June 27, 2001

1. Survey Objective

(1) Japan has made concerted efforts to open its markets through deregulation and other measures to contribute to the well-balanced development of the global economy and enhance the quality of life of Japanese citizens. It has also sought to increase imports through the adoption of several promotional policies.

(2) Under these circumstances, to advance constructive discussions about the Japanese official regulations and business practices for those industries in which a more open market is being requested by foreign countries and in those industries where there are price differences between the domestic and foreign markets, it is important to compare the actual conditions of official regulations, business practices and other factors in Japan to those of major European countries and the United States. It is also important to objectively identify the impact these factors have on market entry.

(3) This survey was conducted by the Japan External Trade Organization (JETRO), beginning in the 1995 fiscal year. We made international comparisons of actual data and analytical studies of official regulations, business practices and other features of certain specified industries. The results were then widely publicized, both inside and outside of Japan. The aim of the survey is to gather a broad range of opinions and provide materials to aid discussion of what would be the most desirable official regulations, business practices, etc.

2. Publicizing This Report

(1) In fiscal 2000, direct inward foreign investment were selected as the target industries of our survey. We have finished preparing these reports. This is why we are publicizing the results at this time.

The Targeted Industries Already Published:

(2) In fiscal 2001, Electronizaion and One-stop System of Trade Related Procedures and Medical Care and Welfare Services were selected as the industries to be the target of the new survey.

3. The Characteristics of the Survey Method

(1) Establishment of an Advisory Council

To implement this survey from an objective and international perspective, JETRO has established an Advisory Council consisting of wellｭknown academics from Japan and abroad. This Advisory Council is chaired by Professor Motoshige Ito of the University of Tokyo's Faculty of Economics. This council gives suggestions about the concrete implementation at the initial stage, comprehensively examines and evaluates the contents at the final stage, and drafts the final reports.

(2) International Comparisons

In order to compare and analyze official regulations, business practices and other factors in a specific industry, it is necessary to grasp the actual conditions of the official regulations and other facts. Therefore,

After clarifying the actual conditions of official regulations, business practices, etc. through these surveys, the survey results were analyzed and compiled.

[Members of the Advisory Council]

* Frans Andriessen

* Gary Saxonhouse

* David Flath

* Anil K. Kashyap

* Motoshige Ito (Chairman of the Advisory Council)

* Kyoji Fukao

A survey on "Direct Inward Foreign Investment" carried out in FY 1999, documented factors that would be obstacles or increase costs for foreign companies planning to begin operations in Japan, from the planning phase to the launch of operations. This new survey built on that survey to take as its main subject foreign companies that have begun operations in Japan and to focus on the problems they encounter after startup and the support services they need to facilitate operating in Japan.

Foreign companies that have begun operations in Japan, for example, are making a definite contribution to vitalizing the Japanese economy. A JETRO survey carried out in October 2000 found that 80% of foreign companies operating in Japan have added to their workforce since they were founded, and that over half are expecting an increase in sales in FY 2000.

A Ministry of Economy, Trade, and Industry survey has revealed, however, that while 73 foreign companies set up operations in Japan in fiscal 1998, 86 pulled out. What problems did they face after starting operations in Japan, what services will they need in the future?

From this point of view, we carried out a survey concerning the areas detailed below. The international comparison was carried out with the same countries as last time, the US, UK, Germany and France.

Hiring personnel and procuring funds are pointed out as problems for foreign companies doing business in Japan. While it is said that the environment for hiring personnel for foreign companies has improved, according to the JETRO survey cited above, as factors in the worsening of the business environment, the most companies (13.9%) stated the difficulty in securing capable personnel. Second was the difficulty in procuring funds (12.3%). On the other hand, in the Ministry of Economy, Trade, and Industry survey stated above, the high cost of business (65.5%), difficulty in hiring personnel (37.7%) and difficulty in procuring funds (20.5%) were given as problems faced when conducting business. Thus, this study primarily addressed employment and fund procurement as problems directly related to companies� activities.

Today, globalization of the economy, Japan's low birthrate and ageing society, and changes in individuals� attitudes towards work are producing new and more varied forms of employment, and Japan has no option other than to rethink its outmoded employment system, which is designed and operated on the assumptions of long-term employment and fulltime, regular employment. In particular, as foreign companies place emphasis on recruiting mid-career personnel that provide immediate capability, the establishment of matching functions and securing of fluidity in the external labor market are important points. According to the results of a survey of 1500 foreign corporations carried out at the end of 1999 by the Ministry of Health, Labour and Welfare, 55.0% of foreign companies responded that they mainly sought to hire people in mid career

Foreign companies in Japan mainly raise funds by having the parent company provide funds or borrowing from a bank in Japan. Listing on the stock exchange is also not a popular choice among foreign companies, because their parent companies, typically stressing consolidated financial statements and corporate governance, often will not wish their Japanese subsidiaries to make public offerings of their shares because they wish to retain a controlling interest in their Japanese subsidiaries. Recently, however, some foreign companies have sought listing on the stock exchanges in Japan, in cases in which the Japanese entity was highly independent or when ensuring a stable labor supply, winning market recognition as a Japanese company, or upgrading the company's credibility has been a greater priority. Therefore, this study has addressed securing bank loans and listing on the stock exchange in focusing on foreign companies� fund procurement issues.

As economies become global and corporate activity expands internationally, both trading partners and transaction formats are changing at an increasingly brisk pace. In this context, the risk of a dispute arising in connection with corporate activities is growing in Japan as in other advanced industrialized economies. The US government, for example, has noted, in a document stating its requests for regulatory reform, "The business community is most likely to commit capital and technology to markets with legal systems that are easily accessible and have sufficient and comprehensive legal services and reliable dispute resolution mechanisms."

Japan is thus conducting a broad review of its legal system and legal services, in the course of which many have asserted that it needs fuller and more vigorous use of ADR as a system for resolving civil disputes. Now that globalization, increasing use of information technologies, and other advances in technology are making disputes more varied, complex, and specialized, ADR offers promise as the primary means of settling disputes that the conventional legal system cannot adequately handle. Therefore, in addition to employment and fund procurement, ADR was added as a third area of inquiry in this study, which thus addresses factors impeding the development of ADR in Japan and measures for promoting it.

With two exceptions, all restrictions on the occupations that private-sector employment agencies can handle in Japan have been removed, and the number of private-sector employment agencies is increasing. However, the requirements for a permit to operate an employment agency are much stricter than in other countries. In particular, the Japanese requirement for providing a set number of supervisory agents based on the number of job seekers handled is not found in the other countries studied. While the security deposit required of Japanese employment agencies is not overly large compared with requirements in, for example, the US, the variety of documents that must be submitted to receive a license is large.

Japan also has such complex regulations covering how an employment agency provides services in other countries that few agencies, in fact, succeed in receiving permission to do so. It is, for example, the responsibility of the agency operator to submit a full set of the employment-agency-related laws and regulations of the other country, translated into Japanese. None of the other countries surveyed have a similar requirement. This undeniably constitutes an obstacle to offering employment agency services overseas.

Japan is, however, moving toward laying the legal infrastructure for Internet-based employment agency services, clarifying standards and relaxing its requirement that employment agencies conduct face-to-face interviews.

The temporary staff business, which helps make the labor force more fluid by providing personnel who can be deployed tactically at need, was effectively liberalized in the 1999 revision of the governing law, and the use of temporary workers has become easier for foreign corporations. Nonetheless, the prohibition on supplying temporary staff to manufacturers remains in place, and there is a gap between the maximum assignment for temporary workers in the 26 occupational categories authorized before the law was revised (3 years) and those in other occupations (one year). The occupations for which they are prohibited to supply temporary staff also include positions in medical care filled by physicians or nurses.

With the exception of Germany, the other countries surveyed have no similar regulations on temporary staff agencies. Both Germany and France do impose the same limit on the maximum length of assignment for temporary workers as Japan does and are less flexible than the US and the UK, which have no such limit. The one-year limit, according to survey results, is of little benefit to either the temporary worker or the employer. Japan also has detailed regulations governing everything from the ratio of managers to persons on assignment a temporary staff agency must have to the amount of floor space it must provide. Nothing similar was reported in the other countries studied.

In Japan, acquisition of the appropriate status of residence (effectively, a working visa) by a foreign engineer requires "a university degree or equivalent knowledge and ability" or "10 years or more of practical experience" and "compensation at the same level or higher than a Japanese individual." In February of 2001 Japan and India finally exchanged a memorandum of understanding concerning mutual certification of IT engineer examinations. Apart from that, Japan has no IT-related exceptions in its visa requirements for foreign engineers. The UK, the US, and Germany, however, all have established special visa provisions for IT engineers and other high-tech fields.

Despite official plans to increase the number of foreign students in Japan, the requirements for acquiring status of residence (effectively, a visa) are applied very strictly, and there are no systems in place to help foreign students in Japan find work after graduation. In the US, the UK, and Germany, outstanding foreign students are seen as valuable additions to the labor force and systems such as practical training periods or special measures are in place or under consideration for retaining them.

Many foreign residents working in Japan are obliged to participate in both their home country's and Japan's national pension system. This double payment problem, which signifies the lack of portability of public pensions, arises because Japan has public pension totalization agreements only with the UK and Germany. Since Japan has fewer totalization agreements than do the other countries surveyed, its lack of pension portability points to gaps in the necessary infrastructure for accommodating foreign workers.

Japan has no system for mutual recognition of physicians' licenses with other countries. Thus, graduates of medical schools in other countries or persons who have been licensed to practice medicine in other countries are not permitted to provide medical care in Japan. The advanced Western countries, by contrast, allow foreign physicians who have not acquired local medical licenses to practice if they meet certain conditions. Germany stands out among them in that it allows not only physicians from EU and EEA countries but also physicians from other countries (including developing countries) to practice, for limited periods of time.

Japanese corporate pensions system are designed and operated on the assumption of life-long or long-term employment. Thus, pensions are of the defined benefit type and virtually devoid of portability. (The Defined Contribution Pension Law was enacted in this Diet.) Many years of employment are required before a pension is vested, employees who leave before retirement age face difficulties in receiving pensions, and calculations of benefits (a lump-sum retirement payment plus the defined benefit pension) privilege longevity of employment, disproportionately reducing payments to those leaving before retirement age. These systems are an indirect obstacle to greater fluidity in the labor market, especially for middle-management-level personnel.

In Japan, dismissing an employee requires reasonable, objective grounds. Even if an employee is found, after being hired, to be unsuited for the work, it is extremely difficult to dismiss him or her on those grounds. Such strict regulations regarding dismissal may, it has been pointed out, lead companies to refrain from hiring people to avoid the risk of not being able to dismiss an employee once he or she has been hired. Similar strict regulations are not found in the other countries surveyed, where employees may be dismissed for incompetence. The period of notice before dismissal required in Japan is not unusually long compared with the UK or Germany, and Japan has relatively mild regulations on payments in lieu of notice, compared with the UK. The US has no national regulations on the period of notice or payments in lieu of notice.

In Japan, close-ended employment contracts have a maximum duration of one year. This restricts the flexibility of the employer's hiring options and is not, it is pointed out, advantageous to the worker. Neither the US nor the UK has restrictions on the duration of employment contracts. In Germany, close-ended contracts are limited to a maximum length of two years and in France to a maximum of 18 months with one renewal.

The standards for investigating creditworthiness in Japan stress the collateral the potential borrower can offer and the borrower's credit record; and it is said that companies� management plans and technologies are not always evaluated. Loan agreements by custom favor the banks, and resrictions apply to the size of company that can make use of a committed line of credit. In the US and the UK, collateral and guarantees are not the only factors given weight in assesing creditwortiiness; a full credit evaluation includes the potential borrower's financial status and growth prospects. The Western countries studies also do not have business customs that place banks in a priviledged position, as loan contracts with Japanese banks do, or similar restrictions on lines of credit.

Japan now has a more varied set of stock markets, following the founding of markets with more relaxed listing requirements, and the infrastructure to facilitate foreign companies� listing on them is taking shape. Documents related to listing must, however, be in Japanese and conform to Japanese accounting standards, and no support system (including attorneys) is in place to help those planning to list with the procedures, and these factors are obstacles to foreign.

Many Western countries use international accounting standards or US general accounting principles, and it is customary in the US, the UK, and France, to rely on the assistance of attorneys and accountants when planning to list on a stock exchange.

Legislation and policy measures to promote use of ADR in specific fields are being used in Japan, but there has been no new legislation to encourage the comprehensive use of ADR, including court-annexed ADR, and the position of ADR in the dispute resolution system is unclear. In the US, legislation and policy measures have promoted the use of court-annexed ADR for ten to twenty years. Furthermore, while several types of ADR are available for use in court-annexed ADR in the US, mediation is the only type used in Japan.

A variety of ADR institutions exist in the US, the UK, and France, from traditional to new; competition between them provides those who use ADR with better dispute resolution services. ADR does not have much of a track record in business disputes in Japan, however, and thus the decision makers in companies have little awareness of ADR and are unlikely to use it; the result is a vicious cycle. The need is growing for new ways to handle disputes arising from international transactions and Internet transactions, and a neutral ADR institution that can resolve disputes swiftly, at low cost, and flexibly over the Internet is needed.

In Japan, under the Lawyers Law, restrictions are placed on persons other than lawyers carrying out legal business related to ADR. In the US, however, it is possible to become a qualified mediator by completing a prescribed course of training and to function as a mediator, for compensation, without being a lawyer. In the US, the UK, and France, training in mediation skills is available for lawyers, and mediator training programs for non-lawyers and arbitrator training programs are also conducted. In comparison, Japan has almost no training or other programs to develop arbitrators and mediators.