Japan Should Reconsider Joining AIIB

shutterstock_266572730By Pengqiao Lu–

Should Japan join the China-led multilateral financial initiative, the Asian Infrastructure Investment Bank (AIIB)? The question arises whenever the bank welcomes important new members – Britain, Germany, France, and Italy last year and, most recently, Canada. Despite China’s courting and Japan’s intense domestic debates, Tokyo, along with Washington, has been holding out and betting on a rival initiative – the Trans-Pacific Partnership (TPP) – to maintain its role in regional economic cooperation.

Nonetheless, America introduced a  wild card — Donald Trump’s victory in the presidential race – that basically declared the death of TPP. It’s not just Trump’s win, either; Brexit, Italy’s referendum failure, and the rising populist backlash against globalization and free trade more generally all point to a dimmer future for global and regional economic integration. Against this backdrop, China and Japan need to take leadership and jointly construct a positive agenda to maintain the momentum of such integration. Tokyo’s reconsidering its AIIB holdout could be a step in the right direction.

Tokyo did not jump on last spring’s AIIB bandwagoning because of deep concerns, which centered around the bank’s operation. Unlike the Asia Development Bank (ADB), which holds a clear goal of poverty reduction, Tokyo questioned the obscurity of AIIB’s vision. Japan wondered, in Japanese Foreign Minister Fumio Kishida’s words, “Whether there will be added value from creating a new international institution in addition to the existing international development financial institutions?”

More question marks were drawn over China’s strong influence on the bank. With the bank headquartered in Beijing, the first president being Chinese, and China holding 30 percent of the shares and 26 percent of the total voting power, Tokyo suspected that Beijing would direct the bank for self-serving ends, for example, funding Chinese President Xi Jinping’s flagship program, the “One Belt, One Road” initiative that envisages a giant economic bloc linking China and Europe via Asia and the Middle East. A Yomiuri Shimbun editorial even doubted that China might use the AIIB to fund “projects to create and improve harbors that could be used for military ends.”

Japanese also raised eyebrows over the potentially unsound lending policies and standards. As infrastructure development is characterized by significant capital investment and a long lifespan, excessive lending might cause a borrower to pile up of debt beyond its repayment capacity, which would affect all other lenders’ revenue. Therefore, Tokyo worried that the inexperienced AIIB lacked the ability to conduct solid assessments of projects’ risks and hence might fund financially unsustainable projects. Meanwhile, citing examples like China’s foreign investment in Africa, Japanese analysts were concerned that the AIIB would adopt low lending standards without taking environment protection, human rights, and social development into consideration, especially when Chinese officials expressed suspicion over “Western rules.”

Looking at the performance sheet of AIIB after nearly one year of operations, however, Tokyo’s concerns should largely be assuaged. Rather than acting like a barbarian at the gate that tried to squeeze old players off of the stage, the new bank adopted a cautious approach and built a healthy cooperative relationship with existing multilateral development banks. Compared to ADB, which has approved 115 projects so far in 2016, the new bank approved merely six projects, five of which are co-financed with established institutions including ADB, the World Bank, and the European Bank for Reconstruction and Development (EBRD). Besides, five of the other eight proposed projects are also planned to be co-financed with other institutions. Moreover, AIIB signed co-financing framework agreements with the World Bank and EBRD and an MOU with ADB that agrees to strengthen cooperation “at the strategic and technical levels on the basis of complementarity, value added, institutional strengths and comparative advantages, and mutual benefit.” AIIB also keeps close and regular consultations with these institutions. Apparently, by mainly choosing projects that have already been approved by other lenders and constructing cooperative ties, AIIB has worked to reassure the suspicious bystanders, Washington and Tokyo.

Could AIIB change its current low-profile course to adopt a more confrontational approach with other lenders in the future? The possibility does exist given the bank’s strong China mark. However, with new members (the president of the bank, Jin Liqin, said earlier this year that over 30 countries are waiting in line to join) further diluting China’s share, such a possibility is decreasing. Japan, if it joined, would have an estimated 11 percent capital share and 9 percent voting share in AIIB, and could further check China’s influence.

A reconsideration of Japan’s AIIB holdout could also provide an opportunity for Beijing and Tokyo to improve their still frosty relations. Next year marks the 45th anniversary of the normalization of diplomatic relations between these two Asian giants. In their meeting on the sideline of APEC Summit last month, Japanese Prime Minister Shinzo Abe and Chinese President Xi Jinping have agreed to improve ties ahead of the anniversary. Considering such context and the fact that China has repeatedly indicated that AIIB’s door is always open, Japan’s bid for AIIB membership now is unlikely to meet strong opposition, and could “give face” to Beijing.

Domestically, there have always been voices calling for Japan to reconsider its AIIB policy. According to a recent survey by the Center for Strategic and International Studies (CSIS) and the Japan-based Nihon Keizai Shimbun (Nikkei) that examines Japanese business people’s evaluation of Sino-Japan relations, 60 percent of the respondents believe that Japan should formally become a member of the China-led bank at some point in the future. A strong leader like Abe, who could make a deal with South Korea on the sensitive “comfort women” issue against conservatives’ opposition and push forward agricultural reforms despite resistance from the traditional LDP supporters in rural areas, is well able to make tough decisions such as a turn on Japan’s AIIB policy, provided he has the will to do so.

In a word, in the context of new uncertainties added into regional economic cooperation and with old concerns proving largely unwarranted, Japan should leverage the option of joining the AIIB to improve Sino-Japan ties and to keep the momentum of regional integration.

(This article was originally published in The Diplomat on Dec. 10, 2016. Pengqiao Lu is an editorial assistant at the Carnegie Endowment for International Peace’s Asia Program.)

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