Japan’s Antimonopoly Law and

Competition Policy:
Historical Evolution and Deliberate
Design

Kotaro Suzumura

Science Council of Japan

and
School of Political Science and Econo
mics, Waseda University
September 2008

To be presented at Australian Nationa

l University
Epochs in Japan’s Antimonopoly
Law and Competition Policy I

 Original Antimonopoly Law (AML): Enacted in 1

947 as a part of Economic Democratization Polic
y pursued by Occupation Forces; Modeled after
US Antitrust Laws; “Per se Illegal” Standard for
Cartels; Stringent control over Mergers and Acqu
isitions; Pure Holding Companies outright prohib
ited ⇒ Lasted until 1997 AML Revision; Legacy o
f Occupation = Foreign Exchange and Foreign Tr
ade Control Law.

 Changes after Occupation Period: Rigorous appli

cation of original AML claimed to be unrealistic i
n early phase of economic rehabilitation in Japa
n; Recession Cartels and Rationalization Cartels l
egalized and Exemption Laws introduced ⇒ Most
ly abolished around 1997, almost all cartels as of
now being illegal.

 Hibernation Period of Japan’s Fair Trade Commi

ssion (FTC), which paved the road towards the 1
953 Weakening of AML; How did it happen and t
o whom should the blame be attributed?
Epochs in Japan’s Antimonopoly
Law and Competition Policy II

 Japan’s Rapid Growth Era in the 1960s: Heyd

ay of MITI’s Industrial Policy or Erosion of M
ITI’s Controlling Power ?

 Yahata-Fuji Merger Case: An Uprising of “Mo

dern” Economists in 1968; Why did they join
force and opposed to this conspicuous merge
r case? Were they right in their substantial ju
dgments on the merit and demerit of the prop
osed merger? What was the logic of their opp
osition? Was their reason sustainable with th
e wisdom of hindsight? What lesson can we d
educe from this social experiment?

 Introduction of Surcharge Scheme against Ca

rtels: The 1977 AML Reform

 US-Japan Debates on Structural Impediments

Initiatives in 1990: Enabled FTC to ride a tail
wind towards more effective AML enforceme
nt.
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 rate
s = The surcharge scheme became even more biz
arre Sphinx-like animal.

 Competition Policy Research Center (CPRC) withi

n FTC inaugurated in 2003: Conducting research
es on (1) the process of negotiation with Occupati
on Forces on the draft of original AML; (2) the co
ntents and reason of an uprising of “modern” ec
onomists against the Yahata-Fuji merger case; an
d (3) the original design of sur-charge scheme an
d the process of its implementa-tion. CPRC also e
ngages in theoretical and empirical analysis of Ja
pan’s competition policy so as to enrich the infor
mational basis of Japan’s antimonopoly law and c
ompetition policy.

 The 2006 AML revision in search for the coher-en

ce of AML and the use of private incentives throu
gh the Leniency Scheme.
Legacy of Occupation Period and
Their Hysteresis Effects I

 A persistent problem for the resource-poor Ja

pan = Problem of International Balance of Pa
yments.

 An agency having the controlling power over

foreign currency allocations could exert decis
ive power over private firms. This power resi
ded with Ministry of International Trade and I
ndustry (MITI) in postwar Japan.

 According the Potsdam Declaration, which Ja

pan had accepted at its surrender, SCAP exer
cised complete control over all exports/impor
ts of goods and services, as well as all foreign
exchange and financial transactions. SCAP di
rected the Japanese government to create a si
ngle agency to account for and distribute the
goods that SCAP imported into Japan and to r
eceive and transfer to SCAP products manufa
ctured by the Japanese for exports.
Legacy of Occupation Period and
Their Hysteresis Effects II

 Charmers Johnson (1982, p.194): “During 194

9, SCAP began a policy of transferring some of i
ts own controlling and supervisory powers to th
e Japanese government in anticipation of the c
oming peace treaty. On February 2, 1949, the
occupation delegated to the Japanese governm
ent all control over foreign exchange accruing f
rom international trade, and it ordered the crea
tion of a Foreign Exchange Control Board to su
pervise the investment of these funds in industr
ies that were essential to Japan’s economic rec
overy. To complete the transfer of authority, SC
AP encour- aged the Japanese government to p
ass the Foreign Exchange and Foreign Trade C
ontrol Law … . Among other things, this law re
quired that any citizen who acquired foreign ex
change through trade must turn it over to a gov
ernment account, and the Foreign Exchange Co
ntrol Board was put in charge of how these fun
ds would be used.”
 Thus, it was SCAP which helped create MITI’s
mighty controlling power up till the Rapid Grow
th Era in the 1960s.
Hibernation Era of Japan’s Fair
Trade Commission

FTC’s Legal Decisions

1947: 5 1948: 2  FTC’s Hibernation Era
FTC’s Size the smallest ever in 1953

Reasons behind FTC’s Hibernation Era

(1 ) There were not much leeway for FTC’s competitio
n policy in the presence of prevalent quota system

within MITI’s jurisdiction.
(2 ) FTC’S morale very low for two reasons:
(a) FTC as an orphan
 in the government organiza
tion;
(b) FTC’s chairman coming from other and much
larger government sections:

Ref. Roundtable Talk among FTC’s Sucessive Chairs, F

air Trade, No. 184, 1966, pp. 17-24.

(3) FTC’s decision to sink the collusive price setting

by major newspapers.
Conventional Wisdom on Welfare
and Competition I

First Conventional Wisdom: Excessive Competition

The Autobiography of Fukuzawa Yukichi, transl

ated by E. Kiyooka with an Introduction by S. Ko
izumi, 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 offici
al in the treasury bureau one day, he became m
uch interested and wanted me to show him the t
ransla-tion. … I began translating it. … [W]hen I
came upon the word “competition” for which th
ere was no equivalent in Japanese, and I was ob
liged to use an invention of my own, kyoso, liter
ally, “race-fight.”

When the official saw my translation, he appe

ared much impressed. Then he said suddenly,
“Here is the word, ‘fight.’ What does it mean? It
is such an unpeaceful word.”
Conventional Wisdom on Welfare
and Competition II

“That is nothing new,” I replied. “That is ex

actly what all Japanese merchants are doing. F
or in-stance, if one merchant begins to sell thin
gs cheap, his neighbor will try to sell them even
cheaper. Or if one merchant improves his mer
chandize to attract more buyers, another will tr
y to take the trade from him by offering goods o
f still better quality. Thus all merchants ‘race a
nd fight’ and this is the way money values are f
ixed. This process is termed kyoso in the scien
ce of economics.”

“I understand. But don’t you think there is t

oo much effort in Western affairs?”

“It isn’t too much effort. It is the fundament

als of the world of commerce.”

“Yes, perhaps,” went on the official. “I unde

r-stand the idea, but that word, ‘fight’ is not co
ndu-cive to peace. I could not take the paper w
ith that word to the chancellor.”
Conventional Wisdom on Welfare
and Competition III

Excess Entry Theorem: Mankiw-Whins

ton 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.
Conventional Wisdom on Welfare
and Competition IV

Second Conventional Wisdom: Competition as an Effici

ent 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 anal

ysis [of industrial organization] leaves us with t
he im-pression that there is a rough continuum,
in terms of desirability of industry performanc
e, ranging from unregulated pure monopoly as
the pessimal [sic] arrangement to perfect comp
etition as the ideal, with relative efficiency in re
source allocation increasing monotonically as t
he number of firms expands.”
 Conventional Wisdom on Welfare
and Competition V

Paul Samuelson: Ruling Theme among Economists Sin

ce 1750

There is a vague notion … that there is something o

ptimal about lasses-faire pricing. Among the most s
ophisticated lay people, it is realized that laissez-fair
e pricing systematically makes some people better
off and some other people worse off, and this patter
n quickly changes. There is a chivalrous rule of thu
mb; “Don’t interfere with it.” In the first place, if y
ou do interfere with it, you probably do as much har
m as good because of imperfect government. But,
more than that, there is the law of large numbers op
erating. One invention helps A, another invention
helps B; by James Bernoulli’s theorem of large num
bers, it evens out. Perhaps. The trickle down theor
y from inequality is bred by the Schumpeterian dyn
amic process of innovation. The total pie is improv
ed; on the whole and over time, it evenly lifts up ev
erybody. The same tide raises all ships. That is dog
matic faith, but I think it is in the background of int
elligent conservatives.
Yahata-Fuji Merger Case: An
Uprising of “Modern” Economists I

Yahata Steel and Fuji Steel proposed merger in 1

968

A Minister in Commission, MITI Officials, Busines

s Leaders: Strong Acclamation supported by su
ch economists as Ichiro Nakayama and Miyohe
i Shinohara

More than 100 “Modern” Economists led by such

representative scholars as Ryutaro Komiya, Ke
n-Ichi Imai and Tsunehiko Watanabe joined for
ce and strongly opposed to the merger

Major Reason for Opposition: (1) Legal procedure of A

ML not respected by a minister in commission, MITI
official and business leaders, (2) Doubts on the prop
osed scale merits

FTC decided to admit the proposed merger subject to d

ue conditions
Yahata-Fuji Merger Case: An
Uprising of “Modern” Economists II

Lessons to be Learnt:

(1 ) Respect for Legal Procedure: Comparison

with National Tax Tribunal

(2 ) “Modern” Economists’ Understanding of

AML doubtful: Monopoly versus Private
Monopolization

Ref. Yasusuke Murakami, “Principle of Comp

etition and the Merger Problem,” Chuo-K
oron, September 1968, pp. 160-168.

(3) Postmortem of the Yahata-Fuji Merger Ca

se Necessary
Secret Price-Fixing Cartels in
Petroleum Industry and Its After-
effects I

Oil Crisis in 1973

Secret Price-Fixing Cartels in Petroleum Industry

and Its Aftereffects
(1 ) Introduction of Administrative Surcharge o
n those who are involved in illegal cartels.
To prevent the charge of double penalty, his
device was explained as the measure to con
fiscate illegal gain earned through cartels.
[1977]
(2 ) Surcharge levied as the fixed percentage of
the sales during the cartel enforcement.
(3 ) Rigidity of the scheme made it difficult to s
olict information on secret (illegal) cartels fr
om their members.
 Secret Price-Fixing Cartels in Pet
roleum Industry and Its After- eff
ects II
Secret Price-Fixing Cartels in Petroleum Industry and
Its Aftereffects

(4) FTC has exclusive legal rights to charge offenders o

AML. In the case of secret price-fixing cartels in pe
leum industry, this charge was submitted with no pr
consultation with the Public Prosecutor’s Office. It
widely recognized to have created many frictions be
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 agreem
is reached between FTC and the Public Prosecutor’
Office.
 The extraterritorial abuse of proofs gather for the
purpose of administrative procedure.
US-Japan Debates on Structural
Impediments Initiatives

As a result of this debates, the following changes are intro

duced to the AML procedures.

The 1992 strengthening of administrative surcharge on ca

rtels
 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 comp
eti-tion policy.
(a ) The lack of incentive device to gather information on
cartels from the members thereof.
(b ) The illegitimate use of information gathered for the p
urpose of administrative charge for the purpose of d
eciding on the criminal charge.
(c) The nature of administrative surcharge may well be i
nternally contradictory.
Leniency Scheme for Cartel Surc
harge

The 2006 Revision of AML

(1 ) Surcharge on cartels and huddles (dango) are g
iven the legal status of a criminal sanction.
(2 ) The percentage of surcharge on cartels lifted up
further so as to strengthen its deterrent effect.
(3 ) To enable FTC to gather evidence for the pur-po
se of criminal accusation.
(4 ) Introduce the leniency scheme on cartel sur-ch
arge so as to provide private incentives to carte
l members for voluntary collaboration with FTC.
(5 ) The rigidity and transparency of the surcharge s
cheme given priority over its flexibility and adm
inistrative discretion.

N.B. The first instance of the leniency scheme: appli

cation: Mitsubishi Heavy Industry, Ishikawajime
-Harima Heavy Industry and Kawasaki Heavy In
dustry.
What to Learn and Which Way to
Go?

Transplantation of AML into foreign soil may well r

equire the adjustment to indigenous social norm
on welfare and competition;

International harmonization of AML or design of int

erface 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 s
hould recognize the procedural fairness viewpoi
nt which legal scholars are accustomed to, wher
eas legal scholars should pay due attention to th
e mechanism design viewpoint which economist
s developed over the years.
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 Poli

cy of Japan, Tokyo: The University of Tokyo Pres
s, 1999. In Japanese.

 Itoh, M., Kiyono, K., Okuno-Fujiwara, M. and K. S

uzumura, The Economic Theory of Industrial Poli
cy, 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., Ind

ustrial Policy of Japan, New York: Academic Pres
s, 1988.
References II

 Mankiw, N. G. and M. D. Whinston, “Free E

ntry and Social Efficiency,” Rand Journal of
Economics, Vol. 17, 1986, pp. 48-58.

 Suzumura, K., “Competition, Welfare, and C

ompetition Policy,” in Schmidt, U. and S. Tr
aub, eds., Advances in Public Eco-nomics:
Utility, Choice and Welfare, Amsterdam: Sp
ringer, 2005, pp. 1-15.

 Suzumura, K. and K. Kiyono, “Entry Barrier

s and Economic Welfare,” Review of Econo
mic Studies, Vol. 54, 1987, pp. 157-167.

 Vickers, J., “Concepts of Competition,” Oxf

ord Economic Papers, Vol. 47, 1995, pp. 1-
23.