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