Aid Recipients Are Squeezed as The Yen Soars
International Herald Tribune
November 11, 1994
Steven Brull and Michael Richardson 

The yen's ascent to record levels is straining the finances of East Asian governments that have borrowed heavily from Japan and now must pay Tokyo back in a now more expensive currency.

Yet even as Asian and Pacific nations begin meeting Friday in Indonesia to map out increased cooperation, the issue threatens to sour relations with Tokyo, which has bluntly rebuffed requests for relief.

East Asia has been the prime recipient of Japan's soft-loan program, which was designed to foster good relations with Tokyo, but which has increasingly come to be seen as a new irritant. For Indonesia, Malaysia and China, the hardest hit, the problem has yet to become critical, but threatens to force a delay or cut back in domestic spending.

In private, some countries have repeatedly demanded relief or fresh concessions from Tokyo but have received only rigid responses. They are likely to raise the issue again in bilateral meetings with Japan at APEC, the Asia-Pacific Economic Cooperation forum, where ministerial meetings begin Friday in Bogor, Indonesia.

"We tried to renegotiate the loan in order to reduce slightly our debt burden to Japan," Prime Minister Mahathir bin Mohammad of Malaysia said in a recent speech in Japan. But, he added, "We were not given even one yen reduction."

Japan, with $11.26 billion, was the world's biggest provider of official development assistance in 1993. Most of the money is in yen-based government loans, and Asia, with more than 78 percent of the total, is the biggest recipient. But while Japan's aid has helped lay the groundwork for inflows of private capital that have been fueling the region's economic growth, the yen has more than doubled in value against the dollar since the Plaza Accord of 1985 and has saddled many countries with a heavier repayment burden than they planned for.

Because the currencies of most Asian countries are pegged to the dollar, the rise of the yen has also made imports of Japanese capital goods more expensive; for the Japanese, imports of products from elsewhere in Asia have become far cheaper.
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Malaysia, which has about one-third of its $15 billion official foreign debt denominated in yen, has forsworn additional borrowing in yen. The decision is largely symbolic, however, because Malaysia's economy has grown to the extent that it will soon no longer qualify for Japanese development assistance.

Other countries in the region, including Indonesia, China, Thailand and the Philippines, are taking steps to cut their exposure to the Japanese currency for official and for private loans.

In Tokyo, the debt-repayment issue is sensitive because officials are wary of making any special concessions that could lead other recipient nations to demand similar treatment, greatly increasing Japanese expenditures.

"The amounts involved are huge, so bureaucrats are worried that changing things will create problems that will spill over into other areas," said one source close to a Japanese government lending institution.

Officially, Tokyo's response has been unbending. "We have no obligation," said one government source, noting that recipient countries could have avoided the problem by swapping their yen obligations into other currencies as private companies commonly do.

Officials are reluctant to do anything that would increase their costs at a time when the recession has strained government finances and a rapidly aging society is raising fears about future needs.

"The appreciation of the yen has caused great trouble to our economy, more than to any other," the source said. "Our government budget situation is as serious as any other Group of Seven nation," he added.

Still, pressure is mounting and Prime Minister Tomiichi Murayama may have to offer to reschedule debts, albeit in an informal manner that would avoid affecting the broader loan portfolio, according to C.H. Kwan, a senior economist at Nomura Research Institute in Tokyo.

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