North Korea: Tiptoeing toward Tokyo

North Korea looks to Japan for help with its stagnant economy

Anyone wanting to take the pulse of North Korea's relations with Japan would do well to check out Tokyo's upscale food shops. As the autumn chill sends Japanese gourmands searching for savory matsutake mushrooms, bargain-hunters will find a surprise from North Korea: Matsutake from the North cost about $8 per 100 grams--half the price of a similar package from South Korea. But shoppers, angry at North Korea's recent admission that it kidnapped 13 Japanese citizens in the 1970s and '80s, are leaving the northern variety on the shelves. "Customers won't touch North Korea's mushrooms" this year, says Takahiro Miyamoto, a store clerk in Tokyo.

In fact, Japanese consumers have been shunning most products from North Korea for several years--especially since 1998. That's when it launched a missile over Japan and sent ties between Pyongyang and Tokyo to new lows. Bilateral trade fell to $365 million last year from $485 million in 1997, with matsutake imports dropping to $10 million from $23 million. During that time, North Korea's economy has edged ever closer to disaster.

With a renewed charm offensive from North Korea's Dear Leader, Kim Jong Il, mushroom sales may perk up. And trade in inexpensive suits and clams from North Korea and used cars and machinery from Japan could get a boost as well. For Japan, the sales are insignificant, representing less than 1% of its $758 billion in annual overseas trade. But as North Korea makes gestures toward opening its economy to foreign investment--most recently by announcing the creation of a free-trade zone on the Chinese border--a major commitment from Japan to the communist country's economic revival will be crucial to the success of Pyongyang's initiatives. "Economic assistance from Japan will likely be the most important factor invigorating the North Korean economy," says Jo Dong Ho, an economist who studies North Korea at Seoul's state-funded Korea Development Institute.

North Korean officials would love to develop robust trade flows between the two countries--but some big hurdles remain. Top Japanese trading houses are still licking their wounds from the 1970s, when they built cement plants and power stations in North Korea on credit. Pyongyang still owes them almost $1 billion. "That debt must be paid off before any new yen are invested," says Osamu Watanabe, chairman of the Japan External Trade Organization.

Since North Korea doesn't have that kind of money, the Japanese government might pay the debts as part of a broader rapprochement. At a summit meeting in Pyongyang on Sept. 17, Kim and Japanese Prime Minister Junichiro Koizumi agreed to open talks in October aimed at normalizing relations and increasing economic cooperation. That, Japanese officials say privately, could include grants and loans of up to $10 billion--which would be key in unlocking the frozen gears of North Korea's economy, since no other country is likely to match what Japan contributes. To make investing in North Korea more palatable to Japanese companies--and to avoid a repeat of the failed 1970s ventures--Tokyo will need to offer trade insurance to protect investments. "Japanese companies won't rush in to North Korea unless the government provides a safety net," says Shinobu Sawaike, head of a group representing Japanese firms with interests in North Korea.

Even without such assistance, a few Japanese companies are rooting around for opportunities in North Korea. Discount men's apparel chain Aoki International Co. already imports some 7,000 suits a year from North Korea. And industrial sewing machine maker Juki Corp. had a booth at a Pyongyang trade show in May to boost its profile there.

Still, few expect a quick payoff. "It will be hard for any manufacturer to set up shop in North Korea until it develops the infrastructure for very basic necessities, like electricity," says Shoichiro Higashi, a Juki spokesman. For companies such as Juki, neighboring China offers everything foreign investors want--with far less hassle and more potential for sales and profits than they can expect in North Korea. Pyongyang needs Tokyo. But it could take years before Tokyo needs Pyongyang.

By Chester Dawson in Tokyo, with Moon Ihlwan in Seoul

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