Japan's foreign aid policy appears to be on the verge of a historic change. The world's largest provider of official development assistance since 1992, Tokyo faces a 10.4 percent funding cut in FY 1998 that is almost certain to bring this era of dominance to an end.
Political and economic pressures have forced policymakers to design a program that can survive the current focus on the domestic economy and fiscal austerity. Tokyo seems to have committed to what some observers term a "reverse course" that may result not only in reduced funding but also in changed ODA goals and philosophy. To date, however, efforts to reform the structure and institutions of ODA policymaking have been stymied by bureaucratic turf battles.
As public support for foreign aid has waned, corporate Japan has stepped up demands that the ODA program create opportunities for domestic firms as well as foster economic development overseas. Ruling Liberal Democratic Party leaders and the aid bureaucracy are being forced to create new categories of projects designed to appeal to disgruntled domestic constituencies and, at the same time, to slash the overall ODA budget. New initiatives include: lower-cost loans for environmental or "green" ODA, expanded technical cooperation that directly involves more ordinary Japanese (so-called citizen-backed ODA) and increased efforts to foster private-sector participation in infrastructure development projects. In the background, influencing each of these initiatives, is a renewed commitment to retie foreign aid funds to contracts for Japanese firms — a policy that, if carried out, will reverse a nearly 10-year effort to untie virtually all of Japan's development assistance loans.
The domestic debate over foreign aid comes at a time when economic crises are creating new demands for loans for infrastructure and human development in Asia, the biggest recipient of Japanese aid. Tokyo, already the focus of criticism for doing too little to help neighboring countries either directly or indirectly, may face further heat if it reduces ODA commitments to the troubled region. Resentment there would hurt Japan's efforts to build stronger economic and political ties to its key trading partners, especially in Southeast Asia.
The coming ODA budget cut, combined with the effort to retie funding, may bring pointed international criticism. How Tokyo handles the increasingly complicated and challenging task of reconciling conflicting domestic and international forces will determine the ultimate character of Japan's foreign aid program.
MINISTRY OF FINANCE AT CENTER OF WHIRLWIND by Jon Choy
Already devalued by previous scandals and harsh criticism, public trust in the Ministry of Finance plummeted to a new low after the Tokyo Prosecutor's Office raided MOF's headquarters in late January. The investigation and the arrest of two Banking Bureau officials led Finance Minister Hiroshi Mitsuzuka and the top career civil servant to resign. The same developments also are thought to be the reason for the suicide of another Banking Bureau examiner. After heated internal debate, Prime Minister Ryutaro Hashimoto named Hikaru Matsunaga, the head of the lower house Budget Committee and a former Minister of International Trade and Industry, to take the helm of the beleaguered Finance Ministry. The turmoil at MOF ignited furious speculation about the course of fiscal and monetary policy, the implementation of financial market deregulation and restructuring, and the state of Japanese business and bureaucratic ethics. While traders on the Tokyo Stock Exchange reacted positively to Mr. Mitsuzuka's resignation, based on the hope that the government now would be free to pursue a more expansionary fiscal policy, it still is too early to conclude how this latest scandal will play out.
HASHIMOTO LEADERSHIP HIT BY MOF SCANDAL by Barbara Wanner
Just as Washington insiders' new favorite past-time is making bets on how much longer President Clinton can stay in office amid allegations of immoral conduct and perjury, Japanese pundits are speculating on the tenure of embattled Prime Minister Ryutaro Hashimoto. Facing record-low public approval ratings over his perceived mismanagement of the economy, the Japanese leader in early December looked to be hanging on by a thread. By the end of 1997, Mr. Hashimoto appeared to be on firmer political ground, having stunned critics by announcing a ¥2 trillion ($16.7 billion at ¥120=$1.00) stimulative tax cut. Barely a month later, however, the premier's leadership again came under fire following the January 26 arrests of two Ministry of Finance officials for allegedly accepting bribes from bank officials.
PRICES STABLE IN JAPAN DURING 1997 by Douglas Ostrom
As public officials in Japan contend with a plethora of economic problems slow to nonexistent growth, troubled financial institutions and the fallout from problems in Asia, to name just three they at least can take some reassurance from the fact that inflationary pressures remain firmly in check. Although the prices of goods and services have been remarkably stable in recent years, several factors in 1997 particularly a consumption tax boost and a weak currency might have been expected to destabilize prices. The fact that they did not had to be a rare piece of good news for policymakers.
SOUTH KOREAN DEBT ROLLOVER BOON TO JAPANESE BANKS by Eric Altbach
The South Korean government reached agreement January 28 with a group of 13 leading international banks to extend the maturities on roughly $24 billion in short-term loans to local banks. Under the plan, announced in New York City, banks can exchange debt due in 1998 for loans maturing in one to three years. In a major victory for lenders, Seoul will guarantee the new loans. However, it was able to win acceptance of below-market interest rates for the new debt, which will be publicly traded. South Korean banks also will retain call options on the loans with maturities of two to three years, allowing earlier-than-scheduled repayment and acquisition of new loans at lower interest rates. The pact is especially important for Japanese banks, South Korea's largest creditors, with a total of $23.7 billion outstanding to their troubled neighbor as of the end of June 1997, according to the Bank for International Settlements.
Notes: KODAK DISPUTE
From the start, Washington's charge that Tokyo directly or indirectly hobbled world-class foreign competitors in the Japanese market for consumer photographic products was a mother lode of firsts for bilateral trade disputes. Even with the end of legal maneuvers after 32 months, the complaint continues to be a source of precedent. On the heels of the World Trade Organization's final, blanket rejection January 30 of White House claims that Japan's government skewed conditions of conditions against outsiders (see JEI Report No. 46B, December 12, 1997), the Clinton administration announced a novel method of keeping the spotlight trained on the market access issues raised initially by Eastman Kodak Co. It will put to the test formal statements Tokyo made to the WTO dispute-settlement panel about the openness of the domestic market for consumer photographic film and paper.