The Promotion of Foreign Direct Investment
and Imports to Japan

June 12, 1995

the Committee of Foreign-Affiliated Corporations

I. Introduction

  1. Efforts Taken by Keidanren
  2. In 1992 Keidanren's Committee on International Industrial Cooperation and this Committee of Foreign-Affiliated Corporations jointly established the Ad-hoc Committee on Foreign Direct Investment in Japan after which Keidanren proposed import- and FDI-promotion measures. The following year Keidanren set up another Sub-Committee to study ways to improve the business climate for foreign-affiliated corporations (hereafter referred to as foreign companies). This Sub-Committee carefully examined the issues as well as conducted a follow-up survey to monitor actions taken in response to the opinion paper presented in 1992.

    Their findings indicated that, first, improvements in the business climate for foreign companies benefit both Japanese and foreign capital alike, encouraging new entrants to the Japanese market. And second, the promotion of foreign investment in Japan is of vital importance to reactivate Japan's economy and to create more business opportunities. The 23 proposals contained in our opinion paper, titled "Improvement of the Business Environment of Foreign-Affiliated Companies and Reform of the Japanese Economy" issued in December 1993, are concrete means to help realize those findings.

  3. Japanese Government Efforts
  4. After calling on people in Japan and abroad to submit proposals, the Government made a number of announcements on deregulation. Major statements were the "Administrative Reform Charter" (September 1993), the "Outline of External Economic Reform Measures" (March 1994), the "Policy for Promotion of Deregulation Hereafter" (June 1994), and the "Deregulation Action Plan" (March 1995). In April 1995 the Government also announced its "Emergency Economic Measures To Cope with Yen Appreciation," at the heart of which are policy measures aimed at increasing public investment and front-loading the Deregulation Action Plan (the Plan had previously been scheduled over a five-year period). Prior to this, in November 1994 the Government established the Japan Investment Council with the Prime Minister as Chairman. The Council's purpose is to consider ways to promote foreign direct investment into Japan, taking into account opinions expressed by a number of trade-promotion institutions in Japan and abroad, including the American Chamber of Commerce in Japan and the European Business Community (EBC). These efforts represent a significant push to expand foreign investment in Japan and to raise import levels.

    Deregulatory measures announced by the Japanese Government are praiseworthy in a number of respects, and address many times that Keidanren itself stated needed improvement. For instance, the Government has already announced measures to reform its procurement system (by clearly delineating bidding procedures, introducing a comprehensive procedure to evaluate tenders, etc.), and relaxing regulations governing gift premiums. Such initiatives are expected to encourage the operations of foreign companies and help them enter the Japanese market. However, the policies do not yet go far enough -- a number of items and measures have still not received mention, and much work remains to be done in promoting foreign direct investment in Japan.

  5. Foreign Companies
  6. Foreign companies have a role to play in Japan as well, increasing competition and raising the nation's standard of living. They do this by offering new technologies, products and service, and by acting as good corporate citizens.

    Keidanren would like to take this opportunity to reaffirm that it welcomes direct investment in Japan from abroad, since investment helps internationalize the Japanese economy and promote structural reform. In this opinion paper the Committee of Foreign-Affiliated Corporations calls for further measures following up on proposals we made in our December 1993 report, "Improvement of the Business Environment of Foreign-Affiliated Companies and Reform of the Japanese Economy." Many of these proposals have not yet been adequately addressed by the Government. This paper also highlights matters that require priority attention, ones that will promote new foreign direct investment in Japan and raise the level of imports to Japan.

II. Priority Issues

  1. Extensive Reform of the Foreign Access Zone System
  2. The July 1992 Law on Extraordinary Measures for the Promotion of Imports and Facilitation of Inward Investment (the Inward Investment Law) permits the establishment of Foreign Access Zones (FAZ) in Japan. As things now stand, though, the FAZ system provides only for the establishment of import-related facilities. Comprehensive incentives for import and investment companies are needed since the intent of the Law is to promote imports and foreign direct investment in Japan.

    1. Relaxation of requirements for designation of integrated bonded areas

      Foreign Access Zones use an integrated bonded area system, which loosely corresponds to Free Trade Zones (FTZ) in the United States. However, to be designated an integrated bonded area a number of conditions must be met: [i] in each case the land and facilities must be contained in one area, and [ii] facilities must be used for processing, exhibiting and storage. Because of this narrow definition only one integrated bonded area thus far has been permitted -- the Asia and Pacific Trade Center (ATC) in Osaka. To put the integrated bonded area system to better use, requirements should be relaxed and further incentives should be given to importers and foreign companies wishing to invest.

    2. Elimination of current land use classification

      The City Planning Law requires that land used for business purposes be classified either commercial or industrial which sometimes prevents businesses from processing and exhibiting goods in the same facility. Companies in a Foreign Access Zones experience the same problem. Exempting FAZs from these land-classification system would make integrated bonded areas more accessible and would raise the efficiency of facilities located there.

  3. Taxation
  4. To promote foreign direct investment, Japan's high cost structure must be rectified. The tax burden is higher in Japan than in many other countries, and should be lowered. A cut in the corporate tax rate is of primary importance along with concurrently introducing a consolidated tax return system. In addition, Japan should sign tax treaties with foreign countries in line with provisions of the OECD Model Convention on Taxation. The withholding tax on dividends sent from foreign subsidiaries in Japan to their head offices abroad should be lowered to 5%, and the withholding tax on interest and royalties should be eliminated. Revising of the tax system should aim to harmonize it with international norms, and to eliminate stamp duties and the securities exchange tax. Substantial measures reducing the tax burden will encourage foreign entrants and facilitate their operations here.

  5. Treaties Covering Portable Pensions
  6. The double payment of premiums for public pension plans could be prevented by treaty agreements on pension payments. This would be a boon for both foreign companies in Japan and Japanese companies located abroad. However, no such agreement has yet been signed. The Japanese Government should quickly reach portable pension agreements with major countries.

  7. Lifting the Ban Against Holding Companies
  8. In its Deregulation Action Plan, the Government specifies a 3-year period during which it will consider lifting the ban against holding companies. This ban should certainly be lifted -- doing so is in keeping with the legislation of other countries, would facilitate corporate restructuring, and would encourage foreign companies to invest in Japan. In another area, a consolidated tax return system is greatly needed.

  9. Unifying Registration Procedures for Businesses Participating in Government Procurement Plans
  10. The "Outline of External Economic Reform Measures," announced in March, 1994, was one of several official statements setting forth plans to reform the Japanese Government's procurement system. However, none of these statements mentioned reform of procedures requiring that businesses register at a number of different ministries and agencies. We call on the Government to create a "one-stop shop" system, unifying its registration procedures for businesses participating in government procurement plans.

  11. Liberalization of the Private Employment Agency Sector, Permitting Paid Services
  12. Foreign companies investing in Japan find it difficult to attract suitable personnel. As long as Japan's labor market lacks fluidity, this situation will continue. The Government should make it possible, through the creation of suitable conditions (e.g., the granting of permits), for the private sector to run employment agencies; this could help resolve Japan's employment problems and also secure personnel for foreign companies.

  13. Relaxation of Regulations Controlling the Liquidity of Lease and Credit Loans
  14. Provisions of the Jurisdiction of the Business Asset Securitization Law regulate lease and credit loans. The Deregulation Action Plan specifies that, after required measures are drawn up during FY1995, a system providing for asset-backed securities to act as collateral for lease and credit loans will be introduced. We urge swift implementation of this measure, including drawing up of the required legislation, as a means to facilitate easy and effective access to capital.

III. Continuing Concerns

The following is an evaluation of the current situation with respect to items proposed by this Committee in its 21 December 1993 paper, "Improvement of the Business Environment of Foreign-Affiliated Companies and Reform of the Japanese Economy."

  1. Reform of the Government Procurement System
  2. Critics assert that often information on Japanese Government procurement projects does not reach foreign companies. Keidanren has already made a number of proposals in this regard, including: [i] establishment of a channel that conveys information on government procurement projects; [ii] simplification of business registration procedures for procurement projects; and [iii] a comprehensive method to evaluate tenders.

    The Government's "Outline of External Economic Reform Measures," issued on 28 March 1994, announced the establishment of an action program for government procurement, and clearly delineated rules guiding the official announcement of information on procurement projects and governing bidding procedures. Moreover, as a way to help companies obtain information on government procurement projects, a database at the Japan External Trade Organization (JETRO) will be established within some years. Also, Ministry of Foreign Affairs conducts a number of public relations activities, meetings, etc. to enable a greater flow of information.

    In particular, comprehensive tender evaluation procedures have been adopted for government procurement in the computer, telecommunications and medical technology sectors. Studies are underway to draw up evaluation guidelines, so that comprehensive evaluation systems can be rapidly adopted for other sectors as well.

    Yet problems still exist even in sectors where a comprehensive evaluation system is in place. If the anticipated price to be quoted by a bidder is known to be very low, price could become the only determining factor. Also, when evaluating each item, points are allotted; point values are based on degree of necessity, importance, etc., but there are cases where information on point distribution is kept from bidders before they submit their tenders. This has resulted in cases where comprehensive evaluation of a bid does not, for all intents and purposes, occur. Additionally, the Government has not drawn up measures to introduce a "one-stop shop" system that unifies registration procedures for government procurement projects. We request that these problems be addressed.

  3. Administrative Procedures -- Making Them More Transparent and Simpler
  4. Promulgation of the Administrative Procedures Law was meant to ensure greater transparency of government procedures, but some areas remain opaque. To correct this, Keidanren proposed: [i] an amendment to laws whose intent is to promote foreign direct investment in Japan, and improved application of these laws; [ii] a loosening of requirements for the establishment of employee pension funds; [iii] greater transparency in the administration of permits for financial products; and [iv] greater transparency for government-subsidized projects.

    Revision of the Foreign Exchange and Foreign Trade Control Law in 1992 amended regulations governing foreign direct investment in Japan. The amendment eliminates the requirement that notification be made prior to investing and it permits post facto notification in all areas except industrial sectors which Japan, under the OECD Code on Liberalization of Capital Movements, reserves for stricter treatment (i.e., agricultural, forestry and marine industries, the petroleum industry, hides and leather products, mining, air transport, marine transport, and investment trusts), and sectors in which there are safety concerns. The Deregulation Action Plan calls for a study to determine whether in light of opinions voiced regarding OECD multilateral agreements, the number of industrial sectors required to submit prior notification can be reduced. We suggest that this matter be dealt with promptly.

    Amendments to the Insurance Business Law will change the licensing system for insurance products. The most significant change is a notification system allowing companies to introduce a part of insurance products to the market. However, the Government should adopt a notification system for other financial products as well. Certification requirements and time periods should be clarified.

    We also suggest that the Government quickly relax requirements for the establishment of employee pension funds, and that it improve procedures relating to subsidized projects.

  5. A Stronger Office of Trade and Investment Ombudsman
  6. The purpose of the Office of Trade and Investment Ombudsman (OTO) is to handle specific complaints of foreign businesses problems when importing to or investing in Japan. A February 1994 Cabinet decision gave greater stature to the OTO and strengthened its functions by making the Prime Minister its Head. In its "Outline on OTO Management," the Government clearly defined procedures for handling complaints, the time period during which the complainant must be notified, and OTO basic policy on the handling of complaints. Despite the "Outline on OTO Management," however, complaints are still not being processed according to procedures. The OTO still cannot handle complaints effectively, hence has limited power in conducting a fundamental overhaul of systems affecting import and investment business. Opinions of experts on the private sector (including foreigners) voiced in meeting are often not reflected in OTO's complaint-handling process. Discussions held by the Market Access Ombudsman Council and the Expert Meetings should be made public. Moreover, the government, in keeping with its policy spelled out in the "Outline on OTO Management," should strengthen the OTO's authority and its ability to actually solve problems.

  7. Revision of the Act Against Unjustifiable Premiums and Misleading Representations
  8. The Study Group on Revising and Clarifying the Premium System presented its report on 28 March 1995. Based on recommendations in this report, the Fair Trade Commission has announced its intention to revise, during FY1995, regulations governing premiums (i.e., gifts or prizes). Proposals in the Commission's report are numerous: eliminating the obligation of the Commission and businesses to make announcements when department stores offer premiums to consumers raising the ceiling on values for prizes offered in open competitions, for other prizes, and for premiums not offered as prizes; and providing a clear description of regulations, particularly those governing premium value ceilings. The Commission's report thus proposes to revise and clarify regulations controlling premiums, and as such represents a positive first step in the reform of the premiums system. We urge the swift implementation of these measures as well as further steps in the future to ensure that other changes are also made to the premiums system, to bring it up to date with the present needs of consumers and businesses.

  9. Agreements on Portable Pension Plans
  10. Because Japan has not yet concluded portable pension agreements with foreign countries, companies doing business in Japan and in another country are often obliged to make double payments into public pension schemes. The Government should quickly work with other major countries to conclude such agreements with Japan.

  11. Deregulation of Rules Set Out in the Electrical Appliances and Material Control Law
  12. The Deregulation Action Program clearly specifies that 117 electrical appliance items classified as Category A material items (thereby requiring government certification) will be reclassified as Category B material items (thus permitting self-certification). The Program also delineates that formal classifications will be revised, taking into account technological advances, and that Japan's safety standards will be brought into conformity with IEC's (International Electrotechnical Commission) standards by 1999. We call on the Government to implement these measures without delay, and to work for the reciprocal recognition of Japanese standards and American UL standards.

  13. Lifting the Ban Against Holding Companies
  14. Due to the need to open Japan's markets further and to stimulate business activity, the Deregulation Action Plan indicates a decision will reach within three years on regulations that prohibit holding companies. However, the Plan does not clearly state that such regulations should be abolished. We strongly urge that the Government lift its ban against holding companies, introduce a consolidated tax return system, and establish other systems related to this issue.

  15. Revision of the Criteria for Issuing Corporate Bonds and Commercial Paper
  16. The Deregulation Action Plan proposes fundamental revision, possibly abolition, of financial criteria regulating corporate bonds, and establishes a program for the current fiscal year aimed at deregulating criteria-related items. To this end, the Government's interim report on the Deregulation Action Plan states the following: first, due to legal implications, much careful study is needed before changing regulations governing the issuing of commercial paper; second, during this fiscal year the Government will clearly articulate what limitations apply to the use of funds raised by non-banks issuing corporate bonds and commercial paper; and third, the Government will lengthen time limitations and implement other related measures. Keidanren intends to look closely and make further suggestions on the Government's deregulation measures when they are announced.

  17. Reform of the Insurance Market
  18. In March 1992, the Insurance Business Law was amended in response to the findings of the Insurance Council, published in "The New Course of Insurance Business." We urge the Government to rapidly implement the amendments.

  19. Deregulation of the Telecommunications Sector
  20. The requirement of a permit for commercial agreements expanding international value added network (VAN) services to a country is no longer necessary as of July 1994. Other deregulatory measures are as follows: in May 1995, basic voice service carried over international VAN services without a public network connection will be permitted; and, in 1997, comprehensive connections, to public network as well, will be allowed. In April 1995, voice communications were liberalized through the connection of a public line to one side of a leased line. In 1997, public-leased-public connections will also be liberalized. We urge that measures not yet implemented be enacted without delay.

  21. Foreign Lawyers
  22. The Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers was amended in 1994, permitting: [i] partnerships between Japanese and foreign lawyers; [ii] employment of Japanese lawyers by these partnerships; [iii] relaxation of professional experience requirements; and [iv] the use of the law firm's name as used in the home country. As an issue still outstanding, the freedom to represent a party in an international business arbitration case will be studied. A decision is expected in October 1995.

  23. Trade Associations
  24. To prevent violations of the Anti-Monopoly Act by trade associations, on 3 April 1995 the Government announced a draft of its "Anti-Monopoly Act Guidance Concerning the Activities of Trade Associations." These guidelines clearly specify which types of acts, taken by a trade association to restrict a competitor's entry into the market, constitute activity regarded as criminal, possibly criminal, or not criminal. The Government intends to study the matter further, taking into account opinions in Japan and abroad. It will announce its final guidelines during FY1995. We look forward to progress in this regard.

  25. Taxation
  26. An important way to promote foreign direct investment in Japan is to cut taxes, particularly corporate taxes (which are higher than those of many other countries). More tax incentives are also needed. Keidanren has already called for the following tax measures: [i] reduction of the corporate tax rate; [ii] introduction of a consolidated tax return system; [iii] use of special tax measures; [iv] tax deductions for foreign companies' investments; [v] extension, to ten years, of the loss carry-over period for new investments; and [vi] the conclusion of tax agreements which lower the withholding tax rate on dividends sent to a parent company overseas. The Government has, already, extended to ten years the period permitted for loss carry-over, but other measures are still needed to reduce the overall tax burden.

  27. Raising of Capital
  28. To provide foreign companies greater access to capital, the ceiling on low-interest loans provided by the Japan Development Bank was raised to 50%. Financing conditions (e.g., loan amounts, loan ratios, the preferred interest rate system, and qualification for financing) should be made more attractive, and institutions offering these upgraded services should include the Export-Import Bank of Japan and the Hokkaido-Tohoku Development Finance Corporation.

  29. Others
  30. The following is a list of items that have not received sufficient attention from the Government. We ask they be dealt with as soon as possible.

    1. Softening of requirements for construction business licenses

      If a company wishes to undertake a construction project valued at 9 million yen or more, the Construction Business Law requires that it obtain a general construction business license. But to obtain the license, the Law specifies that "companies employ a person with at least five years of management experience in the construction business" as a full-time director. For this reason, entrants to the construction industry must often obtain the services of a director from existing construction companies. This requirement should be dropped, to promote the entry of both Japanese and foreign companies and to stimulate competition.

    2. Revision of regulations governing depreciation periods

      A Ministry of Finance ordinance specifies a uniform period of six years for the depreciation of electronic computer equipment. This period is too long, especially considering the fact that personal computers, workstations and other electronic equipment are subject to technical innovations over a very short time. To encourage use of the latest technology and to raise business efficiency, personal computers, workstations and other electronic equipment should depreciate over two to three years. To the same end, we suggest that the Government review all asset depreciation periods.

    3. Relaxation of regulations governing the management of qualified pension assets

      Only trust banks, life insurance companies and the Federation of Agricultural Cooperative Associations are presently authorized to manage qualified pension assets. The distribution of assets is also regulated. These obstacles make it impossible for other businesses to enter this market. A more flexible system of pension asset management would be achieved by relaxing limitations on asset-management institutions and loosening regulations on asset distribution.

    4. Reduction of the special corporate tax for qualified pension assets

      A special corporate tax rate of 1.173% is applied to qualified pension assets. This rate is unfair, as shown when compared with the rate applied to employee pension funds. Qualified pension assets should be taxed at a lower rate, treating them the same as employee pension funds. This measure is in keeping with the needs of Japan's aging society, and would improve employee welfare.

    5. Ownership of R&D results obtained through government consignment or subsidy

      In almost all cases the Japanese Government owns the rights to results findings obtained through research the Government has consigned to a company. Before the company commissioned to do the research can use the fruit of its research, or permit a third party to do so, it must first obtain government consent as well as pay for such rights. To provide ample incentives to companies involved in research, and to bring Japan's practices into conformity with those of other nations, [i] research results should belong to (or at least be shared by) the contracting company, and [ii] the contracting company should be given the rights, gratis, to use or permit another to use, the patent.

      Furthermore, when a research and development contract is drawn up, it should clearly specify what information is to be kept confidential, and for how long. The contracting company should not be forced to accept extraordinarily restrictive confidentiality obligations.

    6. Rationalizing and streamlining statistical reports and surveys

      Similar and overlapping statistical surveys are performed independently by a number of ministries, agencies and regional governments, creating a ponderous clerical burden on respondent companies. Government entities should, as much as possible, conduct their studies jointly, and share the resulting statistical data.

tentative translation(or. Japanese)
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