Japan Could Benefit from China's One Belt, One Road Plan

Japan Could Benefit from China's One Belt, One Road Plan

Japan is considering alternative options to enhance its position—even limited cooperation with China.

Having recently met President Xi Jinping on the sidelines of the G20 summit, Prime Minister Shinzo Abe has once again expressed interest in China’s Belt and Road Initiative (BRI), thus renewing momentum around the possibility of improving deteriorating Japan-China relations. Despite Abe’s growing interest, many in Japan remain opposed to joining the BRI, proposing instead that Japan compete with China through its Partnership for Quality Infrastructure, Abe’s “Free and Open Indo-Pacific Strategy,” and the newest addition, the Japan Infrastructural Initiative. However, given the fast-changing dynamics of international relations in the Asia-Pacific, as well as Japan’s position there, Tokyo’s initial dismissive attitude to the BRI carries with it the ability to hurt the country’s economic interests and even diminish its presence as a major power in the region. While it makes more sense for Japan to welcome the BRI from a purely economic standpoint, other strategic benefits could also accrue as a result of this venture.

 

The BRI, which was launched in 2013 as “One Belt, One Road,” involves China underwriting billions of dollars of infrastructure investment in countries along the old Silk Road linking Europe, Asia and Africa. Beijing has been incredibly ambitious in its project, spending roughly $150 billion a year in the sixty-eight countries that have signed up for the scheme. However, a common concern amongst many states and critics is that the BRI has been chiefly designed to help China enlarge its strategic sphere of influence while creating new sources of growth for its own economy.

It is clear that Japan would prefer a U.S.-based regional order. However, Tokyo has to factor in its current position in the region. For decades, Japan has been suffering from economic stagnation with “Abenomics,” which has yet to achieve its goal of raising inflation to 2 percent. America’s waning influence in the Asia-Pacific region, uncertainty about the Trump administration and the decision to pull out of the Trans-Pacific Partnership are factors that weigh on Abe’s calculations. Further, strained relations with China and South Korea regarding ongoing territorial disputes and historical grievances have consistently driven a wedge between Japan and both these nations. Finally, with the alarmingly unstable nature of the North Korean regime, it is in Japan’s best interests to sooth tensions with its neighbours. Given these dilemmas, it is understandable that Japan is considering alternative options to enhance its position—even limited cooperation with China.

There are multiple arguments for Japan joining the BRI. First, while Japan and China can—and should—continue to compete with each other (which has its own benefits), joining the BRI can enable a greater level of cooperation leading to a deeper impact on infrastructural projects. Infrastructural development in Asia is not a zero-sum game and the BRI and other projects can provide win-win outcomes by addressing infrastructure gaps, improving trade flows and stimulating economic growth.

Putting the current scenario into perspective, Japan’s initiative to promote infrastructural development is led by its Partnership for Quality Infrastructure, in which Tokyo pledged $110 billion over five years to help Asian countries build high-quality infrastructure. In May 2016, this amount was revised to $200 billion and expanded to include Africa. Additionally, in December 2016, the Japan Infrastructure Initiative was established. Comprised of Mitsubishi UFJ Lease & Finance (47.55 percent), Hitachi Capital (47.55 percent) and Bank of Tokyo-Mitsubishi UFJ (4.9 percent), the venture aims to provide a total of around 100 billion yen ($878 million) in investments and loans to support private-sector infrastructure exports. Projects will also include power plants and railways in Asia, Europe and the United States. Abe also aims to connect Africa and Asia through the “Free and Open Indo-Pacific Strategy.

Further, financing by the Japanese government for some of the biggest infrastructural development projects come from the Asian Development Bank (ADB) and Japan International Cooperation Agency. Private funding for infrastructural development through the Partnership for Quality Infrastructure’s Public Private Partnership is now also supported by the Japan Bank for International Cooperation, Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development and Nippon Export and Investment Insurance. Some of the endeavors underway include a $8.76 billion natural gas purification plant and $4.38 billion chemical plant in Turkmenistan, a fertilizer plant in Uzbekistan, three big-ticket rail projects in the Philippines and a plethora of special economic zones in Cambodia. With India, the ADB has a large number of projects: the Delhi-Mumbai Industrial Corridor, a fifteen megawatt diesel plant on South Andaman Island, a high-speed rail line between Mumbai and Ahmedabad and two additional metro systems. Most recently, the ADB announced that it is prepared to invest up to $5 billion between 2018–22 on infrastructure to develop India’s East Coast Economic Corridor.

While the Japan International Cooperation Agency will continue to promote its low-interest yen loans and the Japan Bank for International Cooperation will strengthen loans and investment, the ADB is facing a few challenges. The main hurdles it faces are U.S. leadership in the ADB and the establishment of China’s Asian Infrastructure Investment Bank (AIIB). At the ADBs Fiftieth Anniversary conference held in Yokohama earlier this May, ADB president Takehiko Nakao addressed the new challenge of U.S. leadership retreating from the organization, stating that “it’s not really good that such a big shareholder, with the same voting share as Japan, doesn’t have an executive director.” Adding to ADB’s woes is Trump’s avowed preference for bilateral cooperation. Further, the ADB estimates that Asia needs to invest $26 trillion from 2016 to 2030, or $1.7 trillion yearly, to meet its infrastructure needs. At present, only 2.5 percent of total infrastructure investment is funded by multilateral lenders. When China and India are excluded, the ratio rises to 10 percent.

If one looks at the number of initiatives and mechanisms present in the Asia-Pacific region what is clearly visible is that ultimately, though competitive in nature, China and Japan are building parts of the same pan-Eurasian trade and connectivity network. Given this scenario, China can and should be seen as a competitive partner; at the end of the day competition can be beneficial in the sense that it will motivate the countries involved to push harder and achieve more. The Chinese and Japanese competition in Asia is extremely prominent. For example, in Sri Lanka, Japan is pursuing a plan to build a port and industrial zone at Trincomalee as a response to the $1.4 billion one that China has already built in Hambantota. In Indonesia, Japan had a contract to build a high-speed rail line from Jakarta to Bandung, which was eventually secured by the Chinese. In Bangladesh, as part of its BIG-B initiative, Japan scored a contract to build a deep-sea port on Matarbari Island at the direct expense of a Chinese plan to build one on Sonadia Island.

However, as competition ensues, China can—and should—also be seen as a collaborative partner. Given the ADB estimates mentioned above, through its BRI, China, which has committed $1.4 trillion to the initiative, can leverage multiples of private finance to foot the bill for building and servicing infrastructure. Further, with regard to the AIIB, ADB president Takehiko rightly stated that “We don’t need to regard the AIIB as a kind of rival, because there is a very large need to finance, so we can cooperate.” On this positive note, since 2015, the ADB and AIIB have cofinanced a highway project in Pakistan, a natural-gas field upgrade in Bangladesh, and a bypass road in Georgia. Thus, it is possible that China’s efforts to construct new infrastructure and economic interconnectivity throughout Eurasia can complement Japan’s, and vice versa.

Secondly, China is currently going through what one could call the growing pains of being a big-time international infrastructure investor. The BRI, which has been criticized amongst other things for its lack of transparency, also saw in May 2017 at the BRI Summit held in Beijing the absence of prominent heads of state from the UK, Germany and the United States—with India pulling out last minute due to concerns over sovereignty and territorial integrity. On the other hand, Japan has an undeniably long-standing history with official development assistance projects, financial lending and working on quality-in-infrastructure projects. For decades, Japan, with a great degree of transparency and high standards, has been pumping in massive amounts of money for the development of roads, rail lines, metro systems and ports across Asia; indeed, since 1979 Japan has provided China with aid for its economic and infrastructural development, (75 percent of which was given as yen loans) which totaled 3.1331 trillion yen by the year 2005.

Against this background, Japan’s presence in the BRI, alongside Prime Minister Abe’s attachment of conditions for joining the BRI, has the ability to continue to shape infrastructural growth such that “harmony with a free and fair Trans-Pacific economic zone” is achieved. It is well known that large-scale infrastructure projects are prone to corruption, environmental damage and cronyism. The participation of countries with high governance standards, such as Japan, can help prevent this. With the United States expressing its support for the BRI in May, it is an ideal time for Japan to continue to push for its conditions to be met, while aiming to join the BRI.