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Japan risk: Foreign trade & payments risk(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentB27B28Foreign trade & payments riskA14A14Note: E=most risky; 100=most risky.SUMMARY In line with Japan's commitments under the World Trade Organisation (WTO), tariff rates are low and non-discriminatory (with the exception of much of the agricultural sector). Although there is little risk that this will be reversed, cheap imports from the rest of Asia, particularly China, may induce Japan to take those measures, sanctioned under the WTO, to protect domestic producers. Moreover, informal barriers to trade--ranging from formal and informal cartels to the importance of personal relations--will remain a problem for foreign companies trying to enter the market. An open current account and capital account are expected to remain in place even in times of economic crisis. Japan's importance to the world trading system means that the risk of a multilateral trade embargo is small, but the risk of China or the US imposing a unilateral trade embargo on specific Japanese exports is more significant. SCENARIOS Sino-Japanese trade friction rises (High Risk) Relations between Japan and China have been frosty since the prime minister, Junichiro Koizumi, took office in early 2001. In part this reflects Chinese ire at the repeated visits by Mr Koizumi to Tokyo's Yasukuni shrine, where the spirits of Japan's war dead (including its war criminals) are honoured. Bilateral relations have, however, worsened considerably since 2004. Although our central forecast assumes that bilateral business-to-business ties continue to deepen, there is a high risk of political tensions between the two countries spilling over into trade, with both sides willing to ban imports of sensitive items (such as food) in order to score political points. Companies operating in Japan that depend on imports from China should therefore make plans for alternative sourcing should trade tensions rise. US-Japan trade friction rises (Moderate Risk) Claims by the US that Japan's large merchandise trade surpluses constitute proof of unfair trading, which are never far below the surface, may become shriller if US economic growth slows markedly. One area to watch in this regard is that of beef imports from the US. Japan started importing beef again in December 2005 following the imposition of a ban in 2003 after cases of mad cow disease were found in US herds. In January 2006, however, a consignment of beef from the US was found to contain cattle spine, which had been banned under the terms of the import resumption. The ban was reinstated in the same month, but could be lifted again as soon as July. Further problems with US beef imports would, however, almost certainly result in a swift reimposition of the ban. Measures that the US could take against exporters from Japan include forcing Japan to agree to voluntary export restraints and slapping punitive tariffs on Japanese-made goods entering the US. Such measures would likely have a negative impact on foreign companies exporting from Japan. Precedent suggests sectors likely to be hit by such a development include steel, automotive and electronics. BACKGROUND (Background material is updated twice yearly. Last update: October 24th, 2005) Tariffs The Customs and Tariff Bureau of the Ministry of Finance administers tariffs. As a member of the Harmonised System Convention, Japan shares a common international (maximum six-digit) trade-classification system. Japans tariff schedule has four columns of applicable rates: (1) general rates based on the Customs Tariff Law; (2) World Trade Organisation or bound rates; (3) temporary rates (exceptions to general rates made in response to short-term industrial and economic changes); and (4) preferential tariff rates under the countrys Generalised System of Preferences scheme (granting lower or duty-free rates to products imported from developing countries). Tariff status varies from country to country; the updated table of country-specific tariff information is available from the Japan Tariff Association (JTA). Goods from the US are charged WTO rates unless a lower temporary rate applies. Japan applies mainly ad valorem tariffs, which cover about 90% of all tariff items. Nevertheless, specific tariffs apply to a range of imported products, including vegetable oils, foodstuffs, alcoholic beverages and petroleum products. Japan is the only industrialised country that places no customs duties on imported cars. Tariffs on imported rice are still high, at Y341/kg (equivalent to three to four times the import price of foreign rice). Meanwhile, the government is obliged to maintain WTO-imposed minimum-access quotas under the tariff plan. A simplified tariff system for low-value imported freight valued at less than Y100,000 (such as small packages for personal imports) simplifies determination of tariff rates, eliminates the extra time necessary to determine the type of product and precise value, and minimises customs brokers handling charges. Importers may choose either the normal rate or the simple tariff, which might be higher or lower. It is possible to obtain an advance ruling on tariff classification and duty rates from a local customs office. Besides customs duty, a 5% consumption tax (general excise tax) is levied on all goods sold in Japan. This is assessed on the cif value of the product plus the import duty. Duties and consumption tax are payable when making an import declaration at the time of customs clearance by the importer. Packages containing items with a value of Y10,000 or less are exempt from duty and consumption tax--except for certain products, such as leather goods. In fact, tariffs have fallen to zero in many major sectors--such as cars, car parts, software, computers, and industrial machinery. Japan is the only industrialised country that places no customs duties on imported cars. Import duties on agricultural items continue to decrease under WTO agreementswith notable exceptions such asrice. Despite the continuing realignment of the Japanese tariff structure with international standards, tariff escalation, or the tendency for tariffs to be higher on processed goods than on the raw materials from which they are produced, is still an issue. Trade peaks, which involve a single tariff or a small group of tariffs that are particularly high, often defined as greater than three times the average nominal tariff, also are a concern for companies exporting to Japan, since they present significant tariff barriers to market access. These higher tariffs typically apply to food products in order to protect domestic producers; they include 40% on processed cheese, 38.5% on beef and 32% on oranges. Non-Tariff Barriers Most goods now qualify as freely importable. Exceptions, provided for in the Foreign Exchange and Foreign Trade Law, require approval in the interests of the sound development of foreign trade and the national economy. These include compliance with conventions, United Nations Security Council resolutions and other international agreements. Importers are required to declare their imports to customs authorities after the arrival of their cargoes from foreign countries. Import declarations must include necessary documents such as an invoice, a bill of lading and a certificate of origin to obtain customs clearance. More than 90% of import procedures are now computerised. According to the Customs and Tariff Bureau of the Ministry of Finance, the following types of products are specifically prohibited from entering Japan: (1) opium and other narcotic drugs, stimulants, and psychotropic substances (excluding those designated by an ordinance of the Ministry of Health, Labour and Welfare); (2) firearms (such as pistols, rifles and machine guns), ammunition for such articles, and firearm parts; (3) counterfeit, altered or imitation coins, paper money, bank notes, or securities; (4) books, drawings, carvings and other articles that harm public security or morals (obscene or immoral material such as pornography); and (5) articles that infringe upon rights in patent, utility models, designs, trademarks, copyrights, neighbouring rights or layout designs of integrated circuits. Some imported goods may have a negative effect on Japanese industry, economy and hygiene or on public safety and morals. Such goods fall under import restrictions as provided by various domestic laws and regulations. For importing goods prohibited or otherwise restricted, the importer must obtain an import permit and official approval under the Customs Tariff Law and other relevant laws. These laws include the Foreign Exchange and Foreign Trade Law, the Law Concerning Wildlife Protection and Hunting, the Firearms and Swords Possession Control Law, the Poisonous and Harmful Substance Control Law, the Pharmaceutical Affairs Law, the Fertiliser Control Law, the Explosives Control Law, the Law Concerning Screening of Chemical Substances and Regulation of Their Manufacture, the High Pressure Gas Safety Law, the Food Sanitation Law, the Plant Quarantine Law, the Domestic Animal Infectious Control Law, the Rabies Prevention Law, the Cannabis Control Law, the Stimulant Drug Control Law, the Narcotics and Psychotropics Control Law and the Opium Law. For environmental reasons, exports and imports of certain types of harmful waste require approval from the Ministry of the Environment. Regulations severely restrict the use of chemicals and other additives in foods and cosmetics. The Japanese Measurement Law requires all imported products and shipping documents to show metric weights and measures. Country-of-origin regulations apply under various laws and requirements of the Japan Fair Trade Commission. Because all these laws and regulations apply specifically to individual products, it is important to work with a prospective agent/importer to ensure that the items meet any applicable requirements. Most labelling laws are not required at the customs clearance stage but at the point of sale. Japan enacted a new law regulating the use of genetically modified organisms (GMOs) in June 2003. The law came into force in February 2004 at the same time the Cartagena Protocol on Biosafety took effect in Japan. The biosafety treaty, adopted in Cartagena, Colombia, in January 2000, regulates international trade of GMOs in order to prevent imported GMOs from damaging ecosystems and to preserve biodiversity. Under the Law for the Maintenance of Biodiversity of Fauna and Flora with Regulations of the Use of Genetically Modified Organisms, GMO handlers, including importers, must obtain government approval before conducting experiments with GMOs or using them in the open air, and they must provide the government with a plan outlining the GMO use and an assessment on its probable effect on biodiversity. The government can issue a retrieval order if problems are found in the plan. The inspection of genetically modified foods was made compulsory under a separate law enacted in 2001. An amendment to the Customs Tariff Law, passed in March 2004 and put into force the following month, requires customs authorities to notify intellectual property rights (IPR) holders of import declarations if the goods in question are suspected of infringing registered IPRs. The information should include the importers identity and address. The Japanese IPR holder may request an injunction against imports of certain products for IPR-related reasons. Importers of commodities falling under official import quotas must apply for licence approval. Japan maintains quotas on many agricultural products, and liberalisation tends to move ahead one product at a time. The country is steadily aligning regulations on farm imports with international standards, though its guidelines are still often seen as discriminatory. Strict quotas for imported foodstuffs such as rice, wheat, barley, starch, beef and peanuts have been rescinded. Instead, minimum-access quantities have been set; imports exceeding these quantities are allowed, though they face high tariffs. Deregulation, often prodded by pressure from abroad, has helped to remove non-tariff barriers in sectors such as agriculture, cars, car parts, semiconductors, telecommunications equipment, and medical equipment and supplies. In recent decades, the United States has exerted considerable influence over Japans foreign-trade regime with numerous market-access complaints. These have led to a series of bilateral agreements. Notable successes in Japanese-US trade include agreements on beef, citrus fruits and semiconductors. Trade agreements have been less effective for apples, insurance, construction and government procurement of telecommunications equipment and services. The US also considers rice trade, port service and the procurement practices of Nippon Telegraph & Telephone to be problematic areas. For its part, the Ministry of Economy, Trade and Industry has criticised the USs continued use of unilateral measures, including Section 301 of the US Trade Act, as contravening the free-trade principles of the World Trade Organisation. Another area of concern for the Japanese government has been the increasing complaints from domestic producers unable to compete against a flood of cheap imports from some Asian countries, particularly China. In April 2001 Japan invoked a temporary emergency import curb on three agricultural products, mainly from China; this was the first time Japan had taken such a step under the ordinary WTO safeguard mechanism. China retaliated with its own punitive tariffs on some Japanese exports to China. The two countries resolved their dispute in December 2001. Japan took a similar action in August 2003 by imposing emergency tariffs on beef imports, amid strong protests from beef-exporting nations including the United States and Australia. The 50% tariff (increased from 38.5%) on fresh and refrigerated beef was in force from August1st through March31st 2004. Japan claimed that the safeguard measure was invoked under WTO rules in response to a year-on-year increase of more than 17% in imports during a three-month period. Moreover, Japan has kept a ban on imports of US beef since December 2003 due to concerns over sporadic outbreaks of mad cow disease in US cattle farms. Bilateral negotiations to reopen beef trade remained stalled in mid-2005. In Japan, anti-dumping filing proceedings take about a year before the government decides whether to impose punitive tariffs. The Ministry of Finance and the Ministry of Economy, Trade and Industry must commence investigations within two months after accepting dumping complaints from the private sector. The exercise of anti-dumping clampdowns on imports is rare. To date, Japan has activated anti-dumping tariffs only three times. Payment Restrictions Domestic and foreign-owned firms are permitted to borrow freely from overseas and need only report these transactions to the Ministry of Finance (MOF). There are no restrictions on interest payments, loan maturities or credit ceilings for loans obtained overseas by foreign and domestic firms. Large foreign firms tend to use foreign sources for long-term financial needs, borrowing mainly in US dollars. There are no borrowing restrictions on resident or non-resident individuals. Principal and interest payments on overseas loans are freely permitted. Amounts exceeding Y5m must be reported to the MOF. There are no government-imposed limitations on receipt of export proceeds. No official restrictions apply to payments for imports. The Foreign Exchange and Foreign Trade Law repealed all remaining restrictions on leading and lagging of payments. Most goods now qualify as freely importable and do not require an import licence. The only exception is for those commodities falling under import quotas, where the Japanese importer must apply for licence approval. Japan strictly prohibits entry of narcotics, obscene materials and goods that are counterfeit or otherwise violate intellectual property rights. The use of chemicals and other additives in foods and cosmetics is severely restricted by regulations. Restricted items include certain agricultural and meat products; endangered species and products such as ivory, animal parts and fur whose trade is banned by international treaty; and swords and firearms. Imports of restricted or banned items must go through clearance procedures stipulated by relevant laws other than the Customs Law. Risk of Trade Embargo The risk of a multilateral trade embargo is very small. However, the risk of China or the US imposing a unilateral trade embargo on specific Japanese exports is more significant. China placed 100% punitive tariffs on Japanese imports in June 2001, specifically on 60 varieties of products from three categories of goods--vehicles, mobile phones and air-conditioning units. The value of the goods targeted by China is estimated to be about US$700m. The measure came in response to Japanese tariffs on a wide range of Chinese agricultural items, including spring onions and shiitake mushrooms, which were designed to protect Japanese farmers from cheap Chinese imports. China estimates the trade value of the agricultural products to be about US$100m a year. The two countries resolved the trade dispute in December 2001. Japan took a similar action in August 2003 by imposing emergency tariffs on beef imports, amid strong protests from beef-exporting nations including the United States and Australia. The 50% tariff (increased from 38.5%) on fresh and refrigerated beef was in force from August1st through March31st 2004. Japan claimed that the safeguard measure was invoked under WTO rules in response to a year-on-year increase of more than 17% in imports during a three-month period. Moreover, Japan has kept a ban on imports of US beef since December 2003 due to concerns over sporadic outbreaks of mad cow disease in US cattle farms. Bilateral negotiations to reopen beef trade remained stalled in mid-2005. Capital Flows and Foreign Debt Until recently Japans capital and financial accounts typically ran large deficits (the converse of its large current-account surpluses) on the strength of the large deficits recorded on the latter. Movement in Japans financial account was volatile in much of the 1990s, partly reflecting worries on the part of foreign investors about the state of Japans economy and, more recently, arising from Japanese institutional investors seeking higher returns on overseas financial markets. The first large-scale desertion by foreign investors of Japans financial markets in the decade came in 1992, when net purchases of Japanese stocks and bonds by foreign investors fell by nearly 95% year on year. This more than offset the steep fall in the value of Japans direct and portfolio investment abroad during the same period and was an important factor in the 40% year-on-year rise in yen terms in the financial-account deficit over the year. The financial-account deficit narrowed progressively between 1993 and 1996, corresponding to the easing in the current-account surplus. In 1997-98, however, it widened again as Japanese investors maintained high levels of direct and portfolio investment abroad. In 1997 there was also a sharp increase in short-term loan assets, which pushed up the other investment asset category. To a large extent this reflected increased loans by Japans banks to their subsidiaries and to other Japanese companies in Asia as the regions deepening financial crisis made European and US banks reluctant to lend. In 1999 the deficit narrowed again, owing to the slowdown in direct investment abroad and to sharply increased inflows of foreign capital into the domestic stockmarket, as foreign investors increased their holdings of Japanese stocks in expectation of economic recovery. After the deficit widened again in 2000-02, partly reflecting the pick-up in direct investment abroad, the financial account moved into surplus in 2003-04. Two of the main factors driving these surpluses were the sharp reduction in foreign loan portfolios of Japanese banks in 2003, and the heavy influx of foreign portfolio investment in 2004 on the back of Japans improving economic recovery. The yens appreciation after 1985 heightened the attractiveness of direct investment abroad for Japanese companies, since goods produced in inexpensive foreign facilities can be sold for less on international markets. In fiscal year 1994/95 (April-March) Japanese investment in Asia (mostly in manufacturing) soared, allowing Asia to overtake Europe as the second largest recipient of Japans outward investment, behind North America. Although investment by Japanese companies in Asia slowed in the late 1990s, owing to the economic problems in the region, it is likely to pick up again in next few years, particularly to China, as these companies move to escape the high cost of production at home. Over time this investment should reduce the countrys merchandise trade surplus, since it will increase the volume of goods produced by Japanese subsidiaries operating abroad for resale back in Japan. Foreign investment in Japan is still limited, mainly because of the high business start-up costs there: land prices, office rent, taxes and salaries are all considerably higher in Japan than in many of its regional peers. Balance-of-payments data (national series) show inward direct investment flows of around Y3trn-5trn in recent years. Although these sums are large in absolute terms, they are equivalent to barely 1% of GDP. European companies have been major investors in Japan in recent years. High profile deals include the takeover in 1999 of one of Japans largest vehicle makers, Nissan Motor, by Renault of France, the takeover in 2001 of Japans third-largest telecoms operator, Japan Telecom, by Vodafone of the UK, and the acquisition in 2002 of a supermarket chain, Seiyu, by the worlds largest general merchandiser, Wal-Mart of the US. |