No. 40 — October 25, 1996


Feature Article


Christopher B. Johnstone


For the fifth straight year Japan in 1995 was a global leader in the provision of official development assistance. Tokyo increased foreign aid outlays by some 9 percent in dollar terms, a striking contrast with the aid cuts implemented by most other major donor countries in recent years. Despite occasional international criticism of the Japanese approach to ODA, foreign aid officials in Tokyo continue to pursue a strong regional focus — on Asia — as well as to concentrate heavily on loans for economic infrastructure projects.

Whether this approach will remain viable in the future is even more problematic than in the past. Two trends in particular present challenges for Tokyo's foreign aid policy: the explosion in private capital flows to the developing world and East Asia's massive infrastructure needs. With official monies increasingly scarce or structured with rigid conditions, some developing countries are finding private capital a more convenient means of financing infrastructure development. That pattern threatens to make much of Japan's aid to Asia less relevant.

Partly in response to these developments, Tokyo has formulated the outlines of a new component to its ODA strategy. This approach would use foreign aid and other forms of government financing to support directly private-sector infrastructure projects in the developing world. Although some observers praise the new strategy as realistic, it is certain to be controversial. Undoubtedly, too, this initiative will reawaken suspicions of a mercantilistic intent behind Japan's foreign aid.

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Weekly Review

--- by Barbara Wanner

Japanese voters, who three years ago wanted to shake up the ruling order, now apparently either do not care what happens in Tokyo, would prefer a more measured pace to political and economic change or simply did not like some of the candidates offered as choices in the October 20 lower house elections. That, at least, appeared to be the mixed message offered by the 59.7 percent of registered voters who bothered to cast ballots under a new system ostensibly aimed at transforming the country's politics and policies. Since voter turnout was the smallest for any lower house poll since World War II, it provided anything but a clear mandate. Nevertheless, the electorate all but ensured the continuation of a conservative, status quo-oriented government by awarding 239 seats of the 500-member House of Representatives to the Liberal Democratic Party. The LDP, which governed Japan for 38 uninterrupted years until August 1993 and for the past 14 months has served at the helm as part of a triparty ruling coalition, has not embraced economic, political and administrative reforms as its raison d'etre, unlike some of the other parties that fielded candidates. But the fact that Japanese voters denied the Liberal Democrats a simple majority, or 251 seats, in the powerful lower chamber also may suggest that the electorate wanted to check the largest party's power — perhaps out of a concern that the LDP would return to the corruption and exclusionary back-room dealmaking associated with its pre-1993 governing era. Support for other parties also keeps alive their platforms of reform.

--- by Douglas Ostrom

New data confirming a continuation of Japan's falling trade surplus, while welcome to many policymakers on either side of the Pacific, also contained hints that drops may become less likely in coming quarters. The Ministry of Finance-compiled figures indicated that the customs-clearance trade surplus contracted 33.8 percent in the July-September period from a year earlier after plunging by equally big amounts in the first two quarters of 1996. The surplus with the United States also was lower, dipping an additional 10.2 percent.

--- by Jon Choy

Old-line Japanese pension managers are turning in such poor performances, according to observers, that a shake-up of the pension management market increasingly is likely. Over the past several years Tokyo gradually has eased the tight web of regulations governing pension funds, including allowing foreign pension fund managers more opportunities to court Japanese clients. Yet this somewhat more competitive environment barely has begun to elicit new investment patterns from Japanese fund managers. With the proportion of the Japanese population over 60 due to rise rapidly in the next 20 or so years, both government and business economists are concerned that the pension system may be unable to provide seniors with the comfortable lifestyle it once promised.

--- by Christopher B. Johnstone

Amid an atmosphere of somewhat dampened public expectations, officials from the 18-member Asia Pacific Economic Cooperation forum are rushing to complete preparations for the group's annual leaders' meeting, to be held November 25 in the Philippines. In contrast with the gatherings of the last three years, this year's summit is likely to produce relatively little drama. Nevertheless, APEC officials are confident that the get-together will achieve important goals on the road to regional free trade and investment. At a final senior officials' meeting in Manila between October 18 and October 20 the delegates achieved what was described as "broad agreement" on a U.S. initiative to eliminate tariffs in the region on a range of high technology goods. American officials hope to use APEC's endorsement as a means of spurring members of the World Trade Organization to support a similar global pact at that body's first ministerial meeting in Singapore in mid-December. Delegations participating in the latest APEC gathering also reported progress in the revisions of individual members' liberalization plans — a central element of this year's agenda. Many forum officials expect that the leaders will bring additional, unexpected liberalization offers with them as continuing proof of their government's commitment to the APEC process. Nevertheless, the question of what will be on the table for the leaders' formal approval when they arrive in the Philippines next month has yet to be answered completely. This environment of uncertainty — as well as the relatively low-profile nature of this year's APEC agenda — has spurred growing disenchantment within the business community over the forum's progress.


Tiring of continued fruitless talks, the European Union decided October 14 to take its complaints about Japanese port regulations to the World Trade Organization. Invoking Article VIII:2, the European Commission called on Tokyo to enter into consultations regarding its "prior consultation system," which forces all shipping firms operating in Japan to obtain the approval of the Japan Harbor Transportation Association for any changes in scheduled calls to Japanese ports or in stevedoring companies. Current rules distinguish on paper between "major" changes, which require prior consultation with JHTA, and "minor" changes, which do not. In practice, however, JHTA, which represents terminal operators, insists on reviewing and approving all changes, no matter how small. Not only does this add to the cost of shipping goods in and out of Japan, but it limits the flexibility of companies to shuffle ship resources, freely engage in consortium agreements with other carriers, and hire the lowest cost longshoremen. The consultative process involves both JHTA and dock worker unions, but observers say that JHTA chairman Shiroo Takashima is the "shadow shogun" of Japan's ports, with the power to make arbitrary decisions.

The fate of the White House's controversial charge of government-skewed conditions of competition for foreign suppliers in Japan's consumer photographic products market is in the hands of the World Trade Organization. At an October 16 meeting the WTO's Dispute Settlement Body automatically approved Washington's September 20 request for the formation of an arbitration panel; Tokyo blocked that move at an October 3 DSB session, but it had no further recourse under WTO rules. Once selected, the three people making up the dispute-settlement panel will have at least six months to decide the validity of the Clinton administration's argument that Japan is skirting several of its international trade obligations by keeping in place measures that collectively restrict the access of Eastman Kodak Co. and other offshore photographic film and paper manufacturers to wholesale and retail distribution channels as well as limit their marketing flexibility.

NEC Corp. hopes an unusual legal maneuver will lower the odds of the firm coming out on the losing end of a dumping investigation of made-in-Japan vector supercomputers set in motion by rival Cray Research, Inc. (see JEI Report No. 29B, August 2, 1996). Company lawyers have asked the New York City-based Court of International Trade to appoint an independent organization to oversee the pricing phase of the case in place of an allegedly biased Department of Commerce. Their October 15 lawsuit asserts that the agency has prejudged the inquiry's outcome and, consequently, is not in a position to provide the fair and impartial pricing analysis to which NEC is entitled by law. As proof of Commerce's prejudice, the court filing cites a May 20 "predecisional memorandum" in which the department's Import Administration estimated dumping margins of anywhere from 163 percent to 280 percent on the SX-4 system that NEC proposed to lease to the government-funded National Center for Atmospheric Research in Boulder, Colorado (see JEI Report No. 20B, May 24, 1996). Lawyers for NEC, the tentative contract winner over Cray, pointedly note that Commerce's report was prepared more than two months before the beleaguered world supercomputer industry leader filed its dumping complaint. They portray the premature dumping analysis — the results of which were forwarded to the National Science Foundation, the organization with the final say on the climate simulation lab's procurements — as a blatant attempt by Commerce to sway NCAR's contract decision in Cray's favor.

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