Staff writer

Japan and Vietnam will agree later this month to launch preliminary negotiations on an investment protection pact to encourage private Japanese companies to increase investments in the country, government sources said Thursday.

The sources said the two countries will also agree to set up a special forum — comprised of government officials and businesspeople — to discuss methods to facilitate and expand bilateral trade and investment.

These agreements will be made during a meeting between Prime Minister Keizo Obuchi and his Vietnamese counterpart, Phan Van Khai, scheduled March 29, the sources said.

The sources also said Japan will grant a “most-favored-nation” trading status to Vietnam as early as the end of March. The MFN status is expected to help increase Vietnamese exports to Japan since it subjects Vietnamese goods to the lowest possible import-tariff rates granted to most other developing countries.

Phan Van Khai will make his first official visit to Japan as premier from March 28 to 30 to strengthen bilateral relations, especially economic ones, to help resolve Vietnam’s economic troubles.

Phan Van Khai’s visit will be the first by a Vietnamese premier in six years. His predecessor, Vo Van Kiet, visited Tokyo in spring 1993, only several months after Japan became the first major industrialized country to resume full-scale economic aid to the impoverished communist country.

During his talks with Obuchi and other leaders, Phan Van Khai, who succeeded Vo Van Kiet as premier in a reshuffle of leadership in September 1997, is expected to seek firm commitments to continuing economic aid and strengthening bilateral trade and investment relations.

Obuchi is expected to reiterate to Phan Van Khai Japan’s firm support for Vietnam’s “Doi Moi” (renovation) free-market reforms introduced in 1986 and since accelerated.

Japan is Vietnam’s largest single aid donor. Obuchi and Phan Van Khai will sign an official document on the provision of fresh loans worth 88 billion yen for power, transport and other infrastructure projects.

Tokyo has so far concluded investment protection pacts with a limited number of countries, including China, Russia, Egypt, Turkey, Sri Lanka and Bangladesh.

An investment protection pact enshrines the principles of granting a “national treatment” — or equal treatment of foreign and domestic investors — and MFN status. It also compensates foreign investors for possible losses incurred from civil strife, confiscation of their assets and other emergencies.

But, as government sources acknowledge, an investment protection pact alone will not be enough to lure more Japanese investors to Vietnam. Many analysts point out that Vietnam must do much more to improve its climate for foreign investors, including an acceleration of free-market reforms and improvements in its cumbersome and time-consuming procedures for investment approvals.

Vietnam has not been spared the fallout from the Asian financial and economic crisis that has swept through most of its neighbors since summer 1997.

After posting average annual growth of 9 percent between 1993 and 1997, the Vietnamese economy slowed sharply to a growth pace of 5.8 percent in 1998 — the lowest rate in seven years — due to slumping exports and declining foreign investments in the nation.

The unemployment rate also edged up to 6.85 percent last year from 6.01 percent in 1997 and 5.65 percent in 1996.

Last year, Vietnam approved foreign direct investments totaling $3.65 billion, down 23 percent from the previous year’s level, according to official Vietnamese data. Of total foreign direct investments, $138 million was from Japan, down a sharp 79 percent from the 1997 figure.

As a result, Japan stood as the sixth-largest foreign investor in 1998, although it remained the fourth-biggest investor in terms of an accumulated investment amount, after Singapore, Taiwan and Hong Kong.

Japan is Vietnam’s largest single export market. But Vietnamese exports to Japan declined at a double-digit pace last year, largely because Japan’s demand for foreign products as a whole remains sluggish amid the worst economic slump in decades.

Vietnamese exports to Japan totaled 228 billion yen in 1998, down 13.4 percent from the 1997 level, according to Japanese statistics. Vietnamese imports from Japan, meanwhile, totaled 173 billion yen, up 12.2 percent.

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