Main Findings and Recommendations

See also Japan's Aid-at-a-glance

New developments, overall strategy, and the public

Japan’s development co-operation programme has undergone major reforms and significant restructuring since the last Peer Review in 1999. Most importantly, its Official Development Assistance (ODA) Charter was revised to reflect changed domestic and international circumstances. In addition, the legal status of the Japan International Cooperation Agency (JICA) was changed in 2003 to make JICA more autonomous. The former Overseas Economic Cooperation Fund (OECF) and the Export-Import Bank of Japan (JEXIM) merged into the Japan Bank for International Cooperation (JBIC) in 1999. Also, the Ministry of Foreign Affairs (MOFA) has become the de jure co-ordinating body for the diverse implementing institutions of ODA. In the international arena, Japan has played a leading role in fostering new initiatives and in hosting major conferences on development issues.

The ODA Charter, revised in 2003 from the 1992 version, forms the policy basis of Japanese development co-operation. It proposes that the ultimate objectives of ODA are “to contribute to the peace and development of the international community, and thereby to help ensure Japan’s own security and prosperity”. For Japan, as for other DAC members, ODA is an integral part of its foreign policy.  As such, it is important that narrower national interests do not over-ride the primary development objective of ODA.

Poverty reduction is listed in the Charter as one of four priority ODA issues. In practice, Japan needs to more fully mainstream poverty reduction and other cross-cutting issues throughout its development co-operation system though poverty reduction is addressed through interventions in various sectors. Past emphasis on economic growth has not always taken full account of the poverty reduction dimension, and Japan with its experience could usefully contribute to better document the relationship between economic growth and poverty reduction.  While the ODA Charter recognises the common development goals of the international community, the achievement of the MDGs could be further elaborated in a statement of strategy.

There is clearly a sign of aid fatigue among the Japanese public. Although in part due to Japan’s weak economic situation, the public is also becoming critical regarding the effectiveness of the aid programme and the commercial sector has become less supportive of aid. Simultaneously, the public is supportive of humanitarian efforts and responding to crises. While substantial effort is made to disseminate official development information, the public is only weakly influenced by these sources, is generally unfamiliar with ODA issues, and has misconceptions concerning the bilateral aid programme. Therefore, a recent decision to incorporate development education in school curriculums is encouraging as a way of broadening support. With better understanding of development issues from early formative years, the students will hopefully become the future supporters and participants of Japanese and international development co-operation efforts.

Recommendations

• In implementing the ODA Charter, Japan should highlight that the primary objective of ODA is for the development of the recipient country and should ensure that, narrower national interests do not over-ride this objective.

• Japan should develop a government-wide approach to mainstream cross-cutting issues, rather than treating them as separate sectors, particularly concerning poverty reduction as part of achieving the Millennium Development Goals.

Aid volume and allocations

In 2002, Japan’s net ODA volume of USD 9.3 billion was the second largest among the DAC countries. In 2001, Japan conceded its status as the largest bilateral donor to the United States, a position it had held for a decade. However,  Japan recorded an ODA/GNI ratio of only 0.23%. The continuing recession has had an effect on the gradually declining trend of ODA funds. At the 2002 Monterrey Conference, Japan was one of the few DAC members which was unable to commit to maintain or increase ODA. With loan repayments from developing countries steadily increasing, Japan may have to increase the ODA budget so as to maintain current levels of net flows.

A prominent feature of Japanese bilateral aid is the significant proportion of loans, representing 55% of total bilateral ODA in 2002. This is easily the most extensive use of loans of any DAC country. Japan’s reason for focusing on loans is mostly due to its own experience of having had borrowed credit from the World Bank for its post-war reconstruction. The ODA loans are normally untied, with the recent exception of a short-term, tied Special Yen Loan facility (1999-2002) that was set up to help countries affected during the Asian crisis. As a result of providing large amounts of loans, Japan is by far the largest bilateral creditor to developing countries, including Least Developed Countries (LDCs). In response to the Heavily Indebted Poor Countries (HIPC) Initiative and other international efforts, Japan’s involvement with debt relief is rising. As Japan continues to disburse ODA loans to low-income highly indebted countries, more attention should be given to debt sustainability issues.

Japan has a clear policy on priority attribution of ODA to Asia and some 74% of bilateral ODA is disbursed to the region. The top ten recipients of Japanese ODA in 2001-2002 were China, India, Thailand, Indonesia, Philippines, Viet Nam, Bangladesh, Pakistan, Sri Lanka, and Brazil. Six are Low Income Countries and the list includes the five countries with the most number of absolute poor. In addition, Japan is the largest donor in several African countries. This suggests that Japan could usefully clarify its policy on how it intends to focus on poor countries or the poor populations within countries.

Concerning sector allocations, only a small portion of Japanese resources in the social sector is actually directed towards Basic Social Services (BSS). As was noted in the 1999 Peer Review, Japan’s allocation in the social sector tends to be directed to the tertiary levels, such as universities, research institutions, urban water systems or hospitals.

Recommendations

• Japan should make every effort to increase ODA levels as economic conditions improve, building broad-based public support to facilitate this.

• Lessons learned from the provision of loans to indebted poor countries that resulted in large debt relief should be factored into future lending policies.

• The development of a clearer policy on how Japan intends to focus on poor countries or poor populations within countries should be considered.

• Japan should strive to achieve a more balanced sector portfolio in line with new ODA Charter directions, by focusing more investment in basic health and education services to reduce poverty.

Policy coherence

At the 2002 Ministerial Council Meeting, OECD Ministers recognized the need to bring greater coherence across a wide range of policies that impact on developing countries. Among the policies, trade and agricultural policy issues became the most urgent as a result of the Doha Development Agenda for negotiations at the WTO. Japan has promoted FDI into the Asian region, based on its view that economic growth is the main driver of development. The private sector role in FDI is facilitated by the Japanese government, using both ODA and non-ODA funding. The Japanese government is negotiating regional economic co-operation agreements and Free Trade Agreements, which are expected to be mutually beneficial to Japan and its partners. Japan is also carrying out capacity building activities, particularly in the APEC countries. Furthermore, JBIC has recently developed environmental guidelines for borrowers using ODA loans or export credits, which encourages coherence between the two instruments. At the same time, Japan needs to establish a system for monitoring compliance with codes of conduct by the private sector, covering social, environmental and governance issues.

Japan imports 60% (by calorific value) of its food and is the largest net food importer from developing countries. It does not provide export subsidies for agricultural products. Agricultural policies have addressed the decline of Japanese agriculture by promoting rural development, preserving the landscape and securing Japan’s food supply, which are characterised as the “multifunctionality of agriculture.” There are still import barriers to agricultural products, including high tariffs on rice, tariff escalation on processed foods; and other restrictions such as sanitary and phyto-sanitary procedures, and state management of certain agricultural products. Based on OECD (2002) “Agricultural Policies in OECD countries : Monitoring and Evaluation”, Japan’s support remains among the highest in the OECD countries and is dominated by the most production and trade distorting measures. These barriers and restrictions make access to the Japanese market difficult for developing and other countries. To address the problems of LDCs, however, Japan has proposed an initiative for enhancing the Generalized System of Preference scheme. It covers 2 287 duty-free and quota-free products from 47 LDCs, including 436 from agriculture, forestry and fisheries. At the same time, significant challenges of market access remain for some commodities that are excluded from the scheme, notably rice and sugar.

The ODA Charter and institutional arrangements for co-ordination among ODA related institutions provide opportunities for enhancing policy coherence, but there is a need for an explicit government-wide statement on policy coherence for development so that the public is made more aware of the issues. There is a risk of incoherence if officials promote domestic interests at the cost of development of developing countries. Japan appears to do relatively little analytical work on policy coherence for development issues (a notable exception is a research programme with the OECD on East Asia) and should give attention to this issue. In this respect, MOFA, given its co-ordinating role, could take leadership in enhancing the capacity of the Japanese system to analyse policy coherence issues. Rather than promoting particular interests, MOFA could facilitate discussions on policy coherence for development, including the possible long term mutual benefits to Japan’s consumers and taxpayers and developing countries.

Recommendations

• The government of Japan should make a policy statement on coherence for development and seek ways to educate the public on this issue.

• The Japanese government should enhance analytical capacity on policy coherence for development in order to improve its ability to take appropriate policy decisions.

• Japan should establish a system for monitoring the environmental, social and governance aspects of FDI and of regional economic co operation agreements.

Aid management and implementation

Important initiatives for the reform of ODA operations began in 2002 and have led to a variety of new options for future Japanese development co operation, including pilot work at the field level in Vietnam and Tanzania. The current Japanese ODA management system is actually a locally co ordinated network of separate ODA administrations. MOFA now plays a core role within the ODA organisational hierarchy, over which it was accorded the de jure responsibility for co-ordination in 2001, in addition to its responsibilities for policy formulation and provision of grant aid. Of the two implementation agencies, JICA undertakes about half of Japanese technical co operation. The other agency is JBIC, which was formed in 1999 as the result of a merger of the former OECF and JEXIM. JBIC constructed an administrative firewall between the two functions of ODA loans and export credits, the administrative units for which report separately and maintain different sets of procedures. The Ministry of Finance also has an ODA role, mainly by passing funds to JBIC and through its liaison responsibilities with the IFIs. In addition, there are about 10 different ministries responsible for ODA operations, most of which is technical co-operation.

Within MOFA, the Economic Cooperation Bureau has responsibilities for ODA policy formulation, inter-agency co-ordination, and grant aid management. Bureau operations are largely organised around instruments (operation of grants and supervision of loans and technical co operation) rather than on a country basis, which raises the issue of how to relate with the other geographic bureaus, the implementation agencies, and the field. The fact that Japan is now putting in place a country strategy and country based team approach should help MOFA to move more rapidly to a more decentralised operational system. Also of particular interest to the future efficiency of Japanese ODA management is the division between grants and technical co-operation, both of which are so operationally related that the distinction between them often appears artificial. Operationally, the separate administration of MOFA grants and JICA technical co-operation can lead to transaction costs and difficulties in maintaining the linkage between strategy and implementation, not to mention confusion among development partners. To enhance system complementarity and synergy, the entire sequence of project planning and implementation of both grants and technical co-operation could be delegated to an experienced developmental agency like JICA. Such an arrangement would offer MOFA the advantages of ending its operational role and redistributing its limited resources toward the priority mandate of system co ordination, strategy and policy development.

At present, Japan has a total staff level of some 2 097 development professionals to manage its worldwide portfolio of USD 9 billion, an estimated 668 of whom are located in the field. Japan continues to be one of the more thinly staffed systems among DAC Members. Its overall human resource capacity is further reduced by the fact that MOFA development staff and those seconded by other ministries rapidly rotate out of development co-operation. Finally, there is currently no requirement for specific experience or substantive formal development training for MOFA officials who work on development co-operation. MOFA is encouraged to consider establishing a career track in the “development” category, so as to attract and maintain high level staff that will be needed to carry out the current Ministry mandate in strategic co-ordination and policy.

Japan’s highly centralised administration and the special interests of the different ODA institutions have created bureaucratic obstacles to operational decentralisation. However, Japan is now slowly moving towards greater decentralisation through a new ODA Task Force team concept. The ODA Task Force is an all-Japan co ordinating body in the field that can foster internal Japanese co ordination around a common vision and build synergies among agencies dealing with grants, technical co operation and loans. Japan is now testing in Vietnam and Tanzania the use of such an ODA field team to design the country strategy in a manner consistent with locally owned national approaches, such as the PRSP. Nevertheless, Japan currently lacks a country-based budget approach, which would make its work more efficient and more easily understandable for its partners. It will be important to retain the current flexibility to respond to sudden needs. Although Japan continues to organise its programmes mainly on a project basis, it remains open to whatever modality seems to make the most sense, including sector programmes.

Concerning harmonisation policy, Japan is globally supportive of the harmonisation of its implementation procedures with other partners and has played a lead role in pilot loan harmonisation activities in Vietnam and elsewhere, and is co ordinating the DAC’s Working Party on Aid Effectiveness. At the same time, the practice of tying of ODA grants to Japanese primary contractors, despite the extensive use of non-Japanese sub-contractors, remains under discussion in the context of the 2001 DAC Recommendation on Untying ODA to the LDCs.

Recommendations

• Japan should consider moving away from an instrument based co-operation system to a more country based approach, as well as establishing country budget envelopes. Japan should replicate more broadly its decentralisation pilot efforts, such as that of Vietnam and Tanzania, with special emphasis on an effective use of a country-based, all-Japan team and strategy approach.

• The Ministry of Foreign Affairs should consider delegating most grant management to Japan International Cooperation Agency and focussing its own energies on strategy, policy development and system co ordination.

• More development co operation staff are needed across the system, particularly if decentralisation is to succeed An integrated ODA personnel policy should be established that includes planning and analysis of development staff levels and skills.

• Japan should work with the DAC on identifying concrete measures to progressively untie the use of grant funds for primary contractors in the spirit of the Recommendation on untying ODA to the least-developed countries.

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