382. Briefing Paper Prepared in the Embassy in Japan0

BB-18

US-JAPAN COMMITTEE ON TRADE AND ECONOMIC AFFAIRS

Tokyo, November 25-27, 19631

Treatment of U.S. Investment in Japan: Recent Developments

Embassy Recommendations:

It is recommended that the Government of Japan be urged to modify its screening procedures and criteria for approving foreign investment so as to enable American investors to obtain the national treatment to which they are entitled under Article VII of the FCN Treaty. Specifically, we should request: (a) that American firms making application for investment in an industry in which all investment is restricted by the Japanese Government be treated on the same basis in all respects as a Japanese [Page 799] firm; and (b) that restrictions placed on American firms to which Japanese firms are not subjected (e.g., limited equity participation and limitations on the number of Americans on the board of directors) be removed.

Background:

On July 1, 1963, the Government of Japan amended its foreign investment and foreign exchange laws2 so as to eliminate the right of foreigners to invest in Japan on a non-validated basis, thereby eliminating the possibility for foreigners to invest in Japan on the same basis as Japanese nationals. This change was accompanied by the announcement of new, more liberal criteria for the validation of foreign investments: the amendments to the Japanese law were referred to by the Government of Japan as a liberalization. The Government declared that in the future, direct foreign investment such as joint ventures would be presumed approved in principle and disallowed only in exceptional cases deemed to have “conspicuously adverse effects on the national economy.” Criteria for such a determination were declared to be: extreme disruption of the industrial order; extremely adverse effects on the domestic financial and economic conditions as well as on the balance of payments; and unfair pressure on small or medium enterprises.

Despite the emphasis given in the announcement to relaxing the criteria for approval, there has been no indication in the several months since July 1 that the treatment of new foreign investment has been liberalized. Changes in screening procedures have been apparent only for approval of new funds for investments which previous to July 1 did not need validation. As long as American firms could make such “yen-basis” investments, no discrimination in treatment between American and Japanese firms was involved in the Government of Japan’s failure to approve a joint venture or to approve the percentage of participation desired by a United States firm. However, since the foreclosing of the option of “yen-basis” investment, the Japanese Government’s current investment screening practices appear to constitute discrimination against American firms.

Although ostensibly designed to limit calls on foreign exchange reserves, the screening of foreign investment has been administered particularly to limit the extent of foreign control in Japanese enterprises and to prevent upsetting the establishment pattern of competition in an industry.

Foreign Office officials, in discussions with the Embassy, have suggested that if American firms bring complaints of discriminatory treatment [Page 800] of investment applications, such cases should be called to the attention of the Foreign Office. The Embassy has sought to obtain from American business evidence of discrimination on which a protest could be based. However, since American firms operating in Japan are depend-ent in manifold ways on the good will of the bureaucracy, such firms are understandably reluctant to allow their names to be used in a specific protest to the Japanese Government. In the one instance in which an American firm (the American Cyanamid Company) authorized the Embassy to use its name in representations to the Government of Japan, the Foreign Office indicated that the failure to approve the application was not discriminatory since the Japanese Government is restricting all investment whether domestic or foreign, in the particular industry (see Embassy’s A-499 of November 6, 1963, attached).3

A talking paper delivered to the Foreign Office on August 144 noted that the abolition of “yen-basis” investment introduced a distinction between the treatment afforded Japanese and American investors and that this difference in treatment appeared to constitute a possible denial to American investors of “national treatment.” It was pointed out to the Foreign Office that whether the loss by American investors of the option to invest on a “yen-basis” resulted in practice in a denial of national treatment would depend on how the new criteria for the approval of foreign investment were applied.

Anticipated Japanese Position:

It must be recognized that the Japanese economy has many weak points, and that the Japanese officials believe it is essential for economic growth that foreign capital not be permitted entry on an entirely indiscriminate basis. In spite of this, the Japanese Government has obligated itself to approve foreign investment in all but exceptional cases. Exceptions would involve cases which would have a serious effect on small and medium size industry and where an adverse effect on the existing “industrial order” might be anticipated. Since approval of investments under the new regulations, dated July 1, will be given in all but exceptional cases, Japan will not consider the “yen-basis” option to be necessary.

  1. Source: Department of State, Central Files, E 1 JAPAN-US. Limited Official Use. Transmitted as enclosure 1 to airgram A-549 from Tokyo, November 15. Drafted by Millard L. Gallop, Second Secretary and Commercial Officer, and Keld Christensen, Counselor for Economic Affairs.
  2. Concerning postponement of this meeting, see Document 385.
  3. A detailed description of these changes is in airgram A-10 from Tokyo, July 17. (Department of State, Central Files, FN 5 JAPAN)
  4. Not printed.
  5. Not found.