Is the EU’s Digital Markets Act going global? How Japan is crafting its own version of digital regulation with the Smartphone Act
Simon Vande Walle (University of Tokyo)
Disclaimer: Any views expressed are those of the author’s.
In June 2024, Japan enacted a ground-breaking regulation known as the Smartphone Act (スマホ法, in full: Act on Promotion of Competition for Specified Smartphone Software; text in JP and a partial translation in EN), marking a significant shift in its approach to digital market regulation. Scheduled to come into force by the end of 2025, the law targets tech giants such as Apple and Google, and aims to promote “fair and free competition” in the smartphone-related markets which these companies dominate.
Some may wonder: isn’t promoting or preserving competition the task of Japan’s competition law, the Antimonopoly Act (独占禁止法)? It is, but the Japanese legislature has concluded that cases under the Antimonopoly Act take too long. Hence, new legislation was enacted, which complements the Antimonopoly Act and will be enforced by the same agency, the Japan Fair Trade Commission (JFTC).
Inspired by the European Union’s Digital Markets Act (DMA), Japan’s legislation reflects a growing global trend towards stricter oversight of major technology companies. While there are similarities between the two acts, the Smartphone Act has distinct features, reflecting Japan’s different approach to digital regulation.
The Smartphone Act’s target: Apple and Google
The Smartphone Act essentially targets Apple and Google, although technically, it is a bit more complex. The law says the JFTC will designate specific companies, active in one or more of the following fields: (1) mobile operating systems; (2) app stores; (3) browsers (used on smartphones); and (4) search engines (used on smartphones).
For each of these four types of “software”, the JFTC will designate the specific companies that will be covered by the law, based on thresholds that will be set in a Cabinet Order. It sounds complicated but, in reality, there is little doubt about the companies that dominate these markets and will be designated. In mobile operating systems, everyone expects the JFTC to designate Apple (iOS) and Google (Android). For app stores, we can expect Apple’s App Store and Google Play to be designated. For search engines, Google search will undoubtedly be designated. For browsers, things are somewhat murkier: Chrome in all likelihood, but perhaps also Safari.
Do’s and don’ts
The Smartphone Act aims to stop these companies from taking advantage of their position to give their own products “a competitive advantage” and from “imposing disadvantages on business users” (Smartphone Act, Art. 1).
That may sound vague, but the act lists several specific “do’s and don’ts” for the companies. Most of these do’s and don’ts will sound familiar to anyone following the EU’s Digital Markets Act. Among the key rules are the following:
- app stores: Apple and Google will have to allow competing app stores on iPhones and Android phones (Art. 7(1)). However, unlike the EU’s DMA, the act does not oblige Apple and Google to allow for direct downloading from websites (so-called sideloading).
- payment systems: Apple and Google will have to allow competing payment systems (Art. 8(1)).
- no anti-steering: Apple will no longer be allowed to prohibit apps such as Spotify from informing users that they can get a subscription outside of the app, directly via the Spotify website (Art. 8(2)).
- no self-preferencing: in search results, Google will not be allowed to favour its own services without legitimate reason (Art. 9).
Enforcement
Enforcement will primarily lie in the hands of Japan’s competition agency, the Japan Fair Trade Commission. Business users or competitors may also seek relief in private litigation before the courts, but the hurdles for such private enforcement are high.
When the law was enacted, many foreign media picked up on the staggering level of the fines: 20% of the turnover which the infringer derived from the products at issue in Japan. Because the fine is calculated as a fixed percentage of the turnover, without discretion for the JFTC to impose a lower or higher fine, the fine is referred to as a surcharge課徴金. This type of fine also features in the Antimonopoly Act and has become more common in other fields as well, but the 20% surcharge rate is particularly hefty. Cartels – the supreme evil in competition law – only attract a 10% surcharge rate.
Although the 20% surcharge rate sounds impressive, not all the rules in the Smartphone Act are subject to these fines, and it remains to be seen whether the JFTC will actually make use of these fines or rather prefers to resolve cases through commitments, as it often does in traditional competition law cases.
“Less is more”: a targeted approach
Although inspired by the EU’s DMA, Japan charted its own path in several respects. A first key difference is the more limited scope of the legislation. The Smartphone Act specifically focuses on what happens on mobile phones. For instance, the rule prohibiting Google from engaging in self-preferencing only applies when consumers use Google search on a smartphone (cf. text of Art. 9), not on their laptop or PC. By contrast, the corresponding rule in the DMA applies to Google everywhere. The DMA also covers a much larger range of services, including social networks, online advertising and online marketplaces.
The advantage of Japan’s more targeted approach is that fewer resources will be needed to enforce the law. Enforcement of the Digital Markets Act, with its roughly twenty “do’s and don’ts “, across the more than twenty platform services that have already been designated, presents a herculean task for the European Commission. For a smaller enforcement agency such as the Japan Fair Trade Commission, a more targeted approach may be the more practical and manageable option.
Japan, the land of “safety first”
A controversial issue when discussing regulations such as the Smartphone Act is to what extent companies can invoke an “objective justification” (in Japan, the JFTC uses the term 正当化事由 for this concept), to justify engaging in conduct that would otherwise be unlawful. For instance, companies might argue that their conduct, although in violation of a specific rule, is necessary to ensure device safety and should therefore not be caught. The Digital Markets Act leaves little room for such justifications, as the legislature was concerned that they would be used by gatekeepers to escape the rules, and lead to protracted battles with authorities. The only provisions that specifically mention a possible justification – based on security – are those on sideloading (DMA, Art. 6(4), 2nd and 3rd para.) and on interoperability (DMA, Art. 6(7), 2nd para.).
In cases brought under “traditional” competition law, competition authorities and courts in Europe have dismissed the justifications invoked by companies like Apple. For instance, in proceedings before the Dutch competition authority, Apple invoked security and fraud risks to justify the mandatory use of Apple Pay, its in-app payment system. The Dutch court rejected this justification, dryly noting that Apple doesn’t impose Apple Pay for the large number of transactions that occur on so-called Schedule 1 apps such as Amazon, Booking, Uber and Airbnb, therefore undermining Apple’s security argument (para. 25.2). In a case targeting Apple’s anti-steering rules, the European Commission also rejected Apple’s argument that the rule was justified to prevent apps from circumventing their obligation to pay a fee to Apple and to avoid free-riding (para. 776 and following).
In contrast to the DMA’s rather strict approach, Japan’s Smartphone Act leaves much more room for justifications. The key obligations of the Smartphone Act all have a proviso stating that they will not apply to measures that are necessary to protect cybersecurity, privacy, the protection of minors or other goals set by Cabinet Order. These openings – safety valves or loopholes, depending on one’s view – were made because of concerns about data security and privacy, including some rather alarmist opinions that opening up mobile ecosystems could also open up the way to hacking and security breaches by China. It remains to be seen which justifications will be acknowledged in the Cabinet Order. Discussions in a recent workshop on the Smartphone Act featuring a JFTC official suggest that any additional justifications will be rather limited, and will not include concepts such as efficiency or pro-competitive effects.
Overall, Japan’s Smartphone Act is much more cautious and places greater emphasis on “safety” than the European Digital Markets Act. Perhaps this difference reflects the risk-averse nature of Japanese society and policymakers, or perhaps it is simply due to effective lobbying by the likely targets of the regulation. Whether the European or the Japanese approach will prove to be more effective remains to be seen, but both create a natural experiment that will allow us to observe and compare the outcomes.
About the author: Simon Vande Walle is Professor at the Graduate Schools for Law and Politics, University of Tokyo, focused on competition law.
