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Yen loans for aid to developing countries being used for promoting exports

  • 2015-12-17 15:00:00
  • , Tokyo Shimbun
  • Translation

(Tokyo Shimbun: December 17, 2015 – pp. 28-29)

 

 By Yoko Nakayama, Nobuyuki Suzuki

 

 Yen loans meant for supporting infrastructure construction in the developing countries to enhance their economic self-reliance are being used to promote exports. The government has decided to provide up to 1.4 trillion yen in loans to India to underwrite the use of Shinkansen technology, which is an unprecedented amount for a single project. Yet, where does Japan, a debt-ridden country, get the money to provide loans? Such loans may become irrecoverable or go into default. In this article, we take a close look at yen loans.

 

 At the joint news conference held after the Japan-India summit on Dec. 12, Prime Minister Shinzo Abe declared proudly that “today marks the start of a new era in the Japan-India relationship,” flaunting the achievement of the bilateral talks.

 

 There is also a growing “India fever” in the government and the business sector. At this recent summit, the two countries reached basic agreement on signing a nuclear energy cooperation accord that will enable Japan to export nuclear plants to India and a deal was made on introducing a 500-kilometer Shinkansen line in India, linking Mumbai, the largest commercial center in western India, and Ahmedabad.

 

 Japan had also tried to sell the Shinkansen technology for a high speed railway project connecting Jakarta and Bandung in Indonesia, but it lost the deal to China, which offered exceptional terms – waiving the Indonesian government’s funding and loan guarantee – at the last minute.

 

 From this bitter experience, Abe pledged yen loans to cover up to 81% of the Indian Shinkansen project, which will cost a total of 980 billion rupees (approximately 1.8 trillion yen), to clinch the deal in the present case. However, this is contrary to the original purpose of yen loans, which is to support the economic development of developing countries and improve living standards there through low interest long-term loans as part of official development assistance (ODA).

 

 Naoto Amaki, a foreign affairs commentator who has long been involved with economic cooperation issues, points out that “Japan’s aid policy, which used to focus on stabilizing the local people’s livelihood and stay away from large-scale economic projects, has made a major shift.”

 

 The Abe administration included “strategic deployment of ODA” in the growth strategy approved by the cabinet in June 2013. It reviewed the ODA Charter last February and passed a cabinet decision on an outline of development cooperation. The scope Japan’s ODA has been expanded to include medium developed countries and even foreign troops engaged in disaster relief operations. A new passage on “contributing to securing national interest” was introduced into the outline.

 

 Even in the outline of TPP-related measures drawn up in late November, “expediting yen loan procedures” was included in the strategy to promote infrastructure exports. Active utilization of ODA for the promotion of infrastructure exports under the Abenomics growth strategy has gained prominence.

 

 Amaki warns that, “In the first place, aid to the developing countries to help nurture local industries and Japan’s economic policy of promoting exports are incompatible. It would still be acceptable if the Japanese people approved of this, but the government has effected a qualitative change in aid policy for the developing countries without even a debate.”

 

 Prof. Noriko Hama of Doshiba University’s graduate school, who specializes in international economics, voices the following criticism: “There has long been criticism of ‘tied aid,” or using ODA to benefit certain companies, but overall, Japan has stayed away from aid with unabashed ulterior motives. The Abe administration’s approach of using ODA to promote Abenomics is based on the mentality of ‘enhancing national prosperity and defense,” which contradicts the concept of aid.”

 

 The government decided in September to provide yen loans amounting to approximately 20 billion yen for road building and other projects in Uganda. In October, it pledged low interest loans of 12 billion yen to Uzbekistan for the construction of a thermal power generation facility. At the ASEAN meetings last month, Abe announced around 430 billion yen in loans for the Philippines’ urban railway project and infrastructure construction in other countries.

 

 Yen loans to India, seen to be a promising market, have continued to increase. Total loans up to FY2014 had exceeded 4.2 trillion yen, making India the No. 2 loan recipient after Indonesia.

 

 It must be remembered that the source of all these massive yen loans is the people’s tax money. The loans are provided by the Japan International Cooperation Agency (JICA) and the Japan Bank for International Cooperation (JBIC), which are both 100% funded by the government. These two bodies borrow from the government’s Fiscal Investment and Loan Program to provide loans to recipients determined by the government.

 

 It goes without saying that the borrowing countries will have to repay the loans in the end. However, many developing countries are politically unstable, so there is a risk of default. In recent years, a total of some 300 billion yen of loans to Myanmar (Burma), which is undergoing a democratization process, was written off in FY2012 and FY2013.

 

 According to the Foreign Ministry’s statistics, the total amount of loans made by JICA was approximately 11.2 trillion yen (as of end of September), while the balance of loans provided or guaranteed by the JBIC was 17.2 trillion yen (as of end of March). These are huge amounts in relation to the FY2015 regular budget of 96 trillion yen or the 1 trillion yen required to cover the revenue shortfall from reducing the consumption tax rate for certain items when this is raised to 10%.

 

 There is no denying that economic development aid obtained by the developing countries from Japan, which succeeded in postwar reconstruction and joined the ranks of the Organization for Economic Cooperation and Development (OECD) nations at an early date, has helped these countries in their development. China or the ROK would not have developed as fast as they had without the yen loans, and infrastructure construction will surely benefit Indonesia or India economically.

 

 Eiichi Sadamatsu, secretary general of Japan NGO Center for International Cooperation, admits that “on the whole, Japan’s ODA has benefited the recipient countries, even though it’s not all a success story and there have been good points and bad points.” However, he expresses doubts about the Indian case: “ODA should be for the benefit of the recipient country in principle. It’s fine if the result turns out to benefit Japan’s economy but there seems to be a reversal of the order of priority.”

 

 So far, the recipients of Japan’s ODA have mostly been Asian countries. The Abe administration is also actively promoting aid to the Middle East and African countries. However, China is already providing aid to many of these countries, where it exercises strong influence.

 

 Prof. Motoki Takahashi of Kobe University, who specializes in the African economies, observes that “generally speaking, aid is not bad because industrial development is essential for poverty reduction.” However, he warns against being dragged into providing aid by China without careful consideration.

 

 Takahashi points out that, “China enjoys a trade surplus and possesses the world’s largest foreign exchange reserves. It is assisting the developing countries because it has a monetary surplus. There are many risky African countries because they are over-reliant on resources. China’s modus operandi suggests ‘it’s OK not to repay loans,’ so the moral hazard of loans not being repaid may occur.”

 

 He adds: “It is necessary for the advanced nations to assist the developing countries, and stability in the international community is also in Japan’s interest. The government has the responsibility to explain this to the people. However, aid premised on the overseas expansion of certain Japanese companies undermines Japan’s reputation and would be unacceptable to the people in light of increasing poverty in Japanese society. While I am not against providing aid with Japan’s interest in mind, priority should be given to the interest of the recipient country.”

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