NEWS ANALYSIS : Japan Steps Up as a Summit Power Hitter

Like the last kid chosen in a pickup baseball game, Japan for years felt itself to be on the fringes when the Western World’s industrial powers got together for their annual summit. Asian outsiders at Eurocentric political and economic debates, the Japanese were given the distinct feeling that they should be grateful just to be included.

No longer. At this week’s Munich summit, Japan is flexing its economic muscles. In the process, the Japanese are shaping the debate on a surprisingly wide range of issues, from aid to the former Soviet Union to world economic growth.

By asserting its due as an economic superpower, Japan is proving that it understands the golden rule--those with the gold make the rules.

Japan’s higher stature in the post-Cold War world is easy to understand. The Japanese are rich, and no one else is right now. Japan’s trade surplus with the rest of the world has hit new records, its unemployment rate is roughly equal to its projected economic growth rate, and it is flush with the cash needed to invest in high-priority international projects. While the nation has suffered a stock market crash and a mild downturn, Japan looks absolutely vibrant next to the United States.

So, increasingly, the Western powers see Japan as a prime candidate to become banker to the Group of Seven industrial nations.

But the Japanese don’t want to play sugar daddy on other people’s pet projects, so they are now openly making controversial political demands in return for the use of their funds. That, in turn, has led to growing criticism that the Japanese are acting as if they are not yet ready to put their parochial concerns aside to become true global leaders.

“The real challenge Japan faces is whether it can assume a broader and bolder role on the world stage, one commensurate with its economic might and geopolitical potential,” wrote Kenneth S. Courtis, a senior economist for the Deutsche Bank Group in Asia.

Indeed, Japan’s biggest political demand at the summit has to do with a tiny territorial dispute that outsiders find rather trivial.

Japan vows that it will not give Russia significant economic assistance until the Russians return four small islands in the remote Kuril chain, off the northern coast of Japan, which the Soviet Union seized at the end of World War II.

While Russian President Boris N. Yeltsin has offered encouraging signals to the Japanese, he has not turned over what the Japanese call the “northern territories.” And, as a result, the Japanese have refused to provide any aid to Russia that would be funded with Japanese taxpayer money.

While the Japanese have participated on a modest scale in multinational aid efforts for Russia, “there is a line we cannot cross,” a senior Japanese Foreign Ministry official told reporters Monday. “We cannot ask for taxpayer-paid assistance to Russia. We cannot ask the Japanese people to do more without a political settlement” of the islands issue.

So far, Japan has committed itself to modest, non-taxpayer-financed aid, totaling $2.6 billion, but little of that money has actually been disbursed.

With aid to the former Soviet Union the highest priority on the Munich summit agenda, Japan’s inflexible stance has suddenly taken on new significance. The industrial powers have pledged $24 billion in aid to Russia, and it is becoming increasingly clear that the Russians need a quick pledge from the West of a one- or two-year moratorium on payments on Russia’s $74 billion in foreign debt.

But Japanese officials seemed cool to the idea of providing the Russians with a debt-forgiveness scheme before they have won international approval for their economic reform program. Japanese officials also suggested Monday that they are opposed to an expansion of the Group of Seven to include Russia in a so-called Group of Eight, an idea briefly floated by President Bush last week. They also indicated that they are not enamored of a proposed G-7 program to help finance the repair of poorly designed Soviet reactors in Russia and Eastern Europe.

Such Japanese roadblocks now appear to threaten the chances for more formalized ties between the G-7 and the Yeltsin government.

Certainly, the Japanese know that their financial strength--coupled with Russia’s weakness--gives them their first chance in a generation to press the islands issue. And the fact that the rest of the industrial world now wants Japan to step forward to take a leading role in providing aid to Russia only puts Japan in a stronger position.

“With Germany (the leading donor to Russia) reaching its limits in its ability to pay, people look around for someone else to take over, and they think of Japan,” one Japanese official said.

But the islands stand in the way. “This is an issue of justice for Japan,” he insisted.

At least publicly, the Bush Administration supports the Japanese linkage between aid and the Kuril Islands issue.

“I don’t think there is any friction on that issue,” Deputy Treasury Secretary David C. Mulford asserted Monday. But German officials, who now want someone else to take the lead in Russian aid, show little patience with the Japanese.

“We know the Japanese position, but one could ask whether the Japanese wishes (to get the islands back) could be attained more easily if they would support assistance for the former Soviet Union first,” Dieter Vogel, chief spokesman for the German government, said Monday.

Japan’s problems with the rest of the G-7 go beyond aid to Russia. Although the Japanese held a press briefing in Munich on Monday to point out that they are now the world’s leading donor of foreign aid to developing countries, they have provided little aid in Eastern Europe and former Soviet republics besides Russia--even though they do not have territorial disputes with them.

More ominously, Japan’s record trade imbalances threaten to lead to a new round of Japan-bashing and protectionism in the United States and Europe, just at a time when the G-7, led by the Bush Administration, is attempting to craft a fragile world trade agreement. Fred Bergsten, director of the Institute for International Economics in Washington, argues that Japan’s trade surplus will continue to surge until the Japanese--and the G-7 as a whole--take action to strengthen the value of the yen against other major currencies, much as they did in a coordinated policy program in the mid-1980s. That would have the effect of dampening Japanese exports.

“If they don’t do that, we could have another major crisis on Japanese trade,” said Bergsten.

Japan is trying to play down the trade gap as an issue and is doing little to address the problem, Bergsten and other Western economists say.

“We don’t think our surplus will grow much further, and we don’t think it will become a point of controversy internationally,” said a senior official of the Japanese Ministry of Finance.

The Japanese have also so far refused Bush’s requests that they help him boost the American economy in time for the November presidential election. Japan has offered only token support for the Bush Administration’s efforts to coordinate anti-recessionary measures to quickly stimulate the economy of the United States and other G-7 countries.

Bush is badly in need of some election-year help from the allies to spur the American economy, especially after last week’s stunning report that the nation’s unemployment rate in June surged to 7.8%, its highest point in more than eight years.

The White House wants the Japanese to spur their domestic government spending, in hopes that it would drive up Japanese consumer demand for foreign goods.

Just before Japanese Prime Minister Kiichi Miyazawa’s pre-summit visit to Washington last week, Japan announced a proposed budget that the government said would spur economic growth to a healthy pace of about 3.5% annually, but the Bush Administration found the announcement sadly lacking in details.

Yet Japanese officials insist that they are committed to playing a larger role within the G-7, even on such touchy matters as Russia.

“There are certain areas we cannot go along with,” noted a senior Japanese Foreign Ministry official, “but there are many areas on which we can cooperate.”