Japan’s Antimonopoly Law and Competition Policy: Historical Evolution and Deliberate Design

1. Japan’s Antimonopoly Law and Competition Policy:Historical Evolution and Deliberate Design Kotaro Suzumura Science Council of Japan and School of Political Science and Economics, Waseda University September 2008 To be presented at Australian National University

2. Epochs in Japan’s Antimonopoly Law and Competition Policy I • Original Antimonopoly Law (AML):Enacted in 1947 as a part of Economic Democratization Policy pursued by Occupation Forces; Modeled after US Antitrust Laws; “Per se Illegal”Standardfor Cartels; Stringent control over Mergers and Acquisitions; Pure Holding Companies outright prohibited ⇒ Lasted until 1997 AML Revision; Legacy of Occupation = Foreign Exchange and Foreign Trade Control Law. • Changes after Occupation Period: Rigorous application of original AML claimed to be unrealistic in early phase of economic rehabilitation in Japan; Recession Cartels and Rationalization Cartels legalized and Exemption Laws introduced ⇒ Mostly abolished around 1997, almostall cartels as of now being illegal. • Hibernation Period of Japan’s Fair Trade Commission (FTC), which paved the road towards the 1953 Weakening of AML; How did it happen and to whom should the blame be attributed?

3. Epochs in Japan’s Antimonopoly Law and Competition Policy II • Japan’s Rapid Growth Era in the 1960s: Heyday of MITI’s Industrial Policy or Erosion of MITI’s Controlling Power ? • Yahata-Fuji Merger Case: An Uprising of “Modern” Economists in 1968; Why did they join force and opposed to this conspicuous merger case? Were they right in their substantial judgments on the merit and demerit of the proposed merger? What was the logic of their opposition? Was their reason sustainable with the wisdom of hindsight? What lesson can we deduce from this social experiment? • Introduction of Surcharge Scheme against Cartels: The 1977 AML Reform • US-Japan Debates on Structural Impediments Initiatives in 1990: Enabled FTC to ride a tailwind towards more effective AML enforcement.

4. Epochs in Japan’s Antimonopoly Law and Competition Policy III • The 1992 strengthening of surcharge scheme on cartels. A result of this increase of surcharge rates = The surcharge scheme became even more bizarre Sphinx-like animal. • Competition Policy Research Center (CPRC) within FTC inaugurated in 2003: Conducting researches on (1) the process of negotiation with Occupation Forces on the draft of original AML; (2) the contents and reason of an uprising of “modern” economists against the Yahata-Fuji merger case; and (3) the original design of sur-charge scheme and the process of its implementa-tion. CPRC also engages in theoretical and empirical analysis of Japan’s competition policy so as to enrich the informational basis of Japan’s antimonopoly law and competition policy. • The 2006 AML revision in search for the coher-ence of AML and the use of private incentives through the Leniency Scheme.

5. Legacy of Occupation Period and Their Hysteresis Effects I • A persistent problem for the resource-poor Japan = Problem of International Balance of Payments. • An agency having the controlling power over foreign currency allocations could exert decisive power over private firms. This power resided with Ministry of International Trade and Industry (MITI) in postwar Japan. • According the Potsdam Declaration, which Japan had accepted at its surrender, SCAP exercised complete control over all exports/imports of goods and services, as well as all foreign exchange and financial transactions. SCAP directed the Japanese government to create a single agency to account for and distribute the goods that SCAP imported into Japan and to receive and transfer to SCAP products manufactured by the Japanese for exports.

6. Legacy of Occupation Period and Their Hysteresis Effects II • Charmers Johnson (1982, p.194): “During 1949, SCAP began a policy of transferring some of its own controlling and supervisory powers to the Japanese government in anticipation of the coming peace treaty. On February 2, 1949, the occupation delegated to the Japanese government all control over foreign exchange accruing from international trade, and it ordered the creation of a Foreign Exchange Control Board to supervise the investment of these funds in industries that were essential to Japan’s economic recovery. To complete the transfer of authority, SCAP encour- aged the Japanese government to pass the Foreign Exchange and Foreign Trade Control Law … . Among other things, this law required that any citizen who acquired foreign exchange through trade must turn it over to a government account, and the Foreign Exchange Control Board was put in charge of how these funds would be used.” • Thus, it was SCAP which helped create MITI’s mighty controlling power up till the Rapid Growth Era in the 1960s.

7. Hibernation Era of Japan’s Fair Trade Commission FTC’s Legal Decisions1947: 5 1948: 2  FTC’s Hibernation Era FTC’s Size the smallest ever in 1953 Reasons behind FTC’s Hibernation Era • There were not much leeway for FTC’s competition policy in the presence of prevalent quota system within MITI’s jurisdiction. • FTC’S morale very low for two reasons: (a) FTC as an orphan in the government organization; (b) FTC’s chairman coming from other and much larger government sections: Ref. Roundtable Talk among FTC’s Sucessive Chairs, Fair Trade, No. 184, 1966, pp. 17-24. (3) FTC’s decision to sink the collusive price setting by major newspapers.

8. Conventional Wisdom on Welfare and Competition I First Conventional Wisdom: Excessive Competition The Autobiography of Fukuzawa Yukichi, translated by E. Kiyooka with an Introduction by S. Koizumi, Tokyo: The Hokuseido Press, 1899/1960, p. 190. I was reading Chambers’s book on economics. When I spoke of the book to a certain high official in the treasury bureau one day, he became much interested and wanted me to show him the transla-tion. … I began translating it. … [W]hen I came upon the word “competition” for which there was no equivalent in Japanese, and I was obliged to use an invention of my own, kyoso, literally, “race-fight.” When the official saw my translation, he appeared much impressed. Then he said suddenly, “Here is the word, ‘fight.’ What does it mean? It is such an unpeaceful word.”

9. Conventional Wisdom on Welfare and Competition II “That is nothing new,” I replied. “That is exactly what all Japanese merchants are doing. For in-stance, if one merchant begins to sell things cheap, his neighbor will try to sell them even cheaper. Or if one merchant improves his merchandize to attract more buyers, another will try to take the trade from him by offering goods of still better quality. Thus all merchants ‘race and fight’ and this is the way money values are fixed. This process is termed kyoso in the science of economics.” “I understand. But don’t you think there is too much effort in Western affairs?” “It isn’t too much effort. It is the fundamentals of the world of commerce.” “Yes, perhaps,” went on the official. “I under-stand the idea, but that word, ‘fight’ is not condu-cive to peace. I could not take the paper with that word to the chancellor.”

10. Conventional Wisdom on Welfare and Competition III Excess Entry Theorem: Mankiw-Whinston and Suzumura-Kiyono Within the standard Cournot model of oligopolistic competition, Socially First-Best # of Firms < Long-Run Equilibrium # of Firms and Socially Second-Best # of Firms < Long-Run Equilibrium # of Firms.

11. Conventional Wisdom on Welfare and Competition IV Second Conventional Wisdom: Competition as an Efficient Allocator of Scarce Resources Fundamental Theorem of Welfare Economics Allocation at Perfectly Competitive Equilibrium ⇔ Pareto Efficient Allocation of Resources Theoretical Industrial Organization William Baumol (1982, p. 2): “[T]he standard analysis [of industrial organization] leaves us with the im-pression that there is a rough continuum, in terms of desirability of industry performance, ranging from unregulated pure monopoly as the pessimal [sic] arrangement to perfect competition as the ideal, with relative efficiency in resource allocation increasing monotonically as the number of firms expands.”

12. Conventional Wisdom on Welfare and Competition V Paul Samuelson: Ruling Theme among Economists Since 1750 There is a vague notion … that there is something optimal about lasses-faire pricing. Among the most sophisticated lay people, it is realized that laissez-faire pricing systematically makes some people better off and some other people worse off, and this pattern quickly changes. There is a chivalrous rule of thumb; “Don’t interfere with it.” In the first place, if you do interfere with it, you probably do as much harm as good because of imperfect government. But, more than that, there is the law of large numbers operating. One invention helps A, another invention helps B; by James Bernoulli’s theorem of large numbers, it evens out. Perhaps. The trickle down theory from inequality is bred by the Schumpeterian dynamic process of innovation. The total pie is improved; on the whole and over time, it evenly lifts up everybody. The same tide raises all ships. That is dogmatic faith, but I think it is in the background of intelligent conservatives.

13. Yahata-Fuji Merger Case: An Uprising of “Modern” Economists I Yahata Steel and Fuji Steel proposed merger in 1968 A Minister in Commission, MITI Officials, Business Leaders: Strong Acclamation supported by such economists as Ichiro Nakayama and Miyohei Shinohara More than 100 “Modern” Economists led by such representative scholars as Ryutaro Komiya, Ken-Ichi Imai and Tsunehiko Watanabe joined force and strongly opposed to the merger Major Reason for Opposition: (1) Legal procedure of AML not respected by a minister in commission, MITI official and business leaders, (2) Doubts on the proposed scale merits FTC decided to admit the proposed merger subject to due conditions

14. Yahata-Fuji Merger Case: An Uprising of “Modern” Economists II Lessons to be Learnt: • Respect for Legal Procedure: Comparison with National Tax Tribunal • “Modern” Economists’ Understanding of AML doubtful: Monopoly versus Private Monopolization Ref. Yasusuke Murakami, “Principle of Competition and the Merger Problem,” Chuo-Koron, September 1968, pp. 160-168. (3) Postmortem of the Yahata-Fuji Merger Case Necessary

15. Secret Price-Fixing Cartels in Petroleum Industry and Its After- effects I Oil Crisis in 1973 Secret Price-Fixing Cartels in Petroleum Industryand Its Aftereffects • Introduction of Administrative Surcharge on those who are involved in illegal cartels. To prevent the charge of double penalty, his device was explained as the measure to confiscate illegal gain earned through cartels. [1977] • Surcharge levied as the fixed percentage of the sales during the cartel enforcement. • Rigidity of the scheme made it difficult to solict information on secret (illegal) cartels from their members.

16. Secret Price-Fixing Cartels in Petroleum Industry and Its After- effects II Secret Price-Fixing Cartels in Petroleum Industryand Its Aftereffects (4) FTC has exclusive legal rights to charge offenders of AML. In the case of secret price-fixing cartels in petro- leum industry, this charge was submitted with no prior consultation with the Public Prosecutor’s Office. It is widely recognized to have created many frictions bet- ween FTC and the Public Prosecuter’s Office.  A new convention developed so that FTC should consult with the Public Prosecuror’s Office prior to their charge.  FTC’s charge will be made only when an agreement is reached between FTC and the Public Prosecutor’s Office.  The extraterritorial abuse of proofs gather for the purpose of administrative procedure.

17. US-Japan Debates on Structural Impediments Initiatives As a result of this debates, the following changes are introduced to the AML procedures. The 1992 strengthening of administrative surcharge on cartels  The surcharge scheme became even more bizarre Sphinx-like animal. The administrative surcharge scheme became the symbol of contradictions involved in AML and Japan’s competi-tion policy. • The lack of incentive device to gather information on cartels from the members thereof. • The illegitimate use of information gathered for the purpose of administrative charge for the purpose of deciding on the criminal charge. • The nature of administrative surcharge may well be internally contradictory.

18. Leniency Scheme for Cartel Surcharge The 2006 Revision of AML • Surcharge on cartels and huddles (dango) are given the legal status of a criminal sanction. • The percentage of surcharge on cartels lifted up further so as to strengthen its deterrent effect. • To enable FTC to gather evidence for the pur-pose of criminal accusation. • Introduce the leniency scheme on cartel sur-charge so as to provide private incentives to cartel members for voluntary collaboration with FTC. • The rigidity and transparency of the surcharge scheme given priority over its flexibility and administrative discretion. N.B. The first instance of the leniency scheme: application: Mitsubishi Heavy Industry, Ishikawajime-Harima Heavy Industry and Kawasaki Heavy Industry.

19. What to Learn and Which Way to Go? Transplantation of AML into foreign soil may well require the adjustment to indigenous social norm on welfare and competition; International harmonization of AML or design of interface mechanism? 1980: 26 countries and regions with AML. 9 new additions between 1981 and 1990 59 new additions between 1991 and 2000 2004: 101 countries and regions with AML Collaboration among legal scholars and economists are highly desirable. To be fruitful, economists should recognize the procedural fairness viewpoint which legal scholars are accustomed to, whereas legal scholars should pay due attention to the mechanism design viewpoint which economists developed over the years.

20. References I • Amsden, A. and K. Suzumura, “An Interview with Miyohei Shinohara: Non-Conformist in Japanese Economic Thought,” Journal of the Japanese and International Economies, Vol. 15, 2001, pp. 341-360. • Goto, A. and K. Suzumura, eds., Competition Policy of Japan, Tokyo: The University of Tokyo Press, 1999. In Japanese. • Itoh, M., Kiyono, K., Okuno-Fujiwara, M. and K. Suzumura, The Economic Theory of Industrial Policy, San Diego: Academic Press, 1991. • Johnson, C., MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975, Stanford, California: Stanford University Press, 1982. • Komiya, R., Okuno, M. and K. Suzumura, eds., Industrial Policy of Japan, New York: Academic Press, 1988.

21. References II • Mankiw, N. G. and M. D. Whinston, “Free Entry and Social Efficiency,” Rand Journal of Economics, Vol. 17, 1986, pp. 48-58. • Suzumura, K., “Competition, Welfare, and Competition Policy,” in Schmidt, U. and S. Traub, eds., Advances in Public Eco-nomics: Utility, Choice and Welfare, Amsterdam: Springer, 2005, pp. 1-15. • Suzumura, K. and K. Kiyono, “Entry Barriers and Economic Welfare,” Review of Economic Studies, Vol. 54, 1987, pp. 157-167. • Vickers, J., “Concepts of Competition,” Oxford Economic Papers, Vol. 47, 1995, pp. 1-23.