In order to achieve specific objectives, the government sometimes regulates economic activities of firms in terms of market entry, pricing, etc. in accordance with laws and regulations (government regulations). However, as a result of changes in the economy and other circumstances occurring since they were introduced, some of these government regulations may become, in the light of their objectives, questionable in terms of their necessity or excessive in terms of their intensity. It may also be the case that government regulations and systems that are exempt from the application of competition laws sometimes obstruct economic vitality and efficiency.

For these reasons, government regulations must be continually reviewed, taking into account changes in social and economic circumstances. However, the review on the governmental regulations should not be confined to mere easement and abolishment of the regulations, but must be the comprehensive ��regulatory reforms�� including establishment and implementation of new rules for improving competitive conditions, and strict enforcement of competition laws. With respect to systems that exempt certain cartels, etc. from the application of competition laws, these systems should be limited to the minimum, because they basically function to limit competition and restrict market mechanism.

Based upon such a belief, Japan is actively implementing competition policy in conjunction with deregulation. In this session, I would like to present an overview of Japanese efforts in deregulation from the viewpoint of competition policy, which include reviewing systems that exempt certain cartels, etc. from the application of competition laws, strict enforcement of competition laws, and deregulation policy recommendations by the competition authority.

2. Review of the Antimonopoly Act Exemption Systems

In Japan, there have been a substantial number of systems that have exempted certain conducts from the application of competition laws, or , in short ��exemption systems��. The majority of such exemption systems have been those exempting cartels.

The Antimonopoly Act, Japan��s competition law, prohibits cartels involving firms or trade associations. However, some cartels are permitted under conditions prescribed by relevant laws. As a general rule, approval from or notification to the Fair Trade Commission (JFTC), Japan��s competition authority, or the relevant Ministers, is necessary for the formation of carrels that are exempt from application of the Antimonopoly Act. Permission of cartels exempt from the Antimonopoly Act generally requires the existence of conditions that make such exemption necessary to achieve relevant cartel exemption system��s objectives, such as to overcome severe economic depression. In addition, these laws need to prevent negative consequences, such as exceeding of the extent necessary to achieve cartel��s objectives or unjustifiable discrimination, to ensure that such cartels do not go too far, or do not lead to abuses. Moreover, when these exempted cartels involve unfair trade practices, such acts must not be exempt from application of the Antimonopoly Act.

The exemption systems are classified into three categories:

1. those based on the Antimonopoly Act itself;
2. those prescribed in the Antimonopoly Act Exemption Act; and
3. those stipulated in individual laws (laws other than the two Acts mentioned above).

Historically, these exemptions were introduced from 1950s to the early 1960s. During that period, the Japanese economy was in the process of attaining self-reliance while being beset with a labour surplus and an unstable balance of payments. Many industrial policy makers viewed cartels as useful tools to attain such policy objectives as the stability of corporate management, facilitation of industrial rationalization and maintenance of employment.

In 1953, the Diet amended the Antimonopoly Act by introducing exemption systems under which certain cartels (depression cartels and rationalization cartels) were permitted subject to approval by the Fair Trade Commission under specific conditions. The Diet also introduced a number of individual laws which could exempt cartels in special industries from the application of the Antimonopoly Act. Conditions of depression cartels or rationalization cartels set forth by these specific laws are more lenient than those in the Antimonopoly Act.

Since then, due to changes in the economic situation in Japan, the necessity for such exemptions has markedly decreased. The Fair Trade Commission has closely examined the necessity of individual applications for exemption. Consequently, the number of exemption cartels has decreased from more than 1,000 in 1960s to as few as 10 in April 1997. At its peak, at the end of March 1966, the number was 1,079. The Fair Trade Commission has not authorized under the Antimonopoly Act any rationalization cartel since 1982, and any depression cartel since 1990. However, even if most of these exemption systems have not been utilized, the existence of such systems could still have a negative impact on business behavior. A business might expect that once it fell into serious economic trouble, the system would be employed to offer assistance by way of approving cartels. Such attitudes would lessen private incentive to engage in serious business efforts to recover from an economic recession, and consequently obstruct economic vitality and efficiency. Accordingly, a drastic reevaluation of exemption systems has been launched.

In the Deregulation Action Plan, adopted by the Cabinet in March 1995, it was decided to review exemption systems under individual laws with a view to abolishing them in principle by the end of FY 1998 (March 1999) and to forming a definite policy on the matter by the end of FY 1995. The exemptions under individual laws amounted to 49 systems based on 28 laws as of the end of March 1996. Three of these systems were abolished or were limited in terms of the scope of exemption by the end of 1996. A bill has been presented to the Diet which will abolish thirty systems, and limit the scope of exemption for seven systems. Ongoing review will be effected regarding the remaining systems.

With respect to exemption systems that are provided for under the Antimonopoly Act and the Antimonopoly Act Exemption Act, it has been decided in the Second Revised Deregulation Action Plan, adopted by the Cabinet in March 1997, that these systems will be reviewed, with the possibility of abolishing some of the systems. It was also decided that a final decision will be reached by the end of FY 1997 (March 1998).

As I have stated before, abolishing exemption systems that are no longer appropriate is expected to broaden the range of application of competition laws and make it possible to implement more effective and comprehensive competition policy.

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2. Exemptions from Prohibitions on Resale Price Maintenance

Main exemption systems currently in effect covering acts other than cartels are those on resale price maintenance provided for by the Antimonopoly Act. The Fair Trade Commission has also been reviewing these systems.

Certain commodities designated by the Fair Trade Commission has been exempted from the prohibition by the Antimonopoly Act on resale price maintenance. As of March 1997, 14 non-prescription medicines for general use and 14 cosmetic products with prices under 1,030 yen were designated by the Fair Trade Commission as items for which resale price maintenance was permitted. The Fair Trade Commission abolished these exemptions last April.

After that, ��copy righted works�� (such as books, magazines, newspapers) are the only commodities exempted from the Antimonopoly Act prohibition of resale price maintenance. The Fair Trade Commission has begun studies on how to deal with this exemption, and intends to reach a conclusion by the end of March 1998.

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3. Strict Enforcement of Competition Laws

The Fair Trade Commission has been paying special attention to economic fields still subjected to regulations. When firms or trade associations have conducted anticompetitive activities by taking advantage of regulations, the Fair Trade Commission has taken appropriate measures while requesting ministries concerned to correct such regulations.

For example, the Fair Trade Commission found that a public testing organization for food for patients in hospitals and a related firm worked together to monopolize the market. Under Japan��s health insurance system, hospitals were entitled to an additional allowance on top of ordinary allowances for supplying food to hospital patients when the nutritional elements of such food have been analyzed and examined by a certain body designated by the Government. Taking advantage of this situation, the public foundation designated by the government as the testing body and a major dealer in medical food conspired to exclude firms wanting to enter to medical food market. They also restricted medical food manufacturers�� selection of purchasers for their products as well as medical food dealers�� selection of suppliers and purchasers. These two bodies were found to have controlled the business activities of other firms. The Fair Trade Commission issued cease and desist order in May 1996 and these two bodies stopped their conducts. The Fair Trade Commission also requested the relevant ministry to review this additional allowance system and hence the relevant ministry abolished this system and decided to dissolve this public testing organization.

In sectors where deregulation has been achieved, strict enforcement of competition laws is still required in order to ensure effective functioning of market mechanism. Once abolished, regulations should not be replaced by the constraint of competition by firms or trade associations. If any such conduct is identified, it should be strictly dealt with in accordance with competition laws. Accordingly, the Fair Trade Commission considers it particularly important that Antimonopoly Act violations be eliminated in economic sectors under deregulation process, because such violations could negate the benefits of deregulation.

For example, the Fair Trade Commission issued warnings against anti-competitive practices in the fields of domestic air transport where regulations�� governing market entry and pricing have recently been eased. In this case, an airline with a near monopoly on certain regular domestic routes tried to limit sales by travel agencies of competitors�� tickets for other routes. In response, the Fair Trade Commission cautioned the airline not to allow similar occurrences in the future.

In order to enforce competition laws effectively, transparency of enforcement is crucial importance. This will enable firms and consumers to understand the purpose of the Antimonopoly Act, the contents of regulations, and the policies of implementation. For this purpose, the Fair Trade Commission has been making efforts to formulate and publish various guidelines regarding the specific matters dealt with by the Antimonopoly Act. In formulating guidelines, the Fair Trade Commission makes it a policy to elicit opinions on draft guidelines from consumers, trade associations and related government agencies.

With a vies to further promoting public awareness on the competition policy and law as well as on the Fair Trade Commission��s activities, the Fair Trade Commission publishes handbooks and leaflets, and periodically holds explanatory session for business community. In mid-1997, the Fair Trade Commission will begin providing through the internet information on competition policy and law in both Japanese and English.

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4. Review of Government Regulations from the Viewpoint of Competition Policy

The Fair Trade Commission has also reviewed government regulations from the viewpoint of competition policy in the medium-to long-term.

Since 1988, the Fair Trade Commission has organized meetings of the ��Study Group on Government Regulations and Competition Policy��, a group made up of academics and experts in the relevant fields. The group was assigned the task of examining problems in government regulations from the viewpoint of competition policy and indicating possible areas and modality for improvement. The findings of the ��Study Group�� are made public in several reports. The Fair Trade Commission, finding much merit in the recommendations contained in these reports, has requested relevant ministries to review the systems concerned in line with the recommendation.

In its 1993 report, the ��Study Group�� expounded its fundamental views on the review of government regulations as follows.

1. Economic activities in the private sector should, in principle, be free, and should be left to the principles of a free market system. Regulations should be applied only in exceptional cases where policy objectives cannot be realized solely through free economic activities. Accordingly, no government regulations should be kept unless it is found that the benefits of regulation are greater than the possible benefits resulting from competition to be achieved by the abolition of such regulation.

2. Even where a regulation is required, as an exception, for meeting such social needs as maintaining people��s safety and health, the economy��s vitality and consumers�� interests should be secured by allowing as much competition as possible and thereby leaving room for market mechanisms to function. Therefore, regulations should be limited to the minimum extent necessary for the achievement of their objectives. At the same time, the question of whether or not it is possible to adopt alternative regulatory measures with less restrictive effects on competition should also be examined.

3. Among various market entry regulations, there may be some cases where there is a need for what is known as demand-supply adjustment, in which administrative authorities, in the light of demand-supply balance in a given industry, decide whether or not a new entry is permissible. In such cases, the function of market mechanism in the relevant market is often weakened, leading to such adverse effects as the fostering of a competition-restrictive tendency in the market, an inclination for existing firms to guard their vested interests, and so forth. Such demand-supply adjustment should be abolished, as a rule.

Price regulation naturally restricts firms�� freedom of pricing and inhibit their efficient business management. It sometimes induces a price cartel among firms. Such price regulation should be abolished as a rule. Even where price regulation is needed because an area is prone to natural monopoly or for some other reason, such regulation should not impose specific prices, but should be flexible enough to leave room for pricing at the affected firms�� own discretion (e.g., by setting maximum prices).

The ��Study Group�� has studied and issued reports on the current status of and problems in government regulations in specific fields based on these principles.

It is vital that effective competition be fostered in deregulated industries. The ��Study Group�� has assessed the actual effects of deregulation on the relevant industries as well as remaining problems in deregulated industries. Recently, for example, the ��Study Group�� conducted a fact-finding survey on domestic air services. Regulations governing market entry and prices have recently been eased in Japan��s domestic passenger air transport industry. From the ��Study Group�� survey, however, there have not been any major changes in the oligopolistic market structure even after the deregulation. For example, fare competition is still limited. In the light of these problems, the ��Study Group�� has proposed that in examining the application for approval for the service in a particular rote, such criteria for approval be abolished that take into account demand-supply balance of air transport on the route in question. The ��Study Group�� also proposed the formulation of rules for reallocating arrival and departure slots when limitation to slots exists due to airports�� physical capacity.

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5. Conclusion

In this session I have presented an overview of Japanese efforts in deregulation from the viewpoint of competition policy. In concluding, I would like to refer to a discussion conducted at a joint OECD �� Fair Trade Commission seminar held last December in Tokyo concerning the role of competition policy in the deregulation process.

The seminar was attended by experts of competition policy from government agencies, private industries, and academic institutions. They reached the following consensus regarding the role of competition policy and competition authorities in the deregulation process.

1. Both the abolition of exemptions from competition law and the vigorous enforcement of competition laws are indispensable if deregulation is to succeed. Without vigorous competition law enforcement, deregulation could hinder economic efficiency.
2. Competition authorities should stress to regulatory authorities the need to reform anti-competitive regulations and should present proposals for the promotion of competition. Moreover, competition authorities should be in a position to review laws and regulations which contain anti-competitive provisions. They should also stimulate public debate by making their views public by issuing reports and other means.

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