Facing China’s diplomatic offensives to establish the Asian Infrastructure Investment Bank (AIIB), 56 Asia-Pacific and Western European countries, including major U.S. allies, have chosen to get in on the ground floor. The United States has exhibited displeasure with the initiatives as a challenge to its global economic leadership. Not only the U.S. but also Japan has decided to not jump on board as a founding member.

Has Japan alone swum against the tide toward a multipolar world in which China and other major developing countries rise? Or is Japan too loyal to the U.S., its security guarantor, particularly when China’s potential military threat is growing? A close look at the evolving design of the bank’s governance structure and China’s internal economic conditions will demonstrate that Japan’s prudence is warranted.

With its commitment to contributing a large portion of the bank’s initial capital investment, China will exercise significant influence over its governance. It will be headquartered in Beijing and ruled by Chinese Communist elites. Reportedly, the bank will have no standing board of directors, and board decisions will be made after draft proposals have been circulated via the Internet. Given the top-down decision-making of the one-party dictatorship, the bank may be nothing more than a policy instrument of the Communist regime.

China will use AIIB-financed infrastructure projects to advance its strategy of “One Belt, One Road”: the maritime Silk Road that links China with Southeast Asia, the Middle East and Europe, and the overland Silk Road economic belt that connects China with Europe. The infrastructure, such as roads, railways, ports and airports, is often dual-use and may be instrumental in China’s power projection.

It’s not surprising that the founding member states located far from China are less concerned with the security implications. Major European allies, in particular, have myopically put priority on their own economic survival, given their deepening structural weaknesses involving recurring financial crises. It makes sense to utilize China as an economic counterweight against the U.S. and Japan — their economic competitors.

At the project level, China’s approach will probably do more harm than good, as demonstrated by its track record of environmentally and communally destructive development. In fact, the country is now struggling with its own grave air and water pollution, and civil unrest. Yet to sustain its own economic growth, employment and social stability, China needs to export more and then fill the growing demand gap.

It has to be noted that the new bank will focus on infrastructure-building, not on sustainable development by balancing growth, environment, community-building, gender and human rights considerations.

Also, China is eager to export its rapid transit railways system and nuclear power plants. But these are fraught with serious technical and safety risks, given the imperfect system integrations of Japanese and Western high technologies.

The AIIB’s governance and project review capability, therefore, will most likely be weaker than those of the World Bank and the Asian Development Bank (ADB). This means that when the AIIB tries to finance funds through international financial markets, its project loans will be viewed less recoverable, requiring a higher interest rate than the two Bretton Woods institutions have to pay. To avoid this disadvantage, the AIIB will have to rely on Chinese money.

China is the world’s largest holder of international reserve assets, but its financial muscle is not as mighty as generally believed. In the second half of 2014, China experienced a decrease of some 5 percent of its reserve due to significant capital flight amid its continuing recession and a sharp fall in real estate markets, compounded by transfers of massive assets held by corrupt officials to bank accounts overseas.

Subsequently, China rushed to borrow a large amount of hard currency through international financial markets so as to maintain the reserve as funds to secure money supply in yuan. Otherwise the Chinese economy would suffer from financial anemia. Last September, the borrowing from overseas exceeded the increase in reserves. If this trend continues, the reserve will eventually halve.

Revealingly, the reserve is China’s show money to plow with another’s calf. This will become most conspicuous should the AIIB finance huge infrastructure projects in China’s northwest hinterland as an integral part of the overland Silk Road. It’s no wonder that China has repeatedly attempted to persuade Japan, the world’s largest net creditor nation, to join the AIIB as a major founding member.

Japan, therefore, should welcome the AIIB only if its governance and project review capability meet the current stringent international standards. It must not join the bank as a major founding member. This choice is in contrast to that of the European founding members splitting their contributions to the bank, with each subject to limited financial risk. Japan should welcome them to monitor the bank’s operations from within.

Japan should also support the World Bank and the ADB to co-finance projects with the AIIB when appropriate. Such a collaborative relationship already exists between the Inter-American Development Bank and the Development Bank for Latin America. Similarly, Japan should use the Japan Bank for International Cooperation and the Japan International Cooperation Agency for co-financing on a case-by-case basis. To facilitate such co-financing, Japan may need to seek observer status at the AIIB. Furthermore, Japan should support the ADB’s plan to significantly increase its capital, which will inevitably intensify competition with the AIIB and press the latter to follow existing international standards for development project financing.

Last but not least, to prevent China from gaining an undue advantage in raising funds for the AIIB though issuing yuan bank notes and bonds, Japan together with the U.S. should seek to put the brakes on hasty internationalization of the currency, unless it satisfies international standards for the yuan to be regarded as fully convertible.

Amid much ado about the AIIB, doing nothing is at the moment the best policy for Japan.

Masahiro Matsumura is a professor of international politics at St. Andrew’s University (Momoyama Gakuin University) in Izumi, Osaka Prefecture.

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