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Trade Compliance Center

JAPAN JOINT REPORT ON INVESTMENT

Report of the Working Group on Investment and Buyer-Supplier

Relationships Under the Framework for a New Economic Partnership

Report to the Prime Minister of Japan and President of the United States On the Environment for Foreign Investment in Japan and the United States

May 2, 1999

Dear Sirs:

The Working Group on Investment and Buyer-Supplier Relationships, which started meeting in 1993 under the Framework for a New Economic Partnership, has prepared the attached joint report concerning improvements in the environment for foreign direct investment in Japan and the United States. This report is the outcome of follow-up work based on the "Policies and Measures by the Government of Japan and the Government of the United States of America Regarding Inward Direct Investment and Buyer-Supplier Relationships," which was released in 1995. These discussions are rooted in our joint recognition of the increasingly important role which foreign direct investment plays in stimulating economic growth and structural change and fostering sustained domestic demand-led growth in any economy.

Historically, Japan has attracted comparatively low levels of inward direct investment. As a result, our bilateral discussions and the attached report give particular attention to efforts being made to improve the environment for foreign direct investment in Japan. In the course of our discussions, both the Governments of Japan and the United States have repeatedly emphasized the usefulness of increasing foreign investment flows into Japan and stressed their willingness to examine measures identified as important to improving the environment for foreign direct investment.

As the attached report makes clear, it is the view of the Working Group that considerable steps have been taken toward improving the environment for foreign direct investment and that improvement in Japan's environment for foreign direct investment is accelerating. At the same time, additional steps are both necessary and worthwhile.

The economic relationship between Japan and the United States has been growing stronger and closer, and the investment relationship has improved. The Working Group believes that the process of following up on the 1995 "Policies and Measures" has been completed. The Working Group intends to continue to exchange information and conduct consultations, as both Governments recognize that improving the environment for foreign direct investment is an ongoing effort. These consultations will be conducted under the mandate of 1993 Framework for a New Economic Partnership, aimed at improving the investment environment in both countries.

Signed,

____________________

Kunihiko Saito

Ambassador of Japan to the United States of America

____________________

Stuart E. Eizenstat

Undersecretary for Economic, Business, and Agricultural Affairs

Department of State

Report of the Working Group on Investment and Buyer-Supplier

Relationships Under the Framework for a New Economic Partnership

Report on the U.S.-Japan Investment Environment,

as follow-up to the 1995 "Policies and Measures."

TABLE OF CONTENTS

I. Introduction

1. Developments to Date

2. Economic Situation and Benefits of Direct Investment in Both Countries

3. Working Group Meeting Record

4. Future Plans of the Working Group

II. Japanese Government Measures to Improve Investment Environment

1. Mergers and Acquisitions

(1) Promoting Foreign Capital Participation in M&A

(2) Expanding Disclosure of Business-related Information

(3) Cross-shareholding and Corporate Governance

(4) Reform of Capital Markets Regulation

(5) Review of Insolvency Laws

(6) M&A-related Services

2. Land Policy

(1) Maintenance and Improvement of the "Outline for Promoting Comprehensive Land Policies"

(2) Deregulation of Land Use Restrictions

(3) Real Estate Lease System

(4) Land Taxation System

(5) Real Estate Finance

3. Labor Policy

(1) Pension portability

(2) Labor Transfer to Potential New Fields for Job Creation

(3) Fee-charging Employment Placement Enterprises

(4) Employment Security Organizations

(5) Acceptance of Foreign Nationals with Expertise

(6) Promoting Internships

(7) Other Issues Related to Labor Policy

4. Corporate Tax Policy

5. Regional Measures for Promoting Investment to Japan

(1) Promotion of Investment by Local Governments

(2) Regional Meetings to Promote Inward Direct Investment

(3) Regional Investment Exchange Promotion Facilities for Foreign Enterprises

6. Investment Regulation

(1) Deregulation Under the Foreign Exchange and Foreign Trade Law

(2) Deregulation in the Telecommunications Field

7. Others

(1) The Japan Investment Council

(2) Measures under the Law on Extraordinary Measures for the Promotion of Imports and Facilitation of Inward Investment (Import and Inward Investment Law)

(3) Japan External Trade Organization (JETRO)

(4) Japan Development Bank

(5) Japan Regional Development Corporation

(6) Foreign Investment in Japan Development Corporation (FIND)

(7) The Office of Trade and Investment Ombudsman (OTO)

III. The U.S. Investment Environment

(1) Recognition of the Importance of Direct Investment, and Confirmation of National Treatment

(2) Foreign Concerns about US laws

(3) Support for Private Sector Efforts to Promote Investment in Japan

I. Introduction

1. Developments to Date

The Working Group on Investment and Buyer-Supplier Relationships, which has been meeting continuously since 1993 under the auspices of the Framework for a New Economic Partnership, adopted in July 1995 a document describing and prescribing "Policies And Measures by the Governments of Japan and the United States of America Regarding Inward Direct Investment and Buyer-Supplier Relationships." Since that time, in a quest to increase direct investment between Japan and the US, the Working Group has been monitoring progress and concurrently doing follow-up work listening to the views of private sector specialists. At its meeting in July last year, both sides came to share a view that the Working Group should continue its work, seeking to prepare a report aimed at improving the investment environment of Japan and the United States, in order to follow up the 1995 "Policies and Measures." As a result, this report was prepared.

2. Economic Situation and Benefits of Direct Investment in Both Countries

As seen from a macroeconomic viewpoint, the Japanese economy has been in a severe state since 1997 marked by a substantial decline in domestic private sector equipment investment, an unemployment rate running at a record high level , and a pessimistic business and consumer sentiment. On the other hand, the US economy has continuously been performing well for the last 8 years with low inflation, rapid job creation, and high levels of new investment and venture business formation. This Working Group believes that foreign direct investment contributes to the long-term expansion of the economy through improvement in terms of economic supply, and in addition to this, the importance of expanding foreign direct investment in Japan is increasing in view of the current economic situation of Japan. Of course, it is needless to say that Japanese direct investment in the US continues to make an important and welcome contribution to the United States economy, spurring innovation and promoting employment.

According to the reports made to MOF, foreign direct investment in Japan remained at about 390 billion ($3.8 billion) annually until fiscal year 1995 -- 3 year average from fiscal year 1993, -- but increased thereafter, the annual average amount for fiscal year 1996 and 1997 being 720 billion ($6.2 billion). For fiscal year 1998, the figure was 590 billion ($4.3 billion) for the 1st 1/2 of the year. US direct investment in Japan has also increased, particularly in the financial and information-related sectors.

Sources: Japanese Ministry of Finance; RECOF International Inc.; OECD Direct Investment Statistics Yearbook 1997; -- M&A and comparative international data are calendar year; FDI in Japan date is fiscal year.

Cumulative foreign direct investment --historical cost -- in the United States has surged in the past decade from $263.4 billion at the end of 1987 to over $681.7 billion at the end of 1997. This 106% increase in investment into the US has created over a million new jobs for US workers in the past decade, mainly in high-paying export-related industries. Since the end of 1995 alone, cumulative foreign direct investment in the United States has increased 27%, while US investment abroad has risen to $860.7 billion, a 23% increase over the same period. US companies see tremendous benefits in investing abroad, while foreign companies are more eager than ever to enter the US market. Japanese companies are just one example of the types of firms that see the benefits of entering the US market, and became the second largest investor in the United States over the last decade, surpassing the Netherlands.

As mentioned above, the economic relationship between the two countries has been growing stronger and closer, and the investment relationship has improved. In an age of accelerating globalization, expansion of inward foreign investment is considered important in both countries, especially in Japan given its recent weak economic performance.

3. Working Group Meeting Record

November 1993: The 1st meeting was held under the auspices of the Economic Harmonization Basket of the Framework for a New Economic Partnership.

June 1995: The 7th meeting was held, and prepared the "Policies And Measures by the Governments of Japan and the United States of America Regarding Inward Direct Investment and Buyer-Supplier Relationships" document.

July 1995: Letters were exchanged finalizing the "Policies and Measures."

October 1995: The 1st follow-up meeting (Washington, DC)

October 1996: The 2nd follow-up meeting (Tokyo) -- A joint public seminar to promote investment in Japan was held.

June 1997: The 3rd follow-up meeting (Washington, DC) -- A joint public M&A seminar was held.

December 1997: The 4th follow-up meeting (Tokyo) -- A 2nd joint public M&A seminar was held.

July 1998: The 5th follow-up meeting was held (Tokyo) -- 3 days of private sector expert testimony concerning M&A, land, and labor-related issues were held.

March 1999: The 6th follow-up meeting was held (Tokyo)

4. Future Plans of the Working Group

With the completion of this joint report, the Working Group believes that the process of following up on the 1995 "Policies and Measures" has been completed. Going forward, the Working Group will continue to exchange information and conduct consultations, under the mandate of 1993 Framework for a New Economic Partnership, aimed at improving the investment environment in both countries.

II. Japanese Government Measures to Improve Investment Environment

This section outlines policies and measures taken by the Japanese Government in recent years, leading to the improved environment for foreign direct investment in Japan. Salient measures proposed by quasi-governmental organizations, and independent government-related advisory bodies, or under active consideration by government ministries, which may or may not lead to government action, are noted as "Supplemental Information."

1. Mergers and Acquisitions (M&A)

Due to: (1) anxiety about so-called "take-overs" (2) the philosophy of management especially owner-managers, emphasizing long-term business commitments; and (3) psychological resistance to M&A rooted in the lack of recognition and knowledge of the M&A due to the scarcity of actual M&A cases, M&A has not been actively pursued in Japan as compared to the US and other countries. In recent years, however, the number of M&A cases has been on the increase, reflecting recent changes in the economic situation and business environment. M&A by overseas enterprises is rapidly increasing, especially in the information, telecommunications, and financial sectors. Recent surveys show that M&A has become much more acceptable in Japan.(1)

(1) Promoting Foreign Capital Participation in M&A

a. The Japan Investment Council issued "The Statement of the Japan Investment Council on M&A" in April 1996, announcing that the government of Japan welcomes foreign investment through M&A in Japan. Within fiscal year 1999, the Council is planning to follow up on the implementation status of a series of measures adopted by the Council.

b. A "Seminar on M&A in Japan" on the theme of the significance and promotion of M&A in Japan was held in December 1997 in cooperation with the US Embassy, Tokyo and JETRO. In addition, seminars (M&A Plazas) and other events have been held between December 1998 and March 1999 at the local level, with a view toward enlightenment and dissemination in cooperation with local chambers of commerce and industry and local governments.

(2) Expanding Disclosure of Business-related Information

The availability of accurate financial information is critical to firms interested in pursuing M&A relationships with other firms.

a. The financial accounting system for listed business enterprises will be developed in sequence taking into account trends in international harmonization:

Consolidated accounting: With respect to the preparation of consolidated financial statements, the real control standards and the influence standards will be introduced instead of the conventional holding standards, expanding the range of the subsidiary and affiliated companies as from the settlement of account for the March 2000 term. Consolidated disclosure of contingent liabilities, such as guarantees, and subsequent events will begin with the March

1999 term.

Market value accounting: As from the settlement of account for the March 2001 term, (1) financial instruments will be evaluated for their current values, with the exception of securities classified as so-called available-for-sale securities -- for which, starting in the March 2002 term, appraisal gains and losses will be included in the balance sheet, but excluded from profit and loss statements -- and (2) pension assets and liabilities will be evaluated for their current values.

Tax effect accounting: As from the March 2000 term, tax effect accounting will be introduced with respect to the individual financial statements in addition to the consolidated financial statements.

b. Supplemental Information: In February 1999, the Legislative Council prepared and submitted to the Minister of Justice draft amendments to the Commercial Code which will allow non-listed firms to mark-to-market their financial assets, in parallel with listed firms, on a voluntary basis. The legislation is planned for submission to the current regular Diet session.

(3) Cross-shareholding and Corporate Governance

The Working Group recognizes that there are a variety of views regarding the optimal structure of corporate shareholding and governance. At the same time, potential foreign investors in Japan frequently point out that extensive cross-shareholding (mochiai) in Japan greatly complicates market-based merger and acquisition (M&A) transactions, and reduces the potential impact of effective shareholder-based corporate governance. Corporate governance practices which result in senior management emphasis on firm loyalty over shareholder return can also lead to premature rejection of M&A offers. In this context, the WG notes that the market observers believe Japanese markets are undergoing a secular trend of unwinding of cross-shareholding, and that this trend has accelerated in recent years under the pressure of difficult corporate finances. At the same time, more corporations are hiring board members from outside the firm, and placing greater emphasis on shareholder value in their management practices.

a. Supplemental Information: To assist corporations in reducing the unfunded liabilities of corporate pension funds, the Japanese Government is preparing legislation which will allow corporations to transfer shareholdings to their related corporate pension funds. The pension funds will be able to properly execute shareholder rights on the transferred shares, and sell the shares if deemed in the best interests of the pension-holders. This legislation is expected to bring about the unwinding of cross-shareholdings.

(4) Reform of Capital Markets Regulation

a. The Japan Securities Dealer Association introduced the book building system in determining the issue prices of newly introduced stocks in September 1997, reconsidered the standard of over-the-counter registration in December 1998, and introduced the market-maker system in December 1998, as a measure for even smoother transactions on the OTC markets.

b. In order to promote the structural reform in over-the-counter market, Japan Securities Dealer Association is reviewing the regulation before initial public offering, which hinders facilitated financing for the companies. In addition, Japan Securities Dealer Association plans to promptly consider ways to reflect appropriately the opinion of the market participants other than the security industry, experts and others to the operation of over-the-counter market, in order to make the work of Japan Securities Dealer Association more effective and more appropriate.

c. The Cabinet has approved and submitted before the Diet a bill that revises part of the Commercial Code to create a stock exchange system through which one of the parties becomes a wholly-owned subsidiary company and the other a parent company as well as a stock transfer system to establish a parent company. Special tax treatment will be implemented in conjunction with the creation of the stock exchange and the stock transfer system to allow deferment of taxes on capital gains on stocks at the time of exchange and transfer.

(5) Review of Insolvency Laws

Smooth and flexible bankruptcy procedures make it easier for a corporation and its assets to be acquired or merged in a "rescue" format, thereby preserving employment and protecting underlying corporate value.

Legal proceedings for disposal of insolvent corporation in Japan are carried out in accordance with the Bankruptcy Law, the Composition Law, the Corporate Reorganization Law, and the Commercial Law -- reorganization of a company, and special liquidation. It is pointed out that these laws need to be mutually adjusted and proceedings reassessed from the viewpoint of the entire legal system concerning insolvency.

a. Supplemental Information: The Ministry of Justice is conducting a review of the insolvency laws with particularly expedited efforts focussed on the reorganization-type disposition procedure covering the small and medium-sized enterprises, which is required for prompt improvement, with the aim of arriving at a plan by this summer in light of the markedly increasing number of insolvent enterprise. This review is not directly aimed at activating M&A through the improvement of investment environment, but is likely to indirectly contribute to the improvement of the investment environment. The Economic Strategy Council, in its February 1999 final report, called for an improved legal framework for handling bankruptcies.

(6) M&A-related Services

Specialized services such as those provided by introduction services, consultants, accountants, and lawyers are also important to facilitation of M&A transactions.

a. In order to realize the expansion and improvement of M&A-related services in the private sector, the government plans to continue educational activities such as seminars.

b. Various services related to M&A will be covered as a part of built-in-agenda at up-coming WTO negotiations.

c. With respect to the lawyers, the successful bar examination applicants is expected to be increased to about 1,000 per year from fiscal 1999 by the partial amendment of the National Bar Examination Law and the Court Organization Law. Legal measures were taken under the "Law revising Part of the Special Measures Law concerning the Handling of Legal Business by Foreign Lawyers" -- enforced on August 13, 1998 -- as follows:

The practical experience requirement for qualification period of the gaikokuho-jimu-bengoshi(registered foreign legal consultants), was shortened from "more than 5 years" to "more than 3 years".

The scope of practice was expanded to allow the gaikokuho-jimu-bengoshi to handle 3rd country law.

Restrictions on the objectives of joint enterprise between a gaikokuho-jimu-bengoshi and abengoshi were relaxed.

2. Land Policy

While the price of real estate as indicated by land prices has been falling for some years in Japan, foreign companies still point to high real estate-related expenses and regulations as obstacles to the promotion of investment to Japan. In recognition of the extreme importance of land and real estate policy, the Government of Japan continues to address land policy problems. Central to its effort are the measures mentioned below:

(1) Maintenance and Improvement of the "Outline for Promoting Comprehensive Land Policies"

a. The Government of Japan has been strongly pressing ahead with a comprehensive land policy. Against the background of the land situation and structural change of Japanese economy and society, a "New Outline for Promoting Comprehensive Land Policies" was adopted by the Cabinet in February 1997. In addition, in November of the same year, the Government and the ruling party compiled the proposal of an "Study Group for Promotion of Effective Land Use" and various measures have been taken toward effective land use and activated land transactions.

b. As a part of the "New Outline" concerning land information availability, the Cabinet tasked the Government with studying ways to improving the quality and availability of public information on land price, transaction, use, and ownership.

(2) Deregulation of Land Use Restrictions

a. To promote efficient land use, incentive measures have been introduced to give a Floor Area Ratio (FAR) bonus to good projects which provide with open-space or improve urban infrastructure, because of concerns that across-the-board relaxation of FAR may lead to traffic congestion, inefficient pencil buildings or conflicts within the community, rather than increasing land use efficiency smoothly and rapidly, given the characteristics of downtown areas with narrow streets and small land properties in Japan. As a result of these city planning measures over the last 10 years, approximately 8.3 million square meters of floor space for office or commercial use and 19,000 housing units have been provided in the 23 Tokyo wards.

b. With the aim of rationalizing the land use regulation, the National Land Use Planning Act was amended to replace the prior notification system of large-scale land transactions with an ex post facto notification system; it came into effect on September 1, 1998.

c. With a view toward reassessing the role-sharing between the national and local government and properly allowing industrial sites in keeping with environmental protection objectives, the Factory Location Law was amended so that local governments can establish greenery area ratios on its own in accordance with the regional circumstances, within the extent prescribed by the national government; it came into effect on January 13, 1998.

(3) Real Estate Lease System

a. With respect to land leases with the intention of having buildings, a fixed-term land leasehold system was introduced when the Land Lease and House Lease Law came into effect in August 1992.

b. Supplemental Information: With respect to building leases, a bill amending the Land Lease and House Lease Law to introduce a fixed-term house leasehold system, under which the house lease relationship definitely terminates with expiration of the stipulated contract period, was submitted to the ordinary session of the Diet in fiscal year 1998, and is currently under continuous consideration.

(4) Land Taxation System

a. In the FY 1996 Tax Reform, the following measures were implemented:

Tax burden on capital gains from transfer of land was revised; -- tax rate was reduced for individual income tax on capital gains from transfer of land held more than 5 years and for corporation tax, and increased partially for tax on capital gains from transfer for certain purposes.

The special measure to reduce tax base of Registration and License Tax on land registration was expanded; -- the reduction rate was increased from 50% to 60%.

The tax rate of Land Value Tax was reduced from 0.3% to 0.15% and fixed amount deduction for Land Value Tax was revised.

b. In the FY1997 Tax Reform, the following measure was implemented:

Term for the special measure to reduce the tax base of Registration and License Tax on land registration was extended for three years

c. In the FY1998 Tax Reform, the following measures were implemented:

Tax rates for individual income capital gains on land were simplified and reduced. The 5% additional corporate tax on capital gains from the transfer of land held more than five years and the 10% additional corporation tax on capital gains from the transfer of land held less than five years were suspended. The 15% additional tax on capital gains from transfer of land held less than two years was abolished.

Land Value Tax was suspended from 1998 for the time being.

d. In the FY1999 Tax Reform, the following measures were approved by the Diet on March 24 :

The tax rate for individual income tax on capital gains from transfer of land held more than 5 years will be reduced; -- uniform tax rate of 26%.

The special measure to reduce the tax base of Registration and License Tax on land registration was expanded; -- the reduction rate was increased from 60% to 66.7%.

(5) Real Estate Finance

Real estate-financing derivatives can help lower the cost and risk of real estate acquisition, and greatly enhance and stabilize the liquidity of real estate markets.

a. Supplemental Information: In order to secure smooth financing to the housing and urban development areas, it is essential to expand the means of raising funds directly from the market by securitization. Therefore, the Government has been looking into the standard for disclosure and the real estate investment indices, which are important as real estate investment market infrastructure ,and plans to actively draw on the results of its study to promote the securitization of real estate.

b. In order to promote the securitization of real estate and designated debts as a part of the financial system reform, the "Law on Securitization of Specified Assets by Special Purpose Companies"(SPC Law) was enacted and became effective on September 1, 1998. In addition, the "Special Measures

Law concerning Credit Management and Collection Business" -- the so called "Servicer Law" -- promulgated on October, 16, 1998, is expected to help contribute to the liquidity of real estate markets, through its function associated with mortgage-backed securities.

3. Labor Policy

When employing Japanese, foreign enterprises often faced difficulties due to factors in Japan such as lifetime employment, the access to private sector services facilitating mid-career job mobility, problems with the portability of pensions and accrued fringe benefits, and the negative "unstable employment" image of foreign affiliates among Japanese. However, the flexibility of the labor markets has been increasing as a result of deregulation, and gradually such factors have become less important as obstacles to investment to Japan. In addition, the interest of new graduates in joining foreign affiliates has gradually increased.

(1) Pension Portability

a. It is sometimes pointed out that pension portability is a critical consideration in increasing labor mobility, particularly for middle-aged employees, and it is also sometimes asserted that defined contribution pension plans, in particular, are a useful way to improve pension portability. The government is examining issues including basic frameworks of defined contribution pension plans with a view to introducing them in fiscal year 2000.

(2) Labor Transfer to Potential New Fields for Job Creation

a. The Government is now promoting active labor market policies to increase labor mobility toward new fields where jobs are expected to be created. Employment promotion and new job creation measures based on the Law Concerning the Promotion of Improvement of Employment Management in Smaller Enterprises for Securing Manpower and Creating Quality Jobs, the Special

Measures Law for Employment Security for Workers in Specified Depressed Industries and the Law Concerning the Promotion of Local Employment Development, among other laws, are having a positive impact on labor mobility. Also, comprehensive employment services such as counseling programs for effective job placement, and job training programs for displaced workers, are being provided at Public Employment Security Offices.

(3) Fee-charging Employment Placement Enterprises

a. On April 1, 1997, the range of occupations handled by placement agencies was expanded as a result of changes made to the regulations concerning the Ordinance for the Employment Security Law, and a negative list was implemented. Since March 1998, the Central Employment Security Deliberative Council has been examining the further expansion of the occupations handled by these agencies, in order to improve the functioning of the labor market.

b. In March 1999, the Central Employment Security Deliberative Council recommended to the Minister of Labor that, in principle, placement agencies should be allowed to handle most occupations, except for certain occupations such as construction. At the same time, the Council recommended stricter penalties for mishandling of employee information. Based on this recommendation, legislation was submitted to the Diet in March 1999, revising the Employment Security Law.

(4) Employment Security Organizations

a. The public placement agencies have been providing placement services for foreign investors when certain conditions are met, such as a person responsible for business being stationed in Japan. The Government has also been operating public placement agencies such as Talent Banks, which register the requirements of foreign affiliates for employees, and look for suitable applicants to be placed with these foreign companies.

b. The Government has been organizing Joint Recruitment Fairs for domestic and foreign affiliates, and making every effort to attract as many participants as possible via advertising. In February (in Tokyo and Osaka) and December (in Tokyo) 1997 and March (in Tokyo) 1999, the Government organized Joint Employment Fairs which provided opportunities for foreign affiliates and individuals seeking administrative posts to connect.

c. To promote the use of the Public Employment Security Office by foreign affiliates, the government prepares and distributes pamphlets in English language concerning the job placement services of Public Employment Security Office, including job placement and employment-related subsidies.

(5) Acceptance of Foreign Nationals with Expertise

a. In accordance with a policy to accept as many foreign workers in the professional and technical disciplines as possible, documents to be submitted for various applications were reviewed and reduced in July 1997, while further simplification of immigration procedures will be continuously pursued for qualified foreign nationals. In addition, in January 1998, the maximum period of stay was abolished for an intra-company transferee who is transferred to a business office in Japan from the main or branch office of the same enterprise. Each period of stay is also under consideration, and a conclusion is scheduled to be reached before the end of fiscal 1998.

(6) Promoting Internships

a. Since fiscal 1998, projects have been implemented such as: holding of liaison meetings between universities and employer organizations; "implementation of job experience courses" leading to internships; provision of information through guidebooks and by collecting lists of opportunities ; and occupational awareness consulting for individual students, etc. In addition, from fiscal 1999, support will be extended to entrepreneurs who implement model internship programs.

(7) Other Issues Related to Labor Policy

As related additional information, following measures were taken after 1995.

a. Based on the August 1998 recommendations of the Central Employment Security Deliberative Council, legislation was submitted to the Diet in October 1998 revising the Worker Dispatching Law. The main contents of this legislation are; a) to allow for worker dispatching in most job categories, except for certain jobs such as job of construction, b) to extend measures for the protection of such workers, and so on. This legislation is still under consideration by the Diet.

b. The Labor Standards Law was amended in September 1998. The Government of Japan is eager to inform foreign-capital companies in Japan of the contents of the amendment and has held meetings for that purpose.

4. Corporate Tax Policy

a. In the FY1999 Tax Reform, in consideration of the current state of the economy, the effective corporate tax rate, including local taxes, will be reduced from 46.36% to 40.87%. This measure may also lead to the improvement of the investment environment in Japan.

b. As for consolidated taxation system, the Japanese Government will conduct a full-scale examination from an expert and operational perspective.

5. Regional Measures for Promoting Investment to Japan

Recognizing that inducement of foreign affiliates into the regions can help revitalize regional economies and promote employment security, the Government, together with local governments, has taken the following measures:

Note: JETRO, the Japan Regional Development Corporation, and the Japan Investment Council also have taken regional measures for promotion of investment to Japan, which will be described

later.

(1) Promotion of Investment by Local Governments

a. Local governments are implementing aggressively measures to promote investments by foreign companies as well as Japanese companies, and have created and expanded the corporate location system such as granting subsidies. In addition, overseas missions have been dispatched by local governments for the purpose of the promotion of investment to Japan.

(2) Regional Meetings to Promote Inward Direct Investment

a. Local governments and administrative organs concerned have organized regional councils on enterprise inducement promotion, including the Kansai Council on Investment Promotion into Japan to help attract foreign enterprises into the regions.

(3) Regional Investment Exchange Promotion Facilities for Foreign Enterprises

a. Incubation facilities that can be utilized by foreign enterprises at a reasonable expense are useful to foreign enterprises that are just starting business in Japan. The German Industry & Trading Center with German enterprises as the chief tenants (1987), and the British Industry Center with British enterprises as the chief tenants (1997) have been established in Yokohama. In addition, the Government provided support through low-interest financing by the Japan Development Bank to the Technology Village Partnership facility opened by primarily U.S. firms in Yokohama on January 25,

1999.

b. In addition, the Government has approved FAZ's (Foreign Access Zones) in 22 regions nationwide, and given support to the development of various import promotion facilities and groups of import-related businessmen by means including: funding from the Industrial Structure Improvement Fund; various taxation system measures; and low-interest financing by the government financial institutions.

c. In addition to these measures, under the Private Participation Law, there is also a system whereby specific facilities are certified as "International Business Exchange Foundation Facilities". The certified facilities are granted subsidies and special taxation system measures. Two facilities, Rinku Gate Tower Building and Japan Business Center in the World Business Garden at Makuhari, have been certified to date.

6. Investment Regulation

In compliance with its open investment policy and international obligations, the Government of Japan recognizes that restrictions on foreign investment should be limited to the minimum, and continues to support the principle that foreign investment should be treated not more unfavorably than domestic investment -- be provided "national treatment".

(1) Deregulation Under the Foreign Exchange and Foreign Trade Law

With the revision of the Foreign Exchange and Foreign Trade Law (as amended) in April 1998, deregulation has been implemented that comprises three points: (1) Change of the mining industry

from the prior to the ex post facto notification type of business, (2) abolishing any requirements to changes in the business objective of foreign investments, unless the change involves becoming a prior

notification type of business, and (3) with respect to the conclusion of technical import contracts, threshold limits have been established for required reporting.

(2) Deregulation in the Telecommunications Field

a. In February 1998, the Telecommunications Business Law and the Radio Law were amended and all restrictions on foreign ownership were removed with respect to the Type I telecommunications carriers including their radio stations -- with the exception of NTT and KDD. At the same time, examination standards regarding the Cable Television Broadcast Law were amended, abolishing restrictions on foreign ownership of cable television operators who engage in the Type I telecommunications business. Further, with respect to restrictions on foreign ownership in KDD, the "Law to Revise Related Laws on the Rationalization of Regulatory Frameworks in the Telecommunications Field" came into effect in July, 1998, abolishing such investment restrictions.

7. Others

(1) The Japan Investment Council

a. In April 1996, The Japan Investment Council declared at home and abroad a "Statement of The Japan Investment Council on M&A" aimed at promoting investment to Japan through M&A. The Expert Committee of The Japan Investment Council has been exchanging views directly and periodically with foreign enterprises, taking up opinions and requests concerning the environment for investment to Japan, and trying to have them reflected in government measures.

b. In 1997, hearings were conducted with foreign affiliate managers, the American Chamber of Commerce in Japan, and the European Business Community with respect to issues associated with hiring new employees. Taking this input into account, issues were examined in 1998, mainly the employment problem concerning the securing of human resources by foreign affiliates, and measures to be taken for the promotion of investment in regional area.

c. In addition, with the aim of informing the local governments of the policy of the Japan Investment Council and receiving information on the actual status of the regional areas from administrative interests and corporate managers, etc., regional Japan Investment Council meetings were held in Akita, Hyogo, Kumamoto, and Okinawa Prefectures in 1997 and in Kagoshima Prefectures in 1998 and Kyoto Prefectures in February 1999.

(2) Measures under the Law on Extraordinary Measures for the Promotion of Imports and Facilitation of Inward Investment -- Import and Inward Investment Law.

a. With the view to promoting import and inward investment continuously, the Import and Inward Investment Law enforced in 1992 was extended in 1995 for an additional 10 years. b. A special tax measure allows designated inward investors to carry over certain losses for tax purposes for ten years rather than for the normal five years. In fiscal 1996, the scope of losses which qualify for this special measure was expanded.(2)

(3) Japan External Trade Organization (JETRO)

a. JETRO established an "Investment Promotion Department " in July 1998 to strengthen the support system for investment to Japan. It created a "Investment in Japan Support Initiative" in 1998. Under

this program, potential investment projects are pursued by JETRO offices in the U.S.

b. With respect to JETRO's invitation program for the promotion of investment to Japan, individual invitations were implemented starting from 1995, in addition to collective invitations which started in

1992.(3)

c. In 1996, region to region initiatives for industrial development was launched with the aim of the establishing new industries by vitalizing regional industrial exchanges.

d. In March 1998, an international technobusiness forum was held with the participation of 32 foreign firms (of which 10 were U.S. firms). In addition, a Committee for Promotion of Investment to Japan - Foreign Affiliate Inducement Research Seminar was held in August the same year.

e. JETRO publishes the Investment News (quarterly, 6,000 copies in total in English) carrying latest M&A trends, regional information, promising fields for investment to Japan, and information about direct investment to Japan and the English guidebook concerning the legal system and investment environment within Japan.(4)

f. Every year, JETRO dispatches missions to Europe and America in cooperation with other organizations and holds symposia on the promotion of investment to Japan.(5)

(4) Japan Development Bank

a. In 1984, Japan Development Bank (JDB) commenced the low-interest and long-term loan program for Japanese corporations whose capital is more than 1/3 non-Japanes --(more than half non-Japanese until 1996 -- and for foreign companies seeking to establish a registered branch in Japan. Since then, JDB has been making efforts to expand the range of eligible projects and to lower interest rates so that these companies can utilize the program more conveniently.

b. Since fiscal 1995, the scope of JDB's lending activities has been broadened to include infrastructure for foreign direct investment in Japan such as construction and expansion of international school facilities. In addition, a loan program for facilitating corporate alliances carried out through M&A or equity participation between foreign affiliates and Japanese enterprises was added in fiscal 1996. Since fiscal 1997, a loan program for facilitating corporate alliances involving business transfer has also been in effect. Further, under the government's emergency economic measures in November 1997, it was decided that the special low-interest rate program initiated in

fiscal 1995 for high-technology field could apply to all first significant investment in Japan.(6)

c. JDB established the Center for the Promotion of Direct Investment in Japan to provide a variety of information services to overseas firms seeking to penetrate the Japanese market. In 1991 the investment promotion centers commenced operations in the international Department in JDB's head office and in overseas representative offices. The centers have also been established within JDB's domestic branch offices in May 1996.

(5) Japan Regional Development Corporation

a. Every year the Japan Regional Development Corporation holds "Foreign Affiliate Location Promotion Seminars" and "Business Site Location Explanatory Meetings" in order to provide information, especially for foreign affiliates which have already made inroads into Japan and are operating through branch offices or representative offices about the investment environment of the provinces with the aim of rousing interest in locating their operation in the provinces.(7)

b. In October 1998, a "Corporate Location Information Center" was opened in order to provide all kinds of information about industrial sites at about 1,000 locations nationwide in cooperation with local governments across the nation and the Japan Location Center.

(6) Foreign Investment in Japan Development Corporation (FIND)

a. From its foundation up to the present, FIND has continuously given support for making inroads into the Japanese market such as sales support including sales cooperation, talent support, support for the establishment of company, and M&A support, about 170 foreign enterprises receiving such support by March 1998.

b. In addition, in order to pursue the promotion of M&A, a workshop was established in FIND in November 1997; studies were conducted on concrete measures for improvement of the environment

for promotion of M&A including improvement in provision of information and improvement of administrative/legal procedures in addition to the support actions for opening of the M&A market in Japan; and a report was drawn up.

(7) The Office of Trade and Investment Ombudsman (OTO)

a. Since 1994, the Market Access Ombudsman Council (MAOC) has prepared a yearly report to recommend governmental actions to address complaints regarding Japan's market access including

foreign direct investment received from foreign businesses and government bodies (the 5th report was issued in March 1998). The Office of Market Access (OMA) has paid the highest attention to

the MAOC's reports and has determined to take policy actions -- the 5th policy Actions was decided in March 1998.

b. In consideration of a proposal from the OTO Promotion Meeting (June 18, 1997), the OTO Measures Headquarters decided on July 18, 1997 to handle issues from the viewpoints such as pursuing the development of the environment with respect to the promotion of investment to Japan when individual and specific complaints are lodged and problems raised. III. The U.S. Investment Environment

(1) Recognition of the Importance of Direct Investment, and Confirmation of National Treatment

The United States Government recognizes the importance of foreign direct investment and the benefits it provides to the economy. The U.S. is currently the largest target for foreign investment in the world, accepting $90.7 billion worth of foreign investment in 1997, and over $681.7 billion in total. We are also the largest investor abroad with over $860.7 billion in overseas assets as of 1997. U.S. firms are increasingly relying on foreign investment to position themselves to compete effectively in global markets.

With the two-fold growth of foreign investment over the last decade, it is increasingly important that the environment and business atmosphere abroad and in the U.S. be conducive for investments. In the U.S., over one-fourth of U.S. merchandise exports go to foreign affiliates of U.S. companies each year, accounting for over 3 million skilled, high-paying jobs. U.S. and other international firms are making their investment decisions based on the existence of a strong regulatory and legal framework for their businesses, national treatment in host country markets, and other cost and information related expenses. Without guarantees and an environment that is conducive to business and attracts capital investment, the U.S. economy would not be entering its 8th consecutive year of economic expansion.

Recent high-profile acquisitions in the U.S. auto industry have not resulted in lay-offs or downsizing, and pre-acquisition employment levels have remained steady. U.S. investment abroad and in Japan, totaling $35.6 billion in Japan as of 1997, has resulted in an increase in high paying U.S. jobs. As mentioned above, over ? of U.S. merchandise exports go to foreign affiliates of U.S. companies each year, accounting for over 3 million skilled, high-paying jobs. Higher levels of foreign direct investment in Japan should result in an increase of U.S. exports to Japan and a commensurate number of new jobs.

(2) Foreign Concerns about U.S. laws

Foreign governments have raised concerns about the transparency of the Exon-Florio rules, and expressed the view that those rules may act as an impediment to foreign investment in the United States. The U.S. Government states that Exon-Florio gives the President certain powers that are applicable only in extraordinary situations, (i.e.) those involving threats to national security that cannot be addressed under any other U.S. statute dealing with national security issues. Due to the inherent sensitivity of the national security considerations involved and the proprietary nature of information submitted by businesses, detailed information regarding any particular investigation is not

made public.

Foreign governments have also expressed concern about the Helms-Burton and Iran and Libya Sanctions Acts (ILSA). The U.S. Government states that, with the stated purpose of promoting a peaceful transition to democracy in Cuba, the Helms-Burton Act provides, inter alia, for lawsuits in U.S. courts against "traffickers" in confiscated U.S. property in Cuba -- these provisions have been suspended by the President, -- and requires the exclu sion from the U.S. of foreign "traffickers" in confiscated U.S. property. Under ILSA, certain U.S. benefits may be denied to those who invest in the petroleum sector in Iran or Libya, as well as those who engage in certain transactions with Libya in violation of UN sanctions.

Foreign governments have also raised concerns about a Massachusetts statute that generally prohibits Massachusetts state agencies from procuring goods and services from U.S. or foreign individuals and entities that do business with Burma. In November 1998, the U.S. Direct Court for the District of Massachusetts declared that the Act was an unconstitutional infringement on the federal government's power to conduct foreign affairs and permanently enjoined its enforcement. Massachusetts has appealed to the U.S. Court of Appeals for the First Circuit.

(3) Support for Private Sector Efforts to Promote Investment in Japan

The United States Government is involved in many fora facilitating overseas investment. The U.S. Department of Commerce and Department of State have business advisory offices and our embassies and consulates abroad have officials who can assist potential investors with host country regulations and business practices.

The U.S. Government is also involved with organizations promoting investment in Japan, such as the American Chamber of Commerce Japan (ACCJ) and the U.S.-Japan Business Council. The U.S. Government has also worked to support incubator projects in Japan, including the Technology Village Partnership (TVP) in Yokohama (also mentioned above in section 5(3)a), which is a good example of incubator facilities that are resulting in higher levels of U.S. and other foreign investment in Japan.

III. The U.S. Investment Environment

(1) Recognition of the Importance of Direct Investment, and Confirmation of National Treatment

The United States Government recognizes the importance of foreign direct investment and the benefits it provides to the economy. The U.S. is currently the largest target for foreign investment in the world, accepting $90.7 billion worth of foreign investment in 1997, and over $681.7 billion in total. We are also the largest investor abroad with over $860.7 billion in overseas assets as of 1997. U.S. firms are increasingly relying on foreign investment to position themselves to compete effectively in global markets.

With the two-fold growth of foreign investment over the last decade, it is increasingly important that the environment and business atmosphere abroad and in the U.S. be conducive for investments. In the U.S., over one-fourth of U.S. merchandise exports go to foreign affiliates of U.S. companies each year, accounting for over 3 million skilled, high-paying jobs. U.S. and other international firms are making their investment decisions based on the existence of a strong regulatory and legal framework for their businesses, national treatment in host country markets, and other cost and information related expenses. Without guarantees and an environment that is conducive to business and attracts capital investment, the U.S. economy would not be entering its eighth consecutive year of economic expansion.

Recent high-profile acquisitions in the U.S. auto industry have not resulted in lay-offs or downsizing, and pre-acquisition employment levels have remained steady. U.S. investment abroad and in Japan, totaling $35.6 billion in Japan as of 1997, has resulted in an increase in high paying U.S. jobs. As mentioned above, over one-fourth of U.S. merchandise exports go to foreign affiliates of U.S. companies each year, accounting for over 3 million skilled, high-paying jobs. Higher levels of foreign direct investment in Japan should result in an increase of U.S. exports to Japan and a commensurate number of new jobs.

(2) Foreign Concerns about U.S. laws

Foreign governments have raised concerns about the transparency of the Exon-Florio rules, and expressed the view that those rules may act as an impediment to foreign investment in the United States. The U.S. Government states that Exon-Florio gives the President certain powers that are applicable only in extraordinary situations, i.e., those involving threats to national security that cannot be addressed under any other U.S. statute dealing with national security issues. Due to the inherent sensitivity of the national security considerations involved and the proprietary nature of information submitted by businesses, detailed information regarding any particular investigation is not made public.

Foreign governments have also expressed concern about the Helms-Burton and Iran and Libya Sanctions Acts (ILSA). The U.S. Government states that, with the stated purpose of promoting a peaceful transition to democracy in Cuba, the Helms-Burton Act provides, inter alia, for lawsuits in U.S. courts against "traffickers" in confiscated U.S. property in Cuba (these provisions have been suspended by the President), and requires the exclusion from the U.S. of foreign "traffickers" in confiscated U.S. property. Under ILSA, certain U.S. benefits may be denied to those who invest in the petroleum sector in Iran or Libya, as well as those who engage in certain transactions with Libya in violation of U.N. sanctions.

Foreign governments have also raised concerns about a Massachusetts statute that generally prohibits Massachusetts state agencies from procuring goods and services from U.S. or foreign individuals and entities that do business with Burma. In November 1998, the U.S. Direct Court for the District of Massachusetts declared that the Act was an unconstitutional infringement on the federal government's power to conduct foreign affairs and permanently enjoined its enforcement. Massachusetts has appealed to the U.S. Court of Appeals for the First Circuit.

(3) Support for Private Sector Efforts to Promote Investment in Japan

The United States Government is involved in many fora facilitating overseas investment. The U.S. Department of Commerce and Department of State have business advisory offices and our embassies and consulates abroad have officials who can assist potential investors with host country regulations and business practices.

The U.S. Government is also involved with organizations promoting investment in Japan, such as the American Chamber of Commerce Japan (ACCJ) and the U.S.-Japan Business Council. The U.S. Government has also worked to support incubator projects in Japan, including the Technology Village Partnership (TVP) in Yokohama (also mentioned above in section 5(3)a) , which is a good example of incubator facilities that are resulting in higher levels of U.S. and other foreign investment in Japan.

(1) In a February 1999 survey of 300 medium-sized firms, the Tokyo Chamber of Commerce and Industry found that more than 50% of firms would not oppose M&A deals if they found them appropriate.

(2) Losses incurred up to 5 years after establishment are now eligible for carry-over, vice 3 years. Also, the period of eligibility for loan guarantees was extended to eight years after establishment (from five years).

(3) Participants are briefed on the investment promotion measures of Japan, inspect industrial parks in the regional areas, and hold meetings with local enterprises. 137 firms were invited collectively, of which 10 firms have invested. 49 firms were invited individually, of which 13 firms have made invested in Japan -- including planned future investments.

(4 ) Information from such publications is provided widely to enterprises in Japan and abroad through JETRO's 36 offices in Japan and 80 offices abroad -- of which 8 are in the U.S.. Since fiscal 1995, information associated with investment to Japan has been provided on its website over the Internet. (5) In October 1998, JETRO held symposia in Los Angeles and Chicago attended by about 200 persons in Los Angeles and about 100 persons in Chicago, providing enterprises interested in Japan with information on Japan's policy and incentives for investment to Japan, merits in investment to the regional areas, and successful cases of investment of foreign affiliates in Japan.

(6) Results of financing for foreign investors is increasing annually: 6.5 billion for FY94, 1.2 billion for FY95, ? 9.1 billion for FY96, and ? 12.6 billion for FY97. Of this, U.S. enterprises accounted for 3.4 billion in FY94, 6.8 billion in FY96, and 7 billion in FY97.

(7) In addition, individual visits are made on the enterprises which are either dug out through symposiums on a joint mission with JETRO or identified as the potential foreign affiliates for location on the basis the collection of various kinds of information with a view to inducing location to the provinces (40 ~ 50 cases annually).

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