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WT/TPR/S/1079 October 2002
(02-5353)

Trade Policy Review Body



TRADE POLICY REVIEW JAPAN Report by the Secretariat



This report, prepared for the sixth Trade Policy Review of Japan, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from the Government of Japan on its trade policies and practices.Any technical questions arising from this report may be addressed to Mr. M. Hayafuji (tel. 022-739 5873) or Mr. M. Daly (tel. 022-739 5077).Document WT/TPR/G/107 contains the policy statement submitted by the Government of Japan.

Note: This report is subject to restricted circulation and press embargo until the end of the meeting of the Trade Policy Review Body on Japan.

CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) ECONOMIC ENVIRONMENT vii
(2) TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES vii
(3) TRADE POLICIES AND PRACTICES BY MEASURE viii
(4) TRADE POLICIES BY SECTOR ix
(5) OUTLOOK x
I. ECONOMIC ENVIRONMENT 1
(1) MAIN ECONOMIC DEVELOPMENTS 1
(2) MACROECONOMIC POLICIES 3
(i) Monetary and exchange rate policy 3
(ii) Fiscal policy 5
(iii) Structural Policies 7
(3) DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT 8
(i) Composition of merchandise trade 9
(ii) Direction of merchandise trade 9
(iii) Composition of trade in services 9
(iv) Foreign direct investment (FDI) 9
(v) Prospects 12
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 13
(1) TRADE POLICY OBJECTIVES 13
(2) TRADE POLICY FORMULATION AND EVALUATION 13
(i) Trade policy formulation and administration 13
(ii) Evaluation of trade-related policies 14
(3) TRADE AGREEMENTS AND ARRANGEMENTS 17
(i) WTO 17
(ii) Regional agreements 20
(iii) Bilateral agreements 22
(iv) Preferential treatments 24
III. TRADE POLICIES AND PRACTICES BY MEASURE 26
(1) INTRODUCTION 26
(2) MEASURES DIRECTLY AFFECTING IMPORTS 27
(i) Customs clearance 27
(ii) Rules of origin 27
(iii) Tariffs 28
(iv) Non-tariff border measures 33
(v) Contingency measures 35
(vi) Government procurement 35
(vii) State trading 38
(viii) Standards, sanitary and phytosanitary measures 38
Page
(3) IMPORT AND INWARD INVESTMENT PROMOTION MEASURES 42
(i) Import promotion 42
(ii) Investment regulation and promotion measures 42
(iii) Foreign access zones (FAZs) 43
(4) MEASURES DIRECTLY AFFECTING EXPORTS 43
(i) Export taxes. charges and levies 43
(ii) Export prohibitions, restrictions, and licensing 43
(iii) Export promotion schemes 44
(5) MEASURES AFFECTING PRODUCTION AND TRADE 45
(i) Taxation and tax-related assistance 45
(ii) Subsidies and other financial assistance 45
(iii) State-owned companies and privatization 45
(iv) Trade-related investment measures 46
(v) Trade-related intellectual property rights 46
(vi) Regulatory reform 48
(vii) Competition policy 48
(viii) Corporate governance 52
IV. TRADE POLICIES BY SECTOR 54
(1) INTRODUCTION 54
(2) AGRICULTURE 54
(i) Overview 54
(ii) Border measures 55
(iii) Domestic measures and support programmes 58
(3) MANUFACTURING 59
(4) SERVICES 60
(i) Financial services 60
(ii) Telecommunications 63
(iii) Transport 65
(iv) Other services 67
REFERENCES 69
APPENDIX TABLES 71

CHARTS
I. ECONOMIC ENVIRONMENT
I.1 Formulation process of the FY2002 Budget 6
I.2 Merchandise trade by product, 1999 and 2001 10
I.3 Merchandise trade by country, 1999 and 2001 11
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1 Development of policy evaluation system in Japan 16
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Share of non-ad valorem, by HS section, FY2002 30
III.2 Simple average applied MFN tariff rates, by HS section 32
III.3 Applied MFN tariff distribution, FY2002 33
Page
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Selected macroeconomic indicators, 1995-01 2
I.2 Shares of GDP and employment by sector, 1995-00 3
I.3 Current and capital accounts, 1997-01 4
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1 Status of notifications to the WTO, July 2002 18
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Structure of applied MFN tariffs in Japan 29
III.2 Procurement composition by product and by origin, 2000 37
III.3 Major standards and technical regulations in Japan, May 2002 39
III.4 Suspension of imports likely to infringe intellectual property rights, 1995-01 47
III.5 Enforcement statistics related to competition policy, 1997-01 51
IV. TRADE POLICIES BY SECTOR
IV.1 Applied MFN tariff protection in agriculture sectors, FY2002 56
IV.2 Special safeguard (SSG) actions in agriculture by Japan, FY2000-02 58
IV.3 Procurement prices for all major crops subject to pricing an/or marketing
arrangements/price controls 59


APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Composition of trade in services, 1995-01 73
AI.2 Inward and outward FDI flows by source and destination, FY1999-01 74
AI.3 Inward and outward FDI flows by activity, FY1999-01 76
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
AII.1 disputes to which Japan has been a party, 2000-July 2002 77
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Tariff escalation and tariff ranges in Japan, FY2002 79
AIII.2 Allocation of import quota by item, FY2001 82
AIII.3 Import quotas on fisheries products, FY1996-01 83
AIII.4 Subsidies notified under WTO provisions, FY1998-01 84
AIII.5 Industries monitored by the JFTC with respect to a "monopolistic situation", 1999 and 2001 89



SUMMARY OBSERVATIONS
(1) ECONOMIC ENVIRONMENT
1. Since Japan's previous Trade Policy Review, in 2000, its economic situation has hardly improved. After a slight recovery in 1999 and 2000, following a decade of stagnation, real GDP shrank by 0.6% in 2001 and is expected to decline slightly again in 2002, notwithstanding a monetary policy of virtually zero interest rate and recurring fiscal deficits that have raised government debt to unprecedented levels. The economy also continues to be beset by persistent downward pressure on prices, which have been mildly declining since 1998, unusually high levels of unemployment, and uncertainty. One of the main structural problems is a fragile banking system, with non-performing loans amounting to 7% of GDP at the end of September 2001.
2. During the period under review (2000-02), Japan's scope for using expansionary monetary and/or fiscal policies to extricate itself from this downward spiral was greatly constrained by the fact that interest rates were close to zero, while public debt was approaching 140% of GDP. The Bank of Japan has further relaxed monetary policy by reducing the official discount rate, down to 0.1%; it has also lowered the short-term call rates and provided more liquidity to the market. However, with mildly negative rates of inflation in recent years, real interest rates have tended to be somewhat higher than nominal rates. This seeming "liquidity trap" in combination with a fragile banking system has thwarted monetary policy. In September 2002, the Bank of Japan indicated its intention to spend trillions of yen on the purchase of shares owned by commercial banks in an effort to facilitate resolution of the non-performing loan problem and to secure financial system stability. At the same time, the Bank announced that it would conduct its own comprehensive review of the banks' non-performing loan problem and publish the results.
3. Trade has played an important role in the economy. Although the shares of exports and imports are each around 10% of GDP, with domestic demand sluggish, external demand has been the main source of growth during the past few years, due in part to the openness of the multilateral trading system.
4. A sustained recovery would appear to hinge on structural reforms; indeed, the Government has begun to place greater emphasis on structural reforms than on expansionary monetary and fiscal policies. A key element in structural reform is regulatory reform, particularly to reduce economic intervention in several sectors. Another element of structural reform entails the disposal of non-performing loans in order to strengthen the banking system, and the promotion of corporate restructuring. These elements are in addition to the stimulus to competition generated by Japan's further liberalization of its trade and investment regime, partly in accordance with WTO commitments.
(2) TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
5. The overall aim of Japan's trade policy has remained unchanged since its previous Trade Policy Review: its priorities include strengthening the multilateral trading system while, at the same time, linking and integrating with other countries and regions.
6. Japan grants at least MFN treatment to all WTO Members. During the period under review, it has been an active participant in WTO activities. Japan has used extensively the WTO dispute settlement mechanism, having been a party to four disputes, one as respondent and three as complainant. It participates in the WTO's Working Groups on Trade and Investment, Trade and Competition Policy, and Transparency in Government Procurement, and has submitted a number of proposals and discussion papers to these bodies and to the Council for Trade in Goods on the subject of trade facilitation.
7. Japan has traditionally eschewed regional and bilateral preferential trade agreements. Although Japan supported the "open regionalism" approach of the Asia?Pacific Economic Cooperation (APEC) Forum, and participates in other regional fora, such as the Asia-Europe meeting (ASEM) and the ASEAN+3, it was not party to any preferential trading agreement until the signing of a bilateral free?trade agreement with Singapore in January 2002. Japan has also proposed an "initiative for a Japan-ASEAN Comprehensive Economic Partnership", which would encompass broader issues than conventional free-trade agreements, such as science and technology, human resource development, and tourism. Japan is clear that although regional arrangements are being pursued, it has by no means abandoned multilateralism, and that regional and bilateral trade agreements are useful tools for market liberalization and structural reform, complementing multilateral efforts as long as they are consistent with WTO rules. In this context, the authorities maintain that Japan's bilateral agreement with Singapore will be fully consistent with WTO rules.
8. During the period under review, Japan expanded the scope of unilateral preferential market access granted to products from certain developing and least developed countries under its Generalized System of Preference (GSP) scheme.
(3) TRADE POLICIES AND PRACTICES BY MEASURE
9. Since its previous Trade Policy Review, Japan has continued to liberalize gradually its trade and investment regimes. Although progress has been made in improving the competitive environment, potentially important distortions to competition are still evident in some sectors, especially agriculture. Recognizing the continued need to promote competition, the authorities seemingly attach high priority to further regulatory reform and sound competition policy.
10. The tariff remains Japan's main trade policy instrument; most imports enter Japan duty free or are subject to low tariff rates. In fiscal year 2002, the simple average applied MFN tariff was 6.9%. Nearly 99% of tariff lines are bound and most applied tariff rates coincide with bound rates, thereby imparting a high degree of predictability to Japan's tariff schedule. At the same time, non?ad valorem duties are an important feature of the tariff, particularly in agriculture. Such duties, which account for 7% of all lines, are indicated clearly in Japan's tariff schedule; they tend to involve relatively high ad valorem equivalents (AVEs). Moreover, bound tariff rates that exceed applied rates pertain mainly to non?ad valorem duties. The Japanese authorities have provided the Secretariat with AVE estimates for the non-ad valorem duties; these estimates show that 95 of the top 100 tariffs entailed non-ad valorem duties with AVEs ranging from 47.2% to 1,739% and that the simple average of all specific rates for which AVEs were available was roughly ten times the simple average of purely ad valorem tariff rates. The allocation of tariff quotas varies by product and can be intricate.
    11. Japan has few non-tariff border measures. Those currently applied involve some import prohibitions, import licensing, and quantitative import restrictions, for example, on certain fish and silk. Imports of certain goods are subject to licensing requirements in order to ensure national security, safeguard consumer health and well?being, or preserve domestic plant and animal life and the environment. Like tariff quotas, certain aspects of the import quota system can be intricate.
12. Japan implemented its first safeguard measures in April 2001, imposing provisional emergency tariffs on three agricultural products; these expired in November 2001. One anti?dumping measure is currently in force. Japan has never taken countervailing actions.
13. Certain export controls are maintained on the grounds of national security and public safety, and to ensure adequate domestic supplies of certain agricultural and other primary products. Japan has not notified any export subsidies to the WTO, thereby indicating their absence. Export finance, insurance, guarantees, and drawback schemes are available.
14. Various forms of assistance are provided by central and local governments, particularly to agriculture. The total value of assistance to agriculture exceeds the sector's contribution to GDP; most of the assistance seems to consist of measures that distort production and trade.
15. No preferences are granted to domestic suppliers in respect of government procurement covered by the Agreement on Government Procurement. The share of foreign suppliers in the total value of government procurement was 6.9% in 2000 (up from 5.7% in 1998).
16. Standards continue to be brought into line with international standards; about 90% of Japan Industrial Standards (JIS) were aligned to their international counterparts as of 31 March 2001, compared with about half in FY 1997. Japan has also taken further steps to ensure acceptance of foreign test data and conformity assessments.
17. Japan has continued to participate in multilateral and regional discussions for agreements to promote international harmonization of regimes protecting intellectual property rights (IPRs).
18. A growing awareness that ineffective corporate governance has contributed to excessive use of capital and labour in the corporate sector (and the associated non-performing loans) has prompted the government to implement a number of policy measures to reduce excess capacity, including facilitating debt-equity swaps and tax incentives. There have also been some significant changes in the regulatory framework and business practices that are conducive to the establishment of more effective corporate governance; these changes include easing and extending the use of stock options, revision of the Commercial Code to provide a greater role for external directors, and significant revisions to Japan's accounting standards to assure greater transparency.
19. The Three-Year Program for Promoting Regulatory Reform (TPPRR), first adopted in March 2001 and revised in March 2002, is aimed, inter alia, at creating "a free and fair socio-economic system fully open to the international community". The TPPRR also contains measures to increase competition. Nonetheless, it remains unclear whether the existing enforcement measures available to Japan's antitrust enforcement agency, the Japan Fair Trade Commission (JFTC), are sufficient to constitute an effective deterrent to violations of Japan's competition law, which is commonly referred to as the Anti-Monopoly Act (AMA). The Government has made efforts to increase the JFTC's budget and staff, however, thereby facilitating investigation of AMA violations.
(4) TRADE POLICIES BY SECTOR
20. Since Japan's previous Trade Policy Review, the Government has continued to implement structural reforms; progress has been made especially in the services sector, including financial services and telecommunications.
21. In agriculture, there have been few policy changes since the previous Review. In 2001, the Government announced a Priority Plan for a Stable Food Supply and Aesthetic Land Development, which calls for directing measures and resources towards productive sectors, and at the same time providing safety measures to address risks associated with structural reform. Since March 2001, certain stock companies (effectively limited to companies formed by farmers) have been allowed to participate in farming. The average applied MFN tariff for agriculture (WTO definition) decreased slightly from 18.9% in FY2000 to 18.6% in FY2002. Total transfers to agriculture exceed the sector's small contribution to GDP. Japan's food self-sufficiency ratio has remained stable at around 40% since the previous Review; it remains the world's largest net importer of food.
22. Japanese manufacturing has traditionally been much more exposed to international competition than agriculture and certain services. Tariffs on manufactured goods are usually low; moreover, non-tariff barriers are few and the sector receives relatively little financial or other support from the Government. As in most other industrialized countries, manufacturing's contribution to GDP has been declining steadily; it accounted for 21.6% of Japan's GDP in 2000, compared with 23.0% in 1995.
23. By contrast, the share of services in Japan's GDP has been growing steadily; it accounted for 70.1% in 2000, up from 68.8% in 1995. Reforms have continued, especially in financial and telecommunications services.
24. Against the background of a heavy debt overhang, financial sector reforms have been concentrated on strengthening prudential norms and eliminating non-performing loans (NPLs). Over-the-counter sale of some insurance products by banks has been permitted since 1 April 2001, and the "third sector" (e.g. personal accident and liability) was liberalized in July 2001.
25. Recent postal reforms were focused on the liberalization of mail delivery, allowing competitors to enter the market provided they set up a minimum of 100,000 post boxes. Absent from the legislation, however, were significant measures to reform the postal
savings system, which enjoys a privileged position (including its ability to secure for its savers full protection of their entire deposits). With ¥240 trillion (US$2 trillion) in assets, the system deters competition from the private sector and constitutes an important source of off-budget financing for various public projects, thereby possibly undermining the efficient allocation of savings to various investments.
26. In the telecommunications industry, the limit on foreign ownership restrictions of NTT was relaxed from 20% to one third, and an independent dispute-settlement commission was established.
(5) OUTLOOK
27. There are tentative signs of moderate recovery in the Japanese economy, although its strength is not altogether clear owing to underlying structural problems, particularly the resolution of the non-performing loans matter; if they are not resolved, these problems could jeopardize a sustainable recovery. According to the latest official figures, real GDP increased by 2.6% in the second quarter of 2002 (on an annualized basis), driven in large part by exports, which began to recover in early 2002. The present unusually high level of unemployment has contributed to Japanese consumers' reluctance to spend and thus to the fragility of consumption demand and persistent downward pressure on prices. There are signs that structural reforms, supported by macroeconomic measures, are under way; the Government has indicated the need to intensify regulatory and other structural reforms aimed at removing distortions to competition.