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Japan's digital platform regulations

Online mall operators and app store operators now subject to regulation, and additional entities to be covered in future

23 August 2021

The Act on Improving Transparency and Fairness of Specified Digital Platforms (the TFDPA) was passed on 27 May 2020, and became effective on 1 February 2021, with the aim of improving the transparency and fairness of transactions handled on digital platforms.

The TFDPA currently targets online mall operators and app store operators, but it is expected to cover additional players in the future and the Cabinet recently resolved  (18 June 2021) that it intends for the scope of the TFDPA to be extended to apply to digital advertising companies.

In order to improve transparency and fairness, whilst allowing innovation in the digital market, the TFDPA has adopted an approach referred to as "co-regulation", which means that while the government sets out a general regulatory framework, it leaves the details around implementing the voluntary efforts to each operator, and the government then monitors whether the operators' efforts and operations are appropriate.

Background

In recent years, digital platforms have played an important role in dramatically improving market access for consumers, though concerns have been raised about transparency and fairness in digital platform markets, such as the absence of notification of changes in terms and conditions or explanation of the reasons for refusal to trade.

Against this background, the Japanese government established a new organisation, the Headquarters for Digital Market Competition, in 2019, which will consider measures to address certain issues identified in the digital market.

Upon the initiative of the Headquarters for Digital Market Competition, the TFDPA was passed on 27 May 2020, and became effective on 1 February 2021, with the aim of improving the transparency and fairness of transactions handled on digital platforms.

The key features of the TFDPA

Currently the TFDPA covers only online mall operators and app store operators. Certain operators that meet specified category and size criteria (please see below for details) have been designated as "Specified Digital Platform Providers" and are subject to the regulation and control under the TFDPA.

The regulation does not take a traditional, prescriptive form, but employs an approach referred to as "co-regulation", meaning that, while the government presents a broad framework, it leaves it up to the voluntary efforts of each operator to a certain degree to accomplish the purpose of the regulation.  To supplement the effectiveness of the new regulatory framework, if the Ministry of Economy, Trade and Industry (METI) finds potential violation of the Japanese Antimonopoly Act during the monitoring process under the TFDPA, METI may request measures from the Japan Fair Trade Commission (JFTC) pursuant to the Japanese Antimonopoly Act.

Designation of "Specific Digital Platform Providers"

The criteria for "Specified Digital Platform Providers" are as follows:

  • Online mall operators: domestic sales for one fiscal year of JPY 300 billion (approximately USD 3 billion) or more
  • Operators of app stores: domestic sales for one fiscal year of JPY 200 billion (approximately USD 2 billion) or more

On 1 April 2021, the following six companies were designated as "Specified Digital Platform Providers".

  • Online mall operators: Amazon Japan G.K., Rakuten Group, Inc., and Yahoo Japan Corporation
  • App store operators: Apple Inc., iTunes K.K., and Google LLC

As is evident from the list of operators, foreign operators may also be designated as "Specific Digital Platform Providers".  It is also worth noting that, if a digital platform is provided jointly by two or more operators, all such operators would be subject to the regulation and discipline under the TFDPA.

Co-regulation

The TFDPA sets to regulate based on the autonomy of each operator, taking into account the possibility that the establishment of uniform or strict regulations could impede innovation in the rapidly developing digital market.  More specifically, companies designated as "Specified Digital Platform Providers" have three types of obligations: (i) disclosure of terms and conditions and prior notice of changes to vendors, (ii) setting up of a procedure to secure fairness, such as complaints handling; and (iii) annual reporting to the Japanese government, including self-assessment of their compliance with disclosure and fair process obligations.  Such reports are expected to be reviewed by consumers, academics and other stakeholders and the results thereof will be made public.  Through this monitoring process, it is expected that operators providing digital platforms would be able to avoid any violation under the Japanese Antimonopoly Act.  If METI finds any suspicion of breach of violation of the Japanese Antimonopoly Act during the monitoring process, METI may request measures from the JFTC based on the Japanese Antimonopoly Act.  If the JFTC finds that an operator has violated the Japanese Antimonopoly Act, such operator may be subject to an order to pay an administrative monetary penalty under the Japanese Antimonopoly Act.

Consultation Hotlines

As an effort to further ensure the effective operation of the TFDPA, METI and the JFTC have established certain consultation hotlines for vendors transacting on the relevant digital platforms.  These hotlines enable vendors to receive advice on how to respond to digital platform providers and to inform METI and the JFTC of any problematic behaviour by digital platform providers:

 

Looking ahead

Although improved transparency is being expected from Google, Apple, Amazon and other large-scale platform operators designated under the TFDPA, the TFDPA leaves it up to the voluntary efforts and autonomy of each operator to reach this goal.  METI, however, intends to actively monitor and continue making improvements to the effectiveness of the TFDPA by looking at the situation surrounding digital platforms, including information to be provided by vendors to METI.  Further, the Cabinet announced on 18 June 2021 that it intends to extend the scope of the TFDPA to cover digital advertising companies.

A member of METI commented that they would like to actively disseminate positive information and examples rather than simply overseeing operators and pointing out failings – a key approach the co-regulation is intended to take. Therefore, it would be advisable for both operators and vendors to cooperate and communicate closely with METI and the JFTC to collectively improve the digital platform market.

The TFDPA's approach is different from the EU drafts of the Digital Services Act and Digital Markets Act, which aim to impose ex ante obligations, speedy enforcement and deterrent sanctions with regard to digital platforms, and contain a list of DOs and DON'Ts (see our articles: EU Digital Services Act and Digital Markets Act – What are the implications  and The EU's proposals for new far-reaching regulation of the digital sector). The obligations under the TFDPA are relatively light due to the concept of co-regulation and the TFPDA does not include a list of DOs and DON'Ts.  It is not clear whether Japan will go in a similar direction to the drafts of the Digital Services Act and Digital Markets Act in the future. That said, the TFDPA is a very important and meaningful step for the regulation of digital platforms in Japan, and we will have to see how the co-regulation approach under the TFPDA will work in practice.