Created: 6/1/1983

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Japan: Marking Time in Economic Relations Wiih Ihe USSl


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Mc-scow's harsh reaction io Prime Minister Nakasone's moves toties with the United States, particularly in the military field, and Tokyo's hardline response militate against any significant impfovemeni in relations for some time lo come

pressure for better economic relations isow point. Business interest in the Soviet market has faded as recession and other problems have reduced demand for Soviet raw materials and energy The Japanese Government and private investors in tbe Sakhalin offshore oil and gas project do appear determined to move ahead, although prospects for new Siberian resource development projects are dim.3 total trade between Japan and the Soviet Union is likely to rise at well belowpcrccnt rate (year-to-year comparison of yen values)I

The Nakasone administration's efforts to strengthen ties with the United States have alsoillingness to cooperate in the enforcement of economic sanctions against tbe USSR. Tbe Japan Rx port-Import Bank has made no major new commitments to Moscow since the declaration of martial law in Poland. Enforcement of export controls recently has been tighiened. On other East-West issues I

The real test of Nakasone's willingness to subjugate economic interests lo broader political objectives will come two or three years from now, when domestic business conditions have improved and scene of the currcm pessimism surrounding future demand for resources and energy has


dissipated. Nakasone then may have io compromise with domesticof expanded economic ties with Moscow by permitting increased activity on the private level. Japanese banks are showing increasing interest in the Soviet Unionoienlia! borrower and arc likely at some point to lobby for removal of existing guidance against directubstantial expansion of trade would then be possible without any relaxation of thecurbs on official financing]

Japan: Marking Time In Economic Relations With the USSR

Political and Security Selling

Japanese-Soviet political relation! are nowow ponit. with liule prospect they will improve toon Although mutually profitable economic relation* have provided an elementability and an incentive for dialogue between thegovernments, economic circumstances have changed Moreover, securityhaveore prominent place in the relationship as Prime Minister Nakasone has moved to strengthen the L'S-Japan alliance. Tokyo has also cipressed concern about Soviet deptoyrncntofnd Backfire bombers in tbe Far East.|

Security Concerns

More than any of his predecessors, Nakasone hut made securityajor government concern He hat said that Japan must have the military capability to defend itselfonventional war and must be capable "of ecmribtniag in scene measure to tbe security and well-being of other state*.'* Someofficials, particularly in the Ministry of Foreign Affairs, had worried that ihe new Prime Minister's penchant for personal diplomacy might lead lo an initiative to improve relation* with Moscow. They have found, instead, that Nakasone was willing to use the Soviet military buildup in Asia, the Northern Territories issue, and thessue to bring attea-tioti lo Japan's security problems. In bis first few months in office, for example, he increased defense spendingercent. Improved relations with South Korea, decided that Japan should makeavailable to the United Stales for^

referred to

cosing the approaches to theapan in wartime,eneral left no doubt that strengthening the alliance wiih the United States and sbonng up Japan's defense capabilities were personal prioriiica.

Even before Nakasone took office, the Soviet Union had registered concern about tbe increase in defense expenditures by ihe Suzuki administration and the

closer strategic cooperation between the United States. Japan, and China In the Far East On the eve of Nakasone's accession, ihe Soviet Embassy in Tokyo protested Japan's decision io allow ihe basing ofl Misawa. Nonetheless, ihe Soviet media gave tbe new Primeonth's grace, mixing praise for his experience and influenceolitician with reminders of bis past support for revising Japan's constitutional prohibition against war as anof foreign policy and his supporttrong Japanese military)

In January, however. Moscow switchedarsh propaganda campaign and threatened to use force in an effort to counter Nakasone's move toward closer military cooperation wish tbe United States andrelations wish South Korea. In response to tbe remark about tbeaircraftASS report onanuary carried threats of possible nuclear attack against Japan. Two days beforen Bonn, Soviet Foreign Minister Gromyko for the first time publicly raised tbe issue of redeployingo the Far East. Articles denouncing the revival of Japanese militarism and the threal it posed to other Asian nations began to apctearwiihregularity in :he Soviet press H

As part of an effort io turn Japanese public opinion against increased military cooperation with the United States, the Soviet Embassy in Tokyo sent letters to two opposition parties in Japan promising tbat the Soviet Union would notuclear strike against Japan as long as Tokyo observed its three nonnuclcarpossessing,or permitting the introduction into Japan of nuclear weapons. At ihe same time, by charging thai niicfcar-equipped US forces were already based in Okinawa. Mcecow implied thai tbe nonnuclearwere not being faithfully observed and that the Japanese people should not be content with theof the Nakasone government |


The Northern Ierritorka

In addition to the increased interest in securityokyo bts uken every opportunity to press the USSfll strongly for the return of the Northern Terntones. Oe|pril. Nakasone and Chief Cabinet Secretary Gotoda reaffirmed Tokyo's longstanding demand that| the Soviet Union return the Northernthree small islands (Kunashiri. Etorofu. and Shikotanlmal! archipclagt (the Habomais) ti lapencsc conuolH

Japanese officials have repeatedly emphasized that bilateral relations will not improve substantially until the Soviet Union at least recognizes the existenceerritorial issue. Japanese diplomats keep the issue front and center by insisting that Foreign Minister Gromyko visit Tokyo before any high-level Japanese official rides Moscow The Soviets have conflictedromyko visit can take place only after the proper "atmosphere" is created and some possibitilyreakthrough on political issue* is imminent, in other word* not until they receivelhat the Northern Territories issue will not be raised and Tokyoome inter est inood Neighbor treaty,no nuclear" weapons agreement H

The Political Setting

Tokyo face* little domestic casposition to iu policy on the Northern Tern toes and generally believes the onus is on Moscow to improve bilateral relations. This unusually hardline consensus owes much toow's actions and statements in recent month*

The Economic Relationship

Tbe increased salience of security issues on both sides of the bilateral relationship comesime when the prospects for improved eeoooinic ties are uncertain. Exporti continue toalmostercent inimports declinedercent Tokyo, meanwhile, shows diminishing interest In deepening Japun's involvement in the Soviet economy For one thing. Japan's raw material and energy requirements have been reduced by recession and structural changes in the eeooorm Acting ie tandem with the United Slates and NATO. Tokyo imposed sanctions against the USSR afler the Soviet invasion ofThe sanction* included;Restrictions on official export credits to the Soviel Union.

Reaffirmationan against the export of high-

tcchnology hems included on the COCOMestrictions on contacts between high-levelofficial* Allhough the restrictions on eiport credits and official contact* have been relaxed to some extent, they remain an impediment. Japan's current insistence that Gromyko visit Tokyo before high-level Japanese visitors go to Moscowacit limitokyo continues to observe the letter of (he COCOM rest rut torn and -recently ha* begun to discourage someof transactions not yet official-on the lisij

In the case of official export credits. Tokyo has modified its policy from lime to time to assuage pnv ate-lector complaints that Japanese reUrateis arc more severe than those observed by West European countries But Tokyo has done so without destroying the framework of the sanction* Inor example. Tokyo decided that the sanction* applied only to new credits and approved an extension of

buyers credits0 million supplement to tbe South Yakutsk coking coal protect and (he (bird phase of the Siberian umber project Stretching the old-new distinction orn further toajor business interest. Tokyo justified Japan Export-Import Hank credits to finance the vale of large-diameter pipe on the ground that the pipe was part of an ongoing scries of transactions0 million ha* been allocated to finance pipe sales in fiscalhich began in April Modificai.ons also have been made as West European governments and tbe United Stales easedjj

One measure of the continuing efficacy of the export credit sanction is thai Japanese firms have signed only one plant expori contract in excessillionince Tokyo reaffirmed its commitment in2 to restrict export credits after the declara-hoc of martial Law in Poland, theport-Import Bank hasmost no new to finance plant exports

Export Credit Policy

Japan is also cooperating with US efforts to tighten the terms under which official credits are granted. In recent negotiations, the Minislry of Finance insisted on strict observance of OF.CD guidelines on interest rates. Tokyo does argue, however, that the current premiumercentage point that it must add to the long-term prime rateercent )inthe rale for Export-Import Bank loans makes official financing more expensive than loans from private bank

Moscow has responded by waging an increasingly intense campaign to undermine domestic support for Tokyo's hard line on official credits. Rather than protesting directly to the government, the Soviets have aitcmptcd to mobilize the Japanese business community to pushhange. One tactic is to remind businessmen that Japan, which was once the


Protecting Existing Economic Interests

Although not actively pushing economic lies with Moscow. Tokyo docs not want to damage existing interests. On the question of broadening the scope of COCOM restrictions, for example. Tokyo isof US motives. Reporting in the Japanese press


reflects the suspicions of trade officials andthat Washington hopes to cripple existingtrade and resource development deals with the USSR and close off potential markets for newindustries.

Tokyo also resists some parts of the US pfoposal to control equipment and technology related to the oil and gas industry. The proposed monitoringfor pipeline-related equipment in particular hiteel and machinery industries hard. Wc suspect Tokyo is also concerned that parts of the proposal might impede completion of the Sakhalin offshore oil and gag development project.

Declining Interest in Resource Deie-lopment

Resource development pro)ects in tbe USSR have lost most of Iheir luster for the Japanese. Their industrial suuciure has undergoneast transformationesult of higher energy prices that even the scale of existing projects to import raw materials from theUnion is beginning to appear excessive.

In some cases, tbe inconsistency of Soviet policies has dampened interest. Japanese businessmen wereto move aheadulp and paper complex in Sakhalin two years ago. but the Soviets said no.

The Soviet* also have recognized that prospect* Tor Urge-scale developmentrcoviet official* arc nowaunching "miniprojecii" lo develop Siberianhe concept is too ill defined, however, for the Japanese to consider it sen ously

Only the Sakhalin offshore oil and gas protectany momeatam at present Tbe oft-delayed exploratory phase of the project should be completed this summer Tokyo, proddedonsortium of major firms and banks that0 million invested in the protect, remains committed to proceeding with the development phase, even though the utilitythe ultimate consumers of the liquefied natural gas iI.NGi portion of the output, appear to have adequate supplies assured into the

Trade With the USSR

ihe governmenl's perspective the protect is another opportunity to diversify source* of LNC-Japar now depcrds on Indonesia forercent of its natural gas Moreover. Sakhalin is closer to Japan than Alaska, Australia, or Malaysia, and it does not pose the same risk of political instability a* Abu Dhabi and Indonesia Sakhalin wouldG at prices lower than those available from manysuppliers, not only because of discounts built into the contract, but also because Moscowecord of underpricing competitors toarket for its gas. Equipment sales will also provide employment opportunities in Japan. Soviet hard currency earnings from the project, which could exceed siear in tbe asjd go, could also pay forapanese exports to the USSR.


Trade with the Soviet Union is growing but is still relatively unimportant to the Japanese economy.2 total trade between the two countries rose lb percent in yen terms isee figure iiercent in US dollars toillion The Soviet Union, however, accounted forercent of the value of Japan's total foreign trade, and the Soviet share in any given year has neverercent With the exception of platinum-group metals and nickel. Japan'son the USSR for supplies of individual imported commodities remains low. On the export side only two

Japaneseandaveslakes in the Soviet market. The Japanese enjoy substantial annual trade surpluses2 billion

Japan's growing trade surplus may become anto further expansion of trade with the USSR. Although in deficit with Japan, the Soviet Union is running surpluses in trade with West EuropeanItaly has alreadycacow that its deficit is in effect financing Japan's exports to the USSR. The Italians arc demanding that the Soviets grantarger share of pipeline-related contracts to correct ihe imbalance Japanese businessmenother West European countries will make similar demands. The Soviets are likely to respord. they generally seek bilateral balance in their trading|


Exports. The value of Japanese exports io the USSR rose6 percent (year-to-year comparison of yen values)9 billionroducer goods made up ibe majority of Japanese swpments; iron and steel alone were0 percent of all exports. Large-diameter pipe for natural gas pipelines, seamless pipe for oil wells, steel plate for theof Urge-diameter pipe, and special steels were Ihe principal iron and steel products. Japaneseexpects the volume of steel exports to remain high as work on ibe Siberia-Western Europe and Soviet domestic gas pipelines continues. Shipments of large-diameter pipe should remainillion metric tons per year for al least two more years. Plate shipmentsonsccording to aindustry' newspaper, the Soviets are seeking an assured supplyear.|

Tbe worldwide recession has increased the importance of the Sovici market to Japan's steel industry. Tbe Sovietsercent of the industry's total exports, as comparedercent last yearerceniependence on the USSR for export sales should drop back into theercem range once markets improve elsewhere. By product, Japanese dependence on the Soviet market is greatest in tbe case of large-diameter pipe. The Soviet Union has been the principal buyer of this item for many yea i

Japan's machinery exports to the Soviet Union rose by almosterceniillionnlike in the past, when plant exports accounted for the growth, construction machinery, cargo-handling machinery, and dump trucks led Ihe way. Japanese observers note that the Soviets arc buying much of Ibis machinery as pan of Phase III of the Siberian timber resources project. The limber resources development contract signed in1 specified that plant and equip-lent purchases had to be made within two years.

officialslants to produce electronic goods and In automated productionbut actual exports will be limned by Tokyo's adherence to COCOM. Japan's Minislry of Foreign Affairs has refused visas to Soviets seeking to visit facilities containing sensitive technology, and MITI is taking measures to upgrade COCOM enforcement.

Machine tools essential to improvingubstantial percentage of exports to ihe USSR. Tbe Soviets purchased large numbers of grinding machines and machining centersbe Soviets also rely on Japanese suppliers forcontrols and industrial robotics. Kawasaki Heavy Industries, for example, has soldpot welding robots for use in motor vehicle assembly in the lasl three years, accordingS businessman. Nonetheless, the Soviet market is not of greatto the machine tool industryhole;wereercent of Japanese machine tool exportsn the case of individual firms, few if any depend on the Soviet Unionarket."!

Imports. The value of Japanese imports from the Soviet Union fell2ercent7 billionhe drop reflected falling demand induced by recession and falling prices for semimanufactured goods and raw materials, which haveccounted for more than half of the value of imports. The USSR accounts forercent of Japan's total import bill. Pros pec Is are not good for asoonH

Table I

Japan: Imports of Nonmonetary Gold

ihe USSR


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substantial part of tbe decline in tbe value of imports ii linkedall in the price of gold, which accounted forercent of all Japanese imports from the Soviet Unionmall amount* of Soviet gold alio may have reached Japan indirectly throughndon and Zurich markets, the largest sources of Japanese imports. Over two-thirds of tbe fall in the value of direct gold imports from the USSR is attributableecline in the price of gold. Japanese buy gold primarilyinancial asset.ownwurd movement in tbe world price reduces its attractiveness as an investment and cuts importI

ood was again Japan's leading import from tbe USSR, having been temporarily displaced by goldood import* are especially important to the pro-Soviet lobby Member firms ia the association that bandiesercent of the trade channel port of then profits to the Japan Socialist Party and other

ajor martec for fold ia INI. tee flru yaa> Japaaaw citizens wert allowed lo bar toid freer, Gold in-tutf fat aacaber boeat atmajor nwamrel teats IMrodvoed pawnee* tea*.nil for (old-a steeaaaa Imnlincni lor Japaneac alth lo evade latia Man' dca.cn arr no* rvajalred lo icpori Irafuaclloaa lo laa oftkab. Tha rciioa for iaveulna was etpeclsll* compelling In INI2 became ibe Ministryoacaok thai hat allowal pooric lo aimt blboatlaVtfafl) ia ui eiemtw atnaanTheowc*cr.jattjlrairaiii it ot ihe MaiiMry erfati Cor five years Moat wmi aroeabejchocac to seep (hot avonty id ibe inieren-earning unngi lOBCanhjew meat intra, Ihai reducina ihe potential demandlaaaTal

prornotcrs of better Japanese-Sovietecent Japanese magazine article. Ashows, however, recessiontagnant housing market tn Japan have taken their toll. Japan imported6 million worth of logs, lumber, and wood pulpompared7 million in the peak year0) million1 Here, too, much of the decline it the resultall in prices. Tbe price of pine logs, foe example, fell byercent0H

Japan's wood imports thou Id increase modestlyousing investment turnedhe fourth quarter2 and is expected to continue rising in3 For the year the increase in bousing invesirnent shouldercent Lets certain, however. Is the Soviet Union's ability to maintain its share of the market Japan's total wood imports rose in value approximatelyercenthile tbe value of Soviet shipments declined substantially IJH

The Soviet Union continues toajor supplierpalladium,arc essential to Japan's'I.es

ercent of Japan's rhodium.ercent of ita palladium, andercent of its platinum. Imports of

pan Wood imports From th* USSR

Nakasone's interestommon approach extends to the INF negotiations. We believe tbe suddenof high-level Japanese concern about the INF negotiations and the basing ofrobably has less to do with the potential threat from tbe USSR than with the need for reassurance that ihe Uniled State* gives as much priority to the defense of Japan and the western Pacific as it does to tbe defense of Western Europe and the Atlantic. |

Recession and, more recently, the Levchcnkohave spared Nakasone tbe hard decisions usually necessary to bring export credit and control policies into lineougher political stance towardThe real test of Nakasone's willingness toeconomic intercsu to broaderbjectives such as the recovery of tbe Northern Territories will come two or three years from now, when domestic business conditions have improved and some of the current pessimism surrounding future demand for resources and energy has dissipat

Nakasone will not. io our view, turn away from Japan's commitmentarder line politically. He will, however, eventually have u> compromise with tbe advocates of expanded economic ties with Moscow by permitting increased activity on the private level. Japanese banks are showing interest in the Soviet Unionotential borrower and are likely at some point to lobby for removal of the Ministry' of Finance guidance against direct loans. If the Sakhalin offshore project and tbe Siberian-Western Europe pipelines move ahead, the Soviet Union would beelter position to repay long-term credits. Thus, il is quite possible that commercial banks could displace the Japan Export-Import Bank as the primary supplier of credit for plant exports and smallerubstantial expansion of trade would then be possible without any relaxation of the existing curbs on official financing.^

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