[ Nippon Keidanren ] [ Policy ]
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Recommendations for Amendments to Ensure Japan's Antimonopoly Act Meets the Needs of the 21st Century

July 13, 2004

Nippon Keidanren
(Japan Business Federation)

The Japanese government is pushing forward with deregulation and economic structural reform. Fair and free competition, which is one of the goals of these initiatives, will further internationalize and revitalize the nation's economy and benefit its people.

The Act Concerning Prohibition of Private Monopolization and Maintenance of Fair Trade (the Antimonopoly Act) serves as a charter of basic rules for the market economy. However, it is necessary to periodically revise the act to ensure that it remains current and readily adapts to changes in the market environment. Revisions to the act should be supported by changes to the structure of the Fair Trade Commission (FTC) so that it may properly enforce the provisions of the act.

These ideals are behind Nippon Keidanren's recommendations, made over the course of the previous year, that the government make fundamental revisions to the act's enforcement mechanisms. Nippon Keidanren identified problems in the proposals that the FTC made on April 1, 2004, regarding amendments to the Antimonopoly Act, and reiterated its recommendations when the FTC organized a public hearing of its position on June 25.

Rather than sticking resolutely to the draft amendments it proposed on April 1, the FTC should develop new proposals for amending the Antimonopoly Act to ensure an overall balance that respects the opinions of Japanese people expressed during public hearings and the views of various business representatives, including Nippon Keidanren. The FTC's amendment proposals should also include further measures to inhibit illegal activities and ensure that entrepreneurs respect legislation and regulatory ordinances.

Nippon Keidanren strongly urges the prime minister and the Japanese government to show firm leadership by adopting the basic position indicated immediately below, and to undertake the fundamental reforms detailed in the following sections of this opinion paper.

  1. Strengthen Japan's international competitiveness by revising the Antimonopoly Act and bringing it up to date.
  2. Establish the basis for 21st-century competition policies by: (i) eliminating the structural imbalances of enforcement mechanisms embodied in the Antimonopoly Act that are the result of numerous amendments made in a jumbled fashion; (ii) clarifying the nature of surcharges, which is at present unclear; and (iii) treating surcharges as punitive sanctions.
  3. Eliminate the practice of subjecting corporations to the dual punishment of both surcharges and criminal penalties, and amend the Antimonopoly Act so that it more closely resembles the antimonopoly laws of other countries.
  4. When enhancing the authority of the FTC, ensure that it respects due process and is structured in a way that is suitable for the quasi-judicial entity that it is.
  5. Take overall responsibility for ensuring that steps leading to the amendment of the Antimonopoly Act are transparent and fair by promoting an open, full-fledged study, before a bill amending the act is submitted to the Diet.

1. Revision of the surcharge system

Bound by the idea that the purpose of the surcharge system is the divestiture of illegal profit, surcharges are rigidly applied and do not take into account the level of seriousness or maliciousness of each specific case. The Antimonopoly Act has been amended on numerous occasions without a clear understanding of the differences between surcharges and criminal penalties. As a result, surcharges represent an anomaly in Japan's legislative system and cannot properly inhibit trade-restricting activities. Any attempt to amend the Antimonopoly Act should first clarify that surcharges are levied as an administrative sanction. The next step would be to ensure that all related systems conform to this principle of administrative sanction.

In other words, surcharges levied as sanctions should be commensurate with the level of seriousness and maliciousness of the illegal conduct. The surcharge base amount should be calculated using a fixed percentage of the amount of sales revenue earned during the time goods or services were supplied illegally (a maximum of three years, dating back to the end of such illegality), and this base amount should then be increased or decreased according to the level of seriousness and maliciousness of the specific case. (Even the present rate of 6% often results in a surcharge that exceeds the amount of illegal profit-in other words, in such cases, the surcharges serve as sanctions, exceeding the amount required to divest the entrepreneur of any illegal profit.) The base surcharge amount should be one sixth in the case of a wholesale business, one third in the case of a retail business (one sixth for small and medium-sized enterprises), and one half in the case of small and medium-sized enterprises engaged in other types of industry.

To ensure that surcharge calculations are as independent as possible from arbitrary FTC decisions, transparent criteria taking into account factors such as the following should be established to increase or decrease the ratio used to calculate the surcharge.

  1. Factors that would increase the surcharge ratio (for example, 40% for a repeat offence, 20% for cases where the offense results in considerable economic gain, and 10% for other cases; a total maximum of 100%)
    1. Serious cases
      • cases where the offense results in considerable economic gain (conditional upon the FTC proving that the economic gain greatly exceeded the surcharge base amount)
      • cases where the illegal conduct continues over an extended period (more than three years)
    2. Malicious cases
      • cases where a repeat offence is committed
      • cases where a leadership role is taken in the illegal conduct
      • cases where the investigation is impeded
      • cases where compliance measures are not taken, or where the measures taken are negligible

  2. Factors that would decrease the surcharge ratio (for example, 20% for cases where economic gain is not considerable, another 20% for when the entrepreneur cooperates with the investigation, and 10% for other cases; a total maximum of 70%)
    1. Lack of seriousness
      • cases where the offense does not result in considerable economic gain (conditional upon the entrepreneur proving that the economic gain was far less than the surcharge base amount)
    2. Lack of maliciousness
      • cases where a leadership role is not taken in the illegal conduct
      • cases where full cooperation is given to the investigation
      • cases where compliance measures are taken, and where the measures taken are considerable
      • cases where the illegal conduct is halted within a relatively short period of time

Under the current system, surcharges are levied against quantity and price-setting cartels. Cases subject to surcharges should only be extended to include cartels that basically inflate prices by limiting market share and/or client base. Conduct subject to a surcharge should be clearly and fully defined through rules and guidelines.

The FTC has stated that it hopes to extend the list of cases subject to surcharges to include not only the abovementioned types of cartels but also: (a) cartels whose control over other companies permits them to develop a private monopolization that basically controls prices, the amount of goods and services supplied, market share, and client base; and (b) procurement market cartels. However, such activities have rarely been labeled illegal, and there have been very few serious studies as to whether they should be restricted through sanctions in the form of surcharges. Extending the list of cases subject to surcharges without proving a need to do so, without indicating the basis for doing so, and without clearly identifying the types of conduct to be outlawed would simply cause confusion in the marketplace.

Especially in the case of procurement market cartels, it is impossible to correctly estimate the amount of extra sales revenue, and this makes it impossible to determine the amount of a possible surcharge. Moreover, cooperative buying is a common business practice for many companies. Corporate activities would be needlessly reduced in scope if such a practice were restricted without just cause and without clearly defining at which level of monopolization the practice would be illegal.

2. Elimination of dual punishment for corporations

Two ways to inhibit corporate illegal conduct are criminal penalties and administrative sanctions. In Japan, a thorough study into criminal penalties for companies is needed to ensure that such penalties function effectively as sanctions. It is clear that the most suitable sanctions that can be applied against a corporation are surcharges, and that criminal penalties should be applied only against individuals who commit illegal acts. This approach would conform to that taken by antimonopoly laws in other countries.

Until a consensus is achieved on a corporate penalty system that would form part of Japan's overall legislative system, if surcharges and criminal penalties are both allowed to remain as corporate sanctions, only one of them should be imposed for a single infraction-in other words, a surcharge and a fine should not both be imposed for the same illegal action.

It has been pointed out that, under the current system, the amount of a fine sometimes ends up being less than the amount of a surcharge. One way to deal with this issue would be to examine the possibility of changing the fine to bring it to the same level as the surcharge would have been. If this approach is not taken, discussion should focus instead on adding a provision to the Antimonopoly Act itself, to the effect that illegal economic gains could be forfeited as stipulated in criminal law and other legislation, or paid to the National Treasury.

3. Introduction of leniency program

It must not be forgotten that in Western countries sanctions are applied in a flexible manner because it is understood that leniency (a system under which sanctions are reduced or waived) can prevent or expose some antimonopoly legislation violations.

Japan should introduce such an exemption and reduction system, with the understanding that an entrepreneur's compliance-for example, cooperation with an investigation or establishment of a corporate compliance system to prevent violations of the Antimonopoly Act-could be taken into consideration when determining the surcharge amount. This exemption or reduction system is an essential element in a system permitting flexible determination of a surcharge amount.

To ensure that the exemption or reduction system functions effectively, it should be clearly stated in law that legal authorities would be obliged to issue a disposition stating they would not prosecute a corporation that is able to avail itself of the system, and the system of suspension of eligibility to bid on public works contracts should be modified to conform with the exemption or reduction system. The FTC has stated that it would not ask for the criminal prosecution of the first entrepreneur to report a violation of the act, but in the current situation, where both surcharges and criminal penalties can be applied as sanctions against an entrepreneur, one cannot eliminate the possibility of a reporter being prosecuted. This is because, in Japan, the principle is that if one violator is charged, all accomplices must also be charged. Therefore, to ensure that the exemption or reduction system functions effectively, sanctions against an entrepreneur should be only in the form of a surcharge.

If surcharge amounts are determined flexibly, and if only surcharges are imposed as a punitive sanction, the following type of system could be effective, assuming that the sanction system is changed to encompass surcharge reduction or waiving.

If, before an investigation is launched, an entrepreneur gives the FTC substantial evidence indicating knowledge of the existence of a violation, the surcharge could be waived or reduced as indicated below, provided that said entrepreneur had established a compliance system that discovered the violation and was used to gather evidence of said violation.

  1. Treatment of the first reporter: surcharge waived (except in cases where the FTC already knew about the violation and had evidence of it)
  2. Treatment of the second reporter: surcharge reduced by 50%
  3. Treatment of the third and subsequent reporters: surcharge reduced by 30%

If the violators come forward as a same time, this system should still be applied, since it would inhibit violations and assist in investigations. The amount by which the surcharge is reduced could be distributed proportionally among simultaneous reporters.

To ensure flexible determination of the surcharge amount and introduction of a leniency program, the investigative division of the FTC would have to thoroughly evaluate the extent to which each entrepreneur cooperated with the investigation. The results of this evaluation would be taken into account when determining the amount of the surcharge. Investigators need a high level of expertise because of the risk that companies could fabricate the "facts" they report or invent falsehoods that place them in a good light.It is essential that systemic safeguards be established so that information reported by entrepreneurs to determine whether a specific case warrants reducing or waiving a surcharge, is not used in an FTC investigation.

Therefore, the FTC division in charge of evaluating the extent of corporate cooperation in an investigation should be separated from and made independent of the FTC's regular investigation division. To accomplish this, the government should introduce legislation providing for the appointment of experienced public prosecutors, who will work as investigators attached to the independent division. In addition, a number of experienced people with judicial qualifications should be hired to work in FTC divisions with the responsibility to discover criminal activity and conduct investigations. At a minimum, the FTC should be obliged to take steps to hire such experts.

4. Delineation of authority to conduct criminal investigations

If investigations into criminal activity were conducted by staff members with judicial qualifications, this would help ensure that court decisions are based on appropriate procedures. Even so, it would have to be made clear that the authority exercised in the types of administrative investigations currently conducted would be different from that exercised in a criminal investigation. At the present time, the authority exercised by FTC investigators is an administrative authority that has only indirect compulsory power, and the investigation is supposed to proceed only upon the agreement of the person under investigation. However, in many cases there is a mistaken impression that an investigation and confiscation of documents are based on a court warrant. In other words, those being investigated may misunderstand the limits of authority of investigators, and thus investigators should clearly explain these limits. In addition, the FTC should clearly define within its organization the distinction between procedures applied in an administrative investigation and those applied in a criminal investigation.

Furthermore, the conventional type of administrative investigation, which could result in an administrative sanction in the form of a surcharge, but which does not involve the exercise of authority typically used in a criminal investigation, should of course collect evidence only through appropriate procedures, as is done during a criminal investigation. The rules should clearly state that a person under investigation must be informed that an administrative investigation with the indirect compulsory power to impose a penalty can proceed only upon that person's agreement, and should ensure that the investigation is handled properly in other ways as well.

5. Revision of FTC hearing proceedings and the warning system

(a) FTC hearing proceedings

Because a surcharge is levied as an administrative sanction, FTC hearing procedures must of course ensure due process, just as procedures in a criminal case must do the same.

Under current FTC hearing procedures though, hearing examiners act as court judges and investigators act as prosecutors. Examiners and investigators are attached to the FTC General Secretariat, and FTC commissioners have the authority to make final decisions. Commissioners are involved in the case before the hearing begins and see the evidence collected by investigators before they conduct the hearing. They are therefore in a position to have already formed an opinion. This arrangement gives the hearing procedures an inquisitorial tone and places the entrepreneur under examination at a serious disadvantage. This inquisitorial nature of hearings should be eliminated, the person being examined and the investigators should be placed on an equal footing, and the examinee should be able to hear the testimony of his/her accusers and be allowed the chance to refute it.

In more concrete terms: the status of hearing examiners should be guaranteed; hearing examiners should be presented with evidence of findings only in the hearing chambers and should form an independent opinion only during the hearing; the role of commissioners should be restricted to interpreting the law; and decisions rendered by the hearing examiner should be respected by the FTC.

Most of the hearing examiners and more than half of the panel members should be experienced judges. In addition, to ensure the transparency of the hearing system, it is imperative that commissioners do not try to influence hearing examiners behind the scenes, that commissioners have no access to the hearing, and that if opinions on decisions being prepared are expressed, the public should be permitted to hear them. Furthermore, those appointed as FTC commissioners should have judicial qualifications-for example, experience as a court judge-or have a deep knowledge of business circumstances.

(b) Warning system

Under current practice, a warning, caution, or discontinuance is given as a disciplinary measure when a case is not serious enough to warrant the FTC issuing a recommendation or deciding to launch hearing proceedings. The gist of a warning is made public each time one is issued, giving information on those involved and the facts of the suspected crime. This causes entrepreneurs to lose public trust and damages their reputation, placing them at a serious disadvantage-this in itself is equivalent to a sanction. The FTC has the discretionary power to issue a warning even when a case is relatively insignificant or when there is not enough evidence to prove a violation or make it easy to obtain a legal decision. On the other hand, the entrepreneur receiving the warning is not given the opportunity to refute the facts. This shows the unfairness of the warning system. If entrepreneurs insist that they are not in violation of the Antimonopoly Act, and if the FTC does not have sufficient evidence to proceed to a hearing, a warning should not be made public without their consent.

6. Strengthening the organization of the FTC General Secretariat

The conclusion of the report issued by the Liberal Democratic Party Research Commission on the Antimonopoly Laws, issued May 14, 2004, correctly stated that if the government is to implement competition policies that truly contribute to Japan's international competitiveness, antimonopoly ordinances must be enforced effectively and procedures must be followed properly. To achieve these aims, the organization of the FTC General Secretariat should be strengthened.

It should be noted that more than half of the staff working at the U.S. Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice are lawyers or economists. In consideration of this fact, Japan's Fair Trade Commission should make a point of hiring experienced people who have either judicial qualifications or a rich academic background in relevant fields. In addition, the FTC's policy-drafting capacity should be strengthened and the Antimonopoly Act should be enforced in an effective, proper manner to give the Japanese people greater confidence in the competitive system.

7. Dealing with bid rigging

  1. More than half of all Antimonopoly Act violations that result in the imposition of a surcharge involve collusion in bidding for public contracts issued by regional offices of the national government or by local governments. Many of the entrepreneurs found to have violated provisions of the act are medium, small, or very small enterprises. In light of these facts, any attempt to eliminate violations of the act must include a revision of the disciplinary measures embodied in the act, together with improvements in the public procurement system.

  2. An FTC study group on public procurement and competition policy proposed in November 2003 that the public procurement system be reformed. The group's report identified problems with the current public procurement system and recommended that the bidding system should be modified so that not only price but also technical ability and quality are considered. The report also stressed the need for all local public organizations to coordinate their suspension of designation for eligibility to bid on public works contracts. Nippon Keidanren agrees with the thrust of these recommendations and believes that the FTC should play an active and, indeed, pivotal role in ensuring that all relevant ministries and government agencies put these recommendations into practice.

    One problem that must be thoroughly discussed in the future is upper restrictions on anticipated prices, which are embodied as principles of existing Public Accounting Law ordinances. This issue should be resolved at the same time amendments are made to the Antimonopoly Act.

  3. To deal with cases of collusion where government officials divulge confidential information to bidders, the Act Concerning Elimination and Prevention of Involvement in Bid Rigging includes provisions for the FTC to ask that the heads of national ministries, national agencies, and local government organizations implement corrective measures and conduct the required investigations, after which: (i) the abovementioned offices are expected to eliminate the practice of bid rigging and implement the required countermeasures to ensure that it has been eliminated; (ii) if the above mentioned offices have suffered a financial loss, heads of them shall demand that the civil servant responsible pay compensation; and (iii) the heads of the abovementioned relevant entity shall perform an investigation if it is possible to impose disciplinary actions upon the civil servants involved in said bid rigging etc. However, there is still no system under which a government official calling for bids for a public works project can be punished if he/she tried unsuccessfully to persuade a supplier to collude in the bidding process.

    A new provision was added to section 3, article 497 of the Commercial Code stipulating that it is a crime to ask for profit through collusion. In light of the fact that instances of this type of crime have plummeted because of the new stipulation, a new provision should be added to the Act Concerning Elimination and Prevention of Involvement in bid-rigging, providing for the direct imposition of criminal penalties for any employee of an entity calling for bids who instigates or suggests a bid-rigging scheme or some other nefarious trade-limiting practice. (Nippon Keidanren has made this recommendation on numerous occasions.)

  4. The conclusion of the report issued by the Liberal Democratic Research Commission on the Antimonopoly Act correctly states that entrepreneurs who obtain orders through dumping are likely to cut corners on construction sites and pay subcontractors minimal compensation. Simultaneous improvements should be made in both the bidding and contracting systems to promote healthy competition that takes into account not only price but also technical ability and work quality.

  5. Dumping and taking undue advantage of one's high position are commonly designated as unfair trade practices. However, there are no clear-cut, detailed standards that can be used to determine whether a specific instance of dumping is wrongful or not, and this can cause confusion in the marketplace. A special designation should therefore be made to establish an effective, clear-cut standard.

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