No. 26 — July 7, 2000


Weekly Review

--- by Susan MacKnight

Months of political paralysis in Tokyo have left Japan less than two weeks to work out with the United States a compromise on the depth and the timing of the cuts that Nippon Telegraph and Telephone Corp.'s two regional operating units will make in the fees they charge other carriers to use their networks to move voice and data traffic the "last mile" between local switching centers and homes and businesses. Riding on the outcome of this effort, which will start July 10 in Tokyo with discussions among government experts, is the nature of the atmospherics at the July 21-23 summit of the leaders of the Group of Seven industrial nations plus Russia. Prime Minister Yoshiro Mori and the other powers-that-be in Japan want a settlement before the G-8 talks to ensure that the interconnection-rate dispute does not distract from the gathering's big-picture agenda (see JEI Report No. 19B, May 12, 2000).

That, however, is the least of the adverse consequences of a continued stalemate. The White House has set July 28 as the deadline for a decision on whether to initiate a World Trade Organization complaint against Japan for its internationally steep local-access tariffs. More importantly, absent a resolution of the NTT interconnection-fee issue, implementation will be delayed of the latest installment of Japanese regulatory reform measures devised by the two governments under the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy. Clinton administration officials have said repeatedly that Washington will not sign off on this report, originally scheduled for release by March 31, unless it includes acceptable concessions on NTT charges. Most ominously, say analysts on both sides of the Pacific, Tokyo's failure to quickly slash interconnection costs for NTT rivals will jeopardize Japan's economic prospects since communications services are at the heart of the information technology revolution that the government is promoting.

Japan has a long way to go to avoid these potential diplomatic and economic calamities. Officially, Tokyo is no more prepared to accept Washington's call for a 41.1 percent rollback in local-assess charges at the end of 2000 than it was when the Enhanced Initiative negotiations ended in deadlock 11 weeks ago (see JEI Report No. 14B, April 7, 2000). Ditto for the compromise formula still on the table. This proposal bridges a big part of the gap between the U.S. demand and Japan's offer to trim interconnection fees by 22.5 percent over four years. Under it, Nippon Telegraph and Telephone East Corp. and Nippon Telegraph and Telephone West Corp., which control as much as 96 percent of Japan's last-mile communications network, would cut their tariffs by 22.5 percent in 2001 and 2002 and then institute the full 41.1 percent decrease sought by the United States.

Behind the scenes in Tokyo, however, signs of coming flexibility are apparent. The Ministry of Posts and Telecommunications' calculation that, short of making politically unacceptable changes in their operations, year-old NTT East and NTT West could afford to give up no more than 22.5 percent of their interconnection revenues over four years was derived from the two firms' FY 1999 business projections. But instead of the forecast loss of ¥41 billion ($372.7 million at ¥110=$1.00), NTT reported May 26 that its regional affiliates had a combined operating profit of ¥13.7 billion ($124.6 million) in the year through March 31, 2000, consisting of a ¥56.7 billion ($515.5 million) pretax profit for NTT East and a ¥43 billion ($390.9 million) loss for NTT West.

The unexpected earnings report knocked the props out from under MPT's take-it-or-leave-it negotiating position. It already had been hurt indirectly by the May 8 news that NTT's long-distance/international unit, NTT Communications Corp., would spend $5.5 billion to buy the 90 percent of Internet services provider and Web hoster Verio Inc. that it did not own already (see JEI Report No. 20B, May 19, 2000).

NTT East and NTT West again forced MPT to rethink tactics ahead of the upcoming discussions with the United States when they issued new business forecasts June 30 for the three years through March 2003. The projections, revisions of estimates made last November, were notable not just for the better results both regional operating units anticipate in the medium run but also for the inclusion of predictions of how a 22.5 percent drop in interconnection charges phased in over two, three or four years would impact pretax profits.

For example, NTT East now puts net operating income at ¥44 billion ($400 million) in FY 2000 versus ¥18 billion ($163.6 million) as of last November, although this gain could shrink to ¥21 billion ($190.9 million) if a two-step rate cut were enforced. At the same time, NTT West believes that it can limit its pretax loss to ¥67 billion ($609.1 million) in FY 2000 compared with an original forecast of ¥99 billion ($900 million). Interestingly, even if local-access fees were lowered by 22.5 percent over two years, the company's projected red ink of ¥91 billion ($827.3 million) would be below the November figure.

Weeks before the revised forecasts destroyed what little credibility MPT's standpat bargaining stance retained, there were indications that the political paralysis in Tokyo was easing. First, Shizuka Kamei, the number four on the Liberal Democratic Party's leadership team, said June 1 that NTT's interconnection tariffs should be quickly lowered to international levels. A more powerful voice weighed in June 12 when LDP Secretary General Hiromu Nonaka characterized the proposed four-year timetable for the 22.5 percent cutback as too drawn out. By the end of the month, even then-MPT Minister Eita Yashiro was signaling that Japan was willing to expedite the phase-in of the reduction in local-access costs.

His comments immediately unleashed several trial balloons. The most prominent involved NTT East and NTT West rolling back their charges by 22.5 percent by the end of 2002 — the first part of the U.S. compromise deal — at which time Tokyo and Washington would negotiate further changes.

Publicly at least, neither Deputy U.S. Trade Representative Richard Fisher, the head of the White House's Enhanced Initiative team, nor his boss, Charlene Barshefsky, have given Japan any hints about what concessions it has to offer to break the deadlock over NTT interconnection fees. All they have indicated is that the Clinton administration is prepared to improve the terms of the settlement now on the table. However, Mr. Fisher has told Tokyo point-blank that the unquestionably solid financial position of the NTT Group has made Washington less accommodative than it once might have been.

In the days leading up to the July 10 restart of negotiations, the main obstacle to a new compromise appeared to be increasingly outspoken NTT President Junichiro Miyazu. Despite the improving financial fortunes of NTT East and NTT West, he has used every platform available to assert that the restrictions limiting the carriers to local residential and business phone services must be lifted for them to lower the fees charged other firms by any amount over any time frame. Not surprisingly given NTT's political clout, some LDP influentials support such a legal overhaul. Other insiders echo Mr. Fisher's position that cutting interconnection charges and revising the so-called NTT Law are separate, unrelated issues. Somehow, the two camps in Tokyo will have to find a way to finesse their differences to ensure a quick settlement with Washington of a problem that has come to symbolize all that critics find lacking in economic policymaking in Japan today.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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