ERI Discussion Paper Series No.62
International Comparison of Privatization and Deregulation
- The Case in JAPAN -

August 1995
Tsuruhiko Nambu(Gakusyuin University)
Hirotaka Yamauchi(Hitotsubashi University)
Hideki Murakami(Kobe University)
Hirotaka Yamauchi(Hitotsubashi University)
Hisao Kibune(Nagoya Gakuin University)



In 1985 Japanese telecommunications industry was reshaped and several new institutional arrangements were adopted. We will summarize such changes as below.

1) NTT(Nippon Telegraph and Telephone)Corporation was given a birth by replacing public monopoly (Denden Kosha). NTT has become a private company but it is a special entity in that more than 51% of its shares were held by the government and it inherited public obligations as is called "Universal Service".

2) Instead of Public Telecommunications Law, Telecommunications Business Law came out which has become the key to determine the industrial structure of telecom industry. Under this law telecom service providers are classified into two categories: Type I carrier and Type II carrier. The former owns telecom facilities whereas the latter rents them from Type I carriers. Type II carriers are equal to Value Added Network Service providers (VANS) (See Table-1 and Table-2.).

3) The Ministry of Posts and Telecommunications (MPT) is in charge of regulating Type I & II carriers. In the days of public monopoly Kosha was under the surveillance of the National Diet. Accordingly the regulation of MPT was rather nominal and there could not exist any conflict between MPT and NTT because Kosha system was created in the spirit to encourage and respect the independence of Kosha. Although Denden Kosha was privatized, NTT still has maintained its bureaucratic system.

4) According to the new regime, companies which own telecom facilities are labeled Type I carrier. As a result Type II carriers include every size of telephone service providers from pager service companies to giant NTT. ALL Type I carriers are required to obtain detailed permission of MPT in doing their business whereas Type II carriers have only to file to MPT.

5) Type I carriers are classified into 5 categories as below (for more details see Table-1)

  1. i) long distance (inter-city)
  2. ii) local (regional)
  3. iii) satellitev
  4. iv) mobile
  5. v) international

NTT provides local and long distance services but it can not provide international service. KDD (Kokusai Densin Denwa Corporation) used to provide international service as monopoly but now it has two new competitors.

MPT regulates carriers according to the classification above and accordingly regulatory environment has been created that each carrier must operate in one of the 5 categories. For example, local new comers are mainly composed of subsidiary companies of electric utilities and they are technically interconnectable. But according to the established rule up to now, they cannot enter into long distance market.

The inability of NTT to provide international service is very strange from the world standard. But there used to be demarcation of market between NTT and KDD. This tradition cannot, it seems, be broken easily not from any economic reason but from MPT regulatory philosophy.

When we look at the number of Type I carriers it amounts to 80 which is enough to astonish careless foreign watchers that competition has been enhancing. The reality is that regulation is applied onto each category and competition has been strictly controlled except for the case of mobile telephone area since April 1994.

Structure of the whole text

  1. full text別ウィンドウで開きます。(PDF-Format 988 KB)
  2. page3
    I. Introduction
  3. page6
    II. NTT vs. MPT : institutional stalemate
  4. page15
    III. Competition in the long distance market
  5. page17
    IV. Competition in the local market
  6. page19
    V. CATV and Broadcasting
  7. page21
    VI. Consequence of deregulation and Privatization
  8. page22
    VII. Estimation of Demand Function and Social Surplus



There are presently eight scheduled airline companies in Japan. With respect to passenger transport, the big three - Japan Airlines (JAL), All Nippon Airways (ANA) and Japan Air System (JAS) - account for nearly all of the major markets; together they serve roughly 91% of the passenger on both domestic and international routes. ANA claims about 45% of the domestic market, while JAL about 76% of the international market. The other airlines are for the most part subsidiaries of the big three. The domestic air transport market, with about 70 million passengers annually (55 billion revenue-passenger kilometers), is one-sixth (one-tenth) the size of the United States' markets. Japan's airlines carry about 11 million international passengers a year, about one-quarter of that of the United States' carriers.

Japanese airlines experienced a boom during the second half of the 1980s. From 1985 to 1991, revenue passenger kilometers in the domestic market grew at the rate of 9.3% annually, and in international markets 8.0%. As a result, their operating profits also soared, and they recorded the highest profits in their company histories. These trends reversed from the beginning of 1990. The average growth rate from 1991 to 1993 fell to 3.4% and 4.8% respectively. The declining growth rate influenced the companies' operating performance. JAL, especially, operations in international markets constitute more than half of their business, has suffered huge losses since 1991. It is true that the losses of JAL were caused mainly by changing market conditions, but it should be noticed that the rapid appreciation of yen also made the situation worse.

Air transport markets in Japan have developed in a strictly regulated environment. The Civil Aeronautics Law, which governs the industry, requires that airline companies obtain government licenses to enter the market. Airlines also need government approval for setting and charging their fares, and even for their annual business plans. Naturally, international routes also require government-negotiated bilateral agreements with other countries. In this respect, Japan has been a traditionalist. Its agreements are generally modeled after the old Bermuda Agreement, concluded between the United States and the United Kingdom in 1946.

However, the world-wide policy trend to deregulate the industry reached Japan in the mid-1980s. In 1985, the United States and Japan concluded a provisional agreement on international air transport. This agreement allowed new entry into the market, but required the Japanese government to change their air transport policy, because the government had restricted its carrier in the international market to just one. The government then changed its policy not only in the international market but also in the domestic, intending to promote competition in both markets. But this policy change was not as complete as that of the U.S. government. Since the institutional framework (such as entry licensing and approval system) remained unchanged, whether the competition would work effectively depends on how the regulators control markets.

The purpose of this paper is to evaluate the policy changes the in Japanese air transport industry. In sections 2 and 3, we describe the evolution of the policies, and in section 4 we sketch the domestic market structure and performance of the industry. Then, from section 5 to 7, we examine the effects of the policy change by econometric analysis, focusing on the airlines' behavior and cost structure.

Structure of the whole text

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  2. page41
    1 Introduction
  3. page42
    2 Evolution of Domestic Air Transport Policy
  4. page44
    3 New Policy Since 1986
  5. 4 The Market Structure and Performance of the Japanese Airline Industry
    1. page46
      : Descriptive Statistics
  6. page50
    5 Service Competition and Demand Character in Double / Triple Truck Routes
  7. 6 Dose the Demand Meet Supply in Double / Triple Trcuk Routes?
    1. page55
      : The Models and Regression Results
  8. page63
    7 The Regulatory Change and Cost Structure
  9. page67
    8 Summary and Conclusions
  10. page68
  11. page72
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The trucking industry in one of the rare cases in Japan in which regulatory changes were brought about by new legislation. In 1989, the Japanese Diet passed two bills that relax the requirements for new entry and conditions of fare setting in the industry. In a sense, this was an epoch-making event, because the change was accomplished without any "foreign pressure." It is true that we experienced big institutional and regulatory changes in telecommunication and railway industries, but in these fields, changes were accompanies by privatization of public corporations. On the other hand, in trucking industry, in which there large number of carriers and almost all are private except for very small companies owned by local authorities, the purpose of the new laws was only to relax the economic regulations.

It should be noted, however, that new enactment does not always lead to a substantial change in administrative policy. In the trucking industry, economic regulations was not as tight as in other transport fields. For example, it was much more difficult for a newcomer to enter into bus or taxi service than in the trucking industry. Thus we can say that the results of the new laws were nothing more than the ratification of the existing state of affairs before the statutory change in the market.

Needless to say, this does not mean that there was sufficient competition in the trucking industry. Many researchers and shippers insisted that there should have been and should be much more competition in the market. The recent report of the Ministry of International Trade and Industry pointed out that the high cost of freight transport including trucking cased by lack of sufficient competition is one element that is reducing the international competitiveness of Japanese manufacturing industry. And indeed, it was the political pressure from industrial consignors that lead to the new legislation.

Judging from some statistical surveys, we could not find clear evidence that the new laws made substantial impact on the trucking market, although we cannot obtain enough data. This means that there is likely to be much room for further regulatory change or deregulation, we also need to show how competition works in this market, and how we can develop it.

In this paper, we examine the contents and processes of regulatory change in the trucking industry, try to evaluate the effects of the regulatory reform, and discuss necessary change in policy. In the next section, we describe briefly the transport markets in Japan. We the investigate and inspect the legal changes in the succeeding section. In Section 4, we examine changes in the industrial organization of trucking markets and we also try to measure the welfare changes in case competition would drive fares down. Section 5 evaluates these policy changes. The last section contains our concluding remarks.

Structure of the whole text

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  2. page85
    1 Introduction
  3. page86
    2 Transport Markets in Japan
  4. page87
    3 The Evolution of Regulatory Policy on Trucking Industry.
  5. page94
    4 Industrial Organization of the Trucking Market
  6. page103
    5 Door-to-door Trucking Service Market
  7. page105
    6 Effects and Consequences of the Policy Change
  8. page106
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Following the war, the electric utility industry in Japan was vertically integrated into nine core utilities, each devoted to a system to ensure a stable supply of high-quality electricity. Today, however, this system is undergoing gradual changes amid varying rules and deregulation that call for a more efficient system of the industry. Among the changing regulations under consideration are to liberalize entry into the electricity wholesale market, stimulate wheeling, revise rate-making system, establish direct electricity retailing in the from of specified electric utility industry, and ease safety regulations. The first drastic amendment in thirty years of the Electric Utility Industry Law is already slated.

This report is designed to consider the background and contents of deregulation of the electric utility industry currently underway. Composition of the report is as follows. Present systems of the electric utility industry and applicable regulations are reviewed (Chapter 1), followed by a discussion on why the changes are necessary (Chapter 2). Subsequently, conventional regulations are evaluated from a theoretical aspect (Chapter 3). Thus, the first three chapters deal with the background of deregulation. Then, after summarizing the contents of deregulation under consideration (Chapter 4), that extent that deregulation can produce effects on the national economy in considered (Chapter 5). The final section gives a glimpse of desirable conditions of the electric utility industry and regulation in the future.

Structure of the whole text

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  2. page119
  3. page119
    1. Japan's Electric Utility Industry
  4. page129
    2. Industry's Subjects for the Present (Need for Deregulation)
  5. page134
    3. Evaluation of Conventional Regulations
  6. page138
    4. Deregulation Under Consideration
  7. page142
    5. Effects of Deregulation
  8. page145
    6. Subjects of Deregulation
  9. page147
  10. page148
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