No. 19 — May 12, 2000


Weekly Review


Telecommunications And Deregulation - Tokyo has said on any number of occasions that it hopes negotiations intended to break the impasse over the contents of the final report on regulatory reform under the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy will not overshadow the July 21-23 summit of the leaders of the Group of Seven industrial nations plus Russia. However, the government has set itself up for just such an outcome. Trade officials have informed the Clinton administration that Japan will not be in a position to conduct high-level talks on the major source of the deadlock — the fees that Nippon Telegraph and Telephone Corp.'s two regional operating units charge other common carriers to use their networks — until after elections for the Diet's lower house take place. Those polls likely will be held June 25. That informal scheduling gives Washington and Tokyo less than four weeks to achieve the settlement that has eluded them for the last six months.

The Ministry of Foreign Affairs, the lead Japanese agency in the Enhanced Initiative forum, tried to avoid this time trap — and to set the stage for a controversy-free May 5 get-acquainted session between Prime Minister Yoshiro Mori and President Clinton — by proposing in late April that the two negotiating teams convene in Washington May 1 and May 2. Within days, though, this plan was scrapped.

The official but patently creative explanation for the cancellation was that reductions in NTT interconnection rates could not be discussed while the Diet was debating legislation to amend the Telecommunications Business Law. The bill, which cleared the lower house April 26 and is pending approval by the upper house, gives the Ministry of Posts and Telecommunications the authority to employ market-based pricing, as embodied in the so-called long-run incremental cost methodology, to compute NTT local-access tariffs instead of its fee-inflating historical-cost model. The real reason for the meeting flip-flop, however, was the Foreign Ministry's belief that the talks would end in failure because of MPT's refusal to go beyond the rate-cutting deal it had on the table.

Under it, Nippon Telegraph and Telephone East Corp. and Nippon Telegraph and Telephone West Corp. would trim their local-access charges by 22.5 percent over four years. The White House team's offer to split a big part of the difference between Japan's proposal and the U.S. demand for a 41.1 percent slash in interconnection fees at the end of 2000 apparently is no more acceptable to MPT authorities now than when the compromise was presented in March (see JEI Report No. 14B, April 7, 2000). If anything, MPT's position has hardened. The cause is language that lower house lawmakers, briefed on the ministry's intention to reduce access fees by 22.5 percent over four years, added to the Telecommunication Business Law bill. Their resolution states that "note should be taken that [the planned cut] will not adversely affect the management of NTT East and NTT West [or] subscriber charges."

NTT has calculated that a cut in local-access fees on the order of Washington's proposed 41.1 percent reduction would cost its two affiliates roughly ¥700 billion ($6.4 billion at ¥110=$1.00) of the ¥1 trillion-plus ($9.1 billion) they generate annually from current interconnection tariffs. At first, MPT officials talked about a hike in the fixed service charges that NTT East and NTT West customers pay each month to counter the projected revenue hemorrhage. The Diet add-on would appear to eliminate that offset, however. Forcing the pair of local carriers to chop their swollen employee count of some 127,000 people by more than the planned 20,000 over three years or requiring them to pare capital spending beyond the announced ¥900 billion ($8.2 billion) pullback also could be viewed as contrary to the lower house's rate-cutting proviso.

Accordingly, a search has been underway in Tokyo in recent weeks for new revenue sources for NTT East and NTT West, which now are limited to providing local residential and business phone services at uniform nationwide rates. One idea is to allow the two companies to charge more in sparsely populated areas. Another is to give them the freedom to offer more profitable, growth-oriented services, such as domestic long-distance and international calling, Internet access or mobile phone service.

How this diversification could be achieved without poaching business from other NTT firms (NTT Communications Corp. is Japan's dominant provider of long-distance and overseas voice and data services as well as Internet connections, while NTT DoCoMo, Inc. is its leading cellular operator) is not clear. More critically, expanding the ways the two regional carriers can make money would require changes in what is known as the NTT law. For all their commitment to protecting NTT East and NTT West, MPT policymakers are not anxious to revisit this legislation so soon after the difficult July 1, 1999 reorganization of NTT (see JEI Report No. 26B, July 9, 1999). In any case, the suggested revisions would take several years to implement. The U.S. government certainly is not willing to defer realization of its demand for deep, near-term cuts in interconnection fees for that long.

MPT, in short, faces some equally unpalatable choices in the coming weeks. It can accept the compromise Clinton administration offer, which Washington reportedly is prepared to sweeten slightly, and, in the meantime, help inefficient NTT East and NTT West to streamline their operations. Alternatively, the ministry can stick to its position of a reduction in local-access fees no deeper nor faster than 22.5 percent over four years. That strategy not only has the potential to upend the government's plans for a harmonious G-8 summit, but it also could leave Japan open to a U.S.-filed World Trade Organization complaint after July 28, the White House's deadline for a resolution of the interconnection-fee dispute.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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