A REVIEW OF 27 KEY JAPANESE SECTORS FOR EUROPEAN COMPANIES

1. Aeronautics: The Japanese market for commercial aircrafts and helicopters is one of the largest in the world, and historically has been dominated by the United States. Japanese airlines and operators should recognise the benefits of competition, the risk of depending on a single source, and the benefits of diversifying their suppliers. For instance, the availability on the market of the unique A380 commercial aircraft offers unprecedented possibilities to airlines in terms of innovative customer services, whilst reducing congestion at major international airports.

2. Space: Japan is a leading space-faring nation with independent access to space. State-of-the-art programmes include launchers, satellites, satellite components, and ground equipment. Despite such advances, the commercial success of Japan's space industry is limited because of low domestic volumes, past US political pressure, and a lack of consistent space utilisation policies across the ministries.

3. Airlines: The services provided by airlines are indispensable for the efficient functioning of the global economy. By the same token, the success of the Japanese economy is to a large extent dependent on well-functioning links between Japan and other countries. European airlines are willing and ready to increase capacity to and from Japan, but currently the infrastructure constraints and regulatory environment do not permit the expansion of services. Moreover, increased security concerns and sky-rocketing fuel costs have severely affected the global airline industry in the past few years, leading to higher costs and a substantial negative impact on route profitability. For European airlines operating in Japan, this situation has been exacerbated by the country’s underdeveloped air transport infrastructure and high operating costs.

4. Animal Health: Japan is the second largest market in the world for animal health products, with annual sales of approximately 83 billion yen. Due to the high cost of development of animal drugs, most new products are now developed on a worldwide basis by a few global companies. Many new innovative products come from Europe. Even though each product can only be registered after going through a rigorous review process in Europe and the USA, additional testing is required in Japan before approval is granted to bring it to market. In some cases, a product that is readily available to veterinarians and animal owners in Europe cannot be registered in Japan due to the unique local regulatory requirements.

5. Asset Management: Professional management of pooled assets is becoming increasingly important in Japan, as the financial basis of the social security system steadily weakens. With the birth-rate at its lowest level ever and the post-war baby-boom generation starting to retire, even a sustained economic upturn with a potentially increased tax base would be unlikely to reverse the trend of decreasing revenues. The proportion of Japan’s financial assets managed by investment management firms is relatively low compared to other major economies. By providing professional advice and innovative services in an increasingly complex market, global professional asset management companies are proving they can contribute to the more effective allocation of resources in the economy at large.

6. Automobile: The Japanese domestic car market is in crisis. Sales, which have declined for the last three consecutive years, are some 60% lower than in the peak year of 1990 and are still declining. Nonetheless, Japan is still the world’s fourth largest passenger car market after the US, the EU and China. European importers are particularly strong in the luxury segments of the market. Car ownership by household is broadly comparable to that in the EU, but as a result of the declining birth-rate and the ageing population, the overall market is unlikely to expand in the mid-term. Changes in the pattern of consumer spending, higher petrol prices and environmental concerns will affect the mix of car models sold in Japan.

7. Automotive Components:  Unfortunately, European automotive component and systems manufacturers continue to face difficulties in promoting European technical expertise to the Japanese automobile industry, mainly due to continued reluctance in the industry to outsource product development on a global basis. Japanese firms are still uneasy about divulging proprietary information to outsiders, continuing to favour traditional suppliers for product design and production. It is also still often necessary to provide “Japanese solutions” to customers in order to adhere to company-specific requirements, which defies the global trend towards single platform development and volume production. The European system offers low risks, reasonable prices and flexibility.

8. Banking: Japan's relative prosperity has decreased considerably in the past decade, apparent in the steady decline of Japan’s GDP per capita ranking. Japanese consumers have continued to save throughout this period, but while the rest of the industrialised world has enjoyed record capital growth, their own return on capital has been extremely poor. Innovative financial products and instruments commonly used in Europe have not been available in Japan, as the regulatory framework is not conducive to services and structures that do not fit into predetermined categories and prescriptions. Reform of the Japanese financial sector has been high on the Government’s agenda ever since the burst of the bubble in the early 1990s. The Hashimoto “Big Bang” reforms initiated in 1998, which allowed for the formation of financial holding companies, were followed by consolidation of the banking sector and efforts to clean up bad debts and non-performing loans under the Koizumi cabinet. Multiple financial services regulators were streamlined and a no-action letter process was introduced to enhance transparency, while limited structural reform was achieved by enabling Japanese city banks to engage concurrently in trust and banking businesses.

9. Construction: The absolute size of Japan’s construction sector makes it one of the largest in the world. The Government has made enormous efforts to increase the sector’s efficiency by more than halving (54%) yearly public spending during the past eight years, yet inefficiencies in the structure and management of the sector continue to prevent the creation of a market environment based solely on cost-effective merit. It remains almost impossible for foreign companies to sell and install building materials and equipment in Japan directly to end-users, especially for new building projects.

10. Cosmetics and Quasi Drugs:  Japan is the second largest market for cosmetics in the world. European firms have a large market share of the imports, but continue to face substantial market access barriers, such as an overly restrictive regulatory environment, an overly complex product approval system and complicated manufacturing requirements.

11. Energy:  The Japanese utility industry is run by ten regional private power companies that have a virtual monopoly on power generation, transmission and distribution in each area. Japan`s energy policy is enacted in the Basic Act on Energy Policy, which sets the following goals: 1. Securing of a stable energy supply ; 2. Environmental sustainability and 3. Use of market mechanisms, which should, however, remain consistent with the first two basic goals. After the March 2011 nuclear disaster, Japan`s utility model was placed under review. A METI committee on industry reform proposed splitting off power generation from transmission operations and creating a nationwide entity to manage major power lines.

12. Food and Agriculture: Japan’s food market ranks second in the world and the food retail market is worth about 38 trillion yen (about Euro 240 billion). Japan’s packaged food market is worth about Euro 140 billion, which is about 11% of the world total of Euro 1.2 trillion. The food processing industry is estimated to have a value of about Euro 150 billion, making it the third largest sector in Japan after electronics and car manufacturing. Japan is the largest importer in the world of pork, maize and canned chicken, the second largest importer of beef, soybeans and wheat, and a major importer of fruit and vegetables. Rice is the principal domestically produced crop. Japan depends on imports for about 60% of its food supply on a calorie basis. Its self-sufficiency ratio has steadily declined, dropping recently to just below 40%. This is very low compared with France at 130%, the US at 119%, Germany at 91% and the UK at 74%. Japan is seeking to improve this ratio and has set a target of 45% by 2015

13. Human Resources : Economic globalisation and current demographic trends in Japan, including an acute shortage of skilled labour, an ageing population, and a declining birth rate, present significant challenges for domestic and foreign-owned businesses and for the long-term vitality of the Japanese economy. Companies are forced to streamline their management, improve working conditions, enhance operational efficiency and find new sources of labour from abroad. In the light of these challenges, it is critical that labour regulations and human resource management facilitate international commercial transactions and provide the best means of acquiring and retaining a highly skilled competitive workforce.

14. Insurance: The Japanese insurance market is the second largest in the world, and is key to global insurance groups. European insurers bring their expertise to the market and provide proven insurance products to the Japanese consumer to meet their insurance needs. The market share of foreign affiliates in Japan is increasing, but they continue to encounter regulatory obstacles that can limit efficient development of their businesses. An example of this is the rigid reserving and solvency regulations on variable annuity and variable life insurance products. Future growth in Japan will come from the aging of the population, driving a need for products dealing with extended retirement, difference in family structures and rising demand for medical products.

15. Intellectual Property Rights: Japan remains the world’s most attractive market for luxury products as it still accounts for 29% of worldwide consumption of luxury goods and is worth around Euro 14.3 billion. Given the sheer size of the market, Japan is among the principal targets for the trade in counterfeit goods. Most of the counterfeit goods entering and circulating in Japan are sold through Internet auction websites. More than 20% of well-known foreign brand goods sold on the Internet and mobile phone auction sites are fake. Yahoo!Japan, Rakuten and DeNA are the principal auction site operators in Japan and play a significant role in the fight against counterfeits. In the past few years, the Japanese authorities have also started to more pro-actively counteract violations of intellectual property rights. However, notwithstanding important legal improvements and encouraging results following intensified surveillance over the past years, crucial issues remain unresolved.

16. Legal Services: Foreign lawyers in Japan have provided a valuable service in introducing new corporate and financing techniques to Japan. They play a crucial role in the integration of both economies by providing assistance in interfacing between European and Japanese firms on cross-border investment, in advising financial institutions investing or lending abroad, and in assisting Japanese companies wishing to access the European capital markets. However, there are restrictions on lawyers in exercising their profession, as legal qualifications are currently not recognised across jurisdictions and/or their activities are circumscribed by local rules.

17. Liquor: Europe is the leading exporter of liquor and wine worldwide. The Japanese liquor market is one of the largest in the world with estimated annual liquor sales of 6 trillion yen and growing wine consumption. Despite such figures, in terms of volume, foreign imports account for only 3.7% of the total Japanese liquor market (including beer and beer-like products) while Japanese producers account for almost 96.3%. The Government of Japan has implemented a notable reduction in taxes. However, Japan lags behind the rest of the world in the application of international standards for product definition and in elimination of non-tariff barriers to market access.

18. Logistics and Freight: A well-functioning freight forwarding and logistics services market is crucial for the global integration and competitiveness of Japanese industry. All companies active in Japan, whether foreign or Japanese owned, with customers and/or operations outside of the country, depend on efficient freight services both domestically and across borders. European companies offering Japanese consumers access to their worldwide logistic operations have largely been successful, but still face serious regulatory challenges

19. Materials:  Japan has developed a depth of knowledge and expertise in processing materials, and is at the forefront of many sensitive technologies, such as rechargeable batteries for hybrid vehicles, nanotechnologies for manufacturing semiconductors, and various electronic components. These advanced technologies are largely based on the availability of key raw materials and Japan’s ability to secure a stable high quality supply. Japan, one of the main consumers of industrial materials in the world, would benefit greatly from better access to the reliable sources of high-quality products at market-based prices that European companies can offer. However, Japan has been reluctant to reduce tariffs on industrial materials on a unilateral basis before formal negotiations on tariff reductions are concluded under the auspices of the World Trade Organisation (WTO). Following a number of bilateral trade agreements and continued difficulties in reaching a breakthrough in the WTO’s Doha round, Japan has started to reconsider its policies. The unilateral lifting of tariffs on high carbon ferro-chromium (tariff code 720241000), a key ingredient in the manufacturing of all stainless steels, is a welcome step of major importance.

20. Medical Diagnostics:  Medical diagnostic reagents and equipment are used to perform diagnostic tests in hospitals, commercial laboratories, physicians’ offices and blood banks. Reagents are an essential component of any healthcare regime, indispensable in preventing sickness, detecting and diagnosing diseases, ascertaining the side effects of drug therapy, monitoring treatment, improving patient quality of life and decreasing total healthcare costs. Repeated cuts to reimbursement prices have reduced pricing levels in Japan below those of comparable overseas markets. The current regulatory structure and reimbursement regime constitute an obstacle to introducing new products the Japanese market

21. Medical Equipment: Healthcare in Japan is generally of a high standard, as suggested by the country enjoying the highest average life expectancy and lowest infant mortality rates in the world. However, inefficiencies in the system, such as structural over-consumption of certain services and unparalleled long stays in hospital, need to be addressed urgently. The method of financing the healthcare system and demographic changes are leading to lower contributions and higher consumption. Consumers expect higher quality medical equipment services, which will come under increasing strain in the years ahead. However, the current regulatory structure and reimbursement regime constitute an obstacle to introducing such equipment to the Japanese market and deprive Japanese consumers of access to products available in other industrialised countries, including China and South Korea.

22. Railways: Since the Tohoku Earthquake 2011 still much remains to be rebuilt and progress is slow. In rural areas the train station plays a vital role and an increased focus on a Bus Rapid Transit (BRT) system will weaken communications and communities alike. The EU-Japan FTA/EPA should enable Japan to work jointly with Europe to promote open integrated systems built on harmonised standards. Furthermore under the FTA/EPA, test data from internationally recognised certification bodies should be accepted without further delay and references from Europe should be fully recognised and accepted.

23. Retail & Wholesale:  The Japanese retail market is one of the largest and most vibrant in the world. However, unlike in many markets, non-franchised outlets of overseas retail chains are rare. Successful entries into Japan by European retailers have been few and the failures have been given considerable coverage by the local and international media. This has led to a perception that Japan is simply ‘too difficult’: competition is intense, costs are high, the threat of a rise in consumption tax is real, and regulatory requirements and enforcement are opaque. Many retailers looking to expand internationally pass over Japan in favour of other markets that provide examples of non-local retail success. Nevertheless, a number of European retailers that have made careful studies of the Japanese market have elected to ‘set up shop’. It is important that they be allowed the opportunity to succeed. Their success benefits the Japanese consumer by offering them greater choice.

24. Sustainable Development: In an increasingly globalised world of dwindling natural resources and escalating social tensions, harnessing the innovative potential of business across all industries to address the issues of sustainable development and climate change is imperative for the survival of the broader system that enables life and business. European companies are committed to contribute to sustainable development in Japan and aims to facilitate their access to the Japanese market. This includes efforts to identify any trade or investment barriers that block such access and advocate their removal. European business is keen to enter into a dialogue with Japanese society, government and business to facilitate reform.

25. Tax: A vital and robust economy is impacted by rules and regulations in the tax regime. The Government of Japan deserves credit for undertaking far-reaching tax reforms in recent years; however further measures are needed to create a tax system compatible with the globalisation of corporations and increased capital mobility. European firms continue to encounter inconsistent and arbitrary treatment from tax authorities and regulations that impede market access and growth.

26. Telecommunications Carrier: The global economy is increasingly dependent on access to well-functioning networks. The fee structure for connectivity is a crucial element for the success of many businesses. Whilst Japan has developed one of the most sophisticated information infrastructures in the world, it remains one of the most regulated telecommunications markets. Operators in Japan can do very little without first consulting and obtaining the formal or informal approval of the regulator.

27. Telecommunications Equipment: Japan is the second largest telecommunications equipment market in the world. Telecommunications equipment accounts for 12.5% of Japan’s total industrial output, worth an estimated Euro 108 billion. Structural reforms under the Government of Japan’s ICT Strategy have supported the introduction of high-speed, large-capacity ICT infrastructure, lowering of communications rates, and the development of e-commerce and e–government.  Internet access costs have decreased dramatically and access to broadband infrastructure is now amongst the most developed in the world. The Government of Japan is also considering strategic measures to further strengthen Japan’s competitive edge in the global telecommunications market, in terms of research, development, standardisation and structure of the domestic market.