KDDI Corp. President Tadashi Onodera criticized on Wednesday a government panel report urging the mobile phone industry to end its marketing practice of offsetting heavy discounts on handsets with higher phone service charges.

"Amid free competition among three carriers . . . I feel odd about the government-backed decision," he said at a news conference in Tokyo.

Onodera cited the example of South Korea, which unsuccessfully tried to terminate a system in which service providers pay rebates to cell phone dealers in exchange for heavy discounts on handsets.

"I understand that South Korea once ended the same practice, but they restarted the subsidies system after all," he said.

Ending the rebate system would be a heavy blow to handset manufacturers and sales agents, as users may become reluctant to pay higher prices for new models now that they are accustomed to buying new models at cheaper prices.

Such discounted phones can sometimes be purchased for as little as ¥1. Cell phone dealers make money from the rebates mobile carriers pay.

"The handset sales may decline, the sales shop may not make money and may need to close. We need to avoid such a vicious circle," Onodera, head of Japan's second-biggest mobile services provider, said.

The government's recommendations, issued Tuesday, come about a year after the introduction of number portability, which allows customers to keep their number on different handsets and as a result promoted defections from one carrier to another.

Onodera said the effect of number portability on KDDI will be slower, partly because the carrier has offered cheaper fees with a two-year-contract amid price competition triggered by Softbank Corp.'s ¥980 White plan.

Softbank gained more new users than its rivals for the fourth straight month in August, while the biggest player, NTT DoCoMo Inc., lost subscribers.