JFTC's control over competition policy for digital platforms challenged by new government expert group

15 February 2019 00:00 by Toko Sekiguchi

As antitrust rulemaking in Japan’s data economy increasingly takes on protectionist overtones in the form of measures targeting foreign Internet giants, the debate on revising competition laws and guidelines is being co-opted by Prime Minister Shinzo Abe’s administration, diminishing the role played by the traditional gatekeepers of competition policy. At issue is who will ultimately make the rules — the Japan Fair Trade Commission or an expert group convened by the prime minister?

At an economic policy meeting of cabinet ministers and business lobbies on Wednesday, Abe pushed forward the creation of a new group of legal, economic, IT and systems experts under the Cabinet Secretariat — the administrative agency under the direct command of the prime minister — to lead the “coordination of competition policy in the digital market.”

The group, formed in 2016 to discuss nearly any and all aspects of the government’s domestic economic policies, has recently designated the creation of a level playing field for digital industries as one of the top priorities in Japan’s growth strategy, with the aim of coming up with a detailed road map by this summer.

In so doing, what was once a highly specialized discussion within the JFTC over competition policy in the data economy has garnered attention from policymakers and politicians alike, raising its profile to a hot-button issue almost overnight.   

Additional expert panels on the issue are popping up across multiple government agencies, and the ruling Liberal Democratic Party’s competition-policy research group has shifted its focus from strengthening company defense rights against JFTC enforcement practices to carving out a piece of the debate over regulating online platforms.

The sudden interest in — and politicization — of online-platform regulations may also be driven by upcoming elections this year for the upper house of Japan’s parliament, giving the conservative governing party more reason than usual to cater to its traditional support base among business lobbies and owners of small- and medium-sized enterprise, or SMEs.

Domestic protectionism

In particular, the prime minister has called for measures to rein in foreign tech giants such as Google, Apple, Facebook and Amazon — dubbed GAFA — as well as Chinese Internet Titans Alibaba and Baidu, in order to protect Japanese SMEs, young startups and individual users from unfair business practices by these platform operators.

However, given that entrepreneurship is notoriously weak in Japan — an OECD study ranked Japan as having the lowest level of entrepreneurship among 26 countries surveyed — and the lack of focus on individual users in the Japanese government's debate over the data economy, the goal of Abe’s platform policy appears to be to defend Japanese companies and SMEs from foreign platform bullies in an election year.

The points raised in Wednesday's meeting largely concentrated on the explosive growth of foreign platform operators and concerns over their business practices, such as disadvantageous and opaque rules and conditions in their dealings with Japanese suppliers. Pointedly, there were no references during the meeting to Japan’s own platform giants, including Rakuten, Yahoo Japan, and the social-networking site LINE.

A leader of a business lobby attending the meeting said that application of existing rules was completely inadequate to create an environment that would lead to “the creation of Japanese businesses that [can] rival GAFA.” He called for new competition laws to address the issue.

Diminishing the JFTC's authoritiy

A closely watched aspect of the platform debate are proposed changes to the JFTC’s merger-review guidelines. Among those changes are calls to consider the impact of mergers on the accumulation of data, research and development investment, human resources, and innovation among companies.

On the topic of data accumulation, in particular, the key question is how to determine the value of data held by separate companies and their consolidated worth following a deal.   

Earlier this month, a JFTC official told MLex that the regulator was planning to incorporate data-economy concerns in the commission’s revision of its merger guidelines, because as the sole regulator of M&As, any changes to its rules would fall under the JFTC’s authority.

However, MLex was told by a cabinet secretariat official that the expert group that is being formed would be taking the lead on making any changes to existing laws and guidelines. The JFTC will undoubtedly take part in the group, but any significant revisions — whether to merger guidelines or to the Antimonopoly Act — will be the task of the expert group, which is modeled after the EU’s Observatory on the Online Platform Economy, the official said.

“With all due respect to the JFTC,” Heizo Takenaka, a long-time cabinet member under former Prime Minister Junichiro Koizumu and who now heads one of Abe’s economic panels, was quoted at the meeting as saying, “an expert group in the cabinet secretariat is much needed” to make antitrust rules for the digital market. A panel report chaired by Takenaka referred to what it described as the JFTC's lack of insight into the platform industry as one of the central arguments for setting up the expert group.

The JFTC’s experience in platform merger reviews has been limited — including one involving the publisher Kadokawa and an online video membership service Dwango, and another between Yahoo and an online booking service called Ikkyu. Data wasn’t taken into consideration in either case, nor did the review process garner much attention.

Bad blood between JFTC and government

The bid to curtail the JFTC’s control over changes to its merger guideline brings to mind the commission’s protracted battle with the financial services regulator over a regional bank merger, which ultimately resulted in the very same policy group taking executive control of the issue.

At the heart of the differences between the JFTC and the government over that regional bank merger — between Fukuoka Financial Group and Eighteenth Bank — was the government's view that the antitrust regulator should subordinate competition issues to the need to address the challenges of Japan's shrinking rural economies.

Since then, JFTC Chairman Kazuyuki Sugimoto has said that the commission will not shoot down mergers if integration was the only means to continue providing necessary services in shrinking markets.

Sugimoto, who was present at the Wednesday meeting, was quoted as saying that he recognized the need for an “across-the-board government consideration” to maintain a competitive landscape in the digital economy, but didn’t express his views on the apparent power struggle brewing between the JFTC and the government's expert group.

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