TAC Program - Making Trade Agreements Work for You!

Since the March 2-4 Palm Springs meeting between President Bush and Prime Minister Kaifu, Japan and the United States have been busily engaged in strengthening the U.S.-Japan relationship by resolving on-going trade and economic issues. An agreement has been concluded on supercomputers and agreements in principle have been reached satellites and telecommunications.

Today the U.S.-Japan SII Working Group released its interim Report on the progress achieved to date. The SII talks represent a approach that may be unique in the history of bilateral trade and economic discussions. The talks were designed to identify and resolve the structural impediments that contribute to economic tensions between the two countries. Accordingly, the Interim Report and Assessment identifies specific areas impeding the adjustment of the trade imbalance in both countries. The Interim Report is the first major step in a process that will include a final SII report in July as well as implementation and follow on.

Prime Minister Kaifu and the political leadership of Japan have worked long and hard to produce the policy commitments embedded in the SII Interim Report. Because structural problems are deeply ingrained in both economies, complete results will not come quickly. However, the SII Interim Report is an important way station along the road leading to a strengthened U.S.-Japan relationship. We believe that the Prime Minister will continue to exercise his assertive leadership on these issues and that this will greatly facilitate the work on remaining economic and trade issues. Japan's inputs to the SII Interim Report have been very positive ones and we look forward to further cooperation on the final report in July. For its part the United States will continue to do its utmost to address the structural issues identified in the SII Interim Report as affecting the competitiveness of the U.S. economy.

As President Bush has said, the leadership of Prime Minister Kaifu has brought a new spirit of cooperation to our relationship -- a positive, cooperative force which will strengthen our security relationship and enhance the U.S.-Japan global partnership while simultaneously facilitating the solution of outstanding economic differences.

Joint Press Release

The U.S.-Japan Working Group on the Structural Impediments Initiative (SII) reaffirms its continuing commitment to identify and solve structural problems in both countries which stand as impediments to trade and to balance of payments adjustment. In that regard, the Working Group provides the attached interim report on the Structural Impediments Initiative.

Since the U.S. and Japanese Heads of State agreed to launch the Structural Impediments Initiative in July, 1989, the SII Working Group has studied and identified structural problems in both countries that impede trade and balance of payments adjustment. The structural problems which were identified by the Government of Japan in the U.S. economy were in the following areas: U.S. Savings and Investment Patterns, Corporate Investment Activities and Supply Capacity, Corporate Behavior, Government Regulations, Research and Development, Export Promotion and Workforce Training and Education. The structural problems identified by the U.S. Government in the Japanese economy were in the following areas: Japanese Savings and Investment Patterns, Land Use, Distribution System. Exclusionary Business Practices, Keiretsu Relationships and Pricing Mechanisms.

Plenary meetings of the SII Working Group were held in September and November, 1989, and February l990. In September and November, the SII Working Group identified and discussed specific structural impediments. In February, the SII Working Group exchanged productive ideas for possible policy changes which would accelerate the adjustment process and contribute to the reduction of trade and current account imbalances, open markets, and improvement of competitiveness. Both the U.S. and Japanese Governments have already taken steps, some of which are identified below, as an indication of their commitment to the SII process and to solving the problems that have been identified.

Both governments believe that the interim report represents substantial progress to date and is a product of determined, earnest efforts to achieve structural improvement in both countries. Both governments agreed that further progress will be required in order to address structural problems before the final report. Matters concerning implementation and the follow-up phase of the report will also be dealt with by the time of the final report.

SII Interim Reports by U.S. and Japanese Delegations and Press statements

April 5, 1990

JAPAN U.S. STRUCTURAL IMPEDIMENTS INITIATIVE INTERIM REPORT BY THE JAPANESE DELEGATION

APRIL 5, 1990

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Saving and Investment Patterns

I. Basic Recognition

1. Reduction In the Current Account Surplus

As a result of appropriate policies pursued to sustain solid economic growth led by a strong domestic demand, Japan's current account surplus has been reduced remarkably from 4.5 percent of GNP in FY 1986 to an estimated 2.2 percent in FY 1989, which is less than half the level of FY 1986. This ratio in FY 1990 is projected to be less than 2 percent.

Impressive growth of imports, along with increases in overseas travel expenditures by the Japanese people, reflecting in part an increased emphasis on leisure, has contributed to this positive trend. U.S. exports to Japan have increased faster than U.S. exports to the rest of the world.

To make further progress on the basis of this positive trend, the Government of Japan will continue to undertake economic policies aimed at promoting sustained non-inflationary growth led by domestic demand.

The Government of Japan recognizes the need to continue to reduce its current account surplus and reaffirms its commitment to work actively toward that end. The Government of Japan also recognizes that a reduction of the imbalance between domestic savings and investment is important to that process. This will help further a reduction in the current account surplus.

2. Recognition of the Need for and Importance of Social Overhead Capital Improvement The Government of Japan recognizes that there remain areas where Japan is still behind other major Industrialized countries in terms of the levels of social overhead capital accumulation, though the pace of improvement has been rapid-partly as Japan was historically a slow starter in this field -with annual public investment (Ig) four times as large as that of the U.S. measured against the GNP.

Under these circumstances, the Government of Japan will continue to pursue its policies to increase and promote steady accumulation of social overhead capital, based on the keen recognition of the need for and importance of social overhead capital improvement. This would, through sustained non-inflationary growth of domestic demand, facilitate further reduction in the current account surplus.

I I. Measures to be Taken

1. Positive Measures in the FY 1990 Budget

(1) The Government of Japan declared in the "Economic Outlook and Basic Policy Stance of Economic Management for FY 1990," manifest of guiding principles for the budget, that much emphasis should be placed, in compiling the FY 1990 Budget, on the improvement of the social overhead capital, especially those directly related to the quality of life, in order to further substantiate the foundation for a better lite of the people.

(2) Based on that principle, the expenditures for public works, at 7,444.7 billion yen, surpasses the historic high level of the previous fiscal year, despite the revenue constraint caused by unsuccessful sales of NTT stocks in the previous fiscal year, and notwithstanding the vigorous expansion of the economy expected in FY 1990 which does not warrant additional stimulus.

Furthermore, the public works expenditure by local governments financed entirely by themselves (in the Local Public Finance Program) as well as the expenditures of the public works executing agencies financed through the FILP (Fiscal Investment and Loan Program) are expected to rise 7 percent, respectively, in FY 1990. In sum, the investment by the public sector on GNP basis (Ig) would add up to 26.3 trillion yen.

(3) While there are currently fifteen long--term plans for specific categories of social overhead capital designed to improve them in a systematic manner, it is expected that total cumulative expenditures in seven out of eight such plans, which are to expire at the end of FY 1990, will exceed the projected target expenditures as a result of further emphasis placed on social overhead capital in the FY 1990 budget.

2. Toward further improvement (1) The Government of Japan intends to increase and promote steady accumulation of social overhead capital, from a medium to long term perspective, as the nation heads for an aging society toward the twenty first century.

For that purpose:

(i) The ministries concerned will expedite preparations, at this early juncture, for formulating new long-term plans on eight categories of social overhead capital -including housing, sewers, parks, airports and port facilities - whose current plans are to expire at the end of FY 1990 (i.e., March 1991), in order to Indicate positive and specific targets for larger long-term plans for the major areas by the final SII report. It is envisaged that the current long-term plans for certain other key areas will also be augmented on a scale similar to that for these plans.

(ii) The Government of ,Japan will start formulating immediately a new comprehensive plan of public investment for the coming ten years. In this plan, real aggregate investment in infrastructure will be increased substantially above current levels for the ten years to boost domestic investment, improve social overhead capital and reduce the shortage of investment relative to savings and to the size of the Japanese economy. This should, along with other measures, facilitate further reduction in the current account surplus. Toward these ends, the Government of Japan will specify the aggregate amount of expenditures of the plan in the final SII report. Through these efforts, the accumulation of social overhead capital in Japan will be considerably enhanced and advanced.

(iii) The yearly expenditure for social overhead capital should be decided flexibly considering the prevailing economic and fiscal conditions, paying due attention to avoiding inflation and overheat of the economy as well, given the significant role that the public investment plays as a counter~cyclical measure in Japan. (2) In allocating the expenditure among various types of social overhead capital, utmost consideration should be given, as much as possible, to those closely linked to the improvement of the quality of life. (3) The Government of Japan will make effective use of the legislative form of the budget that authorizes contracts incurring treasury liabilities over the succeeding fiscal years, in order to secure maximum efficiency in executing public investments within the constitutional framework of the single year budget system. (4) The Government of Japan will make more effective use of the FILP (Fiscal Investment and Loan Program) funds to improve social overhead capital. Such effective use would Include financing urban redevelopment projects through the Japan Development Bank. In allocating the FILP funds, utmost consideration should be given, as much as possible, to housing and other projects contributing to enhancement of the quality of life of the people. (5) The Government of Japan will see to it that overall efficiency be increased in promoting the complex multi-jurisdictional development projects like the Kansai International Airport and the Tokyo Bay Area Development, by ameliorating systems for securing better communication and closer cooperation among the related ministries. (6) Land and Use, Deregulation, etc.

(i) The Government of Japan will give due consideration to effective utilization of publicly held lands in metropolitan areas for urban facilities, urban redevelopment, and public housing projects to ensure smooth implementation of public works. The Government of Japan sees to it that the discharged track yard site in Shiodome should be highly utilized as multifunctional urban space responding to the needs arising from internationalization, and as a regional transportation hub. Related urban infrastructures including subways and roads should be furnished as well.

(ii) The Prime Minister's Office will be central in vigorously promoting utilization of super-subterranean space (about 50 meters below surface or deeper in metropolitan areas) for social overhead capital Including urban infrastructures in metropolitan areas and thus seeing more effective use of land. Wide ranging issues--legal, safety, and environmental--need to be addressed carefully in the process.

(iii) More active use of various resources in the private sector, such as financial resources, technologies and know-hows, is important for the improvement of social overhead capital, as seen in such eases as the Kansai International Airport and the Trans Tokyo Bay Road Project. The Government of Japan will continue to promote further deregulation and to provide various incentives as needed in order to make the best use of these private sector resources in the social overhead capital improvement.

(iv) The Government of Japan will effectively activate the special act which aims at promoting organized development of housing sites and railways in greater metropolitan areas, thereby Improving the quality of life of the residents and promoting orderly development of the region. For example, discussions are being held on the formation of the basic plan, including the appropriate form of managing entities, for a new railway line called the Joban New Line.

(7) The Government of Japan will sincerely implement the U.S.-Japan Major Projects Arrangements aiming at facilitating the U.S. firms to gain expertise in the Japanese construction market.

3. Encouraging Consumption in the Private Sector

(1) As to curtailing work hours, the Government of Japan will launch a trial, starting this April, of 40 hour weeks for those government employees on shift work schedules, to pave a road to complete 5 day weeks for all government employees, and will encourage curtailing work hours in the private sector.

(2) As to improvement of consumer credit convenience, study on the credit sales industry in the future, including the issue of allowing revolving credit function to the credit cards issued by bank affiliated companies, is now in progress by the Council on Credit Sales, paying due attention to consumer protection, equal footing for competition and maintenance of an orderly credit system. Efforts will be made to reach a conclusion of the Council by the final SII report.

(3) The Government of Japan will welcome business decisions of the financial institutions to lengthen operating hours of their teller machines when they so decide based on their own commercial considerations, while there are no restrictions on the operating hours at present.

Land Policy

I. Basic Recognition. The land problem is one of the most serious domestic problems facing the Government of Japan. The Government of Japan has, as a first step, already enacted the Basic Land Act (*) last December. Recognizing the need such as for the increase of supply of housing and residential land, the Government of Japan will implement a wide range of specific measures as set forth in guidelines such as the Priority List of Land Policies, also announced last December, and as set forth below. Due to these measures, it is expected that housing and other demand will be boosted, leading to greater import opportunities.

1. Promotion of further supply of housing and residential land in metropolitan areas.

2. Comprehensive review of the land taxation system.

3. Greater utilization of land owned by the central or local governments or other public land.

4. Improvement of infrastructure necessary to facilitate increase in the supply of housing and residential land.

5. Review of the Land Lease Law and the House Lease Law.

6. Review of divisions between Urbanization Promotion Areas and Urbanization Control Areas and promotion of specific deregulation measures.

7. Rationalization of the official assessment of land value.

(*) The Basic Land Act stipulates:

(a) basic principles regarding land such as giving priority to public welfare;

(b) responsibilities of the central and local governments, private enterprises and individuals; and

II. Measures to be Taken

1. The Government of Japan will take the following measures and submit necessary legislation to the Diet by the end of FY 1990.

(1) Improvement of the existing system to enable the formulation of master plans regarding the supply of housing and residential land across two or more prefectures,

(2) Establishment of a new system for identifying and promoting the utilization of, idle land such as unused plant sites.

(3) Improvement of current city planning and other systems in order to facilitate the conversion of agricultural land within urbanization promotion areas to residential land. Through these measures, substantial increase of the supply of housing and residential land in metropolitan areas would be expected.

(1) The Government of Japan will conduct a comprehensive review on the land taxation system on the basis of such basic principles of taxation as equity, neutrality and simplicity, and in accordance with the principles expressed by the Basic Land Act and with other land policies. A study will be initiated by a sub-commission to be established this spring under the Government Tax Commission. Taking into consideration the results of this study, the Government of Japan will submit the necessary legislation to the Diet by the end of FY 1990.

(2) With respect to the taxation system on agricultural land within urbanization promotion areas of the major metropolitan areas, the Government of Japan, together with necessary adjustments and improvements in the related policies, will conduct a review with a view to addressing the deferment system of payment of the inheritance tax and the fixed assets tax, in accordance with the Comprehensive Land Policy Plan, so that the results will be smoothly implemented from FY 1992.

(3) In addition to the establishment of the new system for idle land mentioned in 1,. a review will be made with regard to the possible strengthening of the special land holding tax on idle land.

3. The Government of Japan will examine, by the end of FY 1990, the utilization of State-owned land in the major metropolitan areas and try to enable the land to be utilized for, through sales and other arrangements, appropriate private projects of urban district development, urban facilities, urban redevelopment and public housing projects, except those cases where preservation of land for public use is necessary. The Government of Japan will urge local governments to take similar measures with regard to local government-owned land. Effective utilization of the extensive land owned by the Japanese National Railways Settlement Corporation in metropolitan areas will also be ensured.

4. In order to increase the supply of housing and residential land, installation of the required infrastructure will be steadily pursued. In this context, the Government of Japan is committed as specified in Section II. 2.(1)(i) of "Saving and Investment Patterns" chapter to indicate a positive and specific target for a larger long-term plan for housing (as well as other major areas whose plans are to expire at the end of FY 1990) by the final SII report. The "eminent domain system" will also be utilized. Studies will be conducted on the system concerning public use of the deep underground in order to encourage its utilization.

5. In order to meet the changed circumstances and to improve the legal relationship between lessors and lessees, a review of the Land Lease Law and the House Lease Law has been conducted, and an outline of the draft amendment of these laws may be ready by as early as the end of FY 1990. The Government of Japan will then submit the necessary legislation to the Diet without delay. These measures are expected to induce a more appropriate use of land and an increase in the supply of good quality houses for lease.

6. In order to encourage effective utilization of land, the Government of Japan will conduct timely and appropriate review of divisions between Urbanization Promotion Areas and Urbanization Control Areas, and zoning. It is expected that Urbanization Promotion Areas will be expanded to provide for the growing housing demands. Specific deregulation measures, Including the relaxation of limits on building heights, total floor area ratio, and coverage ratio will be pursued for quality projects contributing to the increase of housing supply and the formation of a better urban environment.

7. In order to rationalize the official assessment of land value, the Government of Japan will:

(1) rationalize the land value assessment for inheritance tax calculation as soon as possible, taking into account the nature of the tax with a view to making the assessment reasonably closer to the market value; and

(2) give guidance to local governments to rationalize their land value assessment for fixed assets tax calculation at the time of the reassessment of the land valued in FY 1991; and advise them to make public the land values of the standard points.

Distribution System

I. Basic Recognition

Concerning the distribution system in Japan, the Government of Japan attaches great importance to the enrichment of consumer life in Japan through further improving efficiency, ensuring market access, and building physical infrastructures. Based upon such recognition, the Government of Japan will promote the implementation of a broad spectrum of measures:

1. The distribution of import freight will be accelerated and its cost will be reduced by the improvement of airports, harbors, and other import infrastructures .

2. Customs clearance procedures and other import procedures will be further expedited to correspond to the increasing trade volume, while maintaining such functions as realizing a proper and fair sharing of the tax burden, and ensuring the health and safety of the people.

3. Deregulation of the distribution system will be further promoted with regard to a variety of laws and regulations, such as the Large-Scale Retail Store Law, with a view to enriching consumer life in Japan.

4. As to trade practices concerning distribution, an improved environment will be sought from the standpoint of promoting competition and securing market openness.

5. Wide-ranging measures with lasting, structural impact will be implemented In order to expand imports, thereby improving the efficiency of Japan's market structure including the distribution system.

II. Measures to be Taken

1. Improvement of Import-related Infrastructures

(1) Airport Improvement

(a) Based on the Fifth Five-Year Plan for Airport Improvement (FY 1986-90), the improvement of the New Tokyo International Airport, the off-shore expansion of the Tokyo International Airport and the improvement of the Kansai International Airport are being vigorously promoted as the three most important projects. In particular, completion of the second phase construction of the New Tokyo International Airport and the first phase construction of the Kansai International Airport will double the cargo handling capacity as the cargo handling area will expand from about 20 hectares at the New Tokyo International Airport alone to about 50 hectares at the two airports combined. This expansion of capacity, together with the improvement and the expansion of the regional airport and airport-related cargo handling facilities, is a significant step toward the goal of ensuring airport capacity sufficient to meet the demand for international air services for some time to come. The airport-related cargo handling facilities at the New Tokyo International Airport and at the Baraki Terminal are being improved and expanded responding to the increasing demand for international air cargo handling. Considerable efforts are also being invested in the improvement of local airport facilities: For instance, the construction of the New Hiroshima Airport is now vigorously under way with December, 1993 as the target inauguration date.

(b) Regarding the Sixth Five-Year Plan for Airport Improvement, the Minister of Transport referred the matter to the Aviation Council on March 15. The Ministry of Transport will request formulation of a new five-year plan after receiving an interim report of the Council in August. A major goal of the review is to ensure that Japan's airport facilities can meet the medium-to-long term growth of demand in international air transportation. To this end, a number of airport improvements, including the expansion plan of the Kansai International Airport (its overall concept) and increased use for international service of regional airports, will be discussed in the process.

(c) Improvement of roads related to import is being promoted in line with the Tenth Five-Year Plan for Road Improvement (FY 1988-92).

2) Harbor Improvement Harbors are being improved in line with the Seventh Five-Year Plan for Harbor Improvement (FY 1986-90). In order to be able to respond to increasing imports, the improvement of container terminals for overseas trade and large scale multi-purpose terminals for overseas trade will be given high priority in the Eighth Five-Year Plan now being prepared. Concerning warehouse facilities, the Government of Japan is promoting private investment in facilities through such means as low-interest loans by the Japan Development Bank (JDB) and favorable tax measures. Since FY 1989, special emphasis is being placed on promoting the improvement of warehouse facilities dealing primarily with imported goods through a special low-interest loan facility. Thanks to these measures, warehouse companies in the Tokyo and Osaka metropolitan areas plan to expand their facilities by 16% by the end of FY 1991.

2. Expeditious and Proper Import Procedures

In order to ensure rapid entry of normal cargo imports into the Japanese distribution system, the Government of Japan goal is 24 hours clearance (from presentation of import declaration to import permit) through entry procedures for imports by 1991. The Government of Japan will ensure adequate budget resources and make regulatory changes necessary to accomplish this goal.

(1) Customs Clearance Procedures Automated Processing System will be introduced for customs clearance of sea cargoes from 1991 to 1992. In addition, the Japanese Customs will further improve and rationalize the customs clearance procedures, In accordance with the report by the Japan-U.S. Customs Experts Group. This will include efforts for achieving, within a few years, the implementation of upgrading of NACCS (Nippon Air Cargo Clearance System), expansion of the scope of the Provisional Examination System and its procedural simplification, and introduction of the Automated Risk Judgement System supported by the Customs Data Base.

(2) Import Procedures other than Customs Clearance Procedures A Japan-U.S. Experts Group, consisting of officials of the agencies concerned, will be set up in order to make import procedures more expeditious and proper. This Group will submit a report including recommendations for improvement by the time of the final report of the SII.

3. Deregulation

(1 ) Large-Scale Retail Store Law As dynamic changes are called for in the distribution industry, deregulation measures will be taken in order to meet new needs of consumers, to enhance the vitality of the distribution industry and to ensure smooth procedures for opening new stores. Deregulation measures will be put into place by both the central Government and local public authorities. The following deregulation measures will be implemented by the Government of Japan.

(a) Deregulation measures that will be immediately taken (such measures as those for an appropriate implementation of the law)

(i) In order to ensure smooth coordination procedures and to facilitate the opening of new stores and expansion of existing stores, the following deregulation measures for an appropriate implementation of the law will be in effect by the end of May this year, subsequent to the deliberation by the relevant council. These are the maximum measures which are legally possible under the current Large-Scale Retail Store Law (LSRSL).

(aa) Shortening of coordination processing period for opening stores: The coordination processing period will be less than one and a half years.

(bb) Exceptional measures concerning floor space for import sales: Regarding floor space for import sales, coordination procedures will be exempted for an increase up to a specific scale (approximately 100m2 of the floor space).

(cc) Exemption of coordination procedures for the increase of a certain increase in floor space: Coordination procedures will be exempted for certain cases such as a floor space increase up to a specific scale (whichever is the smaller, 10% of the existing floor space or 50m2).

(dd) Relaxation of the scope of regulation on closing time and the number of business holidays: Closing time under regulation will be relaxed from "after six o'clock p.m." to "after seven o'clock p.m." The number of business holidays will be relaxed from "less than four days a month" to "less than 44 days a year".

(ee) Enhancement of transparency in the coordination procedures: Transparency of the coordination procedures will be improved through such measures as further disclosure of the outcome of the deliberation in the Council for Coordinating Commercial Activities, regular publication of the status of coordination activities and receipt and processing of the inquiries by the interested parties including those wishing to open stores. It is confirmed that, as has been the case in the past, the ongoing coordination procedures will not prevent other procedures required by other laws and regulations (such as Building Standards Law and City Planning Law) from being pursued in parallel nor will they prevent those wishing to open stores from advertising for potential tenants. It is also confirmed that in case of acquisition of existing retail outlets through corporate acquisition (including those by foreign firms), the coordination procedures are not required.

(ii) Regarding separate regulation by local public authorities, the central Government, together with the above measures, will make its utmost efforts by, for example, directing local public authorities to take necessary corrective measures in the light of objectives of the law.

(iii) In order to ensure an appropriate implementation of the law and of separate regulation by local public authorities, the Government of Japan will take necessary follow-up steps including the checking of the status of implementation of the above measures. The institutional system will be put into place to achieve the above mentioned objective by establishing the headquarters for follow-up both in the Ministry of International Trade and Industry (MITI) Headquarters and in regional Bureaus and Department.

(iv) In order to ensure an appropriate implementation of the above measures thus to expedite the processing of the coordination procedures, the fiscal 1990 budget will establish a new division called the Distribution Industries Division in the MITI and will increase by ten the number of officials concerned. Further efforts will be made to expand and strengthen the institutional setup.

(v) In order to accelerate changes in the distribution industry and to expand manufactured imports, together with the above measures, steps will be taken to help promote Imports by the distribution industry including small and medium distributors. To achieve this objective, the budget, the fiscal loans and investment plan, and the tax reform proposal of the FY 1990 will establish tax incentive measures to promote manufactured imports, promote grass-root import expansion activities of small and medium distributors, promote international comprehensive distribution centers, expansion of import promotion fairs by local retailers, and others. Further efforts will be exerted to expand and reinforce such measures.

(b) Amendment of the law which is to be submitted to the Japanese Diet during the next regular session The Government of Japan will immediately start preparation for the amendment of the law aiming at submitting the bill during the next regular session of the Japanese Diet, by initiating the deliberation of the relevant council.

(i) Standpoint of the amendment

(aa) Sufficient consideration upon consumer interest.

(bb) Ensuring expedited processing of the coordination procedures.

(cc) Ensuring the enhanced clarity and transparency of the procedures.

(dd) Consideration upon international request to Japan to increase imports.

(ii) Items considered as the elements of the amendment.

(aa) Introduction of exceptional measures of coordination procedures concerning the floor space for import sales aiming at more import expansion.

(bb) Shortening of coordination processing period for opening stores. (The objective of efforts is to shorten the period to approximately one year.)

(cc) Enhancing clarity and transparency of coordination procedures for opening stores.

(dd) Restraining local public authorities' separate regulations.

(ee) Others.

(c) Review after the above-mentioned amendment of the LSRSL The LSRSL shall be reviewed further two years after the above-mentioned amendment of the LSRSL. This study will Include an analysis of the law's impact on consumers and competition in the retail sector and, based thereon, the need for a basic review of the law and further action. In order to make the first point clear, the above mentioned amendment shall include a provision stating that the effectiveness of the implementation of the amendment will be examined and that, based on this result, examination will be made on matters including removal of regulations applied to specific geographical areas.

(2) Regulation concerning premium offers and advertisement The regulation of premium offers by the Act Against Unjustifiable Premiums and Misleading Representation, including that by Fair Competition Codes, is designed to ensure fair competition in the market place and to protect consumer interests. Obviously, it is not intended to be an impediment to new entry by foreign or domestic firms. The Fair Trade Commission (FTC), however, is currently reviewing all existing Fair Competition Codes on premium offers so that they will not work as impediments to new entry by foreign or domestic firms, giving priority to Codes relevant to foreign trade or investment. The FTC will relax, as part of such an undertaking, the regulation of nine Codes as early as possible this year. Of the nine Codes, the contents of regulation by the Fair Competition Code on Premium Offers in Chocolate Industries will be relaxed for the second time by this June. Newspaper advertisements with coupons will be allowed by this summer. In reviewing the Codes, the FTC will hear the opinions of foreign firms and foreign businessmen. Guidance on Fair Trade Conferences by the FTC will be tightened lest. they should take any action beyond their proper objectives.

(3) Regulation concerning liquor sales and other businesses

(a) The Guidelines for Liquor Sales Licensing were amended, and their implementation has been improved since last September by such measures as the easing of the licensing criteria for large retail shops and the simplification and clarification of those for average sized liquor shops. Concretely, liquor sales licenses are planned to be issued to all the large retail shops (with a floor space of more than 10,000m2) and to about 5,000 average-sized shops by 1994. Moreover, the Government of Japan will seek the possibility of front loading licensing to large retail shops, which are expected to sell more imported liquors, and will reach a conclusion before the final report of the SII is submitted.

(b) On trucking business, a law was approved by the Diet at the end of last year and the Government of Japan has decided to promote deregulation. The revised law altered the method of entry regulation from the licensing system to a permit system while abolishing the supply-demand adjustment regulation, and changes the permit system for fare regulations to a notification system. (The revised law is due to take effect on December 1 this year.)

(c) With regard to the Pharmaceutical Affairs Law regulation concerning general sales of pharmaceuticals, the Government of Japan plans to decide on deregulation measures by mid-May which will include the reduction of items general pharmacies should be equipped with to about one third of the present number.

(d) In NTT, introduction of discounts for bulk contractors of the "free dial" (toll-free calls) is under consideration with a view to introduction by this June. Reduced postal rates have been made available for direct mails and catalogues sent out in large numbers for business purposes. These have become possible by the introduction of the advertising mail service in October 1987 and the catalogue parcel service in September 1989.

4. Improvement of trade practices

(a) The Fair Trade Commission (FTC) has held meetings of the Advisory Group on Distribution Systems, Business Practices and Competition Policy, consisting of scholars and business experts, in order to formulate a guideline clarifying the criteria regarding the enforcement of the Antimonopoly Act vis-a-vis the marketing policies of manufacturers towards distributors and of distributors towards manufacturers. The Advisory Group is due to issue a recommendation this June. The Fair Trade Commission, after receiving the recommendation, will formulate and publish the guideline. The FTC will strictly enforce the Antimonopoly Act according to this guideline so that business transactions among companies will not hinder fair competition. The FTC will intensify information gathering on illegal activities under the Antimonopoly Act, and will strictly eliminate such activities. For that purpose, the FTC will endeavor to enhance its investigation system.

(b) The Ministry of International Trade and Industry (MITI) is now examining its policies on such matters as the ways and means of encouraging the industries concerned to take positive measures to improve trade practices. After consulting with the Industry Structure Council, the Ministry will formulate a guideline for improving trade practices aiming at simplification, clarification and increased transparency of trade practices. MITI will start the process of formulating the guideline this spring and will try to reach a conclusion by the time of the final report of the SII. In that process, the Ministry will hear the opinions of foreign business organizations in Japan. MITI will present the guideline to the industries concerned and encourage them to take necessary steps. Contact points for processing complaints from foreign businesses will be established both in MITI and in the industries concerned.

5. Import Promotion The Japanese Government has introduced a new package of comprehensive import expansion measures in order for Japan to become a world leading importing nation. It includes:

(a) creation of tax incentives to promote manufactured goods imports;

(b) considerable increase in budget allocation for import expansion measures such as the establishment of an information network for the promotion of imports and the dispatch of experts to western countries and other forms of human exchanges in search of products to be exported to Japan;

(d) elimination of tariffs on more than 1,000 products. These measures are to be implemented after Parliamentary approval in this Diet session. Regarding concrete complaints by foreign firms concerning the standards and certification system, the Office of Trade Ombudsman (OTO) will continue to receive them and promptly respond to those claims. OTO will continue to hold meetings of the members of the OTO Advisory Council as well as the members of the Special Grievances Resolution Meeting with the members of the foreign Chambers of Commerce in Japan, including the members of the American Chamber of Commerce in Japan (ACCJ) at the latter's request. This will continue to provide opportunities for the latter to express their opinions on the improvement of access to the Japanese market including issues relating to the standards and certification system. Appropriate government agencies concerned will study these opinions with a view to improving the openness of the Japanese market and will report back the results of their consideration. The Government of Japan will initiate a new review in the area of standards, certification and testing, where it will review existing regulations and practices with regard to standards, certification and testing, including matters connected with industry association standards, to ensure that processes are transparent and that standards and testing are performance based where appropriate. As a first step, this new review will take up standards, certification and testing which are raised by ACCJ, other foreign chambers of commerce and other interested parties through the O.T.O and other appropriate channels.

Exclusionary Business Practices

1. Basic Recognition

Maintenance and promotion of fair and free competition is an extremely important policy objective, which not only serves the interest of the consumers but also increases new market entry opportunities including those of foreign companies. Based upon such recognition, the Government of Japan will implement wide-ranging measures.

1. Enhancement of the Antimonopoly Act and its enforcement.

2. Greater transparency and fairness in administrative guidance and other government practices.

3. Encouragement of transparent and nondiscriminatory procurement procedures by private companies.

4. Facilitation of patent examination disposals including a shorter examination period.

II. Measures to be Taken

1. Enhancement of the Antimonopoly Act and its Enforcement. The Government of Japan or the Fair Trade Commission (FTC) will take the following action, including legislative action, which are necessary or appropriate to achieve the goals acknowledged in the Report: regarding enhancement of the Antimonopoly Act and its enforcement.

(1) Resorting More to Formal Actions. The Fair Trade Commission (FTC) will strictly exclude illegal activities violating the Antimonopoly Act by resorting more to formal actions under the Act. This will be realized by enhancing the FTC's investigation system and by expanding its capacity to collect evidence of illegal activities. In addition, an Ombudsman system will be newly established in the FTC to deal promptly with information and complaints from foreign businessmen and foreign firms concerning such cases as violation of the Antimonopoly Act.

(2) Ensuring Greater Transparency In order to ensure transparency, to enhance deterrent effect and to prevent similar illegal activities from occurring, the contents, including the names of the offenders, the nature of the offense and circumstances surrounding it, of all formal actions such as recommendations and surcharge payment orders will be made public. Warnings will also be made public other than in exceptional eases.

(3) Increase in Budgetary Allocation. In the FY 1990 Budget Proposal, the Government of Japan has decided to substantially increase the number of personnel in the FTC investigation department and create new divisions: (a) allocate 25 new officials (129 - 154), resulting in a 20% increment in staff, (b) establish one new office for strengthening violation detection (1 - 2 offices ), (c) establish two new divisions for enhancing investigative functions (6 - 8 offices). (d) establish one new division in the Osaka Local Office for enhancing investigative functions of local offices (1 - 2 offices). The Government of Japan will continue with its efforts to steadily improve and strengthen the FTC.

(4) Surcharges. In order to enhance the deterrent effect against violations, the Government of Japan plans to revise, within the FY 1991, the Antimonopoly Act to raise surcharges against cartels so that they are effective. Moreover, group boycotts will also be regulated as cartels if they substantially restrain competition, and will be subject to surcharges if they influence prices.

(5) Resorting to Criminal Penalties. The FTC will resort to more criminal penalties through criminal prosecution triggered by its indictments. The FTC will more actively indict illegal activities when deemed necessary taking account of the degree of its maliciousness and the importance of its social impacts. For that purpose, the FTC will improve its criminal indictment system through such measures as establishing indictment standards and internal administrative procedures, and will make public the FTC's policy on criminal indictment. In addition, the Ministry of Justice and other relevant governmental agencies will coordinate in enhancing systems to cope adequately with any cases violating the Antimonopoly Act.

(6) The Damage Remedy System A study on the effective use of the current damage remedy system provided in the Section 25 of the Antimonopoly Act is currently undertaken by a study group set up in the FTC, in order that any individual party suffering damage from violation of the Antimonopoly Act can resort effectively to damage remedy suits. The FTC plans to receive and make public the results of the deliberations of the study group by June this year. Upon the publication of the study, appropriate measures will be taken so that the current damage remedy system will be effectively utilized.

2. Government Practices

(1) Deregulation will be further promoted on the basis of the recommendations issued by the Provisional Council for the Promotion of Administrative Reform.

(2) Administrative Guidance. In order to ensure transparency and fairness of administrative guidance, the Government of Japan will see to it that administrative guidance is not intended to restrict market access nor to undermine fair competition. The Government of Japan will implement administrative guidance in writing as far as possible, and unless there are good reasons not to do so, it will make the administrative guidance public when it is implemented.

(3) Advisory Committees and Study Groups. The Government of Japan confirms the following principles:

(a) The results of the deliberations of government sponsored "industry advisory committees and study groups" shall be made public.

(b) Where subjects of discussions are related to consumer interests, the committees and study groups shall invite, as members, those who can effectively represent consumer interests.

(d) The "visions" developed by the Government shall not be used to enhance the competitive position of particular companies in the Japanese market.

(e) In the "visions" involving trade matters, the significance of imports shall be emphasized.

(4) The exemptions from the application of the Antimonopoly Act should be at a minimum, and the necessity of existing exemptions will be reconsidered with a view to promoting competition policy. The scope of exemptions will also be reviewed, even in cases where they will be maintained. No recession cartel based upon the Antimonopoly Act is currently in effect.

3. Procurement Practices of Private Firms

(1) The Government of Japan confirms its view that procurement by private firms should be left to the decisions of the buyers and the efforts of the suppliers under free competition at the market place, and that any action in violation of the Antimonopoly Act hindering market competition must be resolutely eliminated.

(2) The Government of Japan believes that, as a matter of course, procurement by private firms should be non-discriminatory against foreign goods.

(3) The Government of Japan, therefore, will encourage, from an international viewpoint, private firms to make their procurement procedures transparent and nondiscriminatory against foreign goods as soon as possible.

4. Effective Patent Examination. Regarding the patent system, consideration on the harmonization of patent systems has been under way in multilateral fora such as WIPO and GATT. The Government of Japan, together with the U.S. Government, will actively participate in, and contribute to, the discussions there. The Government of Japan has vigorously promoted comprehensive policy measures to expedite patent examination disposals, which include the continual increase Tn the prescribed number of patent examiners (by 30 persons each in FY 1989 and in FY 1990), as well as the submission of the revision of the Patent Law before this session of the Diet for the commencement of the electronic filing of patent applications. Through such measures, the situation of the patent examination delay has already started to be improved. Through further intensive accumulation of such measures, the Government of Japan will make the patent examination period of Japan internationally comparable within five years. Apart from the ordinary examination procedure, the accelerated examination system which terminates the examination in a short period, has been introduced and is expected to be utilized.

Keiretsu Relationships

I. Basic Recognition

Certain aspects of economic rationality of Keiretsu relationships notwithstanding, there is a view that certain aspects of Keiretsu relationships also promote preferential group trade, negatively affect foreign direct investment in Japan, and may give rise to anticompetitive business practices.

In order to address this concern, the Government of Japan intends to make Keiretsu more open and transparent. The Government of Japan will take measures in its competition policy and enforce the Antimonopoly Act strictly, so that business transactions among companies with the background of Keiretsu relationship would not hinder fair competition. The Government of Japan will also promote a wide range of policies to facilitate the entry of foreign enterprises into the Japanese market.

II. Measures to be Taken

1. Strengthening the Function of the Fair Trade Commission

(1) The Fair Trade Commission (FTC) will strengthen its monitoring of transactions among Keiretsu firms, including but not limited to, those which have cross shareholding relationships, to determine whether these transactions are being conducted in a way that impedes fair competition. If such monitoring reveals that competition is substantially restrained in any particular field of trade by the cross shareholding, the FTC will take appropriate measures - including restrictions on cross shareholding or transfers of shares held in the cross share- holding - to remedy the illegal situation, and further, if the same monitoring reveals that anticompetitive practices are occurring, the FTC will take appropriate measures to prevent and remedy the anticompetitive practices.

In this connection, the FTC has established the "Advisory Group on Distribution Systems, Business Practices and Competition Policy," consisting of scholars and business experts, in order for the FTC to set up a guideline which will clarify the criteria regarding the enforcement of the Antimonopoly Act with respect to the exclusiveness of transactions among companies in the same Keiretsu group, whether or not cross shareholding is involved. The Advisory Group is scheduled to issue a recommendation this June. On the basis of the recommendation. the FTC will set up and publish a guideline to ensure that the transactions among companies in Keiretsu groups will not hinder fair competition, and thereby contributing to the promotion of fair and more open transactions among them without any discrimination against foreign firms. The FTC will strictly enforce the Antimonopoly Act according to the guideline.

(2) The FTC will conduct regularly, roughly every two years, close analysis of various aspects of Keiretsu groups, including supplier customer transactions, financing arrangements among group firms, personal ties, and special emphasis on the role of general trading companies in Keiretsu groups. The results of these analyses will be published. The FTC will take steps, including stricter enforcement of the Antimonopoly Act, to address anticompetitive and exclusionary practices uncovered in the FTC analyses.

2. Foreign Direct Investment

The Government of Japan is considering issuance of a policy statement on the openness of Japanese foreign investment policy.

(1) The Government of Japan will reexamine the Foreign Exchange and Foreign Trade Control Law with a view to submitting an amending bill in the next ordinary Diet session. The current Foreign Exchange and Foreign Trade Control Law enables the Government of Japan to restrict the foreign direct investment and importation of technology into Japan in any industrial sector on the grounds that the investment and the importation of technology might adversely and seriously affect similar domestic business activities or the smooth performance of the Japanese economy.

The Government of Japan will revise these provisions of the law on the recognition that these provisions are neither appropriate nor fit to the present practices of the law, and that such restrictions are not needed on a general basis. The bill will contain the relaxation or abolition of the provisions relating to prior notification requirements for foreign direct investment and importation of technology into Japan.

(2) The low-interest loan facility offered exclusively to foreign companies and Japanese affiliates of foreign companies by the Japan Development Bank (JDB) and the Okinawa Development Finance Corporation is to be drastically expanded. In addition, a corresponding facility is to be established in the Hokkaido-Tohoku Development Finance Corporation. Furthermore, advisory offices for the promotion of foreign direct investment in Japan are to be set up in the overseas representative offices of the JDB in order to support foreign companies investing in Japan in cooperation with Embassies, Consulates-General and JETR0 offices. Appropriate offices of JETRO or these advisory offices in cooperation with Embassies and Consulates-General provide information useful in arranging beneficial ventures between foreign firms and Japanese companies and arrange seminars and missions for potential investors (JETRO offices only).

3. Revision of the Take Over Bid System Regarding the take-over bid (TOB) system, the Government of Japan is planning to submit, at this Diet session, a bill calling for abolition of the prior notification requirement for TOB's and prolongation of the takeover period.

4. Enhancement of the Disclosure Requirements

(1) In order to introduce the so~called 5 percent rule, which requires the disclosure of substantial ownership in shares, the Government of Japan is planning to submit a bill at this Diet session, together with the revision of the TOB system. The new rule would also require continuing reporting as investors above the five percent threshold acquire or dispose of blocks of shares in an amount equal to one parent or more.

(2) With respect to the disclosure requirements related to the Keiretsu problem, the Government of Japan will examine areas in which Improvements are needed for their further enhancement, taking into account the disclosure requirements in the U.S. and Europe, and will reach a conclusion before the final SII report is submitted. It is envisaged that improvements in disclosure requirements will include enhanced reporting of related-party transactions as well as consolidated financial information.

5. Reexamination of the Company Law. The Committee on Legislation will reexamine the Company Law with a view to enhancing the disclosure requirements and to simplifying mergers and acquisitions procedures.

Pricing Mechanisms

1. Basic Recognition

Based upon the recognition that it is undesirable, in realizing a high quality of life, for large and unreasonable price differentials between domestic and overseas markets to continue to exist for a long time, the Government of Japan will implement the following policies to adjust the differentials:

1. Obtaining information on price differentials and providing it to consumers and industries;

2. Deregulation and strict enforcement of the Antimonopoly Act; 3. Promotion of imports and improving productivity;

4. Formation of more appropriate land prices;

5. Setting of public utility prices at more appropriate levels.

II. Measures to be Taken

1. Implementation of Measures to Adjust Price Differentials between Domestic and Overseas Markets. The Government and the Liberal Democratic Party (LDP) established on December 4 last year the Government-LDP Joint Headquarters for Adjustment of Price Differentials between Domestic and Overseas Markets to promote comprehensive policy measures for the adjustment of the price differentials from a consumer-oriented standpoint. The membership consists of the Prime Minister as Chairman, with the Minister of State of Economic Planning Agency, the Minister of International Trade and Industry, the Chief Cabinet Secretary and the Chairman of Policy Affairs Research Council of the LDP as Vice Chairmen, and other Cabinet Ministers and LDP leaders concerned. The Headquarters decided on 52 items as concrete measures to be taken for the adjustment of price differentials between domestic and overseas markets in its second meeting held on January 19 this year. These concrete measures can be grouped into the following six pillars:

(1) The government agencies concerned will endeavor to obtain information on price differentials through such means as surveys of price differentials of goods and services between domestic and overseas markets, and, where needed, to take necessary measures such as providing the industries concerned with the information on price differentials in order to adjust and narrow the gap.

(2) The government agencies concerned will endeavor to improve the competitive condition in the distribution system by such means as deregulation and strict enforcement of the Antimonopoly Act.

(3) The government agencies concerned will endeavor to further promote import and/or improve productivity of the relevant industries for the purpose of contributing to the adjustment and narrowing of the price differentials between domestic and overseas markets.

(4) Efforts will be made to set prices for public utilities at more appropriate levels by further improving productivity of the industries concerned and by examining from an international perspective their cost compositions and other elements of price formation.

(5) Based upon the deliberations of the Ministerial Conference for Land Policies, efforts will be made to rationalize land prices, especially in metropolitan areas, through close coordination among the government agencies concerned.

(6) The government agencies concerned will promote other policy measures which will contribute to the adjustment of price differentials, such as further deregulation, strict enforcement of the Antimonopoly Act and the dissemination of relevant information to the consumers. The government agencies concerned will steadily implement the 52 measures included in the above six pillars and publish the state of implementation each time any measure is implemented.

2. Continuous Implementation of Domestic and Overseas Price Surveys and the Dissemination of Information to Consumers and Industries. The Ministry of International Trade and Industry (MITI) has repeatedly carried out price surveys, including the Japan-U.S. joint price survey, to grasp the present conditions of price differentials between domestic and overseas markets. MITI decided to continuously conduct domestic and overseas price surveys, and requested for necessary resources in the supplementary budget for FY 1989 and the FY 1990 budget. Specifically, price surveys on 130 items, including a wide range of consumer items, are under way since March this year, based upon the supplementary budget for FY 1989. Two series of price surveys on 60 items will be conducted, based upon the FY 1990 budget. Based upon the results of these surveys, MITI will provide detailed information to consumers and industries. The dissemination of comparative price information will not be done in a manner which discriminates against imports or interferes with individual firm pricing decisions. MITI also held a discussion meeting, with consumers and industrial representatives on February 6 this year and heard their views on the problem of price differentials between domestic and overseas markets. Similar meetings have been held in eight major cities since then. MITI intends to hold such meetings based upon the results of domestic and overseas price surveys.

3. Promotion of Deregulation. The Provisional Council for the Promotion of Administrative Reform made an extensive study on deregulation, and the Government of Japan has been engaged in the promotion of deregulation based upon the recommendations of the Council. Specifically, the Cabinet decided, in December 1988, on the General Plan for the Promotion of Deregulation to promote the reform of public regulations, basing its decision on the recommendations made by the Council. In addition, the Government of Japan decided to continue active promotion of deregulation in its Administrative Reform Plan of 1990 (Cabinet Decision, December, 1989), and the agencies concerned have been making the utmost efforts in accordance with this decision. As the Council is planned to be dissolved on April 19 this year, the Government of Japan will consider the most effective scheme thereafter for the continued promotion of administrative reform, including deregulation.

4. Further Steps Based on the Interim Report of the SII. In addition to the measures listed above, the Government of Japan will take concrete steps with respect to the structural problems identified in this interim report. Some of them are described below, and it is expected that those steps will allow price mechanisms to work more effectively in the Japanese market. These measures will be implemented in conjunction with the six policy pillars and 52 measures decided in December 1989 and January 1990 by the Government-LDP Joint Headquarters.

(1) Deregulation of the distribution system, including the Large-Scale Retail Store Law, liquor sales, trucking and other businesses. The government agencies concerned will endeavor to improve conditions for free and fair competition in the distribution system through various measures. These will include the immediate relaxation of implementation and subsequent amendment of the Large-Scale Retail Store Law and the Government of Japan encouragement to private firms to make their procurement transparent and non-discriminatory.

(2) Promotion of fair and free competition in the market through the enhancement of the Antimonopoly Act and its enforcement. The Government of Japan plans to raise surcharges against cartels, so that surcharges will be effective. The FTC will resort to more criminal penalties. Appropriate measures will be taken so that current damage remedy system will be effectively utilized.

(3) Increase of Japanese overhead capital. The Government of Japan notes that these efforts will include the substantial increase in social overhead capital, including that which relates to the entry and distribution of imported products in Japan. In the new ten-year plan, real aggregate investment in infrastructure will be increased substantially above current levels for the ten years to boost domestic investment, improve social overhead capital and reduce the shortage of investment relative to savings and to the size of the Japanese economy.

(4) The Government of Japan will implement a wide range of measures with respect to the land problem. These include measures which encourage increased supply of available land, including the establishment of a new system for identifying and promoting the utilization of idle land (such as unused plant sites), reviewing the land allocation system, and reviewing the Land Lease Law and the House Lease Law in order to improve the legal relationship between lessors and lessees.

(Note) Full and precise contents of the measures above are described in the related part of this interim report.

U.S./JAPAN STRUCTURAL IMPEDIMENTS INITIATIVE

COMMENTS OF THE U.S. DELEGATION on the

INTERIM REPORT BY THE JAPANESE DELEGATION *

The Government of Japan's interim report reflects substantial progress at this stage of the Structural Impediments Initiative (SII) talks. The United States Government appreciates the hard work and leadership on the part of the Japan SII Working Group and the Government of Japan that produced this report. Many of the measures in the interim report should contribute to the goals of opening markets, reducing trade and current account imbalances, and promoting consumer interests.

The measures and commitments in the interim report are, in many respects, welcome plans for action. Additional progress is needed in subsequent SII talks to develop the plans and actions more fully in some areas. The effectiveness of the measures and commitments will depend upon achieving greater specificity in the commitments, and, ultimately, on the actual implementation of measures to reduce or eliminate the structural impediments.

Saving and Investment Patterns

A principal objective of the SII talks is the reduction of trade imbalances and current account imbalances of Japan and the United States. The U.S. Government welcomes the significant reduction which took place in Japan's current account surplus in 1989 to $57 billion from a peak of $87 billion in 1987, along with the further reduction in the U.S. deficit. Reducing the gap between saving and investment in Japan is essential for the further reduction of the current account imbalance.

The U.S. Government, therefore, welcomes the commitment of the Government of Japan to reduce the shortage of investment relative to savings and thereby to further the reduction of the current account surplus. Of particular importance to the achievement of that goal are the following specific commitments by the Government of Japan in the interim report: To increase substantially real aggregate investment in infrastructure above current levels in a new comprehensive plan of public investment which would last 10 years, thus reducing the shortage of investment relative to saving and to the size of the economy.

[footnote] * These comments constitute solely the views of the U.S. Government on progress to date, and areas for further progress.

o To start immediately formulating this new comprehensive plan.

o To specify the aggregate amount of expenditures of this plan in the final report.

o To prepare on a fast-track basis eight new larger, long-term sectoral plans in key infrastructure areas, including housing, airports and port facilities, parks and sewers whose current plans are to expire at the end of FY 1990. This offers a concrete mechanism for meeting Japan's social overhead capital needs, for improving the quality of life of the Japanese people, and helping reduce Japan's current account surplus.

o To provide positive and specific targets for these sectoral plans in the final SII report.

o To welcome the voluntary extension of the operating hours of bank automated teller machines to increase consumer convenience.

These decisions represent substantial progress for the purposes of the interim assessment. However, further action and specification will be needed in order to ensure a substantial increase in investment relative to saving and as a share of GNP. Only when the Government of Japan provides positive and specific targets for the timing and levels of funding for public investment will it be possible to assess the effects on the pattern of Japanese saving and investment, and on the current account surplus.

Land use

The U.S. Government welcomes the Government of Japan's basic recognition of the seriousness of the land use problem, and its commitment to address this problem through a wide range of policy measures. Of particular importance, the Government of Japan has already taken, or has committed to take, the following actions ln the interim report:

o Passage of the Basic Land Act in December, 1989, outlining principles which will guide the governments efforts to reform land taxation and to improve land use policies.

o To establish a system for identifying and promoting the utilization of idle land and to conduct a review with regard to the possible strengthening of the special land-holding tax on idle land.

o To conduct a comprehensive review of land taxation, and to submit reform legislation to the Diet by end-FY 1990, with a view to revising land taxation on the basis of principles such as equity, neutrality and simplicity.

o To review the taxation of agricultural land within Urbanization Promotion Areas (UPAs), with a view to addressing the deferments system of payments of the inheritance and fixed asset (property) taxes.

o To rationalize the land value assessment values for or the inheritance tax, taking into account the nature of the tax, with a view to bringing assessments closer to market value.

o To install urban infrastructure, and, in this context, to indicate a positive and specific target for a longer-term plan for housing by the final SII report.

o To review the Land and House Lease Laws and then to submit draft reform legislation to the Diet in order to improve the legal relationship between lessors and lessees.

o To review the UPA zoning designations, and to expand UPAs to accommodate growing housing demand.

o To pursue specific deregulation measures, including the relaxation of limits on building heights and housing density.

The U.S. Government believes that it is essential that the Government of Japan build on these actions and achieve further progress. Studies will need to be completed and positive action taken on the basis of these studies.

Further action will be needed in a number of areas, including: progress toward the elimination of the property and inheritance tax exemptions (deferrals) for agricultural land in urban areas; imposition of penalty taxes on idle land, pending the completion of efforts to make tax policies neutral; reduction in capital gains tax rates; correcting the legal imbalances between lessees and lessors; progress in implementing the Government of Japan's commitments to convert idle land to productive use, to install urban infrastructure and to implement the deregulation measures cited above.

Distribution System

The United States Government shares the Government of Japan's assessment that, in order to increase import opportunities and improve the quality of life for the Japanese consumer, improved infrastructure, deregulation and enhanced anti-monopoly enforcement are all necessary in the distribution sector. The U.S. Government welcomes the Government of Japan's commitment to:

o Improved infrastructure for imports, including airports, harbors, and roads. The goal of "24 hour" import clearance, as a useful step which should contribute to faster clearance procedures.

o Measures to ease restrictions in the distribution area, including rules on liquor licensing, trucking, premium offers and general pharmaceutical goods, and review of standards, certifications and licenses which are impeding imports.

o Shortening the approval period for new store openings under the Large Scale Retail Store Law and seeking legislative changes which would further liberalize that law.

o Measures to improve trade practices in the distribution sector, including stronger enforcement against anticompetitive practices.

o Implementing a program of incentives, including tax credits, to increase imports, as well as measures to enable small stores to carry more imported goods.

Many of the proposed actions of the Government of Japan are not yet possible to appraise because they are still under study and review. These include future plans for airport expansion, improvements in procedures to expedite import clearance, guidelines for anti-monopoly actions of manufacturers towards distributors, and guidelines for improving trade practices. The U.S. Government looks forward to rapid completion of these reviews, which we hope will lead to a more open Japanese distribution system.

The U.S. Government expects the relaxation of the Large Retail Store Law and its revision in the coming year to result in a substantial increase in the availability of foreign products and a more competitive distribution sector. We believe this objective could be further enhanced by exempting certain geographic areas from the law's application and hope that this measure will be taken in the near future.

Finally, the U.S. Government has been told by the Government of Japan that the measures that have been proposed will significantly open the distribution system of Japan. If this is borne out in the implementation phase, then many of the key problems related to the opening and expansion of stores would have been addressed without complete abolishment of the Large-Scale Retail Store Law itself. Should this, however, not prove to be the case, then the U.S. Government will return to its original view about the need for more drastic legislative solution. The United States Government shares the view of the Government of Japan that fair and free competition in the Japanese market is essential for the market entry opportunities of foreign companies and the benefit of Japanese consumers. In particular, the Antimonopoly Act should be enhanced and enforcement made more effective; government actions should be transparent and market-oriented; the procurement policies of private companies should be transparent and nondiscriminatory; and the patent system should be improved.

The U.S. Government appreciates the efforts that the Government of Japan has made in most areas; in particular, its commitments to:

o Strengthen substantially enforcement of the Antimonopoly Act, including increased staff and budget; more formal actions, resulting in more public disclosures of violations and violators; public disclosures of "warnings"; and more criminal prosecutions.

o Impose more effective penalties, including proposing legislation for higher fines (surcharges).

o Implement actions to make private remedies more effective.

o Issue guidelines to ensure that business practices in the distribution area and among keiretsu firms do not hinder fair competition.

o Minimize exemptions from the Antimonopoly Act.

o Implement government-wide policies to make 'administrative guidance, "visions" and the results of study groups more pro-competitive and consumer-oriented; and, in general, public and in writing.

o Encourage transparent, nondiscriminatory procurement by private Japanese companies with respect to foreign companies and goods.

o Reduce, within five years, the average time required for the examination of patents to coincide with international levels.

o Review all industry "fair competition codes" to remove anticompetitive effects of restrictions on the use of premiums, with a priority on codes that affect foreign trade and investment.

We support and encourage, and will continue to support and encourage, the increased role of the Fair Trade Commission in the Japanese economy and increases in its budget and staffing that are designed to increase enforcement. The commitments and measures are welcome plans for action. It is important, however, that these plans be substantiated by greater specificity and actual implementation in order to eliminate exclusionary business practices in Japan. The U.S. Government will discuss these commitments and measures, and their implementation, in thecourse of the SII. We are especially interested in further clarification and specificity regarding: the extent of increases in surcharges and the effectiveness of other enforcement measures: steps to enhance the effective utilization of private remedies; effective deregulation of sectors and restrictions (such as those on premiums) that can affect foreign trade and investment; demonstrable progress in reducing patent examination delays; pro competitive government actions; and the removal of other exclusionary practices that operate as barriers to trade and investment.

Keiretsu Relationships

The United States Government is of the view that keiretsu relationships can promote preferential group trade, negatively affect foreign direct investment in Japan, and give rise to anticompetitive business practices. The U.S. Government is encouraged, therefore, by the Government of Japan's clear statement of its intention to address this concern. In particular, we welcome the following specific commitments contained in the interim report:

o To make keiretsu more open and transparent;

o To take steps to improve the climate for foreign direct investment in Japan;

o To strengthen monitoring by Japan's Fair Trade Commission of keiretsu transactions and enforcement of the Antimonopoly Act, taking steps to remedy anticompetitive practices:

-- In this connection, the FTC will publish a guideline to ensure that keiretsu transactions do not hinder fair competition, and will strictly enforce the guideline;

o To begin addressing the cross shareholding issue by restricting cross shareholding relationships between keiretsu firms where FTC monitoring reveals that the cross shareholding leads to substantial restraint of competition;

o To conduct regular FTC analysis of various aspects of keiretsu groups, with special emphasis on the role of the general trading company.

o To examine disclosure areas in which improvements are needed, and to complete, before the final report, a study of further improvements with a view to enhancing disclosure of related-party transactions;

o To encourage foreign direct investment in Japan by amending the Foreign Exchange and Foreign Trade Control Law to:

- relax or abolish prior notification requirement for foreign direct investment and the importation of technology into Japan, and

- revise the provisions enabling the Government of Japan to restrict foreign direct investment and the importation of technology on broad economic grounds, recognizing that such restrictions are not needed on a general basis;

o To promote foreign direct investment in Japan, including the establishment of overseas advisory offices and the activities of JETRO;

o To submit legislation abolishing the prior notification requirements for takeover bids; and

o To issue a policy statement welcoming foreign investment in Japan.

The U.S. Government believes that it is essential for the Government of Japan to build on the commitments enumerated above through additional actions and commitments in a number of areas, including: issuance of a broader policy statement encouraging the loosening of keiretsu ties; further actions to address the cross shareholding issue; measures to encourage opening of keiretsu procurement practices; further steps to relax or abolish the broad authority of the Government of Japan to restrict foreign direct investment and the importation of technology on broad-economic grounds; and measures to bolster shareholders~ rights in Japan.

Pricing mechanisms

The U.S. Government believes that action by the Government of Japan is appropriate, given that large and unreasonable gaps between foreign and Japanese prices are a structural adjustment problem with significant adverse impact on Japanese consumers. The U.S. Government welcomes:

o The decision to establish a Government-LDP Joint Headquarters for Adjustment of Price Differentials as an indication of the very high priority attached to the problem.

o The broad scope of the 52 point program outlined by the group, although several items, designed to enhance Japanese productivity, are not germane to the SII discussions.

-- In the distribution sector, this list includes amending the regulations and guidelines on the Large-Scale Retail Store Law; relaxation of licensing and the regulations for retail distribution of liquor, tobacco, salt, and medical supplies; and specific examination of business practices affecting distribution of processed food products.

-- The plan includes eight steps to rationalize public utility charges including airfares, domestic/international telephone rates.

-- It also calls for formulation of land policies, including promoting housing supply, and revising the land tax system to promote more appropriate land prices.

o The broad scope of this list clearly reflects that past policies and practices in these areas are at the root of the price problem. The U.S. Government believes that continuing attention to price levels in Japan suggests price changes may be a useful device for monitoring efficacy of SII reforms in other areas.

The U.S. Government notes that many of the actions listed above require further elaboration and specific commitments before an assessment can be made of their effectiveness in reducing Japanese prices. The Japanese program requires further attention to timetables for implementation and to the elimination of regulations which attempt to manage markets by restricting entry. The nexus between the Japanese Government-LDP program and the SII undertakings in this and other sections should lead to more specific solutions to problems of deregulation and market entry with particular implications of eliminating unreasonable price differentials. It is essential that price surveys be designed and presented in a broad-based, representative and unbiased fashion to ensure a fair and accurate determination of the reason for the price differences, and not focus unfairly on prices and practices of foreign products or producers. We expect that survey data will not be used for purposes which inhibit competition or the operation of market forces.

U.S. JAPAN STRUCTURAL IMPEDIMENTS INITIATIVE

INTERIM REPORT BY THE U.S. DELEGATION

APRIL 5, 1990

[end cover page]

Structural Impediments in the U.S. Economy

The Government of Japan has identified several conditions in the U.S. economy which may impede balance of payments adjustment and long-term competitiveness and has offered helpful suggestions to remedy these conditions. Below is a review of US. initiatives that address the issues raised by the Government of Japan.

I. Saving and Investment Patterns

Raising U.S. saving rates would help to reduce the nation's current account imbalance. Increasing the pool of domestic saving would contribute to lower US. interest rates, thereby facilitating domestic capital formation, productivity and economic growth. The Administration is taking action to promote saving by both the public and private sectors.

Public Sector Deficit Reduction and Government Saving

The top priority is to eliminate the Federal budget deficit by 1993 and to reduce government debt. The deficit is being reduced within the context of the Gramm-Rudman-Hollings (GRH) process.

Federal Budget Deficit

o Substantial progress has already been made on the Federal budget deficit.- It has been reduced from 6.3% of GNP in FY 1983 to 2.9% in FY 1989.

- In the budget plans submitted by the President, the deficit is expected to fall from 2.3% of GNP in FY 1990 to 1.1% in FY 1991.

o Deficit reduction will be achieved through spending restraint and continued growth.

o Following the procedures in the GRH law, the President ordered a sequester in FY 1990 and demonstrated his fiscal resolve by announcing his willingness to operate with the sequester for the entire fiscal year, if necessary and by not canceling the budget savings achieved through the sequester. This reversed past practice and set a strong precedent for future fiscal discipline.

The Budget Process

o The President's FY 1991 budget calls for a stronger Gramm-Rudman-Hollings (GRH) law, one which would close loop-holes and strengthen the process of deficit reduction. For example: - the President's budget proposes an automatic second sequester that would be imposed if targets are not met later in the budget period; - the technical feasibility of using revised economic assumptions for the purpose of calculating the budget proposals for the second sequester is being studied; - a requirement for a super-majority vote to cancel the savings from sequestration once achieved; and - automatic off-set rules for supplemental funding requests.

o The President strongly supports a form of enhanced rescission authority called legislative line-item veto proposed in late 1989 by a group of Senators. In the absence of a line-item veto amendment to the Constitution, enhanced rescission would give the President a realistic opportunity to seek to eliminate from appropriations bills special interest items that he deems unworthy, while offering Congress full protection through a vote on each rescission.

Social Security Surpluses

o The Administration has proposed in the FY 1991 budget a Social Security Integrity and Debt Reduction Fund (SSIDRF) to ensure that anticipated surpluses in the Social Security program are not spent for other purposes. Instead, they would be applied to reduce the Federal government's outstanding debt. o By retiring government debt and, in effect, balancing the non-Social Security budget, anticipated surpluses would be injected into the nation's capital markets. Thus, the Federal government would become a net saver - a source of funds for enhanced growth.

- Once the SSIDRF is fully phased in, the Federal government would pay from the general operating budget into the SSIDRF each year an amount equal to the projected surplus on the Social Security trust funds during that year. The payments into the fund could be used only to reduce outstanding Federal debt held by the public. These payments would be counted as a standard outlay in the budget.

- To preclude Federal borrowing as a method to finance these contributions, the current GRH law would be amended to require a balanced budget in 1994 and thereafter. Payments into the SSIDRF would be exempt from the sequester in the GRH law.

- In the near term, saving allocated to the SSIDRF would rise quickly, from 0.3% of GNP in 1993 to 1.5% of GNP in 1995.

- The Director of the Office of Management and Budget, testified before the Senate Finance Committee on February 8, 1990 to explain the Administration's SSIDRF proposal.

Revenue Developments

o Federal revenues have grown steadily during the current, 8-year economic expansion. In each year since the expansion began, Federal revenues have exceeded the average of 18% of GNP experienced during the 1950-1979 period. Revenues are projected to increase by 9% in FY 1991 and to total 19.9% of GNP.

o The projected increase in revenues in FY 1991, comes largely from a projected increase in incomes, but additional steps are being proposed which would affect revenues. For example, the President's budget for FY 1991 proposes:

- Extending social security retirement coverage to those state and local employees not currently participating in public employee retirement programs. This measure would provide coverage for approximately 4 million state and local employees. This extension of coverage is expected to yield revenues of $2.1 billion in FY 1991, and more in future years.

- Providing coverage for all state and local government employees under the Medicare Hospital Insurance program. This proposed extension, to take effect on October 1, 1990, would yield an anticipated $1.7 billion in FY 1991.

- Reducing tax rate on capital gains will increase Federal revenues (see Lower Capital Gains Tax Rates, below).

- Raising a variety of aviation user fees. The air passenger tax would be increased to 10%, the air freight tax to 6.25%, the non-commercial aviation gasoline tax to 15 cents per gallon, and the non-commercial jet fuel tax to 17 cents per gallon. It is anticipated that these proposals would raise $500 million for the Airport and Airway Trust Fund in FY 1991, and more in future years.

- Making permanent the 3% communications excise tax. If enacted, this extension would yield an estimated $1.6 billion in FY 1991, and more in future years.

o In addition to these revenue increases, the IRS has identified several management reforms and opportunities for increased enforcement that are expected to yield more revenue. Some of these are listed below.

- Resources will be reallocated to accelerate the examination process for tax shelter cases, making it possible to close such cases more quickly. Significant cases will be prioritized and given expeditious handling. It is estimated that this reallocation of resources will yield an additional $349 million in FY 1991.

- Settlement authority for appeals will be delegated to the examiners of the Coordinated Examination Program on the basis of historical appeals settlement precedents. The result will be an acceleration of the receipt of taxes, penalties, and interest. The effect on FY 1991 revenues is estimated to be $547 million.

- Resources will be shifted to conduct actuarial examinations of small retirement plans, increasing the number of examinations in this area from the previously planned 700 to 18,000. The revenue effect begins in FY 1990, with additional collections of $64 million. An additional $602 million is anticipated for FY 1991.

- Resources will be reallocated from examinations staff to appeals staff in order to help close targeted large cases in the appeals process. The IRS plans to target between 30 and 50 cases in FY 1991, yielding collections of approximately $1 billion in that year.

Private Sector: Incentives to Save and Invest

Though still below historical levels, the personal saving rate in the US. seems to be improving. It reached 5.4% in 1989, up from a trough of 3.2% in 1987, and it now appears to be moving higher. The Administration's Working Group on Savings and the Cost of Capital considered numerous options to stimulate personal savings. As a result of this review and analysis, the Administration has proposed to Congress several initiatives designed to stimulate private saving and investment further.

Family Savings Accounts

o The Administration has proposed the introduction of Family Savings Accounts (FSAs). FSAs would stimulate private saving by allowing tax-free earning on contributions to these accounts.

- Individuals would be able to make non-deductible contributions of up to $2500 per year and couples up to $5000 per year, provided the taxpayer's adjusted gross income is less than $60,000 per year (less than $100,000 for heads of households, and less than $120,000 for married couples filing joint returns).

- Contributions to FSAs would be allowed in addition to contributions to qualified pension plans, IRAs, 401(k) plans and other tax-favored forms of saving.

- Earnings on contributions retained in the FSA for at least seven years would be eligible for full tax exemption upon withdrawal. Withdrawals of earnings allocable to contributions retained in the FSA for less than three years would be subject to both a 10% excise tax penalty and to income tax. Withdrawals of earnings allocable to contributions retained in the FSA for three to seven years would be subject only to income tax.

o On March 27, 1990, the Assistant Secretaries of the Treasury for Tax Policy and Economic Policy testified before the Senate Finance Committee to explain the Administration's proposal to establish Family Savings Accounts.

Individual Retirement Accounts

o The Administration has proposed improving existing Individual Retirement Accounts (IRAS) by making them more attractive to savers.

- Withdrawals of up to $10,000 per taxpayer would be allowed for eligible home purchases.

- The 10 percent excise tax on early withdrawals would be waived for eligible taxpayers.

- Eligibility for penalty-free withdrawals would be limited to individuals who did not own a home in the last three years and are purchasing or constructing a principal residence that costs no more than 110% of the median home price in the area where the residence is located.

Lower Capital Gains Tax Rates

o The Administration has proposed lowering the effective tax rates on capital gains. The proposal would induce more saving and investment by raising after-tax rates of return, especially for long-term investment.

- When fully effective in 1992, the exclusion on capital gains would be 30% for assets held 3 years or more, 20% for assets held at least 2 years (but less than 3 years), and 10% for assets held at least one year (but less than 2 years).

- The holding period requirements are phased in. For dispositions of assets in 1990, the 30 percent exclusion applies to all assets held at least 1 year. For dispositions in 1991, assets held 2 years receive the 30 percent exclusion, and assets held 1 year receive a 20 percent exclusion.

- The proposal would apply to all individual capital assets except collectibles (e.g.., works of art, antiques, gems, etc.).

- Excluded capital gains are included in the alternate minimum tax. - As a result of these exclusions, the effective tax rates applicable to capital gains on qualified assets by a taxpayer in the 28 percent tax bracket would be, respectively, 19.6 percent, 22.4 percent, and 25.2 percent.

o On March 28, 1990, the Chairman of the President's Council of Economic Advisers and the Assistant Secretary of the Treasury for Tax Policy testified before the Senate Finance Committee to explain the Administration's proposal to reduce tax rates on capital gains.

Other Incentives to Save and Invest

o In addition to the saving initiatives described above, eligible U.S. workers can still participate in 401(]c) savings plans. These plans, which are similar to the Japanese "ZAIKEI", involve the deduction of a predefined proportion of an employee's pay. These funds are deposited into a savings or investment account. The employee is not taxed on these funds until they are withdrawn. A penalty is assessed for withdrawals prior to retirement.

o The Secretary of the Treasury has testified against the double taxation of dividends. The Department of the Treasury is currently studying this issue. Best efforts will be made to complete the study by the time of the final SII report. No legislation is expected in 1990.

II. Corporation Investment Activities and Supply Capacity: Improvement of U.S. Competitiveness

Investment in U.S.-based production capacity would enhance the competitiveness of exports from the United States. Changes in certain U.S. laws and regulations, as well as the continued openness of the United States to foreign investment, will facilitate productive investment in the United States.

Anti-trust Reform

o The Administration supports legislation which would reduce uncertainty about the treatment of production joint-ventures under the anti-trust laws. The legislation would promote production joint-ventures that enhance competition, while retaining appropriate safeguards for consumers.

o When an anti-trust lawsuit is filed against a production joint-venture, the courts would be required to take into account the competitive benefits of the venture as well as its costs.

o For production joint-ventures that are notified to the government, anti-trust liability would be limited to actual damages rather than the current treble damage liability.

o All stages - from the beginning stage of joint R&D activities to the final stage of joint production - would be covered by either the proposed legislation or the 1984 National Cooperative Research Act. U.S. Government guidelines, either those in effect or those to be issued, will clarify the treatment of joint research and production activities under the Antitrust Laws.

Product Liability Reform

o The Council on Competitiveness, chaired by the Vice President, has endorsed legislation that would reform product liability laws. This legislation would contribute to uniformity in all 50 states and limit damage awards.

- It is designed to restore basic principles of fairness: adequate compensation for accident victims; fault-based liability, and dispute resolution.

- The result would be to cut down on excessive litigation and the cost of doing business in the U.S. It would also lessen disincentives to develop new products and other innovations.

o The President has approved the Council of Competitiveness' recommendation to make product liability reform a top priority.

o The Administration is also working with groups from all sectors of the U.S. economy to reform U.S. product liability laws. The Administration recognizes that reform is necessary to remove burdens on innovation and improve U.S. competitiveness, while still ensuring protection for injured parties.

Policy Toward Foreign Direct Investment

o United States policy toward foreign direct investment has long recognized that a free flow of investment capital across borders benefits both host and investor countries. The United States generally provides foreign investors non-discriminatory treatment under U.S. laws and regulations. It is in the interests of U.S. consumers, workers, and investors to maintain this open policy.

o In his Economic Report transmitted to the Congress in February 1990, President Bush stated:

To serve the interests of all Americans, we must open markets here and abroad, not close them. I will strongly resist any attempts to hinder the free international flows of investment capital which have benefited workers and consumers here and abroad.

o Consideration is being given by the Administration to the issuance of a more detailed policy statement reaffirming the Administration's strong commitment to an open direct investment policy.

o For over 200 years, the United States has welcomed foreign investment and, at the same time, protected vital national security concerns. The U.S. restricts foreign investment only to protect the national security. The Exon Florio provision of the Omnibus Trade Act, which authorizes the President to prohibit foreign acquisitions that threaten to impair the national security, is consistent with this long-standing policy.

o The President delegated his authority to review foreign acquisitions that might impair the national security to the Committee on Foreign Investment in the United States (CFIUS). As of April 1990, CFIUS reviewed over 300 transactions, formally investigated seven, and referred four to the President for a decision. In only one case has the President prohibited a transaction pursuant to Exon-Florio.

o In line with the Administration's open investment policy and the provision of the law, the Exon-Florio authority will be used only when no other measures are adequate or appropriate to protect the national security.

o The Government of Japan has raised a question regarding the U.S. position on H.R. 5 (the Bryant Bill). This bill would require registration and disclosure of foreign direct investment in the United States. The Administration strongly opposes this bill.

Tax Treatment of Foreign Investors

o The U-S. and Japan have entered into a tax treaty that provides for non-discriminatory treatment of business enterprises of the two countries.

Other Measures to Build Supply Capacity

o In order to reduce U.S. reliance on oil imports, the President's FY 1991 budget includes proposals for tax credits to encourage the discovery of new oil and gas fields and the reclamation of old ones.

o Capital investment in productive capacity will also be encouraged by the Administration's proposals that would lower the cost of capital.

III. Corporate Behavior

The productivity of US. workers and the competitiveness of US. corporations are affected by the decisions of corporate managers. These managers, in turn, are influenced by the behavior of company shareholders. The Administration is pursuing policies which will encourage managers to take decisions that will benefit their companies in the long term.

o Long-term investment (as well as short-term) might be discouraged by the high cost of capital in the United States, and by a tax system which penalizes certain forms of saving and investment.

o The Bush Administration is pursuing policies to lower the cost of capital. Such policies include lowering the tax rate on capital gains, promoting private saving, and eliminating Federal dis-saving. These policies are intended to lower the cost of capital for American companies thereby encouraging long term investment and long-term planning by management.

o The Administration's Working Group on Savings and the Cost of Capital continues to review proposals that could result in a lower cost of capital for US. companies.

o In addition to efforts to reduce the cost of capital the Administration continues to seek ways to foster a long-term investment horizon on the part of corporate managers.

- The Treasury is conducting a study of how the relationship between managers and institutional investors of US. corporations affects long term competitiveness. The study is expected to be completed by early summer.

- The Secretary of the Treasury also supports efforts to address regulatory fragmentation in the securities and futures markets. This is intended to promote innovation and increase investor confidence by more effective enforcement and steps to improve the operation of markets (including, among others: harmonization of margins; coordinated circuit-breakers; and improved clearance and settlement procedures).

o As part of its review of factors that affect corporate competitiveness, the Treasury is examining how compensation packages influence the time horizons of executives and of other employees.

IV. Government Regulation

Certain government regulations discourage international trade and competition. Progress is being made to deregulate controls on both exports and imports.

Export Deregulation

o In view of the changing strategic situation, the US. and its allies on the Coordinating Committee for Multilateral Export Controls (COCOM) have agreed to streamline export controls. COCOM is discussing the streamlining of licensing systems for machine tools, telecommunications and computers as a first step to reduce the number of controlled goods.

o COCOM has also agreed to guidelines for member countries to eliminate most licensing requirements for trade among COCOM member countries. The United States plans to implement its new system in the near future.

o In July 1989, the US. removed all controls on the re-export of dual use goods and technologies (except supercomputers and electronic listening devices) into and among COCOM member countries (and Finland and Switzerland), as provided in Section 774.2c) of the Export Administration Regulations.

o New export administration regulations issued in October 1989 eliminated the requirement for US. re-export authorization for exported U.S. goods that are incorporated as parts and components and comprise less than up to 25 percent of the end product. This liberalization eliminated re-export controls on large numbers of telecommunications, electronics and instrumentation equipment imported into European nations and Japan from the US.

o The U.S. Government is reviewing and will consider changing its export control scheme to allow exports of strategic products and technology by those countries such as Japan which impose strict export control on those items without U.S. re-export license irrespective of their destination.

o The U.S. has significantly reduced trade impediments resulting from short supply export controls. The Administration has revised U.S. short supply policy with regard to agricultural commodities. The Administration has proposed in the Uruguay Round that

GATT contracting parties should be prohibited from restricting exports of agricultural food products for reasons of short supply. The United States is working with its major trading partners, including Japan, to gain support for elimination of GATT Article XI 2. (a).

Energy Exports

o The US. has made significant progress in eliminating many energy trade barriers.

- In 1985, controls on exports of refined petroleum products were eliminated as part of the renewal of the Export Administration Act of 1979.

- Exports of crude oil produced in the state waters of Alaska's Cook Inlet were allowed in 1986, pursuant to the Energy Policy and Conservation Act (EPCA) of 1976.

- Exports of crude oil to Canada were substantially decontrolled in 1985, as authorized by both the EPCA and the Mineral Leasing Act.

- From 1988 to 1990, the Administration removed legal and regulatory barriers to the development of a project to export Alaskan LNG to Pacific rim energy markets, as authorized by the Natural Gas Policy Act.

- The Commerce Department recently completed a study for Congress (as required by Section 2424 of the Omnibus Trade and Competitiveness Act of 1988) on the benefits and costs of exporting California heavy crude oil and recommended a partial relaxation of the ban on exports. This matter is pending; the Commerce Department will offer testimony before the House Foreign Affairs Committee on Thursday, April 5, 1990 with respect to this issue.

Import Liberalization

o On July 25, 1989, President Bush announced the Steel Trade Liberalization Program to phase out the voluntary restraint agreements (VRA) after two and a half years and to negotiate the elimination of subsidies and other trade distorting practices affecting steel. This program reflects his commitment to a meaningful international consensus and to freer and fairer trade in steel on a global basis.

- As part of this extension and in keeping with overall Administration policy regarding adjustment measures, major U.S. steel companies must make substantial commitments to reinvestment in modernization for enforcement authority to continue. In addition, each of the major steel companies is required to commit at least one percent of net cash flow for worker retraining.

- Since the inception of VRAs on steel in 1984, the major US. steel producers have spent $8.0 billion on steel-related expenditures, including plant and equipment, research and development, worker retraining and other efforts to adjust and modernize. These companies have modernized their production facilities, eliminated excess capacity, and drastically reduced their production costs.

o VRAs on machine tools, which began on January 1, 1987, are due to expire on December 31, 1991.

- As with steel, and reflecting Administration policy on adjustment, there is a domestic action plan in place which is intended to facilitate the revitalization of the U.S. machine tool industry.

- Despite thin profits, the machine tool industry has increased expenditures on research and development and product engineering and design.

- Combined spending on research and new product development totalled $143 million in 1988 (the most recent data available), or 4.2% of gross sales. By comparison, profits were only 2.1% of sales in 1988.

- During the last two years, many machine tool companies have introduced major new models of machining centers, milling machines, lathes and punching machines.

V. Research and Development

A steady stream of innovative ideas and technological development will enable the United States to remain a formidable competitor in international markets. To maintain this technological flow, the United States must strengthen its research and development efforts. The Administration has proposed several initiatives to advance U.S. research and development by both the public and private sectors.

Federally-supported Research and Development

o The President's FY 1991 budget calls for a $4.5 billion increase in Federal funding for research and development, to a record high of $71 billion. Support for civilian R&D will increase by 12% and defense-related R&D will increase by 4%.

o A 22% proposed increase for Federal civil space activities includes a 72% increase for the development of the commercial potential of space, a 47% increase for manned exploration, a 36% increase for space station development, and a 22% increase for scientific exploration.

o Part of the $45 billion expansion in Federal R&D spending is devoted to a 14% funding increase for the National Science Foundation. The Administration remains committed to doubling the NSF budget by 1993.

o The President demonstrated his commitment to promoting technological development in the United States by establishing the position of Undersecretary for Technology at the Commerce Department. The President's nominee for this position testified before the Senate Commerce, Science and Transportation Committee on March 26, 1990, and is now awaiting confirmation by the Senate.

Private Research and Development

o The Omnibus Budget Reconciliation Act of 1989 modified the Research and Experimentation (R&E) credit and extended it for the first nine months of 1990. The R&E credit is 20% of qualified research expenses that exceed a company's base amount (the product of the company's average gross receipts during the previous four years and the ratio of the company's 1984-88 R&E to its 1984-88 gross sales).

o The President's FY 1991 budget would make permanent the R&E credit, and would revise R&E expense allocation rules. These changes would encourage firms to establish and expand research facilities by assuring them that tax incentives will still be available when research is carried out.

o Private research and development would also be bolstered by lowering the cost of capital and reducing regulatory and legal barriers to investment (see policy initiatives described above).

Adoption of the Metric System

o The Commerce Department has revised and issued for public comment an updated "Metric Conversion Policy for Federal Agencies" under the Code of Federal Regulations. The update, to be issued in final form by June 1990, includes stronger guidance for agency metric implementation, suggestions for agency metric organization and requirements for agencies to report metric progress to Congress.

o Commerce officials continue to meet with standards groups, trade associations and business advisory groups to encourage use of the metric system in the private sector.

o The Secretary of Commerce wrote to each state governor in December 1988 alerting them to the 1988 Trade Act requirements for Federal agencies to convert to metric in grants, procurement, publications and other business related activities by the end of FY 1992. He urged them to plan similar initiatives at the state level and to name a senior official to the National Council on State Metrication. Response from the states was encouraging.

o The General Services Administration (the principal buyer for the U.S. Government) obtained public comment on their planning for metric conversion and will publish their plan in the Federal Register this week. The plan calls for Federal procurement to be conducted in a manner that will stimulate U.S. industry to rapidly develop greater metric capability.

o The House Committee on Science, Space and Technology, Subcommittee on Science Research and Technology, will hold hearings on Federal agency compliance with the metric provisions of the 1988 Trade Act on April 24, 1990. These hearings, in reaction to a recently completed GAO study on the matter, demonstrate the urgency with which metrication is viewed by the Congress. Senior officials of the Departments of Commerce, Defense, Energy, and Education, the General Services Administration and NASA are scheduled to testify.

o At Federal agency urging most U S. technical standards organizations are revising their policy on metric use to develop more aggressively the metric standards needed by U S. business and industry in their transition to metric.

o The Department of Commerce continues to study ways for the private sector to significantly expand and increase the use of the metric system.

VI. Export Promotion

The President has clearly stated that trade and the competitiveness of U.S. business are high priorities of his Administration. To this end, the Administration has been working hard to make U.S. export promotion efforts more effective.

o The FY 1991 budget proposed $159 million for the Commerce Department's export promotion efforts, an increase of $10 million over 1990.

o The Department of Commerce has developed a special export program aimed specifically at increasing U.S. exports to Japan.

- This program focuses on long-term commitments by U.S. firms to the Japanese market and capturing a larger share of Japan's public infrastructure and overseas development projects.

- It also provides services tailored to the needs of small and medium sized U.S. exporters seeking to enter the Japanese market.

- Successful implementation and operation of this program will provide a model for the development of trade promotion plans for other countries and regions.

o The Department of Commerce is expanding its export promotion activities in several geographical areas:

- Commerce has developed a 3-tiered program to help U.S. companies respond to the opportunities presented by the integration of the European Community (EC) into a unified market in 1992.

- For Eastern Europe, the Commerce Department has been active in promoting U.S. business opportunities through a number of trade missions and, most recently, by establishing the Eastern Europe Business Information Center.

- The Commerce Department developed an education program to inform the U.S. business community, particularly small businesses, about the new trade and investment opportunities created by the U.S.-Canada Free Trade Agreement.

VII. Workforce Education and Training

Improving the education and training of the U.S. workforce would heighten America's competitiveness. The Administration has set ambitious goals to improve the quality of education and training in the United States.

Workforce Education

o The President and the Nation's governors recently agreed on a package of six national educational goals for achieving scholastic excellence and providing US. students with skills to compete in a rapidly changing world.

o These goals, to be reached by the year 2000, include: a high school graduation rate of 90% or more; preeminence in the world in math and science scholastic achievement; full adult literacy; ensuring that all schools are free of drugs and violence; and (in grades four, eight and twelve) achieving competency in key subject areas such as English and mathematics.

o The President's FY 1991 budget includes a $500 million increase (36%) for programs which prepare children to learn, provide remedial assistance to the disadvantaged, and stress math and science education.

o The Educational Excellence Act of 1989 contains programs to reinvigorate the US. educational system. The Administration's bill was approved by the Senate on February 7, 1990. The President's FY 1991 budget provides $401 million to support programs proposed in the Act.

o The Administration has proposed, as part of the Educational Excellence Act of 1989, an alternative teacher certification process. Under the Administration's plan, gifted professionals would be certified to teach elementary and secondary school, even if they had not followed the traditional course for teacher certification.

Workforce Training

o The programs provided for under the Job Training Partnership Act (JTPA) are considered highly effective, and the President's FY 1991 budget proposes spending approximately $4 billion to fund them.

o The Administration proposed amendments to the JTPA in 1989 which are intended to revise eligibility criteria to ensure that the program targets the most disadvantaged; provide more intensive and comprehensive services to participants; and improve coordination among Federal, State and local human resource programs. Hearings have been held in both the House and Senate on these amendments. House "mark-up" is scheduled for after Easter. The Administration expects legislative action this Congressional session.

o In addition to the growing commitment of the private sector to workforce education, the Labor Department has initiated a seven-point action plan to improve the quality of the workforce. A series of pilot programs will be launched this spring to expand work-based training.

o The Labor Department has awarded a grant for demonstration projects to the Human Resources Development Institute, the research arm of the AFL-CIO, to upgrade training for current employees in several industries. The unions and the Department of Labor will use the experience gained in these projects in expanding this approach to other industries.

o Another demonstration project is developing methods to support structured work-based training in small firms. Such firms typically lack the necessary expertise and resources for training on their own. The demonstrations will experiment with effective methods for overcoming barriers to training.

o The Secretary of Labor has recently published a booklet, "Work-based Learning: Training America's Workers", as part of the Administration's effort to build a positive perception of, and thereby encourage, work-based training. This booklet proposes a national work-based training board and improvements in the national apprenticeship system. The National Advisory Board on work based training will provide guidance on expansion of structured work-based training and on development of a voluntary system for accelerating such training.

o The Labor Department is in the process of testing alternative uses of unemployment insurance (UI) funds to accelerate jobless workers' return to work. Three experimental projects are studying the effectiveness of offering UI claimants a cash incentive to obtain a job early in their jobless stage. Two others are designed to help UI recipients set up their own business and provide entrepreneurial training, counselling, and a self-employment allowance.

o Towards the objective of increasing U.S. private investment in human resource development, the Department of Labor will examine options to increase investment in skills training by conducting research and demonstration projects which:

- study the effectiveness of existing incentives for both employer and employee-financed training,

- examine incentive policies in other countries, including Japan; and

- form partnerships with industry groups to promote and implement structured workplace training programs.

o In 1990, the U.S., in cooperation with Japan, will exchange visits of experts and host a symposium on comprehensive human resource development.

Japan / U.S. Structural Impediments Initiatives

Comments of the Japanese Delegation on the Interim Report by the U.S. Delegation (*)

1. In the Interim Report produced through the Structural Impediments Initiatives (SII) talks, policies to be taken by the U.S. Government on each of the seven areas which are recognized as the U.S. structural problems are specifically identified. These policies are aimed at fundamental changes of the U.S.-economy based on the recognition that extreme importance should be attached to the necessity of strengthening the competitiveness of the U.S. economy. The Japanese side appreciates the U.S. Government's position on these policies.

2. Substantial portion of these U.S. measures put into the Interim Report are those proposed in the 1990 State of the Union Message and the 1991 Presidential budget proposal which included many of the Japanese suggestions made in the course of the SII talks. President Bush himself has shown deep interest in structural reforms as well as in the progress of the SII talks themselves aimed at strengthening U.S. competitiveness.

(*) These comments constitute solely the views of the Government of Japan on progress to date and areas for further progress.3. The Government of Japan expects that, under the continued strong leadership of President Bush, these proposals will be put into effect without delay, thereby strengthening the U.S. economy.

Further, the Government of Japan hopes that further efforts will continue to be made with a view to making yet more progress on structural reforms of the U.S. economy.

Some comments on the U.S. Interim Report from these viewpoints are as follows.

Savings and Investment

1. The United States of America, both politically and economically, is the biggest and mostimportant country in the world. Also, the U.S. dollar is a key currency in the international monetary system. It is therefore important for the economic stability of the world that the U.S. economy and its competitiveness be strengthened.

2. From this viewpoint, we welcome the U.S. Government's initiative in identifying the savings and investment patterns of its own economy as a structural impediment to trade and external adjustment, and by taking a series of actions to boost savings both by the public and private sectors.

3. Specifically, it is noteworthy that the clear message of the SII talks is that the Administration is placing Federal Budget deficit reduction as a top priority. We expect that the targets of the deficit reduction under the Gramm-Rudman-Hollings procedure will be met in each fiscal year.

We also welcome the series of initiatives by the Administration including the reinforcement of the Gramm-Rudman-Hollings Budget Process. We sincerely hope that these measures will be enacted as early as possible with the understanding and cooperation of the Congress.

4. Secondly, on private sector savings, we highly appreciate the recent decision by the U.S. Administration to propose incentives to save, which we hope will accelerate the recent upward trend of the savings ratio of individuals. We also hope that these measures will be put into effect as soon as possible.

5. The studies on savings and investment in the corporate sector, being conducted by the Treasury Department, will yield an important foundation for formulating the U.S. policies necessary for enhancement of the long-term competitiveness of U.S. corporations. We are looking forward to seeing potentially historic results of these very important initiatives.

Improvement of the U.S. Economy's Competitiveness

Tackling with structural distortions both at the public sector level as well as at the private sector level in the U.S. would bring about the further vitalization of industrial sector and improve the international competitiveness of the U.S. itself. The Government of Japan would welcome the forceful implementation of specific measures by the U.S. Government aimed at this objective.

The Government of Japan strongly hopes that the U.S. Government continues to make efforts on each of the following Areas identified as structural problems in the U.S. economy; corporate investment activities And supply capacity, corporate behavior, government regulation, R&D, export promotion and workforce education and training.

- In order to enlarge the production capacity of the U.S. manufacturing industry, measures to increase investment should occur and statement welcoming foreign direct investment would encourage such helpful activity. It is requested that the U.S. avoid taking tax enforcement measures Aimed unfairly at foreign companies.

- As to the U.S. corporations, further specific measures are expected to be taken by the U.S. Government to encourage corporate managements to take a longer-term perspective.

- Government regulations such as re-export licensing system which prevent the U.S. corporations from becoming more competitive in the foreign markets are expected to be reviewed.

- Efforts should be made with a view to establishing guidelines on implementation of laws pertaining to Anti-Trust Act in order to strengthen the Activities of joint R&D and of production joint-venture by the U.S. manufacturing industry. Further, necessary measures are expected to be taken for the thorough implementation, also by the private sector, of international standards of weights and measures, i.e. metric system, so that the exports of U.S. products will be increased.

- Fundamental export promotion policies should be established and implemented to encourage export activities by U.S. industries and increase U.S. exports.

Effective cooperation is welcomed between the Ministry of International Trade and the Industry of Japan and the U.S. Department of Commerce in export promotion.

- It is expected that studies should be conducted to find existence of any impediments for parallel import to Japan in the U.S., and that, if there are any, appropriate measures should be taken.

- In order to improve further the quality of workforce, it is expected that efforts should be made to strengthen the U.S. education systems particularly in mathematics and science as well as vocational education and training programs.

TANC offers these agreements electronically as a public service for general reference. Every effort has been made to ensure that the text presented is complete and accurate. However, copies needed for legal purposes should be obtained from official archives maintained by the appropriate agency.


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