No. 35 — September 15, 2000


Weekly Review

--- by Jon Choy

Prime Minister Yoshiro Mori and his cabinet have set an ambitious goal for Japan: to surpass the United States within five years as the world leader in information technology and use of the Internet. The head of the coalition government had previewed this objective soon after his early July reelection (see JEI Report No. 30B, August 4, 2000). Mr. Mori handed the job of devising the required framework to a new IT Strategy Council led by Nobuyuki Idei, chairman of Sony Corp. The advisory group is expected to have a concrete plan ready within two months. The council will focus on obstacles that are slowing or preventing Japan from participating fully in the Internet economy. Even as local businesses continue to transform themselves into dot-coms, however, the impact of Mr. Mori's grand plan is open to debate.

The motivation for the IT initiative is clear: to reproduce for Japan the enormous benefits that the United States has captured from the rapid development of new companies and industries based on the Internet and electronic commerce. European nations have been trying to replicate the American "Internet miracle" by amending key laws, promoting industry standards and building supporting infrastructure. These efforts are beginning to bear fruit. European dot-coms have begun sprouting like weeds, and "Old Economy" firms are rethinking their business strategies.

Despite the significant growth of Japan's Internet industry over the past few years, local politicians and businesspeople increasingly fear that Japan is falling behind the United States and Europe. All of the nation's major corporations have examined how the Internet and e-commerce can best be harnessed to increase efficiency, cut costs, boost revenues and promote their companies and their products, but executives complain that laws and bureaucratic rules and procedures encumber such plans. The process of obtaining licenses or permission to drop old businesses and enter new fields is too slow, they say. If Tokyo wants an economy that can operate at the rapid pace of "Internet time," it must slash regulation and remove its hands from the controls.

Another generally recognized obstacle is the relatively high cost of connecting to the Internet. Because Nippon Telegraph and Telephone Corp.'s two regional operating units continue to dominate local telephone service, competition has not yet forced down the cost of making local calls to Internet services providers. The recent agreement between Tokyo and Washington to cut NTT local-access fees for other carriers by 20 percent could promote competition and reduce the cost of dialing, but the change is spread over two years from this past April (see JEI Report No. 28B, July 21, 2000) — an eternity in Internet time. Moreover, there is no guarantee that the deal will bring Japan's calling costs in line with American and European rates any time in the foreseeable future.

To partially allay concerns on this point, NTT's regional services affiliates recently announced that they would simplify their tariff structures October 1, resulting in cuts of up to 40 percent on intra-prefectural calls. Nippon Telegraph and Telephone East Corp. and Nippon Telegraph and Telephone West Corp. gave two examples of their new rates. A 45-second daytime call of more than 12.4 miles but less than 18.6 miles now costs ¥40 ($0.36 at ¥110=$1.00), but a 60-second connection over the same distance soon will total just ¥30 ($0.27). For intra-prefectural nighttime calls farther than 62.5 miles, the charge will drop from ¥60 ($0.55) for 30 seconds to ¥20 ($0.18) for 90 seconds. While the forthcoming rates clearly are an improvement, lengthy and frequent calling — the usual pattern for connecting to the Internet — will remain a more expensive proposition in Japan than in the United States.

Japanese experts also doubt that the country's communications infrastructure can meet the demand for the huge amount of high-bandwidth capacity vital to moving an exponentially increasing volume of Internet traffic. NTT and other carriers have been laying fiber-optic cables to build high-capacity communications backbones, but these efforts are seen as too limited. Tokyo wants to make sure that any IT explosion that does ignite in Japan is not constrained by inadequate infrastructure.

With these issues in mind, the IT Strategy Council has a mandate to quickly suggest amendments to laws, changes in bureaucratic procedures and goals for public works projects. Mr. Idei has promised "bold" action. For his part, Mr. Mori has pledged to have a specific plan in place before the end of this year.

An emphasis on IT and Internet-related projects already is noticeable in the budget-compilation process for FY 2001. For example, the Ministry of Construction, the Ministry of Transport, the National Land Agency and the Hokkaido Development Agency — which will be melded into the Ministry of National Land and Transport after January 1, 2001 — jointly have proposed securing rights-of-way in 18,600 miles of sewers and underroad pipes to lay fiber-optic cables, a project that officials say could boost transmission capacity by a factor of 10,000. The incipient Ministry of Labor and Welfare plans to begin retraining 1 million workers in IT skills in FY 2001.

Because the American and the European Internet industries are not likely to sit still, most observers agree that Japan's aim of surpassing the United States in this field is unlikely to be realized. The Japanese, though, see themselves in a familiar situation: once again, they are trailing their Western peers in a critical industry. Mr. Mori's five-year plan is reminiscent of government-industry efforts in an earlier era to catch up and overtake the perceived global leader in integrated circuits and biotechnology, among other fields. This time, however, Tokyo clearly is focused on removing regulatory and other bureaucratic impediments to private-sector activity instead of trying to guide industrial development through joint research projects and related means. The focus on the development of the necessary communications infrastructure also is a departure from previous industrial-policy initiatives. Tokyo apparently has studied the American and the European examples and decided that its IT development strategy must reflect the changing global economy.

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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