EU Demands for Regulatory Reform in Japan

John de Boer (University of Tokyo & GLOCOM Platform)

On 17 October, the European Commission issued a 50-page report detailing its demands for regulatory reforms in Japan. The report was divided into three main sections which were as follows: (1) Creating a friendly and open environment for foreign direct investment; (2) Revitalizing Japan's economy; and (3) Reducing the burden of regulations for companies. The report was both extensive and critical of current Japanese practices, the majority of which were characterized as contrary to international standards. The report was launched through the EU-Japan Regulatory Reform Dialogue process and was submitted as a recommendation for the Council for Regulatory Reform as it prepares for revisions in March 2003.

In this report, the EC insisted on the need for Japan to implement systematic regulatory reform measures that addressed the structural obstacles, which from the EU's perspective, inhibited business activity, entrepreneurial initiatives and fair competition. The report presented its recommendations as vital to economic recovery in Japan stating that, "measures to improve the economy cannot be implemented successfully without tackling structural problems in the economy. There is a need to revitalize the business environment and to do so in a comprehensive and systematic way". While applauding the recently announced intention of the government of Japan to tackle the non-performing loans issue in the banking sector, the EC urged that the Koizumi administration and the relevant ministries follow through with their declared intent.

Citing the fact that 71 percent of big EU companies mentioned the lack of transparency in legislation and regulation as the "most frequent hindrance to investment" in Japan, the EC requested that Japan increase the transparency, accountability, predictability and independence of regulators. It criticized the Council of Regulatory Reform for not having a comprehensive and consistent philosophy or model for reform and urged Japan to implement "hard core reforms" that in particular benefited entrepreneurs, company start-ups and investment.

The problem with Japan, according to the Report, was that it makes commitments to implement reforms but rarely follows up on those commitments. The exact words used in the Report were, "implementation remains of considerable concern to the EU. There is a need for a commitment by government ministries and other bodies concerned to implement [reforms] fully and energetically".

The EC also called for a level playing field for market entrants who were struggling as a result of Japan's failure to enforce competition policy. It stressed the need to lower the high-cost threshold for a foreign investor entering Japan by easing the regulatory process, improving coordination between national and local bodies responsible for investment promotion and removing restrictions on M&A methods used by foreign companies, notably tax-neutral share-for-share exchanges (common practice in other major economies).

The inability of foreign firms to access high-quality legal advice on multi-jurisdictional questions was also cited as an obstacle. The fact that foreign and Japanese lawyers are still prohibited from practicing together in a single integrated law firm in Japan, prevented foreign firms from gaining high-quality and cost effective legal advice. The EC criticized Japan for this stating that it was "out of step with practice in the majority of the industrialized countries".

Another sector mentioned was that of recruitment. The Report urged the government to lift restrictions preventing haken gaishas (recruitment firms) from dealing with workers in construction, port transport, medical services, securities and manufacturing. In addition to this the EC demanded increased access to public works projects. Citing the fact that only 2 foreign firms, and no EU companies, were awarded contracts in 1999 out of a total of 580 public works contracts worth 7.8 billion Euros, the Report stressed the need to simplify the qualification system for public works bidding.

Freedom and equality of access to information was also mentioned as a debilitating obstacle for EU companies. The Report criticized the Kisha Club system and called for its removal, demanding that journalists accredited by the Ministry of Foreign Affairs be able to attend all media events held by Japan's official bodies.

In conclusion, the EU requested that Japan "move more decisively" in promoting international standards. In doing so it claimed that the Japanese economy would be revitalized and its consumers would be able to gain access to high quality goods at competitive prices. The report represented scathing criticism of Japan's lack of action aimed at opening up its economy and reflected a sense of irritation experienced by foreign firms desirous of entering and/or expanding its business in Japan.

As the Japanese government continues to struggle to find consensus on how to fix its ailing economy, foreign pressure is starting to mount. Also, increased delay in the release of Minister Takenaka's proposals is heightening the sense of frustration overseas. The Koizumi administration is likely experiencing one of its most difficult periods as it continues to fail in its attempts to gather support for Takenaka's reforms and is simultaneously pressured both internally and from the outside. This EC report reflects Europe's view as to how reforms should be implemented, however, considering the far reaching impacts of its recommendations, the EU may have to wait a while before its demands are met.

Article:

• European Commission, "EU Priority Proposals for Regulatory Reform in Japan", 17 October 2002.