New Capitalism in Japan: Measures to Facilitate Pass-on for Value Creation through Partnerships, including by the JFTC

On December 27, 2021, the New Capitalism Headquarters at the Cabinet Secretariat of Japan, Consumer Affairs Agency ("CAA"), Ministry of Health, Labour and Welfare ("MHLW"), Ministry of Economy, Trade and Industry ("METI"), Ministry of Land, Infrastructure, Transport and Tourism ("MLIT") and Japan Fair Trade Commission ("JFTC") jointly published the "Package of Measures to Facilitate Pass-on for Value Creation through Partnerships" ("Proposed Measures").¹

Previously, the Kishida Administration established the New Capitalism Headquarters to achieve the "New Capitalism" based on the concept of "a virtuous cycle of growth and distribution" and "the development of a new society after COVID-19 pandemic," and started discussions on October 26, 2021. On November 8, 2021, the Kishida Administration announced "The Urgent Proposal – "New Capitalism" for the Future and its Launch" ("Proposal").² The Proposal consists of two core pillars: Growth Strategies and Distribution Strategies.³

On December 27, 2021, the New Capitalism Headquarters held a meeting and published the Proposed Measures jointly with the CAA, MHLW, METI, MLIT and JFTC. With the aim of achieving a virtuous cycle of growth and distribution, wage increases are expected as much as possible at the labor-management negotiations based on each company's own ability to pay. Due to the impact of the COVID-19 pandemic, some industries continue to be adversely affected while others (e.g., manufacturing businesses) may have recovered to pre-pandemic or higher; performance recovery varies by industry. In order for small-and-medium sized enterprises (SMEs) to secure the resources to raise wages, the Government of Japan will take the Proposed Measures to create an environment in which SMEs can appropriately pass on increases in labor, material and energy costs through partnerships among all business partners.

The Proposed Measures comprises of ten initiatives: (1) establishment of a framework for cross-governmental measures to deal with pass-on, (2) strengthen law enforcement to facilitate price pass-on, (3) measures taken by the Labor Standards Supervision Offices, (4) measures for rising labor costs and other costs in public procurement, (5) strengthen measures based on the Act on Promoting Quality Assurance in Public Works (Act No. 18 of March 31, 2005, as amended), etc., (6) measures based on the Act against Unjustifiable Premiums and Misleading Representations (Act No. 134 of May 15, 1962, as amended), (7) conducting a survey on transactions between large companies and startups and taking strict enforcement, (8) expansion of the scope of the Partnership Building Declaration⁴ and strengthen the effectiveness, (9) strengthen government agencies' systems and (10) future issues to be discussed. Each initiative specifies more concrete approaches along with the relevant government agencies in charge. This article focuses on the measures to be taken by the JFTC.

Measures to be taken by the JFTC are (i) establishing a scheme to facilitate price pass-on, (ii) clarifying the application of the Anti-Monopoly Act ("AMA"), (iii) conducting a survey and strengthening enforcement against "abuse of superior bargaining position" ("ASBP") under the AMA, and (iv) taking measures to avoid "abuse of buying power" under the Subcontract Act,⁵ all of which are part of the initiative to strengthen law enforcement to facilitate price pass-on (part of the second initiative mentioned above); (v) conducting a survey on transactions between large companies and startups and taking strict enforcement (part of the seventh initiative mentioned above); (vi) strengthening systems of related government agencies (part of the ninth initiative mentioned above); and (vii) amending JFTC's Guidelines Concerning Abuse of Superior Bargaining Position under the Antimonopoly Act⁶ ("ASBP Guidelines") (the tenth initiative mentioned above). More detailed information is provided as follows.

(i) Establishment of a scheme to facilitate price pass-on

The Government of Japan will establish a new scheme to check the status of compliance by industry. Under a new scheme, the JFTC and the Small and Medium Enterprise Agency ("SMEA"), cooperating with relevant government agencies, (a) receive information from the relevant government agencies on suspected violations such as abuse of buying power under the Subcontract Act, and (b) receive information via a website where a subcontractor can anonymously provide suspected violations to the JFTC and the SMEA. In this regard, a Liason Meeting of the relevant government agencies on price pass-on will be established in the Cabinet Secretariat.

The JFTC and the SMEA will publish a report by June 2022 based on the information received by the end of this fiscal year (i.e., by the end of March 2022.) If there is any industry where violations are frequently observed, the JFTC, SMEA and the relevant government agencies jointly request a relevant trade association to conduct voluntary inspections by its member companies.

In addition, based on the information received by a new scheme, the JFTC and SMEA will identify three industries annually where pass-on of incresed labor costs, material costs and/or energy costs is suspected to be refused, and will conduct on-site inspections for those industries.

(ii) Clarification on the application of the AMA

As mentioned above, when increases in costs are not passed on properly, it may constitute an abuse of buying power under the Subcontract Act. However, the Subcontract Act provides requirements for (i) size of company's capital and (ii) nature of the transaction; the law is not applicable if such requirements are not met. For example, a transaction between a company with capital of JPY200 million and a company with capital of JPY15 million is not subject to the Subcontract Act because the size of company's capital requirement is not met. Another example is a sales and purchase agreement (i.e., not a consignment agreement) is not subject to the Subcontract because the nature of the transaction requirement is not met.

The JFTC will clarify that transactions that do not reflect increases in labor costs, materials costs and/or energy costs may constitute an ASBP even if such transactions are not subject to the Subcontract Act.

(iii) Conduct a survey and strengthen enforcement against the ASBP

By the end of this fiscal year (i.e., March 2022), the JFTC will identify three industries where pass-on of labor costs, materials costs and/or energy costs are suspected to be refused, which may constitute an ASBP. The JFTC will conduct a survey into these three industries sometime during the next fiscal year (i.e., from April 2022 to March 2023) and will publish a report. In addition, the JFTC will conduct dawn raids into cases where there is suspicion of refusal to pass on prices. Also, the JFTC will send a letter to relevant companies identifying specific concerns.

(iv) Measures to avoid "abuse of buying power" under the Subcontract Act

Clarification of the interpretation of "abuse of buying power"

The JFTC clarifies transactions that do not reflect increases in labor costs, materials costs and/or energy costs constitute an abuse of buying power under the Subcontract Act:

• The transaction price remains unchanged without explicitly discussing the necessity of reflecting rising costs (e.g., labor costs, materials costs and/or energy costs) at the negotiation table.
• The transaction price remains unchanged without a main subcontracting enterprise responding to a subcontractor in writing a reason for not passing the price on despite the subcontractor's request for an increase in the transaction price due to an increase in costs (e.g., labor costs, materials costs and/or energy costs).

In order to strengthen consultation services on the interpretation of the Subcontract Act including about abuse of buying power, the JFTC's toll-free hotline for the "Subcontract Consultation Desk concerning Undue Burden" will be disseminated more widely.

Strengthen crackdown of "abuse of buying power"

The JFTC and the SMEA strengthen enforcement by conducting on-site inspections at main subcontracting enterprises more frequently. Further, they may request main subcontracting enterprises to submit a remediation report for those with inadequate prevention of recurrence.

Establish an information system to strengthen supervision of subcontracting transactions

In order for the JFTC to identify companies that are highly likely to be in violation of the Subcontract Act and conduct investigations on them with priority, a new information system will be established in the JFTC that will enable centralized management of information on precedents, information provided by relevant government agencies, and information received by hotlines, etc., in addition to written survey responses.

(v) Conduct a survey on transactions between large companies and startups and take strict enforcement

In accordance with the Guidelines for Business Collaboration with Startups issued by the JFTC and METI in March 2021,⁷ the JFTC will conduct a survey of about 5,000 transactions between large companies and startups that are not subject to the Subcontract Act. The JFTC will conduct dawn raids for cases where an ASBP is suspected as a result of the survey, including for cases where (a) disclosure of trade secrets are requested without a confidential agreement in place, (b) sale of competing products or services using startup's trade secrets in violation of a confidential agreement or (c) request for concluding a contract which attributes intellectual property rights based on the results of joint research only to a large company. In addition, the JFTC will send a letter that identifies specific concerns, so the stakeholders can work voluntary verification and improvements.

(vi) Strengthen systems of related government agencies

In order to strengthen enforcement against the ASBP, "Research Office for Preventive Measures against the ASBP" will be newly established at the JFTC.

(vii) Amendment to the JFTC's ASBP Guidelines

The JFTC will be considering to amend the ASBP Guidelines in order to optimize vertical transactions more appropriately under the recent situation where oligopoly is becoming common in various industries, including with the developments of various technologies and digital related services. In doing so, the JFTC will take into account previous cases since the ASBP Guidelines were issued in November 2010 as well as approaches for abuse of buying power in other countries.

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As mentioned above, the Government of Japan will be making efforts to facilitate pass-on for value creation through partnerships, including by measures to be taken by the JFTC along with relevant government agencies described above.

_{¹The Package of Measures to Facilitate Pass-on for Value Creation through Partnerships is available only in Japanese.
²The Proposal is available in Japanese 
³Please also refer our previous Client Alert "New Capitalism in the Kishida Administration and Competition Policy in Japan".
⁴ Partnership Building Declaration is a system where a company who declares certain compliance (e.g., coexistence and co-prosperity of the entire supply chain) may receive certain benefits (e.g., extra points may be awarded for some subsidies provided by the METI).
⁵English translation of the Subcontract Act is available.
⁶English translation of the ASBP Guidelines is available.
⁷Please also refer our previous Client Alert "JFTC and METI issued Guidelines for Business Collaboration with Startups";the Guidelines are available only in Japanese.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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