which will make it possible for them to fulfill their responsibility to provide the people with an explanation of the effect and burden of the regulations which fall under their respective administrative jurisdiction.
As one example of an instance in which there was a clear and strong effect of economic structure reform, let us take a look at deregulation of the mobile telephone market.
- In addition to the separation of the mobile communications division from NTT in July 1992 and the regional separation which took place in July 1993, with the initiation of PHS service in July 1995, the mobile telephone market has expanded to an environment in which there are six to seven companies in one region and there is fair competition among seven companies.
- With the introduction of the sale of mobile and car telephone units in April 1994 (previously, they had been leased only) , the market has seen a diversification in available model types and a reduction in prices.
- The combination of such factors has resulted in rapid growth of the mobile telephone market in recent years. Specifically, compared with the 2.13 million subscribers to mobile and car telephone services as of the end of FY1993, prior to the introduction of a system allowing for the sale of mobile and car telephone units, the market grew to 47.3 million subscribers as of the end of FY1998, and the penetration rate of mobile and car telephones and PHS units surpassed 30%, indicating a deep penetration into people's lifestyles.
Next, I would like to introduce the approach being taken toward deregulation in the electric power sector.
- In order to liberalize market entry into the power generation sector, the Revised Electricity Utilities Law was enacted in December 1995, through which market entry restrictions in the wholesale electric power sector were in principle abolished and a bidding system for procurement of power sources was introduced for electric power companies.
- Similarly, there was a four-fold increase in responses to tender offerings from six companies in FY1996, and in FY1997 a five-fold increase in responses to offers by seven companies was received. As such, a total of 6.17 million kilowatts of electric power is to be procured from FY1999 through FY2004. This amounts to an average of 1.03 million kilowatts per year, equivalent to 25% of the annual thermal power generation volume of 4.37 million kilowatts per year projected in the supply plans of electric power companies.
- An examination of the contracting prices offered by successful tenderers compared to the ceiling prices (the cost in the event that electric power companies generate their own power), shows that for tenders accepted in FY1996 there was a discount factor of slightly less than 10% to approximately 35%, and for tenders accepted in FY1997 a discount factor of approximately 25% to slightly more than 40%. Hence, it is clear that liberalization of market entry in the electric power generation sector has achieved a planned objective of reducing generation cost through severe competition.
As I have outlined, Japan has taken a comprehensive and systematic approach and is currently promoting economic structural reform and deregulation. However, as I mentioned earlier we were not able to take such an approach from the very beginning. After various trial and errors made through our own initiative to seek a better approach, it was also very important that Japan was able to receive good advice from the international community both at bilateral and multilateral level, such as the Organisation of Economic Co-Operation and Development (OECD). Furthermore, it has been very important to gain the full understanding both of the people and private sector corporations that it is absolutely essential to shift to a new socio-economic system based on the principle of self-responsibility. There have been many serious concerns expressed that economic structural reform and deregulation would impose a temporary burden on the people and on the private sector. However, in order to build a firm economic foundation to support our nation in the future, it is important that we boldly advance economic structural reform and deregulation. We will advance economic structural reform aiming to achieve sustainable development of Japan's economy.
When we consider Japan's experience, the importance of the principles proposed by PECC, in particular the primary level principles of comprehensiveness, transparency, accountability, non-discrimination, is clear. I believe that, it would be beneficial for the formulation and strengthening of a competition-driven policy framework in each member economies, to exchange various views among member economies based on the PECC Competition Principles, and develop non-binding principles on competition policy and deregulation in APEC. In that process, the diversity of the APEC region must be taken into consideration and the non-binding principle must be sufficiently flexible as well as general and concise. As an economy with various experience in economic structural reform and deregulation, Japan is willing to continue to contribute to discussions within APEC on this area.