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2005/SOM2/CPDG/009
Agenda Item: 6

 

 

 

The Features of the Newly Revised
Antimonopoly Act

 

Purpose: Information
Submitted by: Japan

 

 

 

 

 

 

 

 

 

Competition Policy and Deregulation Group Jeju, Korea 24 May 2005

 

 

 

The Features of the Newly Revised Anti-Monopoly Act
- Japan� Experience of Making Competition Policy Stronger -

 

Sadaaki Suwazono

Chief, Competition Policy Planning Office

Economic Bureau

Fair Trade Commission of Japan

Before

APEC

Competition Policy Deregulation Group

Jeju, Korea

May 24th, 2005

 

 

Note: The views expressed in this paper are strictly my own, and not those of the Fair Trade Commission of Japan.

1. Introduction

        Both in Western economies and in Eastern economies, of course, in Japan, there is a saying that good medicine tastes bitter. This saying seems to fit competition policy in Japan. Although many people may know that stronger competition policy can enhance genuine economic growth and productivity, the JFTC have had hard experiences to establish the status of competition policy in the economic policy. In fact, recent economic researches by the economist of OECD or World Bank have shown that the degree of competition policy or competition enhancement have positively affected the economic growth, labor productivity growth or several economic indicators, as the Figure 2 shows. That is why, recently, Mr. Takeshima, the chairman of Japan� Fair Trade Commission (hereinafter the JFTC) have made a speech saying �ithout competition, there would be no economic growth.�� in various occasions. However, whenever JFTC have tried to set stronger enforcement to abolish the cartel or bid-riggings, we have faced various oppositions especially from some business communities.         In fact, it took almost three years for the amendment bill of Japan� Antimonopoly Act (hereinafter the AMA) to be passed in the Diet last month after starting to review the AMA. The reason is very complicated, but to put it shortly, after a long-lasting deflation and distressed economy, some business communities may have a sentiment to be weary of too much excess competition as showed in the below. And also, some business communities have insisted on legal problems of the JFTC� plan. Anyway, due to various factors, one of which was related to the advocacy��activities of the international institutions, after a long process, the JFTC succeeded in making enforcement system much stronger than ever.

        Thus, it might be useful for the competition authorities of the APEC economies to explain not only the content of the newly revised AMA but also how the history of Japan� competition policy has affected the process to revise the AMA and what the essential factors succeeding in enactment of the amendment bill of the AMA are. Firstly, I will explain briefly about the history of Japan� competition policy, secondly about the revising process and what are the difficult points to get over in the process. Lastly, I will explain about what kind of factors has pushed the amendment bill to be passed in the Diet.

(a) Before World War II

         For my impression, the history of competition policy in Japan may be much longer than usual explanations, which have said that after World War II the US-led army ordered the Japanese government to make the AMA and break down major conglomerate families, �aibatsu�� such as Mitsubishi, Mitsui or Sumitomo. Almost 130 years ago, Mr. Yukichi Fukuzawa, the founder of Keio University, the oldest university in Japan, wrote, in his book �ecommendation of Learning Science��, that there should necessarily be set up rules under which the firms will compete fiercely, then the whole country will be governed well, and that the rules were the origin of government� law. And, he also advocated that economic growth should be based on the private entrepreneurship and that the government� intervention to private sector should be limited only to just making the basic rule for market players.

        His writing was one of the most popular works historically and affected many people building economic infrastructure and making economic policy before World War I. Surely, in those days, the private companies made a miraculous export-led growth autonomously and the governmental regulations were much less than the Showa Era before World War II, 1926-1945. It shows that even in the developing phase of the economy, the harsh competition and less regulation to the economy can enhance real economic growth.

(b) Around World War II

        However, later because of the preparation of World War II, Japanese government tried to control all of the economic sectors and set up many regulations and production plans until 1945. After World War II, as I mentioned above, the US-led army urged the Japanese government to take strong measures for competition policy. Resultantly, the export-led growth started and the companies which did not have no relationship with Zaibatsu families has explored world-wide operations competing with Western major companies and have grown to the present famous companies such as Toyota, Canon, Sony, Honda and so on.

         However, during the period of almost twenty years after World War II, the government tended to take policies discouraging competition partly because of the concept or stance of economic policy built up before World War II. Under such circumstances, the Antimonopoly Act was not fully applied to many cartel activities, especially to domestic demand related industries, because a lot of legislation was made to grant firms exemption from the Antimonopoly Act. One of the key word of those days was �xcess competition��. Even one of the ministries, the Ministry of International Trade and Industries, so-called MITI, said, �e should expel excess competition among firms in order to stabilize the firms�� management and promote their exports? In order to make sure the stabilized economic growth, voluntary cooperative system among industrial sectors and financial sectors is needed in decision-making of investment? There are many issues to be investigated, and we should investigate the desirable amendment of the AMA�� in the 1957 white paper of the MITI . This statement showed an honest reaction to the competition policy.

(c) The Oil Crisis Era

         Although in mid-1970 there was a big movement promoting competition policy because of growing people� sentiment to fear big firms�� cartel activities, which was originated from the oil trade companies�� cartel activities in oil crisis in 1970�, some Japanese business communities showed a strong protest against the plan to strengthen the competition policy. After a deliberate reviewing work and a long discussion in the Diet for almost five years, in 1977, the Antimonopoly Act was amended to promote competition, for example, introducing surcharge penalty order imposed on cartel activities. Even though the introduction of the surcharge penalty system surely had some effects to prevent cartel or bid-rigging activities in those days, the surcharge rates were too low to abolish long-lasting tendency of cartel or bid-rigging.

         Furthermore, the concept of introduction of the surcharge penalty system invited some confused arguments about the enforcement of the competition policy. The JFTC faced very harsh critics from some business communities against revising plan to strengthen the enforcement system especially because of the argument suspecting that the introduction of surcharge payment system might breech the double jeopardy regulation stipulated in Japan� Constitution. Thus, the JFTC explained that the content of the surcharge payment was just a deprivation of illegal profits gained from illegal activities such as cartel or bid-rigging activities.

         This explanation might help to persuade some business communities because the payment of the illegal profits did not constitute the punishment to the companies violating the AMA and the violation did not mean the activities to be punished. This explanation also helped the JFTC to explain that there was no problem of double jeopardy about concurrent existence of surcharge payment and criminal penalty imposed on the same illegal conduct of the same company because the surcharge was not penalty. However, the intrinsic nature of the surcharge payment was not the payment of illegal profits, but an administrative measures or a sort of administrative penalty. Later, this gap between the explanation and the intrinsic nature of surcharge payment raised the question that to what extent the surcharge rates can be increased to prevent illegal activities.

1 The private big firms also insisted on the theory of excess competition. For Example, the three persons who were top executives of big firms, organized the Japan Economic Research Conference that reported, in ��ihon no Sangyou saihennsei���(Japan� Industrial Restructuring) in 1967, that as for the government� policy, the role of public industrial policy is to raise the competition form from domestic excess competition level to effective competition level which could get along in the worldwide competition.
See Uesugi and et al (2000)

        Furthermore, although the surcharge rates should have been set in the same level as the real illegal profits, the surcharge rates were set in the very low level, 1.5% in principle, which was not the level of real illegal profits. For, the protests from some business communities were so strong that the JFTC seemed to be not able to prepare datum of the real illegal profits level for setting the level of the surcharge rates. Instead of that, the JFTC used the average rates of the current profits-sales ratio in industries such as retailers, distributors, and manufacturing and others. The average rates of current profits-sales ratio were wrong proxies because companies should never make cartel activities if the illegal profits would not be more than regular current profits. Illegal profits must be much more than current profits. That is why, even after the introduction of surcharge payment system, the repeated cartel or bid-rigging activities have never been abolished.

(d) Developments in 1990�

         In the beginning of 1990�, when the US blamed the Japanese market for business closeness to foreign companies and persistently lasting bid-rigging tendency, the Japan� government started to study measures to strengthen competition policy. At that time, the JFTC should have discarded the explanation that the surcharge payment was just deprivation of illegal profits. However, despite of the bubble economy, some business communities still showed strong movements to protest against raising the surcharge rates, saying that raising rates would breach double jeopardy regulation. Then, the JFTC again relied on the concept of deprivation of illegal profits. Of course, the current profits were too low to be referred as a basis of the surcharge rates. Thus, the JFTC used the operational profits, which was much higher than current profits because usual companies�� financial costs were higher than financial revenue. Then, the surcharge rate was increased to 6% in principle, while the rate for small and medium companies was kept very low level, 3%.

         In sum, the history to strengthen competition policy after World War II, had been mainly driven by foreign economies�� pressure or people� temporary fear for cartel activities, but not a consensus of a significant role of competition policy in economic policy.

(e) Recent Developments

         Thus, it might be astonishing for some of the Japanese people to hear the Prime Minister Junichiro Koizumi� inauguration speech in 2001 saying that we must establish the competition policy of 21st century and strengthen the organization of the JFTC. This may be the first time for a Japan� political leader to express a strong initiative to make the Japan� competition policy stronger, of his or her own accord. Why did Mr. Koizumi show such a strong stance for competition policy in his inauguration speech? The reason is that, to put it simply, the main concerns of Japan� government have been the structural reform of the economy, which must need much stronger competition policy.

         Furthermore, there must be two specific reasons behind the statement, from my personal view, but not the views of JFTC or Japan� government. The first is that the main concern of the present government has been thorough privatization and deregulation of public sector, such as post offices, government-aided banks or highway public corporations. When these privatizations and deregulations would be attained even in part, then huge ex-public corporations should play with other relatively small private companies in the same playing field. Thus, the role of competition law and policy as an umpire in these newly deregulated industries will increase further more. In fact, in electric, gas, airplane, and telecommunication industries, the deregulation movements has progressed dramatically since 1990� in Japan and the role of the JFTC has significantly increased. For example, the JFTC has already taken several administrative measures to eliminate the violation of ex-public corporations, such as disturbing new comers�� activities competing with ex-public corporations by refusing to lend their essential facilities for various unreasonable excuses.

        The second is that Japan� government has recognized the effective impact of competition policy on economic growth. Although it has been said that the Japanese miracle economic growth, especially after World War II, has been mainly supported by industrial policy that governs, regulates and protects industries carefully. However, recent studies have indicated that Japanese economy� comparative advantage exists in the export-led industries that have been exposed to domestic and international fierce competition. Recent studies, such as M. Sakakibara and Michaele Porter (2001), show that the international competitiveness of a industry in Japan, of which proxy is the ratio of the industry� exports in Japan to the world total exports of the industry in 1991-1993, is significantly explained by market share instability in the industry in positive direction but significantly explained by the presence of the either tariff or non-tariff barriers in negative direction during 1973 to 1990. And also, the OECD� report �conomic Surveys 2001-2002 Japan�� indicated that domestic demand related industries had suffered from their relatively low productivities because of poor enforcement of the AMA and protection by uncertain and restrictive regulation, while the export-led industries (exposed to fierce competition) had set the world standards for productivity. Thus, competition policy is expected as a policy tool for reviving Japanese economy.

        Even though there has been a growing consensus regarding the above stated reasons behind the policy toward establishing the competition policy in 21st century, the bitter medicine may often be hard to take. Surely, as I will explain in the below, the JFTC faced various hardships before the amendment bill of the AMA to be passed in the Diet. One of the reasons of the objections to the JFTC� plan is indicated in the below statements:

        The opinion of National Association of Construction Industry to the JFTC� revising plan of the AMA says, �lthough there is long-lasting deflation and excess competition among firms in the present Japanese economy, and rampant dumping especially in construction industry, the JFTC have never move to regulate unfair dumping under the present AMA and the JFTC� amendment plan of the AMA does not include the regulation of unfair dumping.��

        The Japan Chamber of Commerce� opinion also says, �t is not appropriate to promote competition in Japanese industries because competition in the industries has been already too much for reviving Japanese economy�吋hus, the really needed policy is not the JFTC� plan of strengthening the AMA by raising the surcharge rates�吐ather, it is the very situation that as an essential role of competition policy to revive Japanese economy the JFTC should take rapid and appropriate measures against unfair trade practices such as �nfair dumping�� and �buse of huge distributors�� buying power��, which is pressuring on management of small and medium size companies because there are defused excessive and unfair competition, prolonged deflation and hollowing industries in Japan.�� This understanding of competition policy might be based on the concept of protection of competitors, but not protection of competition.

(a) The Increase of Surcharge Rates

        The first content is the increase of the surcharge rates. The surcharge payment is calculated by multiplying the surcharge rate, for example 6%, to the affected sales amount. The aim of this regulation is to abolish the tendency of many corporations to repeat cartel or bid-rigging activities. However, since 1977, when the surcharge payment order system was introduced, the aim has never seemed to be attained. The figure 3 shows that quite a few companies have made violations repeatedly in these ten years as compared to the figures in European Union. You can easily understand the reason of the data, when you see next figure 4 which shows the recent figure of the illegal profits of the cartel and bid-rigging activities in these ten years. It explicitly shows that in 90% of the cases, violators have gotten more than 8% of the affected sales amount as illegal profits and the average rate of the illegal profits to the affected sales amounts to 16.5% in the data. As I mentioned in the above, the JFTC has found that the rate of operation profits to the sales was much lower than the real illegal profits rate. However, in 1991, the pressure from business communities were too strong to resist and the JFTC seemed to have no option but to adopt the operation profits rates as a proxy of illegal profits rate.

        This time, strengthening competition policy is embedded in the whole policy to promote deregulation and activate market function, in order to revive Japanese economy, then we was not able to ignore the data of real illegal profits rate. That is why, in our original plan of revising the AMA, we proposed doubling the surcharge rates, from 6% to around 12% for the one time violators and 18% for the repeating violators. However, when we presented the original plan in April 2004, we faced strong oppositions from some business communities.

        Particularly, double jeopardy issue made the arguments confused between the JFTC and some business communities. As I mentioned in the above, the JFTC explained that the surcharge payment was a just deprivation of illegal profits and it must never breached the Constitution� regulation of double jeopardy before the revising process of this time, although the intrinsic nature of the surcharge payment is just an administrative measures imposing monetary disadvantage on the violating companies. The opinions of business communities, such as Japan Business Federation, are the abolishment of criminal penalty on corporation or the selective imposition of either criminal penalty or surcharge payment on the same conduct of the same company making cartel or bid-rigging activities.

        Thus, the JFTC thoroughly investigated the most desirable enforcement system in competition law. As a result, at first, we have found that in the light of previous Supreme Court decision of Japan or the case law of the other economies, such as the US or the European economies, the JFTC� plan to double the surcharge rates does not breach Constitutional regulation of double jeopardy even if doubling the surcharge rates may mean imposing the amount more than illegal profits depending on cases. As the figure 6 shows that in Japan, the administrative measures should be the first to be taken for preventing the violation in general. Then, in egregious cases, if needed, administrative organizations of economic and social regulation, such as, tax, finance, Medicare, labor and so on should file an accusation to Public Prosecutor� Office (hereinafter PPO), or in the case of the AMA, to the Attorney General. Thus, administrative charge differs from criminal penalty in the aspect of content, objective and procedure. The Supreme Court of Japan has made a decision that it does not breach the Constitution to apply the additional tax or administrative charge and criminal penalties to the same conduct of the same corporation.

        Furthermore, in our original revising plan, the increased surcharge amount level will be up to only 1.5 times as much as 8%, the minimum level of the real illegal profits and also the surcharge rate is fixed on a certain level in spite of severity or maliciousness of the violation. Then, it will have the different meaning from criminal penalties. And also, with prudence, the adjustment will be done between the surcharge payment and criminal penalty. Japan� bar Association or major scholars of jurisprudence has supported our revising plan.
The second point is efficiency issue of the enforcement system. As Figure 5 shows that desirable enforcement system consists of double system of administrative measure and criminal penalty, we think that it is desirable to stick to the present double system applying surcharge for all cases and criminal penalty for egregious cases.

        Nevertheless, as a result of concession, we reduced the newly enacted rates of the surcharge payment from 12% to 10% for the one-time violators and from 18% to 15% for the repeating violators, although the compromised rates still have a certain effect, which is strong enough to prevent the violations. For, the JFTC will be able to file an accusation to the Attorney General in the egregious cases more strictly than ever because in this time amendment the JFTC introduced the search warrant system as an investigation tool. And, recently the public procurement offices of local or central government has introduced the system to take back 10% of the contract as a penalty for breach of contract in the case the contract will be found to be under a bid-rigging later. As a result, the maximum amount can reach to the 25% of the affected sales for repeating violators in bid-rigging cases.

        Although the JFTC accepted the above concession, some business communities are still discontent with the newly revised surcharge rates, because the new rates may be more than illegal profits and criminal penalty will be imposed on concurrently in egregious cases. Thus, during almost two years from this summer, the Cabinet Office will hold the study group to review the AMA thoroughly including the possibility of changing the surcharge payment order to flexible system according to severity and maliciousness of the violation and abolishing criminal penalties for corporations.

        As a result of the study in the Cabinet Office, if the surcharge payment order will be changed to flexible one and the upper limit of the surcharge rate is increased up to for example, three times as much as the illegal profits or 10% of the total turnover of a violating corporation, like the EU or other developed economies system, the surcharge payment system will be quite similar to the criminal penalties. Then, we may think about the selective system of either surcharge payment or criminal penalty on the same conduct and the same company. However, the cartel activities are the crime of accomplice. If some companies are imposed on surcharge payment and the other companies are imposed on criminal penalty, the courts of the same case will be separated into administrative hearing procedures and criminal court. Thus, the system may become too complicated for the JFTC to use in practice to prevent violations. Securities exchanges laws or environmental laws in the US or some European economies have adopted the system to adopt the administrative penalty and criminal penalty concurrently by arranging the total amount of payment, which can make the systems circumvent double jeopardy issue. It seems very helpful for the future consideration from my personal view.

(b) The Introduction of Leniency Policy to the Surcharge Payment Order System

         The next issue is the introduction of leniency program. Now, most of the government of developed economies, such as Australia, Korea, Canada, US, now New Zealand and so on have already introduced leniency program into their fine or criminal penalty system in these several years. And, the leniency program has been effectively utilized to investigate and expose the international cartel activities(2) .

(2)The Committee of Competition Law and Policy of OECD reported effectiveness of leniency program for the illegal cartel activities in the OECD policy Report (2001).

        However, the business communities have been opposed to the introduction of leniency program in the surcharge payment system because they insisted that the program was very similar to plea bargaining system that cannot be allowed in Japan� criminal and administrative procedure. Thus, we had to explain that leniency program was totally different system from plea bargaining system and it had been introduced into many European economies in which plea bargaining system was not admitted. And, there were the other issues about introduction of leniency program. In Japan, in egregious cases violating companies may be criminally accused. Therefore, the Chairman of the JFTC explained that the JFTC would publish the accusation policy that it shall never accuse the first applicant of leniency program to the Attorney General, of which statement was similar to the Korean FTC� accusation policy, in the deliberation of the Diet. And also, the Department of Justice made a statement saying �he PPO will give due consideration to the JFTC� accusation policy��, in the deliberation of the Diet.

Furthermore, business communities insisted that the JFTC should admit joint application by several companies in the leniency program because when one company found the violation in its own company in the process of internal audit, it wanted to consult with other company to make sure the fact of violation. However, the JFTC was strongly opposed to the idea because if it admited joint application, then the leniency system could not incur suspicion among violating companies. Ultimately, the JFTC made a concession and increase the number of applicants admitted in leniency program, from two companies to just three companies, but no admission of joint application.

(c) Revising Hearing Procedure

        The hearing procedure of the JFTC originated from that of US Federal Trade Commission. The system had never been changed before the amendment of this time. Under the system, before the JFTC issues an elimination order, hearing procedure shall be set. The system had fitted in the situation before the knowledge of competition law became defused in business communities. In such a situation, a number of cases should have been accumulated to make a rule at first and it should have taken a deliberate hearing process from suspected companies before issuing elimination order. However, now, in Japan, speed and efficiency are required to set a number of issues. In addition, almost all of the recent recommendations of the JFTC, the first judgments on suspected violations have never been reversed in hearing procedure or appellant courts.

        Thus, under the newly revised AMA, the JFTC shall issue an elimination order at first and make the order enforced to eliminate the violations after a short process of giving the suspected companies a pre-notice of the order and an opportunity to make an excuse of the suspected activities, as Figure 7 shows. If the ordered company wants to contend with the JFTC to repeal elimination order, the JFTC shall start hearing procedure. And also, the ordered company can get a temporary injunction against the order to Tokyo High Court with collateral, if it can prove the high possibility that the damage by the order is totally irreversible.

        Furthermore, under the old system, the surcharge payment shall be ordered after all of the hearing procedures are set. However, such a system have tended to make many suspected companies go on to the hearing procedure. Thus, under the new system, the JFTC shall order surcharge payment at the same time as the elimination order. Even though the ordered company can escape from the payment order until the hearing procedure is all set, the interest of the surcharge payment during hearing procedure shall be paid by the company after the hearing decision upholds the initial order.

        Of course, the business communities are opposed to the new system. However, after a lengthy discussion, the JFTC made a concession to increase lawyers as hearing examiners, most of whom are staff members of the JFTC now, for enhancing due process. And also, Japan Business Federation insists on the proposal regarding future revision of hearing procedure. The proposal says that all of the hearing examiners shall be lawyer and independent of the JFTC� personal management. This may be one of the desirable option and will be investigated in the reviewing process of the study group set in the Cabinet Office.However, honestly speaking, there are limited lawyers specializing in the AMA in Japan because the competition law had never been paid so much attention until several years ago. Will the proposal work effectively in Japan? Anyway, this is the future issue to be studied.

        There can be taken several factors that made the JFTC succeed in strengthening the AMA enforcement. The first is the strong political leadership of Prime Minister. Without that, there would be no start of the revising process. Again, in my opinion, such political clear stance may be supported by the idea that competition policy can play a significant role in deregulated industries and real promotion of economic growth. This stance of Prime Minister has strongly seemed to lead some politically powerful figures to make a great effort in arranging a consensus that the enforcement system of the AMA should be strengthened, in the ruling Liberal Democratic Party, although it took almost one year for the Party to make a consensus to pass the amendment bill of the AMA proposed by the JFTC.

        The second is the fact that there has appeared some powerful business organizations, such as the Japan Committee for Economic Development, to clearly and strongly support the AMA revising plan of the JFTC, saying �t is most important to ferment a consensus that free and fair competition, in itself, can produce vitality of society, and to change the desirable vision of our economic society��, while, in the previous revising processes in 1977 and in 1991, there were no business organizations to support strengthening the AMA enforcement system explicitly.

        The third point is the continuous strong support from various consumers parties with which the JFTC has made study sessions several times. They have fully understood that cartel and bid-rigging activities make irreversible losses to consumers and that the Japan� society needs strong enforcement system for abolishing such illegal activities. They were reported to make lobbying activities to the Diet members actively and persistently.

        In sum, the very factor of our success in making competition policy stronger in this revising process is that there is a growing consensus that the competition policy is quite helpful to support economic growth and deregulation process. The OECD, the Asian Development Bank, the World Bank and also the APEC meeting have recently tried to make deliberate efforts to show significant role of competition policy in economic activities. The data produced by such efforts have really enhanced a favorable recognition toward competition policy. I really expect these institutions to produce further researches and make strong advocacy activities.

        The next our main concern is to make the newly revised AMA enforced smoothly and actively from the beginning of 2006. The success of the new enforcement system would activate market function and promote real economic growth. Then, the very fact regarding such relation with stronger enforcement and economic growth would make all of the people fully understand importance of strengthening competition policy. I would like to expect to share such successful stories with the other APEC economies some day.