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B. LARGE STORES LAW
1. INTRODUCTION
5.219 TheUnited States submits thatthesecond element oftheGovernment ofJapan'sliberalization
countermeasures wasthepromulgation, implementation, andapplication ofmeasures limiting theentry
andoperation oflargescaleretail stores. Restricting thepresence andoperations oflarge retail stores
wasnecessary inorder tosupport Japan'ssystemization policy, tolimitmarket access forimports,
andtolimitcompetition inthedistribution sector. Thispolicy wasstrongly supported byphotographic
filmandpaper manufacturers, distributors, andretailers. Underlying theirsupport wastherecognition
thatlarge stores aremore likely tocarry imported products thansmall stores, toprice more
competitively, andtobuydirectly frommanufacturers, withwhich theyhadgreater bargaining power.
5.220 FortheUnited States, theprincipal measure usedbytheGovernment ofJapan torestrict large
stores istheLawConcerning Adjustment ofRetail Business Activities byLarge Scale Retail Stores
(Large Stores Law), which became effective on1March 1974.241ThisLawregulates theopening
orexpansion ofretail stores withatotalretail floorspace inexcess of500square meters. Intheview
oftheUnited States, theLawsetsoutacomplicated notification andexplanation process which requires
builders andoperators ofproposed large retail stores tonotify theGovernment oftheirplans tobuild
orexpand alargeretail store, andtoexplain theplans tolocalretailers inthevicinity ofthenewstore,
withaviewtoobtaining theiragreement. IftheGovernment determines thattheproposed storeposes
ariskofadversely affecting nearby small andmedium retailers, itcanrequire theproposed store to
reduce itsfloor space, delay theopening ofthestore, orreduce thedaysandhours ofitsoperation.
5.221 According totheUnited States, theformal procedures established bytheLarge Stores Law,
andtheGovernment 'simplementation ofthelawhaveledtoaninformal process inwhich largestores
often areforced tonegotiate informal adjustments withlocalsmall andmedium retailers inorder to
ensure thatthelocalretailers willnotoppose thestoreintheformal process. Inaddition, several local
governments haveimplemented measures torestrict theentry oflarge retail stores intotheirareas.
5.222 Taken together, theadjustments thatflowfrom these measures decrease revenues anddelay
return oninvestment forstore operators andmayevendiscourage orblock outright theopening or
expansion ofnewretail stores. This results inrestricting thegrowth oflarge stores inJapan, the
oneviable alternative distribution channel forimported filmandpaper.
5.223 FortheUnited States, revisions totheLawfrom 1973 through 1990 inmostcases served to
strengthen theLaw'sregulation oflarge stores. Although since 1990, Japan hasmodified some of
theLaw'srequirements, under pressure from foreign governments, theLawcontinues tooperate to
effectively limitlarge scale retail stores. Inmost important respects, thelawtoday remains more
restrictive thanwhen originally enacted.242
5.224 ForJapan ,theUSclaim depends onatheory thatimported filmandpaper products aredenied
access toprimary wholesalers, andultimately, small retailers; thatlargeretailstores make direct-to-retail
salesefficient; andthatthegreater amount ofshelfspace inlarge stores increases thelikelihood that
imports willbedisplayed.
5.225 InJapan'sopinion, before addressing theUSfactual claims, twofundamental points mustbe
noted thatgotothelegalrelevance oftheUSallegations. Inthefirstplace, theprovisions oftheLarge
Stores Lawhavenothing todowithspecific products atall;rather, theyestablish anadjustment process
241Large Stores Law, LawNo.109of1973, USEx.74-4 andJapan C-1.
242TheUnited States argues thatwhen theLarge Stores Lawwasoriginally enacted, itonlyregulated stores withfloor
space inexcess of1,500 square meters. Now, however, itcovers allretail stores above 500square meters.WT/DS44/R
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fortheopening andexpansion oflarge retail stores. Thelawdoesnotregulate which products large
retailers cancarry nordoesit-withoneexception thatisactually favourable toimports -takeinto
account what products, much lesstheorigin oftheproducts, thataretailer sellswhen determining
whether andwhatadjustments arenecessary. There isabsolutely noconnection between theprovisions
ofthelawanddecisions byretailers, whether largestores themselves, orsmall andmedium-sized stores
within thevicinity, tocarry imported products. Accordingly, theLarge Stores Lawisincapable of
establishing unfavourable conditions ofcompetition withrespect toimported products. Moreover, the
Large Stores Lawhasinfactbeenliberalized significantly inrecent years. Thus, evenassuming that
theliberalization ofthelawwerefavourable forimports, theconditions ofcompetition under thelaw
aremore favourable nowthanatthetimeofanytariffconcessions onphotographic film. Itistherefore
impossible toconclude thatthelawtoday isupsetting competitive conditions relative tothosethatexisted
atthetimeofthose tariff concessions.
5.226 InJapan'sview, putting asidethesethreshold issues ofrelevance, theUStheory mustovercome
twofactual hurdles. First, theUnited States mustprove thatthecurrent operation oftheLarge Stores
Lawinfactseverely restricts thegrowth oflarge stores. TheUnited States failstomeetthisburden.
ThePanel must evaluate current Japanese measures inthelightofrelevant GATT provisions, i.e.,
itshould evaluate onlythepresent nature andoperation ofthelawincomparison withthose ofthe
past. ForJapan theevidence isquite clearthatthere isnocurrent meaningful limitation atallonthe
growth oflarge scale stores.
5.227 Second, Japan points outthattheUnited States mustprove bothconceptually andempirically
thatlarge stores aremore likely tocarry foreign brands offilmthansmall andmedium-sized stores.
InJapan'sview, theUnited States alsofailstomeetthisburden. Retailers, whether large orsmall,
choose thebrands theycarry tomaximize profit. ForJapan, there isnoreason tobelieve thatthesize
ofstores inanywaychanges theprofitability ofaparticular product. Therefore, theUnited States
failstoprove thatlarge stores aremore likely tocarry foreign brands offilmthansmall andmedium-
sized stores. Empirical dataalsoconfirms thatthere isinfactnocorrelation atallbetween thesize
ofastore anditspropensity tocarry foreign brands offilm.
5.228 Japan notes thattheUnited States alsoargues thattheLarge Stores Lawisusedtoprotect small
retailers thathavejoined thealleged exclusive distribution network ofdomestic manufacturers from
competition withlargeretail stores. InJapan'sview, thisUSargument failsforthefollowing reasons.
Thelawdoesnottakeintoaccount anything about thealleged exclusive distribution networks, about
thebrands small retailers carry, orabout thebusiness relationships between retailers andamanufacturer.
IftheLarge Stores Lawhadbeen enacted toprotect theaffiliation between small retailers and
manufacturers, itwould havebeendesigned inawaytoblock convenience store chains, which are
outside thealleged exclusive distribution network ofdomestic manufacturers, andwhich arecompeting
withsmall retailers thatmayhaveaparticular affiliation withdomestic manufacturers.
5.229 Finally, Japan points outthatitisimportant tonoteattheoutset thattheUSallegations regarding
theLarge Stores Lawapply onlytofilm. Photographic paper isnotaconsumer product andisnot
soldatretail, whether atlarge orsmall stores. Accordingly, thePanel should evaluate thislawonly
inrelation toitsalleged effect onimports offilm.
5.230 TheUnited States responds thattherestriction onthepresence andoperation ofthelargeretail
stores hasbeenanimportant policy objective forJapan inmaintaining anexclusionary distribution
structure based onthedomestic filmmanufacturers ’control ofprimary wholesalers, andinlimiting
animportantalternativechannelforimports.InresponsetoJapan’scontentionthatthereisnoconnection
between theLarge Stores Lawandtheretailers ’decision tocarry imports, theUnited States argues
thatnumerous studies conducted bytheJapanese Government recognized thatlarge stores aremore
likely tocarry imported products thansmall stores. Indeed ananalysis oftheJapanese survey conducted
forthiscaseshowed thatlarger stores aremore likely tocarry imported filmthansmall stores. TheWT/DS44/R
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United States further argues thatdespite recent changes tothelaw,Japanese Government studies by
theJFTC andtheManagement Coordination Agency demonstrate thatthecurrent operation oftheLarge
Stores Lawcontinues toseverely restrict thegrowth oflarge stores.
5.231 Withrespect totheapplication oftheLarge Stores Lawtophotographic paper, theUnited States
submits contracts negotiated between largephotospecialty stores andlocalretailers pursuant totheLarge
Stores Lawthatcontain commitments, among otherthings, totheeffect that"wewillnotinstall mini-lab
machines" andthat"[i]nthespirit ofco-existence andco-prosperity withareastores, wewillmatch
ourprices fordeveloping, colour printing, etc.,toareaprices."243Thelimitation ofpricecompetition
relating tophoto development andcolour printing andtheuseofmini-labs atretail outlets directly
affects salesofphotographic paper andchemicals.
2. LARGE STORES AND IMPORTS
(a) Import-friendliness oflarge stores
5.232 TheUnited States citesJapanese Government reports which haverecognized thatlargestores
aremorelikely tocarry imported products thansmall stores. Astudy bytheEconomic Planning Agency
in1989 found, "itisthelarge retail stores which handle imported products atahighratio"244,and,
topromote increased import competition, itcalled forrelaxation ofregulations affecting large-scale
stores.245MITI'sSmall andMedium Enterprise Agency alsofound aclearcorrelation between store
sizeandimports inasurvey of4,600 stores thatitconducted inDecember 1995: "Examined byannual
sales, theratioofstores 'handling [imported products] 'getslarger asthesalesincrease".246Inaddition,
theUnited States submits asurvey demonstrating thatlarge stores aremore likely tocarry foreign
film. According tothissurvey, foreign filmisavailable in40percent ofstores under 500square meters,
49percent ofstores between 500and2,999 square meters, and63percent ofstores 3,000 square meters
andgreater.
5.233 According totheUnited States, onereason thatlarge stores carry more imports, isthatthe
greater amount ofshelfspace inlargestores allows themtocarry more diverse brands, andthisproduct
diversity increases opportunities forimports. TheEconomic Planning Agency study concluded that
increased shelfspace meant greater opportunities forimports.247Similarly, astudy bytheGovernment
Regulation andCompetition Policy Research Council oftheJFTC inJune, 1995noted thatrestrictions
onlarge stores limited product diversity.248
5.234 Japan responds, however, thatretailers, whether largeorsmall, choose thebrands theycarry
tomaximize profit; there isnoreason tobelieve thatthesizeofstores inanywaychanges the
profitability ofaparticular product. Therefore, theUnited States failstoprove thatlarge stores are
more likely tocarry foreign brands offilmthansmall andmedium-sized stores.
243Agreement andMemorandum between Tokyo Zenren, Branch Office No.9andYodobashi Camera K.K., 31January
1990, USEx.90-3.
244Research Related toImports andPrices, Economic Planning Agency, 1989, p.5,USEx.89-1.
245Ibid. p.10.
246Small andMedium-Sized Retailer DataBook, Small andMedium Enterprise Agency, Ministry ofInternational Trade
andIndustry, December 1,1995, p.9,USEx.95-19. TheUnited States alsorefers toastudy commissioned bytheEconomic
Planning Agency in1994, Present Condition andClarification ofPrice Destruction, Price Destruction Problem Research
Council, August 1994, p.7,USEx.94-12. Seealso: Economic Planning Agency, Planning Bureau, Research Related to
Imports andPrices, 1989, USEx.89-1; JFTC Government Regulation andCompetition Policy Research Council, Concerning
theReevaluationofGovernmentRegulationsintheDistributionSector,June1995,USEx.95-11;JFTC,ResearchonDomestic
andImport Products SoldatLow Price, June 1995, pp.29-30, USEx.95-10.
247Research Related toImports andPrices, Economic Planning Agency, 1989, p.11,USEx.89-1.
248SeeConcerning theReevaluation ofGovernment Regulations intheDistribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p.7,USEx.95-11.WT/DS44/R
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5.235 InJapan'sview, further general propositions that"large stores aremorelikely tocarryimported
products" arenotparticularly relevant tothisproceeding, since thisPanel isnotreviewing theLarge
Stores Lawingeneral. Theonlyrelevant issuebefore thisPanel istheeffect thelawhasonaspecific
product: consumer photographic film.
5.236 Japan further argues thatifoneconsiders theincentives facing individual retailers, itbecomes
clear thatoverall retail space hasnoeffect onthedecision tocarry multiple brands offilm. Japan
underscores thatfilmisjusttoosmall aproduct forspace tobeamaterial consideration intheretailer 's
decision.
5.237 Even instores thatselllargevolumes offilm,thespace usedtosellfilmisquitelimited: often
onlyasingle square meter andrarely reaching above 3square meters. With retail space devoted to
filmranging from0.04to9.92square meters andaveraging only1.44square meters asindicated by
asurvey249,therange ofpossible variation isfartoosmall fortotalstore areatobeameaningful
constraint onpurchasing decisions.
5.238 Accordingly,JapanarguesthatthevariousstudiescitedbytheUnitedStatesassertingthegeneral
"import friendliness" oflargestores, which wereallmacro levelreviews ofimport trends fordifferent
retail segments, donottakeintoaccount thespecific business realities forfilm. Furthermore, none
ofthose studies makes anyattempt tosupply anystatistical datainsupport ofthecontention thatlarge
stores generally aremore likely tocarry imported products thansmaller stores. ForJapan, thePanel
hasanobligation tofocus onthespecific products atissue inthisproceeding, andneednotresolve
orevenaddress themacro levelquestion ofwhether largestores buymoreimported products ingeneral.
5.239 TheUnited States responds thatJapan doesnot,asitcannot, refute theevidence inmany
Japanese Government reports thatlarge stores aremore likely tocarry imports. Instead, according
totheUS,Japan attempts toargue thatfilmissomehow different from allthemany products inits
previous surveys finding thiscorrelation between store sizeandimports.
5.240 TheUnited States further argues thatthefactthatfilmisasmall product isirrelevant tothe
correlation between storesizeandimports. Retail stores arefilled withmany different types ofsmall
products, andwhile asingle rolloffilmmight nottakeupmuch room, carrying different types and
speeds offilmfrom several manufacturers takes upconsiderable retail space.250Itisnotthesizeof
theproduct thatmatters, butthesizeofthedisplay fortheproduct inallitsvariations andcompeting
brands thatistheissue. TheUnited States citesanexample concerning Japan'slargest photospecialty
retailer toshow thatadownward revision offloorspace plans foranewstore affected theretailer 's
ability tomarket foreign filmasithadplanned.251
249MITIsurveyedthe10departmentstoresandthe10chainstoreswiththelargesttotalsalesinJapan.Thissurveyindicates
thateven large stores usually devote thesame amount ofsmall retail space tofilmasdosmall stores (Japan Ex.C-19).
Another MITI phone survey covering 60large stores showed anaverage ofonly1.44square meters ofretail space devoted
tofilm(Japan Ex.C-20).
250TheUnited States argues thatafulldisplay ofKodak filmwould include, ataminimum, 100,200,400,and1000
ASAcolour film,inrollsof12,24and36exposures, forslides andforprints, aswellasblack andwhite filmand"multipacks"
combining rollsofdifferent speeds, andsingle-use cameras. Inthecolour filmproduct linealone, Kodak offers thefollowing
items: super Gold in100,200,400,and1600 -insingle rolls(12,24,35and36exposures), and2,3,or5rollpacks; Royal
Gold in25,100,and400-insingle rolls(24and36exposures), and2,3,or5rollpacks, Ectochrome Dyna in50,100,
200,and400-insingle rolls(24and36exposures), and5and20packs; Chrome in25,64and200insingle rolls(24and
36exposures), and3and10packs; single usecameras infivedifferent varieties including anewAPSversion.
251Letter from Akikazu Fujizawa, President, Yodobashi Camera K.K. toDirector General Tohoku Region Trade and
IndustryBureau,MITI,MembersoftheTohokuCommitteeandLargeRetailStoreDeliberationCouncil,ReportfromYodobashi
Camera toMITI concerning theopening oftheir newRetail Store inSendai, 6December, 1996, USEx.102.WT/DS44/R
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5.241 Japan responds thatretailers donotnecessarily display afull-line ofonebrand. They may
sellapartial lineofseveral different brands based upontheirownbusiness decisions astowhich products
andwhich brands willmaximize profit. Thus, evensmall convenience stores maycarrymultiple brands,
while large stores donotnecessarily havealarge areadevoted tofilm.
5.242 Further, Japan points outthatalthough theUnited States presents aletter from thePresident
ofYodobashi Camera insupport ofitsclaim, intheletter, thePresident notes thattherealreason for
cutting backontheshelfspace forimported filmisthepoorsalesrecord ofimported film,notitsforeign
origin; moreover, infact,Yodobashi Camera isactually selling imported filmcurrently.
5.243 TheUnited States further argues thatJapan’sowndataaffirmatively supports aconnection
between storesizeandpropensity tocarry imports. Inresponse toaquestion fromtheUnited States
atthefirstPanel hearing, Japan provided theUnited States andthePanel withtherawdatafrom its
survey, which Japan claims show acorrelation between salesvolume andimport availability. Each
ofthestores intheJapanese survey wereclassified under theLarge Stores LawasClass Istores, Class II
stores, orsmaller than500square meters. TheUnited States performed twoanalyses using thesurvey
datathatJapan hadnotperformed. Thefirstanalysis examined therelationship between store size
andforeign filmavailability;252thesecond examined therelationship between storesizeandvolume
offilmsold.253Theresults ofthefirstanalysis confirmed theUScontention thatlarger stores aremore
likely tocarry foreign filmthansmaller stores.254Inthesecond analysis, thedatashowed acorrelation
between store sizeandthevolume offilmsold. Thus, Japan’sargument thatlarger volume stores
tendtosellmore imports supports theUSargument thatlarger sizestores tendtosellmore imports.
(b) Large stores anddirect sales from manufacturers
5.244 TheUnited States argues thattheGovernment ofJapan alsohasfound thatlarge retail stores
aremore likely thansmall stores todealdirectly withmanufacturers, andthatcutting outthewholesaler
lowers prices forconsumers. TheUnited States refers toastudy bytheJapan FairTrade Commission
inApril, 1995 which noted thisgreater likelihood ofchain stores anddiscount stores todealdirectly
withmanufacturers inhighvolume transactions.255TheUnited States alsoquotes the1989Economic
Planning Agency report which concluded thatthetraditional wholesaler-to-small-scale-retailer route
impeded imports andkeptprices high.256Furthermore, aReport bytheSmall andMedium Enterprise
Agency ofDecember 1995indicated thatthelarger thestore, themorelikely itwastoprocure itsimports
directly from suppliers abroad, rather thandealing through theregular wholesale channels.257
5.245 TheUnited States further notes thattherestriction onthepresence andoperation oflargeretail
stores hasbeenanimportant policy objective forJapan inmaintaining anexclusionary distribution
structure based onthedomestic filmmanufacturers ’control ofprimary wholesalers, andinlimiting
animportantalternativechannelforimports.TheUnitedStatesrecallsthatthe1969surveyoftransaction
terms sponsored byMITI noted thatthephoto filmindustry "hasestablished adistribution system where
oligopolistic manufacturers lead," andcitedtwothreats tothissystem: "Asfuture problems, wecan
citefirstthegrowth ofretail routes (especially regular chains andsupermarkets) other thanthephoto
retail route andchanges intransaction terms duetothisleadership, andsecondly theeffects offull
participation byEastman Kodak. ...When thisshare [theshare offilmsalesbysupermarkets] becomes
252Second Panel Meeting, USOpening Statement, Exhibit 8.
253Second Panel Meeting, USOpening Statement, Exhibit 9.
254IntheUSview, theresults ofthesurvey submitted bytheUnited States andtheJapanese survey arenearly identical.
(USFirst USSubmission, Figure 12andSecond Panel Meeting, USOpening Statement atExhibit 8).
255Research onDomestic andImport Products SoldatLow Prices," JFTC, June 1995 p.1,USEx.95-10.
256Research Related toImports andPrices, Economic Planning Agency, 1989, USEx.89-1.
257Small &Medium-Sized Retailer Data Book, Small andMedium Enterprise Agency, Ministry ofInternational Trade
andIndustry, December 1,1995, p.10,USEx.95-19.WT/DS44/R
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larger, influence overmanufacturers willgrow, andthemarket system controlled bythemanufacturers
willbeshaken. Thismustbemonitored carefully, andtheindustry itself must develop competitive
activities."258TheUnited States further notes thatthe1969Survey stated thatalthough the"All-Japan
Federation ofPhoto Dealers, known asZenren," which isatradeassociation consisting ofmostly small
photospeciality retailers, "hasimposed pressure onothers inorder tomaintain itsposition", therise
of"general merchandise store--forexample aregular chain supermarket" canposeaserious challenge
"asanewdistribution route."259
5.246 InJapan 'sview, theUSargument presupposes thattherelationship between retailers andtheir
suppliers (either wholesalers ormanufacturers) differs depending ontheretail space oftheretailer.
Thisassumption, however, doesnotreflect themarket reality ofJapan. Tomaximize profit, every
retailer, whether large orsmall, procures those goods itchooses tocarry either directly orthrough
wholesalers frommanufacturers. Inthissense, itisnotmore difficult forimported filmproducts to
besoldtosmall andmedium-sized retailers thantolarge-scale retail stores. First, small retail stores
donotnecessarily procure goods through wholesalers. Forexample, convenience stores havegrown
significantly.260Forallofthese convenience store chains, which areoutside thescope oftheLarge
Scale Retail Stores Law, manufacturers candealdirectly withonedecision-maker andimmediately
reach thousands ofoutlets. Inaddition, foreign filmproducts caneasily findwholesalers intheJapanese
market toreach small andmedium-sized retailers. Also, nothing prevents newwholesalers fromdealing
inimported filmproducts.
(c) Large stores andimported film
5.247 TheUnited States claims thatforeign suppliers 'experience intheJapanese filmandpaper
market bears outthatlarge stores aremore likely tocarry imported products andtoprice them more
competitively thansmall stores. Asurvey commissioned in1995 byKodak ofover2,000 outlets for
filmin144citiesrevealed thatforeign film(including Kodak, Agfa, andotherforeign film)wasavailable
in40percent ofsmall stores (those lessthan500square meters) ascompared to63percent oflarge
stores (those over3,000 square meters). Thisrelationship between higher availability ofimports and
sizeofstorehasbeenconsistent overtime. According tofigures compiled byamajor industry journal,
inevery yearthatthefigures werepublished (i.e.,1979, 1980, 1982, 1983and1984), Kodak 'smarket
share bystore sizewashighest inthelarge sizestores.261
5.248 TheUnited States further submits thattheKodak survey alsoshowed thatprices forfilm,both
foreign anddomestic, werelower inthelargestores. Instores withfloorspace over500square meters,
theprice ofKodak filmwaslower forallthree filmtypes surveyed: ASA 100,ASA 400,andASA
100multipacks. Thispattern oflower prices forimported filmwasrepeated fordomestic film. The
average prices ofsingle-roll Fuji100ASA, single-roll Fuji400ASA, andmultipack Fuji100ASA
werelower inlarge stores thanthecomparable prices instores notsubject tosuchmeasures. Agfa's
experience alsosuggests thatlarge stores offergreater market access forforeign products. Agfasells
almost halfofitsfilminJapan toasingle customer: Daiei, Japan'slargest supermarket chain.
5.249 InJapan ’sview, what amarket survey shows isnotthecompetitive relationship between
products, buttheresults ofmarket competition, which isgenerated from thecomplex interaction of
258Institute ofDistribution Research, Fact-Finding Survey Report Pertaining toTransaction Terms: Actual Conditions
ofTransaction Practices intheWholesale Industry, March 1969, p62-63, USEx.15.
259Ibid.
260Japan explains thatithasmore than48,400 convenience stores, andmore than80franchise chains ofconvenience
stores (Census ofCommerce, Store Type: Retailers, 1994, p.8).Theleading convenience store chain hasmore than6,300
outlets andalmost 1,500 billion yeninannual sales, which isalmost equivalent tothatofthesecond largest general market
store (Nikkei Ryutsu Shimbun, September 16,1996, p.1,Japan Ex.C-21).
261Camera Times, May15,1979, p.49,USEx.79-5; Ibid., April 29,1980, p.50;April 27,1982, p.61,USEx.82-4;
3May1983, p.45andMay1,1984, p.45,USEx.84-2. Thisseries doesnotappear tohave beencontinued after1984.WT/DS44/R
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various factors, among which thecompetitive relationship isnomore thanonefactor. Thus, the
competitive relationship cannot bededuced frommarket survey results. Further, Agfa’ssuccess with
Daiei, alleged bytheUnited States, mayhaveresulted fromAgfa’sconcentration ofitsbusiness effort
onDaiei, andhasnological connection tothelarge retail space ofsome ofDaiei’sstores. Also, in
addition tolarge stores, Daiei operates anumber ofsmall andmedium-sized stores.
5.250 Japan further rebuts thatitishardtoknow exactly howtheresults showing apositive correlation
between store sizeandthefrequency ofcarrying foreign filmwere reached, since theUnited States
never explains howthesurvey segmented stores ofdifferent retail space.262Italsoappears thatthe
Kodak survey innowaycontrolled foreither thevolume offilmbeing soldthrough thespecific outlets
surveyed orthetypeofoutlet. Inother words, thecategory "under 500square meters" appears to
beheavily populated withverysmall volume kiosks andother low-volume outlets thatmight havelittle
motivation tocarry more thanasingle brand filmtomaximize profit from thesales offilm. The
categories "500-3,000 square meters" and"over 3,000 square meters" reflect verydifferent types of
retail outlets.263
5.251 TheUnited States explains thatitcategorized stores bysize;eachstore waschecked against
published listings ofclass Iandclass IIstores under theLarge Stores Lawinthetwoleading
directories.264Based onthese directories, eachstore wascategorized asclass I,class II,orneither
(i.e., under 500square meters). Thesurvey therefore checked filmavailability instores ineachof
these threesizecategories. Theresults show aclearcorrelation between storesizeandtheavailability
offoreign film.
5.252 Inresponse totheJapanese Government claim thattheKodak survey didnotcontrol forthe
volume offilmbeing soldthrough specific outlets orthetypeofoutlets surveyed, theUnited States
performed another runofitsdatausing storetypeasaproxy forsalesvolume. Specifically, theUnited
States sorted itsdataontheassumption that:(1)kiosks, small convenience stores, pharmacies, and
cleaners werelikely todealinsmall volumes offilm;(2)largeconvenience stores, convenience stores
attourist sites, andgrocery stores were likely todealinintermediate volumes offilm; and
(3)photospecialty stores, supermarkets, anddiscount stores werelikely todealinthelargest volumes
offilm.These datashow thatthecorrelation between storesizeandimports holds evenwhen controlling
forsalesvolume (i.e., these store types).
5.253 According toJapan ,these oversights bytheUnited States arenotminor; theyfundamentally
undermine thereliability oftheUSanalysis. Thevolume offilmbeing soldbytheoutlet depends
onwhether theoutlet isactually marketing filmorjustoffering filmasaconvenience. Themore the
outlet ismarketing filmasaparticular product line,themore likely theprofit maximizing outlet might
bemotivated toofferconsumers themaximum choice, andthuscarry multiple brands. Inevery market
intheworld, when theretail outlet isjustoffering filmasaconvenience, theoutlet might beunlikely
tocarry more thantheleading brand offilm. NowintheUnited States, thatleading brand isKodak;
inJapan, thatleading brand isFujifilm.
262ForJapan, nothing intheAffidavit ofSusan Hester, USEx.97-9, thatexplains howtheUnited States disaggregated
thedatabystoresize. Inparticular, theHester Affidavit onlydescribes howKodak constructed itsoriginal availability survey.
Itprovides noexplanation atallhowthedatawasdisaggregated intostore types. Since thequestionnaire provided inthe
affidavit doesnotaskforanydataonthestore size, itappears Kodak mayhave simply usedsome unstated assumption to
classify stores, rather thanactually surveying retail outlets onthebasis ofretail space.
263Japan alsonotes thattheageofsome data, which theUnited States admits aretaken from magazine articles, makes
them irrelevant forassessing thecurrent operation oftheLarge Stores Law. Moreover, theauthors ofthearticles themselves
notethat"itshould benoted thatthisquestionnaire survey might notreflect thetotalobjective figures because ofthestock
volume andthenumber ofsamples atthetimeoftheinquiry" (Camera Times, 3May 1983, p.45,USEx.83-10).
264Toyo Keizai ’s1996 Comprehensive ListfortheNational Large Scale Retail Stores (Zenkoku Ogata Kouriten Soran
1996) andSangyo Times Comprehensive ListofLarge Scale Store Plans (Ogataten Keikaku Soran 1996).WT/DS44/R
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5.254 Japan submits thatMITI conducted itsownanalysis andfound thefollowing:
Percentage ofRetail Outlets byStore Size
Carrying Foreign Brands
Volume Sold Under 500m2Over 500m2
under 300rolls 16.3% 26.1%
301to1,400 rolls 35.0% 29.8%
over1,400 rolls 71.8% 72.6%
5.255 Intheview ofJapan, these results provide nosupport atallfortheUStheory, butdoin
factconfirm what common sense would predict. Themore filmsoldbytheoutlet, themore likely
theoutlet istocarry foreign brands. Inhigh-volume outlets, whether theyarecovered bytheLarge
StoresLawornot,theoutletsmightbeverylikelytocarryforeignbrands265.Conversely,inlow-volume
outlets, whether theyarecovered bytheLarge Stores Lawornot,theoutlet might bemuch lesslikely
tocarry foreign brands.
5.256 Japan further argues thatacloser examination ofthesubset ofdataincluding onlylarge scale
stores -164outlets outoftheuniverse of1,966 outlets -reveals other interesting patterns. Logically,
theUnited States argument thatthemore retail space inastore, themore likely theoutlet istocarry
foreign brands, isnotplausible. Astore'sdecision ownwhether ornottostock imported filmisbased
onwhether ornotaparticular product willsellandmake aprofit forthestore, andhasnothing to
dowiththeLarge Stores Law. Itisnotcredible toargue thatinasmaller store aretailer could not
findafewsquare meters (orless)onashelftostock imported filmiftheretailer believed doing so
tobeinitscommercial interest.
5.257 Japan submits afigure which plotstheretail space ofthelarge scale stores from theNippon
Research Survey against thetotalvolume offilmsales. Onecanseethatthere isnocorrelation at
allbetween thetotalvolume offilmsoldandfloor space. Large stores donotnecessarily sellmore
film. Thefigure thenplotsthepercentage offoreign brand availability ateachlargestore. Once again,
oneseesnoparticular pattern -either inthelikelihood ofcarrying foreign brands (i.e.having adata
point greater thanzero) orinthesuccess offoreign brands (having alarger share ofthefilmsales
attheoutlet).
5.258 Based onthese facts, itisclearforJapan thattheLarge Stores Lawinnowaydisadvantages
imported consumer photographic film.
5.259 TheUnited States rebuts thatthecorrelation between astore'svolume offilmsalesandits
likelihood ofcarrying foreign filmandthecorrelation between astore'ssizeanditslikelihood ofcarrying
foreign filmarenotmutually exclusive, ifastore'svolume ofsalescorrelates withitssize.Alarger
storeisalsomore likely tohavealarger volume offilmsalesandtocarry foreign film. TheUnited
States submits thattheJapanese claim thatitsstudy ledtodifferent results fromtheUSstudy isfalse.
Japan never analyzed itsdatacorrelating storesizeandtheavailability ofimports. Suchananalysis
oftheJapanese databytheUnited States reveals thatstores subject totheLarge Stores Lawwere
significantly more likely tocarry foreign filmthansmall stores, andstores subject totheLarge Stores
Lawsellsignificantly higher volumes offilmthanstores notsubject totheLaw. TheUnited States
therefore argues thatJapan’sdatashowing acorrelation between import availability andoverall sales
volume alsodirectly support acorrelation between import availability andstore size.266
265Within thissample, thehigh-volume range represented 92.8percent ofthetotalvolume offilminthissample. Foreign
availability isthusgreatest where itmatters most.
266Second Panel Meeting, USClosing Statement, 3June 1997, USEx.8and9.WT/DS44/R
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5.260 TheUnited States further argues thatasageneral matter, largestores havelarger volume sales,
andthatJapan hassubmitted nocredible datatoshow thatthislogical correlation doesnotapply in
thecaseofphotographic film.Instead, intheviewoftheUnited States inthefigure referred toabove,
Japan presents anunusable diagram, withanunusable scale, based onindefensible methodology, from
which noconclusion canbedrawn.267
5.261 TheUnitedStatesconcludesthatJapanhasrefutedneitherthegeneralstudiesnorthefilm-specific
study showing aclear correlation between store sizeandlikelihood todealinimports.
5.262 Japan responds thatbothofthetwosurveys themselves indicate nomeaningful difference in
theimported filmavailability atphotospecialty stores, supermarket stores, anddiscount stores --stores
selling ahighvolume offilm--regardless ofwhether thestoresizeisabove orbelow 500square meters.
Theremaining stores --notmajor distribution channels offilm--consist ofconvenience stores and
kiosks forthemostpart,andshow lower availability ofimported film. Thus, theUSclaim isfarfrom
themarket reality. Stores selling ahighvolume offilm, forexample photospecialty stores and
supermarket stores, arelikely tocarry multiple brands tomeettheirconsumers ’demand, while others
likekiosks tendnottodoso.
3. BACKGROUND AND PURPOSE OFTHE LARGE STORES LAW
5.263 TheUnited States argues thatlarge stores posed achallenge totheGovernment ofJapan's
policy ofsystematizing distribution intovertically aligned, exclusive channels dominated byJapanese
manufacturers. Thepurchasing power oflarge stores would allow them tobargain withwholesalers
ordirectlywithmanufacturersforthebesttermsandoperateoutsideavertically-integrated,manufacturer-
dominatedstructureandwouldbringgreaterpricecompetitiontothemarket,contrarytotheGovernment
ofJapan'saimofmaintaining stable prices tomaximize profits fordomestic manufacturers. Inaddition,
limiting pricecompetition allowed theinefficient, small retailers, whoweretheeasiest to"systematize"
under thecontrol ofdomestic manufacturers, tosurvive. Finally, thelarge stores 'greater ability to
carry foreign products andtoby-pass thedomestically-controlled distribution system todealdirectly
withforeign manufacturers threatened thebasic underlying purpose ofdistribution systemization:
supporting Japanese manufacturers. Japan, therefore, sought tolimittheproliferation oflarge stores
asawaytosupport manufacturer domination andcontrol ofdistribution aswellastoprotect small
retailers.
5.264 Japan ,however, notes thattheLarge Stores Lawdoesnotregulate retailers based upontheir
relationship withmanufacturers. Ifthepurpose ofthelawwastorestrict those retailers withenough
purchasing power todirectly dealwithmanufacturers, astheUnited States alleges, thelawwould impose
restrictions onretailers based upontheaggregate priceoftransactions withmanufactures orsome other
measure toserve thispurpose. Thelawimposes nosuchrestrictions because thelawisindifferent
torelationships between retailers andmanufacturers.
5.265 TheUnited States rebuts thattheconcern thatlargestores would undermine themanufacturer-
dominated distribution system comes through clearly ina1969 survey oftransaction terms inthe
photographic sector. According totheUnited States, thesurvey describes theJapanese filmindustry
asastable oligopoly oftwodomestic manufacturers andthephoto filmindustry ashaving "established
267TheUnited States submits thattomake thisdiagram, Japan discarded 1,802 ofits1,966 responses, andplotted the
diagram based onlyon164cases consisting ofthose stores inthesample thatwere over500square meters. Japan therefore
makes noattempt, intheviewoftheUnited States, tocorrelate sales volume andstore sizewithrespect tothevastmajority
ofthestores inthestudy thatarelessthan500square meters. IntheUSview, itisnotpossible toproduce asound study
ofstore sizeandsalesvolume while categorically excluding small stores. Even withrespect tothe164stores inthediagram,
Japan usessuchalarge scale forthehorizontal axisthatmost ofthedatapoints endupinablack smudge crammed into
thelower leftcorner ofthediagram. This, intheview oftheUnited States, allows fornomeaningful conclusions atall.WT/DS44/R
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adistribution system where oligopolistic manufacturers lead". Thesurvey alsoidentifies the"growth
ofretail routes (especially regular chains andsupermarkets) other thanthephoto retail route" andthe
"effects offullparticipation ofEastman Kodak" asfuture problems.268TheUSalsosubmits thatin
several other surveys, theGovernment ofJapan hasdrawn aconnection between thegrowth oflarge
stores andachallenge tovertically integrated distribution.269
5.266 Japanchallenges theUScharacterization ofthe1969Report byexplaining thatthereport simply
notes theneedforexisting stores tostreamline commercial practices toimprove theirefficiency, even
setting aside theissue ofwhether thereport waslegitimized bytheGovernment ofJapan.
5.267 Furthermore, theUnited States responds thatJapan failstomention thatconvenience stores
under 500square meters frequently aresubjected toreview andadjustment under measures applied
bylocalgovernments. According totheUnited States, Japanese government studies havefound that
theselocalregulationscontinuetobewidespreadandthattheyimposeasignificantburdenontheopening
ofstores oflessthan500square meters. Justasunder theLarge Stores Law, thelocal measures
frequently require abuilder orretailer toprovide advance notice ofitsplans toestablish orexpand
anewstore andundertake adjustments withlocal competitors. TheUnited States citesanexample
where theretailer feltcompelled toenterintoanagreement withalocalshopping centre association.270
5.268 Japan responds thatMITI hasundertaken significant efforts inrecent years toensure that
additional localregulations arenotexcessive orinconsistent withtheLarge Stores Law. Inthisrespect,
theagreement citedbytheUnited States isapurely private action anddoesnotdemonstrate theintent
ofthegovernment; thereisnogovernment requirement foranystoreopeners --whether largeorsmall
andmedium-sized --tonegotiate withlocalretailers, because Japan hasmade acontinual effort todetect
andcorrect suchlocalrules.
5.269 TheUnited States further submits thattheGovernment ofJapan wasparticularly concerned
thattheabove effects would multiply significantly iflarge foreign retailers wereallowed toenter the
Japanese market. Large foreign retailers hadthecapital strength toestablish quickly amajor presence
intheJapanese market onceJapan lifted investment restrictions inthedistribution sector. Their large
sizewould ensure thattheycould dealwithJapanese manufacturers directly andonthemostcompetitive
terms. Inaddition, theirestablished relationships withforeign manufacturers would allow them to
introduce more foreign products intotheJapanese market, andtousethisaccess toforeign products
asastrong bargaining chipwithdomestic manufacturers.
5.270 Japan responds, however, thatfirst,there isnoreason toconsider thatretail stores operated
byforeign capital aremore likely tocarry imported brands. Second, theLarge Stores Lawdoesnot
discriminate against foreign retailers infavour ofdomestic retailers. Infact,numerous foreign retailers
haverecently opened inJapan.
5.271 TheUnited States citestwoofJapan'sleading antitrust scholars, oneaformer andoneacurrent
senior official oftheJapan FairTrade Commission, whonotethatrelatively sparse competition in
distribution hadprevented price competition among Japanese manufacturers onthedomestic market,
268TheUnited States indicates thatJapan submitted aversion ofthesurvey edited andrepublished byMITI in1971, which
differs inseveral important respects from theoriginal. TheUnited States quotes from theoriginal (USEx.15).SeeJapan
Ex.B-1,p.309.
269TheUnited States citestheEconomic Planning Agency, Economic Theory ofDeregulation, 10June1989, USEx.
64andDistributionandBusinessPracticesofImports,EditedbythePricePolicyDepartment,PriceBureau,EconomicPlanning
Agency, 28March 1986, USEx.54.
270Theagreement, among other things, limited theretailer 'sfloorspace, mandated certain holidays andclosing times,
restricted theretailer 'sability to"sellcompeting products atasignificantly discounted price, andrequired theretailer to
advertise onbehalf ofitscompetitors". Arrangement between ANewRetail Store andtheLocal Shopping Centre Association,
1996, USEx.93.WT/DS44/R
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thusstabilizing prices271.These scholars alsonoted theprotective effect ofavertically integrated
distribution system:
"Distribution keiretsu ...maywork toforeclose theaccess offoreign products into
theJapanese market. Amanufacturer 'sdominant position might workasadisincentive
fordistributors tolower their prices. Adistributor 'sdependence onaparticular
manufacturer would make distribution channels exclusive andraise entry barriers
significantly."272
5.272 According totheUnited States, MITI'sIndustrial Structure Council understood thatlargestores
could challenge thevertically integrated distribution structure thatitspolicy reports aimed tocreate.
InitsNinth andTenth Interim Reports (1971 and1972), theCouncil acknowledged thatlarge stores
could improve distribution efficiency inJapan, butopted instead forapolicy ofrestricting largestores
infavour ofsupporting small andmedium retailers. Although theCouncil 'sconcerns extended toall
types oflarge retail stores, itwasmostconcerned about theadverse effects thatlarge, foreign retail
storescouldhavedirectlyonsmallandmediumretailersandindirectlyonthegovernment'ssystemization
policy.Specifically,intheNinthInterimReport273,theCouncilrecommendedonlylimitedliberalization
intheretail sector, andthatmeasures betaken toprotect small andmedium retailers from large or
chain retailers inlightofforeign capital liberalization.274IntheTenth Interim Report, theCouncil
developed thispolicy further, again stressing theneedtoprotect small andmedium retailers inlight
offoreign capital liberalization.275
5.273 IntheviewofJapan ,however, theUnited States citesnotasingle shred ofevidence insupport
ofitsallegation thattheLarge Stores Lawwasenacted asa"liberalization countermeasure" designed
toimpede imported products -especially photographic film. ForJapan, acareful review oftheUS
citations ofstatements thatsupposedly document theprotectionist purpose oftheLarge Stores Law
reveals thatnotoneofthem hasanything todowiththeexpected effect ofthelawongoods atall,
much lessconsumer photographic film. ForJapan, theNinth andTenth Interim Reports ofthe
Distribution Committee discuss competition between large andsmall retailers, andspecifically ways
topromotethecompetitivenessofsmallretailers.Thereisnothingsuggestingconcernaboutcompetition
between domestic andforeign products.
5.274 Japan argues thattheUnited States triestocreate theimpression thattheLarge Stores Law
"represents asystematic andelaborate plantoobstruct [Japan 'strading partners] market access" through
"onepotentially significant alternative distribution channel" forimported consumer photographic film.
Thisargument ignores theactual operation ofthelawandimplies afocus onproducts thatsimply does
271SeeTheAntimonopoly Laws andPolicies ofJapan, H.Iyori andA.Uesugi, Federal Legal Publications, Inc., 1994
p.293, USEx.94-1.
272Ibid., p.107.
273Distribution forthe1970s, Ninth Interim Report, Industrial Structure Council Distribution Committee, July1971,
p.64,USEx.71-9.
274Ibid., p.68(emphasis added).
275TheUnited States quotes thefollowing from Retail Business Under Distribution Reforms: TheDirection ofRevising
theDepartment Stores Law, Tenth Interim Report, Distribution Committee oftheIndustrial Structure Council, USEx.72-3:
"[I]n lightoftheinternational conditions following thecurrency crises, andeconomic demands formodernization ofthe
distribution system, itisnecessary toadvance liberalization instages inaccordance withtheprogress being made inthesmall-
andmedium-scale retailers countermeasures" (p.82).
"Attempts should bemade tofurther strengthen andexpand small andmedium-sized retail policies. Forexample, legislative
measures needtobeexplored topromote small andmedium-sized retailers. Active subsidies should begiven tosmall and
medium-sized retailers forvarious independent andcooperative modernization efforts forthestrengthening ofmanagement.
Theseeffortsarebeingdonetocountertheanticipatedadvancementofgiantforeigncapitalintothedistributionsectorfollowing
full-scale capital liberalization aswellas[tocounter] thedevelopment ofvigorous nation-wide activities oflarge-scale retailers,
including department stores andsuper chain stores" (p.88,emphasis added).WT/DS44/R
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notexist. TheLarge Stores Lawdoesnotregulate particular products. Thepurpose oftheLarge Stores
Law, asclearly stated inArticle 1,is
"tofoster thesound development ofthenational economy. Toachieve thatend,giving
dueconsideration totheprotection ofconsumers interests, theLawallows forthe
adjustment ofretail business operations inlarge-scale retail stores, thereby ensuring
thatsmall andmedium-sized retailers operating within theirvicinity enjoy reasonable
opportunities forbusiness, andthattheretailing sector asawhole achieves sound
development".276
Thus, theLarge Stores Lawdoesnotaddress thesaleofconsumer photographic filmintheJapanese
market.
5.275 Japan submits thatlikemany countries around theworld (such astheUnited Kingdom)277,Japan
would likeitsdomestic market tohaveavariety ofsmall, medium, andlargescaleretailers toprovide
consumers withthemaximum degree ofchoice. Similarly, communities inJapan careabout themix
ofdifferent business usesintheirneighbourhoods.
5.276 Japan explains thatwhile many other countries useapermission system, thefunction ofthe
lawinJapan istoprovide adjustments, when necessary, toensure thatnewlarge store openings are
consistent withcontinued retailing diversity. TheLarge Stores Lawaccomplishes itsobjective through
anotification andcoordination system forlargescaleretailers. Large retailers areobligated toprovide
requisite notification oftheirplans; theymaythenproceed withthose plans unless itisdecided that
some adjustment isnecessary. Aspartoftheadjustment process, theLarge Stores Lawallows the
governmentoccasionallytorecommendmodificationsincertainoperatingcharacteristicsupontheopening
orexpansion ofthelarge store. Thestatute andregulations permit onlyfouradjustment parameters:
(1)retail space, (2)opening day,(3)closing time, and(4)storeholidays. TheLarge Stores Lawdoes
notregulate whatproducts alarge store decides tocarry.
5.277 According toJapan, determinations under thelawareinnowaybased onwhich products,
ortheorigin oftheproducts, thataparticular largestoredecides tocarry. Likewise, thereisnoreason
tothink thataparticular retailer 'sproduct purchasing decisions would beinanywayinfluenced by
anyofthepossible adjustments under thelaw.Insum,theLarge Stores Lawisincapable ofestablishing
unfavourable conditions ofcompetition withrespect toimported products. Theonlyinstance inwhich
product origin isconsidered atallintheprocess actually treats foreign products more favourably than
domestic products.278
5.278 TheUnited States responds toJapan’sclaim thattheLarge Stores Lawdoesnotinfluence
theproducts thatlarge retailers carry bysubmitting evidence showing thatprospective large retailers
enterintoagreements withexisting localmerchants thatlimitthetypes ofproducts thattheprospective
retailer maysell.279
5.279 Japan alsoargues thatdecisions under thelawaremade taking account ofcertain qualitative
andquantitative factors, noneofwhich isrelated towhether thelarge store atissue, orsmall stores
276Large Stores Law, Article 1,Japan Ex.C-1.
277SeePlanningPolicyGuidance:TownCentresandRetailDevelopments,DepartmentoftheEnvironment,UnitedKingdom,
revised PPG6, June 1996, Article 1.1,Japan Ex.C-2.
278When calculating theretail space oftheretailer todetermine whether itfallsunder theLarge Stores Lawcoordination
process, upto1,000 square meters ofretail space devoted toimported products istaken outofthecalculation.
279Seepara. 5.243.WT/DS44/R
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inthevicinity, carry particular products, much lesstheorigin oftheproducts theycarry.280Similarly,
thefouradjustment parameters under thelaw-retailspace, opening day,closing time,andstoreholidays
--havenoconnection toaretailer 'sdecisions regarding which products tocarry orwhether tostock
domestic orimported brands. Accordingly, noneofthefouradjustment factors alters thecompetitive
relationship between imported anddomestic products.
5.280 Japan further submits thatithaslongregulated large stores topreserve retailing diversity.
Thispolicy concern longpredates thecapital liberalization ofthe1960s and'70s.Thehistory ofthe
origin andamendment oftheLarge Scale Retail Stores Lawmakes itclearthatthelawconcerns retailing
services, anddoesnotaddress particular products.
4. PROCEDURES UNDER THE LARGE STORES LAW
5.281 TheLarge Stores Lawregulates theopening andexpansion oflarge-scale retail stores above
500square meters infloorspace. Stores above thatthreshold aredivided intotwocategories: Class
Istores, withmore than3,000 square meters offloorspace, which areregulated byMITI; andClass
IIstores, withmore 500square meters andlessthan3,000 square meters offloor space, which are
under thejurisdiction oftheprefectural governor.
5.282 TheUnitedStatesexplainsthatthekeyproceduresunderthelawcurrentlyincludethefollowing.
5.283 Article 3Notification -Parties planning tobuild oropenalarge scaleretail storemustsubmit
anotification, which includes theproposed floor areaofthestore, planned opening date, andarea
surrounding thebuilding, atleast12months before theproposed completion andopening ofthenew
store orexpanded retail store toMITI ortheprefectural governor (appropriate authority).
5.284 Local Explanations -Within fourmonths afterfiling theNotification, thebuilder orretailer
mustexplain theplans forthestoreopening, i.e.,thename ofthestore, floorarea,opening date,closing
times, andnumber ofdaysclosed, firsttoMITI, theprefectural governor, localgovernment officials
inthecityortownwhere thebuilding willbelocated, theChamber ofCommerce andlocalmerchants '
associations (collectively "Chamber ofCommerce"), andthentolocal medium andsmall retailers,
retailers associations, andconsumers.281After thelocalexplanations, theappropriate authority must
postanotice astowhether thestorewillbesubject to"adjustment".282Theretailer maynotcommence
business untilseven months afterthedateofthisnotice.283
280Thefactors considered arethefollowing:
(i) qualitative factors:
(a) protection ofconsumers 'interests;
(b) effects onsmall andmedium-sized retailers andcommercial integrations within thevicinity;
and
(c) local "community development"; and
(ii) quantitative factors:
(a) theshares oflarge scale retail stores inarelevant municipality;
(b) thelevel ofretail space percapita;
(c) local population trends; and
(d) theinflux andoutflow ofcustomers.
SeeDeliberation Procedures, Section I,Japan Ex.C-4.
281ForClass Istores, MITI determines theareainwhich thelocal explanation should bemade aswellasthegroups to
whom theexplanation should bemade. Theprefectural governor decides theprocedures forClass IIstores (Guidance for
Local Explanation forClass IStores thathaveSubmitted aNotification foraNewBuilding, Directive No.93,1April 1994,
USEx.94-7).
282Large Stores Law, Article 3(2), USEx.74-4.
283Large Stores Law, Article 4.WT/DS44/R
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5.285 Japan ,however, explains thatapublic briefing istobegiven totheChamber ofCommerce
andIndustry (oralternatively, theCommerce andIndustry Association), consumers orconsumers ’
unions, andlocalretailers ortheirassociations. Thepurpose istohelptheLarge Stores Council form
itsviews based upon well-informed opinions. Further, theappropriate authority mustpostanotice
afteranArticle 3Notification isfiled, rather thanafterapublic briefing iscompleted.
5.286 Article 5Notification --TheUnited States notes thatatleastfivemonths before theopening
ofaneworexpanded large scale store, theretailer must submit anArticle 5Notification tothe
appropriate authority.284Theauthority thendetermines whether theproposed storeposes theriskof
asignificant effect onnearby small andmedium retailers 'business activities, andmayrecommend
thatthestore reduce salesfloor space, and/or delay opening date.285
5.287 Large Store Council Recommendation -Iftheappropriate authority determines thatelements
oftheproposed planposeariskofsignificant effect, itrefers theitems tothenational (inthecase
ofClass Istores) orprefectural (inthecaseofClass IIstores) Large Store Council, which isanofficial
advisory body toMITI andtheprefectural governors, respectively.286TheCouncil mustsubmit the
results ofitsdeliberations totheappropriate authority.287
5.288 JapanpointsoutthatunderArticle7.2oftheLargeStoresLaw,inordertoconductdeliberation,
theCouncil musthearviews fromtheChamber ofCommerce andIndustry (oralternatively, Commerce
andIndustry Association), consumers orconsumers ’unions, andlocalretailers ortheirassociations.
5.289 Recommendations andOrders -TheUnited States submits thatafterreceiving theLarge Store
Council 'sviews, theappropriate authority maysubmit recommendations tothepersons proposing the
large scale store, among other things, delay thestore'sopening orreduce itsfloor space.288Ifthe
store doesnotfollow therecommendation, MITI mayorder ittodoso.289
5.290 According totheUnited States, theentire process fromtheArticle 3Notification through the
completion ofthereview and"adjustment" process issupposed totakenomore than12months.290
Inaddition tothe"adjustments" thatmaybeapplied tolarge stores onacase-by-case basis, theLarge
Stores Lawrequires alllargestores toclose foraminimum of24daysperyearandby8:00p.m.each
working day(except stores maypetition tostayopenuntil9:00p.m.forupto60daysperyear).291
5.291 Japan remarks, however, thatthisassertion isfactually incorrect. Japan rebuts thattheLarge
Stores Lawdoesnotobligate large stores toclose nolessthan24daysperyear, ornolaterthan
284Large Stores Law, Article 5.
285Large Stores Law, Article 7(1).
286Large Stores Law, Article 7(1). Councils generally arecomprised ofacademics, business persons, press, andconsumer
representatives, ofwhich thelocal retailers generally arethemost influential. TheCouncil must seektheopinion ofthe
Chamber ofCommerce orother business organizations, retail organizations, retailers andconsumers. (Large Stores Law,
Article 7(2), USEx.74-4, JFTC Council Report, pp.16-17).
287Large Stores Law, Article 7(1), USEx.74-4. According totheUS,theexamination ofanewstore bytheLarge Store
Council isbased uponmathematical formulas forcomparing theCommercial Population andlarge scaleretail storeOccupation
Rateofonecitywithsimilar cities. See,Large Store Council Decision, Investigatory Procedures fortheAdjustment of
theBusiness Activity ofLarge Scale Retail Stores, 14November 1991, USEx.91-4. TheUSemphasizes thatthequantitative
approach allows theLarge Store Council toration retail space. Japan disagrees because initsview quantitative factors are
never determinative. Seetranslation issue 11.
288Large Stores Law, Article 7(1).
289Large Stores Law, Article 8(1).
290TheApplication oftheLawRegarding theAdjustment ofBusiness Activities ofLarge Scale Retail Stores, Directive
No.90,1April 1994, USEx.94-8.
291Enforcement Regulations fortheLawRegarding theAdjustment ofBusiness Activities ofLarge Scale Retail Stores,
MITI Ministerial Order No.17,27February 1974, USEx.74-2, Article 10(2), asrevised byMinisterial Order No.33,
1April 1994 andArticle 3oftheSupplementary Provision forMITI Ministerial Order No.33,1April 1994, USEx.94-6.WT/DS44/R
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8:00p.m. Thelawonlysubjects them tothenotification andadjustment procedures iftheyoperate
beyond these thresholds. Further, inpractice, 12percent ofnotified stores close after10:00 p.m.292
and89percent ofnotified stores close lessthan20daysperyear; 22percent ofnotified stores close
lessthan10daysperyear.293
5. EVOLUTION OFTHE REGULATION OFLARGE STORES
5.292 Intheview oftheUnited States ,theGovernment ofJapan imposed andprogressively
strengthened restrictions onlargestores, andinmostimportant respects, theLawtoday remains more
restrictive thanwhen originally enacted. TheUnited States argues thattheGovernment ofJapan's
efforts torestrict large stores tocounter theeffects oftrade andinvestment liberalization proceeded
instages. After theclose oftheKennedy Round, MITI issued three directives tostrengthen the
Department Stores Law,which hadexisted since1956. When thedirectives proved ineffective atclosing
theloopholes forlargestoreexpansion, MITI recommended in1972, andtheDietpassed thefollowing
year,theLarge Stores Lawasanexpansion andreplacement oftheDepartment Stores Law. TheLarge
Stores Lawhasbeenrevised several times.
5.293 JapanrespondsthatwhateverrestrictionsareimposedonlargestoresbytheLargeStoresLaw294,
andwhatever thelegal relevance ofanysuchrestrictions295,thefactremains thatthelawhasbeen
significantly liberalized inrecent years andismore liberal today thanatanypoint intherelevant past.
Accordingly, thelawtoday cannot beupsetting competitive conditions withrespect toimported film.
5.294 TheUnited States rebuts, however, thatthelawhasnotbeensignificantly liberalized inrecent
years. FortheUnited States, theLawtoday doescurrently suppress large stores, asdescribed further
below (seeSection VII), anditisalsoimportant thatJapan aggressively imposed restrictions onlarge
stores inthepast. Without these strong measures against large stores, itisquite possible thatlarge
stores would havebrought sufficient bargaining power andcompetition intotheJapanese distribution
system toerode theexclusive vertical control overdistribution exercised byJapanese manufacturers.
(a) Department Stores Law
5.295 TheJapanese Dietenacted theDepartment Stores Lawin1956296to,interalia,"secure business
opportunitiesforsmallandmediummerchantsbyadjustingthebusinessactivitiesofdepartmentstores".297
Itprohibited theopening ofa"department store" withfloor space inexcess of1,500 square meters
unless theretailer obtained apermit fromMITI298,which MITI could denyifthestorewould "affect
thebusiness operations ofsmall andmedium merchants andposeasignificant riskofinjuring their
interests".299
5.296 TheUnited States submits thatbythelate1960's,theDepartment Stores Lawnolonger
accorded adequate protection tosmall retailers because large stores were evading itsapplication by
292SeeArticle 9-1oftheLarge Stores Law, Executive Regulations Regarding theLawConcerning theAdjustment of
Retail Business Operations atLarge Scale Retail Stores, 27February 1994, Article 10.2, Japan Ex.C-10.
293SeeArticle 9-2oftheLarge Stores Law, LSRSL Executive Regulations Article 10.4, Japan Ex.C-10.
294Asdiscussed below, theLarge Stores Lawascurrently administered doesnotrestrict theopening oflarge stores. See
Section VII.B.4. below.
295Asdiscussed above, theLarge Stores Lawisnotconcerned withanyparticular products. Therefore, regardless of
howrestrictive orliberal theLarge Stores Lawwasandis,thelawisincapable ofestablishing unfavourable conditions of
competition withrespect toimported products.
296TheDepartment Stores Law, LawNo.116, 23May 1956, USEx.56-2 andJapan C-3.
297Article 1,Department Stores Law.
298Article 3,Department Stores Law. Thethreshold was3,000 square meters incities designated byministerial ordinance.
299Article 5,Department Stores Law.WT/DS44/R
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creating so-called "pseudo-department stores".300MITI closed thisloophole onJune7,1968byissuing
adirective, which mandated thatsuchentities obtain department storepermits.301When small retailers
continued tocomplain, MITI issued asecond directive inSeptember 1970, which further limited the
entry andbusiness activities oflarge stores, byinter alia,requiring thatthey"make appropriate
adjustments withthelocalretailers regarding newstoreexpansion, advertising, bargain sales, number
ofdaysclosed, andhours ofoperation".302MITI issued athirdDirective inOctober 1972303,which
instructed large stores torespect localbusiness "customs" andtonot"disturb theorder intheretail
[market]" byusing aggressive salespromotions.304
5.297 TheUnited States explains thatultimately, however, MITI recognized thatissuing directives
tosupplement theDepartment Stores Lawwasinsufficient. Accordingly, initsTenth Interim Report,
MITI'sIndustrial Structure Council called forreplacing theDepartment Stores Lawwithanewlaw
thatwould apply toalltypes oflarge scale retail stores, notjustdepartment stores.305
5.298 TheUnited States alsosubmits thatconcern fortheeffects oflargestores waswidespread among
Japanese industry, particularly among consumer goods industries suchasthephotosensitive materials
sector. Inthissector, manufacturers, wholesalers, andretailers shared acommon interest inopposing
largestores. Inthemid1960s, thefilmmanufacturers, thewholesalers, andthephotospecialty retailers
worked together tofindways tocounter bargain salesbythelarge stores. Atameeting in1964, the
threegroups agreed tocooperate andsetupajointinvestigation committee todevelop countermeasures
for"bargain salesoffilmbysupermarkets".306Ata1964meeting ofthemanufacturers, wholesalers,
andretailers endeavoured todetermine which primary distributors wereselling filmtoDaiei, thelargest
supermarket chain, atadiscount price.
5.299 Themanufacturers, wholesalers, andretailers continued working together against thediscount
stores andsupermarkets inthelate1960s. Ameeting ofthethree groups onFebruary 14,1969again
focused onDaiei andtheproblem raised byits"cheap priceattack". Eachofthethreegroups committed
todoitsparttoattack theproblem. Thewholesalers tookaction afewmonths later, onNovember
1,1969,whentheFederationofPhotosensitiveMaterialsWholesalers(Shatokuren)issuedthe"Directive
Regarding theSupermarket Problem "toitsmembership to"maintain order intheindustry".
5.300 TheUnitedStatesclaimsthattheseactionstakenbythemanufacturers,wholesalers,andretailers
inthephotographic materials sector show theconcerns large stores raised throughout Japan:
manufacturers wereconcerned bylargestores 'lowprices; wholesalers wereconcerned about thelarge
stores 'ability tobypass themorbargain forbetter terms; andretailers, ofcourse, wereworried about
increased competition. TheGovernment ofJapan tookaction toaddress these concerns firstby
strengthening theexisting lawrestricting department stores. When thatproved inadequate, the
Government replaced thelawwiththemore comprehensive Large Stores Law.
5.301 Japan points outthattheUnited States offers statements ofconcern byphotographic industry
representativesconcerninglargestores’pricingpolicies--nothing,however,abouttheirallegedtendency
tocarry imported merchandise. Further, Japan explains that,astheUnited States itselfnotes, theLarge
300Stores established "pseudo-department stores" bycreating legal identities forseparate sales floors thatwere below
theDepartment Stores Law'sfloor space threshold.
301Directive No.941, Guidance Considering Pseudo Department Stores, 7June 1968, USEx.68-6.
302Directive 1759, Concerning theConstruction and/or Expansion ofSpecified Stores, 28September 1970, USEx.70-6.
303Directive No.971,Concerning theConstruction and/or Expansion ofSpecified Stores, October 1972, USEx.70-6.
304MITI History, Volume 13.USEx.78-2 and78-5.
305Tenth Interim Report, p.4,USEx.72-3.
306TheEstablishment oftheCountermeasures Committee -Photo-sensitive Materials Three-Party Liaison Meeting to
DealwithAggressiveSupermarkets,CameraTimes,1October1963,USEx.63-3.KinkiDistrictThree-Party[Manufacturers,
Wholesalers, Retailers] Market Countermeasures Council -Daiei Bargain Sales -¥120 for36Exposure Black andWhite
Film, Camera Times, 21April 1964, USEx.64-2.WT/DS44/R
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Stores Lawwaspreceded bytheDepartment Store Law. Bythelate1960s, however, thislawwas
failing tomeetitsobjective, bothduetotheemergence ofnewtypes oflargestores (e.g., supermarkets)
andthedeliberate circumvention ofthelawthrough division ofasingle large storeintoanumber of
subsidiaries thateachfellbelow the1,500 square meters threshold. AstheUnited States notes, MITI
firstattempted tosupplement thelawthrough aseries ofanti-circumvention directives; intheend,
however,itwasdecidedthattheDepartmentStoreLawshouldbereplacedwithalawthatdealsexplicitly
withallkinds oflarge stores.
(b) Enactment oftheLarge Stores Law
5.302 IntheviewoftheUnited States ,thepurpose oftheLarge Stores Law307wastoprotect small
stores from competition andtohelptheJapanese distribution system restructure toresist foreign
competition.FormerPrimeMinisterandthenMITIMinisterYasuhiroNakasoneemphasizedthispurpose
during aDietproceeding onJuly19,1973:
"[T]he Government isabout toprovide thorough andgenerous measures tosmall- and
medium-sized companies. With regard totheproblems ofinternationalization and
liberalization, wearenotdoing thistoosuddenly, wearenurturing andnourishing
thesmall-andmedium-sizedcompanies'resistancesoastoprovidethemwiththeability
toambush [foreign capital], soweareimplementing liberalization inastep-by-step,
gradual fashion.
Aspartofthispolicy toincrease resistance [toforeign capital], wehavedecided to
amend theDepartment Stores Lawinorder tomake adjustments tothebusiness
operations ofdepartment stores, supermarkets andtheretail industry".308
5.303 Japan notes, however, thatthesequotations address thecompetitive challenge posed byforeign
companies (large retailers) tosmaller Japanese retailers andthere isnomention ofthecompetitive
challenge posed byforeign products. Japan alsonotes thattheNakasone statement neither indicates
theactual purpose ofthelaw,norreflects the"subjective intent" ofthegovernment atthetimeofits
enactment.
5.304 TheUnited States further explains thatconcurrently withthepassage ofthelaw,MITI issued
Directive No.123ofFebruary 28,1974, which elaborated procedures applicable totheLarge Store
Council review process andformalized theroleoflocalretailers ininfluencing whether anewlarge
storewould besubject to"adjustment". Over time, changes inthelaw,administrative measures, and
practices, would greatly strengthen thisinfluence.
5.305 According totheUnited States, implementation oftheLarge Stores Lawhadanimmediate
andnegative effect onthegrowth oflarge stores. Forexample, Daiei, Japan'slargest supermarket
thenandnow, attributed itsdownturn inprofitability, inpart,tothenewlaw. Theapplications for
newstores declined byoverone-third from 399applications in1974 to264in1976.
5.306 Japan submits, however, thattheDepartment Store Lawimposed more restrictive regulations
onlargeretailers thantheLarge Stores Law. Specifically, theDepartment Store Lawrequired entities
toobtain permission tooperate a"department storebusiness", which itdefined asabusiness operating
307TheUnited States notes thatanother lawofrelated concern istheLawonSpecial Measures fortheAdjustment of
Retail Businesses (Commercial Adjustment Law), LawNo.155of1959, 23April 1959, USEx.59-1, which applies tostores
notcovered bytheLarge Stores Law.
308Kanpo, 71,DietCommerce Committee Session, Upper House DietRecord, No.52,19July1973, USEx.73-2. The
United States argues thaton13September 1973, Minister Nakasone further confirmed thatthebillformed partoftheplans
putforth bytheIndustrial Structure Council torestructure thedistribution sector.WT/DS44/R
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more thanoneretail store withretail space inexcess of1,500 square meters. Inaddition, thelaw
prohibited those entities engaging ina"department store business," from opening retail stores,
irrespective ofthesizeoftheirretail space, without apermit from MITI. Nevertheless, itdidnot
regulate largeretail stores withretail space inexcess of1,500 meters, ifallretailers initindependently
operated theirownstores eachofwhich hadretail space nomore than1,500 square meters. This
regulatory scheme created acircumvention problem. Tosolve thisproblem, theLarge Stores Law
regulates notlarge retailers, buttheopening oflarge retail store structures inwhich more thanone
retailer mayoperate, andtheopening andoperation ofretailers operating insuchstructures.
5.307 Japan emphasizes twodifferences between thetwolaws. TheDepartment Store Lawregulated
theopening ofsmall stores iftheywereoperated byacompany which operates more thanonelarge
store, while theLarge Stores Lawdoesnot. More importantly, theLarge Stores Lawhasadopted
anotification andcoordination system, which islessrestrictive thanthepermission system ofthe
Department Store Law.
(c) 1979 Revisions totheLarge Stores Law
5.308 TheUnited States submits thataftertheconclusion oftheTokyo Round, theprocess of
strengthening measures against large stores tookonnewurgency. ThePhotospecialty Retailers
Association, along withother retail groups, strongly supported amendments totheLarge Stores Law.
5.309 TheDietamended theLarge Stores Lawon15November 1978, withtheamendments effective
onMay14,1979.309Themostimportant changes totheLarge Stores Lawinthe1979 amendments
were: (1)tolower thethreshold forstores covered bytheLawfrom1,500 square meters to500square
meters; and(2)todivide large stores intotwoclasses -Class Istores (1,500 square meters andabove)
under MITI jurisdiction, andClass IIstores (500upto1,500 square meters) under theregulation of
theprefectural governors.310
5.310 TheUnited States explains thatlowering thethreshold bytwo-thirds swept awhole newgroup
ofstores under theLaw, andgiving theprefectures authority overClass IIstores significantly increased
thepersonnel andother resources available toinvestigate andorder adjustments tolarge stores. A
veritable explosion innotifications forlargestores occurred in1979, mostattributable tonotifications
forthenewly-covered Class IIstores. However, implementation oftheLarge Stores Lawamendments
soon succeeded insuppressing Class IIstores, asshown bythedecline inthenumber ofClass II
notifications from 1,029 in1979 to424in1980, to308in1981.311
5.311 Simultaneously withtheMay1979 amendments totheLarge Stores Law, MITI issued a
Ministerial Order which reinforced theroleoftheCommerce Adjustment Board, thebodyrepresenting
localretailers andother trade associations.312
309Large Stores LawRevision, LawNo.105of1979, 14May1979, USEx.74-4. TheUnited States argues thatduring
theinterval between Dietpassage oftheamendments andtheirentry intoeffect, theGovernment ofJapan anticipated, and
tookadministrative actions toprevent, aninflux ofnewstores intended toavoid thestrengthened Law. Directive No.205,
SelfRestraint Regarding theRush forConstruction andExpansion ofNewStores, 13March 1978, MITI History, Volume
13,p.525,USEx.78-2. TheUnited States alsocites: Directive No.564,SelfRestraint Regarding theRush fortheExpansion
andBuilding ofNew Stores, 3July1978, MITI History, Volume 13,p.525, USEx.78-5.
310LawNo.105of1978, USEx.78-1.
311TheStatus ofLarge Scale Retail Store Notification, Explanation oftheLarge Scale Retail Stores Law, p.16-17, US
Ex.94-9.
312Enforcement Regulations, Article 8(2), MITI Ministerial Order No.38,11May1979, MITI History, Volume 13,
p.528, USEx.79-2.WT/DS44/R
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5.312 MITI Directive No.365313created "prior adjustment" and"formal adjustment" processes.
Theprioradjustment process tookplace aftertheArticle 3Notification (store construction) andbefore
theArticle 5Notification (store opening). TheUnited States explains thattheideawasfortheretailer
toseekconsensus among those involved intheadjustment process (e.g.,thelocal retailers inthe
Commerce Adjustment Board) before theformal adjustment process, which began aftertheArticle
5Notification. Successful prior adjustment negotiations would leadto"smooth" formal adjustment
procedures based ontheunderstandings reached during prior adjustment". IntheviewoftheUnited
States, theDirective thusinstitutionalized notjustconsultation butnegotiation withlocalinterests as
partofthelarge store opening process. Because oftheimportance toalarge retailer ofensuring a
successful "prior adjustment" process, many large retailers began tocoordinate withlocalinterests
inadvance ofeventheirinitial Article 3Notification.314
(d) 1982 Administrative measures under theLarge Stores Law
5.313 According totheUnited States ,although thestrengthened Large Stores Lawhadanimmediate
effectinsuppressingopeningsoflargestores315,Japanesemanufacturers,wholesalers,andsmallretailers
continued tofearthethreat ofincreased price competition fromlarge stores. Large-scale stores had
developed newstrategies suchasselling products produced bysecondary andforeign manufacturers
under thestore'sownbrand name atdiscount prices ("private brand" strategy). Also, alliances with
foreign manufacturers wereparticularly attractive because imported goods werebecoming increasingly
cheaper asaresult oftheappreciating yenanddecreasing tariffrates. Small andmedium retailers reacted
forcefully tothese threats.
5.314 TheUnited States explains thatinresponse tocontinuing concerns about thethreat oflarge
stores, MITI in1982implemented newadministrative measures under theLarge Stores Lawtofurther
severely tighten restrictions ontheopening ofnewlarge stores. MITI instituted, through Directive
No.36,a"priorexplanation"requirementtoprecedethebuilder'sArticle3Notification,whichobligated
thenotifier toconsult with, andobtain theconsent of,localretailers before submitting itsArticle 3
Notification.316Thepractical effect ofthepriorexplanation process wastoforcethebuilder tonegotiate
"adjustments" withlocalretailers before ittookthefirstformal stepunder theLaw, aswasconfirmed
bytheJFTC 'sJune1995 report.317
5.315 InDirective No.36,MITI alsomandated thattheadjustment process "becarried outina
restrictive manner"318,stating thatinsome cases large stores should begiven direct instructions "to
exercise 'selfrestraint '",i.e.,toscale backorabandon theirplans.319From 1981 to1982, almost
every store thatattempted toopenwasreportedly forced toexercise selfrestraint.320
313Directive No.365,TheOperation oftheCommerce Adjustment Board, MITI History Volume 13,p.528,USEx.
79-2.
314MITIalsolengthenedtheLargeStoresLawadjustmentprocessbyissuingDirectiveNo.366,ObligatoryActionPursuant
totheImplementation Regulations fortheLawPertaining ToAdjustment ofBusiness Activities oftheRetail Industry for
Large Scale Stores, Directive No.366, 11May 1979, USEx.79-4.
315Notifications forClass Iretail stores dropped precipitously from 576in1979 to132in1982. ForClass IandClass
IIcombined, notifications dropped from 1,605 in1979 to402in1982 (TheStatus ofLarge Scale Retail Store Notifications,
Explanation oftheLarge Scale Retail Stores Law, pp.16-17).
316Directive No.36,Immediate Measures Regarding Notification toEstablish Large Scale Retail Stores, 30January 1982,
USEx.82-2andJapan C-16. Japan disagrees withtheUSinterpretation oftheDirective No.36.Seetranslation issue 13.
317Concerning theReevaluation ofGovernment Regulations intheDistribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, pp.18-20, USEx.95-11.
318Immediate Measures Regarding Notification toEstablish Large Scale Retail Stores, Directive No.36,30January 1982,
USEx.82-2.
319Ibid.
320Footnote onpage53ofZaidan Hojin Nihon Sogo Kenkyujo, TheEffect ofLarge Scale Retail Stores onMetropolitan
Areas, February 1983, USEx.83-5.WT/DS44/R
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5.316 According totheUnited States, theresults oftheDirective werestriking. By1983, newlarge
storenotifications hadfallen by75percent from1979 levels, from 1,605 to401,andstayed atthese
lowlevelsthroughoutthe1980's.Evenmorenotable,thenumberofnotificationsforClassIandClassII
stores combined hovered throughout the1980'satlevels typical forClass Istores alone before the
1979 amendments created Class II.Thus, MITI inthe1980'ssucceeded inrestraining openings of
allstores above 500square meters tothelevels typical inthe1970'sforstores above 1,500 square
meters.
5.317 TheUnited States citesparticular cases where photospecialty retailers entered intoagreements
withlocalretailers orretailers associations toillustrate howthisrestrictive application ofthelawaffected
thephotographic materials sector andofhowtheprocess oflocalconsultation andprior adjustment
instituted bytheGovernment ofJapan under theLarge Stores Lawgives localretailers power toextract
restrictive conditions from large stores. TheUnited States citesthefollowing examples:
- InNovember of1982, DoiCamera, alarge photospecialty retailer attempted toopenastore
intheShibuya section ofTokyo, butwasstopped bytheformation ofagroup composed oflocalretailers.
TheTokyo Metropolitan government issued administrative guidance which ledtoanagreement between
Doiandlocal retailers. Thisagreement included aprohibition against expansion ofthesales floor
areainitsShibuya store, andarequirement thatit"negotiate ingood faith[with thelocal dealers]
ifthemarket environment were tochange inthefuture".
- OnJune4,1983, theLarge Stores Lawwasusedtoforce theSakuraya electronics and
photospecialty storetoenter intoanagreement withtheTokyo branch ofthePhotospecialty Retailers
Association inorder toopenalargestoreintheShinjuku section ofTokyo. According totheagreement,
Sakuraya was,among other things, "prevented fromexpanding itsstorespace without consulting local
dealers," andprohibited from wholesaling andin-house photoprocessing".
- OnFebruary 28,1989, Yodobashi notified theTokyo Metropolitan government ofitsintent
toopenaClass IIstore inHachioji City, Tokyo. TheTokyo 9thbranch announced itsopposition to
Yodobashi 'splans anddemanded thatitwithdraw them immediately. After aseries ofunsuccessful
meetings withtheleader oftheFederation 'sTokyo 9thbranch office andofmeetings oftheChamber
ofCommerce, Yodobashi prepared anagreement based ontheassociation 'sdemands, which itexecuted
withthePhotospecialty Retailers Association andthePhotographer 'sAssociation. Theagreement
provides, interalia,thattheparties agree to"conduct theirbusiness activities based onco-existence
andco-prosperity, andregional cooperation andwillalways cooperate ingoodfaith". Theagreement
further bound Yodobashi toundertake commitments setoutinanattached memorandum.
5.318 Japanrespondsthatthe1982circularhasbeenrepealed.Thus,asdiscussedinSectionVI.C.1(b)
below, thepastoperation ofthecircular isirrelevant. Also, Japan argues thattheLarge Store Law
doesnotregulate which products large retailers cancarry nordoesittakeintoaccount whatproducts,
much lesstheorigins oftheproducts, thatalarge retailer orsmall andmedium-sized retailers within
thevicinity sellwhen determining whether andwhatadjustments arenecessary, asdiscussed inSection
B.1.above. Japan, nevertheless, point outthatthere isnophrase inthe1982 circular thatobligates
astore opener toobtain theconsent oflocalretailers before submitting itsArticle 3Notification.
(e) Restrictions onacquisitions
5.319 TheUnited States further argues that,astheGovernment ofJapan strengthened restrictions
onneworexpanded largestores intheearly 1980's,some large storechains looked foranalternative
route togrow through acquisition. However, Japan'sapplication ofmerger guidelines intheretail
sector limited theopportunity topursue thisavenue.WT/DS44/R
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5.320 Japan submits thattheUSargument onthedifficulty ofmergers between large-scale retailers
--duetothereview ruletoconsider themarket share oflarge-scale stores alone --ismisguided. Even
ifsuchmergers become easier, thetotalareaoffloor space willnotincrease. Therefore, there isno
linkbetween themerger regulations andthelarge-scale store regulations.
5.321 TheUnited States citestheexample ofoneofDaiei'ssubsidiaries, which planned tomerge
withalargelocalsupermarket, andwasrequired tolower itsshareholdings inthenewcompany before
theJFTC would approve themerger.321Inthatcase, theJFTC hadconcluded thatthemerger would
result inastorewithmorethana25percent market share forcertain products, giving risetocompetition
policy concerns. TheJFTC calculated thismarket share bydefining themarket asincluding onlylarge
stores. Thus, itfound thatthemerged storewould account formore than25percent oftheretail market
served bylarge stores, nottheretail market asawhole.322
5.322 TheUnited States explains thatonJuly24,1981, theJFTC formalized thisanalysis ofthe
market inRetail Merger Guidelines, anewsetofguidelines which applied onlytotheretail sector.
TheGuidelines defined threetypesofretailmarkets, categorized bythesamefloorspace criteria utilized
atthetimeintheLarge Stores Lawtodistinguish Class Istores, Class IIstores, andstores excluded
from thelaw. Thethree categories included department stores (with floor space atorabove 1,500
square meters), mass-merchandizing stores (withfloorspace atorabove 500square meters), andgeneral
retail stores (with floorspace oflessthan500square meters). Inessence, theJFTC considered each
ofthese categories tobelong toaseparate market. Thisdefinition ofthemarket meant thatalarge
storewould more easily reach ahighmarket concentration through acquisition thanifthemarket were
defined asacombination ofthedifferent types ofstores. Accordingly, thispolicy hadtheeffect of
limiting opportunities forstores toavoid theLarge Stores Lawrestrictions through pursuing acquisitions
rather thanopening orexpanding newstores.
(f) Changes tothelawsince 1990
5.323 IntheviewoftheUnited States, revisions totheLarge Stores Lawandrelated administrative
measures from1973through 1990inmostcases strengthened theregulation oflargestores. However,
since 1990, Japan hasmodified some oftherequirements under pressure fromtheUnited States under
theUS-Japan Structural Impediments Initiative, andfrom other governments. Forexample, MITI
in1990issued administrative guidance thatthepriorexplanation process wasnottobeused"toobtain
anagreement between thenewstoreandthesmall andmedium retailers".323In1992, MITI replaced
the"prior explanation" process withaprocedure for"local explanation".324MITI alsoraised the
minimum floorspace requirements forClass Istores from1,500 square meters to3,000 square meters
(6,000 square meters incities designated byordinance), extended thestore closing timefrom 7:00
p.m.to8:00p.m., anddecreased thenumber ofmandatory daysclosed from 48to24.325
5.324 FortheUnited States, however, thelaw'srequirement toconsult withlocalretailers continues
toleadtoaninformal adjustment process thatsubstantially suppresses theopening andexpansion of
large stores. Moreover, Japan continues tovigorously apply theformal adjustment procedures, and
321Investigation Condition ofRecent Major Notification (International Contract, Merger, etc.), Kosei Torihiki, No.398,
December 1983, USEx.83-23.
322Distribution Problems andAntimonopoly Law, Yamamoto Takeshi, pp.263-264, USEx.96-6.
323Directive No.135,Guidance forPrior Explanation ofBuilders Carrying outaNotification foraClass IStore, 24May
1990, USEx.90-4.
324AccordingtotheUnitedStates,"PriorExplanation"wasabolishedbyDirectiveNo.24onLocalGovernmentRegulations
Concerning Store Openings, etc.,29January 1992 and"Local Explanation" wasimplemented byDirective No.25,Guidance
forLocal Explanation toThose Who submitted aNotification forNew Construction ofaClass ILarge Scale Retail Store,
29January 1992, USEx.90-4. However, Japan points outthat"jimotosetsumei" should betranslated as"public briefing"
rather than"local explanation". Seetranslation issue 14.
325Ministerial Order No.33,1April 1994, USEx.94-6.WT/DS44/R
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theseadjustmentscontinuetoimpairthegrowthoflargestoresasbeforetherecentamendments.Finally,
thelawcontinues toapply tostores above 500square meters (Class IIstores), ascompared to1,500
square meters when thelawwasimplemented in1974.
5.325 Japan explains thatoverthecourse ofthe1990s, theGovernment ofJapan hasinstituted
successive reforms oftheLarge Stores Law. Inparticular, inthepastthereview andadjustment process
oftheLarge Stores Lawhadnostrict timelimits andcould sometimes dragonforyears; in1994,
however, MITI issued acircular directing thattheentire process -fromfirstnotification tocompletion -
would lastnomorethantwelve months.326Theaverage length oftimetocomplete theprocess isactually
only6months.327Alsoin1994, MITI issued ageneral exemption fromthenormal Large Stores Law
process forstores under 1,000 square meters insize.328Inaddition, thelatest closing timethatrequires
nonotification hasbeenchanged from6:00p.m.(based ontheDepartment Store Law), to7:00p.m.
in1990, andthento8:00p.m.in1994. Thenumber ofthefewest annual business holidays thatrequires
nonotification hasbeenchanged from48days(alsobased ontheDepartment Store Law) to44days
in1990andthento24daysin1994. Inparallel withthesereforms, therehasbeenadramatic increase
innewlarge stores (seeSection VIIbelow).
5.326 Accordingly, forJapan, theprovisions oftheLarge Stores Lawarenowmore liberal thanthose
in1979and1994, when thelawhadalready beenexpanded inscope toinclude stores above 500square
meters insize. Inaddition, under thepresent Large Stores Law, large scale retail stores arefreeto
openuntil8:00p.m.andwithasfewas24storeholidays without anotification requirement. Under
thelawatthetimeofthe1979 tariff concession, large scaleretail stores wereonlyfreetoopenuntil
6:00p.m.andwithasfewasonly48store holidays without anotification requirement. Thelawis
therefore incapable ofupsetting competitive conditions forimported filmrelative toconditions atthe
timeofeither tariff concession made byJapan onthisproduct (i.e., theTokyo Round concession in
1979 andtheUruguay Round concession in1994). Furthermore, theLarge Stores Lawisalsomore
liberal thanitspredecessor, theDepartment Store Lawin1967. First, theformer lawhasadopted
anotification andcoordination system, while thelatter lawusedapermission system. Second, the
former lawexpressly mentions theprotection ofconsumers 'interest asoneofitslegislative objectives,
while thelatter lawdidnothavesuchaconsideration. Third, under theformer law,large scaleretail
stores arefreetoopen until 8:00 p.m. andwithnofewer than24stores holidays without any
requirement, while under thelatter lawlargeretailers werefreetoopenonlyuntil6:00p.m.andneeded
atleast48storeholidays without permission.329Inaddition, under theLarge Stores Law, asindicated
above, approximately 96percent ofnotified plans areimplemented330,while under theDepartment
Store Law, only84percent ofapplications werepermitted andimplemented.331Thus, theLarge Stores
Lawismore liberal thantheDepartment Store LawwasatthetimeoftheKennedy Round tariff
concessions.
326Handling Procedures fortheEnforcement oftheLawConcerning theAdjustment ofRetail Business Operations at
Large Scale Retail Stores, Sankyoku, No.97,issued byDG,MITI, 1April 1994, Section (1),Japan Ex.C-6.
327Figures compiled onanotification basis byMITI, Distribution Industry Division, Industrial Policy Bureau, forthe
fiscal yearof1995.
328StandardsforEvaluatingProbabilityunderArticle7,Paragraphs1and4oftheLargeStoresLaw(hereinafter"Probability
Standards"), Sankyoku, No.96,issued byDG,MITI, 1April 1994, Section I(2)(iii), Japan Ex.C-7.
329With respect tothescope ofregulated retail service, Japan submits thatitisnotdefinite thateither ismore restrictive.
Ontheonehand, theLarge Stores Lawregulates retail stores withretail space inexcess of500square meters, while itimposes
noregulation ontheopening andoperations ofretail stores withretail space nomore thanthethreshold. Moreover, inpractice,
noadjustment islikely tobeimposed onretail stores withretail space lessthan1,000 square meters. Ontheother hand,
theDepartment Store Lawregulated onlyretailers operating more thanoneretail store withretail space inexcess of1,500
square meters, while itregulated allretail stores which were operated bysuch retailers (Japan Ex.C-1andC-3).
330Figures compiled onanotification basis byMITI, Industrial Policy Bureau, Distribution Industry Division.
331HyakkatenhoreinoKaisetsu(GuidebookofDepartmentStoreLaw),CommercialDivision,MITI,1956,p.65,JapanC-9.WT/DS44/R
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5.327 TheUnited States responds thatJapan’scontention thatthecurrent operation oftheLarge
Stores Lawdoesnotseverely restrict thegrowth oflarge stores isundercut byitsownrecent studies,
which reached theopposite conclusion. These studies show thatMITI andtheprefectural governors
arerequiring significant floorspace reductions forproposed newstores, andthatthenumber ofdirected
floorspace reductions isincreasing. Moreover, a1995 JFTC study found thatanumber oflocal
government bodies areimposing theirownguidelines onstoreopenings, andthat"those planning to
open stores continue tobearunreasonable burdens intheform ofdemands requiring veryintricate
storeopeningplanstobesubmittedandotherunreasonabledemands."Finally,theJapaneseGovernment
studies found thatmany larger stores feelcompelled tonegotiate informal adjustments withlocalretailers
toensure thattheydonotoppose theirstoreinthereview process. Asaresult, according totheJFTC
in1995, "those planning toopen astore areunfairly hindered from opening newstores andfreely
developing business."
6. FORMAL AND INFORMAL ADJUSTMENTS
5.328 Intheview oftheUnited States, theformal adjustment procedure incombination withthe
adjustments arising fromconsultations withlocalretailers, cause large stores toreduce floorspace or
hours ordaysofoperation inasubstantial number ofcases.
(a) Adjustments under formal procedures
5.329 AccordingtotheUnitedStates,MITIandtheprefecturalgovernorsrequiredownwardadjustment
offloor space inalarge percentage ofnotifications. Thelarger thestore, themore likely itistobe
subjected todownward adjustment andthegreater theamount oftherecommended adjustment.
According toJapanese government data, fortheyears 1992-1995:
- ForClass Istores, MITI ordered floor space reductions in45percent ofthecases;
- ForClass IIstores, theprefectural governors ordered floorspace reductions in10percent of
thecases; and
- ForClass IandClass IIstores combined, thereviewing authorities ordered floor space
adjustments in29percent ofthecases.332
Government ofJapan databased onreports fromMITI regional offices show thattheamount offloor
space reduction issignificant. ForClass Istores, average floor space cut-backs ranged from 15to
50percent range. ForClass IIstores, theaverage reductions generally werebetween 3and30percent.333
5.330 TheUnited States further submits thatdataanalyzed bytheJFTC-sponsored Government
Regulation andCompetition Policy Council shows thattheaverage sizeoffloorspace reductions ordered
under theLarge Stores Lawhasincreased markedly inrecent years. During 1988-1990, large
supermarket owners wereordered toreduce thesalesareaoftheirproposed stores byanaverage of
13percent inorder toreceive approval. By1994, thisaverage hadincreased to22.6percent.334The
USsubmits individual examples toshow theextent andburden offloorspace reductions imposed on
largescaleretailers.335Fromsuchaggregatedstatisticsandexamples,therecanbenoquestion,according
332Table ofofficial statistics provided totheGovernment oftheUnited States bytheGovernment ofJapan byaletter
dated 10December 1996.
333MCA Survey, p.3,USEx.95-15.
334Concerning theReevaluation ofGovernment Regulations intheDistribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p.19,USEx.95-11.
335TheUnited States citesthefollowing examples:
-Floor space reductions foraleading chain store have escalated since theearly 1990'seven though thestore'srequested
sales areadeclined by9.3percent peryear. In1992, three ofitsstores were ordered toreduce theirproposed sales areas
by43percent, 53percent, and63percent. In1996, Retailer Xabandoned plans tobuild astore after being served with
astore adjustment decision ordering ittoreduce thefloor space byaprohibitive 39percent.WT/DS44/R
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totheUnited States, thatthefloor space adjustment provisions oftheLarge Stores Lawforces large
retailers tosignificantly scalebacktheirstoresizetoobtain approval fortheestablishment orexpansion
ofalarge store.
5.331 Japan rebuts, however, thattheUnited States fundamentally mischaracterizes theoperation
oftheLarge Stores Law. Focusing ontheisolated exceptions tothegeneral practice, itleaves the
impression thatalllargestores arerestricted, when infactthevastmajority oflargestores -80percent -
gothrough theentire process without having tomake anychanges intheirplanned retail space.
5.332 Japan argues thatitisimportant tokeeptheoverall adjustment process under theLarge Stores
Lawincontext. Toobtain aclearpicture ofhowthelawactually operates, Japan requests thePanel
tofocus ontwoissues: (1)howoften aretheadjustment mechanisms actually invoked, and(2)if
invoked, themagnitude ofadjustments thatareactually recommended.
5.333 OvertheFY1992 toFY1995 period, 4,513 outof5,679 notifications -approximately 80percent
ofnotifications -received noadjustment atalltoretail space.336Inother words, simply being subject
totheLarge Stores Lawprocess doesnotmean thatsome adjustment willautomatically occur. On
thecontrary, most stores require noadjustment atall.
5.334 Inparticular, thecurrent lawisrarely applied atalltostores withretail space under 1,000
square meters. Such stores areexempt from thenormal process unless amunicipal government or
aChamber ofCommerce andIndustry (oralternatively aCommerce andIndustry Association) requests
thedeliberation bytheLarge Scale Retail Store Council onanotified plan, andtheadministering
authority finds thatthestore isnotcomparable toother stores inthevicinity based onclosing time
andnumber ofstore holidays.337During theperiod May1994 toApril 1996, only66outof2,280
newstores withlessthan1,000 square meters ofretail space, or2.9percent, hadtofollow thenormal
Large Stores Lawprocess.338
5.335 Evenwhen adjustments aremade, theyaregenerally modest. Actual experience withtheLarge
Stores Lawshows howlimited these adjustments havebeeninpractice:339
- Forretail space,only20.5percent ofthenotifications receive anyadjustment atall.Forthose
stores adjusted, theaverage adjustment wasonlya24percent reduction inretail space.340
-Floor space reductions foramajor national supermarket have increased substantially overthepasttwoyears. In1994,
Retailer Ywasordered toreduce floor space ofnewstores anaverage of15.1percent. In1995, theaverage increased to
27.1 percent. Data forthefirsthalfof1996 indicates anaverage floor space reduction of24.2 percent, withtwostores
inKyoto being hitwithfloor space cutsof48.8 and66.9 percent.
-InKyoto, theLarge Store Council required asupermarket toreduce thefloor space ofanewstore from therequested 6,368
square meters to2,500 square meters, a61percent reduction.
-TheLarge Store Council recommended thatDaiei reduce thefloor space ofastore by59percent from theproposed 17,000
square meters to7,000 square meters. InJanuary 1996, Daiei appealed totheRegional Bureau ofMITI explaining thatit
could notkeep sufficient inventory withsuchasmall store. InMarch, 1996, without modifying thedecision, MITI issued
anorder thatDaiei follow thedecision made bytheLarge Store Council.
336Figures compiled onanotification basis byMITI, Industrial Policy Bureau, Distribution Industry Division.
337Probabilities Standards, Section 1,para. 4,Japan Ex.C-7.
338Japan notes thatonlyasubset ofthissmall number (34cases or1.5percent) received anyadjustment aftertheprocess.
339Thedataregarding store hours andholidays cover theperiod May1994 -March 1996, while theopening daysand
retail space datacover FY1992 -FY1995.
340JapannotesthatalthoughtheUnitedStatescitesafewexamplesoflargeadjustmentstoretailspace,suchlargerestrictions
areexceptional. Over theperiod FY1992 -FY1995 there were only67cases -2percent ofallnotifications -inwhich
retail space reductions ofover50percent were made.WT/DS44/R
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- Foropening days,only2.8percent ofthenotifications receive anyadjustment atall.Forthose
adjusted, theaverage delay inopening hasbeenabout 4.5months, andinnocasehasthedelay
beenlonger than12months.
- Forclosing time,theadjustment onlybecomes anissueifthestorewishes tobeopenpast8:00
p.m. Otherwise, there isnotevenanobligation tonotify theauthorities. Only 24percent
ofthenotifications receive anyadjustment atall.
- Forstore holidays ,theadjustment onlybecomes anissue ifthestore wishes toclose fewer
than24daysperyear, orbasically twice amonth. Otherwise, there isnotevenanobligation
tonotify theauthorities. Only 27percent ofthenotifications receive anyadjustment atall.
5.336 IntheviewofJapan, theretail space reduction rateof29percent citedbytheUnited States
exaggerates thecurrent rateandconceals thedeclining trend overtime. Thisfigure from theMCA
Report citedbytheUnited States refers onlytothesixMITI branches andsixprefectural governments
included intheMCA Report. Although theUSdataaretechnically correct, country widedatamore
appropriately represent thecomplete picture. Thefollowing aretheaverage reduction ratesinretail
space, ascalculated onthebasis ofthose cases where adjustment ismade.341Theaverage reduction
percentage ofallnotifications willlikely bemuch lower:342
Figure N
Average Rate ofRetail Space Reduction
forLarge Scale Stores
1992 1993 1994 1995
Class I: 27.7 27.5 24.5 22.3
Class II: 19.9 25.9 20.6 20.4
Total: 24.6 26.9 23.6 22.0
5.337 Japan further argues thatthere arenosignificant procedural burdens imposed bytheLarge
Stores Law. Theaverage examination period under thelawisnowonlysixmonths.343Furthermore,
theexpenses associated withgoing through theprocess arenotasubstantial barrier toentry.
(b) Continued effect oflocal measures
5.338 TheUnited States submits thatsupplementing theLarge Stores Lawareprefectural andlocal
ordinances andregulations requiring notification and"adjustment" bymedium andlarge-scale retail
stores planning toopenorexpand aretail outlet. Several localjurisdictions inJapan maintain such
measures. TheLarge Stores Lawexpressly recognizes theexistence oftheselocalmeasures, andrather
341According toJapan, contrary toUSallegations, theretail space reduction ratehasdeclined. Thedatausedinthe
report oftheJFTC adhocstudy group citedbytheUnited States areonlythose relating to"thecases where thedeliberation
bytheLarge Scale Retail Store Council issettled, classified depending onthetimeofArticle 3Notifications ofsubject
supermarkets," asexpressed intheappendix tothisreport (5supermarkets were subject tothisstudy). While suchdata
arenotnecessarily inappropriate asabasis forareport prepared bysuchanadhocstudy group foragovernmental official,
theyaredefinitely inappropriate tobeusedasmaterials foradjudicatory factfinding proceedings. Thisisalsothecasewith
respect totheMCA Report.
342Japan doesnotconcede thattheaverage reduction rateindicates thedegree ofrestrictions. According toJapan, the
cases cited bytheUnited States areexceptional.
343Datadetermined byMITI, Distribution Industry Division, Industrial Policy Bureau, based onArticle 3notifications.WT/DS44/R
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thanprohibiting them, merely requires thatthey"respect theintent" oftheLarge Stores Law.344In
theviewoftheUS,these localmeasures provide another avenue forgovernment authorities toimpose
adjustments onlargestores, andforlocalretailers toinformally extract concessions fromlargestores.
5.339 According totheUnited States, theJFTC Council found that,asofMarch 1995, anumber
oflocalgovernment bodies werestillimposing theirownwritten guidelines onstoreopenings, so-called
"augmenting" or"supplementary" regulations, which arebeyond thescope andrequirements ofthe
Large Stores Law, inthattheyapply tostores withafloor space oflessthan500square meters.345
Itconcluded that:
"[T]hese excessive regulations andnon-transparent administrative guidance onthepart
oflocal government bodies andpublic entities make those planning toopen stores
continue tobearunreasonable burdens intheformofdemands requiring veryintricate
store opening plans tobesubmitted andother similar demands".346
5.340 TheJFTC Council report alsofound thatsome localgovernments haveso-called "augmenting"
regulations, which areinaddition totherequirements oftheLarge Store Law. TheCouncil citedas
examples theimposition ofobligations toengage inconsultations withlocalgovernment bodies and
to"explain tolocal governments aspecific program forco-existence andco-prosperity withlocal
retailers".347The1995Survey bytheManagement andCoordination Agency made similar findings.348
5.341 Local regulations have, astheJFTC Council concluded, "resulted inalengthening ofthestore
opening adjustment timeandalossoftransparency intheadjustment process, resulting insome cases
insignificant handicaps totheopening ofnewlarge scaleretail stores".349The"adjustments" taking
place under these localmeasures addtotheburdens onlargestores. Themeasures alsocreate another
opportunity forlocalretailers toimpose requirements onlarge stores inorder forthelarge stores to
clear theregulatory process without objection.
5.342 Japan rebuts thatbased uponitsauthority under Article 15-5oftheLarge Stores Law, infact,
MITI hasundertaken significant efforts inrecent years toensure thatadditional localregulations are
notexcessive orinconsistent withtheLarge Stores Law. Japan notes thattheConstitution andnational
lawcontemplate thatlocalgovernments willenact regulations, butdoesnotpermit localgovernments
toenact regulations beyond theprovisions ofnational law.In1989, aMITI survey revealed over400
additional localregulations thatweredeemed excessive.350MITI ordered corrective action, andby1993
alloftheoffending localmeasures hadbeenbrought conformity withthenational law. In1992, the
Large Stores Lawitselfwasamended tostateexplicitly thatadditional localregulations must"respect
thespirit andintentions" oftheLaw.351Japan alsoargues thatthesurveys citedbytheUSarenot
representative ofcurrent conditions.
344Large Stores Law, Article 15-5, USEx.74-4.
345Concerning theReevaluation ofGovernment Regulations intheDistribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June1995, p.23,USEx.95-11. Japan disagrees withtheUSinterpretation
oftheJFTC adhocstudy group report. Seetranslation issue 12.
346Ibid.
347Ibid.
348MCA Survey, p.61,USEx.95-15. Japan disagrees withtheUSinterpretation oftheMCA survey. Seetranslation
issue 12.
349Ibid., p.17.
350Itwould bepermissible "tosupplement incidental procedures which helpaccomplish theadjustments inasmooth and
appropriate manner". Additional Local Regulations onNew Store Openings, etc.byLocal Governments, Sankyoku, No.
24,issued byDG,MITI, 29January 1992 (hereinafter "Additional Local Regulations Circular"), Japan Ex.C-13.
351Large Stores Law, Article 15-5, Japan Ex.C-1.WT/DS44/R
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5.343 Japan further explains thatin1994, MITI created ombudsmans offices inallofitsbranches
tohearcomplaints ofexcessive local regulations andtakecorrective action.352Thus, theUS
characterization oflocalregulations isnotconsistent withcurrent reality.353Inanyevent, therecord
numbers ofnewnotifications andlarge storeopenings confirm thatneither thenational lawnorlocal
measures arerestricting thegrowth oflarge stores.
5.344 TheUnited States provides examples ofrecent cases inwhich local measures were applied
toscale backthesizeandoperations ofretail stores.354
(c) Informal procedures under theLarge Stores Law
5.345 TheUnited States contends thattheformal process established bytheLarge Stores Lawand
related administrative measures andlocalmeasures areonlythetipoftheiceberg. Many larger stores
feelcompelled tonegotiate informal adjustments withlocalsmall andmedium retailers toensure that
thelocalretailers donotoppose theirstore intheformal review process. Thisinformal adjustment
process inturnpromotes thenegotiation andsigning ofagreements between competitors thatrestrict
thebusiness activities andprice competitiveness oflarge stores. Although these anticompetitive
agreements aretechnically "private" agreements, themechanisms oftheLarge Stores Lawandlocal
measures allbutassure theneedforlarge retailers toenter intothem, atleastinthose regions where
theformal review process isparticularly strict.
5.346 TheUnited States submits thattheLarge Stores Lawpresents three opportunities forlocal
retailers toimpose informal andformal "adjustments" onplans forneworexpanded large stores.
Thefirstisthe"prior-explanation"355adjustment process thatmayprecede thebuilder 'sArticle 3
Notification ofitsintent tobuild aneworexpanded large store. Thesecond isa"local explanation"
process thatoccurs afterabuilder orretailer submits anArticle 3Notification, butbefore itsubmits
anArticle 5Notification. ThethirdistheLarge Store Council review process thatoccurs afteraretailer
submits anArticle 5Notification ofitsintent toopenaneworexpanded store.
(i) "Prior explanations"
5.347 TheUnited States submits thatalthough MITI revoked in1992 itsadministrative guidance
requiring thebuilder ofanewstore toconsult with, andobtain theconsent oflocalretailers before
submitting anArticle 3Notification initiating formal procedures under theLarge Stores Law, a1995
survey bytheManagement andCoordination Agency (MCA), found thatMITI regional offices and
some prefectural governments stillguide andadvise largescaleretailers toprovide national, prefectural
andlocalgovernments andtheChamber ofCommerce withexplanations oftheirstoreopening plans
before submitting anArticle 3Notification.356Retailers responding totheMCA survey indicated that
theydoprovide suchexplanations, andthatsometimes theyareforced toenter intoagreements with
local retailers inthisprocess inorder toensure thattheirformal notification proceeds smoothly.357
352Establishment ofOmbudsman onAdditional Local Regulations Etc.onNewStore Openings byLocal Governments,
Sankyoku No.92,issued byDG,MITI, 9April 1994, Japan Ex.C-14.
353According toJapan, theexamples cited bytheUnited States arenotinconsistent withthenational lawontheirface.
Further, Japan claims tohave appropriately dealt withlocal regulations onmedium stores mentioned intheMCA Report
after reviewing thetextoftheregulations inlightoftheAdditional Local Regulations Circular, Japan Ex.C-13.
354Arrangement Letter andAgreements between aNewRetail Store andtheLocal Shopping Center Association, 1996,
USEx.93.
355JFTC Report, pp.15-16. MCA Survey, pp.24-25, USEx.95-15.
356MCA Survey, p.31;Directive No.93,1April 1994, USEx.94-7.
357Ibid.Seealso,ConcerningtheReevaluationofGovernmentRegulationsintheDistributionSector,GovernmentRegulation
andCompetition Policy Research Council, JFTC, June 1995, pp.15-18.WT/DS44/R
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5.348 Japan responds thatcitations relating topastMITI actions thatallegedly fostered negotiations
between largestoreplanners andlocalretailers areirrelevant, sinceallofthesemeasures wereabolished
in1992.358There isnolonger any"prior adjustment" or"prior explanation," andthere isnolonger
anyCommerce Adjustment Board. Since 1992, MITI hasbeenmaking continuing efforts tocorrect
thepractice ofrequiring "prior explanation." Theinstances of"prior explanation" described inthe
MCA report arerarecases, andMITI hasalready instructed therelevant MITI branches andprefectural
governments tostopgiving advice calling for"prior explanation." Should anyadvice begiven, MITI
willtakeappropriate measures assoonaspossible.
(ii) "Local explanations"
5.349 Thenextopportunityforretailerstoimposeinformaladjustment,accordingtotheUnitedStates,
comes aftertheformal Article 3notification. AMITI Directive specifically directs MITI regional
offices andprefectural governments torequest retailers toprovide localparties withanexplanation
oftheirplans within fourmonths aftersubmitting theArticle 3Notification.359According tothe1995
MCA survey, thegovernmental entities generally designate thelocalities andassociations towhom
suchexplanations aretobegiven.360TheMCA Survey revealed thatbetween 1992-1994, theaverage
number oforganizations designated toreceive explanations ranged from fourto13,withahighof
180organizations.361MCA alsosurveyed thecostsofsuchexplanations, andfound thatlargeretailers
spend several hundred thousand yentoprovide theexplanations, andinsome cases thecostsexceeded
3,000,000 yen.362
5.350 FortheUnited States, MITI hasgiven further legitimacy tothelocalexplanation process by
providing inaDirective thatthelocalexplanations "serve asaresource forthedeliberations ofthe
Large Store Council".363Since MITI must takeintoaccount theCouncil 'srecommendations on
"adjustments", thelocal retailers attheArticle 3"local explanation" stage haveadirect means to
influence MITI'sdecision onwhether toimpose "adjustments" onthelargeretailer afterthelaterArticle
5Notification. Thus, localexplanations givelocalretailers leverage toextract concessions fromthe
large store outside theformal process, andprovide anincentive tothelarge retailer toplacate local
retailers toensure thatitisabletoproceed with itsplans, evenifitisinareduced form.
5.351 Japan submits thatallthatisrequired isthatthelargestoreplanner make a"public briefing"364
aftertheArticle 3notification (newstoreconstruction) butbefore theArticle 5notification (newstore
opening). The"public briefing (after Article 3notifications) isnecessary inorder toclarify thecontent
ofthestore opening plantosmall andmedium-sized retailers andconsumers around thesiteforthe
store, thereby facilitating thedeliberations bytheLarge Scale Retail Store Council" byhelping local
interested parties understand theplanandcomment onit.365Therelevant MITI circular expressly
indicates thatthepurpose ofthepublic briefing is"nottoseekconsent, etc.,from them".366Japan
358Instructing Parties Filing Notifications ofNewType-I Large Scale Retail Stores, etc.toHoldPublic Briefing, Sankyoku,
Nos. 25and26,issued byDG,MITI, 29January 1992 (hereinafter, collectively, "1992 Public Briefing Circulars"), Japan
Ex.C-17.
359Directive No.93,1April 1994, USEx.94-7.
360MCA Survey, p.31,USEx.95-15.
361Ibid., p.35.
362Ibid., p.41.
363Section 1,Directive No.93,1April 1994, USEx.94-7.
364InUSsubmissions, the"public briefing" isreferred toasa"local explanation". Seetranslation issue 14.
365Instructing Parties Filing Notifications ofNewType-I Large Scale Retail Stores etc.toHoldPublic Briefing (hereinafter
"1994 Public Briefing Circulars"), Sankyoku, Nos.93and94,issued byDG,MITI 1April 1994, Section 1,Japan Ex.C-18.
366Ibid.WT/DS44/R
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alsonotes thattheUnited States exaggerates theamount ofmoney thatlarge stores mustspend during
thepublic briefing process.367
(iii) Large Store Council Review
5.352 TheUnited States further argues thatthethird opportunity forlocal retailers toimpose
adjustments occurs during theLarge Store Council review. TheMCA survey found thatinthe
overwhelming majority ofcases theauthorities designate thelocalchambers ofcommerce andbusiness
associations asthemainoronlyparties toprovide views totheLarge Store Council. Thesurvey found
thatin99.2percent ofthecases, therecommendations oftheLarge Store Council werebased directly
ontheviews oflocalchambers ofcommerce orbusiness associations inthelocality where thestore
wastobeopened.368
5.353 TheUnited States citestheJune, 1995 report totheJFTC from itsGovernment Regulation
andCompetition Policy Research Council, quoting thattheLarge Store Council 'sconsideration of
alarge store notification "caneasily reflect theviews oflocalretailers".369According tothisJFTC
Council,"existinglocalretailersremaininfluentialmembersoftheseorganizations"andeven"consumer
andacademicrepresentatives[ontheCouncils]haveclosetiestolocalretailers".370Thereportconcluded
thatinorder toprevent recommendations byLarge Store Councils ofsubstantial adjustments, large
scaleretailers enter intonegotiations withlocalretailers.371Thereport alsofound thatinsome cases,
MITI itself forced large retailers tonegotiate withlocal retailers inconnection withanArticle 3
Notification andlocalexplanation process:
"Prior toArticle 3Notification, itappears thatinquite anumber ofcases, those
planning toopenastoreareproviding notmerely explanations ofoutline ofplans but
whatamounts effectively to"adjustment".
[S]ome largesupermarkets havepointed outthat:1)theyhavebeenrequired todeliver
averylarge number ofexplanations (toasmany as45organizations inonecase); 2)
theyhave been forced toalterthemethod ofdelivery oftheexplanation foreach
recipient organization; 3)some local offices ofMITI haveorally demanded theylay
ground workfollowing localrulesorcustoms; and4)theyhavebeenforced intowhat
amounts toanadjustment process duetodemands fromexisting localretailers tomake
outanagreement, etc.Thus, itappears thatthose planning toopenastorecontinue
tobesaddled withunpredictable andexcessive burdens".372
5.354 Japan submits thatultimately, onlyobjective criteria areusedtodetermine theneedforan
adjustment under theLarge Stores Law; thelawdoesnotnecessitate anysortofnegotiation between
thestoreplanner andthelocalretailers.373Theprocedures require consideration ofallopinions, thereby
ensuring afairandimpartial process.
367Even using thelargest reported expenditure of¥3,400,000 asabase, thisamount constitutes lessthan0.5percent of
asingle year'sturnover foralarge store over20,000 square meters Thisexpense represents onlyatinyfraction ofalarge
store'sinitial start-up costs. datataken from Census ofCommerce: Statistics onLarge Scale Retail Stores (Retailers), August
1996, pp.10-11, Japan Ex.C-8.
368MCA Survey, p.50,USEx.95-15.
369Concerning theReevaluation ofGovernment Regulations intheDistribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p.17,USEx.95-11.
370Ibid. According toJapan, theUnited States misleadingly suggests thatintheJFTC adhocstudy group report "these
organizations" refer tothe"Large Scale Retail Store Council". However, inJapan 'sview, thetextofthereport clearly
shows that"these organizations" refer tothe"Chamber ofCommerce andIndustry". Seetranslation issue 15.
371Ibid., pp.20-21.
372Ibid., p.16(emphasis added bytheUnited States).
373SeeDeliberation Procedures, Sections IIandIII,Japan Ex.C-4.WT/DS44/R
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5.355 Japan further explains thattheLarge Scale Retail Store Council isorganized soastoensure
thefairness oftheprocess. Members oftheCouncil areselected andappointed bytheMITI Minister
fromamong neutral members oflearning andexperience. Noretailer isincluded asamember. The
USclaim thattheLarge Stores Lawprocess iscontrolled bysmall andmedium-sized retailers hasno
support inthemembership oftheLarge Stores Law. TheLarge Stores Lawthusdoesnotprovide
opportunities forlocalretailers to"extract concessions" ateachstageoftheprocess; theCouncil applies
objective standards toreach aneutral andunbiased decision.
5.356 TheUnited States further submits thatinformal adjustments havealsoledtotheextraction
of"cooperation money" fromlargescaleretailers. TheJFTC Council found cases inwhich operators
ofnewstoreswereforcedtopaycooperationmoneytolocalretailers,whichwas"labelleda'membership
fee'or'modernization fundcontribution '".374TheMCA Survey made similar findings regarding the
payment bylarge retailers of"cooperation money" ormembership feesinthelocalshopping district
business associations.375These findings illustrate thepower thatlocal retailers wield intheprocess
oflargeretailers 'attempts toestablish competing largestores. IntheviewoftheUS,theLarge Stores
Lawprocess virtually guarantees thatlocal retailers willforce large retailers tomake downward
adjustments intheirbusiness plans.
5.357 Japan contests thatthelawcontains norequirement forcing store openers tonegotiate with
localretailers, enabling thelatter toextract onerous concessions from anewlarge store astheprice
tobepaidforbeing allowed toopen. Totheextent there areanylocalregulations which result inthe
imposition ofsucharequirement incontravention ofthestated policy oftheGovernment ofJapan,
appropriate corrective actions havebeenandwillcontinue tobetaken.376
7. IMPACT OFFLOOR SPACE ADJUSTMENTS AND RESTRICTIONS ONOPERATION
ONTHE GROWTH OFLARGE STORES
5.358 TheUnited States claims thattheadjustments inopening date, floor space, daysclosed and
hours ofoperation havetheeffect ofrestricting thegrowth oflarge stores inJapan.
5.359 Opening Date-TheUnited States argues thatwhile aretailer iswaiting toearnareturn on
itsinvestment during thereview andadjustment process, itmayhaveinterest payments orother costs
associated withthecapital tiedupinthatinvestment. Costs without returns mean losses, andlosses
delay expansion plans, andinvestment cannot beusedforanother project. Causing delay intheopening
ofastore translates intosuppressing thegrowth andexpansion oflarge stores.
5.360 Official MCA dataalsoshow thatthedelays from thereview andadjustment process are
significant. Theaverage length oftimefrom theArticle 5Notification (store opening advance
notification)tothecompletionoftheLargeStoreCouncilreviewinrecentyearsconsistentlyhasaveraged
from seven toeight months.377
5.361 Japan notes, however, thatonly2.8percent ofthenotifications receive anyadjustment atall
withrespect totheiropening dates. Also, Japan points outthattheaverage length oftimeofthe
procedure isnowonlysixmonths.
5.362 Floor Space -According totheUnited States ,theprofitability ofaretailstoreisdirectly related
totheamount offloorspace required tooperate efficiently. TheLarge Stores Lawhasachilling effect
374Ibid.
375MCA Survey, p.42,USEx.95-15.
376JapanfurthernotesthattheGovernmentofJapanneitherrequiresnorrecommendsthatsuchpaymentsbemade.Whether
ornotprivate businesses voluntarily choose tomake such contributions isoutside thegovernment 'sresponsibility.
377MCA Survey, Table 6.WT/DS44/R
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ontheopening oflarge stores because retailers havenoassurances thatthesizeofthestoretheywill
beallowed toopenwillcoincide withthesizeofthestorerequired bytheirbusiness plantobeprofitable.
5.363 Onthebasisofamajor retailer 'ssalesestimates, theUnited States calculates thata20percent
floorspace reduction to12,000 square meters effectively decreases revenue byabout 500million yen
peryear. A30percent reduction reduces annual revenue byabout 1billion yen,anda50percent
floor space reduction translates intoa2.5to3billion yenlossinrevenue peryear.378According to
theUS,floor space reductions ofthismagnitude render anyoriginal business planuseless.
5.364 IntheviewofJapan, however, inthefirstplace, these estimates areuseless since theydo
nottakeintoaccount costreductions thatwould ensue from reduced retail space. Inanyevent, the
factthat96percent ofallnotifications result instore openings demonstrates thatneither retail space
adjustments, noradjustments ofother parameters, noralleged procedural burdens arehaving anykind
ofdisruptive impact.
5.365 Store Hours andDays Closed -TheUnited States submits thattheJFTC 'sJune1995 report
found thatlimiting hours anddaysofoperation alsohurts thecompetitiveness oflarge stores:
"The restrictions onstore closing time, number ofdaysclosed andother matters of
store operation under thecurrent Large Stores Lawdomore thanjustinterfere with
thefreedevelopment ofbusiness onthepartofbusiness operators. Forexample,
extending store hours canhelpbring innewcustomer groups andthereby encourage
storeoperators torethink theirsalesmethods andotherwise usetheircreativity. Thus,
extended storehours represent animportant competitive toolwithgreat possibilities.
However, restricting these activities notonlylimitfairandfreecompetition among
business operators, butisalsolikely tolimit consumers 'freedom ofchoice asa
result".379
5.366 Japan points outthatforclosing time, theadjustment onlybecomes anissueifthestorewishes
tobeopenpast8:00p.m. Otherwise, there isnotevenanobligation tonotify theauthorities. Only
24percent ofthenotifications receive anyadjustment atall.Also, forstoreholidays, theadjustment
onlybecomes anissue ifthestore wishes toclose fewer than24daysperyear, orbasically twice a
month. Otherwise, there isnotevenanobligation tonotify theauthorities. Only 27percent ofthe
notifications receive anyadjustment atall.
5.367 IntheviewoftheUnited States ,perhaps thebestindication ofthecontinuing effectiveness
oftherestrictions onlarge stores isthefactthatthepresence oflarge stores intheJapanese market
hasnotincreased despite therecent changes inthelawsandmeasures. From 1982to1994(themost
recent yearforwhich figures areavailable), theshare ofretail salesinJapan bylarge stores remained
essentially constant andtheshare oftotalretail establishments thatwere large stores alsoremained
essentially constant:
378Estimates bystaffofRetailer X.Frederick Nagai Affidavit of14February 1997, p.3,USEx.97-8.
379Concerning theReevaluation ofGovernment Regulations intheDistribution Sector, Government Regulation and
Competition Policy Research Council, JFTC, June 1995, p.22,USEx.95-11.WT/DS44/R
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Percent ofRetail
Percent ofRetail Establishments in
Sales inJapan by Japan ThatAre
Year Large Stores380Large Stores381
1982 20.8 0.6
1985 21.4 0.6
1988 22.0 0.7
1991 21.7 0.8
1994 22.2 0.9
FortheUnited States, thisconsistent suppression ofthegrowth oflarge stores limits opportunities
forimports toby-pass Japan'smanufacturer-controlled, vertically integrated distribution system and
toreach Japanese consumers through more direct channels.
5.368 ForJapan ,however, thefactsarecontrary totheUSallegation thattheadjustments and
procedural burdens ofthelawhavearestrictive chilling effect onthegrowth oflargestores. Asnoted
above, newlarge storenotifications havesurged fromaround 500peryearinthe1980s toover2,000
peryearcurrently. Thissurge results fromavariety offactors, including increased consumer demand
forvarious types oflargestores andtheincreased mobility ofJapanese consumers. During the1980s,
newnotifications under thelawaveraged around 500peryear. When deregulatory initiatives took
effect, newnotifications surged torecord levels:382
Number ofNewNotifications
forLarge Stores
Year NewNotifications
FY1992 1,692
FY1993 1,406
FY1994 1,927
FY1995 2,206
Thedramatic growth innotifications hasbeenmatched bygrowth inactual storeopenings. Over the
same fourfiscal years, 96percent ofallnotifications resulted inactual store openings.383
380MITI, Shogyo Tokeihyo DaiKiboKouri Tenpo Tokeihen 1982, p.342;Ibid., 1985, p.114;Ibid., 1988, p.114;Ibid.,
1991, p.116;Ibid., 1994, p.114(number oflarge-scale stores), USEx.82-1. MITI, Census ofCommerce 1994, Vol.I,
p.19(total retail stores). Large Stores include Class IandClass IIstores.
381Ibid.
382Figures compiled onanotification basis byMITI, Distribution Industry Division, Industrial Policy Bureau, including
thefourmost recently completed fiscal years.
383Ibid. Inafewcases, retailers decided fortheirownbusiness reasons nottogoforward withtheirplans. Itisunrealistic
toexpect 100percent follow-through onplans.WT/DS44/R
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5.369 Inparallel totheincrease inthenumber ofnewnotifications, thesalesshare oflarge stores
inallsalesbyallretailers havebeenincreasing steadily:384
Share oftheTotal Retail Sales385
Year Sales Share ofLarge Stores
1982 27.1%
1985 27.9%
1988 28.6%
1991 28.2%
1994 29.3%
5.370 Japan further stresses that96percent ofallnotifications inrecent years haveresulted inactual
storeopenings. These figures belietheUSclaim ofachilling effect. Ascurrently administered, the
Large Stores Lawdoesnotacttorestrict thegrowth oflarge stores inJapan. ForJapan, itishard
tofindinanyofthedatadiscussed above support fortheUSview oftheLarge Stores Lawasa
restrictive regulatory structure thatprevents orchills newstore openings.
384Japan notes thatindeed, theUnited States itselfcitesdatawhich show thatfrom1982to1994, large stores asapercentage
oftotalretail establishments climbed from 0.6percent to0.9percent -anincrease of50percent.
385Census ofCommerce: Statistics onLarge Scale Retail Stores (Retailers), 1984, pp.342-343; 1987, pp.114-115; 1990,
pp.114-115; 1993, pp.116-117; 1996, pp.114-115, Japan Ex.C-8. Japan notes thatthese figures differ from those cited
bytheUnited States. TheUSfigures arebased upon thesales bythose large retailers operating astore withretail space
inexcess of500square meters inlarge scale retail stores, while Japan 'sfigures arebased upon thesales byallretailers,
thatareoperating inlarge scale retail stores. Japan claims thattheirfigures rather thantheUSfigures provide afairbasis
fortheevaluation oftheeffect oftheLarge Stores Law, because thelawregulates allretailers inlarge retail stores. The
trend hasbeenpositive; however, inprinciple Japan doesnotagree thatthelarge scale store share ofthetotalretail market
isanappropriate measure ofthenature ofthelaw.WT/DS44/R
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C. PROMOTION "COUNTERMEASURES"
1. INTRODUCTION
5.371 TheUnitedStatessubmitsthatJapanhasreinforcedits"liberalizationcountermeasures"directed
against wholesalers andretail stores bylimiting howphotographic materials producers canpromote
theirproducts. Indoing so,theJapanese Government has,intheviewoftheUnited States, curtailed
twoofthemost important remaining means bywhich imported filmandpaper maygainafoothold
orexpand theirposition inthedomestic market: economic inducements tocustomers andaggressive
advertising.
5.372 AccordingtotheUnitedStates,Japanhasimplementedits"promotioncountermeasures"through
application ofthefollowing laws: (1)restrictions ontheuseofeconomic inducements andstatements
inadvertising under Articles 2to4ofthe"Act Against Unjustifiable Premiums andMisleading
Representations" ("Premiums Law")386;(2)anunduly restrictive enforcement regime under Articles
6,9and10ofthePremiums Law;and(3)restrictions ontheuseofeconomic inducements andstatements
inadvertising under regulations promulgated pursuant toArticles 2(9)and19ofthe"ActConcerning
Prohibition ofPrivate Monopoly andMaintenance ofFairTrade" ("Antimonopoly Law").387
Enforcement ofthese measures primarily istheresponsibility oftheJapan FairTrade Commission
("JFTC"), which hasissued numerous "designations" and"notifications" specifying theactivities that
fallwithin thescope ofthelaws. TheUnited States further argues thatJapan hasbolstered enforcement
efforts byempowering theprefectural governments toissuecease anddesist orders under thePremiums
Lawandbydeputizing members ofthedomestic industry, intheguiseof"fairtradecouncils", toenforce
thePremiums Lawthrough theuseof"faircompetition codes".
5.373 TheUnited States argues thatJapan's"promotion countermeasures" havedisadvantaged foreign
filmandpaper manufacturers byconstraining theirability toincrease salesthrough theuseofcertain
discounts, gifts, coupons andother inducements, ortorelyupon innovative advertising campaigns,
particularly where price orprice comparisons arediscussed. IntheUSview, Japan imposed these
"countermeasures"forthepurposeofdampeningimportcompetitionand,toensuretheirsuccess,enlisted
theaidofthedomestic photographic materials industry inenforcing theregime. Though many ofthe
measures arefacially neutral, others are,according totheUnited States, blatantly protectionist in
discriminating against imports. Regardless ofform, eachhasserved tomaintain thedominant position
ofJapanese filmandpaper manufacturers byshielding them from significant forms ofpromotion
competition.
5.374 ForJapan ,themajor partoftheUSsubmission restsonaconspiracy hypothesis which should
betreated withcaution. Although theUnited States claims thattheJFTC hastaken part,consistently
andsurreptitiously overthepast35years, inaconcerted action which isadiametrical opposite ofthe
espoused policy, according toJapan, thetruthisthattheJFTC haslongbeenanactive advocate of
amore openJapanese economy. Japan argues thattheconcept of"promotional countermeasures" as
usedbytheUnited States isfictional. Ithasnoplace intheJapanese regulatory language, norhas
theJapanese Government evertaken suchmeasures. According toJapan, theUnited States hasadmitted
thatthere isnooriginal Japanese phrase orword corresponding to"promotion countermeasures".388
5.375 InJapan'sview, theUSargument emphasizes whatanAmerican business wasnotabletodo
inselling filminJapan. Japan notes thatthere areawiderange oflawful promotional initiatives and
thattheJFTC regulates nothing other thandistortive practices, namely, (i)excessive premiums and
(ii)misleading representations. ThePremiums Lawdoesnotrestrict inanywaylowprice sales.
386LawNo.134of15May 1962, Kanpo, 15May 1962, amended byLawNo.44of30May 1972, USEx.72-1.
387LawNo.54of1947, USEx.47-1.
388Seetranslation issue 1.WT/DS44/R
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Advertising isentirely lawful unless itismisleading toconsumers. Japan concludes, therefore, that
American businesses havebeenabletocompete freely, subject tonorestriction whatsoever under the
Premiums Law, inpricing andquality, thetwomost important aspects ofmarket competition.
5.376 Japan further submits thattheUnited States doesnotshow howmuch discriminatory impact
the"promotional countermeasures," iftheyeverexisted, would haveontrade inphotographic film
andpaper. EvenifthePremiums Lawshould havesome negative impact onmarket entry, Japan submits
thatitcould nothavebeenasubstantial impediment forestablished foreign companies suchasKodak
which hadbeenactive intheJapanese market foralongtimewitharecognized brand name. Japan
alsoargues thatnoapplicable "faircompetition code" or"fairtrade council" exists inphotographic
filmandpaper. Moreover, inJapan'sview, self-regulation similar toa"faircompetition code" or
a"fairtradecouncil" isnotunique toJapan, butexists inmany partsoftheworld asatooltoeffectively
implement regulations ofexcessive premiums andmisleading representations.
2. THE LAWS UNDERLYING THE PROMOTION "COUNTERMEASURES"
5.377 TheUnited States claims thatJapan's"promotion countermeasures" arisefromarticles ofthe
Premiums Lawandcertain designations under theAntimonopoly Law. Atfirstglance, thesemeasures
mayappear tobestandard trade regulation rules, but,intheUSview, some oftheirprovisions have
beeninterpreted andapplied byJapan inanoverly broad manner soastoimpede import sales.
(a) TheAntimonopoly Law
5.378 FortheUnited States, theJapanese Antimonopoly Law, asoriginally enacted on14April 1947,
wasacomprehensive antitrust statute. Ittargeted fourgeneral economic evilsforelimination: private
monopolization, unreasonable restraints oftrade, unfair methods ofcompetition andexcessive
concentrations ofpower. TheAntimonopoly Lawwaspromulgated during theallied occupation of
Japan following World WarIIandwasdesigned toreduce theinfluence ofpowerful cartels inJapan.
TheAntimonopoly Lawalsoestablished theJFTC, which wascreated toenforce thelaw.
5.379 ForJapan ,theAntimonopoly Lawisacompetition lawwiththepurpose ofpromoting fair
andfreecompetition. Similar tocompetition lawsofvarious countries, itsgoalisfullyconsistent with
theprinciple oftheWTO inensuring anopenandfreetrading system. According toJapan, theJFTC
isthesoleadministrative agency responsible fortheenforcement oftheAntimonopoly Law. TheLaw
delegates anindependent andexclusive authority totheJFTC, anditsinterpretation andapplication
oftheLawisnotsubject tocoordination orconsultation withother agencies.389
5.380 TheUnited States maintains that,during World WarII,tradeassociations inJapan facilitated
government control over industries, enhanced cartel influence andenforced cartel practices.390
"Essentially, theJapanese Government granted legalauthority tothese private control associations to
enforce economic cartel decisions, which inturnpermitted thegovernment tocontrol economic activity
through these control associations."391In1948, theJapanese Dietsupplemented theAntimonopoly
Lawbyenacting theTrade Association Law.392TheTrade Association Lawproscribed awidevariety
ofanticompetitive trade association activities, including price controls andother restraints oftrade,
andenumerated limited permissible activities, suchasexchanging public information andproduct
standardization guidelines.393
389SeeArticle 28oftheAntimonopoly Law.
390Thomas A.Bisson, Zaibatsu Dissolution inJapan, (1954), p.191, USEx.54-1.
391SeitaAlexandTamura Jiro,TheHistorical Background ofJapan 'sAntimonopoly Law, 115University ofIllinois Law
Review, (1994), pp.63-64, USEx.94-2.
392Iyori Hiroshi andUesugi Akinori, TheAntimonopoly Laws ofJapan, (1983), p.13,USEx.83-1.
393Ibid.WT/DS44/R
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5.381 According totheUnited States, aftertheendoftheallied occupation, theJapanese Dietin
1953 amended theAntimonopoly Lawinseveral significant aspects. Theamendments included new
provisions permitting formation of"rationalization anddepression cartels".394"Under theamendment,
these twotypes ofcartels weregiven exemption fromtheapplication oftheAntimonopoly Lawwhen
theywere licensed bytheJFTC, andenterprises could enter intoagreements among themselves for
thepurpose ofovercoming adepression andalsoinorder torationalize theirbusiness operations".395
Theamendments alsoexpanded theauthority oftheJFTC torestrict certain trade practices itfound
tobeunfair orexcessive when compared tonorms inaparticular industry.396
5.382 TheUnited States submits thattheAntimonopoly Lawinitsinitial formpermitted onlylimited
exemptions.397However, in1952, theDietpassed thefirstofmany lawsthatexpressly exempted certain
kinds ofcartel behaviour fromtheAntimonopoly Law: theStabilization ofSpecific Small andMedium
Enterprises Temporary Measures Law"398andthe"Export Trading Law".399Theformer permitted
smaller businesses toform cartels torestrict output inthefaceofdeclining demand, while thelatter
allowed forthecreation ofexporting cartels.400TheDietsubsequently passed many otherAntimonopoly
Lawexemption laws.401"These lawshadprovisions allowing theformation ofcartels, andfurthermore,
allowed theissuance ofministerial orders tonon-members ofthecartel agreement tomake themobserve
therestrictionsofthecartelagreement...[T]heseprovisionsweremodelledafterprewarcartel-promotion
laws".402FortheUnited States, the1953amendments marked aretreat bytheJapanese Government
from opposition torestrictive trade practices andthebeginning ofovert government/private sector
cooperation inthecartelization ofsectors oftheJapanese economy, aswasthepractice during World
WarII.403Abyproduct ofthisdevelopment wastheerection ofbarriers defending against foreign
competition. AsoneofJapan'sleading scholars ofinternational trade lawhasexplained, "[W]hen
oneconsiders thegapthatexists between domestic andforeign firms withrespect toscaleofbusiness,
managerial power, financial resources, andother matters, itprobably cannot bedenied that,by
maintaining faircompetition through theAntimonopoly Law, theactual result willinclude anaspect
ofprotection fordomestic firms fromunjust pressure byforeign-capital."404Thesections oftheAML
banning "unfair trade practices," asrevised in1953, remain largely thesame today.405
5.383 TheUnited States further argues thefollowing inrespect oftheJFTC 'sactivities inregulating
unfair tradepractices. Itnotes thatArticle 19oftheAntimonopoly Lawprovides that"[n]o entrepreneur
shallemploy unfair trade practices". Antimonopoly LawArticle 2(9)setsforthcategories of"unfair
trade practices" anddelegates totheJFTC authority todesignate impermissible practices under the
law.
394Matsushita Mitsuo, International Trade andCompetition LawinJapan, 1993, pp.79-80, USEx.93-1.
395Iyori Hiroshi andUesugi Akinori, TheAntimonopoly Laws ofJapan, 1983, p.16,USEx.83-1.
396Ibid., USEx.83-1.
397SeeAntimonopoly Law, Articles 20-24.
398LawNo.294of1952. Thislawwasrepealed byLawNo.185of25November 1957.
399LawNo.299of1952, USEx.52-1. Thislawwasrenamed Export andImport Trading Law, LawNo.188of8August
1953.
400Iyori Hiroshi andUesugi Akinori, TheAntimonopoly Laws ofJapan, 1983, p.19,USEx.83-1.
401Ibid., USEx.83-1.
402Iyori Hiroshi andUesugi Akinori, TheAntimonopoly Laws andPolicies ofJapan, 1994, p.32,USEx.94-1.
403Ibid., pp.30-34.
404Matsushita Mitsuo, Antimonopoly Law&International Transactions (25May 1970) p.83,USEx.70-2.
405The1953amendmentsestablishedthebasicstructureofthecurrentAMLandthemodern"unfairtradepractice"provisions
thatunderlie Japan ’spromotion countermeasures. TheAML wasamended in1977 toprovide theJFTC withadditional
authority tocontrol monopoly andcartel activity, aswellastoimpose areporting system onprices inoligopolistic markets.
However, the1977 amendments arenotpertinent forpresent purposes. SeeMitsuo Matsushita, International Trade and
Competition LawinJapan, (1993), pp.79,82-84, USEx.70-2.WT/DS44/R
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5.384 TheJFTC issued alistofdesignated "unfair trade practices" shortly aftertheAntimonopoly
Lawwasamended in1953.406TheJFTC defined unjust inducements as"[i]nducing orcoercing, directly
orindirectly, customers ofacompetitor todealwithoneself byoffering unjust advantages orby
threatening unjust disadvantages inthelightofnormal business practices".407
5.385 TheUnited States submits thattheJFTC revised itslistof"unfair trade practices" in1982,
modifying theearlier designations andexpanding thelistfrom12to16practices.408With respect to
unjust inducements, theJFTC prohibited "[i]nducing customers ofacompetitor todealwithoneself
byoffering unjust benefits inlightofnormal business practices".409TheJFTC alsoadded anew
provision addressing representations related tocommercial transactions. TheJFTC outlawed "[u]njustly
inducing customers ofacompetitor todealwithoneself bycausing them tomisunderstand thatthe
substance ofacommodity orservice supplied byoneself, orterms ofthetransaction, orother matters
relating tosuchtransaction aremuch better ormuch [more] favourable thantheactual oneorthan
those relating tothecompetitor".410
5.386 IntheUSview,thesedesignationsostensiblyprotectconsumersandguardagainstwell-capitalized
businesses acting inapredatory fashion (i.e.,using theircapital strength todominate themarket through
massive give-away-type promotions). According totheUnited States, however, Japan hasemployed
theunjust inducement andmisleading representation designations toinsulate domestic filmandpaper
manufacturers from competitive promotional activities byimports.
5.387 InJapan 'sview, theJFTC hasnever accorded anyforeign entity orproduct treatment less
favourable thanthataccorded toaJapanese entity orproduct. Onthecontrary, theCommission has
taken aseries ofmeasures, suchaseconomic surveys andreports, theformulation of"Distribution
Guidelines," theestablishment ofaspecial taskforce, aswellasenforcement actions, inorder to
eliminate impediments tothemarket access offoreign products.
5.388 Japan submits thatthefilmmanufacturing industry anditsoligopolistic structure hasbeena
target oftheJFTC 'sattention since the1960s. Todemonstrate this,Japan provided thePanel with
aseries ofactions taken bytheJFTC withrespect tothefilmmanufacturing industry. Italsoargues
thatsince theintroduction in1977, byanamendment totheAntimonopoly Law, ofmeasures against
monopolistic conditions andparallel price increases411,theJFTC hasbeen monitoring thefilm
manufacturing industry.
(b) ThePremiums Law
5.389 TheUnited States submits thattheJapanese Dietenacted thePremiums Lawon15May1962.412
IntheUSview, astheyrelate topremiums andrepresentations, thePremiums LawandAntimonopoly
Lawoverlap. ThePremiums Lawregulates useofpremiums andrepresentations inanarrower, more
pointed manner. JFTC designations under thePremiums Lawtypically setoutspecific criteria with
respect topremiums orpromotional representations asusedwithin selected industries. Incontrast,
theJFTC 'sdesignations under theAntimonopoly Lawserve ascatch-alls, applying normal business
practice asastandard governing premiums andrepresentations bymembers ofallindustries. The
406JFTC Notification 11of1953.
407Ibid., designation 6.
408Notification onUnfair Trade Practices, JFTC Notification 15of15June1982, USEx.82-6, which replaced Notification
11of1953.
409JFTC Notification 15,designation 9.
410Ibid., designation 8.
411SeeArticles 8-4and18-2 oftheAntimonopoly Law.
412TheUnited States translation ofthePremiums Lawiscontained inUSEx.62-6. Japan indicates thatitdisagrees with
anumber ofpoints oftheUStranslation. SeeJapan Ex.D-1. Theexpert opinions onthetranslation issues raised byJapan
arecontained under item16oftheAnnex onTranslation Problems.WT/DS44/R
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redundant nature ofthePremiums Lawandthepremium andrepresentation designations under the
Antimonoploy Lawdoubly burden imports attempting tomarket products aggressively.
5.390 FortheUnited States, thePremiums Lawsupplements theAntimonopoly Law'seconomic
inducement andrepresentation provisions byauthorizing theJFTC tofurther restrict theuseof
purportedly unjust economic benefits andmisleading promotional statements. According totheUnited
States, thePremiums Law, which wasrevised in1972, exempts fromAntimonopoly Lawenforcement
cartel-like practices bymembers ofselected industries whoareauthorized under thelawtoestablish
codes governing theuseofpremiums andpromotional representations. Indoing so,theUnited States
argues, thePremiums Lawanditsattendant codes inhibit theuseofavariety ofpro-competitive
marketing activities.
5.391 InJapan 'sview, thePremiums Lawisasub-set ofcompetition lawwhich provides foran
expedited enforcement procedure, different from thequasi-judicial process under theAntimonopoly
Law, todealwithexcessive premiums andmisleading representations. Under Article 6ofthePremiums
LawtheJFTCmayissueceaseanddesistorderstonon-compliancewithoutahearingprocess.According
toJapan, misrepresentations orexcessive premiums could beconsidered asatypeofunfair tradepractice
prescribedbytheAntimonopolyLaw,eitherasdeceptivecustomerinducementorascustomerinducement
byuseofunjust benefits. However, inJapan'sview, atthetheoretical levelthePremiums Law'sprimary
purpose isnotconsumer protection perse:theabove-mentioned practices haveaunique feature of
easily spreading wider ascompetitors scramble toimitate eachother; moreover, competitors tendto
escalate these practices astheprocess goeson.
5.392 Japan further submits thatpremiums areoften offered foralimited period oftime. If
enforcement against them requires alengthy procedure, theregulation willbecome ineffective. In
order toprevent impediment tofaircompetition bythese practices andtoprotect consumer interests,
itwasnecessary, therefore, tocounter thesepractices through swiftenforcement action. Inthatsense,
Japan argues, thePremiums Lawisnotredundant. Itincorporated theelement ofconsumer protection
inthetextoftheLaw, andintroduced aswiftenforcement mechanism torestrict excessive premiums
andmisleading representations. Moreover, astheLawlaysoutspecific standards ofunlawful premiums
orrepresentations, itenhances foreseeability forthebusiness andserves toprevent actual excessive
activities.
(i) Background andobjective
5.393 IntheviewoftheUnited States ,Japan promulgated thePremiums Law, atleastinpart,to
counteract aggressive competition byimports thatwasexpected tooccur withtrade liberalization.
According totheUnited States, theJapanese Government 'sprotectionist intentions pervade therecord
ofthelaw'senactment.413
413TheUnited States submitted thatwhen thePremiums Law wasfirstproposed intheDiet, proponents ofthebill
acknowledged thatthePremiums Lawwould soften theeffects oftrade liberalization:
Mr.Tanaka (Takeo): "The second point relates totheliberalization which isnowunderway ...With respect toliberalization
countermeasures, weareoftheview thattheissue ofexcessive advertisement, etc.should beconsidered aswell. Thatis
because Japanese [companies] willnotbeabletosuccessfully compete iflarge foreign companies, etc.,came inandconducted
various excessive premium campaigns. Accordingly, this[bill] isrelated toliberalization countermeasures."
Minister Fujiyama: "The enactment ofthislawisappropriate forpurposes ofconsumer policy ...Inaddition, asaresult
ofliberalization, itcould possibly happen thatforeign trading companies etc.maycome intoJapan andenjoy advantageous
positions through excessive advertisement orbyinviting buyers toforeign countries."
(Diet Record ofthe40thSession oftheLower House Committee onCommerce andIndustry, No.31,18April 1962, US
Ex.62-4).
TheUnited States alsosubmitted thattheDirector General ofthePrime Minister 'sOffice testified before theDietCommittee
onCommerce,statingthatrestrictionsonpremiumswereneededbecause"[i]tappearsforeigncompanieswillthreatendomestic
companies bythese methods" (Diet Record ofthe40thSession oftheUpper House Committee onCommerce andIndustry,
No.21,13April 1962, USEx.62-2).WT/DS44/R
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5.394 Japan submits that,astheJapanese economy entered thephase ofmassproduction/consumption
inthe1950s, premiums sales, including promotional lotteries, became increasingly popular. Prize
money andmerchandises grewveryexpensive. According toJapan, thesociety grewconcerned about
thesepromotional prizes which encourage speculative behaviour andcould impede consumers 'rational
selection ofgoods.
5.395 According toJapan, additional impetus forthelegislation came in1960when itwasuncovered
thatcanned horse meathadbeenmarketed ascanned "beef," which wasveryexpensive then. Asurvey
found thatonlytwoofthe20-plus canned foodmanufacturers used100percent beef. Concerned about
thelackofadequate means tocontrol misrepresentation, thepublic called forintroduction ofeffective
control ofmisleading representations. TheJFTC initially triedtorestrain thedeceptive expressions
asan"unfair trade practice" under theAntimonopoly Law, andissued anotification onthe"Specific
Unfair Trade Practice intheCanned Meat Industry" inFebruary 1961, which banned the"useof
expressions oradvertisement misleading tocustomers." InaDecember 1960 hearing, voices from
consumer representatives andscholars called forexpansion oftheregulation toallmisleading
representations ingeneral andforintroduction ofanewlegislation todealwiththematter.414
5.396 Japan submits thattheobjective ofthePremiums Lawisfound inArticle 1:
"This law,inorder toprevent inducement ofcustomers bymeans ofunjustifiable
premiumsormisleadingrepresentations...,aimstosecurefaircompetition,andthereby
toprotect theinterest ofconsumers ingeneral".
Japan argues that,asthepanel onJapan -Taxes onAlcoholic Beverages found415,interpretation of
domestic lawshould bebased primarily onthetextofthestatute, rather thaninlegislative history.
ForJapan, reference tothistwinobjective offaircompetition andconsumer protection isrecorded
invarious parts oftheDietminutes aswell.416Japan argues thatthestatements citedbytheUnited
States areselective andmisstheoverall context.
5.397 Japan further argues that,astheUnited States admitted, theexpress textofthePremiums Law
makes nodistinction between imported ordomestic products. Itdoesnotcontain amechanism which
discriminates,inherently,importedproductsagainstdomesticproducts.TheLaw'simpactonthemarket
access willbefeltequally bydomestic andforeign products. Inthissense, theLawistrade-neutral.
5.398 TheUnited States submits thatJapan erred inarguing thatitspromotion restrictions serve
toprotect onlyconsumers. Japan'srestrictions notonlywereintended toprotect consumers, butthey
alsoweredesigned toprotect domestic production. Thispurpose isevident inavariety ofmeasures,
mostnotably Japan's30-year restriction ontheuseofpremiums between businesses -ameasure which
clearly hadlesstodowithconsumer protection thandampening competition fromforeign competitors.
TheUnited States argues thatdespite Japan'sprotest thattheJFTC isnota"collaborator" inefforts
414Opinions submitted totheJFTC atthepublic hearing concerning Designation oftheSpecific Unfair Trade Practices
intheCanned Meat Industry, Kosei Torihiki, February 1961, Japan Ex.D-24.
415Panel Report, adopted on1November 1996, WT/DS8, 10and11/R, para. 87.
416Japan cited thefollowing examples:
- reaffirmingtheobjectiveofthePremiumsLaw,theCommerceandIndustryCommitteeoftheHouseofRepresentatives
passed aresolution which emphasizes that"theLawhasanimportant function aspartoftheoverall promotion ofconsumer
policy" when itpassed thebillonApril 19,1962.
- KodairaHisao,thenCabinetMinisterforGeneralAffairs,introducedthebilltotheDiet,statingthat"...[i]nducement
ofcustomers through excessive premiums ormisleading representations, notbyvalue ofthemerchandise orservice, impairs
general consumers 'proper selection ofthegoods andservices, andundermines faircompetitive conditions... [A]ccordingly,
thebillishereby submitted inorder toensure faircompetition andtoprotect general consumers 'interests byproviding for
aswift andappropriate means toeffectively control excessive premium sales andmisleading representations, asaspecial
ruletotheAntimonopoly Law".WT/DS44/R
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tocounteract theeffects oftrade liberalization, Japan hasfailed toexplain theJFTC 'sexpressions of
protectionist intent byofficials oftheJFTC andother agencies oftheJapanese Government.
5.399 Japan argues thatinpursuing thegoalofpromoting fairandfreecompetition intheJapanese
market, theJFTC hasnever accorded anyforeign entity orproduct treatment lessfavourable thanthat
accorded toaJapanese entity orproduct. Japan submits thattheJFTC hasallowed prizeoffers linked
tosales --apractice which isprohibited intheUnited States andother countries --totheextent
compatible withthegoaloffaircompetition. Foreign business inJapan hasbeenabletopromote their
salesthrough thistypeofprize. Hadtheobjective oftheJFTC ’spremiums regulations beentorestrict
foreign manufacturers ’promotional activities these practices would havebeenmade unlawful aswell.
Indeed, Kodak hasbeenactively taking advantage ofthispolicy andoffered aseries ofpromotional
prizes. More fundamentally, theultimate litmus testofintent should bewhether ornotthere is
recognizable "intent" or"objective" builtinthestructure ofthesystem indispute, rather thanindividual
statements. Thefundamentally origin-neutral regulation ofthePremiums Lawcontains nosuchbuilt-in
mechanism based onan"intent" or"objective" ofdiscrimination.
(ii) Substantive provisions
5.400 TheUnitedStatessubmitsthatArticle2ofthePremiumsLawdefinestheterm"representations"
tomean "advertisements oranyother representations which abusiness makes orusesasmeans of
inducement ofcustomers, withrespect tothesubstance ofthecommodity orservice which hesupplies
ortheterms ofthesaleoranyother matter concerning thetransaction, andwhich aredesignated by
theFairTrade Commission assuch". Article 4proscribes theuseof"anyrepresentation bywhich
thequality, standard oranyother matter relating tothesubstance ofacommodity orservice shalllead
thegeneral consumer tobelieve thatitismuch better thantheactual oneorthanthatofother businesses
whoareincompetitive relationship withthebusiness concerned, andthereby which isfound likely
toinduce customers unjustly andtoimpede faircompetition". Inaddition, Article 4empowers the
JFTC todesignate asunlawful "anyrepresentation bywhich anymatter relating totransactions asto
acommodity orservice islikely tobemisunderstood byconsumers ingeneral".
5.401 FortheUnited States, thedefinition ofapremium isunclear. TheJFTC hasissued many
notifications limiting thevalue ofeconomic benefits thatmaybeoffered andindicating theindustries
orbusinesses affected, butthese notifications donotspecify thenature oftheeconomic inducements
subject tothelaw. TheJFTC hasexplained that"[p]remiums which aretheobject ofnotifications
refer toproducts, cash, marketable securities, entertainment, orother economic benefits which are
given inconnection withatransaction involving commodity orservice".417Atthesametime, theJFTC
hasindicated thatitdistinguishes between premiums andprice discounts orrebates onacase-by-case
basis, examining thefacts"inlightofnormal business practices, taking intoaccount details ofthe
transaction, details oftheeconomic benefit, themethod andtheconditions ofoffer, andthecustoms
ofthatparticular industry".418Nonetheless, theUnited States argues, theJFTC acknowledges thatsome
forms ofdiscounts orrebates maybepremiums.419IntheUSview, given thisambiguity andthefact
thatthebulkoftheJFTC 'senforcement actions areinformal andunrecorded, businesses often have
difficulty knowing whether theinducements theyoffer fallwithin thescope ofanyprohibition.
5.402 Japan argues thattheUScharacterization ofthePremiums Lawisfundamentally inaccurate.
ThePremiums Lawrestricts onlyexcessive premiums andmisleading representations, anddoesnot
control themajor partofthepromotional activities, including competition bypremiums, advertising
andlowprices.
417FTC/Japan Views: Information andOpinion from theJapan FairTrade Commission, No.2,April 1988, p.15,US
Ex.88-3.
418Ibid., p.16.
419Ibid.WT/DS44/R
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5.403 Japan alsosubmits thattheUSclaim thatthedistinction between premiums andrebates or
discounts is"ambiguous" isunfounded. ForJapan, thePremiums Law, theJFTC Notifications and
theStandards ofApplication clearly define whatconstitute premiums. First, Article 2ofthePremiums
Lawdefines premiums asfollows:
"Premiums 'asusedinthisLawshall mean anyarticle, money andother kinds of
economic benefits which aregiven, asmeans ofinducement ofcustomers ...,andwhich
aredesignated bytheJFTC".
Second, the"Designation ofPremiums andRepresentations"420further clarifies theboundary by
establishing that"goods, money orother economic benefits offered inconnection withtrade donot
fallunder premiums iftheyareconsidered asdiscounts, post-sales services orothers inlightofnormal
commercial practices". Finally, theDesignation Notification isfurther clarified bytheJFTC 's
"Guidelines fortheImplementation oftheNotification concerning Designation ofPremiums, Etc.".421
5.404 ForJapan, thePremiums Lawdoesnot,contrary totheUSallegation, prohibit allkinds of
premiums. Criteria oftherestriction arecontained inArticle 3ofthePremiums Lawwhich provides:
"The JFTC may, when itfinds thatitisnecessary toprevent unfair inducement of
customers, limiteither themaximum value ofapremium ortheaggregate amount of
premiums, thekindofpremiums ormethods ofoffering ofpremium oranyother
matter relating there to,ormayprohibit theoffering ofapremium".
Japan notes thattheword "premiums" intheLawsignifies both(a)gifts, namely goods offered free
ofcharge ("premiums" inanarrow sense) and(b)prizes, namely cash, goods ortripoffered through
lotteries orprize competition.
5.405 Japan further submits thatsimilar restrictions ofexcessive premiums canbefound inother
countries. According toJapan, some European countries place evenmore stringent regulations on
these practices. Forexample, theJFTC hasallowed prize offers linked tosales-apractice which
isprohibited intheUnited States andother countries -totheextent compatible withthegoaloffair
competition. Japan argues thatKodak hasbeenactively taking advantage ofthispolicy andoffered
aseries ofpromotional prizes.
5.406 Japan argues thattherestriction onmisleading representations under thePremiums Lawapplies
onlytofalseorunsubstantiated advertisement which would mislead consumers, andwould thereby
impair faircompetition. Article 4ofthePremiums Lawdefines whatspecifically constitute misleading
representations ofthequality ofaproduct, oftheprice orofother elements. According toJapan,
thePremiums Lawdoesnotrestrict advertisement orrepresentations aslongastheyarebased onfacts.
Japan argued thattheUnited States failed togiveanyspecific typeofadvertising representation that
Kodak wanted todobutwasbanned because ofthePremiums Law. InJapan'sview, restriction of
deceptive ormisleading representations canbefound allovertheworld. Moreover, according toJapan,
thePremiums Lawdoesnotrestrict lowprice offers. Onthecontrary, theLawserves topromote
lowprice offers andother price/quality competition byplacing arestriction onexcessive premiums.
5.407 FortheUnitedStates,Japan'sargumentthatitspromotionrestrictionsareessentiallyinsignificant
--because oftheavailability ofother ways ofcompeting --restsonflawed assumptions. IntheUS
view, Japan'sargument thatforeign producers arefreetorelyupon discount pricing tocompete is
simply untrue. Designation 6under JFTC Notification 15of1982prohibits "unjust lowprice sales",
including "unjustly supplying acommodity orservice atalowprice, thereby tending tocause difficulties
420JFTC Notification No.3of1962 enacted pursuant toArticle 2ofthePremiums Law, Japan Ex.D-28.
421JFTC/Secretary General Circular No.7of1977, Japan Ex.D-29.WT/DS44/R
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tothebusiness activities ofother entrepreneurs". Indeed, theJapanese Government hasadmitted that
itwould "monitor" filmprices sothatKodak could notdominate themarket inJapan asithadelsewhere.
5.408 Japan notes thatMITI'ssurvey onfilmdistribution including filmpricewascarried outfrom
thestandpoint ofindustrial policy, andnotfrom theviewpoint oftheAntimonopoly Law.
5.409 TheUnited States submits thattheability offoreign manufacturers touseprice discounts to
expand theirpresence inJapan hasbeenrather limited. Kodak hasreduced itsprices by56percent
since1986, substantially undercutting itsJapanese competitors. Kodak 'sdramatic pricediscounts have
hadvirtually noeffect onthemarket. Price reductions byforeign photographic material producers -
-eventolevels wellbelow those ofdomestic competitors -often arenotpassed ontoconsumers at
theretail level. According totheUnited States, thislackofprice competition inthephotographic
materials sector isreflected bythefactthatJapan'sconsumer price index forfilmhasshown almost
nomovement between thethirdquarter of1989andthethirdquarter of1996, aperiod ofseven years.422
Little pricedifferential exists among Fuji,Konica andKodak ateither theretail level423orwithrespect
towholesaler prices toretail outlets.424Thesamelackofpricedifferentiation isobservable withrespect
tovarious filmspeeds, types ofoutlets andindividual cities.
5.410 According totheUnited States, limited pricecompetition, coupled withforeclosed distribution
channels, render promotions especially significant toforeign photographic material producers. The
United States believes thatJapan hasunderstated theimportance ofthepromotional activities atissue
andthatthezealwithwhich Japan hasregulated premiums andrepresentations, inandofitself, should
suggest tothePanel thetruesignificance Japan ascribes tothese marketing techniques.
(iii) Enforcement
5.411 TheUnited States submits thatauthority toenforce thePremiums Lawisshared among the
JFTC, theprefectural governments andmembers ofthephotographic materials industry. ThePremiums
Lawaccords totheJFTC theleading enforcement role. Article 6provides theJFTC withthepower
toinstruct violators "tocease anddesist" orto"take themeasures necessary toprevent therecurrence
ofthesaidact". Article 9gives theprefectural governments enforcement authority, including thepower
toissue cease anddesist orders.
5.412 TheUnited States notes thatArticle 10provides forthecreation of"faircompetition codes"
regulating theuseofpremiums andpromotional representations, asdrafted by"fairtrade councils"
comprised byrepresentatives ofthedomestic industry. Article 10permits theJFTC toauthorize
"businesses oratradeassociation" to"enter intoanagreement ortoestablish acode" inorder to"prevent
unjust inducement ofcustomers andtomaintain faircompetition". "Fair competition codes" must
beapproved bytheJFTC. "Fair trade councils" employ various methods ofcoercion andmonetary
penalties toenforce theircodes.
5.413 TheUnitedStatesarguesthatArticle10ofthePremiumsLawhasallowedpowerfulphotographic
industry trade associations tosuppress competition byestablishing cartel-like groups thatsuppress
competition through enforcement ofrestrictions onmarketing activities. TheUnited States alsonotes
thatthePremiums Lawdoesnotexplain howmembership inacouncil orparticipation inacodeis
tobedetermined.
5.414 IntheUSview, thestatute failstoaddress whether parties whodonotparticipate inthe
formulation oradministration ofthe"faircompetition codes" arecovered bythem. TheUnited States
422Photo Market, 1996, p.31,USEx.101.
423Management Analysis ofPhoto Stores, Camera Times, 1979-1996, USEx.40.
424Construction Research Institute, Information onPrices, Monthly Edition, December 1972- September 1996, USEx.22.WT/DS44/R
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argues thatalthough thecodes aredesigned toapply exclusively tomembers, thestandards established
bythecodes areoften adopted bytheJFTC forapplication tonon-members.
5.415 Japan submits thattheJFTC doesnotapprove afaircompetition codeunless itfindsthatthe
draftcodesatisfies thefollowing requirements ofArticle 10,paragraph 2:
"(i) Thatitisappropriate toprevent unjust inducement ofcustomers andtomaintain
faircompetition;
(ii) Thatitisnotlikelyunreasonablytoimpedetheinterestsofconsumersingeneral
ortherelated businesses;
(iii) Thatitisnotunjustly discriminatory; and
(iv) Thatitdoesnotrestrict unreasonably theparticipation inorwithdrawal from
thefaircompetition code".
According toJapan, andcontrary totheUSargument, thisreview eliminates anypossibility ofafair
competition codebecoming a"quasi-cartel." ForJapan, thenotion of"related businesses" mentioned
inparagraph 2(iii)ofArticle 10includes non-members ("outsiders"). Therefore, theJFTC isobligated
toprotect outsiders 'interests.
5.416 According toJapan, "faircompetition codes" areautonomous rulesandcannot bindoutsiders.425
Moreover, Japan argued, a1982Tokyo Court ofAppeals judgment made itclearthatnon-compliance
withafaircompetition codebyanoutsider doesnotconstitute violation ofthePremiums Law.426The
JFTC alone hastheauthority totakeenforcement action against anoutsider.
5.417 Japan further submits thattheJFTC doesnotcease toexercise itsauthority toenforce the
premiums regulations inrespect ofindustries which adopt faircompetition codes. Generally, ifan
insider doesnotcomply withacode, therelated fairtradecouncil takesaremedial measure. However,
iftheJFTC finds itnecessary totakeanenforcement action fortheprotection ofconsumer interests
andtoensure faircompetition itwillchoose toexercise itsstatutory authority aswell.
5.418 Inresponse, theUnited States provided thefollowing statement bytheJFTC Secretary-General:
"self-regulatory codes cannot reach businesses whodonotparticipate inthefaircompetition codes,
evenwhen theyengage insales activities thatviolate thecodes. However, when theJFTC takes
regulatory actions against unjustifiable premiums andmisleading representations, theCommission uses
thecontent ofthefaircompetition codes, astheindustry ’sbusiness practices designed tosecure fair
competition, tointerpret andapply thePremiums Law. Accordingly, businesses engaging insales
activities thatviolate thecodes canbesubject tothem under thePremiums Law, evenwhen theydo
notparticipate inthecodes."427Although thePremiums Lawdoesnotrequire companies tojoina
fairtrade council, inorder tobeeffective intheJapanese market, businesses often feelcompelled,
orarerequired bytherelevant association, tojointhecouncil.
425Inthisrespect Japan provided thefollowing statement bytheJFTC Secretary-General: "Voluntary restraint inafair
competition codeisnotapplicable tosalesactivities ofbusiness entities whoarenotmembers ofthecode, eveniftheactivities
arenotcompliant withit"(Itoda Shogo, JFTC Secretary-General, JireiDokusen Kinshiho (Competition Policy Law), 1995,
p.423, Japan Ex.D-75, USEx.95-20).
426JFTC v.Sanki Co., Ltd,etal,of1982, Tokyo Court ofAppeals, Japan Ex.D-76.
427Itoda Shogo, JFTC Secretary General, Antimonopoly Law, (15December 1995), pp.392-393, 396,420-424, USEx.
95-20.WT/DS44/R
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(iv) Exemptions from theAntimonopoly Law
5.419 Article 10,paragraph 5,ofthePremiums Lawprovides that:
"Theprovisions ofSection 48[recommendation, recommendation decision] andSection
49[initiation ofhearing procedures], Section 67(1) [urgent injunction] andSection
73[accusation] ofthe[Antimonopoly Law] shallnotbeapplied tothefaircompetition
codes thathavebeenauthorized under section (1),andtosuchactsofbusinesses or
atrade association ashavebeendoneinaccordance therewith."
5.420 AccordingtotheUnitedStates,thisexemptionisnoteworthybecausepreparationandapplication
ofthe"faircompetition codes" mayinvolve activities among competitors andtrade associations that
would beactionable under theAntimonopoly Law.428
5.421 InJapan 'sviewthisUSstatement isincorrect. According toJapan, Article 10,paragraph 5,
ofthePremiums Lawonlyconfirms thatfaircompetition codes, asapproved bytheJFTC, donot
constitute violations oftheAntimonopoly Law. Ifafaircompetition codelaterfailstobeincompliance
withtheAntimonopoly Lawduetochanges intheeconomic situation, theJFTC willhavetorevoke
itsapproval according toArticle 10,paragraph 3.After thecancellation, theJFTC isauthorized to
takenecessary measures against theactions inquestion. Moreover, anyactivity ofentrepreneurs or
tradeassociationsincludingfairtradecouncilswhichisnottaken"inaccordancewiththefaircompetition
code" approved bytheJFTC doesnotenjoy exemption fromtheoperation oftheAntimonopoly Law.
5.422 TheUnited States pointed outthatJapan’sposition inthisregard overlooks thelanguage of
Article 10,paragraph 5ofthePremiums Law, which exempts from antitrust enforcement notonly
thefaircompetition codes themselves, butalso"such actsofbusinesses ortrade associations ashave
beendoneinaccordance therewith." Given thatfaircompetition codes, including the1987 Retailers
code, provide councils withextensive enforcement powers andallow fortheimposition ofpenalties
fornon-compliance, theUnited States maintained thattheexemption permits cartel-like practices by
Japanese businesses against foreign competition.
3. INITIAL IMPLEMENTATION OFTHE ANTIMONOPOLY AND PREMIUMS LAW
5.423 TheUnited States submits thatduring theyears immediately following theenactment ofthe
Premiums Law, enforcement ofthelawwassluggish. FortheUnited States, themost noteworthy
development during thistimewastheJFTC 'simposition ofanotification on"Restriction onPremium
Offers byPrizeCompetition".429Thenotification limited premiums offered inconnection with"closed"
lotteries430orasprizes ingames ofrandom selection. OnJuly15,1965, theJFTC expanded thescope
ofthelottery notification toinclude competitions involving some element ofskill, suchasquizzes or
"pick-a-slogan" competitions.431
5.424 AccordingtotheUnitedStates,theJapaneseGovernmentrecommendedmorestringentapplication
ofthePremiums LawandAntimonopoly Lawagainst "unfair trade practices" inApril 1965.432The
JFTC responded inApril 1966byimplementing changes initsorganizational structure, including the
428Inthisrespect theUnited States submitted thefollowing statement bythepresent JFTC Secretary-General: "[e]ven
ifthecontents ofthecodes ortheactivities based onthecodes violate theAntimonopoly Law, noproceedings torestrict
them willbetaken based ontheAntimonopoly Law" (Itoda Shogo, JFTC Secretary-General, Competition Policy Law, 15
December 1995, p.422, USEx.95-20, Japan Ex.D-75).
429JFTC Notification 5of1962, Kanpo, 30July1962, pp.626-627, USEx.62-1.
430A"closed" lottery requires purchase ofagood orservice. An"open" lottery requires nosuch purchase.
431JFTC Notification 20of1965, Kanpo, 15July1965, p.5,USEx.65-1.
432IndustrialStructureCouncilDistributionCommittee,RegardingtheBasicDirectionoftheDistributionPolicy,Tsusansho
Koho, 24April 1965, p.8,USEx.65-2.WT/DS44/R
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creation ofthePremiums andRepresentation Division.433Following establishment ofthisoffice, total
enforcement actions bytheJFTC under thePremiums Lawrosesharply from 147actions in1965,
to327in1966, thento548in1967, and1,203 in1971.434
5.425 Japan argues that,initially, theenforcement ofthePremiums Lawwascarried outexclusively
bytheJFTC. Whether ornotenforcement actions rosesharply duetothecreation ofthePremiums
andRepresentations Division ofApril 1966, astheUnited States argues, theJFTC hadbeenvigorously
enforcing theregulation onexcessive premiums andmisleading representations which aredetrimental
tofaircompetition, andthenumber oftheissuance ofcease anddesist orders wasincreasing.
5.426 TheUnited States argues thatdespite theJFTC 'sslowstartinenforcing thePremiums Law,
oneofthesubjects itfirstchose toregulate wascameras. Thecamera industry inJapan hadexperienced
highgrowth during thepreceding decade.435"However, in1964and1965, thegrowth oftheJapanese
economy slowed down. Thedomestic demand forcameras became stagnant, anditbecame necessary
toincrease exports inorder toabsorb large [portions] oftheproduction".436Atthetime, though,
Japanese manufacturers faced stiffcompetition fromKodak, dueinlargeparttoaninnovative product
Kodak created allowing foreasier installation ofitsfilm.
5.427 AccordingtotheUnitedStates,domesticphotographybusinessesrelieduponeverlargerpremium
offers inresponse tothiscompetition. "Retailers havestarted tooffer excessive premiums suchas
tripstoHawaii, Hong Kong, Europe, etc.orevenautomobiles".437TheUnited States further submits
thattocombat whatwasperceived asabloodletting inthedomestic photographic sector, theindustry
formed a"depression cartel". TheJFTC certified the"cartel" onJune30,1965. Domestic photograph
businesses began their"move tocorrect those excessive activities ...retailers decided tovoluntarily
refrain from saleswithinvitation orpremiums. Theindustry filedanapplication forcertification of
faircompetition codes according tothePremiums Law".438
5.428 TheUnited States argues thattheJFTC soon acted toprotect the"camera cartel" from
competition onpremium offers. OnOctober 15,1965, theJFTC issued anotification entitled,
"Restrictions onPremium Offers intheCamera Industry", which severely curtailed theuseofpremiums
bycamera manufacturers, wholesalers andretailers tooneanother ortogeneral consumers. Alsoon
October 15,1965, theJFTC approved the"Fair Competition Code Regarding Restrictions onPremium
Offers bytheCameras andRelated Products Manufacturers 'Industry", aspromulgated bythedomestic
industry intheformoftheCamera Manufacturers FairTrade Council. Likethenotification, thecode
restricted premium offers byparticipating camera industry manufacturers. OnOctober 29,1966, the
JFTC issued Notification 35,approving analmost identical faircompetition codeonpremiums for
wholesalers ofcameras andrelated products.439
5.429 IntheUSview,thenotificationandcodes,thoughaimedatcameras,affectimportantpromotions
forfilmandpaper. Almost allleading filmmanufacturers intheJapanese market --including Fuji,
Konica andKodak --aresignificant producers ofcameras. Bycircumscribing theuseofpremiums
inpromoting cameras, these restrictions limited theability offoreign manufacturers topromote their
filmandpaper products byoffering them aspremiums along withcameras.
433Interview withIyoriHiroshi: theRoleofPremiums andRepresentation LawandIssues fortheFuture, Kosei Torihiki,
No.502, August 1992, USEx.92-3.
4341966 JFTC Annual Report, USEx.66-1; 1988 JFTC Annual Report.
435Otsuka Noritami, JFTC Trade Practices Division, Recent Activities Concerning thePremiums Law, Kosei Torihiki,
November 1965, p.3,USEx.65-5.
436Ibid.
437Ibid.
438Ibid.
439InJapan 'sview, kamera-rui means "camera category" rather than"cameras andrelated products". Seetranslation
issue 17.WT/DS44/R
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5.430 ForJapan ,there hasbeennoJFTC Notification applicable specifically tophotographic film
andpaper; norhavetherebeenfaircompetition codes specifically applicable tofilmandpaper either.
4. GENESIS OFTHE PROMOTION "COUNTERMEASURES"
5.431 TheUnited Statessubmits thatduring the1960'sand1970's,asJapan made tariffconcessions
andimplementedothertradeliberalizingmeasuresonphotographicfilmandpaperproducts,theJapanese
GovernmentexpressedconcernthatliberalizationwouldopentheJapanesephotographicmaterialsmarket
tostiffcompetition from imports. Asaconsequence, MITI determined thatthegovernment needed
toinitiate policies toforestall thatcompetition. IntheUSview, thegovernment identified itspremium
andrepresentation restrictions asefficient tools toblunt thestrength oftheperceived advantages of
foreign manufacturers offilmandpaper. FortheUnited States, there canbenodoubt thatJapan's
promotion countermeasures wereaimed atdiminishing theeffects ofpromotional campaigns thatcould
bewaged byforeign enterprises withsignificant capital resources.440
5.432 Japan argues thattheJFTC hasbeenfullyaware ofJapan'scommitment tonon-discriminatory
treatment offoreign products andbusiness andthatevidence tothateffect canbefound inaseries
ofstatements andarticles bytheCommission officials which were published during the1960s.441
5.433 TheUnited States further submits thattheJapanese Government imposed itspromotion
countermeasures, atleast inpart, because itrecognized theimportance ofmarketing toforeign
manufacturers offilmandpaper competing against domestic market leaders. Aleading competition
scholar inJapan similarly explained thatindustry-specific notifications were"adopted because offoreign
capital affiliated firms’excessive premium offer sales ...Faircompetition codes areeffective in
controlling saleswithexcessive premiums thatmight disturb themarket. Weexpect active useoffair
competition codes inthefuture.442According totheUnited States, these modes ofcompetition were
particularly significant inJapan, given thedifficulties foreign photographic materials manufacturers
faced withrespect todistribution andother market factors. IntheUSview, Japan understood that,
ifitwereabletohandcuff foreign manufacturers intheiruseofpromotions andshackle thedistribution
network,itstariffconcessionswouldhaveconsiderablylessimpactandthemarketdominanceofdomestic
players would bepreserved. Inthisregard, theUnited States maintained thataformer Secretary General
andCommissioner oftheJFTC confirmed thatthepromotion countermeasures originated fromaneed
tocontrol foreign capital. Hestated: "[O]ne reason therestrictions concerning theoffering ofpremiums
tobusinesses areestablished istoprevent thesalewithexcessively large premiums byforeign capital
related businesses ingeneral, andtheresulting distortion offaircompetition. There havebeenthree
restriction notifications concerning specific industries ...Allofthesewereadopted asaresult ofselling
withexcessively large premiums by[a]special foreign capital affiliate.443
440TheUnited States provided, interalia,thefollowing statement byMITI: "Along withtheliberalization ofcapital and
trade, themajor issues facing thisindustry today include theU.S. landing inJapan andmarket expansion ...Thestruggle
tocapture market share willdepend substantially onpromotional activities based onfinancial strength. Therefore, those
filmmanufacturers inJapan thatarelacking infinancial strength, eventhough theyareinamonopolistic position domestically,
arelikely tofaceserious testing inthefuture" (MITI, Manual fortheSystemization ofCamera andFilmDistribution, March
1975, p.121, USEx.75-5).
441Japan provided, interalia,thefollowing statement byYamada Sei-ichi, thenChairman oftheJFTC: "[Asked whether
theJFTC would thwart foreign capital bytheAntimonopoly Law: ]Ifweweretotreatforeign capital harshly andtreatdomestic
capital leniently, there would benoruleoflawanymore. TheLawmust beapplied fairly todomestic andforeign capital
alike" (Interview ofYamada Sei-ichi byKanamori Hisao, 205Kosei Torihiki 20,p.24,1967, Japan Ex.D-22).
442Matsushita Mitsuo, Antimonopoly LawandInternational Transactions (With Focus onExtra-territorial Application),
25May 1970, pp.83-89, USEx.70-2.
443Iyori Hiroshi, Basic Approach toCapital Liberalization andAntimonopoly Law: Types ofRegulation, Sample Cases,
Zaisei Keizai Koho, No.1332-1333, 24November 1969, p.7,USEx.69-7.WT/DS44/R
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5.434 TheUnited States argues thatduring the1950'sandearly 1960's,large Japanese consumer-
product manufacturers builtpowerful brand images andproportionately largemarket shares asaresult
oftheir"substantial financial commitments toestablish andpromote theirbrands".444Atthesametime,
several foreign manufacturers demonstrated thatimports could follow similar strategies based onuse
ofpromotional toolstomount successful challenges toentrenched Japanese brands. TheUnited States
provides examples offoreign companies, suchasBristol-Meyer, Nestlé andColgate, which successfully
captured theJapanese market withpromotion campaigns.
5.435 Japan argues thattheexamples provided bytheUnited States failtoprove theUSargument
thatafreer marketing environment hadexisted prior totheintroduction ofthePremiums Law; the
cited cases areallexamples ofpromotional activities which would notberestricted bytheJFTC
regulations ofexcessive premiums eventoday. Japan argues thatSchick 'sdistribution offreestainless
steelrazor blades toJapanese males hasbeenlawful under thePremiums Lawatanypointofitshistory;
thatNestlé 'spromotion wasalowprice offer, thusfalling outside thescope oftheLaw; andthat
Colgate 'sdistribution offreetoothpaste samples would nothavebeensubject tothePremiums Law.
ForJapan, these cases demonstrate, onthecontrary, thatthere areplenty oflawful promotional
opportunities inJapan, andthatforeign business hasbeenabletotakeadvantage ofthose opportunities
successfully.
5.436 Intheview oftheUnited States ,Japan'scontention thatthese examples would be"lawful
under thePremiums Lawatanypoint initshistory" isinaccurate. JFTC Notification 17of1967,
restricting premiums between businesses, andJFTC Notification 5of1977, restricting premiums to
general consumers, provides thatsamples areexempt fromcoverage onlyiftheyare"found reasonable
inthelightofnormal business practices." Inaddition, certain lowprice offers mayberegulated as
an"unjust lowprice" under designation 6ofNotification 15of1982.
5.437 Japan submits thatregulations onpremiums andrepresentations under theAntimonopoly Law
andthePremiums Lawdonotrestrict lowprice offers.
5.438 According totheUnited States ,theJapanese Government expressed strong concerns about
theability ofimports andforeign firms tousesuchstrategies successfully andbegan toformulate policies
forcountering thischallenge. Japan'sconcerns regarding aggressive marketing techniques were
particularly acuteforfilmandpaper due,atleastinpart,toFuji'sstrong name-brand recognition among
Japanese consumers. TheUnited States points outthatoneJapanese official laterexplained that"we
wereafraid thatKodak would useitscapital strength tocontrol themarket withhugeincentives like
lowprices, orattach some kindofgifttothefilms, andthen, afterruling themarket, theywould raise
price...There wasthisworry, soweissued guidelines sothatthecompetition would befair."445Japan
thussetoutonacourse toimpede theability ofimports tochallenge Fuji'sname-brand advantage.
5.439 FortheUnited States, basic economic theory supports Japan'sdecision tohinder promotion
competitionforphotographicmaterials.Economistshavelongnotedthatnewmarketentrantsorproducts
withlimited market share -oftencharacteristics ofimports -faceanuphill battle when competing against
establishedproductswithstrongbrand-namerecognition.446AccordingtotheUnitedStates,thisdifficulty
isevengreater forso-called "experience goods", which develop consumer loyalty based onrepeated
satisfactory experiences. Thenatural market advantages enjoyed byestablished brands maybeenhanced
further when theproduct inquestion isrelatively inexpensive, thereby reducing theconsumer 'sincentive
totryalternatives.
444M.Y. Yoshino, TheJapanese Marketing System: Adaptations andInnovations, MITI Press, 1971, p.103,USEx.71-1.
445Japanese SeeKodak Case AsHardly Black andWhite, New York Times, 5July1995, USEx.95-14.
446SeeJ.S.Bain, Barriers toNew Competition, 1956, p.216, USEx.56-1.WT/DS44/R
Page144
5.440 TheUnited States submits thatnewbrands andproducts challenging leading brands canuse
avariety ofcompetitive toolstoattract consumers away fromthemarket leader, butthat,inthewords
ofoneacademic study, thechallenging brand must provide "something extra".447The"something
extra" oftenconsists ofsome formofpremium toattract customers away fromtheirtraditional brands.
Asafirststep, however, thechallenging brand must beheavily advertised. Essentially, products
challenging leading brands must "shout louder tobeheard". IntheUSview Japan has,through
application ofitspromotion countermeasures, sought tothwart foreign producers attempting todojust
that.
5.441 Japan argues thatexcessive premiums aresubject torestriction inother countries aswelland
thattheJapanese regulations arenotparticularly more stringent thanforeign counterparts. According
toJapan, reflecting thedivergent social/cultural background, theoverseas regulations differ inthedegree
ofrestriction ofpremium offers, andcan,generally speaking, becategorized intotwogroups.448The
firstcategory ofcountries including Germany, France, Belgium, theNetherlands, Norway andDenmark
havetaken anegative approach topremiums astheirpolicy emphasizes price/quality competition.
All-purchaser premiums aregenerally heldtoaverylowlevel inthese countries, andprizes are
prohibited.
5.442 InJapan'sview, thebasic philosophy inthose countries where theuseofpremium offers "per
se"isrestricted, isasfollows:
- aspremium offers mayleadtocompetition being concentrated onmatters other thanprice,
quality andservice, theymake itmore difficult fortheconsumers tosurvey themarket;
- premiums offers arelikely todivert theinterest oftheconsumers fromthemainitemandthus
entice them tobuyoneitemoutofinterest foranother item;
- there isatendency forconsumers tooverestimate thevalue ofpremiums;
- theconsumer mayinsome cases havedifficulties ifhewants tomake aclaim forafaulty or
defective premiums;
- insome cases, theconsumer isonlyinterested ineither themain itemorthepremium and
hasnochance toacquire theitemhewants without buying alsoother itemwhich hedoesnot
want;
- themarket would beartificially inflated byarticles which theconsumer initially didnotwant.
Itwould bepreferable ifconsumers were given anadequate price reduction instead.
5.443 JapanfurtherarguesthattheUnitedStatesandtheUnitedKingdombelongtothesecondcategory
which favours premiums. They donotrestrict all-purchaser premiums. Ontheother hand, however,
theyeither prohibit orseverely restrict saleswithlotteries orprize competition, which arelawful in
Japan.
5.444 TheUnited States submits thatJapan'sattempts tocompare its"promotion countermeasures"
tolawsinother countries areunavailing. Though Japan haspointed toindividual aspects ofits
"promotion countermeasures" thatapproximate facets ofmeasures found elsewhere, theUnited States
argues thatitisunaware ofanynation witharegime thatisquitelikeJapan's.Inparticular, nonation
hasanenforcement mechanism ofgovernment/industry cooperation akintoJapan'ssystem of"fair
trade councils" and"faircompetition codes".
5.445 Japannotesthatamechanismofself-regulationonpremiumsorrepresentationsexistselsewhere,
citing Germany 'sActAgainst Restraints onCompetition (1957) which alsoprovides forself-restraint
ofbusiness entities. According toJapan, Germany hasabout 60"competition rules" approved byvirtue
447Carpenter andNakamoto, Consumer Preference Formation andPioneering Advantage, Journal ofMarketing Research,
Volume 26,August 1989, p.297, USEx.89-4.
448OECD Premium Offers andSimilar Marketing Practices (1977), Japan Ex.D-36.WT/DS44/R
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ofSections 28through 33oftheAct. TheUnited Kingdom 'sFairTrading Actof1973 provides, in
Article 124,paragraph (3),that"itshallbethedutyoftheDirector toencourage relevant associations
toprepare, andtodisseminate totheirmembers, codes ofpractice forguidance insafeguarding and
promoting theinterests ofconsumers".449Japan further submits thatmore recently, inthewake of
deregulation/liberalization ofindustries, countries suchasAustralia orCanada arecontemplating an
increased useofself-regulation fortheprotection ofconsumers, aswellasforthereduction of
administrative cost.
5.446 Thespecific"promotioncountermeasures"challengedbytheUnitedStatesarelistedinpara.3.6
above andoutlined inSection II.B.3.(b) and(c)and4.(a)and(b)above.
5. POST-KENNEDY ROUND PROMOTION "COUNTERMEASURES"
(a) JFTC Notification 17of1967 (premiums tobusinesses)450
5.447 According totheUnited States ,thesweeping limitation imposed byJFTC Notification 17of
10May1967affected nearly allpremium offers between twobusinesses -thatis,premium offers made
bymanufacturers towholesalers andretailers, aswellaspremium offers made bywholesalers to
secondary wholesalers orretail stores -ifusedto(1)open anewrelationship or(2)reinforce sales
volume targets.451TheJFTC explicitly included "photosensitive materials" asoneoftheindustries
covered bythenotification.452
5.448 FortheUnited States, JFTC Notification 17imposed adouble restriction onpremiums between
businesses.Itlimitedtheaggregateamountofpremiumsthatonebusinessmayoffertoanotherenterprise
to100,000 yenperyear, subject toadetermination thatanypremium within the100,000 yenexception
is"reasonable inthelightofnormal business practices". TheUnited States argues thatindustry "fair
competition codes" would playacritical roleintheassessment ofwhatconstituted "normal business
practices". "Asfor'normal business practices, 'ifthere isafair[competition] code, thenthecode
willbeusedasthestandard. Ifnoneexists, theJFTC willmake adetermination afterinvestigating
thebusiness practices ofthatindustry orissueguidance totheindustry toestablish afair[competition]
code".453
5.449 IntheUSview, pursuant toJFTC Notification 17,imported filmandpaper products attempting
toexpand theirmarket share were permitted toofferincentives amounting tonomore than100,000
yentoanyonebusiness. According totheUnited States, insosharply limiting theuseofpremiums
betweenbusinesses,thenotificationallbuteliminatedoneoftheseminalmethodsbywhichmanufacturers
openrelationships withwholesalers andretailers orprovide incentives fordown-line distributors to
increase sales.
5.450 TheUnited States further submits thattheJFTC indicated inits1966Annual Report thatJFTC
Notification 17wasissued asaliberalization countermeasure, noting thatpremiums "1)impede the
rationalization ofdistribution; 2)harmconsumer interest; 3)willleadtocompetition based onfinancial
resources andsalespower where thestronger preyupontheweaker; and4)point3[above] willintensify
particularly withcapital liberalization ".454TheJFTC further explained that"[t]he primary objective
of[Notification 17]is(a)rationalization ofthedistribution stage...;and(b)eliminat[ion] ofthestronger
449Japan Ex.D-62.
450SeeSection II.B.3.(b).(ii) above.
451Severe Restrictions Placed onBusinesses forPremium Offers: Shatokuren Hears JFTC Explanations atJyosui Kaikan
onthe12th, Nihon Shashin Kogyo Tsushin, 20June 1967, p.25,USEx.67-8.
452Seetable attached toJFTC Notification 17.
453Severe Restrictions Placed onBusinesses forPremium Offers, op.cit.
454JFTC Annual Report, 1966, USEx.66-1, emphasis added bytheUnited States.WT/DS44/R
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preyupontheweaker salescompetition based onthepower ofcapital ...IfUScapital weretoconduct
[premium offers] directed attheJapanese distribution sector, thiswould benomatch for[Japan], so
therestrictions should beapplied asabreakwater before liberalization".455FortheUnited States, the
JFTC clearly issued thenotification withforeign competition inmind.
5.451 ForJapan ,theobject andpurpose ofthenotification should befound, byandlarge, notin
thesection ofthe1966JFTC Annual Report quoted bytheUnited States, butinthepreceding section
oftheReport:
"InJune1966, theConsultative Body onPrices, anadvisory organ totheDirector
General oftheEconomic Planning Agency, recommended that'premiums offers at
thedistribution ofhousehold goods would unnecessarily raisesales/distribution cost
andrunscounter torationalization ofdistribution andistherefore undesirable from
theviewpoint ofcombating rising prices. Thematter should notbeleftunattended and
itisnecessary toregulate thepractice under thePremiums Lawinorder topromote
faircompetition andrationalize distribution, andthereby topassthebenefits of
competition toconsumers. 'Inresponse tothisrecommendation, theJFTC surveyed
80organizations including manufacturing associations ofconsumer goods inAugust
ofthesame yearforthefactssurrounding tourinvitations ...".456
Japanarguesthatthenotificationappliedregardlessofthenationalityoftheentityengagedinthepractice.
5.452 Japan further submits thatJFTC Notification 17wasapplicable onlytooffers ofgoods. Low
priceoffers, rebates andoffers ofgoods toassist theother parties 'promotional activities wereoutside
thescope oftheregulation. Moreover, thenotification makes itclearthatitdoesnotrestrict businesses
to"offer equipment orfacilities forselling orstoring suchgoods, toofferequipment, facilities, etc.
foradvertisement oranyother aidsforadvertisement, ortoprovide guidance ontheinformation on
commodities orrepair technique". Hence, according toJapan, themanufacturers, bothforeign and
domestic, havehadalargevariety ofmeans toestablish new,orstrengthen existing, relationships with
distributors.
5.453 Japan notes thatthephotographic materials industry wasnotsingled outsince almost allthe
industries producing goods consumed orusedinevery daylife-more than100industries ranging from
automobiles tosoaps -were covered.
5.454 Japanarguesthattheregulationrestrictedonlyexcessivepremiumoffers-notnormalpromotional
activities -todistributors. Therationale wasthatsuchoffers could impair fairandfreepricecompetition
inthedistribution andcould increase thedistribution costtothedetriment ofconsumer interests.
However, manufacturers werestillabletoofferlowprices orrebates andwerefreetoengage themselves
inother normal promotional activities under thenotification.
5.455 Japan further notes thatpremiums offered toemployees ofcompanies which wereinaspecial
relationship (share holdings orsending executives) withthemanufacturer werenotconsidered premiums
under theregulation, because theywerenodifferent frompremium offers toitsownemployees. This
exception applied onlytotransactions which werevirtually identical tooperation within asingle entity.
Therelationship between FujiFilm anditsprimary wholesalers were noteligible fortheexception
because theywere notinspecial relationship.
5.456 Japan submits thatJFTC Notification 17hasalready beenabolished since April 1996 and
therefore fallsoutside thescope ofthepresent proceeding. Asprice competition intensified atthe
455Severe Restrictions Placed onBusinesses forPremium Offers, op.cit.
456JFTC Annual Report, 1966, Japan Ex.D-43.WT/DS44/R
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distribution levelduetochanges intheJapanese economy since 1967, distributors tended todemand
lower prices, rather thanpremiums, from themanufacturers. Theneedfortheregulation declined,
commensurate withthetrend. Forthese reasons, theNotification wasabolished.
5.457 TheUnited States notes thatthenotification remained ineffect through March 1996, butthat
therepeal ofNotification 17leaves premium offers between businesses subject toJFTC Notification 15,
Designation 9,of15June1982onunjust inducements under theAntimonopoly Law. TheUnited States
argues thatthatdesignation prohibits premium offers inexcess of"normal tradepractice". Given that
premiums worth more than100,000 yenperyeartoasingle business were unlawful from 1967 to
1996, andthusthe"normal tradepractice" mayeffectively belimited tothatamount, thereisuncertainty
astotheextent towhich anypresent restrictions under theAntimonopoly Lawwilldiffer from the
former standard pursuant tothePremiums Law.
5.458 However, according toJapan ,thefactisthatunder Designation 9ofJFTC Notification 15
on"Unfair Trade Practices", theautomatic trigger levelof100,000 yendoesnotexistanymore, and
thattheburden ofproof lieswiththeJFTC.
(b) 1967 Cabinet Decision (guidance onfaircompetition codes)457
5.459 TheUnited States submits thatinJune1967, theForeign Investment Council ("FIC") Expert
Committee, anadvisory committee oftheMinistry ofFinance, called fortheestablishment ofadditional
"faircompetition codes" asan"effective countermeasure".458These codes were tobeestablished,
theCommittee suggested, "with assistance from theindustry thatmight beaffected".459
5.460 According totheUnited States, Japan waswellaware thatitstreaty obligations didnotallow
thegovernment totreatforeign companies inafacially discriminatory manner. Inthewords ofaForeign
InvestmentCouncilExpertCommitteemember,althoughJapanwanted"legalcountermeasurestoprevent
anyriskofforeign capital disturbing domestic businesses ortheJapanese economy, ariskwhich will
arisewithcapital liberalization," itrecognized that"ifanydiscriminatory countermeasures aretobe
taken ...itwillhavetobethe[domestic] companies taking them ontheirown".460Tooutsiders, the
measures would seem evenhanded: "thegovernment must naturally counter suchnewsituations by
expanding theapplication ofthe[Premiums andAntimonopoly Law,] butitmaybethatthelawsshould
betechnically applied inafairmanner todomestic andforeign firms...".461
5.461 TheUnited States further submits thatinJuly1967, theJapanese Cabinet adopted the
recommendations oftheFICanditsExpert Committee thatthePremiums Lawshould beusedasa
liberalization countermeasure byestablishing faircompetition codes.462FortheUnited States, the
government directed thatthecodes were tobeestablished byindustry representatives andtrade
associations, asprovided under Article 10ofthePremiums Law, andthegovernment would exercise
"active guidance".463
457SeeSection II.B.1 above.
458ReportoftheForeignInvestmentCouncilExpertCommittee,Finance,June1967,p.3,USEx.67-5.SeeSectionII.B.1.
459Ibid.
460Postwar Developments andChallenges ofCorporate LawPartII:Capital Liberalization Countermeasures, Hogaku
Seminar, April 1968, p.3,USEx.68-4.
461Ibid.
462SeeSection II.B.1.
463"What hasgained special attention inthislawasaliberalization countermeasure istheestablishment offaircompetition
codes, which have aself-regulatory character forindustry (Article 10ofthesame law)...itwasconcluded thatoffering
excessive premiums andother suchpractices canprobably beprevented effectively bythemore efficacious utilization of
thissystem. There wasstrong feeling thatwhat isneeded forthispurpose aretheefforts ofJapanese industry itself in
establishing these codes andactive guidance inthegovernment inthedirection ofhelping these efforts" (Sato Hiroshi, Deputy-
Director, Foreign Investment Division, Ministry ofFinance, Legislative Countermeasures forPreventing Disorder ResultingWT/DS44/R
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5.462 Thereafter, theUnited States argues, theJFTC urged theprivate sector topromulgate more
"faircompetition codes" andoffered guidance ondrafting them. Industry andassociations initially
resisted, buttheJFTC nonetheless succeeded insecuring commitments toadopt suchcodes: "With
respect toestablishing thefaircompetition codes, unlike today, theywere allextremely unwilling.
They thought that[thecodes] were disgraceful ...Various industries were originally unwilling to
establish faircompetition codes, butby[1969], theybegan establishing thecodes ontheir own
initiative".464
5.463 Japan submits thatitdidnotbelieve itisnecessary toelaborate onfaircompetition codes or
fairtradecouncils asnoneofthemcover photographic filmandpaper. Nevertheless, itfeltcompelled
torectify misperceptions contained intheUnited States submissions. Japan argues thatexcessive
premiums andmisleading representations tendtoquickly spread among competitors, andtoescalate
intheprocess. Itistherefore desirable foreffective enforcement ofthePremiums Lawtohavebusiness
entities agree onself-restraint ofsuchbehaviour andtoprevent actual violation oftheLaw. Japan
submitted thatitisagainst thisbackground thatthePremiums Lawallows business entities toadopt,
subjecttotheJFTC'sapproval,voluntaryrules(faircompetitioncodes)onpremiumsandrepresentations,
toensure consumers 'proper selection ofmerchandises andfaircompetition inthemarket.
5.464 Japan argues thatthereport oftheFIC'sExpert Committee, invoked bytheUnited States,
alsoclearly states that"[i]napplying theAntimonopoly Law, enterprise withforeign capital should
notbetreated differently".465According toJapan, neither theAntimonopoly LawnorthePremiums
Lawhasanyprovision thatallows treating enterprises withforeign capital differently, andthese laws
havenever beenenforced insuchamanner.
5.465 ForJapan,thereportonlycontainedrecommendationsmostofwhich"hadtobefurtherdiscussed
inother expert councils oradministrative agencies fortheirimplementation, inlightofthecharacter
ofbeing anadvisory organ toconsider important matters inconnection withforeign investment".466
Thereport specifically states that"formostofthematters discussed here, neither theCommittee nor
theCouncil isabletorender conclusive judgment". Japan submits thattheJFTC hasnotenforced
thePremiums Lawtoimplement these recommendations. Japan alsoargues that,contrary totheUS
allegation, theJapanese Cabinet didnotadopt thereport. Therefore theJapanese Government did
notexercise "active guidance".
5.466 According totheUnited States ,Japan triestoremove thecodes andcouncils from review
byarguing thattheydonotregulate thesaleorpromotion ofphotographic materials. Japan claims
thatthecodes werenotdrafted withfilmorpaper inmind. Inmaking thisargument, Japan overlooks
theactual market effects these codes andcouncils haveonthepromotion ofphotographic materials.
FortheUnited States, thecodes andcouncils stultify promotions forphotographic materials inthe
Japanese market, anditisthisactual effect towhich itobjects.
5.467 TheUnited States further submits thattobuttress thefledgling fairtrade councils, Japan took
steps toensure thatforeign firms would beunable tomake inroads intotheJapanese market prior to
fullenforcementoffaircompetitioncodesthatwerebeingputintoeffect.TheJFTCinitiatedproceedings
against imports todiscourage aggressive promotional efforts. These enforcement actions sentastrong
signal thatthegovernment intended touseitsrestrictions onpromotions tosuppress import competition.
from Liberalization ofDirect Investment, Finance, July1967, p.6,USEx.67-5).
464Interview withIyoriHiroshi: TheRoleofPremiums andRepresentation LawandIssues fortheFuture, Kosei Torihiki,
No.502,August 1992, USEx.92-3. Japan submitted thatthereason whytheprivate sector was"unwilling" toadopted
thecodes wasthatthetarget industries hadbeenexercising outrageous misrepresentations (e.g., souvenirs, realproperty)
andfeltitwasdishonourable toadopt such codes.
465Finance, June 1967, Japan Ex.D-58, USEx.67-5.
466Finance, July1967, Japan Ex.D-59, USEx.67-9.WT/DS44/R
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TheUnited Stated provides three examples where theJFTC enforced thePremiums Lawagainst
subsidiaries offoreign companies orimporters offoreign products. Oneexample involved aJapanese
subsidiary ofaSwiss watch company which wanted toprovide itstopcustomers withtripstoattend
seminars inSwitzerland. Inanother example action wastaken against importers ofUS-made air
conditioners wanting tooffer afreecolour television witheachproduct sold. Inathird example, a
USsoftdrink producer wasprohibited toofferitsconsumers certain sweepstakes withprizes ofcash
orathree-pack ofsoda. TheJFTC Premiums andRepresentations Division director acknowledged
atthetimethattheJFTC wasconcerned about "flashy premium sales" bylarge foreign competitors
andthata"faircompetition code" wasneeded toprotect domestic industries.467
5.468 According toJapan ,eachoftheexamples citedbytheUnited States hadnothing todowith
theorigin oftheproduct. Thesame action would havebeentaken against domestic producers. Japan
further notes thatforthethree-year period of1969 to1971, JFTC issued cease anddesist orders in
159cases andonlythree were against foreign products. ForJapan, theJFTC hasbeenfullynon-
discriminatory inenforcement oftheAntimonopoly LawandthePremiums Law.
5.469 According totheUnited States ,inaddition tothese enforcement actions, theJFTC tookless
formal action byissuing "administrative guidance" toforeign companies andtheirdomestic importers.
Though notasdrastic aform ofregulation asacease anddesist order, "administrative guidance"
essentially hasthesame effect.
5.470 TheUnited States alsoargues thattheJapanese Government tookadditional steps toenhance
thepromotion countermeasures while fairtrade councils werebeing formed. In1972, thePremiums
Lawwasamendedtoprovideauthorityforprefecturalgovernmentstoinitiatepremiumandrepresentation
enforcement actions.468Under revised Premiums LawArticle 9-2,prefectural governments maydirect
violators tocease fromacting inconsistently withArticles 3or4.Tomobilize public pressure insupport
ofanenforcement measure, prefectural governments maypublicize theirfindings. Ifaviolator fails
tocomply withadirective issued under Article 9-2,orifaprefectural government requests, theJFTC
alsomay"take appropriate measures".469According totheUnited States, the1972amendment resulted
inadramatic upturn inthenumber ofenforcement actions brought under thelaw:from 1972 tothe
present, prefectural governments havebeenresponsible forapproximately 75percent ofallPremiums
Lawenforcement actions.
5.471 Japan submits thatthe1972amendment wasinresponse tocallsforfurther cooperation between
theJFTC andlocal governments forthepurpose ofbetter protection ofconsumer interests.470The
amended Premiums Lawempowers Prefectural Governors toinvestigate possible violations ofthelaw
through therequirement ofreports andon-the-spot inspection. They arealsoauthorized toissue a
non-binding direction toparties inacasetorefrain fromviolation oftheLaw. Japan noted, however,
thatthePrefectural Governors donothavetheauthority toissue cease anddesist orders (Article 9
bisofthePremiums Law). Ifparties donotvoluntarily follow non-binding directions bytheGovernors,
compulsory actions willhavetobetaken bytheJFTC. Moreover, theprefectural governments are
under theJFTC 'scontrol asfarastheenforcement ofthePremiums Lawisconcerned (Article 9-5).
Bothauthorities areengaged inclosecommunication witheachotherinconnection withtheenforcement,
andthere isnopractical discrepancy intheinterpretation orpolicy ofthepremiums regulations.
467UenoToshiro,JFTC'sPremiumsandRepresentationDivision,PepsiColaPremiumsLawCase,KoseiTorihiki,December
1971, USEx.71-12.
468Premiums Law, Articles 9-2and9-3,USEx.62-6.
469Ibid., Article 9-2.
470Thirty-Years ofCompetition Policy, pp.286-287, Japan Ex.D-56.WT/DS44/R
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5.472 InJapan'sview, itshould benosurprise that"75percent ofallPremiums Lawenforcement
actions" arehandled byprefectural governments, asnoted bytheUnited States submission, because
theJFTC hasoneheadquarters and8localoffices while thereare47prefectural governments altogether.
(c) JFTC Notification 34of1971 (open lotteries)471
5.473 TheUnited States submits thatthisnotification rules thatprizes offered through advertised
or"open" lotteries, involving norequired purchase ofaproduct, maynotexceed 1,000,000 yen. In
theUSview, theJFTC included "photosensitive materials" among selected industries subject tothe
newrestriction.
5.474 Japan argues thatKodak 'suseofprizes fortheirsales promotion hashardly beenaffected
byNotification 34of2July1971. Kodak hasconducted alargenumber ofpromotion campaigns using
openprizes. Japan submits thatbetween 1971and1996(when thelimiton"open" prizes waschanged
from1to10million yen), Kodak offered 1-million-yen prizes ononlyafewoccasions. Inthemajority
ofKodak 'spromotion campaigns, thefirstprizes werebetween 300,000 to500,000 yen. Even after
thelimitwasraised to10million yen,Kodak keptoffering prizes farlessthantheformer limitof
1million yen.Inlate1996, forexample, Kodak offered initspromotion campaign 500,000 yenprizes
forfirstplace winners.472
5.475 TheUnited States argues thatKodak haslargely curtailed premiums promotions duetothe
tightcontrols imposed. Kodak hasdeveloped many ideas forpremiums andprizes, but"they were
removed fromtheplans iftheypotentially conflicted withgovernment regulations ortheindustry self-
regulation."473
(d) JFTC Notification 34of1973 (country oforigin ofgoods)474
5.476 TheUnited States argues thatJFTC Notification 34of16October 1973 limits theextent to
which promotional representations forimported products maybemade inJapanese. Among other
things, thenotification designates asmisleading "[r]epresentations ...which, when applied toforeign
made goods, arefound tomake itdifficult forgeneral consumers todistinguish thegoods asmade
intheforeign country inquestion: ...[r]epresentations inwhich alloraprincipal partoftheliteral
description ismade inJapanese letters."
5.477 IntheUSview, limitations ontheuseofthenative language byforeign firms candramatically
impair theefficacy ofmarketing efforts forimported products. Thisisespecially trueiftherestriction
isapplied tothebrand name orother essential information about theproduct.475FortheUnited States,
thelessfavourable treatment accorded toimports byanylimitation ontheuseofJapanese ismanifest
andisexacerbated byguidelines interpreting thenotification.476These guidelines establish exceptions
from thenotification infavour ofdomestic products, exceptions forwhich there arenoanalogies
applicable toforeign-made items.
471SeeSection II.B.3.(a).(ii).
472SeeJapan Ex.D-27, containing a"List ofKodak 'sPrevious Prizes".
473Affidavit ofSumi Hiromichi, p.27,USEx.96-10.
474SeeSection II.B.3.(b).(iii). Even though thisnotification doesnotappear ontheUSlistofmeasures challenged,
itisextensively referred toinbothparties 'submissions.
475IntheUSview, though thenotification alsorestricts theextent towhich representations related totheorigin ofJapanese
goods maybemade inaforeign language, theinability topromote goods inalanguage other thanJapanese doesnotamount
toacomparable burden.
476Application Standards for"Misleading Representations Regarding Country ofOrigin ofGoods", Secretary General 's
Directive No.12,16October 1973, USEx.73-5.WT/DS44/R
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5.478 TheUnited States notes, forexample, thatparagraph 2oftheguidelines permits representations
referring toforeign nations orplaces tobemade inconnection withJapanese products ifitis"obviously
understood" thatthebusiness involved isaJapanese firm. Paragraph 3provides thatdomestic products
maybeidentified withaforeign name, e.g.,"French bread," if"clearly nottoimply thatthecountry
oforigin ofthegoods inquestion isaforeign country".477
5.479 FortheUnited States, JFTC Notification 34anditsguidelines clearly disadvantage imports
byimposing restrictive requirements concerning promotional representations bearing uponthecountry
oforigin ofproducts. Thenotification 'sregulation ofimports intheiruseofJapanese serves noproper
consumer protection purpose because, regardless ofwhere aproduct ismanufactured, thecountry of
origin canbeclearly identified inJapanese. Moreover, theUnited States argues, nolegitimate consumer
protection purpose isserved bycarving outexceptions fromthenotification fordomestic butnotfor
foreign goods.
5.480 Inresponse totheUSarguments withrespect toJFTC Notification 34,Japan submits that
inthelate1960s, ahugequantity ofimported goods began tobedistributed intheJapanese market,
inthecourse oftheexpansion ofexchanges ofcapital, technology andgoods. Unfortunately, improper
representations ofthecountry oforigin became widespread intheprocess. Those representations were
designed todeceive consumers tomistake domestic goods forproducts ofEurope orNorth America,
andtoexploit theconsumers 'preference ofcertain products made abroad. Withaviewtoeffectively
controlling representation which would mislead general consumers onthecountry oforigin ofproducts,
theJFTC adopted Notification 34andalsopublished "Guidelines fortheInterpretation ofApplication
oftheNotification".478
5.481 ForJapan, theNotification wasthusdevoid ofanypurpose oreffect ofrestricting importation
offoreign products; onthecontrary, itwasdesigned, partly atleast, topreserve faircompetitive
opportunities forforeign products against disguised domestic goods intheJapanese market.
5.482 Japan further submits thatJFTC Notification 34issymmetrical andconsists oftwoItems.
Item1provides foraregulation ofrepresentations which could misrepresent domestic goods asforeign
goods, andItem2deals withmisrepresentations offoreign goods asdomestic goods, aswellas
misrepresentation between foreign goods ingeneral.479Theguidelines enacted under thenotification
clarify Item1inparticular. According toJapan, thisisbecause thenotification wasissued primarily
todealwithrepresentations which disguise domestic goods asforeign goods, andtoprotect foreign
products. Japan argued thattheguidelines apply mutatis mutandis toItem2aswell.
5.483 Japan argues inaddition thataslongasthecountry oforigin isclearly expressed inanymanner
whatsoever, beitinJapanese, inaforeign language, orinanon-literal expression, theuseofthe
Japanese language toexpress alloramajor partofliteral representations isentirely lawful.
477TheUnited States alsonoted paragraph 6which allows domestic products touse:
"(i) Representations comprising thename ofortrade mark ofaJapanese business written inforeign letters (including
Romanized Japanese), which arefound tobeclearly distinguished bygeneral consumers asthose which areapplied
todomestically made goods;
(ii) Representations which areallowed bylawtobeusedasdescriptions forgeneral consumers instead ofJapanese
(e.g.,"AllWool," "Stainless Steel," etc.);
(iii) Representations which areaccepted bygeneral consumers asJapanese byvirtue ofgeneral business practices (e.g.,
"size," "price," etc.); and
(iv) Representations which comprise foreign letters, butwhere itisobvious thatthesaidletters areusedonlyaspatterns,
ornaments andthelike,andwillnotimply thatthecountry oforigin ofthegoods isaforeign country (e.g.,the
c[l]ippings from English-language magazines used aspatterns oncarrier bags)".
478JFTC/Secretary General Circular No.12of1973, Japan Ex.D-54.
479SeeSection II.B.3.(b).(iii).WT/DS44/R
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5.484 Japan alsosubmits thatparagraphs 2,3and6oftheguidelines donotprovide foran"exception
ofdomestic goods" astheUnited States argues; theyareillustrations ofrepresentations which would
notmislead consumers. According toJapan, thecountry oforigin rules treatdomestic andforeign
goods inasymmetrical manner. Domestic goods maynotuseaforeign language toexpress allor
amajor partofliteral representations unless theycarry arecognizable representation toindicate its
Japanese origin. Therestriction oftheuseoftheJapanese language forforeign goods should be
understood asacounterpart oftheruleapplicable toJapanese goods, andshould notbeunderstood
tobediscriminatory byanymeans. Inthisrespect Japan notes thattheUSFederal Trade Commission 's
principle oftheforeign origin provides that"itisunfair, asageneral rule,tosellaforeign product,
ortooffer forsale,without disclosing thecountry ofitsorigin".480TheFTCdoesnotrequire, on
theother hand, American goods toidentify theirdomestic origin. ForJapan, incontrast, theJapanese
country oforigin rulesunder thePremiums Lawrestrict, equally between domestic andforeign products,
representations which could mislead consumers about theorigin.
(e) JFTC Notification 3of1977 ("closed" prizes)481
5.485 TheUnited States argues thatthemost noteworthy development during early enforcement
ofthePremiums LawwasJFTC Notification 20of1965, regarding "Restriction onPremium Offers
byPrize Competition." Inthatnotification, theJFTC expanded thescope ofthelottery notification
toinclude competitions involving some element ofskill, such asquizzes or"pick-a-slogan."482
Notification 3of1977 builtupon Notification 20of1965. The1977 Notification limited premiums
offered inconnection with"closed" lotteries orasprizes ingames ofrandom selection asfollows:
(1)where thetransaction value involved inthepremium offer byprize competition islessthan500
yen:20times thetransaction value; (2)where thevalue ofaconnected transaction wasnotlessthan
500yenandbelow 50,000 yen,premiums were permitted tobeworth 10,000 yen;(3)where the
transaction value wasatleast50,000 yenbutbelow 100,000 yen,premiums werepermitted tobeno
more than30,000 yen;and(4)where thetransaction value was100,000 yenormore, premiums were
capped at50,000 yen.
5.486 Japan submits thatJFTC Notification 3of1March 1977restricts onlyunfair salesbylotteries
orprize competition. Theceiling hasbeensetat20times ofthepurchase price or100,000 yen,
whichever isthelower. Thetotalvalue ofprizes isheldwithin 2%oftotalplanned sales. TheJFTC
haspublished the"Guidelines fortheInterpretation oftheNotification onRestriction onPremium Offers
byLotteries orPrize Competition" ("Prize Guidelines").483Japan argues thatKodak hastaken full
advantage oftheavailability of"closed prize" campaigns initssalespromotion inJapan. Inthelist
ofKodak 'spremiums offers484,thenumber of"closed prize" offers isalmost thesame asthatof"open
prize" offers. IntheUnited States, saleswithlotteries areprohibited inall50states bylaw.
(f) JFTC Notification 5of1977 (premiums toconsumers)485
5.487 IntheviewoftheUnited States ,Notification 5of1March 1977 onoffers ofpremiums to
consumers, which limits suchpremiums to10percent ofthevalue ofassociated merchandise, was
particularly detrimental tocompetition inthefilmsector. The10percent limitation might allow for
480Foreign Origin, Trade Reg. Rep., 7551, Japan Ex.D-55.
481SeeSection II.B.3.(b).(iv).
482JFTC Notification 20of1965, reprinted inKanpo (Official Gazette), 15July1965, p.5,USEx.65-1. Therestrictions
imposed under thenotification were expanded in1969, clarified in1977 andsomewhat liberalized in1981 and1996. See
JFTC Notification 16of1969, USEx.69-1, Notification 3of1977, USEx.77-1, andNotification 13of1981, USEx.
81-1. Nonetheless, therestrictions have remained significant, andcurrently themaximum premium thatmaybeoffered
is100,000 yen.
483JFTC Secretary General Circular No.4of1977, Japan Ex.D-35.
484Japan Ex.D-27.
485SeeSection II.B.3.(b).(v).WT/DS44/R
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some meaningful premiums tobeoffered onhigh-price items, butithasafargreater impact onsales
ofrelatively low-price photographic materials. Thevalue ofpremiums usedinconnection withlow-
priced goods mustbehighrelative tothetransaction price, otherwise therestofthepromotion likely
willoutweigh itsbenefits. Thismeant thatbrands challenging market leaders could not"shout louder"
inthemarketplace. JustasJapan hadcutoffpremiums frommanufacturers towholesalers andretailers,
theUnited States argued, JFTC Notification 5essentially precluded large-scale premium promotions
toconsumers.
5.488 FortheUnited States, though Notification 5excludes samples, secondary products necessary
totheuseofmain products, items given away atstore openings orother celebrations, andcoupons,
allaresubject totherequirement thattheymustbe"reasonable inthelightofnormal business practice."
5.489 Japan argues thatonlyexcessive premium offers aresubject torestrictions under JFTC
Notification 5.Japan submitted thatitislawful forfilmproducts of1,000 yenorlesstocarry premiums
upto100yenbymeans ofanall-purchaser offering. Forexample, apremium of100yen,or25percent
oftheprice, maybelawfully offered forafilmrollworth 400yen.ForJapan, itiscertainly doubtful
if,under normal situations, enterprises canoffer, forasustained period oftime, premiums withavalue
of25percent ofthecommodity. Kodak, initsrecent promotion campaign, hasoffered apremium
worth 50yentoeachpurchaser ofapacket offilm. Thisisonlyhalfoftheupper limitofthepurchaser
premium. Japan alsonoted thatfortheeaseofunderstanding thenotification, theJFTC haspublished
the"Guidelines fortheInterpretation oftheNotification ontheRestriction onPremium Offers toGeneral
Consumers" ("All-Purchaser Guidelines").486
6. POST-TOKYO ROUND PROMOTION "COUNTERMEASURES"
5.490 TheUnited States submits thattariff negotiations between theUnited States andJapan inthe
Tokyo Round ofMultilateral Trade Negotiations wereeffectively concluded byAugust 1978. Atthe
same timethattheJapanese Government agreed totariff concessions onphotographic materials, it
expressedconcernstotheUnitedStatesregardingtheabilityofforeignproducers-mostnotablyKodak-
tocompete aggressively intheJapanese market.487
5.491 TheUnited States further argues thataftertheconclusion oftheTokyo Round, theJapanese
Government established newinstitutions tostrengthen itsexisting measures torestrict theuseof
premiums. Itsfirststepwastoprovide greater coordination forthegrowing number offaircompetition
codes andfairtradecouncils thattheJFTC wasapproving inalmost allsectors oftheJapanese market.
On1April 1979, theJFTC issued administrative guidance tothecouncils tocreate anumbrella group,
theFederation ofFairTrade Councils, tocoordinate theactivities ofthevarious fairtrade councils
andprovided cooperation andsupport forthem todothis.488
(a) JFTC guidance ontheuseofdispatched employees489
5.492 According totheUnited States, inOctober 1979, theJFTC proposed andtheCabinet approved
theestablishment ofaDistribution Sector Office ("DSO") to"administer duties pertaining tounfair
486JFTC Secretary General Circular No.6of1977, Japan Ex.D-34.
487TheUnited States submitted thefollowing quote from aletter sentbytheUSDeputy Special Representative forTrade
Negotiations tothepresident ofKodak: "Ishould mention toyousomething thattheJapanese have always mentioned as
anaside during ourtalkswithrespect tocolour filmandpaper. TheJapanese areveryworried about theirability tocompete
withKodak. They have asked foranassurance thatKodak would notmarket aggressively inJapan. Ihave indicated to
theJapanese thatthisisnotthekindofassurance thattheUnited States Government hasevergiven withrespect toconcessions
wehave received" (letter dated 30August 1978, USEx.78-6).
488TheFairCompetition Code System andStatus ofestablishing FairCompetition Codes, Kosei Torihiki, No.390,April
1983, pp.37-38, USEx.83-8.
489SeeSection II.B.3.(c).(i).WT/DS44/R
Page154
trade practice designations related todistribution".490Upon itsestablishment, theDSO studied 16
business sectors, issuing itsfindings oncameras andphotographic materials inDecember 1981.491
FortheUnited States, theDSO'sreport conveyed guidance tothe"camera, photographic materials,
colourphotolaboratoriesandrelatedindustries"todevelop"self-regulatingmeasures"-meaningenforced
bytheprivate sector rather thanthegovernment -controlling "thepermanent dispatch ofsalespeople
soasnottogotoofar[with] manufacturers 'salespromotion methods".492IntheUSview, dispatched
employees areaunique form ofeconomic inducement between businesses: theyreduce costs for
wholesalers andretailers andthereby allow forincreased sales based upon costorprice reductions
passed down thelineofdistribution.
5.493 Japan submits thatthephotographic industry wasinfactworking onstandards forthedispatch
ofpersonnel evenbefore theJFTC published theresult ofthe"Survey ofDistribution oftheCamera
Industry" inDecember 1981 andissued administrative guidance inthematter.493
(b) 1982 Self-Regulating Measures (dispatch ofemployees)494andthePromotion Council495
5.494 According totheUnited States ,thedomestic photographic industry responded totheJFTC 's
guidance inJune1982 when itpromulgated "Self-Regulating Measures Regarding Making Business
Dealings With Trading Partners Fair."496These measures govern theuseofdispatched employees
andcontributions bymanufacturers andwholesalers topromotions byphotospecialty retailers.497The
National Photographic Industry FairTrade Promotion Council ("Promotion Council"), theenforcement
body forthe1982 Self-Regulating Measures, wasestablished on23December 1982.498TheUnited
States submits thattheJFTC hasacknowledged thatitrelies onthePromotion Council toregulate the
useofdispatched employees andpromotional contributions toretailers among council members and
thattheJFTC alsorelies onthestandards setbythecouncil inregulating theaffairs ofnon-members .
5.495 IntheUSview, thecloserelationship between theJFTC andthePromotion Council isreflected
inthecouncil 'sarticles ofassociation, which statethat"establishing orabolishing provisions ofthese
Articles ofAssociation andtheresponsibilities ofthisCouncil shallrequire prior approval from the
Japan FairTrade Commission".499From itsinception, thePromotion Council intended tolookto
theJFTC forapproval andguidance. ThePromotion Council ’sChairman explained theCouncil ’s
approval process withtheJFTC: "And on22April, wesubmitted adraft...[which went] asthereport
oftheDistribution Sector Office Director totheJapan FairTrade Commission. Thedraftisexpected
topassasitstands, andifpassed, thesixtradeorganizations...will looktotheFairTrade Commission
foradministrative guidance asweimplement self-regulating measures.500Furthermore, the1982
Self-Regulating Measures provide thateachmember "shall exert self-regulation inaccordance with
these standards, andtheFairTrade Promotion Council shall, under theguidance oftheJapan Fair
490Cabinet Order No.43of1979 asreported inJFTC Annual Report 1980, p.283, USEx.79-1.
491Thereport referred tobytheUnited States isanarticle byKosugi Misao (signed inhispersonal capacity), anofficial
attheTrade Practices Department, Distribution Sector Office JFTC, TheStatus ofDistribution ofCameras, Kosei Torihiki,
No.377, March 1982, USEx.82-3. SeeSection II.B.3.(c).(i).
492Ibid., p.8.SeeSection II.B.3.(c).(i).
493According toJapan, theestablishment oftheDSO ledonlytosector-specific advisory reports, notanygovernment
action.
494SeeSection II.B.4.(a).(i).
495SeeSection II.B.4.(a).
496Seetranslation issue 23.
497SeeSection II.B.4.(a).(i).
498SeeSection II.B.4.(a).
499FairTrade Council Established, "AnAttempt toImprove theStructure ofIndustry," Fujimori Masao (Misuzu) Zenren
Tsuho, January 1983, p.4,USEx.83-3.
500"SixTrade Organizations toPromote Self-Regulating Measures Enhance Normalization ofTrade Shashoren ’sAnnual
Meeting on22April," Nihon Shashin Kogyo Tsushin, 1May1982, p.10,USAnswers toFirstPanel Questions, USEx.
18.WT/DS44/R
Page155
Trade Commission, issue guidance tothem asappropriate andnecessary".501Unlike the"fairtrade
councils" previously discussed, which arecomprised ofrepresentatives ofhorizontal competitors (e.g.,
cameramanufacturers),thePromotionCouncilisavertically-integratedindustryassociationrepresenting
photographicmaterialsandequipmentbusinessesateverystageofthedistributionsystem:manufacturers,
wholesalers, retailers andphotospecialty laboratories.
5.496 TheUnited States further submits thatthePromotion Council tookaction against imported
filmin1983when Nagase Sangyo, Kodak 'smainimporter, devised apromotion strategy forthelaunch
ofaspecial limited edition ofKodak 'sVRfilmseries, known asKodak 'strialpack. Thetrialpack
included a12-exposure rollofeachspeed ofVRfilm(100, 200,400and1000 ASA). Itinvolved
anumber ofinnovations: theKodak VR1000wastheworld ’sfirstcolor negative filmoffered atsuch
ahighspeed point502andtheseries contained anewelectronically readable barcode. Theseries and
promotion weresignificant inthattheywerepartofKodak ’smostimportant campaign inJapan during
thefirsthalfofthe1980s.503Thepromotion planentailed extensive printandtelevision advertising
inorder "tohaveasmany people aspossible become aware ofthemerits oftheVRSeries."504
5.497 According totheUnited States, while theJapanese photographic industry viewed thetrialpack
as"really smart" anda"good plan" withsubstantial potential forsuccess,505italsosawthecampaign
asasignificant threat --"anextraordinary newexpansion strategy targeting Japan’smarket.506This
wasso,atleastinpart, because theVRsoldata38percent discount offthestandard retail price.
Thedayafter Kodak announced itsplans fortheVRSeries, theJapanese photographic retailers
association indicated thatitconsidered thepricing ofthetrialpackasproblematic. Itwasconcerned
withtheimpact Kodak ’strialpackprice would haveontheprices ofdomestic film, particularly at
atimewhen domestic filmmanufacturers hadmanaged toraiseprices.507
5.498 TheUnited States explained thatmembers oftheJapanese photographic materials industry acted
swiftlytoblockKodak'scampaign.Thephotographicretailersassociation,actingthroughthePromotion
Council, moved toprevent implementation ofthecampaign andasked fortheassistance oftheJFTC.
TheJFTC summoned representatives ofKodak toexplain thepromotion plan. After hearing the
comments ofKodak 'srepresentatives, theJFTC officials issued administrative guidance toKodak,
instructing Kodak to(1)clarify thelimited nature oftheoffer, identifying thevolume oftrialpacks,
thestores carrying themandtheterms oftheoffer; and(2)cutbackitssecond shipment oftrialpacks
andannounce ateachstorecounter when theproduct wasnolonger available.508Kodak complied with
theguidance.
5.499 TheUnited States further explained thatthePromotion Council andtheretailers association
convinced Nagase tocurtail thetrialpack'spromotions. Initsrequest, theretailers association urged
Nagase torefrain fromshowing itsdiscount priceinadvertisements.509Furthermore, retail associations
501Self-Regulating Measures Regarding Making Business Dealings withTrading Partners Fair,reprinted inCamera Times,
22June 1982, p.3,USEx.82-8.
502John Babbitt Affidavit, USEx.97-7.
503Ishikawa Sumio Affidavit, USEx.97-10.
504Ibid.
505Nagase Sangyo, Limited Edition Pack ofFour Types ofVRFilm toBeSoldSimultaneously Nationwide, Camera
Times, 14June 1983, p.5,USEx.83-13.
506Photosensitive Materials: Kodak ’sSo-called Commemorative Specially Reduced Prices: AnExtraordinary NewMarket
Expansion Policy? Nihon Shashin Kogyo Tsushin, 20June 1983, p.6,USEx.83-14.
507USEx.83-11, 83-14, 83-15, 83-22.
508Ishikawa Sumio Affidavit, USEx.97-4.
509Kodak ’sTrial Pack MayBePacked with"Trouble"? Zenren Fears "Dual Pricing," LikeThrowing Cold Water on
aStabilizing Market, Shashin Kogyo Junpo, 20June 1983, p.10,USEx.83-16.WT/DS44/R
Page156
asked Nagase "nottolistprices innewspapers, andamong otherplaces." Kodak wasforced tominimize
itspromotion ofthetrialpack.510
5.500 IntheUSview, thePromotion Council continues toapply pressure onphotographic material
manufacturers toreduce thenumber ofemployees theydispatch toretailers. Asrecently asJuly22,
1996, thePromotion Council issued a"directive" toKodak stating thatthecouncil has"decided in
July1995 torequest your[Kodak 's]cooperation incontinuing toreduce dispatched employees" and
thatKodak isto"immediately report thestatus ofyourcompany tothisCouncil".511
5.501 ForJapan ,thePromotion Council isaprivate-sector organization andhasnogovernmental
authority. Itsaction istherefore notsubject totheinquiry oftheWTO. Generally speaking, theJFTC
isconsulted bybusiness entities ororganizations overissues under theAntimonopoly Lawandresponds
totheirinquiries. Indeed, thePromotion Council wasestablished afterconsultation withtheJFTC.
These consultations withtheJFTC maynotdelegate anyauthority totheCouncil. Iftheorganizations
should commit unlawful activities -suchasacartel torestrict importation -,theJFTC willvigorously
apply theAntimonopoly Law.
5.502 According toJapan, therehasnotbeenaproblem ofdispatched employees inthephotographic
filmandpaper industry. Thisisprobably because thesalesmethod ofpromotion through manufacturers '
employees is,normally, notaneffective marketing tooloffilmproducts; most consumers choose
merchandise ontheir own, rather thanrelying onemployees 'sales talks. Ontheother hand,
photographic paper ismarketed toprofessionals whodonotnormally relyondispatched employees.
5.503 Japan argues thatmembership ofthePromotion Council isnon-discriminatory andopen to
domestic andforeign entities. Infact,Kodak isamember through itsaffiliation withtheCamera
Manufacturers 'Association, andhasbeeninaposition tobefullyaware ofthecouncil 'sactivities.
5.504 JapannotesthatthePromotionCouncilreferstotheJFTC's"approval"or"guidance".Although
theyarefreetodeclare thattheywillseektheJFTC 'sapproval, orfollow itsguidance, suchreference
doesnotconfer ontheCouncil anyauthority oftheJFTC. Nolawallows theJFTC todelegate its
authority tothePromotion Council.
5.505 According toJapan, thereisnoevidence thatthePromotion Council hastreated foreign entities
inadiscriminatory manner. TheonlycasetheUnited States refers toistheVRseries case.512For
Japan, theonlyroletheJFTC played intheVRcampaign wasthatitsstaffinvited Kodak employees
andexchanged views onthepromotional planofVRseries. Whatever thePromotion Council didin
thecampaign hasnothing todowiththeJFTC. There isnoalignment between theJFTC andthe
Promotion Council orZenren (theretailers association). Officials whowereincharge ofthematter
attheJFTC donothaveaccurate recollection ofthemeeting where Kodak allegedly hadtoexplain
itspromotion plan. Judging fromthecircumstances, theofficials might haveheard bothparties 'position
andexplained therelevant regulations. Inanyevent, since apparently thepromotion byKodak was
andislawful, theofficials could nothaveexercised anysubstantial guidance.513ForJapan, itshould
beobvious thattheJFTC didnotimpede theVRcampaign anditissimply untrue thatZenren, the
Promotion Council andtheJFTC acted inunison toprevent theVRcampaign.
510Zenren Boldly Advances TwoStrategies forRectifying theIncreasingly Meaningless Nature ofStandard Pricing at
its50thAnniversary Gathering, Zenren Tsuho, November 1983, pp.8-15, USEx.83-22.
511Promotion Council Issue No.8-1,22July1996.
512Japan argued thatstatements contained inMr.Ishikawa Sumio 'saffidavit oftheUnited States arenotsubstantiated
byobjective evidence andtherefore arenottrustworthy.
513Ibid.WT/DS44/R
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5.506 TheUnited States submits thatJapan'sefforts todisassociate itselffromthecodes andcouncils
itcreated should beaccorded littleweight. The"fairtrade councils" and"faircompetition codes"
arethedirect result ofsection 10ofthePremiums Law, which explicitly authorizes businesses and
trade associations tocreate codes relating topremiums andadvertising. ThePremiums Lawfurther
provides theJFTC withoversight authority, allowing theJFTC tosubsequently revoke itsapproval
ofacode. Moreover, theUnited States points outthatJapan’sposition thatthecodes andcouncils
cannot beattributed tothegovernment directly contradicts theposition ittookinthe1987 Japan -
Liquor Taxes andLabelling Practices Dispute ,where itciteditssystem of"faircompetition codes"
under thePremiums Lawasaform of"legal regulation." Japan stated initssubmission tothePanel
that"labelling ofalcoholic beverages inJapan isregulated byarange oflegalcontrols asfollows....
(iii)faircompetition codes inaccordance withthesaidAct[against Unjustifiable Premiums and
Misleading Representations.]"514
(c) JFTC guidance ondumping andloss-leader advertising515
5.507 TheUnited States argues thatinMay 1983, theDirector oftheJFTC 'sPremiums and
Representations Guidance Division pressed thePromotion Council toexpand itsoperations intonew
areas: "itisofcritical importance todevelop rules onebyoneagainst dumping andloss-leader
advertising."516TheDivision Director explained that,"from theperspective ofthose ofuswhoapply
[thelaws,] ourposition isthatwewillrespect thevoluntary standard youestablish...so wefeelthat
youneedtoestablish yourownvoluntary standard."517According totheUnited States, thePromotion
Council recognized thatdumping cases canbequitedifficult toprove andadminister, butdetermined
thatacharge ofmisrepresentation maybeabetter course. AsthePromotion Council explained: "If
dualpricing canbetaken upasarepresentation issue, wecancertainly tackle theproblem by
communicating closely withtheJFTC. Itistruethattherepresentation issuerather thanprices inand
ofthemselves isbetter suited toself-regulating measures. There arethefaircompetition codes based
ontheLaw Against Unjustifiable Premiums andMisleading Representations from which the
manufacturers andwholesalers havealready made theirownCodes oncamera premiums. Justlike
itiswithpremiums, theissue ofprice representation iswellsuited totheconcept ofvoluntary
restrictions."518
5.508 Japan argues thattheabove-quoted "guidance" wasnotproperly translated bytheUnited States.
Theproper translation of"itisofcritical importance todevelop rules onebyoneagainst dumping
andloss-leader advertising", is,according toJapan, "with regard tounjustifiable lowprices andbait
advertising, itisimportant topileuponebyone". ForJapan, themeaning ofthissentence isnoteven
clear from thecontext.
(d) 1984 Self-Regulating Standards (developing fees)519
5.509 TheUnited States submits thatthe1984 Self-Regulating Standards prescribed themanner in
which prices forfilmdeveloping andprinting could berepresented. Thestandards stipulate "provisions
inregard totherepresentation ofphoto processing feesforcolour negative film...andprinting fee[s]
forservice-size prints fordirect orders from general consumers untiltheFairCompetition Code
514Panel Report onJapan -Liquor Taxes andLabelling Practices ,adopted 10November 1987, BISD 34S/83, 86-87,
para. 2.7.
515SeeSection II.B.3.(c).(ii).
516Yamada Akio, Premiums andRepresentatives Guidance Division Director, asquoted inSuggestions onHow theFair
Trade Promotion Council Should be,Zenren, Tsuho, May1983, p.2,USEx.83-9. Japan disagrees withtheUStranslation
ofthisphrase. Seetranslation issue 22.
517Regarding theAntimonopoly Lawand"Fair Trade", Shashoren Lecture Series (Part II),Shashin Kogyo Junpo, 10
June 1983, p.10,USEx.83-11.
518Zenren Tsuho, October 1983, pp.8-9,USEx.83-21.
519SeeSection II.B.4.(a).(ii).WT/DS44/R
Page158
[governing suchrepresentations onprices] isestablished". Thestandards alsoauthorize thePromotion
Councilto"conductinvestigationsandprovideguidanceontheoperationoftheseStandardsifnecessary".
5.510 According toJapan ,these standards were adopted when service providers onlydisplayed
inexpensive print charges andthencharged customers ahighdeveloping fee.Theintention ofthe
guidelines wastogiveconsumers adequate information ofbothcharges. Assuch, theguidelines are
notrelated tosales offilmproducts, andtheJFTC 'srolewaslimited. Incidentally, theguidelines
werenoteffectively implemented because there weretoomany outsiders. Inthisrespect, Japan also
referred totheCode ofPractice forPhotographic Industry oftheUnited Kingdom which provides that
"[t]he retailer willdisplay hisprices fordeveloping filmandforthemain sizes ofprint" andthat
"[r]etailers willhaveondisplay, orbeprepared toindicate tocustomers, theirservice times forprints,
andwillmaintain close contact withtheprocessing laboratory".
5.511 TheUnited States submits thatsince the1984 Self-Regulating Measures cover "DP
representations", or"representation[s] ofthephoto processing feeforcolour negative film", there is
arelationship between these measures andphotographic materials.
(e) JFTC approval of1987 Retailers Code andRetailers Council520
5.512 FortheUnited States ,theRetailers Code setsforthnumerous requirements foralmost allforms
ofpromotions, suchasidentifying thename ofthemanufacturer andpriceofthemerchandise. Article
5requires that,intheevent anadvertisement compares theprice ofacamera orrelated product to
other suchproducts, theadvertisement must: (1)relyuponthemanufacturer 'ssuggested retail price,
theimporter 'ssuggested retail price ortheshop'snormal retail price forthecomparative rate;and
(2)stateadiscount ratethatisbased upon themanufacturer 'ssuggested retail price, theimporter 's
suggested retailpriceortheshop'snormal retailprice. Article 7restricts theuseofterms like"cheapest"
or"very best" inadvertising, mandating that"objective factors" bedemonstrated inorder todoso.
Article 10prohibits, among other things, theuseofexpressions suchas"super cheap," "give-away
price" or"super special price" ifsuchexpressions willleadthe"consumer tobelieve theofferisbetter
thanitactually is."TheUnited States explained thatthepurpose underlying theestablishment ofthese
rules wastoinhibit aggressive promotions andprice discounts. Inthisregard, theUnited States
maintained thattheRetailers Council Secretary General informed Kodak thattheCouncil "would
contribute significantly inparticular tostabilize price ...."521
5.513 IntheUSview, Articles 3and4include provisions that,ontheirface, discriminate against
imports withrespect torepresentations concerning thecountry oforigin oftheproduct. Article 3,
pertaining tostorefront displays, andArticle 4,governing fliers, require advertisements toindicate
thecountry oforigin forimported merchandise. Advertisements subject toArticles 3and4,however,
donothavetoinclude astatement indicating thatitems were made inJapan, unless suchdomestic
merchandise maybeconfused withimported products.
5.514 FortheUnited States, though itdoesnotexplicitly include filmwithin itsscope522,theRetailers
Code hasbeenapplied topromotions forfilmandpaper products. Thisexpansive application arises
from Article 2.2ofthecodewhich provides: "Toattain theobjectives outlined intheabove Article
[1],businesses aretorespect thespirit ofthiscodeevenwhen theproducts being dealt withdonot
520SeeSection II.B.4.(b).
521Ishikawa Sumio Affidavit 1,p.1,USEx.97-4.
522Article 2oftheRetailers Code states thatthecodeapplies to"Cameras andRelated Products". Japan disagrees with
theUStranslation of"Kamera-rui". Seetranslation issue 17.WT/DS44/R
Page159
correspond exactly toCameras andRelated Products".523According totheUnited States, application
ofthecodetofilmanddeveloping andprinting wasfundamental tosecuring support fortheRetailers
Code andtheRetailers FairTrade Council from theretailers association.524
5.515 IntheUSview, theJapanese Government hasdelegated authority totheRetailers Council to
takeenforcement actions under boththeRetailers Code andthePremiums Law.525FortheUS,the
council isjustlikeasubcontractor fortheJFTC. Thisauthority wasmade plainuponcommencement
oftheRetailers Council 'soperations inJune1987, when thedirector oftheJFTC 'sPremiums and
RepresentationsDivisionOfficeremarkedthat,byapprovingtheRetailersCode,theJFTChaddeputized
theRetailers Council totakeaction onitsbehalf: "The approval oftheCode means thattheroleI
playinfollowing uponviolations willbelefttotheFairTrade Council. Ifthisexpectation isnot
met,[theapproval] willhavenomeaning."526Thecouncil mayprovide "directions inconnection with
theCode", make "adjustments inhowtheCode isbeing observed", investigate "thefactswhen there
issuspicion ofviolation oftheCode", take"necessary stepsagainst those whohaveviolated theCode",
process "complaints received from thegeneral consumer", andserve asaliaison "with competent
authorities". Withregard toArticle 14-7, theCouncil isauthorized toengage in"[a]ctivities pertaining
tomakingtheActAgainstUnjustifiablePremiumsandMisrepresentationsandotherlawsandordinances
pertaining tofairtrade widely understood andpreventing violations thereto "(emphasis added). For
theUnited States, thelanguage ofArticle 14-7delegates authority totheCouncil totakeaction toprevent
violations offairtradelaws. Thislanguage indicates thattheCouncil plays anintegral roleinenforcing
thelaw. Article 15provides thattheCouncil mayinvestigate suspected violations oftheCode and,
ifsuchviolations arefound, Article 16states thattheCouncil maypunish offenders through finesor
other methods ofcoercion.527
5.516 TheUnited States argues thatevenbefore theRetailers Code went intoeffect, theRetailers
Council tookaction tochillcompetition through restrictions onadvertising. AsofthetimetheCode
andtheCouncil became fullyoperational, discounters withlarge store networks hadalready "toned
down" theirrepresentations andevennon-participants inthecode, or"outsiders", hadbeen"silenced".528
TheUnited States submits thatjustasthePromotion Council haduseditsauthority toregulate
misrepresentations tosuppress Kodak 'sdiscount VRcampaign, theRetailers Council similarly uses
itspower overprice representations tolimitdiscounting andpromote stability among competitors.
Ironically, when confronted withalarge-scale promotion similar totheVRcampaign conducted by
adomestic manufacturer, Konica, theRetailers Council tooknoaction.529
5.517 AccordingtotheUnitedStates,akeyelementoftheJapaneseGovernment'senforcementstrategy
tocontrol thenature andlevelofpromotion competition inthephotographic sector wastoensure that
thestandards established intheRetailers Code applied totheactivities ofallbusinesses selling
523TheUnited States quoted, forexample, theFairTrade Council vice-chairman asfollows: "Cameras andrelated products
doesnotmean cameras alone butalsomeans [more] broadly products handled bycamera shops ...Photosensitive materials
anddeveloping andprinting arenever outside ofthescope" (Interpretation oftheFairCompetition Code Seems Stillin
Confusion, Shukan Shashin Sokuho, 7August 1987, USEx.87-9).
524Discussion onProgress ofFairTrade Council Focuses onMaking FairCompetition Code Fully Known, Zenren Tsuho,
August 1987, USEx.87-7. Japan disagrees inpartwiththeUStranslation ofthisarticle. Seetranslation issue 18.
525"Fair Trade Council Established," Operated byZenren, WillRespect "Fair Competition Code" -Urgent Need toMake
Code Known byOctober Start, Zenren Tsuho, July1987, p.3,USEx.87-5. Japan disagrees withtheUStranslation of
"teki-hatsu" as"enforcement action" inUSEx.87-5. Seetranslation issue 20.
526Ibid., p.7.
527FairTrade Competition Code Regarding Representations inCamera andRelated Products Retail Industry, 1987, US
Ex.87-1.
528Don'tGive UpExposing andForwarding Materials [Regarding Violations] -Japan FairTrade Commission Probing
Non-Members '"Representations Violations", Zenren Tsuho, February 1988, USEx.88-2. Japan disagrees withtheUS
translation ofaphrase inUSEx.88-2. Seetranslation issue 21.
529Japan argued thatKonica 'soffer offreesample films, referred tobytheUnited States, doesnotconstitute aviolation
because thePremiums Lawdoes notrestrict thedistribution offreesamples notlinked tosales.WT/DS44/R
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photographic items -notjustbusinesses thatagreed toadhere tothecodes. TheUnited States submits
thattheJFTC confirmed thatitrelies upon"faircompetition codes" when applying thePremiums Law
to"outsiders" andthat"outsiders" maybetreated more severely thancodeparticipants.530Asrecently
as1995, theJFTC confirmed thatitrelies upon"faircompetition codes" when applying thePremiums
Lawto"outsiders":"TheJapanFairTradeCommissionwilldirectlyregulatethosewhodonotparticipate
intheCodes, butaslongastheCodes areobserved andrecognized ashaving beenestablished in
accordance withnormal business practices, theJapan FairTrade Commission usestheFairCompetition
Codes asreference when itapplies thelaw."531
5.518 Japan submits thatmembers oftheRetailers Code consist of49prefecture-wide retailers
organizations, which represent 6600individual business entities. TheRetailers Code deals onlywith
representations; premiums arecompletely outside itsscope. Thepurpose ofthecodeisto"protect
theopportunity ofgeneral consumers toproperly choose merchandises, toprevent undue inducement
ofcustomers, andthereby toensure faircompetition".532TheCode doesnothinder normal sales
promotion activities oftheenterprises, either domestic orforeign.
5.519 InJapan'sview, thelanguage oftheRetailers Code makes itclear thatitapplies onlytothe
"camera category" andhasnever beenapplied tofilmandpaper.533Article 2,paragraph 1,ofthe
Code defines the"camera category" asfollows:
"The 'camera category 'ofthepresent codeshallmean those which arespecified in
theimplementation rules tothepresent code".
Article 1oftheimplementation rules thendefines:
"The 'camera category '...shallmean (i)portable cameras, substitute lenses, small
movie equipments (8-mm cameras, 16-mm cameras, 8-mm projectors and16-mm
projectors), electronic visual equipment (video cameras andstillvideos) andslide
projectors; (ii)photographic electronic flash, photographic filters, photographic
attachment lenses, photographic conversion lenses, camera tripods andcamera bags.
ForJapan, itisobvious from thetextthatfilmorpaper isnotincluded here.
5.520 Japan argues thatalthough Article 2,paragraph 2,oftheCode provides that"business entities
shouldobservetheobjectofthepresentcodewithrespecttothecameracategorynotspecificallyincluded
inthescope ofthecode," theterm"camera category notspecifically included" means suchequipment
which wasnotexistent atthetimeoftheadoption oftheCode butmaybemanufactured through
technological innovations. Filmandpaper, ontheother hand, arephotographic material anddonot
fallunder the"camera category". Japan submits thattheJFTC hasnever allowed andhasnointention
toallow application ofthecodetofilmorpaper.534
5.521 Japan submits thatevenassuming thattheCode would apply tofilmandpaper, thefactremains
thattheUnited States hasfailed tomention which specific provisions ofany"code" orwhich specific
530Seetranslation issues 24(1) and24(2) concerning aquotations from: "Consumer LifeandtheFairCompetition Codes",
AllJapan FairTrade Council Federation, USEx.95-9; and"Fair Competition Code Regarding Representations intheCamera
Category Retailers Industry," USEx.87-1.
531Shohisha noKurashi toKosei Kyoso Kiyaku [Consumer LifeandFairCompetition Codes], March 1995, p.10,US
Ex.95-9. Published byAllJapan FairTrade Council Federation, andcommissioned bytheJFTC (emphasis supplied).
532Article 1oftheRetailers Code.
533Seealsotranslation issue 17.
534Inthiscontext, Japan states thatitdisagrees withanumber ofrespects withtheUStranslation of"Fair Competition
Codes, Sweet Fantasies andIllusions Ought tobeTaboo, Shashin Kogyo Junpo, 1August 1987, USEx.87-8. Seetranslation
issue 19.WT/DS44/R
Page161
activities ofany"council" haveupset thecompetitive conditions ofimported photographic filmand
paper.
5.522 Japan alsosubmits thateventhesubstantive rules oftheRetailers Code bynomeans upset
thecompetitive conditions ofanyimported products. Japan argues thatselfregulatory rules on
advertisement including representations isquite common inNorth America, Europe, andalmost
everywhere. Japan mentions the"Distilled Spirits Council oftheUnited States, Inc." andthe
"Advertising andMarketing Code" among themembers ofthe"Beer Institute" intheUnited States.
5.523 Japan further notes thattheRetailers Council ismerely responsible fortheobservance ofthe
codeagainst misleading representations andhasnoauthority toenforce thePremiums Lawnormay
itrestrict lowprice offers inanyway. Forthepurpose ofimplementation, codes normally establish
afairtradecouncil asavoluntary organ toensure observance oftheself-regulation. Some ofthecodes
contain provisions formonetary penalties fornon-compliance orforexpulsion ofparties involved.
According toJapan, these measures aredesigned toensure effectiveness ofvoluntary restraint. They
donotmean thattheJFTC 'sauthority hasbeendelegated tothesebodies. Inthisrespect Japan referred
tocodes withsimilar enforcement mechanisms intheUnited Kingdom andAustralia.
5.524 Japan argues thattheRetailers Council maytakemeasures agreed intheself-regulation against
insiders, butmaynotapply theCode tonon-members. Outsiders willnotbesubjected toanyaction
oftheCouncil foranynon-compliance withtheCode. TheJFTC, inthemeantime, makes itsown
judgment about theconduct oftheoutsider, andwillnottakeanyaction unless itisinviolation of
thePremiums Law. Japan notes thattheruleonrepresentations inthecodes embodies thePremiums
Law, andthatthereisnofundamental disagreement between theconcept ofmisleading representations
under thePremiums Law, andthatprohibited bythecodes.
5.525 With respect totheUSargument thatArticles 3and4oftheRetailers Code require the
representation ofthecountry oforigin onlywithrespect toforeign goods butnottodomestic goods
ingeneral, Japan argues thattheconcept behind these Articles isfundamentally nodifferent fromthe
JFTC Notification 34oncountry oforigin ofgoods. Theyareintended toprovide adequate information
toconsumers.
5.526 TheUnited States emphasizes thatitisirrelevant whether thecodes andcouncils govern film
andpaper dejureordefacto. What doesmatter isthatJapan hasorganized themostpowerful elements
ofitsdomestic photographic industry andallowed themtosetstandards onhowproducts intheirsector
maybepromoted. FortheUnited States, Japan made aboldcontention insuggesting thatrulesadopted
byJapan'sleading photographic retailers orwholesalers, which govern thepromotion ofalmost every
itemthese businesses sell,willhavenoeffect onfilmandpaper. TheUnited States alsopoints out
thatthedeveloping andprinting division manager oftheRetailers Council explained thatfilmand
developing andprinting aresubject totheCode: "They arenotincluded intheitems subject [tothe
Code], butthespirit oftheCode istorecover order intheindustry and,inthephotosensitive materials
anddevelopment printing divisions aswell, wewould liketodealwiththem bymaking themostof
Article 2Section 2oftheCode –-thatis,‘torespect thespirit ofthisCode evenwhen theproducts
being dealtwithdonotcorrespond exactly toCameras andRelated Products".535Indeed, coverage
offilmanddeveloping andprinting wasfundamental tosecuring support fortheRetailers Code and
theRFTC fromtheretailers association: "Based upon theexplanation given bysome executives, we
firstunderstood photosensitive materials anddevelopment printing toalsobeincluded. With that
understanding, wepersuaded Zenren [photographic retailers association] members andthey, inturn,
withthatunderstanding, contributed funds."536Itwould, "indeed, havebeenimpossible topersuade
535Discussion onProgress ofFairTrade Council Focuses onMaking FairCompetition Code Fully Known, Zenren Tsuho,
August 1987, p.17,USEx.87-7.
536Ibid., p.18.WT/DS44/R
Page162
Zenren members whose mainlineofbusiness isdevelopment printing tocontribute if[theregulations]
only[apply to]hardware."537Thevice-chairman oftheRetailers Council hasconfirmed this,stating
that: "Cameras andrelated products doesnotmean cameras alone butalsomeans [more] broadly
products handled bycamera shops ...Photosensitive materials anddeveloping andprinting arenever
outside ofthescope."538
7. SUBSEQUENT ENFORCEMENT
5.527 TheUnited States argues thatJapan's"promotion countermeasures" havebeenemployed largely
through informal enforcement mechanisms -primarily warnings andthreats -thatleave businesses
uncertain astothescope ofthegoverning laws, codes, rules orstandards. TheJFTC hasinitiated
relatively fewformal enforcement actions, butithasissued many "administrative guidances". These
informal procedures often target imports, volume sales stores andother mavericks whothreaten to
undermine theartificial stability oftheJapanese photographic materials market.
5.528 IntheUSview,theeffectoftheoverlappingenforcementmechanisms-theJFTC,thePromotion
Council, the"fairtrade councils" andtradeassociations -coupled withthenumerous legalprovisions
thatcould stymie apromotion, havehadasignificant chilling effect onimporters likeKodak. Kodak
hasattempted toimplement innovative marketing campaigns within therestrictive confines ofthe
promotion countermeasures. However, these restrictions haverepeatedly thwarted Kodak ’sefforts
topromote itsproducts. Kodak hasdeveloped many ideas forpremiums andprizes, but,according
toageneral manager ofKodak, "they wereremoved fromtheplans iftheypotentially conflicted with
governmentregulationsortheindustry’sself-regulation...wetriedtoregulateourselvesbeforereceiving
suchmeasures from theJFTC ontheFairTrade Council. Inthissense youcansurely saythatthe
regulations onpremiums andprizes havehadaneffective deterrent effect andhaveactually limited
Kodak ’ssalespromotional activities". Furthermore, "Kodak hasinvariably devised itssalesstrategy
anditsrepresentations andadvertisement while giving consideration tohowtheJapan FairTrade
Commission onFairTrade Council would react. Inthisway, theJapan FairTrade Commission ’s
regulations andFairTrade Council ’sviews havehadaformidable deterrent effect onKodak ’spremium
andprizes".539
5.529 TheUnited States mentions several examples involving premiums inconnection withfilm
developing, prizes andother promotions which Kodak attempted tolaunch buthadtocancel. In1990,
theJFTC intervened inapromotion conducted byaKodak-affiliated retail outlet. Nakamurabashi
Photo Station, aphotofinishing laboratory, offered apremium inconnection withfilmdeveloping:
aphoto album worth around 200yen.According totheUnited States, theJFTC found thispromotion
tobetooradical andgaveguidance totakesufficient precautions onsubsequent promotional activities.540
Inanother instance, in1979, Kodak conducted acontest offering video cassette recorders asprizes
worth approximately 100,000 yen.TheJFTC informed Kodak thatitscontest wasimproper.541Later,
Kodak attempted todevise jointpromotions withMcDonald 'sbutwasfrustrated bytheten-percent
limitation onpremiums thatmaybeoffered togeneral consumers. Kodak wanted togiveaway free
Kodak Panorama single-use cameras withMcDonald 'smeals. Because oftheten-percent rule,Kodak
hadtosettle forapromotion inwhich purchasers ofaMcDonald 'smealgota'luckdraw'which gave
them aticket andachance towinaPanorama camera through adrawing.542
537Ibid.
538Shukan Shashin Sokuho, 7August 1987, p.3,USEx.87-9.
539Affidavit ofSumi Hiromichi, p.27,USEx.96-10, p.5and6.
540Affidavit ofIsshi Norito, 1February 1997, USEx.97-5.
541Affidavit ofYasuyuki Suzuki, p.1,USEx.97-6.
542Affidavit ofWilliam Jack, former Kodak vice-president formarketing inJapan, p.8,USEx.97-2.WT/DS44/R
Page163
5.530 FortheUnited States, this"chilling effect" hasbeencompounded bytheopaque nature ofthe
operation ofthe"faircompetition codes" and"fairtradecouncils," which create akindofcartelization
arrangement bywhich cutthroat competition isavoided andprofit levels aremaintained. Thesystem
ofcodes andcouncils elevates industry trade associations, liketheretailers association, toquasi-
governmental institutions withwide-ranging powers. Asaresult, Kodak hasfaced frequent opposition
toitsproposed promotions fromtheretailers association (Zenren). TheUnited States citestheexample
ofa1987 arrangement between theMinistry ofPosts andCommunications andKodak according to
which Kodak would sellphotographic postcards atpostoffices across Japan atprices undercutting
thegoing retail price. Consumers would beabletocharge thecostofthepostcards against theirsavings
deposits atthepostoffices. However, theMinistry withdrew fromthearrangement because ofpressure
exercised byZenren andissued administrative guidance toKodak towithdraw fromtheplan. Kodak
wasforced tocomply because ofcommercial risksinvolved indisobeying theministry 'sguidance.543
5.531 Japan submits thatinthecases itwasaware ofactions weretaken because premiums involved
were inexcess ofthelawful ceiling. Japan argues thattheorigin oftheproduct hadnothing todo
withtheJFTC 'saction, andsimilar campaigns fordomestic products would havebeenequally held
unlawful. Japan argues thatpremiums regulations havebeenfurther relaxed, inparticular since 1994,
andaresubject totheJFTC 'scontinuous review inlightoftheshifting economic environment. In
February 1996, theJFTC announced theresult ofthereview andimplemented the"new general
premiums rule" applicable toallindustries inApril ofthesame year.544Asthenextstep,theJFTC
isreviewing, since April 1996, premiums regulations applicable toindividual industries, including
industry-specific JFTC Notifications orprivate "faircompetition codes" inorder toensure consistency
withthenewgeneral premiums rule. Asaresult, outof29industry-specific notifications, 10(including
theNotification regarding the"Restrictions onPremium Offers intheCamera Industry") havebeen
abolished asofMarch 1997.545
5.532 Japan submits thatsince filmandpaper falloutside thescope ofanyfaircompetition code,
andarenotsubject toanyaction byafairtrade council, theUSarguments onthe"chilling effect"
ofthese codes andcouncils make sense onlyinrelation toKodak cameras, andnottofilmproducts
onwhich theUnited States bases itscomplaint inthepresent proceeding. According toJapan, Kodak 's
account ofanattempted "post card" campaign issomewhat mysterious. Nooneintherelevant Japanese
government office apparently remembers suchanincident. Inanycase, forJapan, suchepisode has
nothing todoevenwiththealleged "promotion countermeasures".
543Affidavit ofSuzuki Mikio, p.3,USEx.97-3.
544Kanpo, 16February 1996, Japan Ex.D-30.
545Kanpo, 10December 1996, Japan Ex.D-31.