No. 28 — July 21, 2000


Weekly Review


Lower costs are in store for communications carriers, domestic or foreign, in Japan that need to access the networks owned by Nippon Telegraph and Telephone East Corp. and Nippon Telegraph and Telephone West Corp. to initiate or terminate voice and data traffic or to move it across the country. Reaching agreement on the depth of cuts in NTT's interconnection charges and their timing took nine months of on-again, off-again talks capped by intensive negotiations starting July 10 in Tokyo. Finally, the morning of July 19, U.S. Trade Representative Charlene Barshefsky and Chief Cabinet Secretary Hidenao Nakagawa separately announced in the Japanese capital that the two governments had a deal. The settlement, achieved overnight, eliminated a potential source of distraction from Japan's lofty agenda for the July 21-23 summit on Okinawa of the leaders of the Group of Seven industrial nations plus Russia. It also cleared the way for the release of the third (and presumably final) report on progress under the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy. Most importantly, the agreement should inject some much-needed competition into Japan's local telephone market and enable carriers and Internet services providers to deliver a broader range of services less expensively (see JEI Report No. 26B, July 7, 2000).

How much lower costs might be and when depends to some extent on which government is doing the briefing. According to a fact sheet distributed by the Office of the U.S. Trade Representative, NTT East and NTT West will cut their local-access interconnection tariffs by 20 percent over two years retroactive to April 1 of this year and will front-load these changes to an unspecified degree. Additional and "substantial" fee reductions are expected in 2002 as a result of improvements in NTT's recently adopted long-run incremental cost rate-setting model, USTR noted.

Lest it seem that Washington settled on terms different from its compromise formula of a 22.5 percent drop in local-access charges in 2001 and 2002, followed by the full 41.1 percent reduction originally sought, Ms. Barshefsky told reporters in Tokyo that the agreement should produce a fall in interconnection rates of 40 percent-plus over three years. Included in this projection, however, is the also front-loaded cut of 50 percent over two years from last April 1 in NTT East and NTT West regional switching fees and something more down the road. These costs got scant public attention during the prolonged talks since local connections represent an estimated 80 percent of Japan's communications traffic. But as the top U.S. trade official argued, regional interconnection tariffs are key to foreign competitors since most of them are in the long-distance business.

Even on local-access rates, the White House justifiably can claim that it achieved its target. The Clinton administration's proposed two-year, 22.5 percent reduction included a yearend 2000 start date and apparently required little if any accelerated implementation. A 20 percent cut beginning nine months earlier and front-loaded is at least equal to the first part of Washington's compromise deal and perhaps better.

In Tokyo's telling, it did not go beyond its final offer to lower local-access charges by 22.5 percent over three years from the end of 2000. That plan, tabled the day after the negotiations resumed, represented an improvement on what had been Japan's fallback proposal to phase in a 22.5 percent rate reduction over four years. Reportedly, though, as much as 80 percent or even 90 percent of the three-year, 22.5 percent cut in interconnection fees will be put into effect in the two years from April 2000, making the decline equivalent to the 20 percent near-term drop in connection costs publicized by the United States.

The Clinton administration figures that the initial cut in local and regional interconnection rates, which it places at 35 percent or so on a weighted average basis over two years, will save local-exchange and long-distance carriers more than $2 billion in costs that can eat up anywhere from 40 percent to 70 percent of their revenues. For their part, NTT East and NTT West, which pointedly noted that they had no say in the settlement agreement, have revised down their earnings forecasts for FY 2000. Even factoring in a higher volume of traffic because of lower access charges, NTT East estimates that its pretax profit will be ¥20 billion ($181.8 million at ¥110=$1.00) instead of the ¥44 billion ($400 million) that it predicted June 30 on the assumption that rates would remain the same. Likewise, NTT West believes that it will fall even further into the hole, incurring a pretax loss of ¥72 billion ($836.4 million) versus one of ¥67 billion ($609.1 million).

Industry analysts expect the impact of lower interconnection tariffs to show up first in long-distance pricing, where competition in the 15 years since Japan deregulated its communications market already has driven rates lower. In time, though, the cut in local-access fees could produce some real competition for NTT East and NTT West and, in turn, force them to trim the ¥10 (9 cents) cost of a three-minute local call — a figure that, incredibly, has remained the same since 1976.

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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