Cancelling Your Mobile Phone Contract in Japan: Penalty Fee For Cancelling 2-Year Contract to be Capped at ¥1000

In order to make it easier for consumers to switch mobile phone contracts and increase competition among mobile carriers, the Japanese government will require the country’s three major carriers to cap the penalty fee for mid-term cancellation of 2-year contracts at ¥1,000.

Announcement of the new rule is scheduled for this fall and would mean a huge reduction in the average penalty fee, which is currently about ¥9,500.

The government also plans to limit the initial handset discount that mobile phone companies are allowed to offer in order attract new customers. Within the next two years, the aim is for the major mobile carriers to stop using upfront discounts on handsets as a sales strategy and to encourage them instead to compete on pricing for monthly voice and data plans.

Making it easier to switch carriers

Currently, Japan’s three major carriers (NTT DoCoMo, KDDI and Softbank) charge an average cancellation fee of ¥9,500 ($88) if you cancel a 2-year contract mid-term.

The government’s focus on lowering high cancellation fees is part of a larger move to make the retail mobile phone market in Japan more consumer friendly. In September 2018, the government came out with a statement saying that cell phone rates in Japan could drop as much as 40% to bring them in line with rates in other countries. For details on this, please see: Mobile Phone Price Plans are Set to Drop in 2019

High termination fees are a big reason why people tend not to switch carriers mid-contract. The government surveyed consumers on what they would consider an acceptable price point for terminating a cell phone contract mid-term and found that more than 80% of people indicated that ¥1,000 was a fair amount.

Rakuten to enter the mobile phone carrier market

By setting a new maximum penalty fee of ¥1,000 the government wants to make it easier for consumers to switch plans if a competing company offers a better deal. Rakuten, the e-commerce giant, plans to enter the mobile phone market this October, which means that the three major carriers are already positioning themselves for increased competition.

Limits on discounts for handsets

The government also plans to set limits on the upfront discount that the mobile phone carriers can charge for handsets.

This move is meant to get mobile phone companies to de-couple pricing of handsets from monthly calling and data plans.

Currently, carriers offer steep discounts on the initial price of some handsets in return for contracts that lock people into long-term contracts (with a big penalty for early termination). For example, during some sales campaigns, a carrier might offer to sell a slightly older generation phone for ¥1; but in exchange, you would have to sign up for a 2-year commitment where you end up paying higher than average for a monthly plan. On top of that, you would also have to pay a high termination fee if you change your mind.

Of the major carriers, SoftBank, was the first to get ahead of the curve. In the fall of 2018, the company had already introduced pricing plans that are not linked to the purchase of a handset. For more on this, please see: Getting a mobile phone in Japan: Softbank Price Plans Explained. NTT Docomo has also recently introduced a price plan that is not tied to the purchase of a handset.

Upper limit of ¥20,000 discount on handsets

The government plans to set an upper limit of ¥20,000 on discounts of handsets by mobile carriers.

This ¥20,000 maximum discount would apply in the case where the linked voice/data plan does not have a specified contract length. This means you could buy a brand new handset discounted at a maximum of ¥20,000, then immediately cancel the contract in order to switch to another carrier that offers lower monthly voice/data rates.

In cases where the carrier links the purchase of a handset to a two-year contract, the company would not be allowed to offer any initial discounts on the handset.

This also means that immediately after this new rule is applied, the price of some popular handset models sold at mobile store fronts will likely go up in some cases, since the carriers will be limited to an initial discount of ¥20,000. Currently, some carriers offer discounts of as much as 50% on brand new handsets in exchange for a 3-year contract.

Encouraging carrier companies to compete on voice / data rates

In the current market, the carriers acquire new customers mainly by competing on initial discounts on handsets, not on the price of monthly voice and data plans. They recoup the cost of the initial discount over the life of the contract, which tends to push up the price that consumers pay for monthly voice and data plans. The move to limit the initial discount is meant to correct what the government sees as a market distortion.

One aim of limiting the upfront discount is to make it easier for consumers to compare actual prices for handsets across different manufacturers, but the government also hopes to jump start the carriers into competing on monthly fees for voice and data.

It is also thought that this move will place downward pressure on wholesale prices for cell phones.

The government aims to have the major mobile carriers stop initial discounts for handsets as a sales strategy within the next two years. The General Assembly of the Diet has already passed an amendment to the Revised Telecommunications Business Law that essentially requires mobile phone carriers to de-couple telecommunications charges from what they charge for handsets.

News source: Nikkei, June 7, 2019

Lead image: Interior of a mobile phone shop, stock photo

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