 FOR THE PAST SEVEN years or so, I worked in Japan as an attorney in the Tokyo office of a multinational law firm and then as Asia-Pacific counsel for a Silicon Valley software company. For much of that time I was also an adjunct lecturer in law at Temple University Japan. Most of my students were American law students on a semester-in-Japan program. Late last year Temple asked me to teach a class entitled 'Regulation of Business in Japan,' a course I hadn't taught before.
I believed that guest lectures by other actual practitioners working 'in the trenches,' so to speak, would give the students a more practical understanding of doing business in Japan.
I also decided that the focus of the class should not be on highly detailed discussions of particular regulatory regimes but rather on the principles, processes and thought patterns that underlie the Japanese approach to regulating business.
I concluded that one of the most straightforward examples of the ways by which the Japanese regulate business was a matter that involved me, my Japanese, American and Scandinavian neighbors, a Japanese retail store developer, an 80-something Japanese lawyer and landlord, and the city of Yokohama's department of buildings. Although I will focus on a particular project in Yokohama, I hope that this case study will give a sense of the underpinnings of the Japanese regulatory regime at all levels.
The Neighborhood and the XYZ Home Center
A few years ago my family and I lived in a quiet residential neighborhood in Yokohama. It was a fairly typical Japanese neighborhood of small, densely packed homes, except for six American-style houses situated rather incongruously in the center. We lived in one of those six houses. Immediately adjacent to the foreigners' houses was a large empty lot. This lot had previously been a wooded hill. The hill had been leveled some years before to pave the way for a development project that had been abandoned before ground was broken. About a year and a half into our two-year lease we learned that a plan was afoot to develop this empty lot into the Japanese equivalent of a 'superstore' which I'll call the XYZ Home Center.
Naturally, we were quite disturbed by the news. We became even more distressed when we heard that the access road to the store would be located about 10 feet from the back wall of our house and that projections indicated 1,000 cars would travel this road every weekday and 2,000 cars a day every weekend -- not to mention the diesel delivery trucks at the crack of dawn each morning. But let me back up.
US Trade Policy
The lot had been vacant for decades; why the rush to develop it in the midst of a stagnant Japanese economy and a seemingly interminable decline in consumer confidence and spending? The root cause of the decision to build this superstore in my backyard was -- surprise -- the United States government.
Over the past 30 years or so, successive US administrations have, with limited success, been protesting and trying to chip away at Japan's relatively closed market. US and international pressure had, through multilateral trade negotiations under GATT (the precursor to the WTO) and bilateral negotiations, largely eliminated tariffs and import quotas as significant barriers to the importation of foreign products, except for a few protected industries such as agriculture. However, the US and other countries gradually realized that the elimination of tariffs and quotas alone would not lead to the hoped-for opening of the Japanese market.
Many of the reasons for the failure of tariff reductions to lead to the opening of the Japanese market were lumped together under the term 'non-tariff trade barriers.' A non-tariff trade barrier is essentially any obstacle (aside from a tariff) to the importation of foreign products, services or capital that arises out of government policy, industry practice or cultural predisposition.
For many years one of the biggest and most contentious trade disputes between the US and Japan was the US assertion that non-tariff trade barriers were behind the failure of large American retail stores to crack the Japanese market. Many barriers were cited, some cultural (such as the average Japanese consumer's purported preference for shopping at small neighborhood 'mom and pop' shops, which smothered their customers with personal attention) and some were structural (such as Japan's infamous multi-tiered, tradition-bound distribution system). It was difficult for the US government to effectively press the Japanese government to change culture-bound preferences and systems since they were arguably beyond the Japanese government's ability to meaningfully influence.
The Large-Scale Retail Store Law
There was another non-tariff trade barrier to the expansion of foreign retailers in Japan that was clearly under the Japanese government's control, namely a post-World War II statute known as the Large-Scale Retail Store Law. The US government therefore decided to press the Japanese government to repeal this law.
Nominally, the law was not directed against foreigners. The law applied to all large stores, Japanese and foreign, without distinction. Nonetheless, the US government took the position that the law had a disproportionately negative effect on US retailers because many US retailers, unlike most of their Japanese counterparts, have as a core competence and primary engine of growth the operation of very large stores often selling heavily discounted merchandise. (In those days, Toys 'R Us was the poster child for large US retailers that were unable to gain a foothold in Japan allegedly due to the law).
The law had a number of provisions that set limits on the operating practices of stores over a specified floor area.
Most critically, from the US government's perspective, the law also had a provision requiring any large store developer to obtain the consent of local shopkeepers as a condition to the grant of a building permit. Needless to say, the neighborhood mom and pop shop owners were usually not keen to give their consent to the opening of large, modern, clean stores, often with on-site parking, longer hours and selling a greater variety of products less expensively than mom and pop ever could. The Japanese public's supposed allegiance to familiar neighborhood shops was gratifying, but mom and pop weren't willing to rely just on the kindness of neighbors. Mom and pop demanded and got the Japanese Diet to pass the Large-Scale Retail Store Law that, in its heyday, effectively gave them a veto over any large competitors that threatened to open in their midst.
Unanticipated Consequences of the Law's Repeal
After years of pressure by several US administrations, and most vigorously by the first Bush administration, the Japanese government finally agreed to loosen its grip on the regulation of large retail stores in amendments to the Large-Scale Retail Store Law in the early 1990s. After several years of additional pressure by the Clinton administration, the Diet finally repealed the law outright, although the repeal was not to be effective until some months after the Diet's action.
Paradoxically, it was not the repeal of the law per se that led to XYZ's development plans in Yokohama. As commonly happens in Japan, the government was unwilling to totally get out of the business of regulating large retail stores so, concurrent with the repeal of the law, the Japanese passed a new law unofficially titled in English 'The Law Concerning Measures by Large-Scale Retail Stores for the Preservation of the Living Environment.'
The new law does not include the reviled provisions allowing mom and pop to veto or slow down the development of large stores. However, the new law does give local governments throughout Japan the right to promulgate local ordinances aimed at ensuring that store plans meet national environmental protection criteria.
In theory, the new law should make it a lot easier to procure permits to build large retail stores. Whereas the old law was expressly designed to protect small shopkeepers, the new law's focus, at least on the surface, is environmental protection, a laudable goal to be sure.
In the short term, however, the new law generated a lot of uncertainty among developers because the local governments had not yet promulgated the regulations implementing their right of environmental oversight. Many developers came to the conclusion that they would be better off applying for building permits under the old law rather than waiting until things sorted themselves out under the new law. The result was a building mini-boom around the country as developers raced to procure building permits before the new law took effect. Unfortunately for my neighbors and my family, one of these developers was the XYZ Home Center in Yokohama.
This mini-boom may have been even more pronounced in Yokohama than elsewhere because the Yokohama city government had already announced that its new rules would require any developer of a new large store to seek neighbor input regarding the environmental impact of the store. This rule would not give the neighbors a veto right but potentially would give them considerable leverage to delay the store unless the developer agreed to changes to mitigate any claimed adverse environmental effects.
To avoid the application of the new law and this regulation, XYZ worked feverishly to obtain a building permit before the new rules were to take effect. Even under the current regulatory regime, however, there were still hurdles for XYZ to jump before they could procure the coveted building permit.
The Public Notice and Consultation System
Since being amended in the early 1990s, the Large-Scale Retail Store Law itself was no longer the huge barrier to the development of large stores it had once been. But a potentially more formidable obstacle was existing administrative guidance by the Yokohama city government, which effectively required developers to notify and consult with the planned store's neighbors. This was looser than the environmental notice and consultation regulations that were to be put in place the following year but could still create problems for the developer if the neighbors objected to the store. The developer's fear was that even consultations could lead the developer down a rat hole that might significantly delay or ultimately even kill the project.
XYZ had a time-proven strategy to get past the neighborhood notice and consultation process quickly and efficiently. XYZ privately approached the chairman of the local neighborhood association about its building plans. Neighbor-hood associations are private organizations typically responsible for mundane matters such as organizing the summer matsuri (festival) and so forth. XYZ decided to use the chairman of the neighborhood association as its conduit for introducing its building plans to the neighborhood.
The chairpersons of many neighborhood associations, including ours, tend to share a number of characteristics. First, although neighborhood associations are nominally democratic organizations and elect their chairpersons by the sufferance of the association's members, in practice many neighborhood association leaders behave, and are treated, as chairmen-for-life, often running unopposed for years, or even decades. In some cases the post is virtually hereditary. Second, it is not uncommon for the chairman to also be the chief priest and proprietor of the local Buddhist temple or Shinto shrine, another often hereditary position.
Buddhist temples and Shinto shrines are big business in Japan. Although few Japanese are religious, most do rely on the neighborhood Shinto shrine or Buddhist temple for conducting various ceremonies, such as funerals, and pay the local priests, in cash, for their services. The temples and shrines also often rely on local businesses for donations, again usually in cash, to subsidize part of their building and operating expenses. The businesses that donate may get their names engraved in stone in the paths leading to the temple or shrine. If you look closely, you will see the names of many businesses, including, just for example, local construction companies and retail stores, engraved in stone around many temples and shrines.
As recounted to us some time later, the neighborhood association chairman, after speaking to XYZ's representative, told the other association members that the store was basically a done deal (actually what I imagine he said was: "shikata ga nai," perhaps the most common expression in the Japanese language which essentially means "it can't be helped"). The chairman apparently went on to say that, if the neighbors could quickly reach a consensus, he would do his best to prevail upon the developer to make some modest changes to the building plans.
Based on their chairman/Buddhist priest's counsel, the members of the neighborhood association resigned themselves to the fact that the store would be built. They did, however, ask the priest to take back two demands to the developer. First, they asked that the access road be moved from the north side of the lot (which adjoined a large number of their homes) to the south side of the lot (which adjoined the foreigners' homes). Second, they asked that XYZ use some of the space reclaimed on the north side to build a small playground for their children.
After what I imagine were tortuous negotiations, the developer assented to both of these demands. Now that the path had been smoothed, XYZ felt confident enough to begin the formal process of notice and consultation as required under Yokohama's rules. The developer sent letters to all of the members of the neighborhood association to schedule a meeting to discuss the project. A couple of meetings were held and, not surprisingly given the advance work that had been done through the association chairman, no serious opposition to the plan was expressed.
Reviving the Process
At this point, a wrench was thrown into XYZ's plans. It turns out that during the consultation phase XYZ had only dispatched notices to the members of the neighborhood association. In most neighborhoods this would ensure nearly 100 percent coverage. Not so in my neighborhood since none of the foreign households were members, or even knew of the existence, of the neighborhood association. Adding to XYZ's woes, our landlord just happened to be a spry 80-something Japanese lawyer with a lot of time on his hands.
When our landlord got wind of the meetings being held with the other neighbors, he protested to the developer and the Yokohama authorities. He also brought the issue to the attention of his representative in the Diet in the hopes that the lawmaker would also bring some pressure to bear on the city. My landlord's immediate objective was to get XYZ off the fast track to building permit approval.
My landlord asserted two grounds to stop, or at least slow, the approval process. First, he asserted that XYZ had failed to follow the mandated consultation process because it had neglected to notify some of the neighbors (his tenants) of the meetings. Second, he asserted that Yokohama was prohibited from issuing a building permit to XYZ on zoning grounds.
My landlord had some fleeting success on the process front. Under pressure from the city, the developer conceded that it had failed to notify the foreign households of the project and agreed to schedule at least one more public meeting for the entire neighborhood. Incidentally, XYZ did offer an excuse for its "inadvertent" failure to notify the foreign residents. At one meeting an XYZ representative pulled out an old city plan of the neighborhood. Lo and behold, the foreigners' houses were nowhere to be seen. Occupying the same space on the plan was a parking lot. XYZ's contention that it did not know the foreigners were there strains credulity when you consider that XYZ's representatives frequently visited the site before it filed its application and could not have helped but see the large American-style houses overlooking it.
So a new public meeting was noticed, with the foreigners (by happenstance, mostly Scandinavians) invited this time around. The meeting was conducted in Japanese without an interpreter. This naturally presented an obstacle for the foreign contingent since only a few others and I could speak Japanese. We complained, on somewhat shaky grounds in my opinion, about the unfairness of conducting these meetings only in Japanese. The developer agreed to accommodate us by holding private meetings just for the foreigners accompanied by an interpreter. Although holding private meetings may sound like extra work, I suspect that actually XYZ wanted to hold these meetings separately to isolate the foreigners from the other neighbors and thereby minimize the risk that our opposing views would influence the more accommodating Japanese population.
Several private meetings were held with the foreigners. These meetings were always scheduled on Sunday evenings. XYZ's side usually consisted of five people including representatives from XYZ, the contractor and the architect, plus an interpreter. All of the members of XYZ's delegation were unfailingly courteous and seemingly willing to spend every Sunday night talking to us about our concerns. At the first meeting XYZ even went so far as to admit that it was wrong not to send notices to the foreigners initially, that the huge influx of additional traffic into the neighborhood could create hazards, inconvenience and air pollution, that the decision to move the access road behind our houses without consulting us was unfair, and finally that there might have been other less disruptive ways to design the store. (XYZ was clearly oblivious to any possibility of litigation. In a more litigious society like the US, it is hard to imagine such admissions being made so readily or at all.)
XYZ's representatives then professed their willingness to do "whatever they can" to alleviate our concerns. It soon became clear, however, that XYZ was unwilling to take any action which might delay the project in any way, increase its expenses by anything more than a nominal amount, or result in any significant change to the store's design. XYZ's representatives did express their readiness to build a slightly taller fence to separate the store from our homes.
Exploring Other Avenues
As these meetings were taking place, I took three actions. First, my foreign neighbors and I prepared a written list of demands, in English and Japanese, to Yokohama's municipal government. At the suggestion of my landlord, I personally submitted these demands to the Office of the Mayor of Yokohama.
The demand letter reiterated our complaints regarding XYZ's failure to follow the required notice and consultation process. In addition, the letter requested that the city take a number of actions, such as providing us with copies of all traffic safety and environmental impact studies related to this project or, if none existed (as I thought likely), that such studies be commissioned immediately. I felt that these requests might have some added appeal given the history of the neighborhood.
Traffic safety was already a big issue in the area because several years before a child who attended the local school had been killed in a traffic accident at the intersection in front of the proposed store site. This incident had led to ill will between the neighborhood and city officials. It also created, I thought, a legitimate fear that this store would exacerbate an already hazardous situation. By raising this issue, I hoped to enlist some local Japanese support for our efforts to slow down or kill the approval for the store.
I felt the environmental issue might strike a chord as well. First, the law was about to be changed to require stricter environmental reviews anyway and I naively felt that the city might want to exercise its discretion to require that this proposed development site come close to the new standards.
Second, I felt that the fact that the US Navy had previously used this site for several decades meant that there might be hazardous materials or even, if we were really lucky, unexploded ordnance still scattered about the property. Many Japanese individuals and local governments have a strong suspicion of US bases on their territory and I thought (rather unpatriotically, in retrospect) that we might be able to play off that sentiment to slow down the approval process.
Next, I called an acquaintance in the commercial section of the US embassy in Tokyo to see if the embassy had any interest in this matter. I realized that the chance that the US embassy would care much about inconvenience suffered by a few Americans (and a larger number of Scandinavians) in Yokohama was low. In the hope of eliciting some interest, I tried to spin the story by focusing on the Large-Scale Retail Store Law, a subject that historically has been of great interest to the US government.
Specifically, I brought to the US embassy's attention the fact that the Yokohama authorities had apparently put XYZ's application on the fast track in order to avoid any delay that might otherwise arise following the implementation of the new large store law and regulations the following year. I suggested that the US government might find it fruitful to examine whether the authorities in Yokohama and other municipalities around Japan were being as accommodating to American retailers (who were presumably also rushing to get their building permit applications approved before the new law took effect) as Yokohama was being to XYZ.
My (long shot) hope was that the US embassy would raise this fairness issue with the Japanese government. If the national government were to then contact the Yokohama authorities to assess whether they were treating the applications of foreign and Japanese retailers with equal vigor, I felt there was a chance that the Yokohama authorities might be spooked just enough to slow down the issuance of a building permit to XYZ.
Third, several neighbors and I visited the traffic bureau of the local police station to raise our concerns regarding traffic safety. We felt this was not entirely a fool's errand since the local police were empowered to order changes to the design of the store or its operations as necessary to ensure that the store would not have a materially adverse impact on traffic safety.
My aim with all three of these actions was to slow down the approval process just long enough so that XYZ's application would still be pending when the new large store law took effect. If this were accomplished, I was hopeful that the whole project would be delayed for so long that XYZ might decide simply to abandon it. (Even if XYZ persisted, I felt that the project might be delayed for at least another year by which time my family and I would have moved out of the neighborhood anyway.) How did we do? If this were baseball, we would have struck out. Next month, we'll reveal the end of this tale. @
Glenn Newman has practiced law in Tokyo and the US as Asia counsel for a Silicon Valley-based software and engineering services company and with a Chicago-based multinational alw firm. His article previously appeared in the Oregon Review of International Law.
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