No. 29 — July 28, 2000


Weekly Review

--- by Susan MacKnight

Never has a change in a Japanese government position been conveyed in such an offhand manner as Prime Minister Yoshiro Mori's acknowledgment July 22 that Tokyo would continue a three-year-old transpacific deregulation forum for another year. The disclosure came after Mr. Mori met for 45 minutes with President Clinton on the sidelines of the summit on Okinawa of the leaders of the Group of Seven industrial nations plus Russia to discuss a number of issues, mainly in the security field, of mutual concern. Asked by reporters whether the two had agreed to extend the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy, the prime minister, after a nudge from the president, said that they had.

In the weeks leading up to the release last year of the second report on Tokyo's progress in implementing the Enhanced Initiative's White House-drafted regulatory reform goals, trade policymakers in Japan were adamant that this confrontational exercise would end after a third cycle of talks extending through the early spring of 2000. In fact, when Mr. Clinton and then-Prime Minister Keizo Obuchi met one-on-one at the time of the 1999 G-8 summit in Cologne, Germany, they confirmed that the accounting due by March 31, 2000 of Japan's deregulation efforts in areas of interest to foreign competitors would be the finale of the Enhanced Initiative process (see JEI Report No. 18B, May 7, 1999).

However, even while Washington and Tokyo were deadlocked this past spring on the contents of the last Enhanced Initiative report, U.S. Trade Representative Charlene Barshefsky and other Clinton administration trade officials began to lobby the powers-that-be in Tokyo to extend the bilateral deregulation mechanism. The most they got in the way of a response was a diplomatic "We'll see." Then, with no advance notice or arm-twisting by Mr. Clinton, Mr. Mori committed Japan to a fourth year of negotiations.

Transpacific trade watchers can think of a few reasons for Tokyo's abrupt about-face in the absence of any clues from the prime minister or his advisers. The obvious one is that a government determined to stage a controversy-free G-8 summit switched positions to avert a possible headline-making dispute with the United States — even though there were no signs that the White House was bent on a fight. Alternatively, Japan signed on for another round of strain-producing Enhanced Initiative talks to silence the growing ranks of critics, especially at home, who charge that the always-suspect commitment of Liberal Democratic Party policymakers to deregulation and structural reform has flagged badly just when the economy most needs the shot in the arm that these changes can deliver. A third possibility is that the LDP-led government wants the cover provided by the Enhanced Initiative to force through politically unpopular reforms, at least in the transpacific framework's priority areas of telecommunications, medical devices and pharmaceuticals, housing, financial services, energy and structural barriers. Cynics might add that Tokyo figured it had nothing to lose by agreeing to extend the Enhanced Initiative because the Clinton administration will be out of office in seven months and a little foot-dragging will take Japan beyond that time.

Whatever the reason for Tokyo's change of heart, Washington welcomed — albeit in a very low-key way — one last chance to advance its primary Japan deregulation agenda. Of course, White House insiders might say that the U.S. government would not have had to push for an extension of the Enhanced Initiative format if Japan had been more forthcoming during the earlier rounds of talks.

The third report on the status of the Enhanced Initiative negotiations lends weight to this contention. Released on the heels of the July 19 settlement of the delay-causing dispute over the rates competitors are charged to interconnect with the networks owned by Nippon Telegraph and Telephone Corp.'s two regional operating units (see JEI Report No. 28B, July 21, 2000) and formally endorsed by Mr. Clinton and Mr. Mori during their July 22 get-together, the document contains a shorter list of achievements in several of the priority areas than the also-criticized 1999 update, with many of the cited accomplishments amounting to little more than vague promises of change by Tokyo at some point.

This is not to suggest that all the days U.S. trade negotiators spent over the last year trying to get their Japanese counterparts to budge were a waste of time. The cuts obtained in NTT's local and regional access charges were worth the work, although the Clinton administration has taken some flak for investing so much political capital and effort in a deal that initially will benefit long-distance operator NTT Communications Corp. more than foreign or other domestic common carriers. Washington also won commitments from Tokyo that, on paper at least, should make it easier for NTT's rivals to build competing networks. These include better access to rights of way controlled by either NTT or electric utilities, more flexibility for newcomers to combine leased capacity with their facilities-based operations and greater access to NTT's infrastructure on a fairly priced, "unbundled" (separately costed) basis. In addition, the Ministry of Posts and Telecommunications agreed to decide by March 2001 whether NTT DoCoMo, Inc., the nation's dominant wireless services provider, should be regulated more closely because of its market power.

The Clinton administration also believes that it made additional headway in changing the restrictive regulatory environment that governs the sale of medical devices, drugs and nutritional supplements in Japan. According to an Office of the U.S. Trade Representative release, Tokyo will implement 25 new and concrete steps to open up the country's huge health-care market. In fact, some of these are recycled, such as the pledge to improve the transparency and the speed of approval procedures for both drugs and medical equipment, including greater use of foreign clinical data. Other commitments, while promising, are phrased so generally that their impact cannot be evaluated until they are translated into reality. One such pledge is the establishment in October of this year of an unbiased and transparent appeals process to enable suppliers of medical devices and drugs to challenge unfavorable reimbursement rates under Japan's national health-insurance system.

More than any other area targeted by the Enhanced Initiative, Japan's financial services market is undergoing sweeping changes. The White House is the first to admit that this overhaul is the direct result of Tokyo's 1996 Big Bang financial liberalization program and that Washington's role is limited to ensuring that Big Bang commitments are implemented and that foreign competitors can take full advantage of the new opportunities. Nonetheless, the U.S. fact sheet includes among the accomplishments of the 1999-2000 Enhanced Initiative negotiating cycle recent and near-term regulatory reform measures.

Interestingly, the Clinton administration gave special attention in its write-up to the contentious issue of foreign access to Japan's huge insurance market (see JEI Report No. 12B, March 24, 2000). It listed what were labeled new pledges by Japan. To an outsider, though, there seems to be considerable overlap with the commitments that Tokyo made in a December 1996 pact. Moreover, on the one insurance-related issue that the White House raised during the latest round of bilateral deregulation talks — the suspicion that the post office's huge insurance arm was on the verge of expanding the range of policies it sells — the United States did not get the iron-clad guarantee that it sought. According to the fact sheet, Japan would say no more than that no current plan exists to broaden Kampo's product offerings.

Where Washington has real trouble justifying its claim of results achieved in the third series of Enhanced Initiative negotiations is in the housing area. The list of accomplishments not only is brief, but Tokyo's latest reform efforts are presented in very general terms. Much the same can be said about the outcome of the talks on the priority issue of energy as well as on such cross-cutting industry problems as distribution and antitrust enforcement.

In the Clinton administration's defense, any change, no matter how seemingly trivial, that it can persuade Japan to make in its competition-inhibiting regulatory regime is beneficial for outsiders, foreign and domestic, and for an economy desperate to find a sustainable growth track. Unfortunately, even this minimalist philosophy could be tested in the few months remaining in the Clinton trade team's tenure.

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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