III. ECONOMIC TRENDS AND OUTLOOK A. Major Trends and Outlook 1. Overview The Japanese economy, the world's second largest at more than $4 trillion, in 1993 posted the lowest calendar year gross domestic product (GDP) growth since 1974, 0.1% for the year. Forecasters predict a return to modest GDP growth in 1994, but do so with caution, because of downside risks to the growth scenario, and because a similar perception of "bottoming out" in early 1993 turned out to be illusory. The current economic slowdown, which began in mid-1991, has proved to be the longest in Japan's post-1945 history -- until 1992-1993, Japan had not experienced two consecutive years of less than 3 percent real growth. The late 1980's surge in asset prices and high rates of capital investment and hiring gave way by 1991 to a period of sharply slower growth, corporate restructuring, and balance-sheet adjustment by businesses and consumers. Equities and real estate are still well below their respective peaks, and continued stock adjustment suggests that private business investment will be a lagging factor in this recovery. In 1993, residential investment and public spending were among the few bright spots in the economy, as private demand made a negative contribution to overall domestic demand growth. Four fiscal stimulus packages between August, 1992 and February, 1994 injected a substantial amount of public works spending into the economy, with some of the money yet to be disbursed in 1994. However, regular budgets, aside from the four "emergency" stimulus packages, have been contractionary in real terms, and the 1994 income tax cut was initially limited to one year because of Japanese government concerns about financing a permanent tax cut. In its external accounts, Japan posted record global trade and current account surpluses in 1993 of $141 billion (balance of payments basis) and $131 billion, respectively. Sluggish domestic demand growth produced a slowdown in import volume, while exports continued to show steady growth, particularly those to other Asian markets. Yen appreciation has helped swell the dollar-denominated surpluses in the short run, through the so-called "J-curve effect." Longer-term, the appreciation of the yen since 1990, plus an eventual recovery of domestic demand, is expected to contribute some downward adjustment in Japan's external imbalance as import volume rises and export volume falls. 2. The Commercial Environment The high yen, and overinvestment and overhiring in the 1980's, have led many Japanese companies to undertake major cost-cutting efforts. For example, Matsushita Electric Industrial Co. assigned 4,000 middle managers and 1,000 new college graduate employees to work in some of its 24,000 company-affiliated retail stores, and Hitachi and Hitachi Household Electric Appliances temporarily transferred 1,500 of their employees to some of their 8,600 "keiretsu" stores and service subsidiaries. Since the implied social contract still effectively prevents large Japanese companies from mass layoffs, many companies are making efforts to reduce their payrolls through voluntary retirements, buyouts, a near freeze on new hiring, or transfers to more profitable areas. They are also utilizing a Ministry of Labor employment adjustment subsidy fund for small and medium size companies that are downsizing, which pays most of an unwanted worker's salary for staying home, going to training, or for being seconded to other firms. The strong yen has also resulted in more Japanese companies moving production overseas to service export markets, resulting in increased exports of parts and machinery from Japan, accounting for 40.9% of the overseas subsidiaries' parts procurement, according to a MITI survey. But this has not yet led to a large increase of reverse imports back into Japan: in 1993, the MITI survey showed that reverse imports actually fell 25%, due to sluggish demand, and imports by Japanese manufacturers from their overseas subsidiaries accounted for only 5.4% of total imports for the year. As the need to cut costs becomes paramount, long-term keiretsu supplier relationships are starting to fray. This should give overseas suppliers new opportunities in the Japanese market. While Japan quietly exported $15 billion worth of telephone and radio equipment to the United States last year, Japanese companies are being very cautious in investing in multimedia and information delivery. They have fewer resources to invest than in the heydays of the late 1980's, directing much of their capital to developing production capability and markets for their "bread and butter" electronics products in Asia, and they lack knowledge and have been unable to gain experience in the Japanese markets in these cutting-edge fields. Ministry of Posts and Telecommunications regulations have stymied the proliferation of computer networks, limited cable TV penetration to 5 percent of Japanese homes and direct satellite broadcasting to 5 channels, and until recently prohibited sales of cellular phones (Japan has only 2 million users, compared to 11 million in the United States); and investment in a nationwide optical fiber network has been delayed. The creative thinking that is required to move into the digital, multimedia future may not be well served by Japan's educational system, with its emphasis on rote memorization. Also, long commuting times and cramped housing have limited opportunities for Japanese to become sophisticated computer users at home, thus limiting Japan's multimedia and information technology development. Rather than taking the lead, Japanese companies seem to be more interested in joint ventures and investing in minority stakes with U.S. multimedia companies, and may take a back-seat manufacturing role for some time to come. The profits of Japan's myriad software companies are also falling fast. Their problem is that they are highly dependent on a small number of corporate clients -- 90% of their sales are to large Japanese companies slow to abandon their outdated main-frame computers, which require customized software unsalable elsewhere. But to cut costs, companies are now starting to switch to networked personal computers, for which packaged software is often already available from U.S.-based software developers who have localized their products to run in Japan. As a result, Japanese software houses may be attractive targets for acquisition or suitable to be a licensee/localizer/distributor for a U.S. software company. New direct investment in Japan by foreign firms totaled just $4 billion during calendar year 1992, according to the Japanese Ministry of Finance, while outward Japanese foreign investment was $34 billion, about 8 1/2 times that figure. Increased direct investment in Japan is crucial to increasing U.S. exports to Japan, as U.S. subsidiaries in Japan tend to procure parts and finished products from the parent or other traditional suppliers in the United States, rather than use Japan as a low-cost base for importing into the United States. According to MITI, in fiscal 1990 foreign affiliates in Japan were responsible for importing 3,800 billion yen (approximately $26 billion) more into Japan than their exports from Japan, representing 16.7% of Japan's total imports, even though foreign affiliates accounted for only 1.2% of all sales, only 0.5% of Japan's work force, less than 1% of total Japanese assets, and 4.5% of all Japanese exports. Similarly, Keidanren, Japan's Federation of Economic Organizations, believes that foreign direct investment in Japan will boost Japan's imports, and has stated that increasing such investment will be the most effective way to dispel criticism of Japan's closed market. Many private analysts foresee improved profit and growth prospects for Japan starting in 1994. However, many negatives remain, and there is still some downside risk. For example, it may take several years for commercial real estate prices to recover, and for Japanese banks to write off the hundreds of billions of dollars worth of bad real estate loans dating from the late 1980's. Spring wage negotiations in 1994 yielded an average increase of 3.13%, 0.76 percentage points below the average figure in 1993, and the lowest rise since 1977. As a consequence of smaller bonus payments and reduction in overtime hours, the household income of salaried workers increased only 1.2% in 1993, versus 2.7% in 1992. The average assets of all households fell in 1993 for the first time in 31 years, due to a decline in self-employed households' income and savings. At the same time, however, housing starts have been booming due to a decline in land prices, construction expenses, and interest rates. Housing starts totaled 1.49 million units in 1993, compared with 1.40 million in 1992, and real spending on houses increased 2.3% in 1993, after falls in 1991 and 1992 of 8.2% and 6.7% respectively. This may accelerate as recommendations by government advisory groups for deregulation to facilitate import of inexpensive foreign construction materials in order to lower housing construction costs are implemented. Increased housing spending will fuel sales of furniture, kitchen items, and amenities. The April, 1994 survey of investment intentions of the Japanese Economic Planning Agency (EPA), which covers over 4,000 Japanese firms, found manufacturing firms projecting a 17% decline in investment in FY 1994 (April 1, 1994 - March 31, 1995). The electric machinery sector was the exception, with respondents expecting a 1.2% increase in investment in the fiscal year. Overall private investment (nonmanufacturing and manufacturing combined) was expected to decline 9.2% in FY 1994, according to the EPA survey. Private nonresidential investment has been a drag on GDP growth since the fourth quarter of 1991. That said, Japan's private nonresidential investment/GDP ratio remains high relative to that of other developed countries, accounting for 19% of real GDP in 1993. Japanese companies have in the past been able to slash costs to remain competitive even as the yen appreciated. And this time as well, many Japanese businesses have slimmed down by repaying debts, shedding personnel, and adjusting production. Successful implementation of the Japanese Government's 1994 deregulation program referred to in this report will also strengthen Japanese companies' competitiveness. The Japanese economy, therefore, may emerge from the current slowdown with many of its traditional strengths intact. Japan continues to have a highly educated and efficient labor force, an elite, stable and highly dedicated bureaucracy, an economy driven by high levels of household savings and capital investment, a huge domestic market, tremendous manufacturing skills and competitiveness, and huge trade surpluses with North America, Europe and East Asia. 3. Land Reform and Deregulation -- Removing Barriers to Domestic Demand Growth a. The Role of Consumer Demand As recognized in the Structural Impediments Initiative and the Framework Talks, Japan needs to effect fundamental reforms in its present economy, business practices, financial markets and regulatory structure, including land reform, in order to unleash Japan's people are not fully benefiting from their hard work. Satisfying the latent demand for better housing and social infrastructure would also create a huge demand for new high-tech consumer products including home electronics, entertainment and information. Unleashing Japanese consumer demand should suck in imports, something that U.S. exporters should prepare to take advantage of now. b. Land Reform with no natural resources. In fact, Japan has a great deal of land that is not being allocated well, as was recognized in the 1989 - 1992 bilateral Structural Impediments Initiative (SII) talks. Much land is kept off the market by antiquated zoning and tax regulation. Vast tracts of land suitable for housing and amenities are also held by the Japanese government, by big business and by urban "farmers" with their cabbage patches and rice paddies even as close as 30 minutes from downtown Tokyo, the center of a metropolitan area with a 30 million population. Japan also has a high rate of capital gains tax for land, and most residential mortgage interest is not tax-deductible. In addition, since 1987, land transactions have been subject to the Land Price Surveillance System, under which the prefectural governor can "recommend a suspension or modification of" (in Japan, that means veto) a land sale if the price is too high. In fact between January and October 1993, out of 100,000 land transactions in Tokyo prefecture, 30,653 were notified, resulting in 5,529 price modifications and 2,472 suspensions. In contrast, taxes for holding land are light, the national fixed asset tax averaging 0.19%. As a result, landowners tend to regard real property as an asset to be held long-term rather than to be sold for development. Part of the problem in freeing up land for development is that in the Japanese economy, land is considered to be the ultimate measure of wealth. Business loans traditionally are secured by real estate mortgages. Especially in the late 1980's the use of land to secure large loans on a wide scale distorted the real estate market, helping cause prices to rise far in excess of the land's usage value. Together with the tax structure, the drop in land prices from the late 1980's boom helps explain why the supply of land for sale in Tokyo and Osaka has virtually dried up. Measures to increase the availability of land for sale should lead to increased consumer demand, which is a key to a domestic-led recovery. In the words of economist Kenneth Courtis, "Releasing the supply of land onto the market would provide Japan with the basis for a long-term, non-inflationary, consumer-driven cycle of expansion in the domestic economy." As stated by the Japan Federation of Employers Associations (Nikkeiren): Spacious, reasonably-priced homes fairly close to work must be provided for in the future, along with a well-organized infrastructure supporting comfortable and convenient living. Further, if deregulation promotes competition, and if restrictions on participation are removed and measures taken to support the development of new projects, latent demand will materialize, which could translate into domestic demand worth many hundred trillion yen over the long term. And if a nationwide information infrastructure to convert Japan into an "intelligent" archipelago were installed, given the pace of technological progress in the future, there is no telling the extent of the demand this might generate. ... The first step is to resolve the land problem. Recent deregulation measures have included steps to enhance the transferability of land. Such deregulation, if followed through, could create significant opportunities for U.S. exporters. c. Deregulation Although deregulation has been a stop-and-go process due to bureaucratic resistance, on June 28, 1994, the Japanese Government announced a comprehensive deregulation package reflecting inputs from the Japanese and foreign private sectors as well as foreign governments, including the United States. The package contains 279 specific "actions" in four broad areas: housing, construction, and land regulation; telecommunications; import promotion, market access and distribution; and finance, securities, and insurance. Some of the proposals represent significant movement by the bureaucracy (e.g. allowing cellular phones to be purchased instead of leased by users, expanding the authorized hours of large retail stores, and granting greater foreign access to government pension funds), while others are merely "reviews" which may lead to future action. The most obvious weakness in the package is the absence of a strong implementation program. The package represents what is hopefully the first of a continuing series of deregulatory efforts. 4. The Japanese Consumer Discovers "Value" as the Complicated Distribution System is Starting to Change A priority of the Japanese government is to reduce the consumer price levels in Japan compared to other OECD countries. Prices are high because costs are high in part due to government regulations protecting employment in Japan's inefficient sectors. Japanese consumer prices average 40% higher than in the United States. Prices of U.S. goods in Japan typically are 70% higher than in the United States. Although MITI's recent White Paper on International Trade recognizes the need to reduce the differential between Japan's high prices and prices overseas, it offers few solutions. But consumers know what they want. While still desirous of luxury brand-name goods, Japanese consumers want good value, too. In a Tokai Bank survey of 503 housewives in Tokyo, Osaka and Nagoya, 48.3% of all respondents and 72.5% of respondents in their 20's stated that they shop at stores which offer the greatest discounts. And changes are now starting to appear in Japan's distribution system to give consumers a wider choice of products, including imports, and lower prices, too. Discount stores have been increasing in number and sales volume. The total sales volume of discount stores has reached 5 trillion yen, about half that of department stores. Under new regulations under the Large-Scale Retail Store Law, any store with more than 500 but less than 1,000 square meters may be opened by notification to the government only. Large-scale stores may freely stay open until 8:00 p.m. Such stores may stay open until 9:00 p.m. up to 60 days per year, and need stay closed only 24 days per year, without reporting to the government. Major discount chains such as Daiei have introduced their own private brands of film, orange juice, detergent and other products, using imports, at substantial discounts from Japanese name brands. This has served to bring down prices of some of these products across the board. Japanese consumers are increasingly seeking value for their yen. At the same time, some old-time electronics retailers in the famous Akihabara district, formerly known for discounts, have started running into financial difficulty since they cannot match the low prices of the discount stores. More and more stores are defying manufacturers' suggested retail prices and are setting their own prices. Manufacturers of home appliances and other goods are also starting to deliver products to stores without suggested list prices, under an open- pricing policy, and are beginning to end payment of rebates to wholesalers who meet sales targets. 5. Travel and Tourism Outlook In June, 1994, the U.S. Travel and Tourism Administration (USTTA) and the Japanese Ministry of Transport agreed to launch a two-country joint promotional effort aimed at doubling the number of Japanese visitors to the United States (from 3.5 million in 1993 to 7 million) and American visitors to Japan (from 500,000 to 1 million) by the year 2000. The United States currently enjoys a tourism trade surplus of over $10 billion with Japan. Through this U.S.-Japan Tourism Exchange Promotion Initiative, the United States Government hopes to generate tourism earnings of some $35 billion of which at least $25 billion will be a surplus in favor of the United States. Under this new initiative, Tourism Exchange Promotion Councils comprised of government and private-sector representatives will be formulated in both countries to plan and implement jointly funded and organized projects beginning in fiscal year 1995. 6. Agricultural Trade Outlook The Japanese gross agricultural product (GAP) grew by a slight 0.4% in Japan Fiscal Year 1991 (April 1991 through March 1992), the last year for which data is available. The strongest growth was seen in vegetable production followed by poultry and fruit. Sectors experiencing a decline include cereals, rice, dairy products, and beef. According to recent press reports, the 1994 Japanese rice crop will be the worst since 1948, when the government started compiling the rice crop index. Japan will likely have to import at least one million tons of rice to offset the shortage. Although agricultural liberalization is often used as a scapegoat for the problems facing Japanese farmers today, there are other structural factors which threaten the future of Japanese agriculture. Without major reforms, the agricultural sector cannot offer the opportunities that Japanese youth can find in the still- growing industrial sector. Efficiency is hampered by the small and scattered nature of farm lands, and by inordinately high input costs. Farmers are limited, by the government and by the cooperative system, in their ability to make decisions regarding production, pricing and marketing. As a result, young people continue to leave the family farm--only 1,700 agricultural school graduates born to farm families continued the family occupation in 1991--leaving a dwindling and aging farm base--about 60% of full time farmers are over 55 years old, 80% of the estimated 3.7 farm households have side jobs, and income from rice farming accounts for only 5% of the income of Japan's rice farmers. In calendar year 1993, the value of Japan's total agricultural imports (excluding forest products) from the United States increased 4 percent over the previous year's level to $10.82 billion. This marks a new record level for sales of U.S. agricultural goods in Japan. Overall growth was dampened, however, by flat or declining imports of certain bulk and non-food commodities. For example, imports of wheat dropped 7 percent to $610 million, while corn imports gained just 2 percent to $1.83 billion. Cotton imports declined by 30 percent to $270 million and imports of tobacco fell 2 percent to $358 million. The brightest news from the Japan trade front continues to be brisk growth in imports of high-value, consumer-oriented food products from the United States. This category now accounts for about 45 percent of U.S. agricultural exports to Japan, and the trade value has nearly tripled since 1986. Only Canada is a larger market than Japan for U.S. exports of consumer-oriented food products. Among the major import sub-headings, growth in 1993 was particularly strong for U.S. red meat products, dairy goods, fruits and vegetables, and confectionery items. The following is a brief review of some of the trade "stars" in 1993: Beef: Japanese imports of U.S. beef continued booming in 1993, rising 15 percent by value and 17 percent by quantity. The trade was valued at an incredible $1.37 billion. Key factors encouraging increased sales included: a 10 percent tariff reduction in April, appreciation of the yen by more than 10 percent, and strong retail and food service promotion efforts to move increasingly affordable cuts through "high yen" sales and "price- cut" menus. Pork: The Japanese pork market suffered some from competition with lower-priced beef in 1993, but U.S. pork still managed to register a trade gain of 11 percent by value to $411 million. Large retailers reported good demand for U.S. lean meat cuts such as loins, tenderloins and chuck roast. Strong selling points included the "tenderness" and "fresh" appearance of U.S. chilled product. Ice Cream: Despite intense competition from domestic suppliers, an economic recession, and an unusually cool summer that depressed frozen dessert sales, imports of U.S. ice cream continue to skyrocket. Imported product commands the premium and super- premium niches of the Japanese market, with U.S. companies taking the largest share. At $34 million, imports of U.S. ice cream remain small relative to purchases of other U.S. commodities like corn, beef or oranges, but another year of outstanding growth (+31%) is impossible to ignore. Frozen Yogurt: Ditto for this product. Total imports of U.S. frozen yogurt are still small at $6 million, but the trade grew a remarkable 134 percent in 1993. Companies are reportedly taking advantage of the convenience store boom in their marketing efforts. The future challenge will be to familiarize Japanese consumers with the product, particularly its health benefits relative to other frozen desserts. Broccoli: Japanese broccoli imports have been streaking upward since 1990, and 1993 was no exception. Imports of U.S. broccoli totaled an estimated $74 million in '93, up over 50 percent from the previous year. Increased consumption is the driving force, but poor weather that damaged Japan's domestic vegetable crops last summer also played a role. Processed sweet corn: Although the U.S. has maintained an excellent market for canned and frozen sweet corn in Japan for several years, 1993 proved to be a particularly good year. Imports of both styles of U.S. sweet corn jumped last year; canned product by 27 percent and frozen by 6 percent, for a combined '93 import value of $162 million. Continued consumption growth and poor weather that victimized the Japanese crop were the key factors. Canned sweet corn, in particular, has benefitted in Japan from its reputation as a healthy, versatile, and easy-to-prepare product. Strawberries: Following a couple of years of only modest growth, U.S. strawberries (particularly frozen) seem poised to boom. Imports from the U.S. in '93 totaled $48.1 million (both fresh and frozen), up 17 percent versus 1992. Fresh California strawberries are facing increased competition from Asian suppliers, but still retain a hugely dominant share of Japanese imports (90+ percent). Japanese consumers lack awareness of the uses of frozen strawberries, but recent marketing efforts stressing the bright red fruit as healthy and tasty ingredient in desserts and beverages are starting to pay off in a big way. Confectioneries: Despite a recessionary economy, the broadly defined category of sugar-containing confectionery products showed excellent trade growth last year, with imports from the U.S. increasing 28 percent to $74.4 million. U.S. chewing gum was the hottest product, as trade value climbed 180 percent to $11.2 million. Strong growth was also registered for U.S. biscuits and cookies (+45% to $6.9 million) and unfilled chocolate confectionery (+31% to $12.2 million). Notwithstanding slow growth in the Japanese economy, Japan represents the largest export market for U.S. forest products. With total export sales in 1992 of $10.4 billion, U.S. market share stands at 32% of Japan's annual forest product imports. While raw products such as logs and chips represent a large portion of the export mix (72% on a value basis), value-added and further processed products are finding good markets in Japan, and export value is climbing. Notable has been the growth in U.S. exports to Japan of large scale glulam beams, which increased from $11 million in 1991 to a projected $30 million plus this year. In addition, changes in Japan's Building Standards Law, which now allow the construction of three-story multi-family wooden apartment buildings, has already led to the application for building permits of nearly 60 publicly and/or privately sponsored apartment building projects throughout Japan. The future of this potential market bodes well for U.S. suppliers of structural lumber, panel and other manufactured wood products. Japan's imports of softwood lumber, shipped mostly from the U.S. and Canada, had been fairly stable in the last several years, at an annual level of about 7.5 million cubic meters. However, to supplement declining log shipments from the U.S., lumber imports have been rising. Based on the imports during the first four months of this year, it is anticipated that total softwood lumber imports during 1993 will amount to around 9 million cubic meters, a 20 percent increase from last year. On the other hand, hardwood lumber imports from the United States were flat in 1992, primarily due to the stagnant housing and furniture markets in Japan. 7. Regional Outlook a. Tokyo and the Kanto Region The largest flat area in Japan, the Kanto Plain, is the location of Japan's sophisticated capital of Tokyo and the surrounding prefectures of Kanagawa, Saitama, and Chiba. Together, these four prefectures have a population of over 31 million, equivalent to the New York and Los Angeles metropolitan areas combined. Tokyo is the governmental, business, higher education, information, media, fashion and cultural center of Japan, corresponding to Paris or London. Most major Japanese companies and trade associations have their headquarters or major branches in Tokyo, and almost all U.S. companies in Japan have their Japanese headquarters in Tokyo as well. More than two-thirds of the non- military American residents of Japan live in the Tokyo area. Kanagawa, which includes the cities of Yokohama and Kawasaki, is by far the richest prefecture in Japan, with a per-capita income of over YEN4.5 million (about $43,000), almost 50 percent above the Japanese average. A presence in Japan means a presence in Tokyo. Despite high rental costs, most U.S. companies locate in Tokyo because of the need to interface with their Japanese customers, to obtain market information, and in many cases, to handle governmental relations with Japanese government ministries. Consumers in Tokyo are more likely to come into contact with foreign products, food and styles then elsewhere in Japan. Also, consumer styles and fashions emanate from Tokyo, the home of publishers of avidly read magazines as well as the television networks. Besides consumer goods, including food, apparel, furniture and automobiles, good prospects in the Tokyo area include medical products, computers and telecommunications hardware and software, and business services. Massive public works projects and urban development are also taking place in Tokyo. Besides the Trans-Tokyo Bay Highway and the Tokyo Waterfront Project, Tokyo International (Haneda) Airport is undergoing a major expansion. Despite the collapse of the overheated speculative economy of the late 1980's, construction of office and residential space is continuing at a high pace, as well. The U.S. Embassy works closely with the 700 companies, 2,400 members, and 40 committees and sub-committees of the American Chamber of Commerce in Japan in promoting U.S. business interests in Tokyo and throughout Japan. b. Osaka and the Kansai, Chugoku and Shikoku Regions "Kansai" is the general name for the six-prefecture region of west central Japan centering around the cities of Osaka, Kobe Kyoto and Nara, with a combined population of some 22 million people. This area, the traditional merchant center of Japan, is an economic giant with a GRP (gross regional product) of nearly $700 billion in 1993, larger than Korea, Taiwan, Hong Kong, and Thailand combined, and accounting for over 3 percent of the entire world's GNP. In 1992, the Osaka stock exchange was the world's third largest by value, behind only Tokyo and New York. The Kansai has development plans that would make even the most aggressive planners gasp: as of January 1994, there were 866 major projects (projects in excess of $9 million) in planning or in progress, of which 612 have costs estimates available, totalling some $377 billion. The centerpiece is the $14 billion Kansai International Airport, built on a man-made island in Osaka Bay, opening on September 4, 1994 -- long term plans call for two more runways to be built, which, if approved, could cost as much as $20 billion. Other massive projects which are complete or nearing completion include the Kansai Science City, a research/industrial park constructed on a large tract of land between Kyoto, Osaka and Nara; Technoport Osaka, a city built on three man-made islands south of Osaka, and including the Asia and Pacific Trade Center and the World Trade Center; the Akashi Straits Bridge; and "Rinku Town," the link town built on the shore facing the new airport to provide support services, hotels, and office space. Osaka Prefecture has recently launched a new project, the Osaka International Conference Center, which will cost an estimated $500 million, and will be a world-class facility suitable to host high level meetings such as the G-7 Summit. The Kansai offers many advantages to American companies looking to enter the Japanese market: labor and housing costs much lower than Tokyo; superb transportation, communication, and other infrastructural support; office rental prices approximately 50% of Tokyo's, on the average; a business orientation, as the home of tens of thousands of companies, and the center of Japan's textiles and apparel, chemicals, pharmaceuticals, and sporting goods; and a willingness to innovate, a long history of doing things first. The Osaka-Kobe Consulate-General, including US&FCS Osaka and the Foreign Agriculture Service, works closely with local business organizations to promote American exports to the Kansai. Together with the Kansai Chapter of the American Chamber of Commerce, US&FCS Osaka has established the "Kansai Made-in-the-USA" Committee, to identify and organize Kansai-area companies importing U.S. products into Japan. This committee will be very useful in helping new-to- market U.S. exporters penetrate the Japanese market. The Consulate-General also covers the Chugoku region, centering on the growing industrial cities of Hiroshima and Okayama, and Shikoku, which is seeing renewed growth due to three bridge construction projects linking Shikoku island to Japan's main island of Honshu. c. Nagoya and the Chubu Region Nagoya, capital of Aichi Prefecture and hub of the 8-prefecture, 13-million population Chubu region of central Japan, is Japan's third largest metropolitan area, after Tokyo (225 miles to the east) and Osaka (125 miles to the west). Aichi with neighboring Mie and Gifu Prefectures comprise the Nagoya Consular District. Along with neighboring Shizuoka Prefecture, the region has a GDP as large as Canada's and accounts for almost half of Japan's trade surplus with the U.S.; Aichi Prefecture alone accounts for over 80% of that trade. The Chubu is the core of Japan's automotive, aerospace, machine tools, and ceramics industries. Top U.S. aerospace/defense firms are active in technical tie- ups and production arrangements. Over ten U.S. auto parts firms have set up Nagoya operations to serve Japanese makers. The Chubu features several major projects, public and private, attractive to U.S. firms: the Aichi Health Forest, the Japan Railways (JR) Tokai Nagoya Station Twin Tower, the Nagoya Sports Dome, the Nagoya International Design Center, and the proposed $10 billion Chubu New International Airport. US&FCS Nagoya has worked closely with American business to develop the 80-member American Business Community of Nagoya (ABCN) into the recognized "Voice of American Business in the Chubu." And US&FCS Nagoya's joint Made-in-the-USA initiative with ABCN has significantly boosted sales of a wide range of consumer goods -- cars and cookware to fashion and furniture, even housing -- in the Chubu. d. Fukuoka and the Kyushu-Yamaguchi Region The Kyushu-Yamaguchi region, lying 700 miles west of Tokyo, is one of the most rapidly developing areas of Japan and is quickly turning into a third economic center, following Tokyo and Osaka. It has a population of some 15 million, a land area the size of Switzerland or Holland, and an economy 1.6 times that of Korea and 2.6 times that of Taiwan, with a gross regional product of approximately $410 billion. Kyushu, known as Japan's "Silicon Island" because it accounts for 42 percent of Japan's total semiconductor chip output, will also account for an estimated 10 percent of Japan's car production by 1995. Particularly good business prospects in the Kyushu/Yamaguchi region may be found in the areas of electronics and computers, architecture, design and construction, and medical equipment and technology. In addition to construction of a new international terminal (an MPA project) at the current Fukuoka airport, plans are being made to obtain funding from the Government of Japan to start construction of a major new multi-billion dollar international airport within the next ten years to serve as a hub for western Japan and nearby Asian countries. The Fukuoka Consulate works closely with the Fukuoka American Business Club, an organization of 32 companies which promotes the interests of U.S. firms in the region. e. Sapporo and the Hokkaido and Tohoku Regions Northern Japan, consisting of six prefectures in the Tohoku region centering on Sendai, 250 miles north of Tokyo, and the island of Hokkaido, whose largest city is Sapporo, 700 miles from Tokyo, has a gross domestic product (GDP) of $418 billion. Northern Japan's direct imports from the U.S. totaled about $2 billion in 1992, but indirect imports via Tokyo and Kansai double this figure, to over $4 billion. Sapporo, Hokkaido's capital of 1.8 million people, and Sendai, with a population of almost 1 million people, are responsible for more than one-third of total sales in the region. The construction, building products and tourism industries are particularly attractive markets in northern Japan. Architectural and construction services are much in demand as the region's focus has shifted in recent years. The region's two major international airports, in Sapporo and Sendai, continue with expansion plans. In recognition of the growing economic ties with Russia's far east, another airport, in Hakodate, Hokkaido has added regular flights to Sakhalin. In Tohoku, a dynamic high technology sector increasingly takes center stage, with growth rates well above the national average. The Sapporo Consulate-General welcomes U.S. companies to explore opportunities in Northern Japan. f. Okinawa Okinawa prefecture, population 1.2 million, consists of the sub-tropical Ryukyu Islands 2 1/2 hours south of Tokyo by air. Okinawa's economy depends heavily on tourism, government public investment, services and construction. The prefectural government has invested heavily in strengthening the tourism infrastructure, and a number of additional high-quality resort hotels are in planning and construction. Okinawa offers potential business opportunities in the design, architecture and internal furnishings of resort hotels and related facilities. Companies specializing in outdoor/leisure activities, including sporting goods, marinas, boating and fishing equipment, and related services may find business opportunities in Okinawa. In addition, the southern islands of Miyako and Ishigaki are the sites of large tourism development projects. Okinawans are particularly receptive to the introduction of American products, due in large part to the influence of the long U.S. administration of Okinawa which ended in 1972 and the large continuing U.S. military presence. A major infrastructure project, the new Naha Airport terminal, is scheduled to begin construction in 1995. U.S. companies are served by the U.S. Consulate-General in Urasoe City, on the main Okinawa Island. 8. Special U.S. Department of Commerce Programs for Japan a. USDOC-MITI Trade Promotion Cooperation Program The U.S. Department of Commerce-Ministry of International Trade and Industry Trade Promotion Cooperation Program (TPCP) was established in April, 1993 as an expansion of an earlier joint program to increase the level of U.S. exports in the Japanese market. The TPCP enhances the independent trade promotion activities of the two governments and encourages the business communities of both nations to pursue trade opportunities aggressively. The program, administered by US&FCS Japan, MITI, JETRO and MIPRO, encompasses the following areas: Data and Information Exchange Market Research Trade Events Cooperation on Specific Trade Expansion Initiatives Trade Facilitation Services In addition, representatives of both governments work together to promote and enhance the operation of the Japan Corporate Program. b. Japan Corporate Program The Japan Corporate Program is a major initiative started by the U.S. Department of Commerce in 1991, in an effort to increase the number and scope of American firms competing effectively in Japan. Twenty companies, reflecting a cross-section of small, medium and large firms in a variety of manufacturing sectors across the United States, were selected to participate in the program. Each company entered into a five-year participation agreement with the Department of Commerce under which each company has made significant commitments to develop its export market in Japan, including: (a) making four or more visits to Japan, including at least two by the chief executive officer, each year; (b) producing product literature in Japanese; (c) participating in at least one trade event in Japan each year; (d) establishing the necessary after sales service facilities for customers; and (e) modifying or developing products to meet the needs of Japanese end users. Under the participation agreements, the Department of Commerce likewise dedicates significant resources to assist the companies in their marketing efforts. Under the joint USDOC-MITI Trade Expansion Cooperation Program, Japanese Government agencies involved in import expansion will also assist the market development efforts of the companies. The commitments represent standards that other companies seeking to enter the Japanese market should strive to meet as essential to successfully entering the Japanese market. Together with the lessons learned over the course of the five year program, the Japan Corporate Program will help numerous other U.S. exporters understand the challenges and opportunities in the Japanese market. B. Principal Growth Sectors The Japanese economy has probably hit bottom; but even in bottoming out, the turn-around and restructuring will be slow. At the same time, housing starts have been booming thanks to an extremely easy money policy and falling land prices; and the hot housing market has fueled sales of furniture, kitchen items, and amenities. Sales of home appliances have also begun to recover, and the influx of foreign made products that are real bargains because of the strong yen has sparked price wars in the retail market. Japanese businesses have slimmed down by repaying debts, shedding personnel, and adjusting production. Sixty-five leading companies from a cross section of industries have already accomplished well over 80% of their streamlining goals and have reduced overall expenses by about 10%. Last year 30% of listed companies on the Tokyo exchange maintained increased profitability -- and over 200 in six industry sectors improved their cost structure; corporate Japan feels it should be back on track between October and March of next year. Over the next several years, a multitude of new opportunities will be seen: in infrastructure buildup, as the tremendous economic growth has brought a need for airports, roads, bridges, and housing; in leisure, as the Japanese worker finds more time and money to spend off the job; in retirement communities and health care with the "graying" of Japanese society (by 2025, Japan will have the highest percentage of the elderly in the world) and in meeting the fundamental needs of the handicapped; and in changing and broadening consumer tastes, as the Japanese consumer has become more cosmopolitan with greater exposure to foreign products. Major opportunities are described below in greater detail. 1. Big Spending By Japanese Power Firms The ten Japanese power companies are key players for business development in Japan's strong regional economies; contact with these influential players is key in developing business opportunities. The power firms are spending $50 billion in annual capital investment -- 10% of all private sector investment. In the past, only fractional amounts have gone to foreign firms, but with increasing deregulation, these firms must cut costs and buy competitive goods and services from overseas -- and from the United States. US&FCS Japan has visited these firms every year for the past seven years and has confirmed their earnestness. Already, for instance, Kyushu Electric is on the move: although just 2% of its current procurement is foreign -- the U.S. share has been about 86%, centered around telecommunications equipment. Kyushu is now doing business with 90 U.S. firms, and the other power firms are also buying. 2. Japanese Government Procurement There are potentially excellent opportunities for U.S. companies to sell to Japanese government entities in the fields of computers, telecommunications, medical equipment, and construction services, among others. The Government of Japan has procedures to make easier the procurement of foreign goods and services of SDR 100,000 (19 million yen) or more by the a total of 122 Government of Japan ministries, agencies and quasi-governmental agencies. Announcements of procurements of SDR 1,000,000 or more (for computer products and computer services SDR 800,000 or more) will be published in the Kampo, the official government gazette. The new Action Program has opened a wide range of construction projects to U.S. company participation, and reforms in Japan's government procurement system announced in 1994, together with implementation by the Government of Japan of its commitments in the GATT Uruguay Round for greatly expanded reporting of tender offers from over 60 additional ministries and agencies, as well as 47 prefectures and 10 major municipalities, and other improved procedures, should improve opportunities for motivated U.S. companies to sell to the Japanese Government. In addition, the January 22, 1992 bilateral computer procurement agreement should create significant new sales opportunities for U.S. manufacturers of mainframe and smaller computers and workstations, U.S. software producers and U.S. service providers and system integrators. The agreement provides for equal access to pre-bid information, coverage of both computer products and services, commitment to neutral technical specifications, reduction of sole source tendering, improved transparency of bid evaluations and establishment of an impartial bid protest system. 3. New Changes in Japanese Business Practices Between 1952 and 1990, Japan's gross national product increased at a rate of almost 7 percent per year in constant 1985 dollars. But following the overheated years of the late 1980's, the strong yen and the retrenchment in Japan's economy are now bringing major changes in some Japanese business practices. These changes--in both the manufacturing and distribution sectors, will open new opportunities for aggressive U.S. companies. These are some of these changes: a. Unprecedented Japanese Electronics and Auto Production Cuts Offer New Opportunities In the last year there have been large drops in Japanese domestic production of color TV's, VCR's compact-disk players, and automobiles, and drops in market share for Japan's personal computer makers, as the high yen makes it increasingly unprofitable to manufacture in Japan, as Japanese companies relocate overseas, and as imports increase. For example, Toyota's vehicle production in Japan fell 9 percent in 1993. Production in Japan of audio and video equipment such as TV's, compact-disk players, and VCR's fell 12.7 percent in 1993--the second consecutive double-digit decline. Exports are only half of their 1985 peak. Japanese companies are moving production overseas. For example, Fuji Heavy Industries is moving production of the Subaru Legacy model to the United States. Hitachi is increasing memory chip production in the United States. Honda plans to produce all cars for the U.S. market in North America. NEC is shifting production of laptop computers for the U.S. market to the United States. Sanyo will make 90 percent of its color TV's overseas. Sony will boost overseas production from 35 to 50 percent. Japan is now a net importer of color TV's. Meanwhile, U.S. computer companies such as Apple and Compaq have aggressively increased their market share with leading-edge, low cost computers with Japanese-language operating systems. This has opened a huge market for U.S. manufacturers of peripherals and software. U.S. software companies already have captured over 55 percent of Japan's personal computer packaged software market. And Japanese manufacturers are abandoning production of unprofitable or low-margin product lines. Auto companies are delaying model changes, and reducing the numbers of options. Companies such as NEC and Hitachi no longer make VCR's or attempt to make a product in every electric or electronic category. This will continue to open niches for specialized products of small- and medium-sized U.S. companies to sell in Japan. b. Distribution Changes as Japan's Consumers Become Value-conscious While Japanese consumers have been remarkably tolerant and uncomplaining of the high cost of consumers goods, they are now becoming more value-conscious. This is partly due to long-term uncertainly about the economy (especially job security) and partly due to increased awareness of high costs compared to overseas. One-tenth of Japan's population goes overseas every year, many for the fourth or fifth time, and the message of cost differences is starting to sink in. Despite Japan's longest recession, Japanese overseas holiday travel broke all records with over 500,000 tourists enjoying the end-of-year holidays overseas at the end of 1993. The Ministry of Transport proposes doubling the number of overseas travellers to 10 million annually. The U.S. Travel and Tourism Administration office in Tokyo is working to ensure that many of these new visitors will come to the United States. Japan's newly value-conscious consumers are turning away from small family-run shops, department stores and name-brands and are turning to discount stores, low-cost private brands and imports. Japan's high-priced department stores suffered a 6.8% drop in sales in the first half of 1993. They are now starting to change their traditional consignment sales practices which have kept prices high. Japanese consumers want lower prices and later store hours. A large staff of politely bowing designer-uniformed but inexperienced salespeople and extravagant packaging are not necessarily viewed as signs of good service by the new Japanese consumer. At the same time, consumers are starting to stress price over perfection, overlooking a minor cosmetic defect for a big discount. The most exciting changes that have started taking place in Japan are the large cracks appearing in one of Japan's most persistent "hidden" trade barriers--the distribution system. These changes offer excellent new prospects especially in the mass consumer goods sectors, traditionally dominated by Japanese manufacturers that control distribution networks through the "keiretsu" (industrial groupings). Discounters are starting to increase their presently small 3.1 percent of Japan's retail market. And there is now American competition even among retailers. With additional revisions to the "Large Scale Retail Store Law" in 1994 going beyond the earlier amendments that paved the way for Toys 'R' Us to open mega-toy stores in several locations in Japan, more and more discounters are appearing, taking sales from the high-priced department stores. Toys 'R' Us has leveraged U.S. Government support through the SII process to open 16 U.S.-style discount toy superstores throughout Japan, and within two more years expects to have 35. Toys 'R' Us stores offer a huge selection at prices 10-20 percent less than small Japanese toy stores. Toys 'R' Us' success--based on a massive invasion and direct purchasing from toy manufacturers rather than going through wholesalers, should give other U.S. retailers the courage to enter Japan's changing retail market. In Japanese stores, the custom has been for manufacturers to agree to repurchase unsold goods and give rebates--and in return dictate prices and sales strategies, and even send their own salespeople to department stores to push the goods. This system was designed to operate in an environment of manufacturer oversupply. Now that production is being cut to save costs and boost profitability, Japanese manufacturers of home electric equipment, toys and food products are starting to abandon manufacturer-set pricing in favor of open pricing. This means wholesalers and retailers will have to learn how to choose products and determine prices. Department stores are also starting to procure from overseas suppliers, using their own buyers, and establishing their own private labels. Price-cutting discounters and retailers armed with point-of- sale computers do not demand the right to return unsold goods, as do Japan's many family-owned shops. In return, they demand lower prices from suppliers. And they are increasingly bypassing Japan's huge number of wholesalers, going directly to manufacturers for supply, including manufacturers outside Japan. Giant retailer Daiei seems to have struck a chord with its private label "Savings" and heavy discounts on items such as film . . . even such former discount-taboo items as beer are beginning to appear on store shelves at prices below the manufacture's determined retail price. Manufacturers are finding it impossible to compete or show profits under the traditional system of high rebate payments, bloated inventories, and unproductive paperwork costs. Over time, and with Japan's aging population, the omnipresence of tiny shops supplied by thousands of inefficient wholesalers is expected to diminish as prices fall. 4. Marketing is the Key U.S. companies should pay close attention to the high-spending young Japanese consumers ages 18 - 27. They are single, have low living expenses, credit cards and a high percentage of disposable income, and like American music, food, and clothing. Nikkei Trendy, a magazine about consumer life styles, recently featured a 40-page cover story on the rush of imports. Market surveys show that good marketing, not necessarily practicality, moves products. Among the top ten "hit" products in Japan for 1993 were the J-League soccer boom, the movie "Jurassic Park" and related items, "Nata de coco" (imported jelly produced from fermented coconut milk), and the "Juliana" phenomenon (where young women in skimpy costumes dance on raised disco platforms). To take advantage of the importance of marketing in Japan, U.S. advertising company McCann-Erickson, which had a joint venture with Japanese advertising company Hakuhodo since 1960, has now bought out its partner and is going solo. 5. The Numbers of Elderly and Handicapped are Growing DSR (Disabled, Senior citizen, Rehabilitation) products and services will explode in the next thirty years. In 2020 one Japanese in four will be 65 or older. Demand for medical products, home health care, home living aids for the elderly, wheelchairs, etc. is a certainty. Demands are increasingly of U.S.-led, high- tech products such as combination of home health care and Electronic Data Interchange (EDI) and home oxygen/home infusion therapy. DSR-related public infrastructure will increase -- Japan is thirty years or more behind the U.S. and Europe (Japan's first wheelchair-capable escalator was just installed in a train station in Tokyo -- cost: over one million U.S. dollars). According to Japan's Ministry of Health and Welfare, there are only about 2.9 million Japanese with disabilities compared to 49 million Americans; if the MHW method for counting disabled persons were the same as in the United States, Japanese disabled persons would exceed 20 million. A Japanese law requiring public access for persons with disabilities could be a reality in a few years; and a Japanese version of our Americans With Disabilities Act could blow open mega-opportunities for competitive U.S. firms. 6. Live and Fresh Seafood Will be Able to Fly into Western Japan The New Kansai International Airport is slated to open near Osaka in September. The new airport will be open 24 hours a day and allow live and fresh seafood to be air-freighted directly to the Kansai region of Japan and the major cities of Osaka, Kobe, and Kyoto. Japanese wholesalers in this area look forward to marketing larger quantities of imported live and fresh seafood and expanding their business territories in Japan's second largest market. 7. Catalog Sales Will Do Well Total annual sales of Japanese direct marketing in 1992 was 17 billion dollars and this industry is expected to keep growing despite the economic recession which began in 1991. Many Japanese catalog houses are looking for American suppliers of quality and unique items. Catalog sales, especially of imported products, are cost effective and convenient for the consumer: the numbers of double-income families and working single women are large and increasing. 8. Japan Sees Big Money In the Trade Event Business Japan has a strategy to become a global trade event powerhouse. It is generally viewed in Japan that the trade promotion business is extremely lucrative, and that being the center of international trade events will reduce competitive costs, increase coordination, influence development of standards, facilitate share/speed of products to the market, bolster prestige, decentralize the nation and expand regional/domestic demand. It's good domestic politics; and dovetails well with Japan's 7 billion dollars and quickly growing annual ODA funds being disbursed to the Asian region. In fact, the Japanese Government plans legislation to set up centers In Japan, New York, and London to promote conferences and events in Japanese cities. The bill will contain tax incentives for facilities construction and conference management. Interestingly, the number of international conferences, seminars, symposiums, and trade promotion events held in Japanese cities has skyrocketed. In 1976 there were only 200 such gatherings, 68% of which were held in Tokyo; by 1985 the number had jumped to 438 but Tokyo's share had declined to 41%; in 1991 events soared to 1,244, but Tokyo's share dropped to just 35%. The number of international conferences in Japan is only one-fourth the number of those held in the U.S. All of this means that it is key for US exporters of all kinds of good and services to get into the Japan trade event circuit -- not only in Tokyo -- but in the huge regional economies and industrial centers. These events are being attended more and more by regulatory officials and decision makers from all throughout the Asian region. 9. Japan's Consumers Demand Better Housing Japan's housing level is changing as Japan's consumers increasing demand quality housing. Both the near and long-term trends are for larger homes, many at greater distances from the major metropolitan areas. For instance, in Hokkaido, Japan's most northern island, construction of housing units in 1993 grew by over 15%; and construction of single family dwellings set a record with almost 30,000 units -- an increase of 25% over the previous year. While building a house in Tokyo is too expensive for most Japanese workers, more American-style and semi-Western housing using U.S. materials and techniques are becoming popular in other regions in Japan, such as Osaka, Nagoya and Kyushu. Japan was the destination for 75 percent of U.S. log and lumber exports for the first half of 1993. Three-quarters of Japan's imported supply of lumber is used by Japan's construction industry, and half of Japan's housing is wooden. Leading edge U.S. technology for non-combustible processed wood products and advanced U.S. two-by-four building techniques are in increasing demand since the Japanese Ministry of Construction introduced the new "Semi-Fire Resistant Buildings" category in its building code and by allowing for the first time three-story wooden buildings. Both the near and long-term trends are for larger homes, many at greater distances from the major metropolitan areas. This presents huge un-tapped prospects for imported housing -- services as well as products (design, materials, construction, furnishings, landscaping, ad infinitum). Most of Japan's largest home builders are already scouting for U.S. suppliers or trying to end-run the current distribution system for imported products. 10. Yes, the Japanese People Do Like American Rice! Despite loud wailings from the Japanese agricultural cooperatives, the Food Agency has agreed to allow the import of a limited amount (380,000 tons or 4% of the domestic market) of U.S. rice as part of the GATT Uruguay Round package. Now U.S. rice-- indistinguishable from Japanese rice in blind taste tests--is selling in Japanese supermarkets for 40 percent less than Japanese rice--and selling out within minutes. Who said Japanese people would never eat foreign rice? C. Government Role in the Economy Japan's bureaucracy, created in 1868 at the beginning of the Meiji era, predates Japan's first constitution and the legislative and judicial branches of Japan's government. The highest level of the Japanese bureaucracy are graduates of the pinnacle of the Japanese educational establishment, the University of Tokyo Faculty of Law. Power is concentrated in 12 ministries and 10 ministerial- sized agencies located within a 300 meter radius circle in Kasumigaseki in downtown Tokyo. All major policies are decided by the ministries in Tokyo, while prefectures and municipal governments merely implement them. Business in Japan traditionally has maintained very close relations with the bureaucracy and politicians. Japanese politicians have depended heavily on campaign contributions by big business. Big business also provides a "descent from heaven" in the form of lucrative employment for high-level bureaucrats who leave government service. Bureaucratic paternalism blocks new companies from entering the market, promotes inefficiency and pushes up prices. Politicians dependent on bureaucrats' expertise to draft policies are too busy with factional politics to exert leadership. Diet members are more akin to lobbyists to the bureaucracy than legislators or policymakers. Until the demise of the Liberal Democratic Party in 1993, which controlled the Diet since 1955, this system worked very well for Japanese business. With the current political instability, giant cracks are starting to emerge in this "iron triangle." From 1945 until about 1980, the Japanese government controlled U.S. access to the Japanese market by allocating precious foreign exchange through the issuance of import licenses, by deciding foreign investments on a case-by-case basis depending on the amount of technology transfer to Japanese companies, and by otherwise restricting imports and foreign investment. However at present, a key role of the Japanese government, in addition to its role of interpreting and enforcing regulations, is to guide Japanese business into new directions of development--that is, "industrial policy." Many Japanese commentators have stated that the proper role of a national government in providing for the welfare of its people is to lead industry into higher value-added sectors -- high technology development and manufacturing. The idea that the "market" alone should lead the people to a higher standard of living through its "invisible hand" is notably lacking. Rather, the view is that the government's role is to remedy the defects of the market. In Japan's extremely competitive environment, the government's role amounts to harnessing and moderating, if not restraining, fierce domestic competitors together in the early stages of applied research, providing seed money for those early studies, and providing reassurance to banks and investors who would be willing to fund the resulting products through to maturity in the marketplace. By encouraging the spread of technology throughout Japan, the government allows Japan's huge industrial groupings called "keiretsu" to slug it out in the fiercely competitive Japanese marketplace, and also abroad. This government role may also translate into a techno- nationalistic "protective attitude" by the bureaucracy toward domestic industry when it comes to foreign competition and the potential introduction of new products from the outside. While American companies do start at a serious disadvantage in information about such research projects, it is increasingly possible to participate in a number of them, but this is generally only possible after establishing a presence in Japan. The power of the bureaucracy over the Japanese economy comes from the 11,402 types of required licenses, permits and approvals (an increase of 460 over 1992 and 685 over 1991) that tightly regulate business activity in Japan, and by informal, but in practice virtually compulsory, administrative edicts called "administrative guidance," which are issued without reference to concepts such as "constitutional limits on government power" and "procedural due process." While a bill has passed the Japanese Diet to require that administrative guidance be in writing in order to prohibit bureaucrats from forcing compliance with unwritten rules by threatening to withhold or delay licenses or curtail rights, it seems that in Japan, there is a rule for almost everything. In part due to U.S. pressure, the Japanese government has removed most of the legal and administrative restrictions on exports to and foreign investment in Japan that made doing business in Japan difficult for U.S. companies for many years, and is actively seeking ways to increase imports and foreign investment into Japan. The U.S. and Japanese governments continue to work on removing anti-competitive and exclusionary business practices through bilateral dialogue. While Japanese business has prospered for many years in a tightly regulated environment, in Japan's current recession, Japanese corporate leaders are now calling for deregulation of Japan's economy. Japanese big business is saying that they can deal with foreign competition and that the government's over- regulation is only protecting inefficient small companies. They now say they want a major cutback in the 11,402 licenses and approval requirements that tightly regulate business and the economy. Japanese bureaucrats are now being criticized by the Japanese press, consumers, and even Prime Minister Hata's Working Group on Import Promotion, Market Access Reform and Deregulation, for being arrogant, obstinate, and against deregulation because they want to protect their own interests. While the Japanese system is very different from the U.S. system, U.S. companies can be successful in adapting to it and make it work for them. A total of 222 of the Fortune 500 companies have a direct commercial presence in Japan, and 45 of the 50 leading U.S. exporters do so, as well. The 700-company, 2400-member American Chamber of Commerce in Japan (ACCJ) is the largest overseas AmCham in the world, and its 40-plus committees and sub- committees are highly visible as lobbyists for U.S. business interests. U.S. Embassy officers are liaison to over 20 of these committees, and work closely with the ACCJ on market access issues. The official policy of the Japanese government is to promote imports and foreign investment in Japan, but knotty regulatory barriers and discrimination do, however, still exist; when a company cannot solve such problems by itself or through its legal advisers in Japan, the U.S. Government stands ready to help. U.S. companies should not be afraid of "retaliation" by the Japanese bureaucracy for seeking fairness and transparency in Japanese administrative regulation. U.S. companies should not let Japan's regulatory environment intimidate them from doing business in Japan. D. Balance of Payments Situation Japan's chronic trade surplus with the U.S. is continuing at approximately $60 billion (based on U.S. trade data), while Japan's 1993 current account surplus with the world, set another record, swelling to $131.4 billion. These large surpluses, although in part caused by the "J-curve" effect of a 12 percent appreciation of the yen against the dollar during 1993, have caused friction with many of Japan's trading partners. In theory, the strong yen appreciation since early 1993 should result in a reduction in Japan's trade surplus. There are some indications that adjustment has begun. Seasonally adjusted figures, however, showed Japan's trade surplus to be rising through the first quarter of 1994, indicating the extent of adjustment has been limited, among other things, by sluggish Japanese domestic demand growth. Private economists generally view that adjustment, driven by last year's exchange rate changes, will continue through 1994. But there is no consensus among private forecasters as to whether adjustment can be sustained after 1994, absent a substantial rise in the rate of Japan's domestic demand growth. In general, the depreciation of the dollar since the mid- 1980's has helped to make U.S. goods more competitive in this market and has presented new opportunities. Of course, the weaker dollar means that the dollar cost of setting up operations in Japan is much more expensive than in 1985. E. Trade and Investment Barriers Since its establishment in 1980, the U.S. and Foreign Commercial Service of the U.S. Department of Commerce has counselled and represented many thousands of U.S. companies in resolving individual market access problems, and has worked with the American Chamber of Commerce in Japan to resolve industry-wide issues. Additionally, the U.S. Trade Representative and the U.S. Department of Commerce's Office of Japan Trade Policy have led many bilateral trade negotiations to resolve Japan market access problems of U.S. companies, and the Departments of State and Treasury are now firmly behind the policy of promoting U.S. business in Japan. Japan's trade and investment barriers are currently the subject of intense U.S. government and industry interest. Bilateral discussions are proceeding in a large number of areas of U.S. government concern. 1. Major Trade Barriers The most important catalog of trade barriers with Japan is contained in the 1994 "Trade Estimate Report on Foreign Trade Barriers" released by the Office of the U.S. Trade Representative on March 30, 1994. This report discusses (1) Japan's import policies that adversely affect imports such as tariffs and import barriers for leather and leather footwear, wood products, and quantitative restrictions on agricultural products, feedgrains, rice, and fish products; (2) import impediments resulting from Japanese standards, testing, labeling and certification requirements affecting (a) overtime customs import processing, (b) freshness labeling for food, (c) feed grains, (e) electrical machinery, pressurized containers for refrigerants and gas systems and components for use in semiconductor manufacturing equipment subject to the High Pressure Gas Law, (f) water purification systems, (g) explosive gas board nailers subject to the Gun and Sword Law, (h) steel structures subject to a fire resistance test, (i) refrigerant recovery systems, (j) building chillers, (k) pharmaceuticals and medical devices, (l) food additives, (m) pesticide residues, and (n) fresh agricultural products including apples; (3) discriminatory government procurement practices primarily in the supercomputer, computer, services, medical technology, major projects, satellites and telecommunications sectors; (4) lack of sufficient intellectual property protection (patents, trademarks, copyrights); (5) services barriers (construction, architectural and engineering services, including access to Japan's major development projects, financial services including insurance, banking and securities, legal services, and accounting services); (6) investment barriers including Japan Fair Trade Commission scrutiny of international contracts; and (7) other barriers (aerospace, amorphous metals, civil aviation, coal, burdensome over-regulation, the distribution system, flat glass, import clearance barriers, liquor tax, marketing practice restrictions, motor vehicles, foreign auto parts, motorcycles, paper, semiconductors, shipbuilding industry support, soda ash, steel, telecommunications terminals, radio equipment and systems, utility company procurement, and wine). The 106-page 1993 "United States-Japan Trade White Paper" of the American Chamber of Commerce in Japan also discusses unresolved trade issues in distribution, government procurement, intellectual property rights, investment, taxation, goods (agriculture, animal health products, automobiles, automotive components, biotechnology, chemicals, coal, computers and peripherals, computer software, cosmetics, flat glass, foods, medical equipment and supplies, paper and wood products, pharmaceuticals, radio communications services and equipment, semiconductors, soda ash, supercomputers, telecommunications equipment); and services (air transport and freight, construction and engineering, financial services, insurance, legal services, sales promotions, telecommunications services (value added networks), and travel and tourism). a. Bilateral Sectoral Talks to Resolve Trade and Investment Barriers U.S. trade and investment concerns have been addressed in the three-pronged approach being taken by the U.S. Government. These are the Market Oriented Sector Selective (MOSS) talks, the Major Projects/Construction Arrangements, and other talks which deal with specific problems in designated industry sectors; the Structural Impediments Initiative (SII), which addressed structural issues; and the Framework Talks, which have concentrated on opening Japan's markets across a wide spectrum of sectoral and structural sectors. The sectoral talks have achieved quick and tangible results on a number of sectoral issues. But it is also important for U.S. government and industry to continue to confront the structural forces that keep U.S. trade with Japan in serious imbalance. (1) Market Oriented Sector Selective (MOSS) Talks The MOSS talks and MOSS follow-up talks have worked toward resolving specific business problems of market access in (1) pharmaceuticals and medical devices, (2) telecommunications, (3) forestry and wood products, (4) electronics, and (5) auto parts. Since the U.S. Mission in Japan works very closely with interested U.S. companies, participation in these talks, and in their follow- up, is an important part of US&FCS Japan trade development strategy. (2) Autos and Auto Parts Talks In July 1993 President Clinton and then Prime Minister Miyazawa designated the auto and auto parts basket of the framework agreement as a "priority area," which along with three other baskets, was to be resolved within six months. The auto basket framework negotiations substantially replaced meetings of the Transportation Machinery (auto parts) MOSS Talks which had been ongoing since 1987. Motor vehicle-related issues had been added to the agenda in July 1991. A major agreement on parts purchasing was reached in 1992 during the visit of then President Bush, wherein Japanese companies set goals of more than doubling their purchasing of US parts to $19 billion by April of 1995. In February of 1994 President Clinton and then Prime Minister Hosakawa failed to reached agreement on the auto basket and the other priority areas of the framework, and negotiations were suspended. As of June, 1994, the auto framework talks have resumed, with both sides professing optimism for some resolution of their differences. The focus of the auto basket framework negotiations includes increased access for U.S. auto makers to established dealerships in Japan, especially through franchise agreements, increase purchasing of U.S. auto parts, motor vehicle standards and certification issues, and expansion of access for U.S. parts makers to the lucrative aftermarket in Japan. (3) Telecommunications The United States and Japan have signed a number of bilateral agreements covering trade in telecommunications products and services, including: procurement by Nippon Telegraph and Telephone (NTT); cellular radio; third party radio; satellites; wire-line terminal equipment; radio terminal equipment; international value- added networks (IVAN's) and network channel terminating equipment. Monitoring of the commitments made under these agreements continues. The NTT Agreement, first signed in 1980 and renewed every three years since, is due for renewal at the end of 1995. The agreements have allowed U.S. telecommunications equipment and services suppliers to make inroads into the Japanese telecommunications market. In particular, NTT has actively sought imported products to meet its sourcing requirements. The Government of Japan has proposed terminating the agreement and covering NTT procurement under the revised GATT Government Procurement Code. The U.S Government has made clear its strong opposition to this proposal and, during the last Framework Talks, the USG tried to include NTT into the Government Procurement package for telecommunications while keeping the current bilateral procurement agreement as is. This position was not accepted by the GOJ and this difference in positions has not yet been resolved under the Framework process. In addition, the U.S. Government is monitoring the spin-off of NTT's mobile communications business (DoCoMo). The U.S. Government has received assurances from the Government of Japan that this firm will follow open and competitive procurement procedures similar to those followed by NTT. Recently, the Ministry of Posts and Telecommunications (MPT) has proposed amendments to the 1994 session of the Diet to partially deregulate activities under the Telecommunications Business Law and the Broadcasting Law. While detailed provisions are still being worked out, the amendments will allow non-Japanese separate satellite systems, in competition with INTELSAT ("separate systems"), to provide communications services directly to Japanese end-users. MPT has also deregulated community antenna television (CATV) to allow CATV operators to enter into communications services. The deregulation will allow new common carriers to work with CATV operators for provision of local phone services in competition with NTT. Currently, NTT is the only carrier to provide nationwide communications services including local phone services while the "new common carriers" (NCC) have to make access through NTT local loops. MPT has also relaxed the foreign equity ownership restrictions of CATV to one-third from the previous 20 percent level. Already American companies such as Nynex, Time Warner, and TCI have formed corporate alliances with Japanese companies to take advantage of this new move. The Japanese communications industry regards the CATV deregulation as a big advance for "multimedia services" in Japan. (4) Major Construction Projects Under pressure from the United States to open its construction market, and in response to Japanese domestic pressure to substantially reform its scandal-scarred procurement system, the Government of Japan announced on January 18, 1994 measures to introduce open and competitive bidding procedures for public works construction procurement. The procedures, allowing for greater participation by foreign design and construction firms, will enhance competition in Japan's public works construction market. These measures, coupled with additional understandings reached between the Governments of the United States and Japan, and embodied in a January 19, 1994 exchange of letters between Commerce Secretary Ron Brown and Japanese Ambassador to the United States Takakazu Kuriyama, are expected to lead to further opening of Japan's public construction market, where 1993 investment exceeded $300 billion. The new measures and the accord reached in the exchange of letters ended the threat of US sanctions against Japan for precluding American firms from actively participating in public construction procurement. The 1994 "Action Plan on Reform of the Bidding and Contracting Procedures for Public Works," which Japan implemented on April 1, 1994, makes considerable changes in the procedures used by central government and quasi-government agencies in awarding design and construction contracts. In addition, prefectural and certain local governments are expected to adopt similar procedures thereby allowing US companies to access a greater number of public projects -- including building, structural and civil engineering work. The Ministry of Construction expects that over $20 billion in projects will be opened to competitive bidding under the new Action Plan. Under the pre-existing Major Projects Arrangements (MPA), which has been subsumed into the Action Plan, US firms enjoyed limited access to just 36 large public works projects in Japan. Through April, 1993, US companies applying for tenders on MPA projects secured 207 contracts, valued in excess of 100 billion yen. (5) Semiconductors The U.S.-Japan Semiconductor Agreement of 1991 is a five- year market access agreement which specifies that foreign semiconductor share in Japan should reach and maintain a minimum of 20 percent starting from the fourth quarter of 1992, and that there should be gradual and steady improvement in market access through the life of the agreement. The 20 percent level was established as an acceptable benchmark for progress toward an open market in Japan because foreign manufacturers should be expected to achieve a far greater share in Japan if market forces were allowed to operate. It has been a struggle to maintain a 20 percent foreign share in the Japanese market. The U.S.-based Semiconductor Industry Association insists that the agreement's requirement for steady progress would be achieved if the foreign share in 1994 increased at a rate comparable to the increase in 1993 over 1992. Despite the improvement in the foreign share to 20 percent in the fourth quarter of 1993, the overall yearly average was only 19.4 percent. As in 1992, foreign manufacturers achieved 20 percent in the fourth quarter, while the yearly average failed to reach 20 percent. The Japanese Government has insisted that it cannot force private companies to purchase foreign products while Japanese companies prefer purchasing from Japanese manufacturers or manufacturing themselves. The current economic slump is also lamented as a factor, but the facts show that semiconductor demand grew in Japan in each quarter of 1993 while the foreign share fell. In response, the U.S. Government points out that the Agreement does not call for forced purchases but rather a demonstrated effort to open opportunities for foreign semiconductor manufacturers where they would otherwise be excluded. The U.S. also insists that many of the high-volume, design-in projects have not been offered to foreign suppliers who have consistently demonstrated their capabilities and competitiveness in similar markets worldwide. A Joint Working Group meeting with both industry and government representatives participating was held in Hawaii on March 22, 1994. Both governments agreed to help promote design-in and help expand purchases of foreign semiconductors by the automotive, telecommunications, and game machine industries. U.S. Trade Representative Mickey Kantor expressed the desire for gradual and steady improvements in foreign market share continue throughout the duration of the Arrangement, so that U.S. and other foreign semiconductor suppliers could achieve improved access to the Japanese market on a sustained basis commensurate with their very strong global competitive position. (6) Legal Services Bilateral consultations resumed in 1989 concerning legal services, a sector that had seen two petitions filed under section 301 of the Trade Act of 1974 since negotiations began in 1982. The U.S. Government seeks Japan to liberalize Japanese law to allow U.S. law firms to assist U.S. companies in doing business in Japan, by permitting U.S. lawyers to hire and form partnerships with Japanese lawyers. The Japan Federation of Bar Associations (JFBA, or Nichibenren) and the Ministry of Justice have opposed liberalization. In 1993, a Government of Japan study committee which followed up the recommendation of the Prime Minister's Third Administrative Reform Council to solve this issue "in light of the important role that lawyers play in facilitating international transactions" issued a report that seemed to recommend allowing partnerships, as did the Japanese offer in the GATT Uruguay Round. With Nichibenren support, the Ministry of Justice is proceeding with a draft bill for submission to the Diet in 1994 that would allow a form of "joint enterprise," but it is not clear what type of business organization this is intended to be. U.S. lawyers and the American Chamber of Commerce in Japan have roundly criticized the Ministry of Justice for trying to placate Nichibenren by proposing a commercially unreasonable plan. In contrast, Keidanren, the Japan Federation of Economic Organizations, has publicly supported the U.S. position on this issue, recognizing its importance in increasing foreign investment in Japan. The U.S. Government has requested bilateral consultations under the Framework to review whether the Japanese measures provide a workable solution to the outstanding issues. (7) Flat Glass Competitive foreign glass manufacturers have experienced substantial market access difficulties in Japan stemming from exclusionary Japanese business practices and a highly controlled distribution system for flat glass. As part of the January, 1992 Plan of Action, the Government of Japan announced a number of measures aimed at increasing market access in the Japanese market for competitive foreign glass producers. For example, MITI promised to facilitate the efforts of foreign firms to increase sales in the Japanese market, encourage Japanese companies to increase imports under MITI's Import Expansion Program, and encourage all Japanese glass manufacturers to put antimonopoly compliance programs into effect. Glass manufacturers have implemented compliance programs, but there has been no noticeable effect yet. In addition, the Japan Fair Trade Commission has completed a survey of competitive conditions in the glass market, and the Ministry of Construction is facilitating the efforts of foreign firms to meet Japanese building standards for flat glass and other glass building materials, including making available in English all relevant laws and regulations. The JFTC report found a restrictive market in glass with virtual control of the distribution system by the three large Japanese glass makers, largely through a system of rebates. MITI has called in the manufacturers and urged them to "review" the rebate system. The U.S. Government, as a part of the "Framework talks," will be monitoring developments in this area closely to ensure that the aforementioned steps meet their intended goal of substantially increasing market access for foreign firms exporting flat glass to Japan. (8) Paper and Paperboard Over the five-year term of the bilateral Paper Agreement, which became effective in April, 1992, foreign supplier penetration of Japan's paper and paperboard market is expected to increase considerably. The agreement calls for semi-annual progress reviews on the extent to which the objectives of the Paper Agreement are being met. At the May 1994 review, the U.S. Government expressed serious concern about the lack of significant change in the import market share of Japan's paper sector (4.1 percent compared to 3.9 percent in 1991). Although some sub-sectors have made some marginal gains, sales in other sectors have actually declined--a situation attributed to production over-capacity in Japan and continuing poor economic conditions. A measure of success for the Paper Agreement will the extent to which U.S. firms' are able to sell to large Japanese end-users, by-passing the cost inefficient and difficult to crack distribution system. To continually monitor progress in increasing market share, the American Chamber of Commerce established a separate "paper subcommittee." (9) Intellectual Property Rights Japan has been on the "watch list" under the "special 301" provisions of the 1988 Trade Act each year since 1989, due to legal deficiencies and practical problems in patent, copyright, and trademark protection. As to patents, in the Structural Impediments Initiative (SII) talks, Japan agreed to make best efforts to reduce the period to examine a patent to 24 months within five years. At present it can take five to six years from the time of patent application to the time of grant of patent in Japan, compared to an average of 18 months in the United States. The Japanese Patent Office (JPO) now accepts electronic filings, and has urged high-volume filers (large Japanese companies) to reduce unnecessary filings. The JPO has also eliminated examination of utility model (minor patent) applications, increased filing fees, and is considering proposals to speed up the patent system by making the pre-grant opposition system a post-grant system. In addition, the JPO has broadened examination standards to give wider protection to patents that represent technological breakthroughs, which will also have the effect of reducing patent applications. In the Framework Talks, the GOJ agreed to start accepting from 1995 patent applications filed in English, to be followed by a Japanese translation within two months, and in the GATT Uruguay Round Japan agreed to protect patents from the date of filing, rather than from that date of publication for opposition, as at present. Other problems remain with Japan's short 6-month grace period, narrow and literal interpretation of patent claims, and a dependent cross-license provision that induces cross-licensing. The trademark and service mark application process is also very slow, taking three years to register a trademark or service mark in Japan, compared to an average of 15 months in the United States. Trademark examiners have fallen further behind as the examiners work on processing the many thousands of service mark applications that were filed in the initial six-month filing period that ended on September 30, 1992. As to copyright, to date, Japan has not taken any steps to weaken copyright protection against unlawful decompilation of computer programs, a subject of an inquiry by a GOJ advisory council during 1993-1994 which resulted in no recommendation, in part because the USG is watching this subject very closely. MITI has also taken steps to increase protection under the Unfair Competition Law by proposing legislation to provide remedies against "knock-off" imitations of well-known products, and a MITI advisory council has made recommendations to strengthen court procedures to prevent trade secrets from being improperly disclosed during litigation to enforce trade secret rights in Japan's courts, as would be required at present in attempts to enforce Japan's laws protecting trade secrets. b. The Structural Impediments Initiative (SII) The Structural Impediments Initiative (SII) was launched by former President Bush and former Prime Minister Uno in July 1989 to identify and solve structural problems in both countries that stand as impediments to trade and to balance of payments adjustment with the goal of contributing to the reduction of payments imbalances. The SII meetings in 1989 - 1990, 1991 and 1992 produced a "Joint Report of the U.S.-Japan Working Group on the Structural Impediments Initiative" dated June 28, 1990, a first annual report dated May 22, 1991, and a second annual report dated July 30, 1992. Under the SII, the Government of Japan is in the process of implementing a 430 trillion yen, 10-year (1991-2000) public infrastructure investment plan; has made progress in deregulating portions of the Japanese distribution system, and achieving faster customs clearance; has liberalized to a degree its foreign direct investment regime; improved various disclosure rules which will help improve transparency of the keiretsu system, and taken steps to enhance shareholders' rights; strengthened anti-monopoly enforcement; and eliminated some tax preferences for agricultural land in major urban areas. Despite these efforts, further steps need to be taken by the Government of Japan to (1) further strengthen the anti-monopoly enforcement regime; (2) make certain revisions to the anti-monopoly act; (3) make "keiretsu" relationships (less than "arms length" relationship between members of groups of manufacturers and suppliers) more open and transparent; (4) coordinate streamlining of customs clearance to achieve 24-hour clearance; (5) encourage open and non-discriminatory procurement; and (6) review problems arising in the distribution system. The U.S. Government will continue to push for progress in these areas in bilateral talks. The U.S. Mission in Japan will continue to use its close contacts with American companies doing or trying to do business in Japan, and with sympathetic Japanese interests, to serve as a key resource for the U.S. monitoring of Japanese efforts to resolve these structural problems. c. The Framework Talks Early on in the Clinton Administration, it was determined that it was necessary to establish a different mechanism to replace the various fora that had developed over the years for pursuing our bilateral economic objectives with Japan. At their first meeting in April 1993, President Clinton and then Prime Minister Miyazawa agreed to establish a framework for bilateral economic consultations between the two governments. After a series of negotiating sessions, the Framework Agreement was announced on July 10, 1993. The Framework's agreed goals are increased access and sales of competitive foreign goods and services through market- opening and macroeconomic measures. In the medium term, the objective is for Japan to achieve "a highly significant decrease in its current account surplus." The Framework provides for "an ongoing set of consultations anchored in biannual meetings between the President and Prime Minister." The two governments agreed to concentrate on five areas or "baskets" initially: government procurement, regulatory reform and competitiveness, economic harmonization, implementation of existing arrangements and measures and other major sectors (autos and auto parts). Priority talks were established for the government procurement, financial services including insurance, and automotive sectors, as well as export promotion. In addition, the two governments agreed to a joint global cooperation effort in such areas as environment and technology. The Administration was determined to have some sort of measure of progress included in the Framework and it was agreed that this would be done based on sets of objective criteria which could be qualitative or quantitative or both. One criticism of SII was that its results were not measurable. Agreement on objective criteria during the individual basket negotiations has proven to be major sticking point in the talks, which resumed in May of 1994. 2. Major Investment Barriers Long-standing Japanese legal restrictions on foreign direct investment have been partially eliminated, but the cumulative effect of these restrictions remains. Major direct investment barriers with Japan, as described in the 1994 National Trade Estimate Report, are in such areas as aircraft, space development, agriculture, fishing and forestry, oil and gas, mining, leather and leather products manufacturing, nuclear power, weapons and ordnance manufacturing, tobacco manufacturing, and other sectors. In addition, there are restrictions on foreign ownership of telecommunications and broadcasting facilities and domestic airlines. The Japan Fair Trade Commission continues its discriminatory requirement of notification of certain types of contracts between Japanese and foreign parties. While the JFTC has recently narrowed the scope of the types of contracts covered by this requirement, which should result in a substantial decrease in the number of notifications, the notification requirement has been used to challenge provisions that were disadvantageous to Japanese companies and has resulted in greater scrutiny of contracts involving foreign companies than between Japanese parties. Foreign direct investment flows to Japan remain minuscule (0.7% of total world inward direct investment, compared to 22% hosted by the United States, and only 0.1% of Japan's gross domestic investment, compared to 6.7% in the United States) partly due to the difficulties foreigners have in breaking into certain areas of the Japanese market and in acquiring Japanese companies. Ties between government and industry, Japanese firms' reluctance to break long-term personal and supplier relationships, cross- shareholding among allied companies, exclusionary business practices, informal discriminatory practices and pervasive over- regulation by the bureaucracy, the low percentage of publicly traded common stock relative to total capital in many companies, and unwillingness of other members of a keiretsu (industrial grouping) to allow a member to come under foreign control all tend to inhibit direct foreign investment. "Trade and Investment in Japan: The Current Environment," the latest report (June, 1991) by the American Chamber of Commerce in Japan, mentions other obstacles, including: (1) the high cost of doing business in Japan; (2) difficulties in locating and hiring qualified personnel; (3) general complexities of doing business in Japan (particularly with regard to understanding the intricate relationships which drive business and government decision-making processes; (4) multi-tiered distribution systems; (5) interlocking business and ownership relationships known as keiretsu, and (6) Ministry guidelines, policies and regulations which lack transparency. F. Labor Force Ideally, a U.S. company's office in Japan should be headed by an American proficient in Japanese with a knowledge of Japanese business practices and the business, products and technology of the U.S. parent, and who has the complete trust of the U.S. headquarters. Hiring Japanese staff of course is essential to expanding the business, and many U.S. companies in Japan prefer to hire a Japanese president because of the latter's intimate knowledge of the local culture and business practices and expertise in a particular industry sector. Japanese nationals may also be more cost effective than dispatching Americans with no industry contacts in Japan. Finding capable staff has been a problem for foreign companies in Japan. There has been relatively low labor mobility between companies, and with Japan's tradition (albeit changing) of a lifetime employment system for managerial-class positions, working for a foreign company has had much less prestige for college graduates than working for a well-known Japanese company. But U.S. companies can benefit from the recent trend of Japanese companies to encourage "voluntary" retirements and reduce intake of new college graduates in an effort to reduce fixed labor costs. Also, U.S. companies can benefit from hiring the increasing number of capable women entering the work force, and from the fact that job- switching is slowly losing its social stigma. In general, however, people are trained and stay with one company, and develop a strong identification with their company. Before important decisions are made, a consensus-building process makes sure that everyone is on board. Snap decisions by an individual, even a top executive, are rare. Once a decision is made, however, it is implemented quickly and thoroughly. G. Major Local and Third Country Competitors in Specific Sectors Japanese suppliers are strong competitors in most industrial and consumer goods areas. Their competitiveness is, however, eroding due to high costs in Japan exacerbated by the strong yen and by difficulties in their abilities to use and develop new uses for personal computers. European suppliers are active in specialty prestige consumer products, including automobiles, leather bags, and some food products, and in some precision and specialty machinery. Asian suppliers of low-cost clothing and some electronics goods compete mostly with Japanese transplant factories in Asia that are increasingly reverse-importing back into Japan. However, Asian suppliers of industrial and food products have had a difficult time breaking into the Japanese market because of poor brand recognition and an image of poor quality. However, the value and quality of furniture made in Asia is rapidly gaining popularity in the Japanese imported furniture market. Japanese agricultural suppliers are inefficient and high-cost, but highly protected. However, the average age of Japanese farmers, many of whom are part-time, is 57 and rising. U.S. exporters of rice, meat, fruit and fishery products have competition from many other countries including Australia, Asia, and even Latin America. H. Infrastructure Situation re Goods/Service Distribution Japan has a fully developed physical infrastructure of roads, highways, railroads, airports, harbors, warehouses and telecommunications for distribution of all types of goods and services. Japan is also engaged in a large expansion of public works projects to enhance the business infrastructure. However, there remain major problems with Japan's physical infrastructure which impedes distribution of imports. In part due to overcentralization in the major cities, high land prices, and regulations restricting large stores, Japan's retail stores are small, lacking adequate shelf space. As a result, they require frequent stocking by wholesalers using small trucks that can navigate the narrow streets. Together with the demand by manufacturers of just-in-time parts and components delivery from subcontractors, this results in huge numbers of trucks on inadequate urban roads and highways during daytime business hours, slowing traffic to a crawl in major urban centers. In effect, a substantial portion of Japan's warehouses are the four-wheeled variety, using public land (the roads). I. Major Infrastructure Projects Underway Japan will spend an estimated eight trillion dollars before the turn of the century on public, private and third sector (public/private) infrastructure development, including airports, bridges, roads, port development projects, heliports, intelligent buildings, telecommunications systems, resorts, retirement communities, marinas, conference centers, medical facilities, foreign access zones, and science cities and research centers. Roughly one-third of this investment will be publicly funded, with the remainder being financed by the private sector. Total Japanese private investment in 1992 reached $740 billion, about 20 percent of Japan's gross domestic product, and it is expected to continue at the 15-18% of Japanese GDP over the short term -- outspending comparable U.S. investment by at least $300 billion per year. As a general rule, it takes more than three years for major construction/development projects to move from project conception to realization. During this process, preliminary planning, consulting, basic design, detailed design, construction/design supervision, and goods procurement are carried out. The 1991 Major Projects Arrangements (MPA) between the United States and Japanese governments was the first opening of the Japanese public construction market to U.S. participation. As a result of further market access negotiations and Government of Japan initiatives to improve transparency in its public works bidding procedures, additional reforms were announced by the GOJ in January 1994 as part of the "Action Plan on Reform of the Bidding and Contracting Procedures for Public Works." The Action Plan, which opens up central government, quasi-government agency, prefectural and select municipal construction procurement above established thresholds to participation by foreign construction and design firms, also continues the procedures set up for the projects covered under the MPA. Regional investment in Japan is very substantial. In just the Kansai region, Japan's second largest population/ commercial center, there are some 920 major projects, valued in total in excess of $345 billion, in planning or under way, funded in varying combinations and degrees by private, public (national and local) and third sector interests. Other regions, including Chubu, Kyushu-Yamaguchi, Tohoku/Hokkaido have similarly dynamic infrastructure development programs. In addition to construction projects, Japan's Ministry of Finance, in an effort to stimulate the lagging Japanese economy, implemented three stimulus packages totalling over $300 billion between 1992 and 1994. The 1993 package included more than $18 billion for government purchases of high tech equipment, including computers and telecommunications equipment. The United States and Japan have an established mechanism for handling military sales from the United States to the Japanese Self Defense Forces. The level of Japanese defense procurement from the United States for fiscal years 1994 and 1995. Comprehensive information on individual sales projects can be obtained from the Defense Security Assistance Agency (DSAA) at the Department of Defense in Washington. In addition to direct sales, there are a number of military licensed production and co-development projects. The following tables, based on best available information, show major projects in Japan where U.S. participation in these phases could possibly exceed $50 million. The format used to supply the information is as follows: NOP: Name of project (* designated MPA project) EVP: Estimated total value of project in U.S. dollars DCA: Date competitive activity likely to begin MAJOR PROCUREMENTS TRANSPORTATION Airports NOP: Tokyo International Airport* EVP: 1,000 million DCA: 1993 (detailed plans not yet announced) NOP: New Chitose Airport* EVP: 250 million DCA: 1993 (runway expansion work started) NOP: Kansai International Airport* EVP: 11,700 million DCA: 1985-1994 (95 percent of work completed) NOP: Fukuoka Airport* EVP: 41 million DCA: 1993 (architectural design completed) NOP: Sendai Airport* EVP: 150 million DCA: 1993 (architectural design completed) NOP: Naha Airport EVP: 380 million DCA: 1993 (architectural design is under way) NOP: Shizuoka Airport EVP: 50 million DCA: 1994 NOP: New Kyushu International Regional Airport EVP: 100 million DCA: 1994 NOP: Kobe Airport EVP: 150 million DCA: 1995 NOP: Niigata Airport EVP: 125 million DCA: 1993 (construction started) Harbor/port facilities NOP: Import Integrated Physical Distribution Terminal* EVP: 600 million DCA: 1993 (architectural design started) NOP: Rinku International Logistic Center EVP: 220 million DCA: 1994-1995 NOP: Rinku Town Jewelry Mart (Foreign Access Zone) EVP: 330 million DCA: 1994-1996 Railways NOP: Osaka Monorail EVP: 185 million DCA: 1982-1998 [Railway-related projects] NOP: Kyoto Station Building* EVP: 1,000 million DCA: 1992 (architectural design completed) NOP: Ueno Station Development Project* EVP: 1,500 million DCA: 1994 (detailed plans not yet announced) NOP: New JR Wakayama Station Building (construction of a 30 story "intelligent building") EVP: 1,000 million DCA: 1994 Port and harbor redevelopment NOP: Kashii Artificial Island (construction of an artificial island only for new port facilities, a university research institute, and housing) EVP: 256 million DCA: 1993 (civil engineering work started) NOP: Shimonoseki Artificial Island (construction of artificial island to serve as a new commercial/passenger port and a leisure/marine sports center) EVP: 525 million DCA: 1994 Bridge construction NOP: Kurushima Bridge* EVP: 1,675 million (60 percent of the budget contracted) DCA: 1990 NOP: Akashi Strait Bridge* EVP: 3,200 million (80 percent of the budget contracted) DCA: 1986 Road construction projects NOP: Second Keihan Expressway* EVP: 2,210 million DCA: 1994 NOP: Ise Bay Highway* EVP: 1,180 million (66 percent of the budget contracted) DCA: 1986 NOP: Trans-Tokyo Bay Highway* EVP: 7,247 million (87 percent of the budget contracted) DCA: 1986 URBAN DEVELOPMENT/REDEVELOPMENT PROJECTS NOP: Kansai Science City* EVP: 30,000 million DCA: 1985-2010 NOP: Technoport Osaka* (MPA in part) EVP: 22,000 million DCA: 1985-2010 Note Construction for the World Trade Center Building and Asia and Pacific Trade Center Building have started. Osaka Sports Island project is expected to start construction in 1993. NOP: Rokko Island* (MPA in part) EVP: 12,000 million DCA: 1972-1998 Note: Construction of Kobe Air Cargo City Terminal Building (1993-1994) has started. NOP: Hitachi-Naka District Urban Redevelopment (Business zone development, including hotel, conference hall, leisure facilities, and office buildings) EVP: 13,500 million DCA: 1992 (some construction started) NOP: Shiodome - old railroad operation site (Construction of office and hotel buildings) EVP: 5,000 million DCA: 1993 (preliminary planning is underway) NOP: Mikawa Port Renaissance Twenty One (Resort with a marine park zone, ocean center - aquarium and science museum, urban complex zone, shopping mall, ocean terminal bldg., and convention center with hotel, event square, culture park zone, park and rest house) EVP: 247 million DCA: 1994 NOP: Osaka International Culture Park City (Urban development) EVP: 10,000 million DCA: 1993-2000 NOP: Cosmo-Park Kata Construction of housing, resort facilities, cultural interaction facilities, and laboratories) EVP: 1,500 million DCA: 1990-2000 NOP: Minatomachi Re-development (Construction of residential/office/commercial buildings) EVP: 5,000 million DCA: 1992-2005 NOP: Redevelopment of the Kishiwada Old Port site EVP: 1,800 million DCA: 1994-1998 NOP: Keihanna Interaction Plaza, Second Phase (Construction of laboratory buildings, hotel, shopping stores, and restaurants) EVP: 200 million DCA: 1995 NOP: Otaru Bay Area Redevelopment (Development of commercial, hotel, and sports facilities) EVP: 900 million DCA: 1994 NOP: Sapporo International Zone Project (Sapporo downtown three-block redevelopment) EVP: 1,800 million DCA: 1994 CONFERENCE HALLS AND EXHIBITION BUILDINGS NOP: New National Theater* EVP: 650 million DCA: 1993 (construction started) NOP: Osaka International Conference Hall (Construction of a conference hall building) EVP: 1,000 million DCA: 1995-1998 NOP: Hiroshima Messe/Convention Center (Construction of exhibition halls, conference halls, multi- purpose dome stadium, hotel, and office buildings) EVP: 3,800 million DCA: 1994-2007 HOTELS NOP: Hotel THV at Tempozan Harbor Village (Construction of a hotel building) EVP: 160 million DCA: 1993 (construction work started) NOP: Replacement of the Osaka International Hotel (Construction of a 28 story hotel building) EVP: 300 million DCA: 1994-1996 OFFICE BUILDINGS, INCLUDING MIXED-USE BUILDINGS NOP: Saitama Consolidated Government Office Building* EVP: 1,500 million DCA: Summer 1993 NOP: Ministry of Posts and Telecommunications Consolidated Office Building (Saitama) EVP: 600 million DCA: 1994 NOP: Rinku Gate Tower Building* EVP: 550 million DCA: 1992 (construction started) NOP: NHK Osaka Broadcasting Center Building EVP: 500 million DCA: 1994 NOP: Time 24 Software Terminal EVP: 400 million DCA: 1993 NOP: Osaka International Post Office on KIA Island EVP: 500 million DCA: 1993 (construction started) NOP: Asia-Pacific Import Mart (Construction of building complex) EVP: 220 million DCA: 1992 NOP: New Osaka Central Post Office EVP: 500 million DCA: 1995 RESIDENTIAL BUILDINGS NOP: Makuhari Highrise Apartment Building* EVP: 200 million DCA: 1994 NOP: New Prime Minister Residence EVP: 250 million DCA: 1993 SCHOOLS/UNIVERSITIES NOP: Tokyo University of Foreign Studies* EVP: 140 million DCA: 1994 NOP: Kyushu University Relocation* EVP: 5,500 million DCA: 1992 HOSPITALS NOP: Social Insurance Hospital* EVP: 140 million DCA: 1992 (construction started) NOP: Tokyo Police Hospital EVP: 1,000 million DCA: 1995 R&D FACILITIES NOP: Synchrotron Radiation Facilities* (MPA in part) EVP: 1,100 million DCA: 1990-1998 (construction work started) NOP: Research Center for Aging & Health* EVP: 50 million DCA: 1994 NOP: National Institute of Polar Research* EVP: 60 million DCA: 1994 NOP: Institute of Statistical Mathematics* EVP: 40 million DCA: 1994 NOP: National Institute of Japanese Literature EVP: 40 million DCA: 199 RESORT DEVELOPMENT NOP: Nikko Kirifuri Resort* EVP: 100 million DCA: 1993 (architectural design completed) NOP: Beppu Artificial Island Project (Construction of an artificial island and facilities including a marina, a hotel, and condominiums) EVP: 200 million DCA: 1995 NOP: Kurikoma Funagata Resort Project EVP: 1,900 million DCA: 1990-2000 ENVIRONMENTAL PROJECTS NOP: Tokyo Bay Phoenix Plan (construction of waste treatment plants) EVP: 1,000 million DCA: 1995 AIRCRAFT PROCUREMENTS NOP: Japan Civil Aeronautics Bureau in flight inspection - aircraft EVP: 50 million DCA: 1994 DEFENSE TRADE NOP: Maritime Defenses Procurement EVP: 4,042 million DCA: 1993-1994 NOP: Air Defenses Procurement EVP: 3,458 million DCA: 1993-1994 NOP: Ground Defenses Procurement EVP: 1,095.5 Million DCA: 1993-1994 COMPUTER PROCUREMENTS Personal computers NOP: Computer Education (economic stimulus package) EVP: 395 million DCA: 1993-1994 Supercomputers NOP: Research facility supercomputers (GOJ Economic Stimulus Package) EVP: 300 million DCA: 1993-1994 TELECOMMUNICATIONS NOP: Fukuoka Telecom Town (telecommunications complex with various peripheral commercial and public areas) EVP: 8,900 million DCA: 1995 NOP: Nippon Telegraph & Telephone's fiber optic network EVP: 391,000 million DCA: 1991 - 2015 NOP: Issue of digital cellular licenses EVP: Private company investments/not known DCA: Starting in 1992 Note: The Ministry of Posts and Telecommunications has issued business licenses for the operation of digital cellular telephones in the major metropolitan areas. The most recently licensed carriers have U.S. participation. Licensing for other areas is continuing. Investment in telecommunications infrastructure is underway by the various private firms. The level of this investment is not known, but U.S. materials could exceed $50 million per year. ELECTRIC POWER PROJECTS The ten Japanese electric power companies (Hokkaido, Tohoku, Tokyo, Chubu, Hokuriku, Kansai, Shikoku, Chugoku, Kyushu, and Okinawa Electric Power), are key players for business development in Japan's strong regional economies. Contact with these influential players is key to developing business opportunities. In the past, only fractional amounts of their procurements have gone to foreign firms, but with increasing deregulation, these firms must cut costs and buy competitive goods and services from overseas -- and from the United States. Already, for instance, Kyushu Electric is now doing business with 90 U.S. firms, and the other power firms are also buying. All ten electric utility companies have plans to extend the electric power generation capacities. The total procurement budgets for Japanese fiscal years 1993 and 1994 (April 1, 1993 to March 31, 1995) for each company are: Electric Utility Company EVP ------------------------ --- Hokkaido 2,500 million Tohoku 10,000 million Tokyo 33,000 million Chubu 15,000 million Hokuriku 4,000 million Kansai 13,000 million Chugoku 6,000 million Shikoku 2,900 million Kyushu 10,000 million Okinawa 1,200 million Major electric power generation projects of 5 megawatts or more under construction in the 1994 - 1997 period are: Hydroelectric Power Stations (PS: pumped-storage) Company Project Megawattage Period of Construction ------- ------- ------------ ---------------------- Tohoku Gassan 9 7/92-5/97 Tokyo Sabigawa (PS) 300 5/92-7/95 Kazunogawa (PS) 800 1/93-7/99 Chubu Nikengoya 26 4/91-10/94 Akaishizawa 19 11/90-6/95 Hiraya 8 4/94-6/96 Okumino (PS) 500 3/85-7/95 Okumino (PS) 500 3/85-7/95 Okumino (PS) 500 4/92-7/96 Sugihara 24 4/94-4/98 Kansai Okawachi 4 (PS) 32 3/87-7/95 Osako 7 6/94-9/96 Minokawai 23 5/93-5/95 Araya 11 6/94-11/96 Unazuki 20 7/90-6/2000 Chugoku Matanogawa 4(PS) 300 3/80-6/95 Matanogawa 3(PS) 300 3/80-4/96 Kyushu Shinitsukikawa 15 3/93-3/95 Shinishikawauchi 2 18 7/93-3/96 Thermal Power Stations Under Construction (O: Oil, C: Carbon, H: Heavy oil, L: LNG, TG: Natural Gas) (GT: Gas Turbine) Company Project Megawattage Period of Construction ------- ------- ----------- ---------------------- Hokkaido Tomatoatsuma 3 (C) 9 6/93-10/96 Shiriuchi No. 2 (H) 350 3/80-9/97 Tohoku Haramachi 1 1000 2/93-7/97 Yanaizunishiyama 65 6/93-5/95 Sumikawa 50 4/93-3/95 Kakkonda 2 30 4/94-3/96 Haramachi 2 1000 2/94-7/98 Tokyo Yokohama 7 (L) 350 6/93-7/96 Yokohama 7 (L) 700 6/93-7/97 Yokohama 8 (L) 350 6/93-7/96 Yokohama 8 (L) 700 6/93-7/97 Yokohama 7 (L) 350 6/93-7/98 Yokohama 8 (L) 350 6/93-7/98 Chubu Chita 5 GT (L) 154 4/93-6/95 Chita 2 GT (L) 154 6/93-8/95 2d 2 Chita 2 GT (L) 154 7/94-7/96 Chita 1 GT (L) 154 6/94-8/96 Kawagoe 3 (L) 1650 1/93-1/97 Kawagoe 4 1650 4/93-12/97 Hokuriku Nanaoohta 1 (C) 500 5/91-12/94 Kansai 1st Himeji 5 (L) 670 9/91-5/95 1st Himeji 6 (L) 670 2/92-7/96 Chugoku Yanai 2 Ser. 2 (L) 35 10/92-1/96 Misumi 1 (C) 100 1/95-7/98 Osaki 1 Ser. 1 (C) 25 11/95-3/99 Osaki 1 Ser. (C) 25 11/95-3/2002 Kyushu Yamakawa (geothermal) 30 7/93-3/95 Shin-Tokunoshima 3(O) 6 7/93-6/94 Reihoku 2 (C) 700 10/95-3/99 Matsuura 2 (C) 700 10/97-3/2001 Okinawa Gushikawa Karyoku 2 156 5/92-3/95 Nuclear power stations under construction Company Project Megawattage Period of Construction ------- -------- ---------- ------------------- ohoku Onagawa 2 825 8/89-7/95 Maki 1 825 1996-2002 Tokyo Kashiwazakikari 6 1356 9/91-12/96 Kashiwazakikari 7 1356 2/92-7/97 Shikoku Iketa 3 890 11/86-3/95 Kyushu Genkai 4 1180 8/85-7/97