Japan and Iran will agree this autumn to open negotiations on concluding an investment protection pact to encourage private-sector Japanese investment in the Persian Gulf nation, government sources said Wednesday.

The agreement will be made at a meeting in Tokyo between Iranian President Mohammad Khatami and Prime Minister Yoshiro Mori as part of measures to boost bilateral relations, the sources said.

Khatami is expected to make his first official visit to Japan in early November, although the exact date has not yet been set.

In his meeting with Khatami in Tehran in August 1999, then Foreign Minister Masahiko Komura invited the Iranian leader to visit Japan by the end of this year.

Khatami will be the highest-ranking Iranian official to visit Japan since the 1979 Islamic Revolution. During his stay, Khatami will hold talks with Mori and other Japanese leaders and will also have an audience with the Emperor.

The sources said that the Japan-Iran investment protection pact was originally proposed by Tehran, which is eager to attract more Japanese and other foreign countries’ investment to promote the nation’s economic reforms.

The protection pact would, among other things, compensate Japanese companies for possible losses incurred due to changes in Iran’s economic policy, including nationalization and seizure of Japanese-funded businesses. Japan has so far concluded similar pacts with several developing countries, including China, Egypt and Turkey.

The sources said, however, that even if Japan and Iran agree this autumn to open negotiations on concluding a protection pact, the negotiations may prove to be quite tough because of Islamic law.

When then Prime Minister Ryutaro Hashimoto visited Riyadh in November 1997, Japan and Saudi Arabia agreed to begin negotiations on a similar pact. But the two countries have yet to sign anything because Islamic law has hampered progress in the negotiations, the sources said without elaborating.

The value of Japanese investment in Iran has been negligible since the Islamic Revolution. The collapse in the late 1980s of the IJPC joint petrochemical project in Iran as well as U.S. sanctions against Iran put off Japanese companies interested in investing in the nation.

The U.S. sanctions punish not only American but also other countries’ companies making huge amounts of investments in Iran’s energy sector, although they are due to expire next August.

The Khatami administration is now reviewing the Iranian foreign investment law — enacted before the Islamic Revolution — to ease investment restrictions, including granting foreign investors a majority ownership of Iranian businesses.

But according to Toru Tokuhara, a researcher at the Japanese Institute of Middle Eastern Economies, Japanese companies — which are generally struggling to survive amid the protracted economic slump at home — are still in no mood to rush to invest in Iran.

Tokuhara pointed out that Iran’s economic and fiscal conditions have not yet improved enough to assuage Japanese companies’s concerns about risks involved in making investments in the country. The recently toughened crackdown on press freedom by conservatives has also raised concerns among Japanese companies about the political stability in Iran, Tokuhara added.

Khatami, a liberal cleric and staunch advocate of greater political and religious freedom, won a surprise victory over a conservative candidate in the presidential election in May 1997. His political standing has been significantly strengthened by a landslide victory for his supporters over conservatives in a parliamentary vote in February.

The Iranian government of President Khatami has improved hitherto soured relations with European countries as well as its Persian Gulf neighbors, including Saudi Arabia. Khatami visited Italy and France last year and went to Germany this past summer.

Iran’s ties with the United States remain chilly, however, although some signs of a thaw in relations have emerged since Khatami took office.

The U.S. administration of President Bill Clinton has labeled Iran a rogue state and retains economic and other sanctions against it. The Clinton administration has accused Iran of sponsoring international terrorism, sabotaging the Middle East peace process and producing weapons of mass destruction. Tehran vehemently denies all these charges.

Japan, which relies on the Middle East for about 85 percent of its crude oil, has placed particular importance on relations with Iran, a major oil supplier.

Therefore, while restricting the extension of official economic assistance, particularly yen loans, to Iran for fear of hurting ties with the U.S., its most important ally, Japan has been moving toward warmer ties with Iran in recent years by resuming an exchange of visits by foreign ministers after several years of suspension.

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