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 You are in: Under Secretary for Political Affairs > Bureau of East Asian and Pacific Affairs > Releases > Reports > 2005

U.S.-Japan Economic Partnership for Growth: U.S.-Japan Investment Initiative 2005 Report

Released by the Bureau of East Asian and Pacific Affairs
July 7, 2005

Executive Summary

  • Foreign direct investment (FDI) in Japan has increased steadily thanks to regulatory reforms in finance, communications, and distribution, as well as the global rise in M&A. As of the end of 2004, the stock of FDI in Japan totaled 10.1 trillion yen (approximately $97 billion at the end-of-2004 exchange rate of 104.1 yen/dollar). This growth of 3.5 trillion yen represents a 50% increase over stock at the end of 2001, the base year for Prime Minister Koizumi’s target of doubling the stock of FDI in Japan in five years. 
  • Between developed countries, 80% of total FDI takes the form of M&A. Thus, Japan will need to undertake institutional reforms to facilitate cross-border M&A if we are to increase FDI. In this context, positive effect on the promotion of FDI is expected from the revision of the Commercial Code to modernize corporate laws.
  • The U.S.-Japan Investment Initiative was launched in June 2001 by leaders of both the United States and Japan under the U.S.-Japan Economic Partnership for Growth. The Initiative provides an important mutual forum to explore ways to remove barriers through exchanges of opinion on key issues such as measures to improve investment conditions in both the United States and Japan. Subjects discussed regarding the improvement of the investment climate in Japan include (1) facilitation of cross-border M&A, and (2) deregulation that will create new business opportunities for investors in areas such as education and medical services. The exchange of opinion between the two governments on improving the investment climate in the United States centered on issues raised by Japan, including (1) visas and other consular matters, (2) cargo security , and (3) the Sarbanes-Oxley Act.
  • Public outreach under the Initiative included Investment Seminars in May 2005 in Nagoya and Chiba to promote FDI in Japan. In the United States, Invest-in-Japan Symposia will be held this autumn in New York and San Francisco as a follow-up to the Symposia held in Atlanta and Los Angeles last October.
  • The Governments of Japan and the United States welcome inward FDI. The U.S.-Japan Investment Initiative will further implement activities that serve to promote the understanding of the importance of FDI and continue its efforts to improve investment climate in both countries through constructive discussion between the two governments.

Table of Contents

I. Introduction

II. FDI in the U.S. and Japan
   1. FDI in Japan
      (1) Trends in FDI in Japan
      (2) Recent Topics
           A. Commercial/Corporate Code Modernization
           B. Corporate Value Study Group
           C. Program for the Promotion of Foreign Direct Investment in Japan
           D. Most Active Areas in Attracting Foreign Direct Investment
      (3) Japan’s Strengths
   2. FDI in the United States
      (1) Trends in FDI in the United States
      (2) Recent Topics
      (3) U.S. Strengths

III. Discussion in the Investment Initiative 2004-2005
   1. U.S. Concerns
      (1) Cross-border Mergers and Acquisitions (M&A)
      (2) Demographic Issues and Investment
           A. Education
           B. Medical Services
      (3) Other Topics
    2. Japan’s Concerns 
      (1) Visas
      (2) Cargo Security
      (3) Sarbanes-Oxley Act

IV. Conclusion

Appendix 1. Investment Initiative Seminars on Promoting FDI in Japan
Appendix 2. Recent Examples of U.S. Business Expansion in Japan

I. Introduction

The United States-Japan Investment Initiative was established in June 2001 as a forum for the exchange of views on how to improve the investment climate in the two countries within the framework of the U.S-Japan Economic Partnership for Growth, which was agreed upon by U.S. President George W. Bush and Japanese Prime Minister Junichiro Koizumi. Under the Initiative, working group meetings were held on January 26 and May 20, 2005 to discuss issues related to the promotion of FDI in both countries and present proposals for specific improvements. The meetings were co-chaired by the Japanese Ministry of Economy, Trade and Industry (METI) and the U.S. Department of State.

As part of a public outreach program, the Initiative held Investment Seminars in Nagoya and Chiba in May 2005 to promote investment in Japan. Invest-in-Japan Symposia will be held this autumn in New York and San Francisco, as a follow-up to the Symposia held in Atlanta and Los Angeles last October.

FDI can play a crucial role in the economic growth of all countries. Particularly in Japan, the introduction of new technologies and management expertise that accompanies FDI may serve as a driving force behind necessary changes, with direct impact on often rigid corporate management. FDI also contributes substantially to the increase of consumer demand, choice, and convenience, as well as to job creation. In light of the increasingly globalized nature of U.S. and Japanese corporate activities, the "nationality" of companies is losing its significance and cross-border corporate activities are contributing to the development and stabilization of the world economy as a whole, as well as to the strong ties between the two countries.

The interdependence between the U.S. and Japan can be easily grasped when we look at the automobile industry, once the focus of U.S.-Japan trade friction. In the increasingly borderless international economy, Japanese automobile manufacturers have expanded production overseas, particularly in the United States. As a result, 67% of the automobiles sold by Japanese manufacturers in the United States are now produced in North America. Similarly, foreign companies, including U.S. firms, have acquired six of the eight major Japanese automobile manufacturers. Such operational partnerships in the automobile sector are spreading to other industries, bringing benefits in terms of improved business management and technological development.

It is clear that through the stimulation of mutual investment and the enhancement of business alliances, the constructive discussion between the United States and Japan under the Investment Initiative has contributed to the strengthening of the friendly relationship between the two countries, and hence to the development of the world economy as a whole.   

II. FDI in the U.S. and Japan

1. FDI in Japan

(1) Trends in FDI in Japan
Japan’s inward FDI has risen steadily since the mid-1990s. Regulatory reforms in the financial, communications and distribution sectors have encouraged foreign investment into these sectors. Furthermore, improvements in corporate law, bankruptcy law, and accounting principles helped attract foreign capital to Japanese companies. Particularly in recent years, large-scale M&A has become a major factor, as companies struggle to compete in globalized markets by means of corporate restructuring on a world scale. Nonetheless, recently published data on FDI in Japan indicate a slight slowdown in investment growth. As of the end of 2004, FDI stock in Japan totaled 10.1 trillion yen (approximately $97 billion at the 2004 end-of-year rate of 104.1 yen/dollar), an increase of 0.5 trillion yen (5.1%) from the level of a year earlier (9.6 trillion yen). This growth of 3.5 trillion yen represents a 50% increase over stock at the end of 2001, the base year set by Prime Minister Koizumi for the target of doubling FDI stock in Japan.

FDI from the United States accounts for 4.2 trillion yen of the 10.1 trillion yen, up 8% from 3.9 trillion yen last year. The United States has the largest share in Japanese inward FDI, representing some 40% of the total. [Editor's note: the following chart also is available as text-only.]

chart showing foreign direct investment in Japan in years 1996-2004

As a percentage of GDP, Japan has the smallest stock of inward FDI by far among major developed countries. Indeed, the ratio stands at only 2.1% in Japan, as compared with 22.1% in the United States, 37.5% in the U.K., 27.4% in Germany and 42.6% in France. According to other statistics (UNCTAD, World Investment Report 2004), Japan is ranked 132nd among 140 countries in terms of the FDI/GDP ratio. [Editor's note: the following chart also is available as text-only.]

chart shows inward foreign direct investment for Japan, U.S., U.K., Germany, France, Canada, and Australia

(2) Recent Topics
A. COMMERCIAL/CORPORATE CODE MODERNIZATION
Discussion in the Legislative Council of the Ministry of Justice on the modernization of commercial law culminated in February 2005 in the adoption of a Guideline on the Modernization of Commercial Law. The Ministry of Justice prepared legislation to revise the Commercial Code and to create a new, separate Corporate Code. The bill was presented to the Diet on March 22, 2005. In order to facilitate corporate restructuring, the bill eases rules on compensation for mergers, enabling cash, foreign shares, or other foreign assets to be used as compensation in mergers and acquisitions. This development is welcome because it is expected to promote inbound FDI by allowing investors to take advantage of modern M&A tools. However, this provision will only take effect 12 months after the enactment of the legislation, thereby delaying the benefits of this law.

B. CORPORATE VALUE STUDY GROUP
For the past ten years, the Government of Japan has been working on the development of an institutional environment that encourages corporate reforms to adapt to changing conditions. Major industrial restructuring has also been accelerated in recent years due to the development of a taxation system for corporate restructuring and increased labor mobility. At the same time, hostile takeovers, although rare in the Japanese market, are a possibilitynow that the practice of cross shareholding is being abandoned. In this context, METI established a Corporate Value Study Group to identify fair defensive measures against hostile takeover that would also promote corporate value. Building upon the final report of the Study Group entitled "Report on Corporate Value," the METI and the Ministry of Justice jointly released "Guidelines Regarding Takeover Defense for the Purposes of Protection and Enhancement of Corporate Value and Shareholders’ Common Interests" on May 27, 2005. Although the guidelines are not legally binding, they present legally valid and reasonable criteria for the adoption of defensive measures against hostile takeover under the three principles of (i) protecting and enhancing corporate value and the interests of shareholders as a whole, (ii) prior public disclosure and shareholders’ consent, and (iii) ensuring the necessity and reasonableness of defensive measures.

C. PROGRAM FOR THE PROMOTION OF FOREIGN DIRECT INVESTMENT IN JAPAN
In January 2003, Prime Minister Koizumi announced the target of doubling the stock of FDI in Japan over the next five years. In March 2003, the Japan Investment Council, chaired by the Prime Minister himself, formulated a "Program for the Promotion of Foreign Direct Investment in Japan" consisting of 74 measures in five categories, subsequently revised in June 2004 to 82 measures. The entire government is committed to the Program. The aforementioned easing of rules on compensation for mergers under the Corporate Code Bill, the U.S.-Japan Tax Treaty, which entered into force last year, and the U.S.-Japan Social Security Agreement signed last year, all attest to the steady implementation of measures listed in the Program.

D. MOST ACTIVE AREAS IN JAPAN IN ATTRACTING FOREIGN DIRECT INVESTMENT
Recognizing that local initiatives to attract foreign businesses, as well as government efforts, are important for promoting FDI in Japan, METI, through the Japan External Trade Organization (JETRO), provides supports to local governments that are most active in attracting foreign enterprises to invest in their localities. So far, nine areas have been selected for this purpose: Sapporo, Sendai, Chiba, Kanagawa, Aichi/Gifu/Mie ("Greater Nagoya"), Osaka, Hyogo, Hiroshima, and Fukuoka/Yamaguchi.

(3) Japan’s Strengths
The Japanese economy has shown signs of improved health in recent years, as real GDP rose 1.9% in fiscal 2004 and continued growth of 1.6% is expected for fiscal 2005. Corporate restructuring and other reforms have resulted in the highest corporate profits in about 15 years. It is now expected that rising corporate profits will increase business investment and subsequently bring about sustained growth led by private demand, as the recovery in the corporate sector will spill over to the household sector.

Japan’s strengths include its huge domestic market that accounts for about 12% of global GDP, skilled human resources, advanced technological capabilities, a predictable business environment supported by strong legal institutions and the rule of law, and a well-developed production/distribution infrastructure, all of which demonstrate the vast potential of Japan as an investment destination. This is supported by the fact that UNCTAD ranks Japan 16th out of 140 countries on its Inward FDI Potential Index. Geographically, Japan is also positioned to function as an international business hub for the fast-growing East Asian region. In addition to this potential, Japan’s stable social and economic conditions make the country one of the top investment choices for foreign companies seeking business opportunities in Asia.

In light of Japan’s market size, technological capabilities and social conditions, promising fields for inward FDI include information/communication, environmental technology, medical care/welfare businesses, leisure and tourism, and biotechnology. Other industries such as auto parts may present good investment opportunities when Japan is considered as the gateway to the whole Asian region, rather than only as a consumer market.

2. FDI in the United States

(1) Trends in FDI in the United States
The United States attracts significant FDI inflows from countries around the world due to its open economy, strong growth, and high rate of return -- FDI inflows reached a peak of over 3% of GDP in 2000. Although FDI inflows into the United States declined over 2001-2003, this was largely caused by the global economic slowdown, increased economic uncertainty, and the worldwide decline in mergers and acquisitions. FDI inflows are recovering, though, and more than tripled in 2004 compared to 2003. Deregulation and technological change have made the United States particularly attractive to investors. At times of economic growth, FDI has capitalized on opportunities and helped reinforce economic successes. At times of economic weakness, FDI has played a key role in diversifying and stabilizing the economy. For example, in the 1980s Japanese FDI, among others, provided a critical catalyst for change, which increased U.S. competitiveness, employment and productivity.

In 2003, the most recent year for which data is available, foreign direct investment stock in the United States was up from the previous peak in 2001; FDI measured at historical costs totaled approximately $1,378 billion (see chart below). The largest investment positions are held by the United Kingdom (17%), Japan (12%), Germany (11%), Netherlands (11%), and France (10%).

Foreign Direct Investment Position in the United States on a Historical Cost Basis, 1997-2003

Year end

Billions of Dollars

Percent Change from Preceding Year

1997

681.8

14.0

1998

778.4

14.2

1999

955.7

22.8

2000

1,256.9

31.5

2001

1,344.0

6.9

2002

1,340.0

-0.03

2003

1.378.0

2.8

Source: Bureau of Economic Analysis, Department of Commerce

 

Investment Outlays in the United States by Type of Investment, 1997-2003
(millions of dollars)

 

1997

1998

1999

2000

2001

2002

2003

 

Total Outlays

69,708

215,256

274,956

335,629

147,109

54, 519

60,320

By type of investment:

 

 

 

 

 

 

 

U.S. business acquired

60,733

182,357

265,127

322,703

138,091

43,442

52,580

U.S. business established

8,974

32,899

9,829

12,926

9,017

11,077

7.741

Source: Bureau of Economic Analysis, Department of Commerce

 

Foreign capital makes an important contribution to the U.S. economy. U.S. affiliates of foreign companies account for 6.1 million jobs and 6% of private sector GDP, while investment by Japanese companies accounts for 700,000 jobs and about 1% of GDP. To cite two examples, Honda employs 16,000 persons in Ohio and 24,000 persons nationwide; Toyota has created over 35,000 jobs nationwide, including 2,000 new jobs in Texas with a new investment of $800 million.

(2) Recent Topics

STATE EFFORTS
Most American states have international affairs offices that promote investment by offering a wide variety of services and information for companies interested in investing in their state. Many states even maintain offices in cities abroad to encourage trade and investment. For example, the State of Colorado’s International Trade Office provides assistance for investors. Its web page (<http://www.state.co.us/oed/ito/invest/invest.html>) includes information in Japanese, Spanish, German, and French, and the State has a detailed on-line guide for interested investors at <http://www.state.co.us/oed/guide/>. Foreign affiliates in Colorado employ over 90,000 people, own over $13 billion in property, plant, and equipment and pay wages 13% higher than the national average. Another example is the State of Ohio’s International Trade Division (<http://www.odod.ohio.gov/itd/>), which works to identify prospects for foreign direct investment in Ohio and helps interested businesses. Ohio has over 180,000 people employed at foreign-owned companies; in 2004 alone new and expanded investment by foreign-owned companies in Ohio exceeded $1.5 billion.

Many states and localities in the United States offer incentives including tax exemptions and targeted investment in infrastructure. However, incentives are just a small part of the success of the United States in attracting foreign investment. It is the investment climate in the United States, based on strong legal institutions, an open economy, an educated and productive workforce, and an attitude that welcomes foreign investment that has made the United States’ success in attracting FDI possible.

(3) U.S. Strengths
The United States continues to be an attractive investment destination because of its market size and openness. In response to corporate scandals in 2001-02, the Government of the United States acted swiftly to improve and strengthen its corporate regulatory systems to restore confidence in capital markets. At the same time, since the attacks of September 11, 2001, the United States has been identifying ways to enhance security protection for the country. As it does so, the United States is striving to ensure that such measures do not hinder trade and investment flows. The Government of the United States is taking this as an opportunity to identify new ways to speed the flow of legitimate business and to increase logistical integration between domestic and foreign businesses. Through the use of IT and other technologies, the United States hopes that legitimate trade and investment can flow in a seamless, secure fashion even faster than before. In designing these new systems, the Government of the United States continues to listen to the views of the private sectors and governments of other countries to ensure that the new measures meet the desired goals without impeding legitimate trade and investment flows.

III. Discussion in the Investment Initiative 2005

1. U.S. Concerns

(1) Cross-border Mergers and Acquisitions (M&A)
The Government of the United States noted that most direct investment throughout the world, particularly between developed countries, takes the form of M&A rather than greenfield investment; M&A represents as much as 80% of the global total. Facilitating cross-border M&A is crucial for increasing inbound foreign direct investment in Japan.

In this light, the Government of the United States asked about progress on the revision to the Commercial Code and requested that provisions easing merger currency to permit the use of triangular mergers and other modern M&A techniques by foreign investors be introduced as soon as possible.

The Government of the United States pointed out that tax considerations are crucial in determining whether or not to participate in an M&A transaction. The Government of Japan is studying tax treatment of triangular mergers available under the new Corporate Code, including consideration of the appropriateness and equity of taxation, and the prevention of tax avoidance with the intention of adopting such policy by such time as relevant sections of the Corporate Code go into effect.

The Government of Japan explained that the current revision to the Commercial Code aims at the "modernization of corporate law," and that the easing of rules on compensation for mergerswill facilitate cross-border triangular mergers, among others. It also clarified that the introduction of the easing of rules on compensation for mergerswill be delayed one year, to allow Japanese companies time to prepare for the new system; the Government of the United States thought the delay unnecessary and unhelpful since it would postpone the beneficial effects of the new merger technique on the Japanese economy.

The Government of Japan also outlined the criteria for specific defensive measures against hostile takeover that were considered in the Corporate Value Study Group established under the METI. The Government of Japan said the purpose of takeover defensive measures is to protect and enhance corporate value and shareholders’ common interests, and corporations would be discouragedfrom adopting or invoking anti-takeover measures that do not have as their purpose enhancement of corporate value and shareholders’ common interestsor that have as their primary objective the protection of entrenched management. The Government of the United States noted that defensive measures have grown less popular in the United States due to the damage they can do to shareholder value. The Government of the United States agreed with the basic idea of the Study Group that defensemeasures should not damage corporate value or violate the rights of shareholders, and expressed its hope that the effectiveness, fairness, and transparency of the guidelines published on the basis of the Study Group’s discussion will be ensured. The Government of the United States recommended that improved corporate governance regimes be implemented in conjunction with changes to corporate defense measures to strengthen shareholder rights and prevent the abuse of such measures.

(2) Demographic Issues and Investment
The Government of the United States reiterated its view that the education and medical services sectors have great potential to attract foreign direct investment because of the changing demographics in Japan, particularly the declining birth rate and aging society. The Government of the United States said that American companies have expertise and are ready to provide high-quality services in these areas, and requested that Japan undertake appropriate reforms to enable such investment for the benefit of consumers and patients.

A. EDUCATION
The main request of the Government of the United States in the area of education was that foreign university branches in Japan be treated as officially recognized schools. This would allow a Japanese branch that provides the same curriculum as that of its parent university to be recognized as a foreign university operating in Japan, provided that the parent university is accredited as a formal educational institution in the home country. The Government of the United States also requested the extension of discounted railway passes to students enrolled in Japanese branches of foreign universities, as well as allowing foreign students enrolled in these branches to qualify for student visas. The Government of the United States also requested that the tax treatment of branches of foreign universities (and their students) be the same as for Japanese schools regarding, for example, consumption tax on tuition and corporation profit tax on donation paid to such branches.

The Government of Japan reported that a study group established under the Ministry of Education, Culture, Sports, Science and Technology (MEXT) had considered ways to promote further internationalization of higher education in a manner that would help provide a variety of choices in education. The work of the study group culminated in December 2004 in an institutional reform that integrates foreign university branches into the Japanese educational system. Upon designation by MEXT that such branch campuses meet certain requirements, the credits and degrees of students at these branch campuses will be recognized. This will also resolve the issues of student railway passes and resident/visa status for recognized institutions. To date, one American university’s Japan branch campus has been so designated, and applications from other foreign universities are being considered by MEXT.

The Government of the United States expressed its appreciation to the Government of Japan for this institutional reform and requested the continuation of discussions including the area of taxation.

B. MEDICAL SERVICES
Recognizing that U.S. companies have been involved in the pharmaceutical, medical technology, and medical equipment businesses in Japan for some time, the Government of the United States noted that there is still much room to open up the medical services market for the participation and contribution of U.S. enterprises. The Government of the United States requested that the Government of Japan allow commercial firms to provide medical services or, as a possible interim step, allow the outsourcing to commercial firms of routine, low-risk medical procedures such as imaging and chronic care, for example, dialysis and physical therapy. The Government of the United States expressed its interest in lifting the ban on "mixed medical services" (that is, care including both treatments reimbursable under Japan’s public health system and other treatments not approved for reimbursement) in terms attractive to private investment. The Ministry of Health, Labour and Welfare will continue to provide the Government of the United States with information on the basic agreement between the Minister of Health, Labour and Welfare and the Minister of State for Regulatory Reform in December 2004 to increase the scope of permissible "mixed medical services" on a case-by-case basis, as well as on the progress of reform under the agreement, upon the Government of the United States’ request.

The Government of Japan replied that it cannot legally authorize commercial firms to provide medical services, but that the involvement of commercial firms in advanced medical technology not covered by NHI has been allowed since October 2004 in Special Zones for Structural Reform, for which an application was submitted by one local government in May 2005. It also explained that a study group has been formed to develop recommendations for regulatory changes – including through a planned revision of the Medical Law in 2006 – aimed at reinforcing the non-profit nature of medical institutions. The Government of Japan noted further that although the outsourcing of sampletests to commercial firms, including blood tests, is authorized under certain conditions, non-doctors should not be allowed to perform any strictly medical procedures as the patient might be exposed to risk.

With regard to "mixed medical services," the Government of Japan explained the content and progress of the reform in detail, stating that the current reform under the said agreement responds swiftly and precisely to the desire of patients.

The Government of the United States responded that permitting commercial companies to provide a narrow range of services not covered by NHI in Special Zones alone was inadequate, and unlikely to attract much interest. In addition to the limited nature of the opportunity, prospective investors would naturally be concerned that they could be forced to withdraw from the market if the services they offer were subsequently approved for NHI reimbursement; under such uncertain circumstances, they would be unlikely to invest. The Government of the United States also pointed out that Japan’s Medical Law does not in fact prohibit commercial entities from operating hospital and clinics, at the discretion of prefectural governors, and urged the Government of Japan to consider this possibility in the light of the changing economic, fiscal, and demographic situation in Japan.

The U.S.-Japan Investment Initiative continues to review the current state of the education and medical services sectors and to exchange opinions on developments.

(3) Other Topics
The Government of the United States raised Article 821 (included in the Corporate Code bill that was approved by the Diet in June) and its potential impact on foreign investors doing business through branch offices in Japan. The Japanese Diet resolved, upon approving the Corporate Code Bill, that the administration should thoroughly publish and establish that Article 821 will not cause any negative effect on existing foreign companies or future investment in Japan by foreign companies.

2. Japan’s Concerns

(1) Visas
The Government of Japan has expressed its hope that security measures taken by the U.S. to improve border security are implemented in a way that minimizes negative impacts on Japanese visa applicants. In Investment Initiative meetings, the Government of Japan expressed concern about the high travel cost, delays, and inconvenience of applying for a visa, noting that only three of the United States’ six diplomatic posts in Japan accept visa applications, and noted the recent change in U.S. requirements that have increased the numbers of people who must apply in person by expanding the age brackets and visa categories that required personal appearances. The Government of Japan requested that the United States allow Japanese businesspeople to be exempt from the personal appearance requirement, and to allow Japanese businesspeople and families to renewvisas in the United States.

U.S. consular experts at Investment Initiative meetings pointed out several measures the Department of State has taken to improve visa issuance, including the adoption a web-based appointment system which allows applicants to apply at the consulate of their choice and adding new visa officers at U.S. missions in Tokyo and Osaka; there are seven non-immigrant visa positions assigned to non-immigrant visa duty in Tokyo and three in Osaka, plus support staff.

U.S. consular experts clarified the process for revalidating/renewing work visas, explaining the different methods available to Japanese citizens as the legal requirement to collect biometric data makes it impractical for work visas to be renewed any longer at the State Department in Washington. Japanese businesspeoplemustrenew visas at U.S. missions overseas that issue visas; in Japan that includes Tokyo, Osaka and Naha. The appointment system allowing appointments to be made up to three months in advance at U.S. missions in Japan eases the difficulties of scheduling trips to Japan to revalidate these visas. More detailed information is available at the following websites: http://tokyo.usembassy.gov and http://travel.state.gov/visa_services.html. Japanese businesspeople may also apply for renewals at U.S. embassies and consulates in Canada or Mexico. These embassies and consulates offer an appointment system through their websites, accessible at http://www.nvars.com http://travel.state.gov/visa_services.html.

(2) Cargo Security
The Government of Japan expressed concern that U.S. requirements to provide cargo manifeststwenty-four hours in advance of lading for maritime shipments, under the Trade Act of 2002, would cause delays and additional expense for shippers. Moreover, the Government of Japan requested that greater flexibility be used in applying the manifest rule to C-TPAT (Customs-Trade Partnership Against Terrorism) members, which represent a lower risk from a security viewpoint. The Government of Japan also expressed concern over the lack of consultation in advance of the March 25, 2005 announcement of C-TPAT Importer Security Criteria. Further, the Government of Japan said that the inspection rate of cargo for participant firms in C-TPAT had not declined, as participants had expected. The Government of the United States advised that the cargo manifest requirement is an essential element of itscounter-terrorism efforts which would continue. Since the attacks of September 11, 2001, the overall inspection rates for cargo entering the United States have doubled; however, inspection rates for C-TPAT participants are only 1/6th that of non-C-TPAT companies. The Government of the United States welcomes discussions with the Government of Japan and explores further advantages for C-TPAT members. The Government of the United States will ensure transparency in the process of implementation and further revision of C-TPAT. Both Governments desire to encourage speedy trade while recognizing the need to continue to improve transport security.

(3) Sarbanes-Oxley Act
Through the Investment Initiative, the Government of Japan has clearly articulated its concern about the applicability of the Sarbanes-Oxley Act of 2002 to Japanese firms and auditors. In response to Japanese concerns expressed in earlier years, the Securities and Exchange Commission has adopted a rule which provides an exemption for jurisdictions such as Japan with boards of auditors or statutory auditors, provided that such auditors are:

  • Authorized by home country requirements;
  • Either separate from the board of directors, or composed of one or more members of the board of directors and one or more members that are not also members of the board of directors; and
  • Not elected by management of the issuer and no executive officer of the issuer is a member.

Regulations require firms using an audit committee system to have an audit committee with 100% independent directors, and there is no exception for Japan's system of audit committees where a majority of members must be outside directors. However, the SEC is willing to receive further information on how this provision is affecting individual firms. Finally, regarding the audit firms, the Public Company Accounting Oversight Board (the Board) and the SEC have authority over accountants who audit the financial statements of public companies that have elected to access U.S. markets. There were many public comments from foreign countries, including Japan, requesting an exemption to foreign public audit firms from the registration requirements. The Board’s final registration rule, as approved by the SEC, requires foreign firms to register, but less information will be required of foreign firms than originally proposed and a mechanism has been included to permit foreign firms to document non-disclosure of certain information that is confidential under home country rules. The Board has proposed rules regarding how it would cooperate with foreign audit oversight bodies in the inspection of foreign registered firms. The Board continues to discuss with foreign governmental bodies the scope of its oversight authority with respect to accounting firms located outside the United States. With regard to internal control over financial reporting, the compliance date for foreign private issuers including Japanese firms has been extended one year to their first fiscal year ending on or after July 15, 2006

IV. Conclusion
The positive impact of FDI on the national economy is becoming better understood in Japan, thanks to the activities of public outreach programs under the Initiative that have contributed to this awareness. Based on this understanding, both countries have taken measures conducive to increased inward FDI. The concerns of the Governments of Japan and the United States taken up under the Initiative contribute substantially to the identification of potential investment opportunities in both countries. Seen more broadly, they represent constructive proposals to help promote sustained growth in the two economies.

In Japan, government regulations in various sectors have also raised obstacles to FDI. Some of those obstacles have been removed gradually as regulatory reforms make headway, resulting in the improvement of the investment climate. The target of doubling the stock of FDI, set by Prime Minister Koizumi, has become the driving force behind further improvement in the investment climate and the reduction of investment barriers through the process of developing and implementing the Program for the Promotion of FDI in Japan.

It is also true, however, that the improvement of the investment climate in Japan has not necessarily resulted in a drastic increase in inward FDI. As a matter of course, investment trends are affected by external factors such as the state of the world economy, but naturally additional efforts are still needed. It is also necessary to counter any underlying misperceptions of some Japanese people on the role and effect of foreign companies entering the Japanese market.

It is encouraging to see Japanese local governments taking greater initiative in mobilizing the strength of foreign companies to revitalize their local economies. Corporate decisions on investment are taken after examining business conditions, infrastructure development, available preferential schemes, and living conditions in the potential investment destination, all of which may be greatly influenced by the efforts of the local governments. The Government of Japan is committed to providing support for the local governments willing to make substantial efforts to attract FDI.

In the United States measures taken to prevent terrorism and in response to corporate scandals that occurred several years ago have also had an adverse effect of complicating smooth trade and investment flows into the country. Although the need for security and corporate governance measures cannot be denied, sufficient care should be taken to ensure that they do not present insurmountable obstacles to legitimate trade and investment. In so doing, the Government of the United States will continue to listen to the voices of a wide range of stakeholders and to take into account costs and benefits of adopted measures.

The U.S.-Japan Investment Initiative will continue its work under the leadership of President Bush and Prime Minister Koizumi. Both countries are committed to a variety of endeavors to promote further improvement in the investment climate, based on the idea that the Initiative provides an effective mechanism to deepen the understanding of FDI’s benefits and to work toward concrete result in the form of renewed economic growth.

Appendix 1. Investment Initiative Seminars on Promoting FDI in Japan
The U.S.-Japan Investment Initiative has undertaken a public outreach program over the past four years to communicate the mutual benefit that FDI brings.

Within the framework of the program, annual Investment Initiative Seminars on promoting FDI have been organized in Japanese cities. This year’s seminars were held in Nagoya and Chiba in May.

A central feature of this year's seminars was the participation of local Japanese businesses and U.S. companies looking for business partnerships with Japanese firms. This year’s seminars also featured presentations to promote better understanding of the importance of FDI in the renewal of the Japanese economy. The heads of local governments called the attention of participating U.S. companies to the attractiveness of the area as an investment destination and conveyed messages welcoming their investment. Present at the seminars were the Prefectural Governors of Aichi, Gifu, and Mie and the Mayor of Nagoya for the Greater Nagoya Area, as well as the Prefectural Governor of Chiba. Focusing on practical matchmaking, the seminars also provided many opportunities for one-on-one business consultations between Japanese and U.S. companies. Furthermore, local governments organized industrial tours to companies and research institutes in the area before and after the seminars.

Some 30 U.S. companies participated in the seminars, attesting to the strong interest of many U.S. firms in investment opportunities in Japanese cities, including Nagoya and Chiba. These cities are also actively seeking investment from the United States, giving priority to the utilization of FDI to revitalize their economies. The seminars provided an excellent opportunity for U.S. companies to gain detailed knowledge of local infrastructure and needs, and for local companies to further their understanding of specific investment strategies of their U.S. counterparts. The encounters between U.S. and Japanese businesses on these occasions are likely to lead to actual business partnerships and hopefully will develop into FDI projects in Japan .

Appendix 2. Recent Examples of U.S. Business Expansion in Japan
(both FDI and investment by U.S. affiliates)

Many U.S. companies have invested in Japan with the help of Investment Japan Business Support Centers (IBSCs) operated by the Japan External Trade Organization (JETRO). The following are five investment projects launched in the past 12 months.

• Turbocam Inc.
Turbocam manufactures and markets easily customized five-axis turbines for automobiles, aircraft, air compressors, and spacecraft. The company established a sales office in Aichi Prefecture in August 2004 to provide better technical support for Japanese customers. JETRO provided support in establishment procedures and the search for an appropriate site.

• Sapidyne Instruments Inc.
Sapidyne manufactures and markets biotechnological testing devices. In December 2004, the company established a stock company in Chiba Prefecture to attract Japanese customers. Future plans include marketing operation in the whole Asia/Pacific region, with the Japanese subsidiary serving as the operational center. JETRO provided support through the Invest in Japan Study Program (IJSP), establishment procedures, the search for an appropriate site, and the provision of market information.

• New Star Digital, LLC
In February 2005, New Star Digital established a stock company in Japan to undertake an M&A transaction regarding a Japanese DVD manufacturer under court protection. Following the takeover, the company will make additional capacity investment in its principal plant in Ishikawa Prefecture in an effort to develop a system to supply products to worldwide markets. The company was initially housed in an IBSC to start operation in Japan. JETRO’s support included assistance in establishment procedures and the provision of M&A information in cooperation with the Development Bank of Japan.

• Encirq Corporation
Encirq Corporation develops various types of operating software for digital consumer electronics and similar products. Encirq established a Japanese subsidiary in November 2004 in Tokyo to develop business in the Japanese market for digital consumer electronics, a market that comprises around half of world demand. The company began operations as an IBSC tenant. The company received personnel search and market data support from JETRO. Encirq participated in the May 2005 US-Japan Investment Initiative programs in Nagoya and Chiba.

• On’e Technology LLC
On’e Technology manufactures and markets network security devices. On’e Technology established a limited company in September 2004 in Fukuoka as a development and manufacturing base in Japan to pursue the Japanese, Chinese, Korean, and Taiwan markets. On the occasion of its founding, the company became an IBSC Fukuoka tenant. JETRO’s support included help with the establishment process, search for an appropriate site, and providing market data.

 


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