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Country Risk Assessment on Japanese Imports of Dru

gsJapan, being the worlds most dynamically competitive nation, is facing an ironic balance in trade with the U.S. The Japanese economy relies too heavily on exports, especially to the U.S., causing increasing trade surpluses. They have been in a repetitive cycle for the last 25 years in which the government allows the yen to fall against the dollar to boost exports and restrict domestic growth to dampen imports. The Japanese government has set too many trade restrictions on U.S. imports, trying to compete against and keep out American imports.

This all began during the postwar period when Japan imposed heavy import barriers. Virtually all products were subject to government quotas, many faced high tariffs, and the Ministry of International and Trade Industry (MITI) had authority over the allocation of foreign exchange that companies needed to pay for any import. These policies were justified at the time by the weakened position of the Japanese industry and the countrys chronic trade deficits. By the late 1950s, however, they had regained balance and could not justify their payment system. Despite Japan’s rather good record on tariffs and quotas, it continued to be the target of complaints and pressure from its trading partners during the 1980s. These complaints revolved around non-tariff barriers other than quotas, which included standards, testing procedures, government procurement, and other policies that were be used to restrain imports.

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In 1984 the United States government initiated intensive talks with Japan on four product areas: forest products, telecommunications equipment and services, electronics, and pharmaceuticals and medical equipment. The Market Oriented Sector Selective (MOSS) talks were aimed at routing out all overt and informal barriers to imports in these areas. The negotiations lasted throughout 1985 and achieved modest success.
Supporting the view that Japanese markets remained difficult to penetrate, statistics showed that the level of manufactured imports in Japan as a share of the gross national product was still far below the level in other developed countries during the 1980s. Frustration with the modest results of the MOSS process and similar factors led to provisions in the United States Trade Act of 1988 aimed at Japan. Under the “Super 301” provision, nations were to be named as unfair trading partners and specific products chosen for negotiation, as appropriate, with retaliation against the exports of these nations should negotiations fail to provide satisfactory results. Japan was named an unfair trading nation in 1989.
The new talks, known as the Structural Impediments Initiative, focused on structural features in Japan that seemed to impede imports in ways outside the normal scope of trade negotiations. Issues that were raised in the Structural Impediments Initiative, and by the Japanese themselves, in domestic discussions, included the distribution system and investment behavior that made it very difficult for foreign firms to acquire Japanese firms. These discussions highlighted some of the fundamental differences in the Japanese and United States economies.
For many years, export promotion was a large issue in Japanese government policy. Government officials recognized that Japan needed to import to grow and develop, and it needed to generate exports to pay for those imports. After the war, Japan had difficulty exporting enough to pay for its imports until the mid 1960s, and resulting deficits were the justification for export promotion programs and import restrictions.
The relationship between Japan and the United States were more uncertain in the early 1990s than at any time since World War II. As long-standing military allies and increasingly interdependent economic partners, Japan and the United States cooperated closely to build a strong, multifaceted relationship based on democratic values and interests in world stability and development. The Japan/United States relationship improved enormously in the 1970s and 1980s, as the two societies and economies became increasingly intertwined. In 1990 their combined gross national product totaled about one third of the world’s GNP. Japan received about 11 percent of United States exports (a larger share than any other country except Canada), and the United States bought about 34 percent of Japan’s exports. Japan had $148 billion in direct investment in the United States in 1991, while the United States had more than $17 billion invested in Japan. Some $100 billion in United States government securities held by institutions in Japan helped finance much of the United States budget deficit. Economic exchanges were reinforced by a variety of scientific, technical, tourist, and other exchanges. Each society continued to see the other as its main ally in Asia and the Pacific. Certain developments in the late 1980s damaged bilateral relations. Nevertheless, public opinion surveys continued to reveal that substantial majorities of Japanese and Americans believed that the bilateral relationship was vital to both countries.
Three sets of factors stand out as the most important in explaining the challenges facing Japan-United States relations. They are economic, political-military, and domestic in nature. The economic issues tended to stem from the ever-widening United States trade and payments deficits with Japan, which began in 1965 when Japan reversed its imbalance in trade with the United States and, for the first time, achieved an export surplus.

The close government-industry relationship in Japan often works to the disadvantage of foreign firms trying to participate in the Japanese market because the relationship favors domestic companies. Several aspects of the relationship are of particular concern.

The United States concluded an agreement on medical technology with Japan on October 1, 1994, under the Framework to improve market access and transparency for U.S. medical device manufacturers in the government procurement market. The agreement also contains both a comprehensive complaint mechanism and procedures for dealing with unfair bids. The agreement and accompanying exchange of letters represent an important step forward in the ability of foreign firms to sell medical technology products and services to Japan’s public sector. The agreement establishes fair and transparent procedures that must be used by national medical institutions in procuring major medical equipment and services for Japan’s $2.6 billion government procurement sector. Also, for the first time, the agreement requires government hospitals in Japan to make procurement information public, regardless of value. Each hospital will publish, on an annual basis, information on the top ten medical technology products it plans to purchase during the upcoming year. Previously, this important information had not been readily available.

U.S. firms are highly competitive in medical technology, and hold a global market share of 52 percent. In the Japanese market, however, the U.S. industry’ share is 26 percent, reflecting the existence of substantial market access barriers in this sector. The 1994 agreement calls for the Framework goal of a “substantial” increase in access and sales of foreign competitive products and services. It specifies a set of five quantitative and five qualitative criteria to assess the implementation of this agreement, including: yearly measurement of the number of Japanese entities procuring foreign products and services; the number and value of contracts awarded each year as a result of a decrease in single tendering; and the results of reviews conducted by the procurement review board.

A key element of the agreement is the requirement that procurement decisions for certain procurements, including purchases above a specified threshold be made on the basis of the Overall Greatest Value Method (OGVM), instead of the current minimum price system. The threshold will be reduced in value over a three-year period from 800,000 Special Drawing Rights (SDRs) on April 1, 1996, to 385,000 SDRs on April 1, 1998. For the first time, equipment costs of these items will be calculated on a life-cycle basis. This means that the highly sophisticated medical technology products manufactured by U.S. and foreign firms will not be excluded automatically because of initial price. The technical excellence of those products, and the value they provide over the long term, will now be taken into account.

The U.S. Government is pleased that the national government hospitals are using OGVM in selecting medical equipment valued above the established thresholds, and that they have found the methodology to be very effective in procuring the kinds of equipment they need to provide quality medical care to their patients. U.S. firms are concerned, however, that prefectural and municipal hospitals continue to use the lowest-bid procedure of evaluation in procurement of advanced technology products. Under the medical technology agreement, the Japanese Government is required to encourage prefectural and local/municipal governments to utilize measures similar to those adopted by the central government entities. The fact these entities do not use OGVM hinders the ability of U.S. companies to sell in this significant portion of the market, as U.S. equipment is usually innovative and/or high-end equipment offering special features or extraordinary performance. This equipment may have a higher initial price, but provides significant cost savings over the life of the product. The United States continues to actively encourage the Japanese Government to have local and prefectural governments adopt this methodology.

The U.S. Government could clearly identify only 21 percent of the market as being held by foreign firms, although this figure almost certainly undercounts the foreign share since sales of U.S. products by Japanese distributors are particularly difficult to track.

The Administration continues to pursue improved medical and pharmaceutical product market access in the context of the Market-Oriented Sector-Selective (MOSS) Medical Equipment and Pharmaceutical talks. One issue of regular discussion is the reimbursement process and schedule under Japan’s national health insurance system for U.S. medical equipment and pharmaceutical products. Reimbursement prices in Japan often do not adequately, or in a timely fashion, compensate firms for the costs inherent in developing and marketing new, innovative equipment and pharmaceutical products in Japan. The United States is monitoring this issue through consultations with industry and through the MOSS.

At the February 1997 MOSS meeting, Japan announced a possible reduction of the “R zone” for medical devices from the current 15 percent. If implemented, this action will make it even more difficult for U.S. firms to sell their products in Japan at reasonable prices. At present, the U.S. Government is working to resolve this issue. In addition, the U.S. Government is concerned with a variety of other obstacles facing U.S. pharmaceutical and medical equipment manufacturers when they seek to market their products in Japan. These range from a slow and sometimes non-transparent approval process to regulations that prevent certain products from being sold in hard gelatin capsules in Japan. In addition, the U.S. Government advocates greater industry access to policy-making councils from which they are presently excluded.

The U.S. medical products industries continue to support Japan’s deregulation initiatives. For the third year in a row, these industries, and the U.S. Government, provided the Government of Japan with a list of regulations that inhibit the ability of health care firms to do business in Japan and raise costs to the end-user and the health care system. Several of these issues also have been raised in the MOSS process.

The United States continues to seek greater market access for U.S. medical devices and pharmaceutical products through the Enhanced Initiative on Deregulation and the Market-Oriented, Sector Selective (MOSS) Medical/Pharmaceutical talks. As Japan undertakes potentially extensive health care reforms, price reimbursement and regulatory issues remain the focus of bilateral consultations. The Administration conducted government consultations on Japanese deregulation of medical devices and pharmaceutical products in September and November 1997 and March 1998.
The bilateral consultations addressed, in particular, specific Japanese government regulatory policies that continue to hinder the ability of U.S. firms to supply innovative and cost-effective medical devices and pharmaceutical products. The United States urged Japan’s Ministry of Health and Welfare to ensure that the pricing system revision under consideration follow a consistent, transparent process and not be imposed disproportionately, or inappropriately, on new and innovative medical devices and pharmaceuticals.
Of particular importance, the United States strongly opposes Japan’s proposed implementation of a reference pricing system for pharmaceuticals. The United States believes that prices should be market-based.
In March 1998, in response to priority U.S. Government deregulation requests, Japan announced its intention to undertake necessary measures to expand the acceptance of foreign clinical data and expedite approvals for new drug applications. These changes, while welcome, represent only incremental improvements. The United States will continue pressing for substantive deregulatory actions on these issues, as well as other U.S. deregulation priorities.
The Administration believes that structural problems underlying Japan’s health care system prevent efficient care delivery, substantially increase costs, and impede the timely introduction of new, innovative, and life-saving medical devices and pharmaceutical products. Cutting costs and improving the health care system in Japan will require the elimination of these inefficiencies and Medical Technology
The United States concluded the Medical Technology Procurement Arrangement in November 1994, with the goal of significantly increasing market access and sales of competitive foreign medical products and services in the Japanese public sector procurement market. U.S. firms are the world’s largest producers of advanced medical technologies. In the Japanese public sector market, however, U.S. industry’s share is relatively low. This agreement represents an important step forward in the ability of foreign firms to more effectively sell medical technology products and services in Japan’s public sector.
The agreement establishes fair and transparent procedures that must be used by governmental entities in procuring major medical equipment and services. The agreement also specifies a set of quantitative and qualitative criteria to annually assess its implementation, including: value and share of contracts awarded to foreign firms by each government entity; number and value of contracts awarded through single tendering; and foreign access to procurement information.
A key element of the agreement is the requirement that procurement decisions for central government purchases above a specified threshold (lowered to 385,000 Special Drawing Rights on April 1, 1998) be made on the basis of the overall greatest value method (OGVM) of bid evaluation, instead of lowest-bid. U.S. equipment is generally more innovative and offers special features or extraordinary performance. OGVM permits procurement decisions based not just on initial price, but on a complete assessment of the product’s value over its life cycle. This ensures buyers the flexibility to select products based on the most favorable combination of price and performance.

Japanese central government entities use OGVM in selecting medical equipment valued above the established thresholds, and have found the methodology to be very effective in procuring the kinds of equipment they need to provide quality medical care to their patients. Prefectural and municipal hospitals, however, are obligated under Japanese law to use exclusively the lowest-bid procedure of evaluation. This hinders the ability of U.S. companies to sell in this significant portion of the Japanese market. Under the agreement, the Japanese Government is required to encourage prefectural and local governments to utilize measures similar to those adopted by the central government entities. The Ministry of Home Affairs, the agency responsible for the applicable laws on government procurement, has shown little inclination to undertake necessary legal measures to allow prefectural and local governments to use OGVM in bid evaluation. The American Chamber of Commerce in Japan has filed a complaint with the Office of the Trade Ombudsman requesting the Japanese Government revise the relevant Cabinet order to permit the use of OGVM in bid evaluation by local and prefectural entities. As a result of Japanese Government inaction, the United States has raised this issue under the Enhanced Initiative on Deregulation.

While Japan’s implementation of the Arrangement requires further improvements, the United States considers that Japan is demonstrating a general adherence to the intent of the arrangement to provide greater market access and sales in its government procurement sector. The United States will use the next review to press for greater transparency, strict compliance with arrangement provisions, and seek the expanded use of overall greatest value methodology through increased availability and use of competitive foreign medical and pharmaceutical products.

Our opinion is that we could perfectly invest in the Japanese market if the government lets us. The problem is the high duties and fees we have to pay if we would export to Japan. The government does not want to let us export. We would have to increase our prices by 200 % to get earnings, and to make a profit with our drugs.

There are about 1,550 pharmaceutical companies in Japan, of which approximately 450 supply drugs for medical care. Most of the large companies, such as Takeda, Fujisawa, and Tanabe, began as traditional wholesalers, and thus have developed more strength in sales promotion than in scientific research. Japan has a corresponding history of importing foreign products and selling them in the domestic market. Because the Japanese market grew rapidly with the implementation of national health insurance and was protected by the National Industrial Policy, Japanese pharmaceutical companies did not develop an institutional capacity to market their products in overseas markets nor did they innovate internationally acceptable drugs until the 1980s. At that time, the government was curbing drug prices to reduce health expenditures, and competition with foreign firms for the domestic market was increasing. Pressures on Japanese drug companies to develop domestic drug products and to market them internationally intensified.

There are already many pharmaceutical industries from all over the world who cooperate with Japanese enterprises. Takeda ( works with Grunenthal GmbH in Germany, Cynamid Italia S.P.A. in Italy, and others. Sankyo works with Luitpold Pharma GmbH in Munich/Germany. The third biggest pharmaceutical company, Yamanouchi Taiwan Co., Ltd. (, works together with Royal Gist-Brocades Nv. Netherlands.

Expansion of Pharmaceutical Marketing into Southeast Asia
The pharmaceutical market has expanded by 10% per year worldwide in recent years. The three largest markets – the United States, Europe, and Japan – comprise 80% of worldwide sales. Southeast Asia, together with China, consumes approximately 8% of the world’s pharmaceuticals and has become the fourth largest pharmaceutical market6 and the fastest growing.
Asia’s newly industrialized countries, such as Singapore, South Korea, Taiwan, and Hong Kong, have become attractive pharmaceutical markets because of high per capita incomes and fairly well developed health service systems. Traditionally, the most demanded pharmaceuticals in Southeast Asia have been antibiotics. Governments have spent the majority of their funds on antibiotics, vaccines, vitamins, and blood products. However, as the area’s economies have advanced, the demand for gastrointestinal, respiratory, and contraceptive preparations has increased. Many foreign pharmaceutical firms have chosen to compete in the markets of Southeast Asia through joint ventures and local distributors, because local firms are more familiar with marketing channels and consumer expectations.
A major barrier for foreign competitors in the Southeast Asian market is the lack of patent protections. China is one of the worst patent offenders in the world; generic and pirated drugs constituted 90% of the Chinese market in 1992. Restrictions on distribution also are very frustrating. Foreign companies must partner with local joint ventures and cannot cooperate with other foreign firms or implement their own distribution operations. Such regulations make it more difficult for foreign pharmaceutical firms to establish wholly owned subsidiaries in Southeast Asian countries and may make an effective market nearly impossible. Despite these barriers, however, the Southeast Asian pharmaceutical market holds great promise for Japanese and Western firms.
Regulatory authorities in the United States or Europe do not readily accept Japanese clinical trials. As long as such problems persist, Japanese pharmaceutical companies will have to conduct clinical trials overseas-often through licensing or joint ventures-to deal with regulatory obstacles. The international harmonization of regulatory standards will ease these difficulties.

Our decision is to decline the opportunity of exporting medical drugs to Japan. The reasons are:
4.barriers that sway us away from the ability to compete against the companies that already have an existing alliance with Japan.

If these companies did not already exist, our company would have the opportunity to consider advancing Japans medical technology. We do however, than have to face the difficulties that Japan sets forth on us dealing with their various obstacles that we have to overcome. raise our prices by 200 percent above the base price would lead to
an impossibility for Japan to consider working with the


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