Japan stood out — along with the United States — among the major economies in deciding not to join the planned new China-led regional investment bank as founding members. While the government cited concerns over governance standards and operational transparency of the planned institution when it opted to not sign up by the March 31 deadline, it is obvious that Japan had chosen to keep in step with the U.S., which views the Chinese initiative to establish the Asia Infrastructure Investment Bank (AIIB) as Beijing’s challenge to the post-World War II international financial order, even as roughly 50 countries — including key European powers and many U.S. allies — decided to join.
The concerns about the new bank’s governance may indeed be legitimate. But there is little that Japan can do to address the AIIB’s perceived problems if it remains a non-member. Japan should join the bank so it can exert influence from within to ensure that it is run according to international norms.
The planned new bank aims to fill the enormous demand for loans to finance infrastructure-building investments in the growing Asian markets, which are currently not being met by existing international financing institutions. China has said the AIIB will not compete with the World Bank or the Manila-based Asian Development Bank — which has historically been headed by officials from Japan, the largest contributor of the institution along with the U.S. — but rather complement their roles. The AIIB, which will initially be capitalized at $50 billion and later $100 billion, is to be headquartered in Beijing. China will be its largest contributor and a former Chinese finance bureaucrat is expected to be tapped as the institution’s first president.
Behind China’s plan to create the AIIB is no doubt its frustration with the international financial framework led by the advanced economies, which does not reflect the growing presence of emerging economies in its decision-making. Much of the wariness toward the initiative, meanwhile, derives from skepticism over what the world’s second-largest economy intends to do with the new bank.
Finance Minister Taro Aso said Japan had no choice but to take an “extremely cautious stance” toward joining the AIIB, citing unanswered questions about the bank’s governance standards and transparency on how it screens loans for approval. Among the concerns over the AIIB’s governance is apprehension that China might use the institution to expand its economic clout by playing a decisive role in its loan-approval process — unlike the ADB, whose board of representatives from participant nations wield strong power in loan decisions. It is feared that the AIIB could be run in discretionary ways to promote China’s own interests.
But can Japan, and the U.S. for that matter, do much to influence the making of operational rules at the new bank — which will be formally launched by the end of this year — if they remain outsiders? It hardly seems credible that they can retain leverage by withholding their participation now that roughly 50 countries have opted to become founding members. The participants include major European powers such as Britain, Germany, France and Italy, key U.S. allies in the Asia-Pacific region such as Australia and South Korea, all 10 members of the Association of Southeast Asian Nations, as well as India, Brazil and Russia.
The initial caution on the part of many of the advanced economies was dispelled when Britain announced its plan to join the AIIB in mid-March. The other European powers immediately followed its lead. Along with the attraction of economic ties with China, the participants from outside Asia were apparently drawn to the enormous potential of infrastructure investments in the region and the opportunities that they would bring for their businesses. In fact, concern is reportedly growing in Japan’s business circles — as well as within the ruling Liberal Democratic Party — that Japanese firms could face disadvantages in the competition for a slice of this lucrative market due to the nation staying out of the AIIB.
Despite the questions about the planned new institution, there is great demand for more funding for infrastructure investments in Asia. The ADB estimates that the region needs about $700 billion in such investments each year, but the ADB cover less than one-fiftieth of that amount. Investment needs for such projects as railway and road construction in the region are forecast to reach $8 trillion in the decade to 2020. Asian countries that have signed up for the AIIB expect the institution to provide them with more loans for their investment projects.
The countries that joined as founding members are aiming to agree on the rules of running the new bank and capital contribution by each member by the end of June. The Japanese government reportedly plans to consider whether to join by the time such details take shape.
When Japan decided not to sign up for the AIIB at the end of last month, Prime Minister Shinzo Abe is reported to have told LDP members at his office, “Now the U.S. will see that Japan is a reliable country.” The government appears to have placed priority on Japan keeping in step with the U.S. at a time when its other allies and major European powers have defied it and joined the China-led initiative.
Japan may have impressed the U.S. with its loyalty by staying out of the AIIB, but it remains to be seen whether it was the right decision for the world’s third-largest economy, which has gained a wealth of know-how and experience in regional financing through its activities in the ADB.