In Its Fight for Allies, Japan Writes Big Checks

Japan invests in its neighbors to keep the Chinese at bay

Yoshihiko Isozaki (center), Japanese parliamentary vice minister of economy, trade and industry, at the ribbon-cutting for the Thilawa Special Economic Zone Project in Thilawa, Myanmar, on Nov. 30, 2013.

Photographer: Soe Than WIN/AFP/Getty Images

One of Japanese Prime Minister Shinzo Abe’s foreign policy goals is to team up with other Asian countries threatened by the rise of China. He’s expanding Japan’s aid for big infrastructure projects in Asian nations. In some cases the Japanese government finances these ventures through grants and loans; in others the Asian Development Bank, which has assets of $116 billion, counts 67 member countries, and is effectively controlled by Japan, lends the money.

Japan and the ADB have been funding projects since 1966, but the pace has picked up in the past year. On July 4, at a summit of five Mekong River nations, Abe pledged 750 billion yen ($6.1 billion) in aid, part of his plan to increase by 25 percent Japanese and ADB funding for infrastructure projects. The ADB lent more than $10 billion last year in Asia, a 17 percent increase from 2013. That, the ADB promises, is just the start of its new, more generous policy. In the spring, the bank unveiled plans to increase annual operations by 50 percent. “I want ADB to be stronger, better, and faster,” the bank’s president, Takehiko Nakao, said in a May 4 speech.

The projects Japan and the ADB have agreed to help fund include a port and an industrial zone in southeastern Myanmar, a highway in Vietnam’s Mekong Delta, a bridge over the Mekong River in Cambodia, a subway line in Jakarta, a rail line in Thailand, the Delhi-Mumbai Industrial Corridor in India, and roads for the Indian state of Madhya Pradesh.

The Chinese didn’t have a development bank of their own until President Xi Jinping created an alternative to the ADB in June with the opening of the Asian Infrastructure Investment Bank, which has $100 billion in capital and 57 members. The U.S. and Japan declined to join. For Japan, the rise of the AIIB means “the competition for political influence with China is likely to accelerate,” says Euan Graham, director of the international security program at the Lowy Institute for International Policy in Sydney.

Some analysts are already predicting the Japanese push will lose momentum. The power of the ADB will wane, says Hong Hao, chief China strategist at Bocom International Holdings, an investment bank. The bank’s “trajectory has largely been parallel with the economic development of Japan,” he says. Abe has provided a short-term boost, but with Japan’s population shrinking and the government heavily in debt, the ADB “is losing its relevance because of Japan’s declining economic might.” Toshiyuki Doi, a senior adviser in Bangkok with Mekong Watch, a Tokyo-based nongovernmental organization, says, “Japan cannot keep up with China.” Just to play it safe, 42 states belong to both the ADB and the AIIB.

Kraisin Vongsurakrai, director of the Thailand Board of Trade and secretary general of the Thai-China Business Council, says, “Thailand welcomes both China and Japan. But China still takes the lead.”

Abe is relying on Asian leaders who need infrastructure funding but are wary of China, which is building artificial islands and an airstrip in the disputed waters of the South China Sea, where Brunei, Malaysia, the Philippines, Taiwan, and Vietnam all have claims. Abe can also count on the long track record of Japanese corporate spending in the region, where his country’s multinationals account for 12 percent of foreign direct investment, making Japan the largest source of outside funding. China lags behind at just more than 2 percent, says the Lowy Institute’s Graham: “When you look at the investment picture, Japan is the giant. China cannot compare.”

Asians can benefit from the Japan-China rivalry. The strategy of the Association of Southeast Asian Nations is “Let’s hedge our bets and try to play off as many countries as possible,” says Chia Shuhui, an analyst in Singapore with BMI Research. “The more the merrier.” 

—With Suttinee Yuvejwattana, Ting Shi, and John Boudreau

The bottom line: Japan is expanding aid to Asia before China’s new development bank embarks on Asian infrastructure programs.


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