How Much Bang for the Buck? Japan's Commercial Diplomacy in Asia

Christopher B. Johnstone

Council on Foreign Relations

On the surface, Japan's commercial diplomacy in Asia presents much for an American observer to envy. Government programs aimed at promoting trade and investment are extraordinarily well funded. The Export–Import Bank of Japan (JEx–Im) alone extended nearly $14 billion in loans and guarantees during FY 1996—with about 40 percent of the total targeted for projects and transactions in Asia. The Ministry of International Trade and Industry (MITI) operates the largest government trade and investment insurance program in the world. Bilateral official development assistance (ODA)—a significant portion of which, in fairness, should not be considered commercial in nature—currently exceeds $8 billion annually, the world's largest aid program. And a host of other, smaller programs and organizations provide support for Japanese business abroad as well.

Japan's commercial diplomacy is also strikingly comprehensive. Initiatives that fall under the rubric of "economic cooperation" (keizai kyoryoku) range from traditional tools—such as financing and insurance schemes—to less direct means of advocacy and influence building—personnel exchanges, for example, as well as government–funded educational and training programs. Further, the institutions responsible for implementing these programs arguably profit from an embedded, societywide view that national security interests are consonant with aggressive support for Japanese business overseas; while criticism of ODA policy emerges from time to time in the national media, public debate on the merits of commercial diplomacy is virtually nonexistent. Broad support for economic cooperation arguably is also linked to the unique arrangement that provides for Japan's defense. In part as a result of the protection afforded by the U.S. military presence, policymakers in Tokyo and the broader public appear largely unburdened by the American tendency to see national security and economic interests as distinct—and at times even in conflict. Put crudely, making the world safe for Japanese business is seen as a perfectly worthy goal of national policy.

Big bucks and a plethora of programs are no guarantee of effectiveness, however. Arguments that government initiatives have played a key role in facilitating—and strategically configuring—Japan's massive investment thrust into Asia paint an incomplete picture of Japanese commercial diplomacy. These programs unquestionably provide important support for private–sector activity overseas, but evidence of waste, inefficiency, and duplication abounds. Bureaucratic turf wars impair many government programs, despite the widely held view in the United States that Japan's commercial diplomacy efforts are centrally controlled and well coordinated. Japanese ODA is only the most obvious example of this problem: four ministries vie for control over the size, uses, and objectives of foreign aid, often leading to poor quality standards and questionable project selection. Such rivalries extend to other programs as well. The activities of JEx–Im and the Overseas Economic Cooperation Fund (OECF) often appear to be in competition, for example, and turf battles between the two massive financing agencies well may increase after their scheduled merger in early 1999.

Interagency rivalry is not the only form of inefficiency. In many cases, implementing agencies offer programs, and impose terms, that could better be provided by the private sector. Export credit organizations in particular provide services that have been privatized in many other industrial economies—implying that a certain percentage of Japanese government support serves only to displace private activity. The large number of smaller organizations that support Japanese commercial interests overseas (often through direct subsidies from MITI or other government agencies) appear to offer strikingly similar programs as well, a fact that suggests the need for consolidation. Corruption and waste remain central challenges to the foreign aid program, although reforms appear to have eliminated some of the most egregious forms of abuse.

That Japanese trade and investment promotion programs are plagued by serious deficiencies will become clear; that fact should not be taken to imply, however, that these programs represent an abject waste of taxpayer money. The various initiatives clearly provide important support for corporate Japan, in ways both tangible and intangible. Indeed, Japanese commercial diplomacy may best be visualized as the advertising budget of a major corporation: a certain amount is surely wasted, but quantifying that sum is nearly impossible—and therefore the activities assume a life of their own. American policymakers attempting to draw lessons from the Japanese experience therefore would do well to view the scope of Tokyo's programs with a healthy dose of skepticism. The large budget outlays, and MITI's grand schemes for molding East Asia into a playground for Japa–nese companies, certainly are impressive and offer insights into the philosophical underpinnings of Tokyo's support programs. The rhetoric, however, often masks a reality that is much less threatening to other competitors in these markets.

What follows first is a broad overview of the programs and policies that form Japan's economic cooperation with the developing world, with particular emphasis placed on activity in Asia. The paper then turns to the question of effectiveness and attempts to look behind the numbers in assessing the strengths and weaknesses of Tokyo's programs. Finally, the paper describes recent initiatives that represent Japan's attempt to adapt these programs to the needs of the future—while still maintaining the comprehensive approach that has characterized economic cooperation from the beginning.

Keizai Kyoryoku: Programs and Components

Japan's economic cooperation policies are an outgrowth of the early postwar need to achieve stable and secure access to raw materials imports—essentially paid for with exports of machinery and other capital goods. The strategy was seen from the outset as fundamental to the nation's survival; as Shigeru Yoshida, Japan's first postwar prime minister, wrote in 1957, "A maritime nation, Japan has no choice but to engage in overseas trade if she is to support her ninety million inhabitants." ₁ Even the war reparations payments to Asian countries victimized by Japanese aggression during World War II assumed an overtly commercial character. Funds were disbursed for projects in targeted industries—often heavily capital–intensive in nature—and tied to the procurement of goods and services produced in Japan. As Tokyo's economic cooperation programs expanded and the country achieved the status of an advanced industrial economy, Western pressure forced Japan in the 1970s to begin separating its ODA and commercial support programs—a process that has occurred only grudgingly. ₂

Despite the nominal separation of the two programs, however, the institutional mind–set continued to envisage economic cooperation as a comprehensive package of public and private programs, all acting in concert to support Japan's economic interests. ₃ The philosophy underpinning MITI's so–called New Asian Industrial D the question of effectiveness anevelopment plan of 1987—which represented an attempt to help Japanese manufacturers undercut by the yen's dramatic post—1985 appreciation relocate to Asian production sites—reveals the continuing strength of this tradition. MITI officials spoke of a "holy trinity" (san mi–ittai) that would link foreign aid, investment, and trade in a comprehensive effort to promote Asia's industrialization—and in turn assist corporate Japan; government and business would cooperate in supporting each component. Even today MITI publishes an annual volume describing Japan's economic cooperation in terms of this trinity; the agencies responsible for disbursing ODA are included with export and investment promotion programs in a list of the organizations that implement keizai kyoryoku. ₄ The programs outlined below follow this model.

Export–Import Bank of Japan

JEx–Im's lending programs are massive: the bank extended some _1.5 trillion ($13.6 billion at $1.00 = _110) in financing during FY 1996, including _57 billion ($518 million) in guarantee commitments (see Table 1). As of March 1997, the bank had more than _9 trillion ($82 billion) in loans outstanding. Cumulative JEx–Im commitments worldwide total some _33 trillion ($330 billion); approximately one–third of this volume was extended for transactions in Asia.

The large figures in part reflect that JEx–Im's services are more wide–ranging than those offered by most other official export credit agencies. In addition to traditional export financing—in the form of supplier and buyer credits—the bank provides loans and

guarantees to support investment overseas, as well as imports into Japan. About half of JEx–Im financing is extended directly to Japanese companies and consortia—often in conjunction with financing from private Japanese financial institutions—or to borrowers in foreign markets for the purpose of purchasing equipment and goods produced in Japan. Since 1987, the bank has also extended nominally untied loans to foreign governments, financial institutions—including the various multilateral development banks—and corporations. Commitments of untied loans made to multilateral development banks are subject to the competitive bidding practices of those institutions and therefore appear genuinely open to contractors of any nationality; loans extended on a bilateral basis, however, suffer from frequent complaints of opaque bidding procedures and face repeated allegations that access to the funds is de facto limited to Japanese contractors. After a major untied commitment to the International Monetary Fund in FY 1994, JEx–Im provided no loans to international organizations in FY 1995; in FY 1996,

JEx–Im extended _25 billion ($218 million) in untied loans to international organizations. Bilateral untied loans amounted to _302 ($2.7 billion) in FY 1996, about 20 percent of total JEx–Im lending; import loans—which include credits to support imports of natural resources, another form of untied JEx–Im financing—totaled _66 billion ($600 million).

A look at JEx–Im lending by region and purpose illustrates an important characteristic: the bank is substantially focused on supporting Japanese commercial interests in Asia (see Tables 2 and 3), particularly participation in large–scale industrial and infrastructure projects. Investment loans and untied loans, the two primary avenues for such financing, together accounted for about 70 percent of the bank's commitments in FY 1996; loans for these purposes in Asia alone consumed about 36 percent of JEx–Im's lending. When loans for exports and imports are included, the share rises to 47 percent. ₅ Examples of recent projects include support for the construction of a build–own–operate power plant in China, expansion of natural gas liquefication facilities in Indonesia, and expansion of the telecommunications network in the Philippines. These projects, it is worth noting, support both Japanese exports and imports—a pattern that illustrates the strategic underpinnings of JEx–Im lending. Japanese firms will construct the gas liquefaction facility in Indonesia; the plant in turn will supply Japan with liquiefied natural gas, a commodity for which Japan completely depends on imports.

MITI's Trade Insurance

The Export–Import Insurance division of MITI administers the largest government trade and investment insurance program in the world—in part because there are virtually no private–sector providers of such products in Japan. Through a number of different services, MITI insured more than 550,000 transactions during FY 1994, a figure that represented in excess of _19 trillion (about $190 billion at that time) in commitments during that year, including nearly _7 trillion ($70 billion) in Asia (see Table 4). Asia accounts for more than 60 percent of the system's outstanding liabilities. Claims against MITI's insurance programs in FY 1994 totaled about _81 billion ($810 million).

Premiums, in principle, are determined on the basis of the length of the contract and the political risk present in the recipient country. To further hedge risks, however—and to boost its premium revenue—MITI has actively steered exporters into arrangements known as comprehensive insurance policies. Under these schemes (which include both company–based and product–based packages) member firms are obligated to pay premiums based on all of their export transactions, regardless of conditions in an individual recipient country. As a result, exporters in effect receive discounted premiums for transactions in risky countries, while being forced to pay higher premiums for less risky transactions—including deals in developed markets for which insurance may not be necessary at all.

Although the distortionary effects of comprehensive insurance policies occasionally become the subject of criticism in Japan, in recent years MITI has, if anything, moved to strengthen the system. As a number of developing countries reached international agreements during the 1980s to reschedule or write off their external debt obligations, claims against MITI's trade insurance programs increased dramatically, causing a rapid erosion of the system's reserves. The ministry responded by raising premiums, securing an annual subsidy from the general account budget (about _25 billion [$250 million] in FY 1994), and pressuring yet more customers into comprehensive insurance arrangements. MITI officials estimate that 80 to 90 percent of the transactions supported by trade insurance are covered by comprehensive packages; some 15 exporters' organizations and virtually all trading companies participate in these schemes. ₆

OECF's Private–Sector Investment Finance

OECF's primary function is to serve as the loan arm of Japan's official foreign aid program, which follows international norms in lending only to other government entities (see below). In addition to this ODA function, OECF provides a relatively small volume of loans to, and equity investments in, Japanese corporations and joint ventures operating in the developing world. In principle, these OECF functions are clearly separated from those of JEx–Im. The fund's private arm is officially sanctioned to provide financing only for projects concerning agriculture, forestry, and fisheries; exploratory mining; preparatory surveys for development projects; and development projects for which JEx–Im would be unlikely to offer its own financing. In fact, however, the delineation of roles between the two lending organs is often fuzzy, particularly in the final category of lending.

In FY 1996, OECF made four commitments to Japanese corporations totaling _6.6 billion ($60 million). Since 1961, the fund's private arm has extended a total of _510 billion in commitments ($4.6 billion at current exchange rates), nearly half for Asian projects. ₇ While some of this financing clearly falls within the fund's officially mandated role—such as a recent loan for a pulp project in Indonesia—other commitments appear remarkably similar to the large–scale

industrial and infrastructure projects generally financed by JEx–Im or ODA loans. In FY 1994, for example, OECF took an equity stake in a power plant project in Pakistan; in FY 1995, the fund provided a loan to support an industrial water project in Chang Chung, China; in FY 1996, OECF provided funds for a study of a toll road project in the Philippines, a private–sector infrastructure initiative. Although formally the roles of the two institutions have been separate since OECF was created, jurisdictional overlap with JEx–Im at times appears to produce activity that competes rather than complements—a phenomenon that may worsen after the two financing organizations merge in March 1999.

Other Commercial Programs

In addition to the major financing arms described above, Tokyo manages or subsidizes a host of other, smaller programs designed to support Japanese business interests overseas. While an exhaustive list of such organizations is impossible, a few examples follow.

Japan External Trade Organization. Although JETRO's functions (which are heavily subsidized by MITI) now include public relations and import–promotion programs, a substantial portion of the organization's activities remains focused on supporting Japa–

nese exports. JETRO performs surveys and collects information concerning conditions in overseas markets, for example, and offers an array of educational programs for Japan's small– and medium–sized companies. Among a number of initiatives focused on promoting trade with developing countries, a JETRO–sponsored program aims to introduce Japanese environmental and energy technology into China and Southeast Asia. JETRO's FY 1995 budget for promoting trade with developing countries was _4.4 billion ($44 million). ₈

Japan International Development Organization Ltd. JAIDO was established in 1989 by the Japanese government and the Japan Federation of Economic Organizations (Keidanren)—an industry group whose members include many of Japan's largest companies—to provide equity support, loan guaranties, and consulting services for "commercially viable" projects in the developing world. As of 1995, about 60 percent of JAIDO's _16 billion ($160 million) capitalization came from contributions by the organization's 132 member companies; the remainder was supplied by OECF. While Japanese companies invariably are participants in JAIDO–supported projects, other international financing organizations—such as the World Bank's International Finance Corporation or the Asian Development Bank—frequently supply funds as well. Projects targeted for JAIDO support tend to be relatively small in scale and appear evenly scattered across Asia, Latin America, and eastern Europe—with a handful under way in Africa as well. Among the dozens of JAIDO projects approved to date are $1.6 million (out of a total cost of $22.7 million) for a cotton–spinning factory in Java; $2.1 million (out of $5 million total) for a computer software company in Shanghai to develop software engineering technology and Japanese–language software programs; and $8.7 million (out of $267 million) for the construction and management of a building complex in Bangkok.

Japan Overseas Development Corporation. JODC was founded under MITI's auspices in 1970 to support the industrial development of, and expand trade with, the developing world. ₉ The corporation's financing programs are focused on facilitating the overseas investments of Japan's small and midsized companies, as well as on promoting imports of primary products. These financing programs are small: in FY 1994, JODC provided _846 million ($8.5 million) in investment support funds and _1.1 billion ($11 million) in funds to promote imports. Perhaps of more significance are JODC's personnel exchange programs. In response to requests from host country companies and other private organizations, JODC dispatches technical and management experts to function as consultants in developing countries for periods of up to two years. In FY 1993, nearly 400 experts were sent overseas through JODC's programs; about 95 percent were bound for countries in Asia.

Association for Overseas Technical Scholarship. AOTS, supported in part by MITI's foreign aid budget, was created in 1959 to provide technical training in developing countries. The organization offers a number of educational programs, ranging from correspondence courses to seminars conducted by lecturers dispatched from Japan. Most well known, however, are AOTS's personnel exchange programs. Trainees—more than 70 percent of whom come from

Asia—are brought to Japan for periods averaging about six months. During the initial phase of their stay, participants undergo Japanese language training, visit factories, and attend other educational programs designed to deepen their knowledge of Japan. Participants then move to a Japanese company for experience more specifically related to their backgrounds and skills; training traditionally has focused on such industries as transport machinery, electronics, and chemicals. Follow–up efforts ensure that the impact of these exchanges continues long after trainees return to their home countries. Offices across Asia allow for regular visits with former participants; AOTS representatives collect information on trainees' current activities, survey common workplace problems, and offer advice on improving management and productivity. AOTS "alumni" organizations also serve to maintain contact among former participants, further solidifying the network of human ties with Japan. More than 60,000 people have participated on AOTS training programs since their inception, including about 4,000 in FY 1993 alone.

Official Development Assistance

Despite recent budget cuts, Japan's ODA program continues to be the largest in the world: net outlays in 1996 totaled nearly $9.5 billion, including about $8.2 billion in bilateral disbursements; the United States, the world's second–largest donor, provided $9.1 billion (although this figure was inflated by budgetary flukes in Washington). Although fiscal constraints in Japan are likely to force reductions in the aid budget, ₁₀ Japanese officials have indicated that bilateral programs are likely to escape significant cuts. Foreign aid will continue to be a major component of Japan's international strategy.

Japan's foreign aid program began in the 1950s with openly mercantilistic intentions, and most disbursements were tied to the purchase of Japanese goods and services. Foreign aid, despite its nominally altruistic intentions, traditionally has been viewed as an integral part of keizai kyoryoku. Although outside pressure and internal reforms have brought much of Japanese ODA formally into line with international standards, suspicion as to the program's true intentions continues. These doubts emanate from several patterns that characterize Japanese aid practices. First, although recent years have brought some movement toward diversification, Japanese ODA remains heavily concentrated in Asia—a region of obvious strategic importance to Tokyo. Despite Asia's relative prosperity, the region received nearly 55 percent of Japan's bilateral aid disbursements in 1995. Second, the share of loans in Tokyo's total giving is much higher than the Organization for Economic Cooperation and Development (OECD) average; less than 50 percent of Japanese ODA in 1993—94 came in the form of grants, a level that placed Japan close to the bottom among the world's major donors—although grant aid has increased significantly in recent years. ₁₁ Finally, Japanese ODA has long emphasized the financing of large–scale infrastructure projects—roads, power plants, telecommunications networks, and hydroelectric dams, for example—as opposed to providing support for basic human needs. Infrastructure projects obviously carry a significant profit potential for Japanese suppliers and improve the business environment for other investors. In 1995, about 45 percent of Tokyo's foreign aid was extended for economic infrastructure projects. Although Japanese foreign aid officials vigorously defend these practices as consistent with an underlying philosophy, criticism in the West continues unabated. ₁₂

No single ministry is in charge of formulating Japanese foreign aid policy. In fact, four agencies—the ministries of Finance, Foreign Affairs, and International Trade and Industry, as well as the Economic Planning Agency (which plays the least important role of the four)—vie for influence over the ODA program. Two smaller agencies—OECF and the Japan International Cooperation Agency (JICA)—are primarily responsible for disbursing ODA funds.

OECF. As noted above, OECF's primary function is to serve as the loan arm of Japan's ODA program. The fund's lending is the primary avenue through which Tokyo finances the economic infrastructure projects described above; some 70 percent of OECF's new commitments in FY 1996 ₁₃ —which totaled _1.3 trillion ($12 billion)—were intended for projects in sectors related to transportation, electric power and gas, irrigation, mining, and telecommunications. These financing programs carry an overwhelming focus on Asia: about 77 percent of the new loans were extended to Japan's closest neighbors—with about 55 percent to northeast and Southeast Asia alone.

In principle, OECF loans are almost completely untied; companies from any country are free to bid on contracts associated with OECF financing. According to official statistics, Japanese firms won just 33 percent of the contracts linked to ODA loans in FY 1996; firms from other OECD countries secured about 14 percent of such contracts, with enterprises in developing countries winning the remainder. These figures are the subject of considerable controversy, however. Critics assert that many firms considered to be developing country concerns for the purpose of calculating procurement statistics in fact are disguised Japanese subsidiaries or joint ventures—and that therefore the Japanese share of ODA contracts is much higher than official figures suggest. ₁₄ Further, some elements of OECF financing are more transparent than others; while bids on construction contracts are formally open to all bidders, the fund's project design and implementation contracts are less transparent.

JICA. The less prominent of Tokyo's two aid–dispensing agencies, JICA is primarily responsible for implementing Japan's grant and technical assistance programs. As in similar programs in other donor countries, procurement contracts from grant assistance generally are limited to Japanese companies; while these contracts rarely are large in and of themselves, they arguably facilitate access to other, more lucrative projects associated with Japanese ODA. The agency plays an active role in identifying development projects by performing feasibility studies, for example. In many cases, these studies lead to the major capital projects financed by OECF; while these larger contracts nominally are untied, critics charge that the consultants and engineering firms involved at the feasibility stage design projects with specifications that favor Japanese companies.

Also important are JICA's personnel exchange programs. The agency brings thousands of people in the developing world—again largely from Asia—to Japan every year for technical training in fields as diverse as agriculture, telecommunications, energy, and health. Since the inception of these programs in 1954, more than 130,000 people have participated in them; in 1994, Japan accepted some 5,600 trainees from Asia—more than half the overall total. JICA also dispatches "experts" to serve as advisers in government, educational, and research institutions in developing countries; these consultants (whose numbers since 1954 have exceeded 40,000) often make substantive policy recommendations and play an active role in formulating comprehensive development plans in the host country. About 2,600 short– and long–term experts were dispatched to Asia for these purposes in 1994; that figure again accounted for more than half the overall total. ₁₅

Bang Or Whimper?

Impact Unquestioned

As the scale and scope of the above programs suggests, Tokyo clearly has sought to support Japanese commercial interests in Asia in a well–funded, systematic, and comprehensive way. By any reasonable measure these efforts have proven beneficial, both to the companies involved and to Japan's strategic interest in a regional environment conducive to trade and investment. Japanese trade and investment with Asia has expanded dramatically over the last decade: Japan's exports to the region have more than doubled since 1990, and the country runs large and rapidly growing trade surpluses with most Asian economies—with the notable exceptions of China and Indonesia, which export to Japan large volumes of raw materials. Annual flows of Japanese foreign direct investment (FDI) to the region rose to $8 billion in 1989, before slumping during the early 1990s; since then, Japanese FDI to Asia has grown rapidly again, reaching $12 billion in FY 1995, nearly double the level of three years ago. Cumulative Japanese FDI in Asia now totals in excess of $88 billion.

Even assuming that much of this trade and investment would occur without government support, JEx–Im and MITI unquestionably have played an important role in amplifying the trends. Japanese trading company executives suggest, for example, that the value of these programs is far greater than the loans and guarantees themselves; indeed, for most projects a range of financing options is available—in some cases more cheaply—through either private financial institutions or multilateral entities, such as the International Finance Corporation and the Multilateral Investment Guarantee Agency. Arguably more important is the role JEx–Im and MITI fulfill as a signaling device, both to other financial institutions and to the host country. The backing of the Japanese government serves as powerful leverage against attempts by local authorities to "change the rules" governing a particular project. ₁₆

Japanese ODA, too, has had an immeasurable impact on the regional economy. OECF estimates, for example, that its loans have financed the construction of 46 percent of Indonesia's hydroelectric power capacity and 12 percent of the country's railroads; 24 percent of peninsular Malaysia's total power capacity—and 15 percent of Thailand's—is said to have been paid for through Japanese ODA loans. ₁₇ More subtly, JICA's technical cooperation programs have given Japanese officials a role in formulating development strategies in Asia that improve the business environment for Japanese investors. Exchange programs run by JICA, AOTS, and other organizations familiarize Asians with Japanese business practices—and improve Japan's public image in a region that is naturally predisposed to view its northern neighbor with suspicion. Although the effect of these "people–centered" initiatives on Japanese commercial interests is impossible to quantify, their significance should not be underestimated—particularly in a region where personal ties are an important element in conducting business.

The lasting importance of the keizai kyoryoku framework to the Japanese business and policy communities is perhaps most dramatically demonstrated by MITI's 1987 New Asian Industrial Development plan. The initiative represented a strikingly explicit attempt to construct an "Asian division of labor" by assisting low–end Japanese industries—undercut at home by the yen's appreciation—to move overseas. As envisioned by MITI, the new Asian Industrial Development (AID) plan consisted of three phases. First, Japanese officials (for example, through JICA exchange programs) work with their counterparts in Asia to develop comprehensive economic development strategies. In the process, particular export industries are targeted for Japanese direct investment and other forms of support, and structural barriers that might impede development are identified. Second, Japanese government officials and private consultants recommend specific policies and projects to support the targeted industries; ODA funds are used, for example, to perform feasibility studies for, and design, infrastructure projects. Implementation occurs in the final phase: ODA loans are used to finance the infrastructure projects; technical experts in the targeted industries are dispatched through the programs described above; and JEx–Im and MITI financing schemes are used to promote Japanese investment in designated sectors. The new AID plan was never formally endorsed by the government—and its importance has almost certainly been exaggerated in the West. Nevertheless, elements of the scheme are under way across China and Southeast Asia—and its very existence provides insight into the mind–set and philosophical framework that guide keizai kyoryoku. ₁₈

Problems Profound

Impressive numbers and MITI's expansive schemes may not be the best measure of Japanese commercial diplomacy's effectiveness, however. Indeed, an undue focus on budgets and rhetoric can cloud understanding of the serious problems that characterize virtually all the programs described here.

Inefficiency and Waste. Many of the institutions and initiatives that make up Japan's commercial diplomacy appear to crowd out private activity and expose taxpayer money to unnecessary risk—and in some cases appear to suffer from corruption and mismanagement. JEx–Im and MITI programs, for example, support a surprisingly high share—36 percent—of total Japanese exports; in contrast, 15 percent of French exports receive some form of official support, and only 2 percent of U.S. exports benefit from similar programs. ₁₉ These numbers are inflated, however, by the fact that Japanese support programs supply short–term credits to borrowers—a function that is fulfilled by private institutions in many other industrialized countries; the percentage of Japanese medium– and long–term exports receiving government support is much closer to G–7 norms. ₂₀ MITI's trade insurance programs similarly displace services the private sector easily could provide; virtually no private trade insurers exist in Japan to compete with government programs. The cross–subsidization resulting from the comprehensive insurance packages described above also in effect imposes a tax on Japanese exporters for their sales in the world's least risky markets (i.e., the advanced industrial economies), which continue to buy the overwhelming share of Japanese exports. MITI's Chinatrade insurance programs therefore have assumed an exaggerated size: a far larger percentage of the nation's exports is covered by insurance than would be the case under a more competitive system, ₂₁ a fact that clearly irritates many Japanese business representatives.

Japan's foreign aid program is subject to frequent charges of waste and corruption. Revelations in 1986 that a portion of OECF loans to the Philippines had been kicked back to the coffers of President Ferdinand Marcos and other government officials sparked the first real domestic debate in Japan over ODA policy. ₂₂ Since that time reforms have improved the transparency of Tokyo's aid program—particularly in concessional lending procedures—but evidence persists of continuing irregularity. In October 1995, for example, Japan's Fair Trade Commission imposed fines on 37 domestic trading companies and department stores for widespread bid rigging on contracts linked to Japanese grant and technical assistance; investigators determined that the firms had colluded on some 631 projects—worth a total of about $170 million—in 82 countries. Similarly, in November 1995, a prominent weekly magazine in Japan charged that waste and poor management plague a number of ODA–financed projects across Southeast Asia; the article further asserted that Japanese commercial interests were the driving force behind many of the projects in question. ₂₃ The large number of apparently indistinguishable personnel exchange programs also raises questions about the overall efficiency of these initiatives—and the possible need for consolidation.

Bureaucratic Rivalry. Interagency turf battles encumber the implementation of keizai kyoryoku. The foreign aid program provides the clearest example of the problem: as noted above, four ministries, each with distinct institutional interests, struggle for control over the program. While MITI, of course, would love to use foreign aid as a tool to support commercial interests, other institutional actors hamper that goal. The Ministry of Finance, for example, views foreign aid primarily as a budget issue and as a tool for recycling Japan's large current account surplus. As concern over the nation's finances has grown, the ministry has applied steadily increasing pressure on ODA outlays. Budgetary constraints have contributed to, for example, a dramatic understaffing in the aid program, particularly in the field; the OECD estimates that Japanese ODA is among the most thinly staffed in the world—a fact that in turn undermines efforts to manage and implement projects effectively. ₂₄ The Foreign Ministry (MOFA) has interests that occasionally conflict with MITI's goals as well. MOFA generally is more sensitive to outside pressure and criticism—particularly from the United States—than other agencies, and has at times sought to use ODA as a broader foreign policy tool. The ministry has played an important role in diversifying the recipients of Japanese ODA, as well as in slowly boosting the share of funds allocated to purposes other than building economic infrastructure—such as basic human needs. ₂₅ Although the Diet traditionally has not played a major role in formulating aid policy, lawmakers in the future also may demand a larger voice in the process—as is discussed below. ODA's utility as a component of keizai kyoryoku therefore may be in decline; the frustration many Japanese corporations express over the increasing difficulty they face in winning ODA contracts is perhaps evidence for the trend.

JEx–Im and OECF also engage in regular turf wars, a trend that shows signs of escalating as the March 1999 merger of the two institutions approaches. ₂₆ Officials from both financing arms insist that the roles of the two institutions are distinct—and assert that even after the merger their respective lending functions will be separated by a "firewall." Nevertheless, JEx–Im's untied loans and project finance programs often appear remarkably similar in purpose—and even financial terms—to lending provided by OECF. This is particularly true in the current interest rate environment in Japan, where long–term rates hover at around 3 percent. JEx–Im's generally "semi–concessional" lending terms—which are determined relative to Japan's long–term prime—in many cases approach the fixed interest rates carried by OECF loans, which were established at a time when domestic rates were much higher. ₂₇ Open competition between the two institutions particularly emerges in projects involving cofinancing with the World Bank. Procedures for handling bilateral requests for loans provide for the interagency dialogue and horse–trading that prevent these turf battles from spilling into the open; a similar process allowing for nemawashi (consensus–building) is absent in many multilateral financing projects.

Evidence abounds that JEx–Im and OECF are jockeying for expanded turf and influence in the postmerger financing organization. Both are extremely active in China in strikingly similar ways; indeed, China is the single largest recipient of lending from both agencies, and much of that financing is extended for large–scale industrial and infrastructure projects. OECF also has recently upgraded several countries to the status of "annual borrowers"—Turkey, for example, as well as Morocco and Tunisia—that in the past fell primarily under JEx–Im's lending purview. Turkey in particular has a per capita GNP that qualifies it as a middle–income economy and therefore soon will likely "graduate" from the list of countries eligible under international norms to receive ODA; that fact raises questions about the true motives behind OECF's decision to extend funds to Ankara on a regular basis.

OECF's recent foray into non–ODA support for private–sector infrastructure projects—a function that ostensibly competes directly with JEx–Im financing programs—also clearly represents in part an attempt to carve out a role in this rapidly growing field. The broader movement toward using private capital to support the construction of large–scale infrastructure in the developing world is likely to further complicate efforts to clearly demarcate the respective roles of ODA and other government financing programs. This trend has particularly strong implications for Japan's foreign aid program, with its heavy focus on economic infrastructure. JEx–Im and OECF therefore probably would be locked in an escalating interagency rivalry even in the absence of the upcoming merger; the fusing of the two institutions only serves to undermine prospects for efficient, coherent keizai kyoryoku.

Effectiveness Questions. The massive expansion in Japan's trade with, and investment in, Asia already has been noted—and the role of commercial diplomacy in supporting and intensifying these trends should not be underestimated. Nevertheless, a variety of anecdotal evidence suggests that keizai kyoryoku is somewhat less effective than might otherwise be assumed. Small and medium–sized companies in particular appear to benefit little from Tokyo's commercial support efforts. Few programs appear specifically aimed at the needs of these firms, with the exception of the small JODC and JETRO initiatives noted above. This lack of focus on smaller firms arguably carries a cost; a recent MITI survey suggests that the overseas subsidiaries of small Japanese companies on balance are withdrawing from production sites abroad. ₂₈ Similarly, for all the support offered by Tokyo, Japanese subsidiaries have found overseas investment to be an intensely competitive enterprise. Although Asia continues to be easily the most profitable site for Japanese investors, MITI estimates that American subsidiaries are more profitable than their Japanese counterparts in virtually every region of the world, including the markets of Association of Southeast Asian Nations (ASEAN), China, and Asia's four newly industrialized economies. ₂₉

A Changing Policy Environment? As noted above, commercial diplomacy in Japan has been supported at least in part by the widespread belief that the nation's security depends on its ability to trade with the outside world. Trade and national security therefore do not represent competing interests in the minds of most Japanese policymakers—the two are one and the same. In this context, government programs in support of exports and investment can be seen as clearly consonant with the national interest. Not surprisingly, the Japanese public appears to accept the wisdom of these programs. In contrast to discussions of "corporate welfare" in the United States, the financing offered by JEx–Im and MITI is uncontroversial to the extreme; despite their massive size—and the implicit risk to taxpayer money—the programs receive virtually no public or political attention. This tendency is arguably amplified by the American military presence in Japan. In essence, because the ultimate national interest—the defense of one's borders—has been in large measure provided by an outside power, the notion of a "trade–off" between economic and security interests has never emerged as a centerpiece of Japanese discourse.

The rise of China as a major world power may force a change of thinking in Tokyo. The consensus in Japan behind a policy of engagement with Beijing is far more solid than in the United States; policymakers in virtually all government institutions agree that policies aimed at integrating China into the world economy represent the most effective means of encouraging the Asian giant's peaceful and stable development. Nevertheless, events over the past few years suggest that that consensus may be weakening. After China conducted a nuclear test in August 1995—its second that year—Tokyo suspended most grant and technical assistance to Beijing. Although these forms of ODA represent only a small portion of total Japanese aid to China, the action nevertheless constituted an unusually strong statement of disapproval. As events continued to rock Sino–Japanese relations in 1996—additional nuclear tests, China's military exercises off the coast of Taiwan, and the reemergence of a territorial dispute surrounding the Senkaku/Diaoyu Islands in the East China Sea—political pressure grew to limit government lending in China. A research group of Japan's ruling Liberal Democratic Party called for a review of yen loans to China; a collection of lawmakers from across the political spectrum opposed JEx–Im's decision to provide loans for the Three Gorges project.

The impact of these voices should not be overblown; with the recent warming in Sino–Japanese ties, public and official opinion remains squarely in favor of engagement with Beijing, and the opposition to aid and JEx–Im financing still amounts to little more than a voice in the wilderness. Nevertheless, the increasing political sensitivity of relations with China is clear. Grant aid was only recently restored; political pressure delayed completion of a large OECF loan package to China for FY 1996 until late November 1996. The emergence of a major world power in Asia therefore may slowly erode the long–standing consensus in Japan behind the perceived unity of economic and security interests—and in turn undermine the coherence of economic cooperation.

Keizai Kyoryoku: The Latest Phase

Despite the obvious problems noted above, the theoretical framework of keizai kyoryoku continues to guide the thinking of many Japanese policymakers. A rapidly changing international environment, however, has begun to undermine several components of the traditional strategy—particularly the role of ODA. East Asia's rapid economic growth, ironically, has given rise to the most central challenge: that of meeting the region's massive infrastructure needs over the next decade. The World Bank estimates that between 1995 and 2004, East Asian economies will have to invest as much as $1.5 trillion in infrastructure—including power generation, telecommunications, transportation, and water and sanitation facilities. China's estimated requirements account for about half this total, with South Korea, Indonesia, and Thailand accounting for another 40 percent. To meet these needs, according to the World Bank, the economies of East Asia will be forced to spend about 7 percent of GDP on physical infrastructure—considerably more than the estimated current levels of 5 percent. ₃₀

On the surface, the infrastructure focus of Japanese ODA, and of keizai kyoryoku more broadly, would appear to position the programs perfectly to continue their contribution to East Asian development, and to the overseas expansion of Japanese corporations. In fact, a number of factors suggest a different interpretation. Despite the size of Tokyo's official support programs, traditional financing approaches will prove inadequate to meeting East Asia's future development needs. At current levels, OECF loans—currently the primary tool for financing many public works projects—would support less than 3 percent of China's overall infrastructure requirements through 2004. The broader shortage of public resources available to finance infrastructure development has forced many developing countries to turn to private funds; one World Bank adviser has estimated, for example, that 12 to 15 percent of East Asia's infrastructure projects are being carried out by the private sector—a share that could increase to about 30 percent by the year 2000. ₃₁ This tendency away from utilizing foreign aid and other public funds to finance infrastructure is exacerbated by long–standing criticism of OECF lending policies. Given the relatively high payback burden of yen loans, which has been amplified by secular appreciation of the yen, many developing countries in Asia prefer that private investors perform work previously limited to the public sector.

These developments represent both a challenge to existing keizai kyoryoku policy and an opportunity for private Japanese infrastructure providers to expand their activities in Asia. In response, the Foreign Ministry and MITI informally announced in 1996 the outlines of a new element to Japan's overall economic cooperation strategies in Asia. In essence, the approach calls for combining foreign aid with JEx–Im and MITI financing programs to supplement the use of private capital in specific infrastructure projects. Targets for the initiative—which thus far is limited to a few pilot projects—will be primarily those ODA recipients with relatively high per capita incomes that already receive large private capital flows from overseas. The plan by no means should be interpreted as a fundamental restructuring of Japanese aid policy; Tokyo also plans to continue meeting requests for more traditional assistance projects and to continue diversifying the forms and recipients of Japanese ODA. Nevertheless, the new strategy recognizes that in the coming decades private capital will play a central role in financing East Asia's economic development. Tokyo clearly is attempting to alter foreign assistance and government financing strategies to reflect this new environment—and, not coincidentally, position Japanese business to compete more effectively.

Supporting the private sector

In February 1996 the Economic Cooperation Committee—a division of the Industrial Structure Council (Sangyo Kozo Shingikai), an advisory body to MITI ₃₂ —issued a report arguing that Japa–

nese government assistance should be used primarily to mitigate the risks for private investors associated with infrastructure investment. ₃₃ The document advocates using a combination of loans, insurance, and guaranties from JEx–Im and MITI; the OECF's private–sector investment finance arm; and OECF's foreign aid loans to support private infrastructure projects in developing countries. As with any commercial project, trade and investment insurance, as well as JEx–Im loans, would go directly to private interests (presumably Japanese corporations) involved in targeted infrastructure projects. ODA loans, in turn, would be used to underwrite components of a given project that are of a "public nature" and that are not likely to attract private financing. Examples cited in the report include developing environmental conservation measures for a power generation project, constructing dams for hydroelectric power initiatives, or building access roads for an industrial park.

In general, according to the committee's report, Japan should develop assistance policies that "utilize the vitality of the private–sector" by emphasizing approaches in which "public funds effectively function as priming water for private funds." In this way, the committee notes, Japan's limited public resources might be put to more effective use in promoting economic development. Criteria that the report suggests for determining which projects are deserving of Japanese government support include initiatives of an "unmistakable public character" that are consistent with the host country's overall development strategy, and that demonstrate "appropriate" levels of risk sharing between the host government and private investors.

Foreign Ministry statements on the proposed policy echo many similar themes. One memo on the subject states that "the Government of Japan believes that some supplementary measures should be taken . . . to facilitate private–sector initiatives in infrastructure development in developing countries." ODA again is seen as playing an important role in this regard. The Foreign Ministry suggests that foreign aid funds could be used to finance "portions of the infrastructure project where concessional public funding is regarded as more appropriate than private capital," to support the environmental conservation components on a given project, and to finance feasibility studies on projects initiated by the private sector.

The first demonstration of the new component to keizai kyoryoku appeared in April 1996, when Tokyo indicated that it would provide a total of more than _100 billion ($1 billion) in loans to help finance the construction of a new 20–kilometer subway system in Bangkok, Thailand. The project—which is slated for completion in 2002—reportedly will cost a total of about _315 billion ($3.15 billion). Private firms will assume responsibility for the procurement of subway cars and other equipment, as well as for the system's operation and maintenance; ODA loans will be used to dig the system's tunnels—a "public" component of the project for which private financing is more difficult to attract. ₃₄ A similar strategy is underwriting the construction of a power plant in Indonesia. Private capital will construct and operate the plant itself; ODA loans will be used to build the network of power lines necessary to convey electricity produced by the plant.

Seeds of Controversy

Japanese aid officials indicate that for now ODA loans extended under the rubric of this new strategy will continue to flow through host country governments. Foreign Ministry representatives have indicated, however, that over the long term concessional loans may be extended directly to companies involved in infrastructure projects, provided that repayment is guaranteed by the host country's government. Regardless of the form that the new approach eventually takes, the prospect of Japanese ODA being used to directly support private–sector projects has sparked concern that Tokyo's foreign aid policies could return to the overtly mercantilistic patterns of the past. Given the large number and the massive scale of the infrastructure projects involved—and the potential for equally large profits—Tokyo's new strategy appears to represent a means of helping Japanese corporations secure a greater piece of the action. ₃₅

Japanese aid officials vigorously deny that such ulterior motives lurk behind the new strategy. They insist that any ODA loans extended to private infrastructure projects will remain open to contractors of any nationality and will be implemented in ways consistent with international norms. Foreign Ministry representatives downplay the possible negative perceptions of the new strategy, maintaining that East Asia's development needs demand innovative solutions; these officials note that "sometimes you have to take a risk to do the right thing." An informal MOFA statement, for example, asserts that support for privately financed infrastructure projects "will strictly follow all applicable international rules and procedures. . . . ODA loans to be extended [for such projects] will be provided under general untied procurement conditions like most of our ODA loans." The statement further invites "other members of the donor community including [the] U.S. and [the] World Bank to jointly support such private–sector initiatives."

The MITI report described above also appears to have bowed to this concern, suggesting that infrastructure projects involving "enterprises from more than one advanced country" are likely to be more effective and less risky. Nevertheless, it is no secret that Japanese companies are expressing dissatisfaction with their ability to win procurement contracts linked to Tokyo's foreign aid loans—a frustration that by some accounts has intensified in recent years as Japan's economy remains mired in little or no growth. ₃₆ MOFA officials acknowledge that Japanese corporate interests have stepped up pressure on Tokyo to guarantee greater access to ODA contracts.

This context adds weight to suspicions that Tokyo's new aid paradigm is intended primarily to benefit corporate Japan. Such worries are compounded by language in the Industrial Structure Council report cited above, which appears to openly express the hope that the new approach will result in increased business opportunities for Japanese firms. The committee document states, for example:

. . . the Government of Japan should consolidate the business environment required to encourage the commitment of Japanese infrastructure service providers to private–sector–led infrastructure development in developing countries.

. . . While adopting the preconditions of respecting international rules and of not disrupting the efficiency of aid projects, the Government of Japan should try to achieve "visible economic cooperation" which unifies Japanese technologies, know–how and financial resources and which makes Japan's presence as a positive donor felt by the international community.

Further contributing to the perception of continued mercantilism in Tokyo's economic cooperation programs is Japan's leading role in spurring greater cooperation among Asian export financing organizations. At a March 1997 gathering sponsored by JEx–Im, for example, representatives from seven institutions—including the export–import banks of China, Korea, Malaysia, and Thailand—discussed ways to promote "cooperation" between Japanese companies and the respective agencies. Of particular interest to the participants were infrastructure projects in Asia. ₃₇

Although still in its embryonic stages, this innovative direction in Japanese aid policy amply illustrates the continuing relevance of the keizai kyoryoku framework—and the attending holy trinity of trade, aid, and investment. Nevertheless, the rhetoric of intentions is likely to exceed the reality of accomplishment. Both internal and external constraints undoubtedly will limit the effectiveness of the new strategy. Bureaucratic wrangling will affect implementation: despite MITI's intentions, the Foreign Ministry—while broadly supportive of the approach—is certain to be sensitive to international opinion; MOFA likely will strive to ensure at least a modicum of openness to outside participation in projects targeted under the new strategy. Further, a policy of extending foreign aid loans directly to corporations would no doubt exacerbate OECF's competition with JEx–Im by further blurring the line between the two lending programs. Continued pressure on Tokyo to diversify the recipients and purposes of Japanese aid will likely also ensure that the strategy remains but one component of a broader policy.

Ironically, the initiative also may provide less benefit to Japanese corporate interests than was intended. American and European infrastructure providers in many ways already are more competitive than their Japanese counterparts. Japanese telecommunications firms and electric power companies—Nippon Telephone and Telegraph Corp. and Tokyo Electric Power Co., for example—face regulatory environments that restrict their overseas activities. Japanese infrastructure providers in general also are less experienced in the build–operate–and–transfer or build–own–and–operate patterns of infrastructure development increasingly prevalent in East Asia; in many cases they look to American firms for leadership and work with them to secure infrastructure deals in emerging markets. In this context, American and European firms may be able to secure access to a considerable portion of the loans for infrastructure projects extended by Japanese government authorities—particularly untied ODA and JEx–Im loans. As with initiatives in the past, the latest component to keizai kyoryoku almost certainly will achieve less than its stated intentions.

Beyond Budget Lines

For all the size of its budgets and the ambitions of its rhetoric, keizai kyoryoku presents a record of mixed success. From the perspective of the American policymaker, the lessons of the Japanese experience are therefore limited. In striving to assist American companies competing in Asia, Washington clearly can never hope to rival the resources Tokyo offers its own corporate customers. America's more limited war chest for commercial diplomacy should not necessarily be a cause for concern, however. As this paper has tried to illustrate, a significant percentage of Japanese official support for business represents a questionable exposure of taxpayer funds hardly worthy of emulation.

The most noteworthy aspect of Japan's economic cooperation may be the attitude that forms its foundation. Japanese commercial diplomacy is not limited to a large volume of loans and guaranties—although these certainly are valuable components to the

endeavor. Policymakers in Tokyo define their task far more broadly than a series of individual transactions completed over a finite period of time. Indeed, the most important contributions of keizai kyoryoku to Japanese commercial interests may be the least direct and the most difficult to measure: the long–term investment—through training programs and personnel exchanges—in building a network of human ties across Asia knowledgeable about Japan, versed in Japanese management techniques, and comfortable with Japanese technology. The importance of the financial resources underpinning keizai kyoryoku should not be underestimated; nevertheless, programmatic diversity is the defining characteristic of Japanese commercial diplomacy. This feature may offer the most important lessons to outsiders. That Tokyo views commercial diplomacy as a worthy—and even paramount—enterprise is demonstrated by the range of tools employed in its execution.

Japan and the Asian Economic Crisis

This paper has argued that a central goal of postwar Japanese foreign policy has been to strengthen and strategically configure the nation's economic ties with East Asia. During the years of the region's economic "miracle," Japan's massive expansion of trade and investment links with its neighbors made the strategy appear wildly successful—and to outsiders, threatening. As Japanese companies began to carve out dominant positions in many industries across Asia, some analysts began to warn that Japan was slowly "embracing" the region in a hold that could exclude outsiders from the world's most dynamic economies. ₃₈

If Japan's major stake in the East Asian economy was a source of strength and envy during the boom years, that stake became a major vulnerability when events took a turn for the worse. The scope of Japan's exposure in Asia is immense. At the end of 1996, Japa–nese banks had some $114 billion in outstanding loans to the major economies of East Asia—including nearly half of Thailand's outstanding debt. Japanese companies have committed about $90 billion in direct investment and send about 40 percent of their exports to the region. At best, a sustained downturn in Asia will weaken the outlook for corporate Japan. ₃₉ At worst, the crisis could threaten the collapse of a financial system already staggering under the weight of massive non and underperforming loans.

Given the stakes involved, Japan's attempts to play a leading role in the early stages of the crisis are hardly surprising. Events during the second half of 1997 exemplify Japan's leadership style, the continuing prominence of the keizai kyoryoku framework, and the constraints—domestic as well as international—on Japanese action. Tokyo clearly sought to lead the international response to the crisis, though not without help. Japanese policymakers continued a long tradition of acting first in concert with other governments or through international institutions, followed by quiet, largely symbolic initiatives to curry favor and influence with regional governments. However, budgetary pressures and Japan's own economic difficulties placed limits on Tokyo's ability to lead—a fact that may have important implications for the future of keizai kyoryoku. Indeed, as the crisis continued to unfold, Japan began to face harsh criticism that it had not done enough to assist its neighbors. What follows is an analysis of Tokyo's response to the unfolding crisis up to its spread to South Korea.

Thailand

Tokyo had indicated that it stood ready to offer assistance to the Thai economy even before Bangkok turned to the international community for help in defending its currency. At a hastily arranged August 11 meeting—held, not coincidentally, in Tokyo—Japan emerged as the single largest donor to a $17 billion bailout structured and conditioned by the IMF. Early reports had suggested that Japan might offer as much as $7 billion to the effort; in the end the Japanese contribution—channeled through JEx–Im—totaled $4 billion, the same amount offered by the IMF. ₄₀ The desire to avoid appearing to dominate the package almost certainly played a role in Tokyo's decision to reduce its contribution.

Japan subsequently undertook initiatives toward Thailand at the bilateral level. In late September the OECF announced a new package of ODA loans for Thailand, totaling some _106 billion ($993 million). Although the aid announcement was not unexpected, the size of the new disbursements—which represented the second–largest package ever offered to Bangkok—was striking. The loans have been earmarked for a mix of infrastructure and environmental projects, and bring the cumulative total of OECF lending to Thailand to _1.5 trillion ($136 billion). ₄₁ Furthermore, when then Thai Prime Minister Chavalit Yongchaiyudh visited Tokyo in early October, he was welcomed with new pledges of trade insurance worth more than $8 billion to encourage new Japanese investment in the Thai economy. Prime Minister Ryutaro Hashimoto also announced plans to send 1,000 technical experts to Thailand over the next three years to assist in the country's restructuring efforts. Although the impact of these steps on the Thai economy will be felt only over the long term—and is likely to be marginal at best—Tokyo's actions carry important symbolic value. The generosity of his Japanese hosts prompted the Thai prime minister to comment, "Japan will stand by Thailand during our time of need." ₄₂

Indonesia

When Jakarta became the second Southeast Asian capital to request IMF assistance in early October, Tokyo was equally quick to react. On the surface, corporate Japan's stake in the Indonesian economy would appear to be smaller than that in Thailand; Japanese banks have fewer outstanding loans in Indonesia ($22 billion), for example, than in Thailand ($37.5 billion). ₄₃ Nevertheless, Tokyo played a key role in the Indonesian rescue effort, ultimately extending more funds to Jakarta than to Bangkok. As before, international authorities played the most prominent role in assembling the package: the IMF, World Bank, and Asian Development Bank extended lines of credit worth a combined $18 billion. Japan assumed a lead role in extending supplemental assistance, contributing $5 billion—matched by Singapore—to a $15 billion package of "second–line" credits available to Jakarta. The United States, which was noticeably absent from the Thai bailout, promised $3 billion, while Australia and Malaysia each pledged an additional $1 billion.

Officials in Tokyo hoped that decisive action in Indonesia would prevent the crisis from spreading across Southeast Asia—and perhaps Asia as a whole. In early November, the Bank of Japan joined counterparts in Singapore and Indonesia in a coordinated effort to support the rupiah; monetary authorities from the three countries purchased some $500 million of the Indonesian currency on the Singapore foreign exchange market, at the time driving the value of the rupiah up 10 percent against the dollar. ₄₄ Japanese policymakers clearly hoped the action would set a precedent for further regional monetary coordination in the future.

Regional Initiatives and the Asian Monetary Fund

In addition to supporting IMF actions and offering supplemental assistance at the bilateral level, Tokyo sought to organize a regional response to the Asian crisis. During a regular meeting in October between MITI minister Horiuchi Mitsuo and his ASEAN counterparts, for example, Japan proposed a number of measures to strengthen Southeast Asia's "competitiveness." Among the somewhat vague initiatives—which received only a lukewarm reception in Kuala Lumpur—were proposals to increase private–sector involvement in infrastructure development and to improve the region's investment climate. The MITI minister also encouraged ASEAN to further reduce the region's tariffs—particularly for automobile components, a major strength for corporate Japan in Asia. ₄₅ As the Japanese contribution to these initiatives, Mr. Horiuchi promised expanded trade and investment insurance along the lines offered to Thailand.

The most prominent Japanese initiative, however, was a proposal for an independent Asian monetary fund to respond to future regional economic crises. Tokyo's proposal, tabled at a meeting of G–7 central bankers and finance ministers in Hong Kong in September, would have created a pool of up to $100 billion to defend Asian currencies from speculative attack. The plan envisioned Japan as the primary donor to the fund, but all regional economies would contribute to the effort. Several Southeast Asian leaders lent immediate support to the idea, partly out of a desire to sidestep the strict conditions imposed on IMF lending.

The plan drew immediate criticism from American and IMF officials, who feared that the new facility would usurp the IMF's authority as the international lender of last resort. Western monetary authorities were particularly concerned that the Asian fund could produce a serious moral hazard in the region. The existence of a large bailout pool, lacking the same disciplines applied to IMF lending, could serve as a disincentive to undertake complex and politically difficult economic reforms. At worst, the easy availability of emergency funds could actually encourage reckless lending and investment—although Asian officials denounced this charge as "patronizing."

The Asian fund proposal raised another concern for U.S. officials: a Japan–centered facility could seriously undermine American influence in the region. A number of Southeast Asian countries were nonplussed by Washington's sermons on the virtue of economic

reform—even as it refused to contribute to the Thai bailout package. Many in the region also blamed the United States for the harsh conditions attached to IMF lending. ₄₆ The appeal of the Japanese proposal thus stemmed in part from a tide of anti–American sentiment sweeping across the region; a separate funding facility could serve as a way around Washington's grating pontification.

The debate surrounding the merits of the Asian monetary fund left Washington in a difficult position. On the one hand, American officials openly expressed the hope that Japan would play a central role in resolving the currency crisis. After the highly unpopular Mexican bailout in the spring of 1995, Washington was in no position to lead an international rescue effort for a handful of obscure Southeast Asian economies. American officials therefore appeared to subscribe to the financial equivalent of the nineteenth–century "sphere of influence" condominium among the great powers: if Mexico was a U.S. problem, Asia is Japan's. At the same time, Washington desperately sought to avoid the obvious implications of that construct, as few could stomach the prospect of ceding influence in Asia to Japan. The United States therefore pursued a naked "have your cake and eat it, too" strategy: the IMF would dictate the terms of the package, and Japan would supply a significant percentage of the funds.

That strategy proved to be an astonishing success. Even as Tokyo continued to contribute generously to the IMF's rescue packages in Asia—as of this writing Japan has offered $10 billion in "second–line" financial support to South Korea as well—Japanese officials faced intense pressure to withdraw their proposal and reaffirm the central role of the IMF in addressing the crisis. Ultimately Tokyo backed away from its Asian fund proposal; indeed, its capitulation to Western pressure was complete. Japan initially sought a compromise in a regional facility that would supplement IMF lending. Member economies would make formal, prior commitments to the fund, but any lending would be subject to the same conditions as IMF funds. Even this proposal was watered down substantially, however. At a November meeting in Manila, deputy finance ministers from 14 Asia–Pacific countries endorsed the creation of a regional "cooperative financing arrangement," but the details of the plan remain vague. Indeed, the so–called "Manila framework"—later endorsed by regional leaders at the Asian–Pacific Economic Cooperation (APEC) summit in Vancouver—contained no details about how the supplemental facility would operate, which countries would participate, or how much they would contribute. ₄₇ To date the plan appears to represent little more than a ratification of the voluntary, ad hoc approach that Asia has pursued throughout the crisis—although Tokyo will host a meeting early next year to "carry forward the initiatives under this framework."

Western criticism was clearly not the only factor behind the demise of the Asia fund initiative, however. Domestic fiscal constraints and financial turmoil tempered Japanese enthusiasm for grand schemes requiring massive new commitments of resources. As a number of Japanese financial institutions closed their doors in the face of scandal and bad debt—most prominently Yamaichi Securities, which folded in November just as officials were gathering in Manila—Tokyo came down with a severe case of cold feet. The realization that Japan might have to deploy public funds at home to protect depositors at risk from the bank failures proved to be the final nail in the coffin for the Asia fund initiative. In mid–November a Japanese government official was quoted as saying, "A permanent monetary fund would be financially burdensome even to economically strong countries. We did not think from the start the idea really feasible." ₄₈ At a press conference during the Vancouver APEC meetings just a few days later, Mr. Hashimoto stated, "In the Asia–Pacific region, we are ready to take on roles that are appropriate [to help the region through the crisis.] But that does not mean that Japan . . . can pull ahead of other economies in the Asia Pacific region as a locomotive. . . . Each of us recognizes each other's freedom, philosophy and methods, and none of us are in a position to impose our own ways on others." The prime minister's effort to downplay Japan's role as a regional leader is a striking departure from earlier action and rhetoric. In the months following Mr. Hashimoto's remarks, complaints that Japan was doing too much to address the crisis would give way to complaints that it had not done enough.

The Effect of the Crisis on Japanese Commercial Diplomacy

The severity of Japan's own economic troubles may have important implications for the future of keizai kyoryoku. The economic cooperation programs of the future are not likely to be what they once were: ODA programs already face significant budget cuts over the near term, and government agencies across Kasumigaseki will be under constant pressure to reduce expenditures as Japan works to trim its fiscal deficit. Additional financial crises—a not unlikely prospect, given the scale of bad debts in the banking system—would only tighten these constraints and place further limits on the funds available for commercial diplomacy.

Nevertheless, the keizai kyoryoku framework will continue to guide much of Tokyo's foreign policy establishment. Budgetary pressures will impede and erode—but not destroy. In Japan's current interest rate environment, for example, JEx–Im and OECF require only a minimal subsidy from the central government to support the "concessional" terms on their loans. At least over the short term, the lending programs of the two institutions—the vital organs of Japan's commercial diplomacy—may go largely unaffected by the turmoil around them. Both organizations will therefore continue to pursue new roles and missions with the full support of corporate Japan.

Keizai kyoryoku will survive because in Japan commercial diplomacy has always been synonymous with foreign policy. Economic cooperation programs have played a central role in Japan's postwar global strategy—to a large extent, these initiatives have defined Japan's relationship with the outside world since 1945. As long as Tokyo continues to view the international economic environment—and the free flow of trade and investment—as vital to the nation's security, the keizai kyoryoku framework will continue to shape the activity of businessmen and diplomats alike.

Endnotes

Note 1: Quoted in David Arase, Buying Power: The Political Economy of Japan's Foreign Aid (Boulder, Colo.: Lynne Rienner Publishers, 1995), p. 16. The book provides a detailed and comprehensive overview of the history of Japan's economic cooperation policies—and describes how ODA has been an integral part of strategies to support Japanese corporate interests. Back.

Note 2: To satisfy the current OECD definition of ODA, official grants and loans to a specified list of developing countries and territories must have promotion of economic development and welfare as their main objective and carry concessional financial terms, i.e., a grant element of at least 25 percent. Back.

Note 3: As Arase notes, "[T]he problem of having to meet Western foreign aid norms became one of altering formal appearances while preserving the substance of the economic cooperation system." Arase, Buying Power, p. 51. Back.

Note 4: MITI, Keizai Kyoryoku no Genjo to Mondaiten (The Current Status and Problems of Economic Cooperation) (Tokyo: MITI, 1995). Back.

Note 5: The Export Import Bank of Japan, Annual Report 1996, pp. 13–20. Back.

Note 6: Tadashi Saito, "Japan's Trade Insurance Program: Responding to the Third World Debt Crisis," JEI Report No. 14A, April 12, 1991. Back.

Note 7: OECF, Annual Report, 1997, p. 24. Back.

Note 8: MITI, Tsushou Hakusho 1996 (1996 Trade White Paper) (Tokyo: Ministry of Finance Printing Office, 1996), p. 707. Back.

Note 9: Interestingly, JODC was known as the Asia Trade and Development Association until 1972. Back.

Note 10: The Hashimoto government has indicated that foreign aid expenditures will be slashed 10 percent in FY 1998. < Back.

Note 11: In contrast, about 98 percent of American foreign aid is in grant form. Back.

Note 12: Much of Tokyo's defense of its aid practices deserves consideration. Japanese aid officials argue that the focus on Asia is natural and represents Japan's comparative advantage. Other donors also focus on regions with which they have historical ties; France's aid program is concentrated in northern Africa, for example. Tokyo also asserts that the emphasis on loans stems from a belief that developing countries should be helped to help themselves; the payback burden gives the recipient a stake in any given project's success. Finally, many Japanese aid officials argue that support for economic infrastructure represents the most effective way to raise standards of living in the developing world. All these arguments may be true; none necessarily refutes the claim that Japanese ODA retains an element of mercantilist intent. Back.

Note 13: New commitments are to be distinguished from net disbursements, which subtract the repayments received from prior borrowers. Japan's focus on loans in its ODA program presents Tokyo with a dilemma: the volume of new loan commitments must expand annually just to hold net disbursements at a stable level. The problem was brought home in FY 1996, when a significant increase in repayments more than matched the above–noted increase in new commitments. Back.

Note 14: An OECF survey of ODA contractors released in 1994 attempted to refute these claims, purportedly demonstrating that the vast majority of contractors designated as host country firms had no ties to Japanese affiliates or subsidiaries. The survey relied on voluntary responses from 211 contractors in India, Indonesia, Thailand, the Philippines, and Malaysia; only 115 companies responded, however, suggesting a sample bias that undermines the survey's credibility. Back.

Note 15: Japan International Cooperation Agency, 1995 Annual Report, p. 183. Back.

Note 16: The imperative of increasing leverage against a potentially unstable political environment has led some Japanese business representatives to call for greater cooperation among JEx–Im and the export credit and insurance agencies of the United States and Europe. For at least one major Japanese trading firm, a precondition for involvement in large–scale capital projects in the developing world is the involvement of an American partner—preferably backed by U.S. Ex–Im Bank as well as multilateral financing institutions. Back.

Note 17: OECF, Annual Report,, p. 218. Back.

Note 18: Arase, Buying Power, pp. 129–34; Walter Hatch and Kozo Yamamura, Asia in Japan's Embrace: Building a Regional Production Alliance (New York: Cambridge University Press, 1996), pp. 138–40; Danny Unger, "Japan's Capital Exports: Molding East Asia," in Danny Unger and Paul Blackburn, eds., Japan's Emerging Global Role (Boulder, Colo.: Lynne Rienner Publishers, 1993), pp. 160—62; and Edith Terry, "The East Asian Miracle: One Paradigm Too Many?," Atlanta Economic Journal, September 1996. Hatch and Yamamura argue provocatively that Japanese business and government are working together to construct integrated production networks in a number of key industries across Asia that both preserve Japan's technological leadership and exclude other investors. Back.

Note 19: Export–Import Bank of the United States, Report to the Congress on Export Credit Competition and the Export–Import Bank of the United States: For the Period January 1, 1995 through December 31, 1995, 1996. See tables in the summary. Back.

Note 20: Dick Nanto, "Japan's Official Support of Trade and Foreign Investments," CRS

Report for Congress, December 6, 1996, p. 2. Back.

Note 21: Saito, "Japan's Trade Insurance Program," p. 4. Back.

Note 22: Arase, Buying Power, p. 114. Back.

Note 23: The article, entitled "A Spectacular Waste of 1.25 Trillion Yen," appeared in the November 4, 1995, issue of Shukan Gendai. Excerpts from the article appear in OECF Newsletter, January 1996, pp. 9–12. Back.

Note 24: OECD, Development Cooperation Review Series: Japan (Paris: OECD), 1996, p.28. Back.

Note 25: For a comprehensive—if somewhat dated—overview of the role of bureaucratic politics and foreign pressure in Japanese aid policy, see Robert Orr, The Emergence of Japan's Foreign Aid Power (New York: Columbia University Press, 1990). Back.

Note 26: The impending JEx–Im—OECF merger is the outcome of a March 1995 cabinet decision. The announcement sparked international criticism from observers concerned that the move represented an overt return to mercantilism in Japan's aid program. In this case, however, the decision appears entirely political; despite opposition from officials in both institutions, legislators imposed the merger in a fig–leaf quest for "smaller government." Back.

Note 27: OECF loans generally carry a 25– to 30–year payback period, including a ten–year grace period. Currently loans are set at 4 percent for upper–middle–income countries, 2.3 percent for low– to middle–income countries, and 1 percent for the world's poorest countries. These rates were cut modestly in 1995 after escalating complaints in the developing world about the onerous payback burden—which has been magnified by the yen's dramatic appreciation over the last ten years. Back.

Note 28: MITI, Dai 25–kai kaigai jigyo katusudo doko chosa gaiyo (Outline of the 25th Survey on the Overseas Business Activities of Japanese Firms), March 1996, p. 8. Back.

Note 29: MITI, 1996 Tsusho hakusho (Soron) (1996 Trade White Paper: Introduction) (Tokyo: Ministry of Finance Printing Office, 1996), pp. 227–29. Back.

Note 30: Economist, "Building the New Asia," May 25, 1996, pp. 65–66. Back.

Note 31: Ibid., p. 66. Back.

Note 32: The Industrial Structure Council has a long history of involvement in formulating Japan's economic cooperation policies. The group issued a report in 1972, for example, that discussed the use of keizai kyoryoku as a tool for upgrading Japan's industrial structure; the current account surplus would be used to finance foreign direct investment, in the process boosting the competitiveness of Japanese firms and improving the nation's economic security. See Arase, Buying Power, pp. 64–65. Back.

Note 33: The February 5, 1996, English–language version of the report by MITI's Economic Cooperation Committee is entitled "Towards New Trends Concerning Development of Economic Infrastructure in Asia." Copies are available from MITI's Web page at http:\\www.miti.go.jp. Back.

Note 34: Hisane Masaki, "New ODA Strategy Debuts in Thailand," Japan Times, April 23, 1996, p. 1. Back.

Note 35: See, for example, Hijiri Inose, "Aid Plan Makes Room for Private Firms," Nikkei Weekly, March 11, 1996, p. 2. Back.

Note 36: Ibid. See also Asahi Shimbun, "Minkatsu Infura, enshakkan de shien" (Yen Loans to Support Private Infrastructure Projects), February 20, 1996. Back.

Note 37: Export–Import Bank of Japan, "Promoting Economic Interactions within the Asian Region: JEx–Im–Sponsored 'Tokyo Meeting of Export–Financing Institutions in Asia,'" News Release, March 10, 1996. Back.

Note 38: See, for example, Walter Hatch and Kozo Yamamura, Asia in Japan's Embrace: Building a Regional Production Alliance (Cambridge: Cambridge University Press, 1996). Also of note is the authors' follow–on piece, "A Looming Entry Barrier: Japan's Production Networks in Asia," NBR Analysis 8, No. 1, February 1997. Back.

Note 39: One analyst has estimated that the problems in Asia could shave between 0.4 and 0.8 percentage points off Japan's GDP growth rate in FY 1998—a serious hit for an economy already mired in recession. See Eric Altbach, "Japan, United States Back Up IMF Indonesian Bailout Plan," JEI Report No. 42B, November 7, 1997, p.4. Back.

Note 40: Australia, China, Hong Kong, Malaysia, and Singapore each pledged $1 billion to the effort; South Korea and Indonesia each added $500 million. The Asian Development Bank and the World Bank will contribute the balance of the funds. Back.

Note 41: As part of a new component to Tokyo's foreign aid policy, the funds extended to Bangkok for environmental purposes carry particularly generous terms—0.75 percent interest over 40 years with a 10–year grace period—and in essence differ little from outright grants. Tokyo has further indicated that because environmental loans carry such soft conditions, disbursements in the future may be explicitly tied to procurement from Japanese contractors. Here, again, is a classic example of keizai kyoryoku: MITI has already taken a number of steps to promote sales of Japanese environmental technologies overseas, particularly in Asia; the "new" direction in ODA policy provides a perfect complement to this goal. Despite this obvious step backward in the openness of the Japanese aid program, however, the international community has voiced little protest. At a time when foreign aid programs around the world are encountering increasingly tight fiscal constraints, other OECD countries are hardly in a position to criticize the world's largest ODA program. Back.

Note 42: Kwan Weng Kin, "Chavalit Assured of Japan's Continued Help," Singapore Straits Times, October 11, 1997. Back.

Note 43: Eric Altbach, "Japan, United States Back Up IMF Indonesian Bailout Plan," p. 4. Back.

Note 44: Ibid., p. 4. Back.

Note 45: Achara Ashayagachat, "ASEAN: Japan to Push for an Integrated Market of 500 Million People," Bangkok Post, October 16, 1997, p. 2. Back.

Note 46: See, for example, Michael Vatikiotis, "Pacific Divide," Far Eastern Economic Review, November 6, 1997, p. 14; and Henny Sender et al., "Not a Happy Bunch," Far Eastern Economic Review, October 2, 1997, p. 69. Back.

Note 47: David Holley and Evelyn Iritani, "Finance Officials Bank IMF Bailout Role," Los Angeles Times, November 20, 1997, p. D3. Back.

Note 48: Barry Porter, "Split over Nature of Regional Entity Eases as Common Ground on Currency Crisis Develops," South China Morning Post, November 16, 1997, p. 3. Back.