Global Policy Forum

By Hussain Khan*

Japan, increasingly concerned about continuing political and economic stability in the world and particularly in Asia, is reversing a six-year trend of reducing its official development assistance. The foreign ministry has asked the Diet (parliament) for substantially increased funds to aid poorer nations. Tsunedo Nishida, deputy vice minister for foreign policy in the Foreign Ministry, said the focus of Japan's official development assistance (ODA) program would continue to be Asia. "Japan is an Asian country, and the growth of Asian neighbors is both strategically and economically important. Volatility in Asia - such as the tension on the India-Pakistan border, in Afghanistan and in Indonesia - deeply concerns the international community," Nishida said. "Japan's ODA can have an important role in stabilizing the region."

For the fiscal year beginning in April 2004, the Foreign Ministry's request for budgetary allocations on official development assistance reached 593 billion yen, up 14.9 percent from fiscal 2003. Grant aid accounts, which cover 250 billion yen of the total, are up 31.9 percent from the current year.

In the face of a persistently weakening economy, Japan, once the world's biggest ODA donor, since 1997 has continued to cut its aid budget. In the current fiscal year its budget for the foreign ministry fell by 4.2 percent to 516 billion yen, after it was cut by 3.2 percent from the previous year. The development assistance budget for the Japanese government as a whole was slashed by 10 percent in fiscal 2002 and by another 5.8 percent in the current fiscal year, to 858 billion yen. Japanese Foreign Minister Yuriko Kawaguchi said the country's aid for developing assistance has been cut by some 27 percent over the past six years even though other industrialized nations are increasing their aid.

The ministry is asking for 65 billion yen to pay for emergency grant aid to war-torn countries - mainly Iraq and Afghanistan. The request is six times larger than for the current year. In April, Japan pledged to provide up to US$100 million, or about 1.2 billion yen, worth of financial support to help rebuild Iraq. In January 2002, Japan vowed to offer 6.5 billion yen in aid to Afghanistan over two-and-a-half years following the US-led military operation in the country. In the fiscal 2004 budget request, the ministry is also asking for 29 billion yen for grants aid to prevent regional conflicts and promote peace.

In Afghanistan, expectations of aid from Japan are very high, especially that earmarked for infrastructure development, according to the Japanese ambassador to Afghanistan, Kinichi Komano. While Japan's initial aid plan for Afghanistan focused on health, education and other humanitarian concerns, Tokyo will also help build infrastructure and improve security, Komano said.

Japan donated $15.32 billion in official development assistance to developing nations in 1999, then the world's largest contributor for the ninth year in a row. The 44.0 percent year-on-year increase was the highest since 1969, and attributable to both the rising yen and Tokyo's massive fund injection to quell the 1997-98 Asian financial crisis. Japan started special yen loans in fiscal 1998 to support the East Asian economies after a series of financial-system crises hit the region. At the time, its plans were to extend loans of up to 600 billion yen over three years. But less than half the projected amount was actually lent out, and the period of the special yen loans has been extended from July.

In 2002, Japan had to give up its title as top ODA spender for the first time in 11 years after having been the top ODA donor since 1991. After the September 11, 2001, terrorist attacks on the United States, both the US and the European Union announced they would increase their budgets for ODA, citing the importance of financial support for developing countries to prevent terrorism. According to a report compiled by a committee of the Organization for Economic Cooperation and Development on May 13, Japan's economic aid to developing countries fell 28.4 percent year-on-year to $9.67 billion, while the U.S. increased ODA by 9.3 percent to $10.88 billion, reclaiming the No 1 position. Germany ranked third with $4.87 billion, while the United Kingdom, France and the Netherlands followed.

Developing countries have been pointing to a 1980 United Nations resolution that requires developed countries to allocate the equivalent of 0.7 percent of gross domestic product (GDP) to ODA programs. The percentage for Japan was a mere 0.35 percent in 1999. Although Japan has not set a deadline to achieve the 0.7 percent goal, it cannot easily ignore the resolution because the country approved it. During the Mexico summit, the US pledged to increase its aid budget by $5 billion, or 50 percent, over the next three years. The European Union said it would raise the ratio of its aid budget against its gross national product to 0.39 percent from the current 0.33 percent by 2006.

The economies of the East Asian countries have grown dramatically, partly fueled by aid from Japan. ODA is an important diplomatic tool for Japan, which does not have military power. Japan has built good relations with Asian, African and other countries though ODA disbursement. However, Indonesia, which receives the largest amount of aid from Japan, turned down for more than two years special yen loans for a natural gas pipeline project. Although Indonesia recently agreed to the "tied loans", which require giving Japanese companies orders for the project, the loans will give only scant benefit to local companies. Petrochemical, powerplant and other projects in Indonesia that were carried out after receiving loans from Japan have been in the red. During the reign of now-deposed president Suharto, Japanese companies working on these projects charged more than twice the international standard. President Megawati Sukarnoputri's administration argues that Japanese companies charge unreasonably high fees for construction and consultation, although interest rates on yen loans are set relatively low.

Japan extended more than $1.22 billion in aid to China in 1999, making that nation the second-largest recipient of Japanese aid after Indonesia, In contrast with Indonesia, China is using loans actively to expand its presence in the world community. But the panel, composed of economists and other academics, urged the government to rethink its ODA policy in light of the fact that China is spending a large amount to fortify its already powerful military. Cutting off the aid should be an option if China continues to expand its military, the report also said. Then-finance minister Masajuro Shiokawa said Japan plans to reduce ODA to China and other nations with nuclear weapons. "It makes no sense to extend assistance to a country that might attack Japan with atomic weapons," he said. But these fears have now evaporated, as China has recently embarked upon a policy of reducing the number of its military personnel over the year.

Japan is Sri Lanka's largest ODA donor, accounting for 45 percent of the country's development assistance, according to a Sri Lankan government dignitary, who recently visited Japan. "Central to our future is Japan," Philippine President Gloria Macapagal-Arroyo stressed during her last visit to Japan, in reference to her country's No 1 source of ODA, its second-largest trading partner and a major source of its tourism. To promote peace and prosperity on the Korean Peninsula, Japan should provide a comprehensive package of official development assistance that covers the entire peninsula, says Kim Young-ho, economist and former minister of commerce, industry and energy of South Korea. Japan should compile an official development assistance plan for the Korean Peninsula like the US Marshall Plan for Europe after World War II.

Japan suspended yen loans for new projects in Pakistan and India after they conducted a series of nuclear tests in May 1998. Japan had frozen such ODA as new yen loans and fresh grants-in-aid other than those for humanitarian purposes. As of the end of fiscal 1999, aid to India totaled 2.11 trillion yen and the amount to Pakistan stood at 1.08 trillion yen. In a meeting in New York last year, Japanese Prime Minister Junichiro Koizumi told Pakistani President General Pervez Musharraf that Japan is ready to increase billions of yen in economic aid to Pakistan while urging the Pakistani leader to promote democracy in the country, a Japanese official said. Apart from the yen loan, Koizumi also told Musharraf that Japan will keep a promise made last year to provide a total of $300 million in financial aid to Pakistan by October 2003. Tokyo announced the plan in November 2001 in a bid to help boost Pakistan's economy as part of its cooperation with the United States to fight terrorism.

About the Author: Hussain Khan holds a master's degree in economics from Tokyo University, and worked for a German bank subsidiary selling Japanese stocks to institutional buyers in Japan, the Middle East, Europe and the United States. He is an analyst on current affairs and economic issues for various newspapers and magazines.

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