July 2001
CONTENTS

FEATURE
Breakup of NTT DoCoMo & Cuts to Public Corporations

MARKET NEWS
Yozan Leaves NTT DoCoMo
Softbank in ADSL Business
Steelmakers Use Bolero Data
New Spending Policies Attract Scientists

NEW TECHNOLOGY
Sony, NEC Develop New Steppers
Lasers Amplify Light Signals
Ultrasmall Gear Developed

MULTIMEDIA ALERT
Matsushita’s New PC
Agilent Optical Mouse Technology
IBM’s Computer That Reads
Soaring Sales for Thin-Screen TV Sets

BIO-SCIENCE DEVELOPMENT
Alzheimer's Enzyme Identified
New Cardiovascular Pump
Biometrics Systems

ENVIRONMENT
Firms Compiling Environmental Data
Honda Unveils New Diesel Engine
Eco-Ratings Online
New Otani Food Recycling Program
Consortium to Drill for Natural Gas

SEMICONDUCTOR
Shrinking Semiconductor Markets
Toshiba Trims Chip Output
IBM Accelerates Chip Speed
Hitachi, Fujitsu Reducing Chip Output

SPECIAL SECTION
Reforms Amplify IT Consolidation

STRATEGIC ALLIANCES
Japan in the United States
United States in Japan

FEATURE

Breakup of NTT DoCoMo & Cuts to Public Corporations

As part of the ongoing initiatives to promote economic growth by Prime Minister Junichiro Koizumi and Financial Services Agency Minister Hakuo Yangisawa, plans for the breakup of Nippon Telegraph Corp., and a cut in outlays to public corporations, will play an important role, NTT DoCoMo's split up is intended to encourage growth and competition. In addition, preventing unnecessary outlays to public corporations will free up money during implementation of reform package.

Tanaka, who stated that the complete breakup of Nippon Telegraph and Telephone Corp. is crucial to promoting competition in the information technology sector. As for moves by NTT's two regional carriers and NTT DoCoMo Inc. to enter Internet-related businesses, some regulatory measures will be created.

The Fair Trade Commission (FTC) will play an important role in regulatory measures by building a special committee devoted to the telecommunications sector to ensure fair competition.

Initiatives to create a formula for cleaning up the massive bad loans at banks by Prime Minister Koizumi have begun, but in any event, they will go full speed ahead with deregulation and other policies.

Slashing fiscal outlays to public corporations by privatizing and combining their operations is the first step.

Prime Minister Junichiro Koizumi's panel promoting reform of public corporations held its first meeting, drawing up an interim report listing standards for re-evaluating the operations of such entities. The report divides government corporations into 18 broad groups, highlighting troubled individual entities.

Public corporation budget allocations and others need to be cut by ¥1 trillion from the current fiscal year's total of around ¥5.3 trillion. Nineteen government entities have been cited for having operations similar to those of private-sector entities causing government shutdowns and other options to be taken under consideration. Of companies that provide credit but do not specialize in policy-oriented finance, twenty-one may become government affiliated.

In addition, Fiscal Policy Minister Heizo Takenaka also stressed that on structural reforms, the government will push for the final disposal of bad loans and implement a series of deregulatory measures.

Revamping securities taxation and creating an employment safely net are high on the agenda. He also expressed confidence that structural reforms could soon lead to annual economic growth of 2-3% because growth in the IT sector will create new demand and employment opportunities. The economy's current potential growth rate is about 2% when the growth potential of human resources, capital and other resources is taken into account.

Another 0.5 to 1% could be added to the growth rate by beefing up the IT sector through deregulation. Some analysts criticize this projection as being too low.

Takenaka defended the government's 0-2% growth projection for fiscal 2001. Takenaka said however that these numbers are a guide and that even private-sector growth projections vary greatly, an indication that it is hard to predict a growth rate for the fiscal year. In regards to the jump-starting of private-sector demand, he said securities taxation reform is an important theme, and that approval of legislation to set up a defined-contribution pension system is particularly significant.

Takenaka is avoiding traditional economic stimulus measures such as supplementary spending, including issuing more government bonds and is looking at other paths, dismissing the arguments that structural reform must be put off as long as the economy is in bad shape.

MARKET NEWS

Yozan Plans to Leave DoCoMo For Europe

The developer of core integrated circuits for third generation cellular-phones, Yozan Inc., is leaving the fold of NTT DoCoMo Inc. and is approaching European companies. Previously, they thought the Japanese 3G system would become the international standard. In mid-May when fiscal 2000 earnings were reported, they changed their tactics believing that the European system will be the one that will be used around the world.

Three different but compatible 3G cellular-phone services will be offered depending on the region of the world. Japan is currently running the wideband code division multiple access (W-CDMA) standard, which NTT DoCoMo is currently running on a trail basis under the name of FOMA, and is likely to become dominant. In Europe, UMTS, a version of W-CDMA will be used. In North America, the services will be based on the CDMA2000 standard.

Yozan started developing its ICs jointly with NTT DoCoMo in 1995 and is highly respected for its technological expertise and .

With joint patents from the development and expectations that Yozan would capture an overwhelming share of the 3G cell-phone IC market, the firm's market capitalization reached 260 billion yen ($2 billion) soon after listing on the over-the-counter stock market in September 2000.

W-CDMA, which was developed together by NTT DoCoMo and European cell-phone companies, was initially assigned for use in both Japan and Europe. But NTT DoCoMo's determination to be the world's first company to offer a 3G cell-phone service led the European firms to establish a different standard, UMTS, around the middle of last year.

Steelmakers Agree to Use Bolero System

Next month, Nippon Steel Corp. and Pohang Iron & Steel Co. will jointly produce Bolero, an electronic data interchange (EDI) system developed in Europe, to speed up the processing of international procurement, shipping and other data.This system is expected to decrease the amount of time needed to process data to one or two days from the current one or two weeks.

Nippon Steel will be the first Japanese steelmaker to use this type of system.The two steelmakers will now be linked with suppliers of raw materials such as iron ore and coal in Australia and elsewhere, shipping companies and financial institutions.Over time the companies hope to increase the number of firms they have on the new system. All papers necessary for international trade will be digitized such as bills of lading and invoices, and use common formats for data required specifically for importing raw materials and fuel. Nippon Steel currently purchases more than ¥300 billion worth of raw materials and fuel annually. The joint project is focused at cutting costs drastically for both of the steelmakers.

Softbank Acquisition

Internet investor Softbank Corp. has acquired struggling high-speed Internet access venture, Tokyo Metallic Communications Corp., another step in achieving the company's goal to become Japan's dominant broadband access provider. Softbank said its wholly owned unit Softbank Broadmedia Corp. had finished acquiring the shares by June 21. ADSL (asymmetric digital subscriber line) is a low-rate high-speed Internet access network. The acquisition is expected to facilitate Softbank's launch of an ADSL service. Tokyo Metallic has already installed DSL equipment on 500,000 phone lines and has thus far secured 25,000 subscribers. Earlier, Softbank Internet portal Yahoo! Japan said it would launch cut-rate ADSL (asymmetric digital subscriber line) services in Japan in August with the intention of acquiring one million subscribers by December.

Steelmakers Agree to Use Bolero System

Nippon Steel will be the first Japanese steelmaker to use this type of system.The two steelmakers will now be linked with suppliers of raw materials such as iron ore and coal in Australia and elsewhere, shipping companies and financial institutions.Over time the companies hope to increase the number of firms they have on the new system. All papers necessary for international trade will be digitized such as bills of lading and invoices, and use common formats for data required specifically for importing raw materials and fuel. Nippon Steel currently purchases more than ¥300 billion worth of raw materials and fuel annually The joint project is focused at cutting costs drastically for both of the steelmakers.

Govt’ Policies

Government budget allocation to individual science and technology projects is being reviewed by a government panel to encourage input from young, talented researchers. Conducting the review is a task force within the Council for Science and Technology Policy. The council aims to nearly double the government's research subsidies allocated to individual research projects selected on a competitive basis, from ¥314.9 billion in 2001 to ¥600 billion in 2005.

Various proposals to reinvigorate projects backed by government subsidies are expected to be presented by the end of June. Proposals include increasing subsidy allocations to young, talented researchers and extending the time. Currently, government funding to young researchers accounts for only 10% of the total subsidies provided on a competitive basis. Beginning 2002 however, government ministries and agencies are expected to adopt the council's recommendations on a step-by-step basis. Reforms should be completed by August. Problems in the operations of public corporations are listed in the interim report. Public-works-related organizations will be re-evaluated for possible changes, such as liquidation, privatization, integrating operations, and putting projects under direct government control.

Among companies that specialize in policy-oriented finance, 20 public corporations were named as having no operational significance and paltry results.

NEW TECHNOLOGY

Electronics Leaders Join to Develop New Steppers

Electronics giants have announced a deal to develop next-generation semiconductor manufacturing equipment. Some companies include Sony Corp., NEC Corp. and Tokyo Seimitsu Co., as well as semiconductor materials manufacturers Dai Nippon Printing Co., Toppan Printing Co. and Hoya Corp. The members are all equipped to reach their goals but their success will hinge on how well they are able to work together.

Higher development costs will result from creating manufacturing equipment with greater accuracy rate. The next-generation semiconductors will be used for digital home appliances and next-generation cellular-phones, which will be more compact and less power-hungry than current devices.

Every member will share the estimated ¥20 billion cost for development in addition to contributing individual technology. Specifics for cost-sharing have not yet been worked out. Steppers are the key components in chip-making equipment and etch circuits by following an image projected onto circuit boards.

The new stepper that the consortium plans to develop will use electronic beams as a light source. The companies will use technology developed by Leepl Corp., a joint venture of Tokyo Seimitsu and two venture businesses set up last June. Leepl Corp. completed development of a prototype machine with the ability to print lines with a width of 0.1 micron.

Their goal is to bring chip-making equipment that can print lines of 0.07 micron to market by 2003. Tokyo Seimitsu said that next-generation semiconductor-manufacturing equipment would cost a few billion yen per unit, though Leepl's equipment would be cheaper than others due to its simplicity.

The kick-off meeting was held by the consortium in Tokyo on June 14. Topics discussed included the acknowledgement of Leepl as a favorite of next-generation chip manufacturing equipment and the recognition that Sony's role will involve inputting development from the computer user's point of view.

Leepl's equipment, which is intended to require more accurate photomaking, is planned to succeed in developing new technologies in Japan, helping to overcome the current recession by creating new demand.

Lasers Are Used to Amplify Light Signals

Electronic signals for long-distance data transmission have been replaced by light signals as special optical fibers can amplify optical signals without the need for electronics. But when it comes to the nitty-gritty of data processing at the level of individual transistors, everything still depends upon the movement of electrons.

Engineers have yet to find the Holy Grail of an all-optical computer for ultrahigh-speed computations. They must first design a practical all-optical transistor.

The new device is made from layers of germanium and silver oxide built to a thickness of 100mm. When a signal from a blue laser is aimed at this thin-film structure, it takes in and stores the signal until it is activated by the light from a red laser, at which point it emits an amplified signal that is 60 times more powerful than the original. This is the same action that is taken by a transistor.

Some participants were TDK Corp., Minolta Co., Pioneer Corp., Pulstec Industrial Co., and Victor Co. of Japan.

Ultrasmall Gear Developed

A University of Tokushima team has built a microgear so small that its outer diameter is no larger than a human hair and has a shaft only 3 microns wide. Assembly of parts at the micron level is very difficult, however. That is the challenge facing researchers working on the fabrication of ultrasmall devices and microfactories that can promote chemical reactions on silicon chips. Photo-hardening plastic and a femtosecond laser were used by the group to fashion the gear and shaft. This allows control over which parts of the plastic harden and when. To construct the parts, the group used the laser like pen to cut the shaft and gear out of the plastic.

MULTIMEDIA ALERT

PC With Wireless Touch-Panel Display Unveiled by Matsushita

The Pronote AirFG personal computer with a wireless hand-held liquid crystal display was released by Matsushita Electric Industrial Co. on June 26.

The product hit the market on June 27 , targeting police authorities and businesses. The display can easily exchange data with the computer unit within a 50-meter range and can be attached to a bicycle or motorcycle.

The 8.4-inch touch-panel display weighs 698 grams and is encased in magnesium alloy. It will work normally even if dropped from a height of 1.2 meters and is both water and dust resistant. The new model will not be shipped to retailers and only be available by direct order. Individuals can purchase the model at about ¥345,000 per unit through the Internet.

Most of the orders are expected to come from the U.S. or Canada and the company plans to produce 50,000 units a year. Executives have stated that U.S. police authorities have expressed a great interest in the model and they will be focusing their marketing efforts on them.

Agilent: Mouse

Agilent Technologies, Inc. and Cypress Semiconductor have agreed to develop low-cost components for the next-generation optical mouse market. Agilent will develop optical mouse sensors designed to work exclusively with Cypress microcontrollers, while Cypress will develop microcontrollers with USB and PS/2 interfaces that will work exclusively with Agilent optical mouse sensors.

They will jointly promote the combinations of sensors and controllers, but will independently manufacture and sell the products for the OEM and retail markets. Technological advances have made optical solutions more economical to manufacture. The quality and longevity of optical mouse sensors are superior to the standard mechanical-wheel approach. The technology works by taking thousands of pictures per second, with a resolution of 800 counts per inch.

Thin-Screen TV Sales

Thin-screen television sets using liquid crystal displays or plasma-display panels are gaining popularity. Ever since Sharp Corp. and Hitachi Ltd. began releasing cheaper models, consumers started buying. Compact versions that are easy to carry around have also been well received. Large home-electronics retailers have been prompted by the jump in sales to set up or expand existing sales space to display the TVs.

Sharp's Aquos LCD TVs come in 12, 13, and 15 inch models with improved picture quality and brightness. Sharp set the suggested retail price of the 20-inch set at ¥220,000, ¥130,000 less expensive than comparable models. The price of the 13-inch TV is around ¥84,000 and the 15-inch model sells for about ¥145,000.

The televisions are equipped with handles and revolving table stands, making them easy to carry. They are about 6cm thick, with the 13-inch model weighing a mere 4kg and the 15-inch model weighing 4.5 kg. Combined sales of the three Aquos models have surpassed their monthly target of 45,000 units.

Hitachi's W32-PD2100 32-inch plasma TV is sold at around ¥600,000 and the purchase of a special tuner allows it to receive high-definition digital broadcasting via satellite. Although the product is more expensive than conventional cathode-ray TVs equipped to receive digital broadcasts, which usually cost about ¥300,000, consumers like its smaller installation space and high-quality.

IBM Reads

The ThinkPad TransNote personal computer capable of transforming handwritten text and drawings into storable digital data has been released by IBM Japan Ltd.

A special pen on the A4-size memo pad attached to the right side of the computer sends any data written or drawn in seconds to the PC. IBM Japan also offers a model with a memo pad attached to the left side of the computer. They are foldable into a 320-by-284\3mm A4-size package.

Magnetic signals emitted from the tip of the special pens are received by a built-in sensor for analysis and recognition. The digitized data is stored in a 2-megabyte flash memory that can store data contained in 50 pieces of A4 paper without using any memory space of the PC.

Preinstalled special software in the PC can process and retrieve accumulated data. For example, it can send a map drawn on the memo pad via e-mail.

BIO-SCIENCE DEVELOPMENT

Biometrics Systems Hot Form of Digital Verification

A Cyber Sign Japan Inc. has developed software to set the industry standard for authentication of digital signatures. Its system uses biometrics, a technology that has the ability to recognize the unique physical characteristics of handwritten signatures, such as shape, type of strokes, speed of handwriting and pen pressure. Signatures written with an electronic pen on a computer pad or screen are compared with the original, allowing for marginal differences. Cyber Sign's technology can almost immediately identify signatures and recognize fake ones as well as classify signatures entered through personal digital assistants. Late last year, a Gunma Prefecture financial institution introduced the software to its systems as a way of verifying an employee's permission to access a client's database and personal information. This marks the first occasion in which Cyber Sign's technology has been used in the financial sector in Japan.

Biometrics has been applied to other forms of verification through fingerprints, iris scanning and voice identification. Although each system has defects, such as unclear fingerprints or shaky handwriting, biometrics based systems have higher verification abilities and are able to better detect fakes compared to conventional identification methods.

A law that recently took effect in April now recognizes documents signed with digital signatures. Expecting computerized signature verification systems to become increasingly widespread, Cyber Sign Japan plans to double sales and gain a larger portion of the market. Cyber Sign has already obtained a wide array of patents for its technology. The company will sell the software at an affordable price, encouraging wider use of its system, seeking to become the global standard.

Cyber Sign was originally set up by Cadix Inc., a company that specializes in computer-aided-design software. Cadix currently owns 30% of the company with the rest of the ownership divided between Fujitsu Ltd., Matsushita Communication Industrial Co. and Hitachi Ltd., in addition to others.

Alzheimer's Enzyme Identified

A team of researchers at the Brain Science Institute under the Institute of Physical and Chemical Research (Riken) has identified an enzyme that breaks down beta-amyloid, an enzyme thought to be the cause of dementia and other symptoms of Alzheimer's disease. The enzyme, neprilysin, normally cleanses the brain of beta-amyloid but when not working properly, beta-amyloid has the potential of building up and killing brain cells.

Knockout mice genetically engineered to synthesize lower than normal levels of neprilysin accumulated almost twice as much beta-amyloid in their brains than normal. This discovery, made together with researchers from Harvard University in the U.S., may lead to the development of a drug that can control the accumulation of beta-amyloid in the brain.

Cardiovascular Pump to Help Transplants

Baxter Ltd., the Japanese unit of U.S.-based Baxter International Inc., plans to begin sales in Japan of a cardiovascular pump system for transplants upon official approval, which is expected in either July or August. The company will import and sell the system manufactured by World Heart Corp., a Canadian medical equipment producer. The heart pump is inserted into the abdomen and connected to the heart by a tube to help circulate blood throughout the body of patients with life-threatening heart failure. The new treatment serves as an important alternative to actual heart transplants, considering the lack of organs for donation. The life span of the system varies according to the severity of the patient's heart condition. The pump has been implanted in 871 patients worldwide to date.

ENVIRONMENT

Environmental Data

According to a survey conducted by the Ministry of Environment, the number of corporations compiling environmental balance sheets had risen almost 12-fold in the past year and that 10% of listed companies have incorporated green accounting. Environmental balance sheets are designed to financially assess the expenses and effects of corporate efforts to protect the environment, while green accounting shows costs and benefits of environmental practices on a special balance sheet. NEC Corp., the major high-tech company, released its fiscal 2000 environmental accounting on June 12, incorporating a new indicator linking earnings with the costs of saving energy and cutting down on industrial waste products.

Diesel by Honda

Honda has rolled out its 1.3-liter Fit subcompact passenger car, hoping that world-class fuel efficiency will power a European rebound. On June 22, Honda launched the model on the domestic market. It will introduce it early next year in Europe and elsewhere. The fuel consumption of the Fit is extremely low at 23km per liter.

Around 4 million subcompacts in the 1.3-liter class are sold each year in Europe, making the market about six times as big as Japan's. The competition for this massive market segment is becoming increasingly fierce.

France's PSA Peugeot Citroen and Germany's Volkswagen AG are strong in the 1.3-liter class. In fiscal 2000, Honda suffered a loss of about 55.5 billion yen in its European operations. In Honda's global strategy, the Fit is the third key model - after the Civic subcompact and its best-selling Accord sedan. Michiyoshi Hagino, a senior managing director, announced that they aim to sell about 300,000 Fit cars a year worldwide. While major European automakers often form alliances with rivals to develop the most cost-competitive model possible in the 1.3-liter class, Honda and Toyota generally rely on their own strategies to challenge their European and U.S. competitors. Honda would like to make the Fit the global standard in terms of mileage and interior space. The car boasts an interior ceiling about as high as Honda's Odyssey minivan marketed in Japan. The standard model has a ticket price of 1.14 million yen, about 100,000 yen less than the Logo subcompact.

Eco-Ratings Online

Through The Green Purchasing Network, established by 2,400 companies and government organizations in 1996, offers a Web site that provides data on environmentally friendly goods from food and clothing to furniture and stationery. The site, which opened in late March, sets numerical ratings of goods to help customers choose eco-friendly products.

Eco-consulting firm, E-Square, introduced its Web site in February, listing over 1,000 products and creating its own standards based on the ecomarks set by the Ministry of Environment. Intage Inc., a private company, followed suit by opening another Web site on April 2 and rates each product by different criteria.

Hotel New Otani Food Recycling

New efforts to save energy, cut waste and preserve the environment has spurred an increase in the recycling of food. In a survey published by the Ministry of Agriculture, Forestry and Fisheries in March, it was found that hotels and reception halls were the largest food wasters, throwing away 16-24% of the food prepared. People tend to order more food than is needed for guests while hotels, in search of profits, prepare more food than necessary in order to charge higher fees.

However, several hotels are taking the initiative to address the growing seriousness of the issue. The Hotel New Otani in Tokyo has begun a food-recycling program, creating a composting plant that produces fertilizer from food waste. The compost is then sold to farmers. The Palace Hotel in Tokyo established a similar composting system and also works to reduce waste by sorting it by category, reducing the volume of waste.

Household food waste is also a growing problem as people are unaware of the issue or uncaring of the environment. Eco-cooking, preparing food with the environment in mind and using eco-friendly products, is a way of addressing this problem. Tokyo Gas offers eco-cooking classes and intends to increase its efforts to preserve the environment.

Natural Gas

Sakhalin 1, a consortium of companies including Exxon Mobil Group and Itochu Corp., announced that they plan to drill for natural gas on the Russian island of

Sakhalin and supply Japan through a pipeline. The consortium discovered 485 billion cu. meters of natural gas in three locations of northeastern Sakhalin. The cost of building the pipeline is estimated to be several hundred billions of yen and is expected to be finished by 2008.

The firms plan annual sales of 7.5 million metric tons of overseas gas to Japanese gas and energy companies as demands for environmentally friendly energy sources grow.

SEMICONDUCTOR

Shrinking Semiconductor Markets

The global semiconductor market will likely shrink 13.5 percent in 2001 to $176.79 billion because of sluggish demand for PCs and cellphones, the World Semiconductor Trade Statistics(WSTS) group said.

The forecast is a sharp downturn from a 36.8 percent jump the previous year to a record $204.39 billion and would mark the biggest decline in a decade. WSTS, which represents about 70 chipmakers worldwide, last October predicted 20 percent growth in the chip market for 2001, but a sudden slowdown in demand for information-technology products late last year has taken its toll.

The industry group said demand for personal computers and mobile handsets could pick up in the second half of this year. It forecasts 5.3 percent quarter-on-quarter growth for the July-September period and 7.3 percent growth in October-December.

The DRAM -- dynamic random-access memory -- segment of the semiconductor market is also expected to remain depressed, diminishing 36 percent to $18.5 billion this year. The industry group said the global chip market would likely return to growth in 2002, expanding 13.9 percent to $201.4 billion. In Japan, the WSTS forecasts that the semiconductor market would dwindle 7.2 percent to $43.38 billion in 2001. Yamashiro said the Japanese market would likely remain relatively buoyant, however, because of strong demand for notebook computers and mobile handsets. He added that digital home appliances could boost Japanese chip demand.

Toshiba Trims Chip Output

Toshiba Corp, Japan's biggest chipmaker, said it would temporarily cut chip output this summer, in the first public sign that the Japanese industry's projections for a recovery later this year were too aggressive.

Analysts expect that profits at the semiconductor divisions of Japan's five chipmaking conglomerates will fall well short of official targets for the year to next March, with semiconductor demand, especially from cell-phone makers, remaining sluggish.

Toshiba said its summer cutbacks, to be implemented from late July to mid-August, would include a two to three-week shutdown of a transistor plant that supplies cell-phone makers and a plant making commodity-grade integrated circuits.

It will also temporarily trim output by 30 percent at a memory chip plant in Yokkaichi, central Japan.

Hitachi Cuts Output

Hitachi Ltd. has suspended operations at a new cellular-phone chip fabrication plant. To prevent a glut, the company has also reduced output of chips for smart cards at another Yamanashi plant and a German plant by 40 percent to about 13 million a month.

Fujitsu, the world's 3rd largest flash memory maker, has jumped on the bandwagon, entertaining the thought of closing a plant and reducing output at a new facility by 30-40 percent.

IBM Innovation Accelerates Chip Speed

At the Symposium on VLSI Technology in Kyoto, IBM said it made a breakthrough in semiconductor technology that can boost chip speeds by as much as 35 percent, while also reducing power requirements. They say it has perfected a way to alter silicon, the basic material used to build microchips, so that it can be stretched, speeding the flow of electrons through the transistors on the chip. The new technology takes advantage of the natural tendency for atoms inside compounds to align with one another. When silicon is deposited on top of a substrate with atoms spaced farther apart, the atoms in silicon stretch to line up with the atoms beneath, stretching -- or ``straining'' -- the silicon. In the strained silicon, IBM said, electrons experience less resistance and flow up to 70 percent faster, which can lead to chips that are up to 35 percent faster -- without having to shrink the size of transistors. Bijan Davari, vice president of semiconductor development at IBM Microelectronics, said the technology was on an aggressive timetable -- to be available for finished products by 2003.

Koizumi Structural Reforms Amplify IT Consolidation

Perhaps the most pressing explanation for the decade long lag in Japan's financial markets has been its reluctance to extinguish traditional regulatory forbearance in place of sound banking regulation. The latest reform package endorsed by Prime Minister Junichiro Koizumi comes in the wake of Japan's swelling pool of non-performing loans and mimics U.S. policies adopted in the early 1990s.

The plan effectively mandates banks to liquidate their books of bad loans (estimated between $320 billion and $1.2 trillion) - a far cry from the heavy spending packages common to previous Japanese fiscal policy. The plan will strengthen the Resolution & Collection Corp. (RCC), which will create a market for otherwise illiquid loans or land held as collateral for the loans, by buying and packaging them, into securities that can be sold to investors. In addition, the plan seeks to privatize public corporations, specifically the inefficient state-run postal savings system.

However, as banks pull the plug on non-performing borrowers, 100,000 to 200,000 job cuts are estimated in the short term, lowering projected growth rates for the economy to 0% to 1% annually for the next 3 years. While the market has taken positively to Koizumi's initiatives, the Japanese economy shows signs of slowing down further.

Most Japanese industries have been consolidating rapidly due to declining exports and a devalued yen, as reflected by the recent slowdown in industrial production. None, however, has experienced such dramatic losses in output as the information-technology sector. As overall capital spending is likely to soon peak and then turn downward, there are few signs that expenditures by non-IT companies will fall as sharply as they have in the IT sector. This is most evident in the slumping semiconductor industry, where Fujitsu, Hitachi and Toshiba are the latest to trim chip output in response to stagnant, if not declining, growth in consumer demand.

Structural reform pursued by the Koizumi administration will accelerate corporate bankruptcies in the IT sector, albeit temporarily.

The Bank of Japan's deputy governor Yutaka Yamagutchi underscored the dismal outlook for an economy mired in decade-long stop-go growth, saying that the slowdown was gaining momentum. Japan's economy shrunk 0.2% in the January-March quarter and the government has said that the current quarter may even decline further. To make matters worse, the diffusion index of coincident economic indicators came in at 25.0, below the critical reading of 50.0.

Taken in full, the international financial markets to this point have shown mixed, but favorable, reactions to the new Koizumi reform measures, lifting the Nikkei and particulaarly banking stocks with relatively stronger than usual gains. Depending on whether these reactions are sustained, the Japanese economy could take a turn for the better relatively soon or the consolidation process could spread beyond the IT sector.

Looking on the bright side, however, the strong U.S. dollar, coupled with pressure put on Japan by the Bush administration to ease monetary policy, will likely result in greater demand for Japanese exports, primarily those revolving around the IT sector. It is apparent that IT companies are suffering dramatically from over-capacity. Rapid consolidation is the first step toward recovery.

STRATEGIC ALLIANCES

Japan in the United States

Japanese Companies Win Nuclear Jobs In U.S.

Two groups of Japanese and American companies plan to develop new nuclear reactors after the U.S. government changed its power policy in May. The government announced a new emphasis on nuclear power after a 20-year hiatus in plant construction, creating potential demand. The companies look to provide safer and more cost-efficient third-generation nuclear reactors, having a far greater generating capacity than current ones.

The plants will require lower construction costs per kilowatt and will also be controlled by high-tech computer systems to improve upon operational safety. Mitsubishi Heavy Industries Ltd. together with Westinghouse Electric Co. plan to develop the AP-1000 reactor with a capacity of 1Mw by 2005.

Hitachi Ltd., Toshiba Corp. and General Electric Co. will work together to develop an advanced boiling water reactor with a capacity of 1.7 Mw by 2010.

The reactor's capacity will be 30% higher than existing models, generating more power by using more powerful fuel and more efficient turbines.

Mazda Developing New Engine

Mazda Motor Corp., the Hiroshima-based automaker, has developed a fuel-saving compact I4 engine to be produced for U.S.-based Ford Motor Co. beginning this summer. The I4, a 2-liter, inline four-cylinder engine, boosts fuel efficiency and will be installed in some 60 models over the next three years. Full production will start in the U.S., Japan, Mexico and Spain with production expected to reach 2 million units annually, helping to boost revenues and bolster Mazda's reputation as an engine developer. Ford aims to use the I4 engine in a hybrid car to be released in 2003 and in pickup trucks and commercial vehicles. The automaker also plans to develop five-cylinder engines with displacements of 2.5 and 2.8 liters.

In addition to the I4, Mazda is also planning to start a variety of development projects next year. Mazda hopes to design engines with technologies such as turbocharging, direct fuel injection and variable-valve timing (VVT). Mazda is also currently developing inline four-cylinder straight engines in the 1.3 to 1.8 liter class and diesel engines in the 2-liter class for passenger cars.

Short New

Nissan Motor Co. plans to start up its new plant in Canton, Mississippi in 2003 with a multi-vehicle assembly line. The plant will produce minivans, large sport-utility vehicles and pickup trucks with completely different bodies on the same production line. This change is expected to eliminate inefficiencies in personnel assignments and distribution by evening out production when there are fluctuations in demand for each type of vehicle. The company will completely automate spot welding of auto bodies with new welding robots introduced to the plant. The robots have the ability to completely change welding locations according to the differences in vehicle types.

Art Corp., a leading moving company in Japan is looking to expand its international services for its domestic customers by reaching an agreement with U.S.-based Allied International, the world's largest provider of international relocation services. The two companies are expected to sign a formal contract toward the middle of this month. With about 1,500 offices worldwide, Allied International, as part of the agreement, will offer moving services and international transportation throughout its network in 38 countries and regions served by few Japanese movers

Takara Shuzo Co. has plans to make and sell abroad DNA chips for screening DNA samples for cancer and other diseases. The company hopes to overcome U.S. rivals through mass production, although it still lags them in research and development. Later this month, exports to the U.S. are to begin and production in South Korea will start in late July. The global market for DNA chips for research use is estimated at 30 billion yen, but the figure could rise to several hundred billion yen if hospitals make active use of the chips in diagnosis.

United States in Japan

High-Speed Data Networks for Smaller Offices

Advanced Intelli Space Inc., a Japanese telecommunications venture plans to launch a high-speed data network service for smaller and older buildings. The company, known as AdiSpace, is an affiliate of U.S.-based IntelliSpace, a leading provider of high-speed telecom services, and plans to bring IntelliSpace's business model to Japan.

AdiSpace sets up high-speed communications networks within a building using cable or wireless communications, creating virtual local area networks and arranging for dedicated lines to connect the building to an Internet access point. The company will also provide a complete communications service including phone lines, high-speed Internet access and Web-site production. AdiSpace will also offer Broadband on Demand, a service that allows customer to temporarily use higher throughput with additional fees.

In recent years, the introduction of data communications services to office buildings has gained popularity. Mori Building Co. formed an agreement with U.S. carrier WorldCom Inc. to connect its buildings with a fiber-optic network while other companies followed suit. However, these companies are primarily focused on the major office buildings in Tokyo. AdiSpace is looking to target a niche. They aim to target a market of smaller, older buildings by offering discounted services. The company hopes to expand to 400 buildings and to win 2,500 customers by the end of next year.

Daikin & Sauer-Danfoss Form Partnership

Osaka-based Daikin Industries Ltd. has formed a strategic partnership with U.S. construction machinery producer, Sauer-Danfoss Inc. The Japanese firm looks to develop its hydraulic-equipment business and increase their combined Asian market share to 30%, up from the existing 18%, through improved sales channels in Asia. Sauer-Danfoss hopes to expand sales in Japan, capitalizing on Daikin's sales network.

Two joint ventures, to be established in October, will focus on production and sales in Japan. The sales company will market products in Asia, Oceania and to Sauer-Danfoss itself. The joint venture will also oversee sales operations in China, Singapore and Australia. The production company will produce hydraulic transmissions and expand its product lineup into steering units used in construction machinery.

Western hydraulic-equipment firms have rushed to strengthen and expand their Asian operations in recent years. German industry leader Mannesmann Rexroth AG increased its stake in Uchida Hydraulics Co. to 80% while U.S. Eaton Corp. turned its joint venture with Sumitomo Heavy Ltd.owned subsidiary last October.