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After several years of warming and rapidly advancing relations, Japan and Iran may be at a crossroads once again.

Time is running out for Tokyo to make a politically difficult decision on an issue that Tehran sees as a litmus test of whether the major economic power will carry relations forward — or bring them back to the past.

At stake is Iran’s request for 25 billion yen in official Japanese yen loans for a major railroad project linking the northeastern city of Mashhad to the southeastern port city of Bandar Abbas through Kerman. Tehran wants the Japanese aid by this summer to ensure that the project — still in its initial stages — will proceed smoothly.

But the Japanese government is still considering the Iranian request with caution.

One reason is purely technical. As is the case for any aid project to developing countries, Tokyo wants to be fully convinced that the railroad project is feasible, profitable and actually worth financing with Japanese taxpayers’ money.

Although Japan has remained the world’s largest aid donor for nine consecutive years, political pressure is growing at home for cuts in official development assistance — or ODA — and more effective use of aid money, amid the tight fiscal conditions due to the prolonged economic slump.

The ODA budget for fiscal 2001, which started on April 1, was actually slashed by 3 percent. Japanese ODA consists of low-interest yen loans, grants-in-aid and technical cooperation.

But more important than such technical reasons is the uncertainty over both Iranian politics and the new U.S. administration’s policy toward the Persian Gulf nation.

“We will have to wait at least until after an Iranian presidential election in early June before making a final decision on the matter,” a senior Foreign Ministry official said on condition that he not be named. “Japan will also have to watch to see what specific policy the new U.S. administration of Republican President George W. Bush will adopt toward Iran.”

“With the Iranian-set deadline approaching, Japan will have to make a difficult decision within a highly limited period of time on whether to meet the Iranian aid request for the railroad project,” the official said, adding that,”the matter is so politically sensitive that a final decision will be left to the foreign minister or maybe even the prime minister.”

In the June 8 presidential election, reformist President Mohammad Khatami is widely expected to easily win a second four-year term — if he actually runs. Khatami has not yet declared his candidacy.

Khatami’s re-election would be what most foreign countries, including Japan, want to see. But Khatami and his supporters are facing growing pressure from conservative forces at home. The country’s judicial and interior authorities, which remain under control of conservatives, have stepped up a crackdown on opposition politicians and media in recent months.

Khatami, a moderate cleric and staunch advocate of greater political and religious freedom, took the government’s helm in the summer of 1997 in a surprising and overwhelming victory.

The Khatami administration has succeeded in mending soured ties with industrialized European countries as well as Persian Gulf neighbors, including Saudi Arabia. He visited Italy and France in 1999 and went to Germany in July 2000.

Since its inauguration in early 1993, the former U.S. administration of Democratic President Bill Clinton had pursued a policy of “dual containment” against Iran and Iraq. The Clinton administration accused Tehran of engaging in the production of weapons of mass destruction, sabotaging the fragile Middle East peace process, sponsoring international terrorism and abusing human rights. Tehran vehemently denied all these charges.

The Clinton administration kept economic and other sanctions on Iran, although some signs of a thaw in the icy ties — such as sports contacts and the lifting of an import ban on some Iranian foods — emerged after Khatami’s presidential inauguration.

The Bush administration, which has been preoccupied by tax cuts at home and strained ties with Russia and China since taking office on Jan. 20, has not yet formulated its own policy toward Iran.

“Officials of the Bush administration are using harsh rhetoric on Iran,” a government source said. “But it is still unclear what the final shape of its Iran policy will take.”

The first major test of the Bush administration’s Iran policy will come in early August, when sanction laws against Iran and Libya are to expire.

Out of fear of drawing the ire of the U.S., its most important ally, Japan imposed strict restrictions on high-level government contacts with Iran for most of the 1990s.

But after Khatami’s presidential inauguration, resource-poor Japan resumed contacts with oil-rich Iran, culminating in a state visit to Tokyo last October by the Iranian leader. Khatami became the first Iranian head of government to make the visit since the 1979 Islamic Revolution.

In May 1993, Japan lifted a nearly 18-year freeze on fresh yen loans to Iran and provided about 38.6 billion yen for a hydroelectric power project on the Karun River in the southern part of the country.

Although Japan had originally planned to extend additional funds for the power project, it backed off in the face of strong pressure from the Clinton administration. It was only a few weeks before Khatami’s historic Japan visit that Tokyo exchanged diplomatic notes with Tehran on disbursing about 7.5 billion yen in additional yen loans for the power project.

Iran initially made Khatami’s Japan visit conditional on Tokyo’s promise to finance the railroad project — underscoring the importance Iran places on such projects.

But at the time, Japan succeeded in persuading Iran not to have Khatami raise the issue with Japanese leaders, claiming that its feasibility study on the project was still being conducted by a consulting firm affiliated with the Ministry of Economy, Trade and Industry and that Japan needed more time to make a reply.

Another, and more important, reason for Japan’s refusal to reply to the Iranian aid request during Khatami’s visit was a U.S. presidential election held only a few days later. “We did not want to take any action that could provoke the U.S. at such a politically charged time,” a Japanese Foreign Ministry source said.

Iran believes the railroad project will contribute to the development of poorer areas along the railway and will also bring fresh revenues to its government coffers in the form of cargo transportation fees from its northern neighbors, like Turkmenistan. The port city of Bandar Abbas faces the Persian Gulf and is located near the Strait of Hormuz.

Whatever Iran’s intentions, there is a possibility that the Bush administration will object to Japan financing the railroad project for strategic reasons.

The project, which will establish a rail link between Iran and its northern neighbors, may eventually help increase Iran’s influence in a region surrounding the Caspian Sea. The oil- and gas-rich region has become the focus of attention in recent years, not only among world oil companies but also among the U.S., Russia and other countries.

Further complicating the question of whether Japan should meet the Iranian request to finance the railroad project is the findings of the feasibility study.

Although the report remains confidential, government sources familiar with it say it is skeptical about the project’s profitability. The report casts doubt on whether Iran will be able to earn the cargo transportation fees that it expects, the sources said.

In response to the report, some within the Japanese government believe that Japan should consider providing loans by the government-affiliated Japan Bank for International Cooperation, which are extended on a more commercial basis, instead of official yen loans, the sources said. But it is feared that Iran would reject the idea.

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