JAPAN DELAYS DECISION ON CHINA LOAN PROGRAM

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 001735 SIPDIS SIPDIS E.O. 12958: DECL: 03/30/2031 TAGS: PREL PGOV EAID CH JA SUBJECT: JAPAN DELAYS DECISION ON CHINA LOAN PROGRAM Classified By: Acting Deputy Chief of Mission James Zumwalt. Reasons:1 .4(b/d). ¶1. (C) Summary: Japan has decided to delay a decision on extending ODA yen loans to China for FY 2005 (April 1, 2005 to March 31, 2006),reflecting growing political difficulties in the bilateral relationship. The delay resulted from a determination by MOFA that its proposal for a yen loan program at last year's level would not have been approved by Diet members who have become increasingly sensitive to the public's anti-Chinese sentiment. Japan is also using the postponement to express pique at recent PRC statements. MOFA may have to wait for some positive news in the political bilateral relationship before submitting the yen loan program for Diet approval. However, in the meantime, Japan's considerable grant aid program continues. End Summary. Yen Loan Approval Delayed -------------- ¶2. (C) Reflecting growing friction between Japan and China, PM Koizumi told reporters on March 23 that ODA yen loans to China should be made in the context of overall Japan-China relations, and that Japan would put off its decision on extending new yen loans to China for FY 2005 (April 1, 2005 to March 31, 2006). On March 22, Assistant Cabinet Secretary Ando had told the DCM that Japan was considering postponing the FY 2005 yen loan program to signal its ire with PRC FM Li's statement that PM Koizumi's Yasukuni Shrine visits are "silly and immoral," as well as China's aggressive position on the East China Sea energy talks. On March 27, Komeito Upper House Councillor and MOFA Parliamentary Vice Minister Kiyohiko Toyama told Embassy Tokyo political officer that decisions on yen loans are normally made before the end of the fiscal year, March 31, but the decision on the China program for the current fiscal year had been delayed for political reasons. ¶3. (C) Toyama said that in accord with a request from Beijing, MOFA had prepared a yen loan program for FY 2005 in the amount of yen 85.9 billion (roughly USD 746 million) (amount is net after repayments received on previous years' loans). That proposed yen loan amount was the same as that provided in FY 2004. However, Toyama related, in late February a heated political discussion ensued within the LDP over the size of the FY 2005 proposal. LDP hard-liners argued that yen 85.9 billion was too much in view of Japan's deteriorating relationship with China. Others argued that Chinese political leaders and members of the public who were familiar with the yen loan program recognized Japan's generosity and that it should continue until the 2008 Olympics, when the two countries had agreed to end the program. Eventually, he said, it was decided to reduce the amount of FY 2005 by some yen 5 billion to yen 10 billion. But because of the political debate, it was suddenly decided to postpone the matter until lawmakers felt more comfortable giving new yen loans to China. ¶4. (C) In a separate meeting March 30, Foreign Policy Bureau Policy Coordination Division Deputy Director Noriake Abe told the embassy that MOFA's consultations with Diet members from February had convinced the ministry that the program would not have been approved by the appropriate LDP Diet committee -- an informal, but traditional step needed before cabinet approval. Consequently, MOFA decided to delay approval of the FY 2005 program. Abe noted that anti-Chinese sentiment in Japan had become such an emotional issue that it was difficult to say when the FY 2005 program might be presented to the Diet. Since the decision on suspending the process was politically motivated, he observed, it would likely take a positive step by the PRC to get the process back on track. Unfortunately, he lamented, there has been no good news in Japan-China political relations for quite some time. New flexibility by China in the East China Sea gas drilling talks would be one such step, he observed. Ruling-Coalition-Partner Komeito Party Reaction -------------- -- ¶5. (C) The Komeito Party's Toyama told us that Party President Kanzaki was quite unhappy with the postponement decision. Kanzaki, who has good relations with PRC leaders, TOKYO 00001735 002 OF 002 has asked Komeito Policy Research Council Chairman Yoshihisa to discuss the matter with his LDP counterpart, Hidenao Nakagawa, with a view toward early resolution. Toyama, however, also noted that as a sign of the growing domestic political difficulties for Japan-China relations, not all Komeito Diet members supported continuing the yen loan program at last year's rate. In past years, he said, all Komeito Diet members would have supported a generous program, reflecting the party's amicable contact with the Chinese Communist Party and strong desire for improved relations between the two countries. This year, however, some Komeito Diet members opposed the MOFA plan, agreeing with LDP hard liners that China did not deserve such generous treatment, Toyama confided. Nonetheless, on March 30 Komeito Secretary General Fuyushiba reportedly strongly protested the postponement on the FY 2005 program to MOFA Economic Cooperation Bureau DG Sato. Grant Aid Program Continues -------------- ¶6. (SBU) Although the decision on new yen loans has been delayed, MOFA Economic Cooperation Bureau First Country Division Director Wada informed AID Counselor that USD 373,610,000 of grant and technical cooperation assistance is still being provided to China. The MOFA grant assistance to China has two primary foci: global issues, such as the environmental (e.g., deforestation, desertification) and emerging health concerns (e.g., SARS, avian influenza, HIV/AIDS),and cultural assistance (e.g., youth exchanges, Japanese/Chinese language exchanges, and media broadcast programs.) Grant assistance totals USD 50,800,000 in FY ¶2005. MOFA technical cooperation in FY 2005 totals USD 322,800,000 which consists of the two above foci, i.e., global issues assistance and cultural assistance, plus two additional areas of focus: economic structural reform (e.g., assistance with intellectual property rights, taxation, and social welfare),and poverty reduction in rural areas (e.g., assistance in health care, water and sanitation). DONOVAN