Japan Reluctant to Open Up Its Phone Market

Two years ago, when Japan turned giant Nippon Telegraph & Telephone over to private ownership and deregulated the telecommunications industry, tension between Japan and the United States reached fever pitch.

After negotiations that involved intervention by President Reagan and Prime Minister Yasuhiro Nakasone, the trouble was resolved.

Foreign firms were banned from domestic telecommunications as primary carriers, but the Ministry of Posts and Telecommunications allowed 11 Japanese firms to go into competition with Nippon Telegraph & Telephone in providing long-distance telephone service. It also approved applications from foreign firms to set up improved services providing both ordinary voice communications and linkups between otherwise incompatible computers.

Now the ministry is about to open up the international sector of Japan’s telecommunications market, and fears of foreign influence have risen once again.

For the first time, foreigners will be allowed to compete with Kokusai Denshin Denwa (KDD), which has been the only company in the field. But a new dispute has been gaining momentum and it promises to attract more attention when Nakasone visits Washington from April 29 to May 2 to discuss trade tensions.

“We are told,” a U.S. official in Washington complained last week, “that (foreign) companies need to try harder to gain market opportunities. Then, in the face of trying harder, they seem to get frustrated.”

Two massive consortiums, one with 55 partners and the other with 35, have gone into separate joint ventures, both seeking the ministry’s permission to compete with KDD. But they have run up against the ministry’s instinct for “controlled competition.”

Almost immediately, the ministry demanded that the two groups amalgamate into a “second KDD.” Under the Telecommunications Business Law, the ministry must ensure that the supply of services does not exceed demand, and the ministry insists that there is not enough demand to support three companies.

Although the law permits up to 33% foreign ownership of an international telecommunications firm, the ministry ordered Cable & Wireless, a British firm, and two American firms, Pacific Telesis International and Merrill Lynch, to reduce their proposed equity in one of the consortiums and to forgo participation in decision making. Cable & Wireless was ordered to slash its proposed holding from 20% to less than 5%.

The “second KDD” issue has attracted far less attention in the United States than has the current dispute over semiconductors, but the ministry’s heavy-handedness has drawn criticism even from the Japanese mass media. And it has generated letters of protest to Nakasone from Reagan and British Prime Minister Margaret Thatcher.

Thatcher, whose anger grew when Nakasone failed to reply for more than a month, has threatened to retaliate. In the United States, retaliation “is not presently under consideration,” a U.S. official said, insisting on not being identified.

The Telecommunications Ministry has relented bit by bit. First, it agreed to allow foreign participation in management decision making, a step implying that it would allow larger foreign ownership than it originally proposed. Then, on Friday, as final preparations for a visit to the United States by a special envoy of Nakasone were being made, it took its biggest step away from its original position.

Minister of Posts and Telecommunications Shunjiro Karasawa announced that he would drop objections to a KDD competitor laying its own undersea optical fiber cable across the Pacific. Previously, the ministry had insisted that KDD’s facilities should be leased by the new firm.

The submarine cable is a key element of Cable & Wireless’ $400-million project to link Japan and Alaska as part of a global network that it hopes to build.

Karasawa, however, said the ministry will continue to insist that only one new firm enter the field. With the ministry’s support, a Japanese mediator has proposed a kind of “shotgun marriage” of the two consortiums with eight “core companies” that include Cable & Wireless and Pacific Telesis.

The ministry’s attempt to control competition adds up to what the Washington official called “a perfect recipe for political tension.”

He said he told the Telecommunications Ministry: “Forced mergers resulting in dramatically diluted U.S. equity opportunities would create significant tension between us. Second, only true competition can be provided if the second KDD is a facility-based company (with its own cable).”

Objections to the ministry’s attempt to dilute equity ownership by foreign firms, he said, “apply not simply to a second KDD but to future trade relations between our two countries.”

The U.S. official also said--for the first time--that the United States would like Japan to revise the law that requires the ministry to determine whether sufficient demand exists for new companies to enter the field.

“We support competition,” he said. “It is the customers, the investors, the banks that should determine when there is too much . . . not the government.”

Nakasone is considered certain to offer some kind of compromise on the matter when he visits Washington, but a solution to the problem appears to be unlikely.

Even if the foreign firms accept the proposed merger, the eight core companies will have to determine how to parcel out the shares among more than 70 others that the ministry has agreed to accept in the “second KDD.”

“I frankly don’t have any distinct impression as to how that might be resolved,” the U.S. official said.