It's wealthier nations that benefit from `recycling' of Japan's surplus. Third world sees few gains yet from Japanese largess

With its massive trade surplus, Japan has become the world's largest creditor. But the developing countries may have to wait in line for a long time before they see much of that money. Government foreign aid is growing at a healthy clip, more than $10 billion in this fiscal year's budget. And the Cabinet Tuesday decided to raise the aid target even higher, pledging to give more than $50 billion between now and 1992.

Prime Minister Noboru Takeshita will take the new aid policy to the summit of Western leaders in Toronto later this week. Japan, he will likely say, is fulfilling its international responsibilities by becoming the world's leading aid donor.

But the focus on official development assistance tends to obscure the reality of how Japan's surplus is being recycled. Most of the surplus is in private hands. The vast majority of that money is flowing to the United States, Europe, and other industrial nations.

Loans to the third world from Japanese banks, whose total assets are the largest in the world, are actually shrinking. Japanese corporations are building factories in Indiana, not Peru: 83 percent of direct investment currently goes to advanced countries.

Japanese officials largely blame the developing countries for failing to create a climate which will attract such investment. Even the Japanese bank that has lent the most to developing countries, the Bank of Tokyo, feels that way. ``Is it right to lend money to ... overliving people?'' asked Bank of Tokyo senior advisor Teruhiko Mano, speaking metaphorically. ``[Developing countries] have to restructure their economy.''

The Japanese government has made some attempts to encourage a flow of private funds, mostly through loans to institutions like the World Bank and the International Monetary Fund (IMF). Its highly touted $30 billion recycling plan, announced in 1987, is one such attempt. Still, in 1986, Japan sent $131.5 billion overseas but only $16.2 billion went into developing countries. Later figures are not available, but a Ministry of Finance official says the pattern has continued.

So far, the Japanese are living up to their reputation as conservative and highly cautious investors. They are jokingly referred to by some as ``LIFO - Last In, First Out.'' Japanese government and business officials say this is simply a matter of the free market at work. ``When we let the market forces play their full role,'' the Ministry of Finance official said blandly, ``the majority of funds will flow to the US and industrial countries where they offer more attractive returns.''

Japanese financiers also indirectly blame the US for running a budget deficit, which is being financed in large part by Japanese purchases of US treasury bonds. The US is now the world's biggest debtor. ``If we concentrate on recycling to developing countries, you'll have to find other sources of money,'' Mr. Mano says.

The one exception to this pattern has been the rapid growth, a doubling last year, of direct investment in newly industrializing Asian countries. Manufacturers moving production offshore to avoid the impact of the high yen account for most of this increase. But that too is relatively ``safe'' investment.

In the 1970s, the massive surplus of the oil-producing OPEC nations was recycled to the developing sector as loans from large commercial banks in New York and elsewhere where the money was deposited. That huge debt - now some $1.3 trillion - hangs over the world economy, threatening to upset the financial system, and strangling growth in indebted nations.

Japanese bankers say that experience has made them even more cautious about lending money to heavily indebted countries such as Mexico. But some Japanese economists argue that is very shortsighted policy. By providing a new infusion of capital, they say, banks and corporations can activate demand in developing countries, creating new markets for products from industrialized nations.

The dependence of Japan and newly industrialized countries such as Korea and Taiwan on the US market could then be reduced.

``The Japanese [trade] surplus [with the US] is caused by the debt problem,'' argues Toshihisa Nagasaka, an official of the Japan External Trade Organization. ``We failed to develop markets in Latin America, the Middle East, and Africa.''

Some prominent Japanese banks criticize the IMF and the major creditor banks (including the Bank of Tokyo) for emphasizing the sanctity of debt payments over the development needs of recipient countries. The debtor countries ``cannot grow'' as long as they are ``under the severe control of the IMF and the bank advisory committee,'' says Yoh Kurosawa, Deputy President of the Industrial Bank of Japan.

``Most of those countries have surplus in their trade balance,'' Mr. Kurosawa points out. ``We [banks] got all of their surplus to cover interest payments. Even that was not enough. We lent new money to cover the interest payments. That was wrong. Let them use their surplus to make their economies grow ... Instead of doing that we have squeezed those countries.''

There is some degree of self-interest in this stance. The Industrial Bank and other large Japanese banks have lent far less than have the large New York banks (and the Bank of Tokyo). A plan presented by US Treasury head James Baker and other similar debt-restructuring plans promoted by the US and the IMF call for large banks to contribute more lending to countries like Brazil and Mexico.

But Kurosawa says ``if we contribute to lending to those countries, it means we help New York money-center banks ... which haven't done anything in the last six years [to solve the problem].''

Kurosawa favors a long-term delay in interest payments by indebted countries, for 20-30 years, until their economies are strong enough to repay the debt.

Japanese development experts also see the policies of the notably conservative Ministry of Finance as an obstacle. The ministry severely limits the amount that banks may place in tax-exempt loan-loss reserves, thereby restricting their ability to effectively write-off their bad loans. Compared to European banks which have written off up to 70 percent of those loans, Japanese banks are allowed to place only the equivalent of 10 percent of the loan value into such reserves.

Critics call on the government to reduce the risk of lending and investment by the private sector. They suggest vastly broader insurance programs for overseas investment and trade, including not denying insurance eligibility to countries simply because they had their debts rescheduled. They also favor more government guarantees on lending, far more extensive than presently are carried out by the Export-Import Bank of Japan.

The Finance Ministry opposes using public funds to help the banks. The banks' loans were ``made by their own decision, by their initiative, on their own responsibility,'' says the Finance Ministry official. ``How can you justify this to the taxpayer?''

The ministry also defends its emphasis on recycling funds through the IMF and similar institutions because they can ``exert some kind of pressure'' on developing countries to tighten their belts. Money is not the bottleneck for development, the official says. Developing countries ``have to sacrifice their standard of living today,'' he says. ``That is the key to development. We all went through the same process.''