Japan curbs sale of illegal technology to Soviet bloc. (additional headline on inside page is: JAPAN INC. TREADS CAREFULLY. High-tech exports to East bloc get close scrutiny. AFTER THE TOSHIBA DEBACLE)

The days of easy fishing by communist countries in Japan's sea of high technology are over - at least for now. The Japanese government has significantly tightened its enforcement of controls on the export of strategic products since the uproar a year ago over Toshiba Machine Company's illegal sale of militarily sensitive technology to the Soviet Union.

Pentagon officials say the Toshiba technology has greatly improved the performance of Soviet submarines, especially their ability to evade detection.

Japanese businesses, under government pressure and fearful of violating the law, are approaching deals with the East bloc with extreme caution.

The change in Japan's atmosphere draws judicious praise from American officials responsible for cooperation among the Western allies in controlling the flow of technology which could be used for military ends.

(US and Japan hammer out a construction-trade pact, Page 3.)

``At the present time, they've taken the issue very seriously,'' says a senior US official in Washington. ``There's no question they have beefed up resources, scrutinizing exports more closely. They have in place a much better system than existed before.''

THE Reagan administration's praise of Japanese actions to curb illegal exports is aimed in part at American critics of Japan, particularly in Congress. The administration hopes to block anti-Japanese legislation that has been fueled by the potent combination of trade frictions and the image of Japan as a lax security partner. Next month Congress will vote on an omnibus trade bill that carries controversial amendments punishing the Japanese companies involved in the transfer of submarine technology.

At the same time, the US administration is maintaining quiet pressure on Japan to further improve its export control system. According to an informed American source, President Reagan raised this issue with Prime Minister Noboru Takeshita in Washington in January. The senior US official acknowledged that ``the issue did come up briefly.''

The primary flaw in the system, says the informed American source, is the continued domination of the enforcement process by Japan's powerful Ministry of International Trade and Industry (MITI). US officials see a vast improvement in MITI's performance, but it remains an agency charged primarily with promoting, not restricting, trade.

Toshiba affair exposes flaw

``There needs to be better inter-agency coordination,'' the official explains. ``It is really important not to have just one agency administer an export-control situation.'' The US system, he points out, works well because of the conflict of interests among the State, Commerce and Defense Departments, each of which has a role in the process. What Japan needs, he suggests, is ``to have commercially oriented agencies doing battle with national-security-oriented agencies, doing battle with foreign-policy-oriented agencies, in order to have good export-control policy.''

Toshiba Machine Company's export of submarine technology exposed a Japanese system that was geared to promoting exports, no matter what their nature or destination (see box on right). The Japanese machinemaker, along with a Norwegian company, easily evaded license approval procedures then in place. Even after being tipped off about the sales by a source in Moscow, MITI simply took the company denials at face value.

Changes made last summer nominally provide a greater role for Japan's police, defense agency, and Foreign Ministry, all concerned with national security. But in practice MITI retains authority, leaving the security agencies a limited and subordinate function.

An amendment to Japan's Export Control Law passed after the Toshiba affair provides for MITI to consult the Foreign Ministry on cases involving national security. At a working level, however, there is no day-to-day involvement of non-MITI personnel in the system. ``Whether or not MITI brings the case to us is entirely up to them,'' a senior Foreign Ministry official says. The defense agency, says a MITI official, is consulted a ``few times a month'' about the significance of a product for military use.

The National Police Agency, which is responsible for counterintelligence surveillance of Soviet-bloc activity as well as of illegal activity related to export controls, has similarly limited interaction.

MITI cooperates

But officials from all these agencies stress that MITI's own attitude is much improved. A police agency official reports that previously when it went to MITI to find out whether a company was selling something illegal, ``they always said the thing was not against Cocom. Now MITI is very cooperative.''

Japan is part of the 16-member Western-nation Coordinating Committee on Export Controls, or Cocom, the group that makes policy on restricting high-technology transfers to communist countries.

Though Cocom is not a treaty organization, it is based on a mutual agreement to observe certain controls over an agreed list of products and technologies. But each nation has its own way of carrying out Cocom policies.

The Japanese government was moved by heavy American pressure and public exposure to investigate and prosecute Toshiba Machine and other companies involved. When the dimensions of the impact of the technology leak became clear, the Japanese acted relatively rapidly to overhaul their system.

Last summer the government pushed through the changes in the export control law which toughened criminal penalties and fines for violations.

MITI issued accompanying regulations requiring exporters to submit the original copy of their contract, place a ``subject to government approval'' clause in all contracts, and set up an internal company compliance program.

The most thorough compliance program has been adopted by Toshiba Corporation, the parent of Toshiba Machine, and its program is promoted by MITI as a model.

Japanese companies, by their own admission, had paid little attention to the security implications of trade. ``Now most of the private firms are very sensitive on this matter,'' asserts Atsushi Iwai, the director of MITI's Security Export Control Office.

Licenses checked thrice

MITI has taken steps within the agency to increase the number of staff and the budget devoted to inspection of the export licenses. Last year, after the Toshiba affair, the staff devoted to this was increased from 40 to 62. This year, it will rise to 103 and the budget has been increased five times to finance computerization.

Export license applications are screened three times, Mr. Iwai says. A first layer of inspectors, placed in local MITI branches and in different industry divisions, examines the applications, and then sending those for communist nations on to the security export office. Finally, a ``screening council'' of senior MITI officials meets every week to decide on highly sensitive goods such as computers, integrated circuits, and machine tools.

The new system caused a pileup of license applications, delaying approval of any request by several months. But by the beginning of this year, according to both Iwai and industry representatives, the processing time had been normalized.

``But because of the screening council,'' Iwai adds, ``sensitive goods may need a bit longer than before.''

These changes have had an impact on Japanese trade with the Soviet Union and Eastern Europe. Exports to the Soviet Union are currently down by about 20 percent, says Takashi Murakami, an official of the semigovernmental Japan Association for Trade with the Soviet Union and Eastern Europe. In particular, ``there were hardly any machinery exports in the second half of last year,'' he says.

``Many manufacturers got scared after seeing what happened to Toshiba,'' Mr. Murakami says. ``Most companies, especially high-tech-related ones, say why take a risk when business is good at home.''

The Tokyo-based trade official of one Eastern European country says Japanese companies are ``overreacting.'' ``They are so afraid that they don't want to have any contacts with businessmen from socialist countries.''

Small companies a target

The one exception to this are Japan's trading companies, which range from the giant companies that control a significant share of the country's trade, to smaller companies, numbering over a hundred, which specialize in dealings with socialist countries. Manufacturing companies do a large portion of their business through such trading companies. In the Toshiba Machine deal, one such smaller company was the initial contact with the Soviets and a larger one made the final arrangements.

The trading companies tend to have a stake in maintaining good relations with their clients, including the socialist countries. The smaller companies, which are often totally dependent on those clients, are particularly vulnerable to pressure, including KGB-sponsored blackmail. Smaller companies, say Japanese government officials, are a high-priority target for close scrutiny these days.

The larger companies, however, still tend to enjoy trust. Sakae Shimizu, a Toshiba Corporation vice-president and the man in charge of the internal compliance program, says that he does not know the contents of his trading company partner's compliance program, ``but I believe they have a reliable system.''

Concern over US reaction

Interviews with a wide range of such companies revealed a very uneven pattern. Some have devoted staff to their programs, but some of the largest, such as Nissho Iwai, have only created committees composed of department directors who meet occasionally to review cases on the request of their salesmen. Among Japanese businessmen, Mr. Shimizu admits, ``the sense of security is relatively lower here compared to the US or Europe.''

Japanese attitudes are driven more by their concern over US reaction than by a sense that technology leaks are a security danger, adds Murakami. ``Their emphasis is always on business, and for them which relationship - with the US or the Soviet Union - is more important? Trade with the US amounts to about 38 percent of Japan's overall trade, while that with the Soviet Union is a mere 1.3 percent.''

There is also a strong feeling among both Japanese business and government circles that Japan is being singled out for attention on Cocom issues because of the larger trade conflict with the US. They point to abuses by Europeans which they say have received far less attention.

What this suggests is that once American pressure is relaxed, Japanese business - and even government officials - could revert to a less stringent approach. For this reason, perhaps, American officials retain a sense of skepticism about Japan's new attitude.

``We are waiting to see whether it will continue over the long run,'' a United States official says.