Joint Statement

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Joint Statement 42nd Annual U.S.-Japan Business Conference U.S.-Japan/Japan-U.S. Business Councils

November 14, 2005 Washington, DC

The U.S.-Japan and Japan-U.S. Business Councils ("the Councils") agreed on the following at the 42nd U.S.-Japan Business Conference.

U.S. Economy
The Councils welcome the flexibility and resiliency demonstrated by the U.S. economy in the face of recent hurricanes. The U.S. economy is forecasted to continue to expand at a steady pace but continued weakness in the domestic automotive sector is of increasing concern.
Consumer spending is growing steadily, supported by rising compensation. Corporate spending remains healthy, and the rebuilding from the hurricanes will keep the construction sector strong. When combined with the strong growth momentum prior to the hurricanes, these developments provide a sound foundation for sustainable growth.
Vigilance will be necessary as overall inflation rates will remain elevated in the very near term because of the destruction of energy infrastructure in the Gulf region and the resulting rise in oil, natural gas, and motor-fuels prices. For the most part, these spikes have proved short-lived, with both oil and gasoline prices below their pre-hurricane levels. Nonetheless, policy makers need to ensure that higher energy prices do not translate into higher inflationary expectations.
The Councils appreciate that U.S. policy makers recognize the economy's global interdependence as they continue to remove policy accommodation, especially on the monetary side. The Councils urge U.S. policy makers to continue to address the issue of global economic imbalances in cooperation with other large economies. Restraining U.S. economic growth to curb the U.S. trade deficit without offsetting improvements in other developed economies could have serious negative consequences for global growth.
Japanese Economy
The Councils have been encouraged by the clear recovery of Japan's economy. Although economic growth slowed temporarily in the first half of this year-due to global inventory adjustments-it has escaped stagnation, thanks in large part to solid domestic demand.
The private sector has overcome its main structural problems-excess debts, excess capacity, and excess employment-which has helped the economy increase medium-and long-term stability. Capital investment will continue to be firm, while an upturn in corporate earnings has had a favorable impact on private consumption, through increases in compensation of employees. Exports remain important and will be steady with growth of the U.S. and Chinese economies. The supply-and-demand gap has dissipated, and a departure from the long-lasting deflationary situation is expected to be near at hand.
It is now important to proceed with accelerated structural reforms in the government sector. Although the restoration of fiscal soundness is an urgent issue, priority should be placed on achieving efficiency in the government sector. In particular, cautious study is required on such matters as increases in taxes and social benefits expenses. We hope that the private sector will be reactivated through deregulation and tax reform, and that an economic turnaround to a structure led by domestic demand will be promoted, which will increase government revenues and thereby restore fiscal soundness.
With the sixth ministerial conference, to be held in Hong Kong in December 2005, fast approaching, the Doha Development Agenda is at a critical stage. In order to achieve the ambitious goals of the DDA, each country must be prepared to announce specific plans to reduce barriers in Hong Kong. There are difficult decisions involved, primarily on agriculture, but it is critical to remain mindful of 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 advance the DDA in Hong Kong and to bring it to a successful conclusion in 2006.
Postal Privatization
Postal Savings and Life Insurance
Postal privatization legislation was enacted into law by Japan's Diet on October 14, 2005. In its "Basic Principles" section, the legislation provides that privatization will be achieved based on "implementation of measures to ensure equivalent conditions of competition between said stock companies [i.e., the four privatized Japan Post companies] and other companies engaged in like business operations." The Councils welcome this commitment and are encouraged by such initial measures contained in the legislation such as the abolition of formal government guarantees on products offered by Yucho (Postal Savings) and Kampo (Postal Life Insurance); application of most of the same tax burdens as those borne by the private sector; separation of each postal function, including application of the Banking and Insurance Business Law; separation of pre-privatization business from the post-privatization businesses; and supervision by the Financial Services Agency (FSA).
The scope of postal business should not be expanded before ensuring "equivalent conditions of competition" consistent with the legislation's Basic Principles. In particular, the Councils urge that Yucho and Kampo not be allowed to broaden the range of products underwritten/manufactured beyond those currently offered until the equivalent conditions of competition are ensured and that effective measures are taken to prohibit cross-subsidies among the new (post-privatization) businesses and existing (pre-privatization) businesses. Accordingly, the process for approval of entry by the privatized postal entities into new businesses or product areas is critical. In particular, the Postal Privatization Committee, which oversees the progress of the privatization, should include experts who are familiar with the banking and insurance businesses, and its proceedings should be conducted based on reasonable grounds and in a transparent manner, including, at minimum, public hearings, where affected parties have an opportunity to present their views, and a public comment procedure.
Express Delivery Services
As with the postal financial institutions, the Councils welcome the commitment to ensure "equivalent conditions of competition" consistent with the legislation's Basic Principles with respect to the privatized postal entity offering delivery services (Yubin). It is equally important that the postal delivery service should not be allowed to expand the scope of its business or broaden the range of international services offered, particularly express delivery services, until "equivalent conditions of competition" are ensured with respect to government guarantees, cross subsidies, and regulatory and tax treatment.
The process for approval of entry by the privatized postal entities into new businesses or product areas is critical. Accordingly, the Postal Privatization Committee should include experts who are familiar with private express delivery businesses and services. Its proceedings should be conducted in a transparent manner, including public hearings where affected parties have an opportunity to present their views, and a public comment procedure. The Commission should also require detailed, transparent accounting for revenues and costs by each new entity.
Financal Reform
Recognizing their critical importance to economic growth, the Councils applaud ongoing efforts by the U.S. and Japanese governments to establish fair and efficient financial and capital markets.
In the U.S., the Sarbanes-Oxley act has helped to restore public confidence in the securities market but has also resulted in an increased compliance burden for listed companies. The Councils believe the Act should be reviewed for potential improvements that reduce compliance costs and time demands through dialogues with affected industry participants, including Japanese and other foreign companies.
In Japan, the Councils strongly support the objectives of the Financial Services Agency's (FSA's) "Program for Further Reform" to establish a financial system "led and dominated by the private sector" with "equal treatment" and a "level playing field" for all financial institutions, and to promote global harmonization of regulation. The Councils support in principle the FSA's stated goals of the proposed Investment Services Law (ISL) to revise the vertical structure of regulations and bolster investor protection. We encourage the FSA to carefully implement the philosophy of "minimizing the negative impact on innovation" stated in the interim report on the ISL while consulting closely with the industry, including on the topics of scope, suitability and disclosure to ensure consistency with this philosophy.
Additionally, Japan has been debating the idea of revising its tender offer system. The Councils hope that the debate approaches the issue from a market standpoint, accurately taking into consideration the importance of M&A on society-at-large.
The Councils recommend that further steps be taken to put in place a transparent and efficient legal and market environment for consumer and commercial lending to ensure a robust supply of credit. For example, consumer lenders should be allowed to use electronic means in satisfying the legal requirement of document delivery to the obligor, provided that there is a mutual agreement among the lender and obligor and/or guarantor.
While the Japanese Government recognizes the need to encourage a shift from savings to investment and the Japanese equity market has seen record trading volume of late, the household sector has yet to increase the amount it has invested in the capital markets. We urge the government to continue promoting securities ownership by extending the current five year provisionary tax concessions for income related to securities investments, particularly the tax break on dividend income.
Foreign Direct Investment
The Councils again encourage the action of the Government of Japan to meet the goal of doubling Japan's stock of inward foreign direct investment over five years. Toward this end, the Councils urge the government and private sector organizations to continue efforts to foster positive attitudes toward FDI by stressing the contributions it makes to Japanese productivity, job creation, and economic growth.
It is particularly important to increase recognition that most FDI in major economies, including Japan, occurs through "cross-border" Mergers and Acquisitions (M&A). Towards the establishment of an effective cross-border M&A mechanism, the Councils urge the government to implement Commercial Code changes that will allow "triangular" mergers in which subsidiaries of foreign companies in Japan may use parent company shares to finance acquisitions, together with changes in tax rules that allow shareholders in acquired companies to defer taxes on the transaction.
Health Care Innovation
The number of new pharmaceutical compounds approved in Japan and the United States has been declining since the late 1990s, while the cost of successfully bringing these new compounds to market has increased. The Councils suggest that this problem needs to be addressed more seriously from the perspective of science and policy, as the sustainability of a vibrant pharmaceutical industry depends both on the scientific and innovative capabilities of companies, as well as supportive government policies.
As a percentage of GDP, Japan spends far less than the average of the OECD countries on healthcare. With Japan's population aging rapidly, this percentage needs to grow for Japan to provide state-of-the-art healthcare to its citizens. Reimbursing preventive care could lead to healthier aging and, over time, lower patient-specific healthcare spending.
Pharmaceutical Issues
Japan is the world's second largest single market for pharmaceuticals. However, more policy reforms in the interrelated phases of R&D, Registration and Approval, Pricing, and IPR are needed to encourage R&D investment that leads to innovative therapies that improve patients' lives and create economic growth.
A number of steps, including increasing the number of patients per medical facility, are needed to bring the time and costs of Japanese clinical trials in line with other major markets.
To improve the efficiency of the new Pharmaceuticals and Medical Device Agency (PMDA) and help meet the agency's goals of reducing product approval times, a transparent set of yearly published metrics should be established to measure, evaluate and continuously improve performance. This would accelerate the introduction of the growing number of innovative pharmaceuticals available in other developed economies that still are not available to patients in Japan. To facilitate the hiring of additional expert reviewers, a more flexible policy to prevent possible conflicts of interest with former employers should be introduced. Steps also need to be taken to ensure that PMDA is able to provide consultations regarding clinical development and dossier composition to all requests within a reasonable time, e.g., 90-days. Finally, PMDA should use more foreign clinical trial data for the purpose of Japanese applications to expedite approval times.
Japanese prices should reflect the size of its economy. As an alternative to current pricing methods for new drugs, Japan should develop and implement a flexible pricing method which ensures that the full scope of a new pharmaceutical's innovative value can be properly evaluated and rewarded on a case-by-case basis, based upon data submitted by the applicant. This new alternative pricing method would be based upon a transparent interaction between applicants and pricing officials with the option of an independent appeals mechanism. The Government should develop this new system after careful analysis of two recent industry proposals - PhRMA's Manufacturer's Suggested Reimbursement Price (MSRP) methodology and the JPMA's Proposed Price Consultation Method (PPCM). Finally, rules for evaluating the value of innovation over a product's patent life should be developed, e.g. no price revision as long as the drug is under patent.
Implementing the current plan before the GOJ to expand data exclusivity to eight years as soon as possible would help make Japan a more attractive market
Food Safety
In order to insure food safety, the Councils recognize that a science-based risk analysis system, which is composed of risk assessment, risk management and risk communication, has been established. According to a survey for Food Safety Monitors in Japan, "Pesticides", "Imported foods", "Food additives," and "Chemical substances" were selected by consumers as the food-borne hazards they worry about most, even though the actual risks associated with these hazards are not reflective of consumer's perceived risks. Considering that these food-related issues are completely controlled and managed in market by risk assessment and risk management, the Councils expect there to be room for improvement in risk communication. Particularly, the Councils encourage cooperation in areas related to "Pesticide" and "Imported foods" for mutual understanding between the United States and Japan.
Also, the Councils acknowledge that a component of effective risk management includes providing consumers with preventative measures that they can undertake on their own such as hand washing, sanitizing food preparation surfaces, separation of raw and cooked foods, etc.
Finally, the Councils also reconfirm the role of both governments, as well as corporations, in becoming even more important in promoting proper public understanding of food safety.
Pension Reform
The Councils continue to believe that the reinforcement of corporate pension schemes to supplement national pension schemes in Japan is increasingly important in light of rapid demographic and social changes. In particular, the expansion of the Defined Contribution (DC) Pension Plan system is needed to reinforce pension schemes and reinvigorate capital markets.
The Councils ask the Japanese Government to review and improve the DC Pension Plan system, 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.
Information Security and Privacy Protection
Governments and the private sector each play a critical role in cyber security and privacy, which are crucial factors for expanding the digital economy and enhancing global competitiveness. The Councils encourage both governments and industries to work together to establish dependable information networks; promote technological innovation and foster a culture of security; develop guidance and best practices; support law enforcement to combat cybercrime; and increase public awareness of security and privacy from a user's perspective.
Both governments can help ensure that standards, policies and laws are technology-neutral and implemented in a transparent and consistent manner between the two countries. Both Governments can also build public-private partnerships based on information sharing and strategies for critical infrastructure protection. Finally, the Councils urge that governments support industry efforts to increase productivity through the greater use of information technology, and promote a cost-conscious, merit-based approach to privacy and security.
Energy and Environment
The Councils welcome the emerging consensus among governments that climate change represents a significant problem and that human activity has helped cause climate change. We urge our two governments to support cooperative scientific efforts to form the basis of a successor agreement to the Kyoto Protocol. This successor agreement should include both developed and developing countries. The agreement should be designed to achieve its goals through flexible, market-based incentives - including cap-and-trade systems - in order to ensure equity and to minimize the economic impact of actions to remedy the problem.
The Councils support continuing scientific efforts to deepen our understanding of the global warming problem and to identify more precisely what remedial steps will be necessary. These efforts will enable fair and meaningful emission reduction targets to be set and equitably allocated among countries.
With our governments and in our business communities, the Councils will facilitate actions to reduce global warming by developing, applying and transferring technology to conserve energy and reduce emissions of greenhouse gases. Helping to maintain a cooperative political relationship between our two countries will be a key part of the efforts of our Councils.
Workforce Management and Training
The competitive pressures brought by globalization and technology change have made it more important than ever before to encourage the development of skilled human resources and implement flexible employment practices and conditions. As labor becomes increasingly mobile, training and educating the workforce have become crucial issues for manufacturing industries in both Japan and the United States.
In the United States, the effort to upgrade the skills of the workforce is ongoing. While many sectors are growing rapidly, such as in services and high technology manufacturing, many more traditional manufacturing industries are struggling to control costs and increase productivity. At the same time, flexible employment rules have been one of the key underpinnings of strong economic performance and competitiveness in recent years. U.S. workers are typically unemployed for shorter periods and job creation is encouraged in a less restrictive environment.
There has also been growing recognition that merit-based compensation and portable benefits programs offer particular advantages in a more competitive market context. The greater frequency with which workers switch jobs argues for more flexible and portable benefits programs, particularly in retirement security and health care. The growth of defined contribution plans in part reflects this trend, along with the desirability for business to have greater predictability in its benefits costs. In short, more flexible rules on employment practices and pensions can encourage new investment, job creation, and competitive opportunities.
In Japan, there are concerns that a labor shortage owing to the problems of low population growth and the aging of society, as well as the so-called "2007 problem," will cause a gap in skills in many industries. These factors make it all the more important to restructure the working environment to ensure fair personnel treatment that reflects the individual effort made by each employee. Creating a truly worker-friendly environment, along with mid- to long-range human resource development plans, are considered imperative in order to secure a highly capable workforce.
The Councils believe that ongoing study and discussion of different regulatory and corporate models for employment rules, compensation and benefits programs are the best ways to promote the use of "best practices" in the industries of both countries.
Enhancing U.S.-Japan Economic Integration
The overall relationship between Japan and the United States remains sound. Particularly in the political and security realms, the two countries are maintaining a solid and cooperative alliance centering on the bilateral security treaty. While trade and investment ties are extensive, there is room for substantial improvement. Given the important role that U.S.-Japan ties play in the Asia-Pacific region and the world, the Councils believe that the economic relationship should be strengthened and that concrete steps need to be taken to build a framework that promotes greater economic integration by expanding trade, investment and financial ties.
The Councils believe that a comprehensive and strategic Economic Partnership Agreement (EPA) encompassing all aspects of bilateral economic activity will ultimately be the most effective means of enhancing economic integration. Toward this end, the Councils urge both governments to initiate formal exploratory talks within 2006 on the outlines and strategies for such an agreement.
In the Councils' view, such an agreement should embody all elements of a Free Trade Agreement consistent with the rules of the World Trade Organization (WTO), by covering "substantially all the trade" in goods, as well as "substantial sectoral coverage" in services. It must also extend, but not be limited, to major areas such as direct investment, capital markets, exchange rates, regulations and regulatory transparency, distribution, agriculture, trade remedies such as antidumping, competition policy, human resources and movement of natural persons to attain the high level of coverage needed.
Moreover, a U.S.-Japan EPA should embody a broad and forward-looking vision, to promote institutional cooperation in areas such as standards and certification, IT security, intellectual property rights, as well as security and trade that could serve as models for agreements with other countries.
The Councils acknowledge that while discussions on such an agreement will be complex and difficult, the potential long-term political and economic benefits are substantial. The Councils will cooperate closely with the governments to identify core issues and negotiating objectives, particularly those that could serve as initial "building blocks;" help devise a workable plan and timetable; and help raise awareness for the potential benefits of a U.S.-Japan agreement among the public, private sector and legislative bodies in both countries.
A U.S.-Japan agreement is intended to supplement, not substitute for, the more important Doha Development Agenda. The Councils therefore urge both governments to make the successful conclusion of the DDA their top trade priority and to do what it takes to move the negotiations forward in Hong Kong in December.

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