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
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” Standard
for 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, almost all 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?
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.
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 surcharge scheme and the process of its implementation. 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 coherence of AML and the use of private incentives
through the Leniency Scheme.
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.
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 encouraged 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.
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 competition
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
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.
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 translation. … 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, “racefight.”
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.”
Conventional Wisdom on Welfare
and Competition II
“That is nothing new,” I replied. “That is exactly
what all Japanese merchants are doing. For instance, 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 understand the idea, but that word, ‘fight’ is not conducive to peace. I could not take the paper with that
word to the chancellor.”
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.
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 impression 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.”
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.
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
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 Competition
and the Merger Problem,” Chuo-Koron,
September 1968, pp. 160-168.
(3) Postmortem of the Yahata-Fuji Merger Case
Necessary
Secret Price-Fixing Cartels in
Petroleum Industry and Its Aftereffects I
Oil Crisis in 1973
Secret Price-Fixing Cartels in Petroleum Industry
and Its Aftereffects
(1) 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]
(2) Surcharge levied as the fixed percentage of the
sales during the cartel enforcement.
(3) Rigidity of the scheme made it difficult to solict
information on secret (illegal) cartels from their
members.
Secret Price-Fixing Cartels in
Petroleum Industry and Its Aftereffects II
Secret Price-Fixing Cartels in Petroleum Industry and
Its Aftereffects
(4) FTC has exclusive legal rights to charge offenders of
AML. In the case of secret price-fixing cartels in petroleum industry, this charge was submitted with no prior
consultation with the Public Prosecutor’s Office. It is
widely recognized to have created many frictions between 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.
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 competition 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
purpose of administrative charge for the purpose of
deciding on the criminal charge.
(c)
The nature of administrative surcharge may well be
internally contradictory.
Leniency Scheme for Cartel Surcharge
The 2006 Revision of AML
(1)
Surcharge on cartels and huddles (dango) are given
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-pose of
criminal accusation.
(4)
Introduce the leniency scheme on cartel sur-charge so
as to provide private incentives to cartel members for
voluntary collaboration with FTC.
(5)
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.
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.
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.
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.