VZCZCXRO7118
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #2905/01 1450750
ZNR UUUUU ZZH
R 250750Z MAY 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 2509
INFO RUEAWJA/JUSTICE DEPT WASHDC
RUCPDOC/USDOC WASHDC
RUEHBS/USEU BRUSSELS
RUEHFR/AMEMBASSY PARIS 4927
RUEHFK/AMCONSUL FUKUOKA 6394
RUEHOK/AMCONSUL OSAKA KOBE 9616
RUEHNAG/AMCONSUL NAGOYA 6341
RUEHNH/AMCONSUL NAHA 9017
RUEHKSO/AMCONSUL SAPPORO 7552

UNCLAS SECTION 01 OF 05 TOKYO 002905 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL TRADE COMMISSION FOR GENERAL COUNSEL 
BLUMENTHAL 
 
FTC ALSO FOR INTL ANTITRUST - TRITELL/SHANAHAN 
 
STATE ALSO PASS USTR FOR AUSTR CUTLER AND MBEEMAN 
 
JUSTICE FOR ANTITRUST DIVISION - CHEMTOB 
 
USDOC FOR ITA/OFFICE OF JAPAN 
 
PARIS FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ECON ECIN ETRD EINV PGOV JA
SUBJECT: JFTC Flexes Its Muscles on Bid-rigging 
 
REF:  A) Tokyo 597, B) 05 Tokyo 4642 
 
¶1.  (SBU)  Summary:  Japan's chief competition 
regulator, the Japan Fair Trade Commission (JFTC), has 
made a good start in applying the new powers it gained 
at the beginning of the year in several bid-rigging 
cases.  Though not a player in what has been arguably 
the most prominent bid-rigging case in 2006 so far -- 
one involving a subsidiary of the Japan Defense Agency 
-- the JFTC has utilized its new leniency program and 
its enhanced investigatory powers in a number of other 
high profile cases.  The danger now, according to one 
of Japan's leading competition law experts, is that the 
JFTC, long considered one of the weaker agencies of the 
Japanese government, may not have the human resources 
to meet the challenge of its new authority.  This could 
offer an opportunity to the opponents of a stronger 
Japanese competition regime to roll back the gains made 
in 2005 with the amendment of Japan's main antitrust 
law.  End summary. 
 
------------------------- 
JFTC Joins the Big League 
------------------------- 
 
¶2.  (U)  Since the beginning of 2006, Japanese media 
have revealed several high-profile bid-rigging cases. 
The most prominent of these has been a series of cases 
surrounding projects contracted by the Defense 
Facilities Administration Agency (DFAA), including a 
number of facilities utilized by U.S. Forces Japan. 
(Ref A)  Although significant in scale -- with a total 
loss due to collusion estimated at nearly USD 113 
million at the current exchange rate -- and in 
political impact, the DFAA cases, which have fallen 
under the auspices of the Tokyo District Public 
Prosecutors' Office have not, to date, involved the 
main competition regulator, the Japan Fair Trade 
Commission.  (Note:  The lower level of JFTC 
involvement probably stems from the fact that the 
charges raised in the DFAA case have centered more on 
official corruption and less on collusive behavior by 
private companies.  End note.) 
 
¶3.  (U)  Of potentially greater significance to long- 
term progress in the fight against bid-rigging are a 
separate series of cases where the JFTC has taken a 
leading role so far this year.  These are: 
 
-- Projects for the construction of sewage treatment 
plants in the Osaka area tendered by municipal 
governments and valued at over JPY 100 billion. 
 
-- Floodgate projects contracted by both the central 
and local governments valued at JPY 70 billion 
 
-- Installation of ventilation fans in highway tunnels 
tendered by the Ministry of Land, Infrastructure, and 
Transport and the former Metropolitan Expressway Public 
Corporation (subsequently privatized into the 
Metropolitan Expressway Co. and the West Nippon 
Expressway Co.) and valued at JPY 22 billion. 
 
¶4.  (SBU)  Each of these three cases represents a new 
step forward in the JFTC's efforts to prosecute bid- 
rigging using the new tools at its disposal following 
the implementation of last year's amendments to the 
centerpiece of Japan's antitrust legislation, the 
Antimonopoly Act (AMA).  In the floodgate and tunnel 
ventilation fan cases, for example, some of the 
 
TOKYO 00002905  002 OF 005 
 
 
companies involved in the bid-rigging scheme reportedly 
took advantage of the JFTC's new program of leniency 
under which they could escape some or all surcharges 
levied by the Commission in exchange for providing 
evidence against their partners in collusion.  (Note: 
The JFTC does not comment on or confirm reports 
regarding participation in the leniency program - 
although presumably the details will emerge when 
penalties are announced.  End note.) 
 
¶5.  (U)  In the sewage treatment plant case, the JFTC, 
in what may be its boldest move, undertook a criminal 
investigation of the companies concerned, a function 
that, until the implementation of the 2005 AMA 
amendments was the sole province of Japan's elite 
public prosecutors.  Japanese media on May 23 revealed 
that the JFTC had issued formal criminal accusations 
(kokuhatsu) against 11 companies involved in the 
scheme, effectively turning the case over to the 
government prosecutors and opening the way for the 
arrests of the relevant company executives.  While JFTC 
has long had the power to file criminal charges, its 
new ability to obtain a warrant and collect evidence 
admissible in court should make it easier for 
government prosecutors to accept and prosecute AMA 
violation cases. 
 
--------------------------------------------- - 
Other Agencies Act on Bid-rigging...To a Point 
--------------------------------------------- - 
 
¶6.  (U)  The Japanese government will also be 
considering new contracting guidelines aimed at 
increasing the application of competitive bidding 
procedures by all ministries and not just the Ministry 
of Lands, Infrastructure, and Transport (MLIT), the 
traditional focus of measures to reduce bid-rigging. 
On May 11, according to Japanese press reports, the 
"liaison committee" of Japanese central agencies that 
issue public works contracts agreed to apply 
competitive bidding for all contracts except those in 
which there is "clearly only a single contractor" and 
to review all contracts currently being processed in 
order to issue a plan in June that will identify those 
contracts that will be converted to competitive 
bidding.  That decision followed a May 10 meeting of 
the Central Construction Commission, an MLIT advisory 
body, that recommended revision of the guidelines for 
bidding and contracting of public works projects in 
order to expand the scope of competitive bidding at 
both the central and local levels.  According to press 
reports, this proposed amendment to the MLIT guidelines 
would be the first in five years. 
 
¶7.  (SBU)  Despite these measures, however, media 
reports continue to indicate that bid-rigging tied to 
the longstanding practice of "descent from Heaven" 
(amakudari), by which senior bureaucrats assume post- 
retirement employment at government contractors, 
persists.  Several of the major bid-rigging scandals in 
2006 to date -- most notably the DFAA and floodgate 
incidents -- involved retired government officials, 
according to media reports.  An MLIT official in charge 
of construction market access confirmed to econoff 
that, due to the right to choose one's employer 
enshrined in the Japanese Constitution, MLIT guidelines 
on reemployment aimed at limiting collusion could only 
be made voluntary.  Retiring officials could ignore the 
guidelines if they chose to do so.  (Note:  Japan's 
National Civil Service Law does stipulate that central 
 
TOKYO 00002905  003 OF 005 
 
 
government employees are prohibited for two years 
following retirement from taking jobs at profit-making 
corporations that have strong relationships with 
governmental organizations where they worked in the 
five years before retirement.  End note.) 
 
--------------------------------------------- - 
Environment Favors Stronger Competition Regime 
--------------------------------------------- - 
 
¶8.  (SBU)  Commenting on the JFTC role in these recent 
cases, Keio University competition law expert Jiro 
Tamura noted that, unlike the leniency program, which 
is fundamentally a passive activity for JFTC, actually 
undertaking a criminal investigation, as in the sewage 
treatment plant case, "takes guts" because it requires 
the JFTC to play in the same legal league as Japan's 
elite prosecutors.  In the big cases of 2005, Tamura 
noted, the JFTC had generally taken action against AMA 
offenders following moves by the prosecutors.  He added 
that for their part the prosecutors, after years of 
focusing on political figures, had taken on a new 
interest in economic crime.  He pointed to the arrest 
and prosecution of the flamboyant Internet entrepreneur 
and investor Takafumi Horie (Livedoor Co.) as an 
example of the prosecutors' new interest in the 
business world. 
 
¶9.  (SBU)  Tamura credited JFTC Chairman Kazuhiko 
Takeshima as being very eager to energize the Fair 
Trade Commission right from the start of his tenure in 
¶2002. He indicated that if Takeshima's concrete 
progress in increasing JFTC enforcement activities had 
lagged his rhetoric, that was due in large part to the 
delays and difficulties in achieving passage of the 
amended AMA, a critical tool if the JFTC were to have 
"teeth."  Now, however, with the amended law in effect 
and the new contest with the prosecutors in pursuing 
criminal activity, the JFTC could not return to its 
previous low-profile status, Tamura noted. 
 
¶10.  (SBU)  The leniency program of the amended AMA 
also was forcing changes in the code of conduct for 
Japan's attorneys, Tamura said.  Previously, lawyers 
for companies accused of bid-rigging would freely share 
information among themselves in a common effort to 
determine what evidence the JFTC might have in a 
particular case.  Now, with the incentive of leniency 
available, companies were seeking to behave more 
independently and to force their lawyers to sign 
binding confidentiality agreements.  Bid-rigging 
cartels, he noted, had been held together as much by 
threat of retaliation from the other members of the 
cartel as by common interest, and companies frequently 
looked for ways to cheat on their ostensible partners. 
The onset of the leniency program gave those who wanted 
to escape from an unwelcome decision by their cartel 
partners a new way to do so. 
 
¶11.  (SBU)  In addition, Tamura indicated, the 
application of the law preventing government officials 
from participating in bid-rigging schemes (Kansei Dango 
Boshi Ho) and the strict application of suspension from 
bidding by MLIT on AMA violators -- a reaction in part 
to the strong public outcry over 2005's headline- 
generating steel bridge case (ref B) -- have meant that 
more and more companies were deciding to compete 
fairly.  The bidding suspension, which had previously 
been negotiable between MLIT and the firms, had 
inflicted real economic damage on some of the offending 
 
TOKYO 00002905  004 OF 005 
 
 
firms, Tamura said. 
 
¶12.  (SBU)  Tamura was skeptical that much would change 
in the near term with respect to the phenomenon of 
amakudari.  He guessed that the Japanese agencies 
concerned believed they had taken adequate measures to 
address the problem.  He indicated that more attention 
might usefully be applied at the other end of the 
employment process:  recruitment.  People with little 
practical experience but who had graduated from elite 
universities and scored highly on their civil service 
exam dominate the ranks of the Japanese bureaucracy, 
Tamura stressed.  Mid-level recruitment and mobility to 
and from the private sector, Tamura said, would greatly 
benefit the entire government and particularly 
relatively less prestigious agencies like the JFTC, 
which had always had to accept the weaker applicants 
for government service, with the cream of the crop 
going to more powerful institutions like the Ministries 
of Finance and Foreign Affairs.  Private attorneys on 
two-year appointments at the JFTC had proven helpful 
but, because of their short tenure at the agency, had 
had less of an impact than if they had been able to 
become career staff..  [As a practical matter, how 
would JFTC hope to hold on to good lawyers for the long 
term?  New personnel track?] 
 
------------------------------------------- 
Higher Expectations:  The Danger of Success 
------------------------------------------- 
 
¶13.  (SBU)  Strengthening the human resources of the 
JFTC, Tamura stressed, was absolutely essential with 
respect to criminal prosecutions where the JFTC actions 
would be subject both to comparison with and to 
scrutiny by the government prosecutors.  Right now, the 
JFTC staff are working seven days a week to process 
their cases, according to Tamura.  One major error in 
processing a criminal case could, however, derail all 
of JFTC's other achievements by handing the opponents 
of the strengthened AMA (e.g., politicians from rural 
areas, conservative business leaders) evidence to 
question the agency's fitness to handle its new 
authority.  With a January 2008 review of the 2005 AMA 
amendments mandated in the revised law itself, these 
elements have a ready opportunity to take advantage of 
any egregious error by the JFTC.  Tamura noted that a 
number of companies were already challenging the agency 
by fighting JFTC's surcharge orders, which the JFTC, in 
order to maintain its own authority, had to resist. 
(Note:  The amended AMA raised the maximum rate of 
surcharges the JFTC could levy on firms as 
"compensation" for illegal profits attained through 
anticompetitive behavior from six percent to 10 percent 
of a company's income during the period it was engaged 
in the illegal activity.  End note.) The workload and 
the risk were such at present that many JFTC officials, 
Tamura said, were scared that a serious mistake in 
pursuing a case was likely. 
 
------------------------------------------ 
Who Will Be JFTC's Champion After Koizumi? 
------------------------------------------ 
 
¶14.  (SBU)  In addition, Tamura was concerned that the 
JFTC would lose its political support once Prime 
Minister Koizumi steps down in September.  In Tamura's 
view, Chief Cabinet Secretary Shinzo Abe, if he became 
Prime Minister, would not pursue reform as aggressively 
as Koizumi has.  Abe, he said, was much more concerned 
 
TOKYO 00002905  005 OF 005 
 
 
about protecting himself and less likely to take 
political risks than Koizumi.  Former Chief Cabinet 
Secretary Yasuo Fukuda, he believed, would be more 
 
SIPDIS 
likely than Abe to support Japan's competition 
authorities but would still not equal the strong 
backing received during Koizumi's tenure.  (Note:  The 
five-year term of JFTC Chairman Takeshima will also 
finish in 2007, thus giving Koizumi's successor an 
early opportunity to put his own stamp on the agency. 
End note.) 
 
------- 
Comment 
------- 
 
¶15.  (SBU)  Bearing in mind Prof. Tamura's observations 
regarding the potential dangers of moving too 
aggressively, the JFTC appears to be off to a good 
start in applying its new powers.  Certainly, based on 
our reading of the frequent media commentary concerning 
the unending revelations of bid-rigging and public- 
private collusion, popular support for JFTC action 
against bid-rigging remains strong.  The primary task 
for that agency, and for those who want to see it 
assume a more prominent role in bringing about economic 
reform in Japan, is to grow into its newly realized 
authority.  JFTC, though, may need to grow up fast as 
the elements opposed to a stronger competition regime 
in Japan may be postponing their counterattack until a 
possibly more auspicious post-Koizumi era. 
 
Schieffer