Japan's first info-communications reform, initiated in 1985, was designed to bring about a change from a monopoly-based to a competition-based market. Significant results have been achieved in the little more than ten years since the reform was implemented. The most important of these results are noted below.

(1) Entry of many new carriers

Up to April 1985, the two main telecommunications carriers were Nippon Telegraph and Telephone Corp. (NTT) and Kokusai Denshin Denwa Co., Ltd. (KDD). Since competition was introduced, the number of new common carriers (NCCs) has risen sharply. At the end of January 1996, the number of Type I Telecommunications Carriers reached 123, while the number of Type II Telecommunications Carriers reached 2,805.

(2)Lowering of charges in competitive fields

Ever-increasing competition since 1985 has produced lower fees. For example, the basic fee for a car or mobile telephone has dropped by approximately 75%, from 30,000 yen in 1985 to 7,400 yen in 1995.
With NTT, the cost of a long-distance call from Tokyo to Osaka (three minutes, daytime on weekdays) dropped approximately 55% from 400 yen in 1985 to 180 yen (in the case of NCCs: 170 yen) in 1993. (Note: NTT and long-distance NCCs have applied to have their maximum distance (160 km or more) call fee lowered. This would reduce the cost of a call from Tokyo to Osaka (three minutes, daytime on weekdays) to 140 yen for NTT and 130 yen for NCCs.)
With KDD, the cost of an international auto-dial call between Japan and the US (three minutes, daytime) dropped approximately 70 % from 1,530 yen in 1985 to 480 yen (in the case of NCCs: 470 yen) in 1995.

(3) Diversification of services and rate structures

Various kinds of new services, such as monthly discounts for long- distance calls, fixed monthly rate systems for specific time zones, virtual private networks (VPNs), freephone services, three-way calling (three- party call) and Nuisance Call Rejection, have been introduced.

(4) Capital investment and other contributions to Japan's growth

Since 1985, the info-communications industry (See note 1 below) has gradually increased the relative weight of its position within the Japanese economy. It has provided a significant contribution toward Japan's market scale, capital investment, employment and other areas of note. The industry is expected to play an even more important role in the Japanese economy of the future.

1. Market size
   The market size of the Japanese info-communications industry was 14.5 trillion yen in fiscal 1985, and grew to 25.4 trillion yen in fiscal 1994. The percentage of nominal GDP also grew from 4.5% to 5.4% during this time (See note 2 below.).
   The market size of the telecommunications industry has shown a huge increase, growing from 5.3 to 9.6 trillion yen in the same time frame. Along with growth in the software and contents sectors of 1.1 to 4.5 trillion yen, the telecommunications industry has contributed significantly to the development of the Japanese economy.
   Market size of the info-communications industry and its percentage of nominal GDP

   

   Notes:
   

   1. For the purpose of this document, the info-communications industry refers to the telecommunications businesses (Types I and II telecommunications businesses), broadcasting businesses, communications and broadcasting equipment, communications lines, information equipment, audio-visual and games equipment, computer software, and content.
   2. The nominal GDP in fiscal 1985 was 324.2 trillion yen and 468.3 trillion yen in fiscal 1994.

2. Capital investment
   The growth in the market scale of the info-communications industry has been accompanied by increased capital investment. The 2.2 trillion yen investment figure of fiscal 1985 increased to 3.8 trillion yen by fiscal 1994. The ratio of investment in the industry as a whole also increased, from 8.7% to 9.2%.
   Capital investment by Type I telecommunications businesses grew to 3.5 trillion yen for fiscal 1995 (planned), thereby amounting to a figure of 8.2% of all capital investment in Japanese industry as a whole. The growth in the mobile communications sector, in particular, is seen to be significant, moving swiftly within the space of a few years, from 0.2 trillion yen in fiscal 1990 to 1.1 trillion yen in fiscal 1995 (planned).
   Ratio of capital investment by the info-communications industry versus capital investment by Japanese industry as a whole

   

   Notes:
   

   1. Investment figures for Japanese industry as a whole are taken from "Survey Report on Corporations" (Economic Planning Agency).
   2. The investment figure for Japanese industry as a whole for fiscal 1985 was 25.3 trillion yen, while the figure for fiscal 1994 was 40.8 trillion yen.
   Capital Investment by Type I Telecommunications Business (planned for fiscal 1995)

   

   Notes:
   

   1. ( ): Comparison with previous financial year (%)
   2. Source: "Survey Report on Corporations"
      (Economic Planning Agency), October 1995

3. Employment
   The growth in the info-communications industry has also exerted a striking influence on employment. The number of people employed in the industry (See note below) has increased from 720,000 in fiscal 1985 to 1,030,000 in fiscal 1994. The number as a percentage of the entire Japanese workforce has also increased, from 1.2% to 1.6%.
   In addition to increased employment opportunities in the software sector, new competitors and the appearance of retail distributors in the mobile communications sector are also important factors.
   Number of employees in the info-communications industry compared with the total number of employees nationwide

   

   Notes:
   

   1. The total number of employees in Japan as a whole is taken from "Annual Labor Survey" (Statistics Bureau, Management and Coordination Agency).
   2. The total number of employees in Japan in fiscal 1985 was 58,070,000 and the number in fiscal 1994 was 64,530,000.
   3. The number of employees in the info-communications industry includes both those directly involved in the info-communications industry and those listed below:
      • Workers employed in the retail distribution of mobile telephones, etc.
      • Workers employed in the installation of PBX equipment, etc.
      • Workers temporarily transferred from NTT to subsidiaries.

(5) Remarkable growth in mobile communications

At the end of fiscal 1984 (March 1985), the number of mobile telephone subscribers was 40,000. Numbers then grew remarkably within the space of a few years, reaching 2,130,000 by the end of fiscal 1993 (March 1994) and 4,330,000 by the end of fiscal 1994 (March 1995). A figure in excess of 10,000,000 (including the number of Personal Handy-Phone (PHS) subscribers) is forecast for the end of fiscal 1995(March 1996).
The major factors behind this rapid growth include technological innovation, the promotion of competition policies through (a) a system of seven operators of services including automobile telephones, portable telephones and personal handy phones (PHS) in each regional block; (b) provision of conditions for fair and effective competition by separation and division of NTT's mobile communications businesses; and (c) introduction of a COAM (customer owned and maintained) system of terminal equipment.

The first reform of the info-communications system in 1985 achieved major results. However, the following problems have also been pointed out:

(1) Rate reductions in monopolistic fields (from the present tendency of increasing rates to rate reductions)

In Japan, some charges have been increased, including basic subscriber rates, the price of local calls from public telephones, and the charges for using leased circuit lines for short-distance calls (NTT has a de facto monopoly.).
For example, NTT's basic subscriber charges (for households, class 3 exchange) have risen 13% from 1,550 yen in 1985 to 1,750 yen in 1995, and the charges for local calls from public telephones (three-minutes during daytime) increased from 10 yen in 1985 to 30 yen in 1994.
These communications charges are authorized according to the procedures provided in the Telecommunication Business Law, and were therefore properly applied.
Nonetheless, it is of great importance to achieve a further reduction of communications charges overall, by taking drastic measures to enable cost reductions to be made in monopolistic fields.

NTT's Rates

(2) Elimination of the gap in charges between Japan and foreign countries

In comparison with international prices, communication charges in Japan, with some exceptions, seem rather high.
For example, the installation charge for telephone subscribers of 72,800 yen in Japan is 4-13 times higher than that of the U.S., U.K., Germany or France. The domestic long-distance telephone charge (maximum distance, Monday to Friday, three-minutes during daytime) of 180 yen in Japan is also 1.3-4 times higher than that of the U.S., U.K., Germany or France.
Similarly, the short-distance leased circuit line charge (1.5 Mbps equivalent, 15 km) is 3-6 times higher than that in New York or London.
Further reduction in communications charges overall is therefore required to eliminate the rate gap between Japan and foreign countries.

Notes:

1. U.S. charges: NYNEX New York Telephone Corp. and AT&T.
2. Exchange rates: As of January 4, 1996
   (1 U.S. dollar = 105.26 yen, 1 pound sterling = 163.37 yen, 1 Fr. franc = 21.33 yen, 1 DM = 72.82 yen).
   These rates apply hereafter.

(3) Diversification of services

The U.S. is regarded as offering a much wider range of services than Japan. For example, 17 different types of discount services for long- distance calls are offered by AT&T in the U.S., while NTT offers only five types. Also, there are five different types of package discounts for high-function services offered by the NYNEX New York Telephone Corp., compared with NTT's one. The future introduction of diverse services to meet users' needs is therefore also an important issue.
Additionally, to improve convenience for users, NTT must upgrade its response to customers' requests, such as for installation or transfer of services in weekends or holidays.

(4) Promotion of competition in the regional communications market

NTT maintains a monopoly situation in Japan's regional communications, accounting for 99% of intra-prefectural calls.
As a result, the three long-distance NCCs paid 310.3 billion yen (or 49.4%) of their entire telephone income of 628.4 billion yen (for fiscal 1994; including interconnecting call charges) to NTT in the form of costs for connecting to NTT's regional networks. Within such a monopoly, if there is not enough incentive to make NTT's regional networks more effective, the risk arises that it may hinder the lowering of charges by the domestic and international carriers that employ NTT's networks for subscriber accessing.
Promotion of competition in this monopolistic regional communications market is thus an issue of importance.

Notes:

1. Includes interconnecting call charges.
2. Total of interconnecting call charges, rental fee for interconnection gateway switches (IGS), modification costs of local switches (LS) and toll switches (TS), and modification costs of local switches to send identification signals.

(5) Promotion of fair and effective competition

Against this background of the monopolistic regional networks, the following obstacles have emerged to fair and effective competition:

1. Issues pertaining to connection
   It is becoming apparent that negotiations for NCCs' connection to NTT's regional networks are not proceeding smoothly. Japan is therefore lagging behind in terms of its introduction of new services.
   For example, in 1989, the three long-distance NCCs applied to NTT for connections to enable them to provide VPN (virtual private networks) services. In February 1994, NTT started its own VPN service. In November 1994, because negotiations between NCCs and NTT were proving extremely difficult, the three long-distance NCCs applied to the Minister of Posts and Telecommunications for a connection order. In December 1994, the Minister ordered NTT to conclude a connection agreement with the NCCs, and, in May 1995, they started their services.
   A similar situation also occurred with the setting up of a frame relay service.

2. Issues concerning the abuse of private information
   From 1993 to 1994, NTT made use of the telephone numbers of unlisted subscribers (information only available to NTT through its Regional Communications Operations Division) for purposes other than the original ones to compete in the long-distance communications service field. This was detrimental to fair and effective competition.

3. Issues concerning terms of business
   Various problems surrounding NTT's business methods are emerging as hindrances to fair and effective competition. For example, it has been pointed out that internal transactions pertaining to facility charges (steel tower, gas maintenance facility, etc.) at NTT are not conducted under the same terms as transactions with long-distance NCCs.
   Further promotion of fair and effective competition is therefore an issue of some importance.

(6) Promotion of cross entry

The info-communications field currently provides services in each of the following areas: domestic / international communications, regional / long-distance communications, fixed / mobile communications, communications / broadcasting, communications infrastructure / content, and other business fields.
To more speedily promote a competitive environment, promotion of cross entry into these service fields is a significant issue for the future.

(7) Improvement of international competitiveness

1. Development of business in overseas markets
   The demand for the establishment of info-communications infrastructure in Asia, Eastern Europe, Central and South America, and other areas is increasing. Moreover, in the European and American markets, the movement toward cross entry is also growing as more and more policy steps are taken to promote competition. In this situation, NTT and KDD of Japan have only entered seven markets - in Asia, Russia, and the United States. Just considering overseas investment figures alone, NTT (0.1 billion dollars) lags way behind compared to the leading European and American communications carriers (British Telecom (BT): 10.4 billion dollars, AT&T: 9.2 billion dollars). Japan's development of business in overseas market has therefore been rather slow.
   

   Note:

   The figures in parentheses are cumulative overseas investment between 1987 and 1993 (Source: Communications Industry Association of Japan).

2. Alliances with overseas carriers
   As described before in Chapter 1 4. (3) "Globalization", the globalization of corporate activities is being accompanied by alliances among communications carriers that transcend national boundaries.
   The main examples are the moves to form three groups - World Partners (comprised of AT&T and other carriers), Concert (mainly made up of BT and MCI), and Global One (comprised of Deutsche Telekom, France Telecom and Sprint).
   Such movements provide competition in the international telecommunications market. It is important to note that the international communications market is a little under 5% (fiscal 1994) of Japan's combined domestic and international communications markets. In view of its capacity for future growth, carriers are expected to respond positively. Among Japanese communications carriers, KDD is involved with World Partners, as is NTT, but experimentally, and with a time limit. However, Japanese communications carriers have not yet reached a point where they are playing a critical role in such international alliances.

3. Provision of global communications services
   As described in Chapter 1, 4. (3), "Globalization", by developing mobile communications technology, such as the low earth orbit satellite (LEO) communications technology, global communications services will be further developed.
   A positive approach is therefore required toward the future development of global info-communications.

(8) Elimination of the informatization gap

Regardless of whether it involves networking (as can be seen with personal computer communications and the Internet) or the dissemination of personal computers and other forms of info- communication equipment, or such contents as data bases and CD-ROM, informatization in Japan is marked by enormous gaps when compared with that in the United States, widely regarded as the world's most advanced country in this area.
The elimination of these gaps in informatization therefore constitutes a future issue of importance.

Note:

The figures of U.S./Japan per person are calculated by
(figures in the U.S./figures in Japan)¡ß(population in Japan/population in U.S.).

(9) Improvement of research and development capability

For the past few years there has been a balance between imports and exports in Japan's trade in technology across industry as a whole. However, a large import surplus has arisen in the fields of communications, electronics and electrical measuring instruments. Also, according to a survey conducted by the Science and Technology Agency, in the three years from 1991 to 1994, research and development capability in the fields of communications, electronics, and electric measuring instruments in Japan is evaluated to have dropped from being superior to being inferior to that in the United States. Furthermore, according to the evaluation made by the Council on Competitiveness, a private organization made up of key U.S. companies and universities, the United States is in a superior position to Japan in many fields of private sector info-communications, including the software sector.
Given this, we should aim to enhance R&D in Japan to a higher level, considering the need to reform and improve existing conditions, rather than taking a defensive stance simply to prevent the deterioration of the current situation or to maintain the status quo.

Source:

"Report on R&D Activities in Private Sector,"
Science and Technology Agency (fiscal 1994)

Note:

Company responses were scored as follows:
Japanese companies superior = +1, equal strength = 0, and U.S. companies superior = -1. The scores were totaled and divided by the number of responding companies to produce these indices of relative superiority.

(10) Development of content

While Japanese content in the areas of games, animation, and karaoke is internationally renowned, satisfactory development has not been realized in such areas as the CD-ROM content industry.
It is therefore important to develop from now on content in various areas, such as education, art, and the needs of daily life.

(11) Summary

The individual issues now facing the info-communications market are described above. Taking all of them into account, it can be envisaged that it will be necessary to examine reforms in the info-communications market with the following aims.

1. The realization of lower charges for the benefit of users and the nation as a whole, as well as diverse services that meet their needs;

2. The promotion of competition, particularly among telecommunications carriers;

3. The improvement of the international competitiveness of the Japanese info-communications industry, such as by positively responding to increasing globalization and by improving Japan's research and development capability.

(1) Promotion of "measures to be taken in accordance with Article 2 of Supplementary Provision of the Nippon Telegraph and Telephone Corporation Law" (i.e. government measures)

1. The March 1990 report of the Telecommunications Council proposed the following structural measures:
   1. Separation of NTT's long-distance communications business from its local communications sector;
   2. Though requiring further study of the status of its regional communications company, allowing NTT to operate as a single entity for the time being.
      However, implementation of these structural measures was postponed for further consideration in fiscal 1995. Meanwhile, it was decided instead to promote eighteen alternative non-structural government measures, concerning "Promotion of Fair and Effective Competition" and "Improvement of NTT Management."

2. Since 1990, the Ministry of Posts and Telecommunications and NTT have been striving to promote and realize those eighteen measures. However, because the structural measures originally proposed by the Telecommunications Council have not been implemented, the results of the non-structural measures have only been partially successful, as described below:

(2) Promotion of fair and effective competition

1. Thorough establishment of the Independent Division System at NTT
   Positive results have been achieved by the separation of the long- distance communications business division and the regional business division at NTT introduced in April 1992, and, from the same financial year, the disclosure of separated revenue and expenditure figures for these divisions.
   However, although the objective of the introduction and thorough implementation of the Independent Division System was to create conditions for fair and effective competition, problems have arisen regarding these aims as described below. Negotiations over interconnection between carriers have not been conducted smoothly and remain to be resolved. Cases of the abuse of information have also emerged.
   In addition, NTT has been criticized for promoting its business by selling regional and long-distance services together, thus failing to adequately promote fair and effective competition.

2. Facilitation of network connections
   Positive results have also been achieved by the measures (see note) listed below, implemented to facilitate the connection of regional communications networks to NTT.
   1. Easier establishment of points of interface (POIs)
   2. Making ID sending automatic
   3. Introduction of an end-to-end fee system for charges related to long-distance NCCs
   4. Introduction of an access charge system between carriers, etc.
   However, within the structure of reciprocal interest that comes from NTT managing its monopolistic regional division and its competitive long-distance division together as one integrated business, difficulties have occurred. For example, positive negotiations over interconnection for frame relay services and VPN services have been delayed for a long time, resulting in petitions being made to the government to issue connection orders.
   In addition, for the reasons described below, there is a lack of incentive for NTT to reduce access charges and make technical conditions more open:
   1. The time lag between an application for connection until actual connection is still long.
   2. There is insufficient disclosure of the accounting method for calculating the access charges and of documentation on which the accounting is based.
   3. The three long-distance NCCs have to pay approximately 50 percent of their telephone revenue to NTT as access charges.
   4. There is no detailed breakdown of access charges for each type of network equipment or function.
   5. It is unclear what the conditions are for connection to a local switch.
   6. Connection to signal networks has not yet been realized.

   Note:

   "Facilitating Interconnection with New Common Carriers (NCCs)" (NTT, March 29, 1991)

3. Securing of openness of network
   1. Connection of Type II Telecommunications Carriers to NTT
      In July 1991, the Open Networks Council was established for the purpose of reflecting the demands of Type II telecommunications carriers concerning the building of NTT networks, and to ensure NTT provide its network functions smoothly to Type II telecommunications carriers. To this end, the Council has conducted several discussions. However, because Type II telecommunications carriers are treated as users by NTT, discussions between NTT and Type II telecommunications carriers regarding the aspect of usage of network functions have not been progressing smoothly.

   2. Interconnection to local switches of NTT a) In March 1995, NTT announced its policies to make interconnection possible at all stages (See note 1). In September of the same year, NTT again announced its policies to make interconnection to local switches, etc., possible (See note 2). In February 1995, the Ministry of Posts and Telecommunications called for NTT to carry out interconnection at all exchanges to promote competition (See note 3). In that sense, progress has been made by the announcement of such policies by NTT.
      On the other hand, as described below, the details of NTT's policies have not always been clear, and in some ways it is difficult to evaluate them.
      1. If no standard interface is prepared, technical examinations, design, and development need to be carried out every time an application is made by an NCC, and, as a result, the waiting time for interconnection might be prolonged.
      2. It is impossible to analyze whether NTT's cost for utilization and the cost to be borne by NCC are at the same level when the cost range and the calculation methods are unclear.
      3. In general, NCCs are required to shoulder the burden of the cost necessary for interconnection. However, an NCC may not be able to interconnect if it cannot shoulder such costs, depending on the amount.

      Note 1:

      "Report on Concrete Measures for the Clarification of Procedures in Negotiations for Connections" (NTT, March 31, 1995)

      Note 2:

      "Making Networks Open" (NTT, September 28, 1995)

      Note 3:

      "Clarification of Procedures in Negotiations for Connections to the NTT Regional Communications Network" (Ministry of Posts and Telecommunications, February 23, 1995)

      b) Even if connection with local switches, etc., is achieved, the present monopolistic situation with local switches and subscribers' lines will continue, and there may not be enough incentive for NTT to reduce costs.

      c) Under these circumstances, it is difficult to evaluate how successful NCCs have been in the area of connection to NTT's local switches, and it is envisaged that, even if connection is achieved, the monopolistic situation in the regional communications network consisting of local switches and subscribers' lines, will continue. How to reduce the costs of these components, such as those of subscribers' lines (whose costs comprise 25% of NTT's operation costs) therefore remains an important issue.

4. Prevention of cross-subsidization
   In February 1992, the Ministry of Posts and Telecommunications decided standards for the separation of accounting of revenues and expenditures among business divisions (See note). These standards are intended to clarify internal transactions between the business divisions and to make internal transactions between the long-distance communications division and the regional communications division of NTT subject to the same conditions as transactions between long- distance NCCs and NTT.
   However, hindrances remain to fair and effective competition, such as the fact that internal transactions at NTT are not conducted under the same terms as transactions with long-distance NCCs, as described above.

   Note:

   "Introduction and thorough implementation of the Independent Division System of long-distance communications division and regional communications divisions, classification of assets and debts regarding disclosure of revenues and expenditures, standards for separate accounting of revenues and expenditures, and etc." (Ministry of Posts and Telecommunications, February 21, 1992)

5. Prevention of information abuse
   NTT has devised certain measures, such as putting internal regulations in place, in connection with the appropriate use of information. NTT has also instituted internal systems to prevent information abuse. However, a series of incidents has occurred in which confidential information on customers, obtainable only by NTT through its local communications division, has been used for purposes other than originally intended. It has also been pointed out that subscriber information is not adequately protected.

6. Positive disclosure of information
   The following measures have been devised to deal with NTT information that is indispensable to fair and effective competition, by the revision of the telecommunications business report rules (See note 1) and by such administrative guidance (See note 2) as the clarification of connection procedures.
   1. The disclosure of network information such as the number of communications and volume of calls between message areas (MAs).
   2. The establishment of contact offices to answer inquiries related to the disclosure of network and technical information, etc., and the creation of summaries of disclosable information (See note 3).
   3. Public announcements in Official Gazettes of additions or changes to network functions that may influence terms for connection.
   However, as described above, there is still inadequate disclosure of the information required for the connection to NTT local communications networks. For example, the inadequate disclosure of the calculation method for access charges and the accounting documents that set out the basis for the calculation method.

   Note 1:

   Ministerial Ordinance of the Minister of Posts and Telecommunications, No. 28, 1990 (Promulgated and enforced on May 30, 1990)

   Note 2:

   "The positive disclosure of information and diffusion of R&D results" (Ministry of Posts and Telecommunications, March 15, 1991)

   Note 3:

   "Measures on positive disclosure of technological information and diffusion of R&D results" (NTT, March 29, 1991)

7. Diffusion of R&D results
   According to NTT's disclosure standards, including their external sale standards, the results of NTT's research and development can, in principle, be disclosed at any time (See note), but NTT decides the timing of the disclosure of the results of exceptional technology on a case-by-case basis. Because the scope of such exceptional technology is not clearly defined, transparency has been insufficiently secured in disclosure of research and development results.

   Note:

   "Measures on positive disclosure of technological information and diffusion of R&D results" (NTT, March 29, 1991)
   'Report: Ideas for opinions by interested persons as regards "Concrete measures to clarify procedures and other related matters concerning interconnections negotiations"' (NTT, August 31, 1995)

8. Mobile communications services
   In July 1992, the mobile communications business was separated from NTT and a new company NTT Mobile Communications Network Corp., was launched. In July 1993, the new company was then divided into nine regional companies.
   Through the separation of mobile communications business from NTT, problems regarding fair and effective competition, such as cross-subsidization and the abusive use of information, have been mitigated. Moreover, the regional division established a competitive environment, enabling locally-operating mobile telecommunications NCCs to compete on an equal footing with NTT mobile carriers.
   The introduction of these conditions for fair and effective competition has led to the rapid growth of the mobile communications market through the abolition of telephone deposit fees (100,000 yen), and major reductions in rates such as a lowering of the subscription fees by approximately 87 percent, a reduction in the basic rates of approximately 43 percent, and a cut in call charges of approximately 12 percent.
   In contrast, NTT finances NTT Mobile Communications Network Corp., to an extremely high level of 95 percent. Consequently, it will be important in the future to make NTT lower this level of capital contribution, in order to establish the conditions for fair and effective competition.

9. Sales of terminal equipment
   1. In July 1990, NTT carried out revisions to its organization in which the terminal equipment sales division and the telecommunications business division were separated.
      However, it has been pointed out that organizational and operational separation has not been fully completed. For example, there have been instances in which the terminal equipment sales division organization has not been separated from regional communications business headquarter branches. There have also been instances in which sales of terminal equipment still continue unchanged at regional communications business headquarter branches from which the terminal equipment sales division has been separated.
   2. Furthermore, it has been pointed out that there have been instances in which NTT has used its position as a Type I telecommunications carrier with a local circuit network and access to subscriber information that only NTT could know to sell terminal equipment.

10. Satellite communications business
    The separate accounting of revenue and expenditure in the satellite communications business since fiscal 1990 can be favorably evaluated.
    It is necessary to establish conditions for fair and effective competition by aiming to secure equality between NTT and satellite NCCs in NTT regional communications networks in the future.
    NTT now has its own satellite, N-STAR. However, at present NTT is to use N-STAR to complement the terrestrial network, and the satellites of other carriers are to be used for services NTT provides to users.

11. Earlier completion of digitization
    Plans to complete digitalization by the end of fiscal 1997 are proceeding smoothly and can be favorably evaluated.

12. Future numbering plan
    The development of fair and effective competition has been hampered by problems such as the lack of equality between NTT and NCCs, and the fact that number portability has not been established. (i.e., a subscriber can use the same number even after changing carriers.).

13. Policies on establishing message areas (MA)
    At the Ministry of Posts and Telecommunications, the study committee on policies concerning short-distance telephone calls compiled a report (June 1992) and indicated measures for improvement of policies on establishing MAs. However, it has been pointed out that progress is not being made in examinations within NTT concerning policies on MAs and that no fundamental review is being undertaken on such policies in response to the increasing need by the people in economic and day to day activities.

14. Introduction of discount rates applicable to telecommunications carriers
    Rates below those charged to users are established, reflecting differences in forms of equipment usage, by means such as excluding charges related to product sales activities. These rates are access charges between carriers for long-distance NCCs, work consignment fees to KDD and international NCCs, access charges for use of leased circuit lines as access lines, and non-tariff service charges for special type II telecommunications carriers providing packet communications services.
    However, there has not been any improvement in the situation whereby NTT does not have any incentive to introduce discount rates for telecommunications carriers, given that NTT has a de facto monopoly on the regional communications network.

(3) Improving NTT management

A. Promotion of rationalization

1. There will be a strong demand from now on for a reduction in rates for information and communications services across the board to promote the development of multimedia, the creation of a lower cost structure across the spectrum of Japanese industry, and an improvement in international competitiveness.

2. NTT is a key telecommunications carrier with the lion's share of the domestic communications market and its rates have a major influence on the communications costs that the Japanese economy has to bear.
   NTT's regional network costs are borne by all carriers that depend on the NTT's regional network.

3. Accordingly, the lowering of NTT's network costs, and in particular the cost of its regional communications network, is needed. And from this point of view, promoting improvements in NTT management, namely rationalization, is an extremely important issue.

4. The fact that NTT has endeavored to cut the number of personnel is a positive factor (There were 310,000 employees at the time of privatization in 1985. By the end of FY 1994, this has been reduced to less than 200,000.). However, on the other hand:
   1. There are 30,000 employees who have been temporarily transferred to subsidiaries, and the source of salaries for these staff members is budgeted for in NTT's work consignment fees paid to these subsidiaries.
   2. The ratio of the sum of personnel expenses and work consignment fee to NTT's total expenses has increased annually since privatization, reaching 47.9 percent in fiscal 1993 (up from 41.8 percent at the time of privatization).
      Consequently, the reduction of employees by separating a business into subsidiaries, which is the method recently used by NTT, needs to be evaluated from the viewpoint of whether such reduction will lead to management efficiency.

5. In June 1995, based on the recommendations of administrative inspections, the Management and Coordination Agency pointed out that it was necessary to rationalize the number of personnel according to work load, the further abolition and integration of branches and etc. The recommendations pointed out the lack of thoroughness in allocating staff based on work load in NTT's telephone number information service, maintenance service, 116 service (orders, etc.) and 113 service (complaints), as well as the lack of thoroughness in abolishing and integrating work unit locations and etc.

6. Furthermore, the administrative inspection recommended that it was necessary for the Ministry of Posts and Telecommunications to instruct NTT to achieve a greater management efficiency by devising new, voluntary rationalization projects, and rationalizing and making greater efficiency of both staff and operations in every area of business.
   In response, NTT submitted a report to the Ministry of Posts and Telecommunications in September 1995 on what steps would be taken. However, the report failed to clarify the concrete details and the time frame for these steps to be implemented. Although the Ministry has instructed NTT to clarify these points and to swiftly respond in report form, NTT has not yet dose so.

7. In addition, in November 1995, NTT announced that it would pare down its employees to 150,000 by the year 2000. However, since concrete measures and the time frame have not yet been clarified what cost saving there will be is far from clear.
   NTT's Personnel Expenses

   

   Note 1:

   The figures in brackets are percentages of total expenses.

   Note 2:

   "Report on the results of administrative inspection over telecommunications business" (Administrative Inspection Bureau, Management and Coordination Agency, June 1995)

B. Maintenance division

Owing to the increased digitalization of facilities and the introduction of remote supervisory and controlling equipment, the number of staffed NTT maintenance branches for switches were consolidated into 250 locations by the end of FY 1994 down from 470 locations at the end of FY 1989. Also, to promote greater efficiency initiatives have been taken to shift external equipment surveying and regular checking maintenance work to subsidiaries. However, it has been pointed out that it is necessary to carry out further planned rationalization of staff by consolidating the staffed maintenance branches that carry out decentralized maintenance work on NTT switches and wireless transmission equipment into one per prefecture.

C. Return of Profits to stockholders

In September 1995, based on profits made by NTT from selling its shares in NTT Data Communications Systems Corp., accompanying the listing of NTT Data Communications Systems Corp. on the stock market in April of the same year, a dividend in the form of a 0.02 NTT share was made available for each NTT share held.

(4) Future status of regulations

A. The major deregulatory steps taken so far are described below:

1. In May 1992, the NTT and KDD Laws were revised, to permit up to 20% of NTT and KDD to be owned by foreign companies, in addition to equity financing for NTT.

2. The Emergency Measures for the Economy in September 1993 facilitated the introduction of the "COAM (customer owned and maintained)" system of mobile/cellular phones from April 1994 and of radio-paging from March 1995.

3. In October 1995, the Telecommunications Business Law was amended, to enable the prior-notification system to be applied to rates other than those closely linked to the people's lives and the economy. As a result the number of subjects requiring authorization was reduced by more than half.

4. In January 1996, it was announced that the Ministry of Posts and Telecommunications would introduce a deregulating policy, named the Promotion of Deregulation for the "Second Info-Communications Reform," aiming at greater flexibility in entrustment of business activities and for further deregulation of rates.

B. Concerning regulatory status, there are, for example, the following arguments:

1. The existing interconnection framework requires that interconnection issues be left to consultation between carriers. This, however, has partly been the cause of the lengthy negotiations over interconnection with NTT, which enjoys a monopoly of local telecommunication networks.
   Therefore, the administrative authorities should swiftly consider the establishment of basic rules, namely, taking legal measures (e.g., making interconnection obligatory, and introducing a tariff system for interconnection).

2. The categories of domestic communication for NTT and international communication for KDD had proved useful in the construction of facilities and the provision of efficient services under the conventional specialized structure. However, the categories need to be reviewed in the interest of stimulating the info-communications by promoting cross market entry.
   Furthermore, KDD - having no "bottleneck" facilities - should promptly be allowed to undertake domestic telecommunications, even if NTT's entry into the international telecommunications market is delayed until structural measures are implemented.