( Provisional Translation )

Interim Report of Working Group on Electronic Commerce, Advanced Information and Telecommunication Society
Promotion Headquarters

May 11, 1998

Preface

The "Digital Revolution" we are experiencing today is no less revolutionary than the Industrial Revolution. The progress of information and telecommunication technology has made it possible to convert all the phenomenon into digitized information, which will be shared and exchanged by the people who need it instantaneously throughout the world by means of computer networks. The prevailing world order, underpinned by mass production and mass consumption since the Industrial Revolution, is now being over and we are riding the crest of a new age whose value systems are based on the accumulation and distribution of information.
In these changing times, many types of competition emerge and those countries who are able to ride the new tide will be the leaders of this new age.

Japan is just facing this competitive age today. The US and the EU announced last year the basic policy regarding new international rules pertaining to electronic commerce which would be a basis for the exchange of value in this new age. Through bilateral discussions within the three major regions, the US, Europe and Japan, and through the multilateral fora such as the OECD or the UNCITRAL, international debate regarding electronic commerce is becoming increasingly intense. Japan too must actively lead in setting rules to befit this new age, or we will be the losers under the new order, and we will lose our presence in international society. Unless we provide a business environment which responds to the new rules, our industry and economy will decline and become sluggish in these borderless circumstances of the "Digital Revolution."

Fortunately, Japan has been attracting international attention for certain fields such as encryption technology with the outcome of its test-bed projects. The private sector in Japan has contributed greatly to international discussions by providing notable guidelines aimed at establishing international rules.
The fact that solutions fitting to the new age are being generated from the private sector's voluntary initiatives is symbolic, reflecting that free competition among the private sectors is the only driving force that can respond to the rapid changes we face today. If these free initiatives are to be fettered unnecessarily by regulations, it will be analogous to the proverb "The remedy is worse than the evil."
Despite these advanced achievements, Japan today hardly leads the world in the development and use of electronic commerce. One factor is the slow growth of Japan's economy which limited the amount of investment in the information-related fields, but, furthermore, the fact that the government has been unable to sufficiently build a business environment which is conducive to the development of electronic commerce is another significant factor behind the current situation. As the government's policy on the various issues related to electronic commerce has been somewhat uncertain, the private sector has inevitably taken cautious action to the full-swing introduction of electronic commerce. From the view point of contributing to the establishment of international rules as a nation, this situation as a matter of course is an impediment. It is also a fact that all Ministries and Agencies are not fully unified in promoting this initiative.

Based on this awareness, Prime Minister Ryutaro Hashimoto as the head of the Advanced Information and Telecommunications Society Promotion Headquarters decided, on September 8, l997, to organize this Working Group with the goal of developing basic concepts and clarifying major issues in the promotion of electronic commerce. The WG has held a total of 12 meetings up to this point, during which views were exchanged with various bodies including organizations conducting test-bed projects, industry associations and private certification authorities. The WG has vigorously studied the significance of electronic commerce promotion, its principles, specific issues and future initiatives.
Based on the results of deliberations, this Interim Report summarizes the basic point of view of the WG. Though conclusions have not been reached on various issues due to the time limitation, we believe that it is extremely significant that the WG has concluded in basic principles for promoting electronic commerce that the private sector should take the initiative and that international harmonization should be sought. Based on these basic principles, we hope that the government will promptly study the individual issues.

T. Significance of Promoting Electronic Commerce

[Scope of Discussion]

* The scope defined by the term "electronic commerce" varies according to which system is constructed for which field. Therefore, the scope differs depending on the objective of discussion.

* This WG has been entrusted with the basic and broad mission of formulating the fundamental policies for promoting electronic commerce and clarifying the issues. Thus, the definition of "electronic commerce" is taken here as broad as possible so that the broadest possible problems that must be resolved for promoting electronic commerce can be considered and hearings and studies have been conducted from time to time.

* Therefore, the definition of "electronic commerce" applied in this WG is not limited to transactions over the global network realized by Internet technology, but it will also focus on all economic activities through computers and networks by all economic entities. Whenever deemed necessary, a specific definition will be set according to each issue.

[The Goal and Significance of Promoting Electronic Commerce]

* The benefits brought by promoting electronic commerce are as follows:

< Social Benefit>
- The correction of the high cost structure, the increase of the level of convenience in our daily lives, and the generation of more free time can be brought through the reduction of various social costs, which cover all segments of society. Also, by building new human relationships through the expansion of communication networks, the diversification of lifestyles will be promoted.
- It will bring a paradigm shift as a transition from a society based on mass production and mass consumption to a society which values the accumulation and distribution of information resources. This new society will contribute to the resolution of such social issues as environment and resources.
- Computer networks will facilitate the instantaneous exchange of transactions across national borders, and will radically transform our social and economic structure. Also, international relations in all segments will be promoted in line with globalization.

< Economic Impact>
- Through the promotion of economic activities aiming at the global and borderless optimum through computer networks, competition on a global scale will be intensified, triggering economic structural changes on a global scale.
- The Improvement of productivity in the private sector, the reform of corporate structures, the rationalization of distribution systems and the disintermediation will provide an impetus for the structural reform of Japan's economy.
- Investment across all industrial sectors in electronic commerce will stimulate economic growth in general, and lift the economy out its current economic doldrums.
- Electronic commerce will spur the development of infomation and communications related technologies, and create new business opportunities in many fields that utilize these technologies, creating additional job opportunities.

* When we consider the benefits in conjunction with the current situation of Japan, promoting electronic commerce is particularly important and demands immediate attention in Japan.
Today, as Japan is confronted with the urgent task of promoting economic structural reform, stimulating economic recovery and strengthening the global competitiveness of Japan's industry, electronic commerce will emerge as one of the most potent driving forces for achieving those respective goals.

* Though the promotion of electronic commerce is such an urgent issue for Japan, the initiative of the government as an entity in this area still remains insufficient .

* Electronic commerce is global in nature. Since a year ago, international discussions have rapidly proceeded regarding the formulation of the basic grounds for establishing international rules for electronic commerce. Unless we make a significant contribution to this discussion and take a full action in this formative period of electronic commerce, Japan will be left behind as electronic commerce evolves rapidly as an international trend. Japan should play an active role taking into consideration its technological capabilities, cultural values and business practices.

* The proposals presented by this WG will lead to the basis for the policy of the Government of Japan, and therefore, will play a crucial role in promoting electronic commerce.

U. Principles for Promoting Electronic Commerce

* The private sector must take the lead in the development of electronic commerce in light of the fast pace of progress in the information and telecommunication technology areas and the vast potential for the expansion of electronic commerce.

* The basic role of the government is to create an environment which is conducive for encouraging private sector activities.
The government should avoid imposing unnecessary regulations or restrictions. In cases where regulations are considered, they must be clear and transparent, and must not give any uncertainties to parties to the transaction.
An appropriate government's role should be reviewed for every specific issue.

* Also, in light of the global nature of electronic commerce, it is important for Japan to vigorously participate in discussions regarding international harmonization and global standards while adjusting its policy with international organizations and foreign governments, and appealing the standpoint of Japan.

V. Individual Issues

* To ensure wide acceptance of electronic commerce and its healthy development, transactions must be conducted under a secure and reliable environment, so that any uncertainties there may be for the parties to the transaction can be eliminated as much as possible.
Since electronic commerce is after all an electronic version of conventional economic activities, the basic concepts and rules which have been applied to conventional commercial transactions should be applied to electronic commerce as well.
However, there might be problems which are unique to electronic commerce and which are not necessarily limited to electronic commerce but will require new efforts according to the active distribution of electronic information. The conventional approach may not work sufficiently to solve these problems. It is, therefore, necessary to study newly these problems and seek solutions while taking account of the rapid technological innnovation. And, when it is necessary, the current rules should be interpreted clearer or reviewed.

* From this perspective, taking into consideration international trends, this WG has continued its discussions from various aspects and extracted the following individual issues for which the policy of Japan should be addressed.

[Electronic Authentication]

Electronic authentication is used to verify the identity of a person with whom data is being exchanged over the computer network, and to verify that the data has not been tampered with. It is a basic element necessary for securing the reliability of electronic commerce.
However, the required level of authentication and its function will vary according to the form of transaction. Also, various authentication methods and technology are being rapidly developed, and international discussions regarding electronic authentication are being promoted vigorously. Therefore, it is necessary to continue studying the authentication system in its entirety, including the involvement of the government, ensuring that the parties to the transaction may freely choose the authentication method that best meets the requirements of the particular transaction style.
Of course, the disclosure of information is required to judge the reliability of an electronic authentication system, therefore the self-management of the private sector including the formulation of guidelines should be promoted.
The government is expected to promote the autonomous development of such electronic authentication technology and guidelines. At the same time, the government is also expected to negotiate with foreign governments to ensure that regulations introduced in foreign countries are minimum and that they do not discriminate against authentication methods of other countries, since such behaviour could become a barrier to international electronic commerce promotion. Furthermore, the government should also actively support the attempts to establish impartial and neutral international standards of reliable electronic authentication system. The government is also expected to study the possibility of application of an electronic authentication system and an electronic notary system which will be based on the current public administrative authentication services, including the commercial registration system.
The so-called electronic signatures should be accorded, at least, the same legal status as handwritten signatures and seals. Thus the government should continue the necessary study for this goal, including the clarification of basic rules regarding the rights and responsibilities of the parties to the transaction. At the same time, it is required to take full consideration of the coherency with the international efforts, such as the tasks of the UNCITRAL.

[Protection of Privacy]

With the development of the information and telecommunication technology, it has become possible to process large amounts of information rapidly, and to accumulate, search, use and alter the information easily. Under such circumstances, the need to protect personal data has rapidly become even more necessary than in the past. The free distribution of information is indispensable for the development of electronic commerce, but must premise the full protection of personal data.
However, since the content, usage and the method for collection of personal data differ according to the types of industry and business, the private sector should make voluntary efforts as quickly as possible for each industry and business, including the formulation of guidelines and registration systems and granting mark systems. On the other hand, the governmental regulations should be into consideration in the fields of highly confidential information, such as personal credit data and medical data, which would be damaging if once leaked.
The government will be required to promote the independent efforts in the private sector, and is expected to review the situation taking into consideration legal regulations. In order to alleviate the anxiety of consumers about infringement on their privacy, the government should make the necessary efforts to encourage businesses to disclose to consumers the way they protect personal data. Consumer consultation service should be augmented as well.
For personal data held by public agencies, in the nation level, the government has been adequately protecting the personal data by the "Act for Protection of Computer Processed Personal Data held by Administrative Organs" enacted in 1988. Also, about 40% of the local governments in Japan have enacted their own ordinances to protect personal data held by the local government organizations, and 159 local governments have also enacted rules to protect personal data held by private sector organizations. It is necessary to fully consider the protection of personal data in the future as well.

[Illegal and Harmful Content]

The problem of the illegal and harmful content has been serious today because of the rapid spread of the Internet, the large volumes of information that is being distributed broadly, and due to the fact that such information can be downloaded instantaneously at home or any place. If this problem is left unsolved, social trust on the Internet will be lost, impeding the development of electronic commerce. At the same time it could be damaging for the healthy education of children.
Content which is considered illegal under the current laws as it is obscene or libellous is also illegal even when transmitted over networks, and must be regulated similarly.
Access to content that may not be illegal but may be harmful to children should be restricted based on the judgment of the user. And since current technology precludes the provider from knowing the age of the user, users (parents) should utilize filtering systems and other methods, and the private sector, including providers, should exercise self-regulations.
The government is expected to make the necessary efforts to improve the effectiveness of governmental control for illegal content, promote the improvement of technologies such as filtering systems, encourage network providers to establish voluntary guidelines, and furthermore, educate content providers to exercise self-regulations by using, for example, rating systems. For commercial activities that are harmful to children such as transmitting pornographic content, the "Law on Control and Improvement of Amusement and Entertainment Business" has been amended to remedy the current situation.

[Consumer Protection]

As with current commercial transactions, the consumer of electronic commerce is comparatively disadvantaged in terms of acquiring knowledge. Therefore the consumer should be accorded the same level of protection as any ordinary transaction (transaction made under off-line environment) by being provided with the appropriate and sufficient information regarding the transaction. Measures should also be implemented to avoid any trouble that may rise and to offer appropriate remedies for consumers when damages occur.
Since the current law system for consumer protection was established by various laws to cover each corresponded types of commercial transactions and partially relies on the independent self-regulation of businesses, in parallel with the efforts to clarify the interpretations of the current laws and the establishment of complaint processing systems, businesses should be encouraged to device voluntary countermeasures such as to formulate adequate guidelines. And, whenever it is deemed necessary, any modifications to the legal system should be considered.
For advertisements transmitted directly to the consumer via networks, exaggerated and deceitful advertisements should be regulated basically within the framework of the relevant laws such as the "Pharmaceutical Affairs Law" and "Travel Agency Law." But for the unilateral transmission of such advertisements, an organization should be established for examining advertisements and receiving complaints, and filtering technology should be developed and made widely available.

[Security and Measures Against Crimes]

To develop and promote electronic commerce, the network, as the basic infrastructure, should be protected from violating actions such as unauthorized access and infusion of computer viruses. To ensure the security of networks, thorough measures should be implemented so that such violating actions can be prevented and the offenders can be arrested and indicted. To this end, the establishment of appropriate laws should also be considered.
The government must vigorously respond to new types of crimes through computer networks and consider enacting the necessary laws. However, since the ability to control such types of crimes would be limited, it is important to prevent these criminal activities to occure, and the establishment of effective protection measures for possible victims is indispensable. To this end, besides educating the users, developments in related technology must be promoted, and guidelines for preventing such crimes must be provided to the users.
For conventional crimes such as money laundering utilizing networks, minimum necessary restrictions must be studied while taking into full consideration the balance with the existing commercial regulations.

[General Rules on Electronic Commerce]

The rules that govern commercial transactions through networks should be set by the parties to the transaction under the principle of private autonomy, as is true for all current commercial transactions. However, since business practices on electronic commerce have not been fully established today for the participating parties, model agreements and guidelines are particularly useful for clarifying legal relations of the parties and eliminating uncertainty in the transactions. Therefore, initiatives to formulate such model agreements and guidelines should be promoted.
Electronic commerce will involve situations not covered by the current civil and commercial codes which are premised on face-to-face transactions or transactions accompanied by the exchange of hard copy documents. Thus, specific ground rules must first be reviewed and clarified: at what point in time a contract becomes valid, in which case misunderstandings invalidate or nullify a contract, which rules are applied to the unauthorized transactions, and in which conditions a credit transference can stand valid against third parties. However, full consideration must be given to the diversified nature of transactions on the electronic environment, the rapid progress of technology, and coherency with the international community. Care must also be given so that the smooth development of electronic commerce will not be hindered, while monitoring the accumulation of practices.

[Electronic Payments, Electronic Money]
Electronic payments and electronic money are still in the embryonic stage, and the framework has not been established yet. In the future, new forms may emerge as well. In this context, it is important in the immediate future to promote developments in technology, free experimentation and creativity of the private sector. On the other hand, it is necessary to provide the users with the appropriate protection and ensure reliable payment systems for establishing the users' trust and promoting the development of electronic payments and electronic money.
The government should attempt to balance out these two requirements, and for the near future, while monitoring private sector initiatives, should study the legal environment for this new field.
Specifically, the government must fully study the establishment of fair rules for governing electronic money and electronic payments, user protection system, requirements for validity of the issuer of electronic money, and measures for responding to cases when the issuer of electronic money becomes insolvent.

[Intellectual Property Rights]

With the development of information technology, it becomes easy to copy or alter the digital information. The computer network like the Internet and the digital storage media have largely been diffused as the popular electronics devices. These changes enable us to easily transmit the content to the public without any special technology or commercial funding. To promote the development of electronic commerce, we should discuss about the ground design for the protection of intellectual property considering these characters of information technologies. However, the issues on intellectual property systems in the context of promotion of electronic commerce include the complicated relations among the various kinds of interested parties. In addition, in order to solve these issues, we have many technological difficulties to overcome.
The government should promote the reexamination of the intellectual property law system, giving the full consideration for the result of the WIPO discussions. At the same time, the government should discuss not only about the existing intellectual property laws but also the related other laws to attain the adequate protection. In addition, the government is expected to actively support the development of the right management technologies for the intellectual properties.

[Domain Name System]

The domain name represents the address of the host computer which is connected to the Internet. The registration and management system of domain names should be fair, market-based and open to the international community.
So that registered trademarks are not infringed, it is necessary to take care of the trademark rights at the registration of domain names, and to set up a system for accepting and processing complaints.

[Taxes]

With the development of electronic commerce, economic activities will become complex and globalized, and it will become increasingly difficult to accurately grasp the real situation of transactions: who, when, where and how these transactions were conducted and in what volume. As a result, it will become necessary to consider appropriate taxation methods.
Taxation of electronic commerce must be fair, neutral and simple. Since electronic commerce is essentially worldwide in scale, it will also be important to establish a taxation structure which is internationally coherent in order to avoid dual taxation or tax leakage. From this perspective, Japan must cooperate in the ongoing tasks of the OECD.

[Tariffs]

In Japan, no customs duties are imposed on content transmitted electronically. With regard to the customs duties on electronic commerce, from the perspective of promoting global electronic commerce, Japan should actively participate in the discussion at the WTO or other international fora, taking full consideration of its relation with the WTO agreement. At the same time, customs duties should be considered immediately both from the legal and practical perspective, including, for example, the issue how each country considers the relationship between the customs duties on an imported software which is recorded on real materials such as CD's and the same software which is transmitted over the Internet .

W. Government Role for Promoting Electronic Commerce

The government should address the following issues in order to promote electronic commerce, in addition to the individual topics discussed above.

* In order for electronic commerce to progress and be disseminated across all areas of people's lives, the government should rapidly provide the necessary groundwork.
From the viewpoint that networks are the basis for electronic activities, the government should enhance the reliability and security of networks, and promote the advancement and diversification of networks. The development of basic technology, standardization and assurance of compatibility should also be promoted. In order to offer secure, low cost, diverse and large-volume communication services, a comprehensive infrastructure must be urgently developed, and an adequate environment for the competition should be provided. The government should also encourage the investment in the advanced information and telecommunication sector, and implement measures that will facilitate the development of vibrant businesses such as venture businesses.

* Also, efforts should be made to improve user interfaces, education and training in information computer literacy so that all the people including the elderly and the disabled can participate in electronic commerce.

* Furthermore, in addition to these mentioned policies of groundwork development, since the government itself is one of the major economic entities, the government should take the lead in improving on-line public administrative services such as on-line public procurement, on-line applications, electronic documentation and one-stop services. Many of these proposals have already been included in the "Revision of the Basic Plan for Promoting Administrative Informatization" (Cabinet Decision, December 20, 1997) and the steady implementation of these measures is called for.

X. Future Tasks

[Tasks Requiring Immediate Government Action]

* The "Action Plan for Economic Structural Reform", (Cabinet Decesion, May 16, l997), states that "the government should urgently review all institutional issues necessary for the full-swing introduction of electronic commerce and, based on the results of the review, should implement the necessary measures by the year 2001." However, such reviews and measures should be accelerated as much as possible, and the results of the deliberations by this WG should be also fully considered.

[Tasks for Integrated Action among Ministries and Agencies]

* Specific reviews should not only be conducted by each Ministry and Agency, which have jurisdiction over specific sector, or its councils and research committees. This is because the issues such as electronic authentication or protection of privacy transcend ministerial boundaries, and urgently require clear and comprehensive government policies. All Ministries and Agencies should coordinate their efforts on such issues of common concern and promote the initiatives in a unified manner.

[ Review of the "Basic Guidelines"]

* The "Basic Guidelines on the Promotion of an Advanced Information and Telecommunication Society" (Decesion of the Advanced Information and Telecommunication Society Promotion Headquarters, February 21, l995) should be revamped comprehensively based on the results of the deliberations by this WG, from the perspective of reformulating our strategy. The review of this basic plan should be implemented based on the understanding that the role of the public sector in promoting the advanced information and telecommunication society has changed. Whereas in the past the government itself intended informatize the public sector in order to vigorously promote the introduction of information and communications across all sectors of society, today in the new age of electronic commerce, the role of the public sector is to create an environment which is fully conducive to private sector initiatives utilizing the newest technologies.

[Follow Up]

* International discussions regarding electronic commerce is expected to become even more intense hereafter. The environment surrounding electronic commerce is to change rapidly as new issues arise with the development of new technology, and as current problems are resolved by the newly introduced technology. Therefore, the government should follow up on the electronic commerce programs at least once a year.