PRC Infrastructure Battle: Japan Pledges $100B for Asia

Will the Japanese International Cooperation Agency of all institutions sink the ADB?

There is utterly fascinating news coming out of Tokyo that the Japanese are preparing to provide a hundred billion dollars in funding to Asian countries in need of infrastructure. Especially smarting from being overtaken as Asia's largest and the world's second-largest economy, Japan does not enjoy playing second fiddle to the Chinese (usurpers). I recently made a series of posts on the upcoming formation of the so-called Asian Infrastructure Investment Bank (AIIB)[1, 2, 3]. Notably, the US tried to persuade all and sundry of its allies not to join the AIIB. However, only Japan actually heeded the jealous Americans' call to stay out.

Now, however, we may have the latest round in Japan-China one-upmanship. For the AIIB, China is pledging a $50B initial contribution to be matched by the other members. Not to be outdone, the Japanese are saying they will pony up $100B for Asian countries to improve their infrastructure by themselves:

Japan will announce a $100 billion plan to invest in roads, bridges, railways and other building projects in Asia, a report said Tuesday, weeks after China outlined its vision for a new infrastructure development bank in the region. In the latest twist of a tussle for influence in the fast-growing region, Prime Minister Shinzo Abe is set to unveil the five-year public-private partnership this week, Jiji Press reported. The sum is in line with the expected $100 billion capital of the Asian Infrastructure Investment Bank (AIIB) that Beijing and more than 50 founding member states are establishing.

"The envisioned assistance is aimed at demonstrating Japan's stance to contribute to building up high-quality infrastructure in Asia through human resource development and technological transfers and showing the difference from the AIIB, so that Japan can keep a high profile in the region," Jiji said, without naming its sources.

The report comes after Japan's Finance Minister Taro Aso said earlier this month at an event hosted by the Asian Development Bank (ADB), a long-established body in which Tokyo plays a key role, that Japan was drafting a plan to boost investment in Asian infrastructure.

Aside from going one better than China all by itself, the Japanese may also want to show the rest of the world that its capabilities in building infrastructure exceed those of China. Which, of course, is entirely plausible. That said, Japan may also be following the lead of China in putting capacity for, well, infrastructure to good use outside of the home nation:

“The AIIB is motivated by multiple factors, one is geopolitical and one is purely economic Twitter , because once this bank exists, combined with the Silk Road Fund, it will begin to finance a lot of infrastructure, particularly railway infrastructure, in Central Asia, Western Asia and South Asia and even in the Middle East,” says Pieter P. Bottelier, a former senior World Bank official. “If that works, it will enable the Chinese to export excess capacity of large industry, such as the state-owned railway manufacturing industry.”

So Japan may have been reluctant to be second to anyone--especially to China--in addition to being more sensitive about US concerns. Still, I will be most interested in following if and how this $100B pot is disbursed. After all, the ADB is a multilateral institution, and the Japanese may choose to funnel money instead through its aid agencies:

The money reported Tuesday would come through government-affiliated bodies, such as the Japan International Cooperation Agency (JICA) and the Japan Bank for International Cooperation (JBIC), as well as the Asian Development Bank, Jiji said.

What happens to the ADB now if its largest shareholder undercuts it by funneling money bilaterally? Ironically, the AIIB may undermine the ADB not directly but by making Japan use it less in its goodwill efforts in Asia.

UPDATE 1: Japan Times notes that a majority of JICA's annual budget is already for infrastructure. Watch out ADB?

In the initiative, the government will extend yen loans to Asian countries through the Japan International Cooperation Agency and lend through the government-affiliated Japan Bank for International Cooperation. The government is also mulling greater financial assistance by the Asian Development Bank, to which it is the largest contributor.

The government hopes to encourage private-sector investments in Asia by reducing risks with the use of public funds. At present, Asia-bound yen loans through JICA total some ¥600 billion a year, of which 60 to 70 percent is related to infrastructure.

UPDATE 2 [5/22]: Somewhat anticlimactically, Japanese PM Shinzo Abe made the announcement public today, filling in a few more details and upping the stakes to $110 billion. Take that, China:

Japan unveiled a plan on Thursday to provide $110 billion in aid for Asian infrastructure projects, as China prepares to launch a new institutional lender that is seen as encroaching on the regional financial clout of Tokyo and its ally Washington. The amount of Japanese funds, to be invested over 5 years, tops the expected $100 billion capitalisation of the Asian Infrastructure Investment Bank (AIIB), the Beijing-sponsored lender scheduled to begin operations next year.

Japanese officials said the plan, announced by Prime Minister Shinzo Abe at a symposium of Asian officials and experts, represents a 30 percent increase over Tokyo's past infrastructure funding. Japan said it wants to focus on "high quality" aid, for example, by helping recipients tap its expertise in reducing pollution while building roads and railways. That's an implicit contrast with the AIIB, whose projects Washington has said may not adequately safeguard the environment. 

"We intend to actively make use of such funds in order to spread high-quality and innovative infrastructure throughout Asia, taking a long-term view," Abe said in a speech announcing the plan. About half the funds will be extended by state affiliated agencies in charge of aid and loans and the rest in collaboration with the Asian Development Bank (ADB).