U.S. Economy

The Councils remain encouraged by the brisk recovery of the U.S. economy, which has been enabled by such stimulative fiscal and monetary policies as large tax breaks and low interest rates. Steady production is likely to persist, given low corporate inventories, stable final demand, and growing exports. Continued growth in productivity will in turn support steady economic expansion. Employment growth is more sluggish than in previous expansion periods, however, which will limit the speed of economic expansion. It is also necessary to monitor the risk that rising oil prices pose to corporate and consumer sentiment.
The Councils appreciate the flexible policies taken by the U.S. government to support the expansion, but note that high current account and fiscal deficits may lead to further depreciation of the dollar and higher long-term interest rates. The Councils therefore encourage the U.S. government to take the initiative in its efforts to curb fiscal deficits and improve the savings rate over the long term.

Japanese Economy

Similarly, the Councils welcome the steady expansion of the Japanese economy while noting that growth has decelerated since the beginning of the year. Initially, the engine for economic recovery was exports, followed later by capital investment and private consumption. While growth is expected to slow, mainly due to the deceleration of overseas economies, it will be sustainable in the near to mid-term.
The private sector's structural problems-primarily excess debt, capacity, and employment-have almost all been resolved by painful self-help efforts. There is little concern about the recurrence of financial-system turmoil in Japan, thanks to progress made in bad-loan disposals. If wage increases become steady, the Japanese economy will surely depart from the current deflationary situation.
The Councils appreciate the close coordination on fiscal and monetary policies between the government and Bank of Japan, and urge the BOJ and government to proceed with further deregulation and tax reforms aimed at accelerating the necessary transition to a domestic demand- led economy. The Councils also encourage the government to minimize the fiscal deficits that negatively affect the growth of the private sector by increasing flexibility and efficiency in budgetary spending, and increasing revenues through activation of the private sector.

Foreign Direct Investment

The Councils again express their support for the Government of Japan's stated goal of doubling Japan's cumulative stock of inward foreign direct investment (FDI) over five years. The Councils commend efforts by Prime Minister Koizumi, METI, JETRO and others to improve Japanese perceptions and attitudes towards FDI, including mergers and acquisitions (M&A), which account for most FDI among developed countries.
The Councils note the substantial growth of M&A among Japanese companies that has occurred on the basis of domestic tax-deferred stock-for-stock structures since April 1, 2000, a clear demonstration that the adoption of such practical new transaction structures can positively influence market practices and perceptions of M&A in Japan.
The Councils endorse the concrete proposals to improve the investment environment for greenfield and cross-border M&A, made by the Invest Japan Forum and the Japan Investment Council and urge their early implementation, especially Commercial Code and tax law reforms. Regarding the expected changes to the Japanese Commercial Code that will allow cross-border "triangular" mergers from April 2006, the Councils urge that the necessary associated legal, accounting, tax and other practical implementation issues be solved to make triangular transactions feasible to have a positive impact on inward FDI. Finally, the Councils also recommend the implementation of other tools to promote inward FDI which are suitable for the Japanese business environment.

Public Financial Institution Reform

The Councils welcome efforts by the Government of Japan to advance reform of Japan Post and, in particular, its public financial institutions, Yucho (Postal Savings) and Kampo (Postal Life Insurance). The Councils note, however, that the terms and conditions of postal financial system privatization and reform must address the competitive impact on the Japanese financial services market, particularly in consideration of the original purpose of Yucho and Kampo to provide a "supplement" to services provided by the private sector. Indeed, since financial service providers in the private sector offer Japanese consumers the full range of financial services throughout the entire country, there is no need for Yucho and Kampo to continue providing "universal" services to the Japanese public and such services, as "universal," should essentially be abolished.
Regardless of the outcome of postal reform in progress, it is essential that fair competitive conditions exist between the private sector and the new entities, and that the new entities be managed in a manner consistent with the regulations to which its private sector competitors are subject. Accordingly, the Councils continue to request the Government of Japan to ensure that:
・the government guarantees for Yucho and Kampo products are abolished;
・the same tax burdens borne by the private sector are applied;
・supervision by the Financial Services Agency and the same regulatory requirements as private companies are introduced;
・measures are taken to prohibit Yucho and Kampo from broadening the range of products underwritten/manufactured beyond those currently offered until equal footing is achieved between Japan Post's financial institutions and their private competitors, including in the preparatory period.

In addition, measures must be taken to prevent the new entities from abusing their overwhelming market power, gained through special privileges enjoyed while under government ownership. Such measures must ensure that:
・four postal functions (over-the-counter service, postal delivery, postal saving and postal life insurance) be separated into four independent corporations;
・government ownership of shares of the "Postal Savings Corporation" and the "Postal Insurance Corporation" be completely eliminated immediately;
・existing pre-privatization savings deposits and insurance policies be managed by separate corporations; and
・effective measures are taken to prohibit cross-subsidization among the four functions.

Securities Market Reform

The Councils recognize the important role securities markets play in creating new industries and achieving stable economic growth, and believe the governments of both countries should take the initiative to ensure fair and efficient securities markets.
The majority of individual financial assets in Japan remain in bank deposits and postal savings, despite continued extremely low interest rates, and investment in the securities market by individuals has not yet taken hold. We believe that tax measures such as extending the five year provisionary tax concessions for income related to securities investments, and integrating taxes on income from financial assets will prove to be effective steps to improve this situation.
The Financial System Council has confirmed its policy to allow certain disclosure materials to be prepared in English from 2007. To ensure that U.S. and other foreign issuers can raise funds smoothly in Japan, the revisions should be brought forward and implemented as soon as possible.
In the U.S., the Sarbanes-Oxley act was enacted in response to diminished public confidence in the securities market. Sarbanes-Oxley has resulted in increased burdens for listed companies in complying with the rules and regulations stipulated in the Act. We believe the Act needs to be reviewed for potential improvement through dialogues with affected industry participants after the first year of full implementation of the Act.

Pension Reform

The Councils believe that the reinforcement of corporate pension schemes to supplement national pension schemes will become much more important in Japan in view of the rapid demographic and social changes now taking place. In particular, the expansion of the Defined Contribution (DC) Pension Plan system that was introduced in October 2001 will be effective not only for reinforcement of pension schemes but also for invigorating capital markets. The Councils ask the Japanese Government to review and improve the DC Pension Plan system without being confined by pre-established dates or review cycles, by:
・increasing contribution limits substantially;
・abolishing the special corporate tax;
・allowing voluntary employee matching contributions;
・expanding eligibility for participants;
・relaxing restrictions on access to DC Pension funds;
・enhancing portability of DC Plans;
・encouraging flexibility in the types of investment options available under DC Plans.

Social Security Agreement

The Councils welcome the Social Security Totalization Agreement signed by the U.S. and Japanese governments on February 19, 2004. This balanced Social Security agreement will benefit companies from both countries, as well as individual employees. The Councils urge their respective governments to expeditiously take the necessary steps to bring the agreement into force.

Health Care Innovation

Vibrant medical device and pharmaceutical industries, an engine of economic growth in Japan and the U.S., depend on supportive government policies in the inter-related phases of bringing a product to patients. Recognizing that the U.S. and Japan are among only a few countries which can continuously generate innovative pharmaceuticals including biologics, the Councils encourage both governments to continue taking steps that will create opportunities for domestic and global companies to invest and innovate; in particular their initiatives to further strengthen infrastructure to encourage innovative R&D and enhance intellectual property policies between the U.S. and Japan.
Specifically, the Councils echo the support of the U.S.-Japan Private Sector/Government Commission for goals set out in the Ministry of Health, Labour and Welfare's Industry Visions as well as the recommendation that the implementation of the Visions' Action Plans be accelerated.
The pace of fundamental innovation in healthcare is accelerating. New scientific disciplines including genetics, advanced material sciences and informatics are already generating new types of products that offer both clinical and cost effectiveness benefits. Advanced economies such as the US and Japan can maintain the high relative physical and economic health of their populations through a positive adoption of these opportunities. In this regard, pricing policies are a key driver in encouraging R&D and product introduction, leading to innovative therapies that improve patients' lives and create economic growth. The Councils support pricing reforms that further recognize the value of innovation, and encourage the prompt introduction of new products. In addition, the Councils support steps to reduce the time for new drug and device application approvals.
The Councils also recognize that the issue of reward to medical device and pharmaceutical innovation should be discussed in the context of the entire healthcare policy as well as the industry policy of a country. The Councils also underscore the importance of the comprehensive nature of healthcare systems as well as the use of preventive care to more effectively utilize healthcare spending.

Biotechnology

Recognizing the significant role that biotechnology plays for sustainable economic growth, the Councils jointly emphasize the importance of creating and maintaining an economic environment that fosters the growth and development of biotechnology-based businesses. The Councils call for accelerating the development and enlargement of bio-ventures and note that regulatory reform is crucial to the development of the biotechnology infrastructure.
The Councils encourage cooperation on biotechnology between the United States and Japan in fields related to agriculture, food, medical science and the environment.
The Councils reconfirm that standards, rules, and regulations on biotechnology should be transparent and absolutely based on sound science. Regulations based on unscientific grounds will stifle the growth of industry, not to mention, research and technological development of biotechnology, which will eventually lead to a decline in international competition.
Finally, the Councils also recognize the role of both governments, as well as corporations, is becoming even more important in promoting proper public understanding of biotechnology's value.

WTO

The Councils welcome the approval of the Framework Agreement by the WTO General Council as a basis for further negotiations in the Doha Development Agenda (DDA). With the DDA back on track, negotiations are now advancing to a deeper level in preparation for the sixth ministerial conference, to be held in Hong Kong in December 2005. In order for the parties to achieve the ambitious goals of the DDA, each country must be prepared to reduce specific barriers. There are difficult decisions involved, but it is critical to keep in mind the broad and substantial benefits that will accrue to the U.S. and Japanese economies from further liberalization of services and lower industrial tariffs.
Accordingly, the Councils strongly urge the governments of Japan and the United States, the world's two largest economies, to exhibit flexibility and leadership and strive harder for trade liberalization, while maintaining close cooperation, in order to bring the DDA to a successful conclusion.

Energy and Environment

The Councils agree to cooperatively promote establishing an equitable and responsible framework, in which all the developed and developing countries can participate, on making global warming prevention plans. For this purpose, the Councils urge both governments to devise and implement plans to:
・accelerate the transfer of technology to increase the efficiency of energy use in developing economies;
・encourage the private sector to take appropriate steps to reduce greenhouse gas emissions;
・strengthen support for energy conservation measures;
・promote technological innovation for the reduction of greenhouse gas emissions.

Training the Workforce

In the era of an aging workforce and the trend for increasing mobility of employment, effective measures should be taken to develop human resources, especially technical skills, and to pass these skills on to the next generations.
It is important for global companies to have a philosophy that is shared globally. At the same time, each region's own culture should be respected under the philosophy.
The councils welcome active discussions and exchange of views between the companies of the U.S. and Japan and urge the discussions should be continued.

Information and Communication Technology

Companies in both nations have invested positively in Information and Communication Technology (ICT) over the past year. The Councils believe that companies will continue to focus on business innovation and productivity growth through ICT to strengthen their competitive edge.
The Councils recognize that the growth of productivity at the GDP level is only achieved in an economy when a certain threshold of ICT penetration has been reached. In order for our society to prosper from more widespread ICT introduction, the Councils acknowledge the importance of narrowing the digital divide at the corporate level, so as to induce overall growth in the economy, and to increase employment and benefits to people's lives.
To secure an environment where high productivity becomes more tangible, the Councils strongly believe that it is necessary for businesses, governments and academia to collaborate to lower network infrastructure costs, to quickly standardize new technology, and to nurture talented individuals with the latest technology.
At the corporate level, both Councils recognize more than ever the importance of stronger leadership by management and the role of the CIO. With the bold deployment of new technology, the Councils expect higher productivity and competitiveness through the most appropriate application of ICT.
While the envisioned ubiquitous network society can enrich individual lives and increase productivity, the Councils acknowledge that safe and reliable networks have to be built, and that information security and protection of personal information are the highest priorities to achieve the ubiquitous society.
In order to ensure the highest standard of information security and personal information protection, it is necessary to take measures at government, corporate, and individual levels. The Councils acknowledge that as corporations are both providers and the biggest users of information systems it is necessary to create a culture of security throughout the organization through measures such as in-house education, and that mutual cooperation among enterprises is also important.
Although the Councils encourage governments to adopt the latest technology in building their networks, it is currently difficult to solve these two issues through technical measures alone. Measures such as legal sanctions are also required, and the Councils urge the U.S. and Japanese governments to formulate appropriate laws regarding cybercrime and privacy. The Councils strongly recommend that cybercrime laws be promoted in accordance with internationally accepted norms and practices. Furthermore, privacy laws and implementing guidelines should be designed to achieve the legitimate goal of protecting individuals while avoiding excessive burdens on enterprises.
In addition, while the Councils believe that individuals' awareness and responsibilities for cybercrime and privacy are critical elements, they encourage the governments to take the initiative in addressing these issues, including through better public education.

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China

The Importance of China's Economy and Trade

China's economy is one of the major engines of growth for Japan and the U.S. given that China is a leading trade partner for both. The Councils agree that this trade is good for all three economies, but note that some concerns over its impact are evident in Japan and the U.S. Further measures to expand trade among the three countries in a manner fully consistent with WTO rules and obligations are very important, and the Councils encourage the respective governments to take a proactive and balanced approach in pursuing these objectives.
Specifically:
・Renewed efforts to implement China's WTO commitments on schedule, particularly with regard to transparency, IPR protection, and market access in services.
・Vigorous steps to meet commitments made with regard to intellectual property rights, wireless internet (WAPI) and 3G mobile phone standards, trading and distribution rights, express delivery, and agricultural biotechnology.
・Allow standards development to take place in an open and transparent manner consistent with internationally recognized practices and norms, including public notice and comment procedures, and in a way that does not impede trade.
・Continue to permit open access to the government procurement sector to foreign suppliers of goods and services in the context of implementing the Government Procurement Law.
・Vigilant efforts by all three countries to keep their markets open to goods and services from each other, and globally.
・Continued efforts to put China's financial system on more market-based footing in order to eliminate distortions in the manufacturing sector and broader economy.

Foreign Direct Investment (FDI)

China is the leading destination for foreign direct investment (FDI), including that by U.S. and Japanese companies. While concentrated in manufacturing, FDI is increasing in energy/power generation and financial services in response to market liberalization, and should rise in telecom, distribution and other sectors as new rules are implemented. These are positive developments, and the Government of China is to be commended for its active promotion and acceptance of FDI, including efforts to comply with the WTO TRIMs commitments. To ensure the continued inflow of FDI, the Councils encourage:
・Further steps to increase transparency of the investment approval process and enhance investor certainty about the terms/conditions of investment.
・Improved coordination between central/local governments to ensure that local governments do not impose content, trade or other requirements covered by the TRIMs agreement.

Intellectual Property Rights

The Councils recognize that the Government of China is taking its WTO commitments to improve protection of intellectual property rights (IPR) seriously and has made significant legal and regulatory changes toward this end. However, software/AV piracy, patent and trademark infringement, and counterfeiting of a wide range of goods continue on a scale that is inflicting serious financial damage on domestic and foreign companies. Left unchecked, IPR infringement can discourage foreign trade and investment, and put public health and safety in China and other countries at risk.
The Councils encourage:
・A public education campaign that significantly increases awareness of intellectual property rights, the importance of IPR protection, and the consequences of violating IPR under Chinese law. China's future global competitiveness will depend on the ability of Chinese companies to innovate and develop unique products and technologies rather than deriving or copying them illegally. There are many opportunities for U.S. and Japanese companies to cooperate with China in this public education effort.
・Strong IPR enforcement by the Chinese government at all levels that leads to material, verifiable reductions in counterfeiting and copyright piracy in all its forms. This requires a clear directive from the highest levels of government for a sustained, visible and effective crackdown by administrative and criminal enforcement authorities that strongly deters counterfeiting and copyright piracy, including the unauthorized use of software in the corporate environment; increased financial, manpower and other resources to administrative and criminal enforcement authorities; and closer coordination among various authorities responsible for enforcement.
・Effective criminal enforcement on those who make or trade in counterfeit or pirated goods in physical or digital formats. This includes lowering the threshold for criminal liability, clarifying the manner in which criminal liability will be assessed, refining the process for "tangible evidence," and increasing transparency in the criminal enforcement process.
・Improve the legal protection, under the unfair competition law, of product designs to provide effective protection against imitation of designs in a way that confuse or mislead consumers as to the source of products.
・Introduction of accelerated examination procedures at the State Intellectual Property Office of China for patent applications which have been found to be infringed.
・More transparency, clarity and conformity to international norms in patent review processes.
・Improved customs enforcement, including making illegal the exportation of pirated and counterfeit goods, fully implementing the PRC Intellectual Property Customs Protection Regulations, enhancing cooperation with customs bureaus from other nations, and investing in necessary computer and tracking systems.

Environmental Protection

The Councils recognize that air, water and solid waste pollution is a serious and growing problem for China and the region, and that the Government of China is taking steps to mitigate this problem by reducing certain kinds of emissions. Toward this end, the Councils encourage the government to work cooperatively with business to achieve the appropriate balance between environmental and economic objectives, including through greater utilization of anti-pollution technologies.
Specifically:
・Improve cooperative relations between the government and companies that comply with existing laws and regulations while ensuring that those companies complying and taking costly measures to abate pollution are not placed at a disadvantage to "free riders."
・Enhance transparency and availability of information about new laws/regulations through official web sites and e-notification.
・Increase training programs by government agencies to inform companies of new rules and compliance issues, such as the new SEPA program on New Chemical Measures.
・Maximize the effectiveness of scarce environmental control resources by prioritizing risks - e.g. streamlining permit approval and assessment requirements for less risky facilities.
・Encourage usage of cleaner and more efficient technologies provided by the private sector that can help meet higher environmental standards and reduce greenhouse gas emissions.