Japan’s Economic Statecraft in 2022: A Dialogue with Tadashi Maeda

Thank you, Dr. Green. By the way, Dr. Green and I have very good questions for me more than two decades. I'm Tadashi Maeda, governor of Japan Bank for International Cooperation. It is my great honor to join this live event of CSIS in Washington DC. I will give you a very quick review of what's going on in the Japanese government and Diet on economic security, and then updated information on what JBIC is doing under the context of the Free and Open Indo-Pacific and cooperation among the U.S., Japan, Australia, and adding India as part of our partnership. First, a quick review of the Japanese government discussion. It started from the policy research commission of the ruling LDP. The key figure of the task force on economic statecraft is Mr. Akira Amari, a senior LDP member who was minister of state for economic and fiscal policy and led the TPP discussion. This started last year due to globalization, conflicts in Asia-Pacific, rising China, and other autocratic countries' actions including cyber attacks and COVID-19, which revealed vulnerabilities in supply chains for semiconductors and other key sectors. Japan's legal framework is not prepared to prevent outflow of sensitive technology; Japan is one of three G20 countries without a classified patent legal framework, making essential technologies easily hacked and sold to countries like China or North Korea. Under Prime Minister Shinzo Abe, in April 2020, he created an economic section at the National Security Secretariat (NSS). Prime Minister Suga accelerated vaccination and promoted economic statecraft, accepting to activate a bill on economic security. Prime Minister Kishida, after winning the election, appointed Minister in charge of economic security, Mr. Takayuki Kobashi, and proclaimed the economic security bill to be developed. The NSS economic division staff increased from 20 to 50. The key points of the bill: reinforcing strategic autonomy in critical infrastructure and supply chains, acquiring strategic indispensability in global supply chains, and maintaining international order based on fundamental values. The most important piece is preventing outflow of critical technologies by introducing a classified patent legal framework, similar to the U.S. system. Critical minerals are also to be added. The expert council articulated the importance of free trade discipline, transparency, sharing common values, international cooperation with like-minded countries, and clear sector focus. They suggested necessary financial and regulatory support. The legal process is ongoing and the draft will be delivered to the Diet shortly. Now on JBIC's activities under the Free and Open Indo-Pacific framework, introduced by Prime Minister Abe in 2007 in India. This concept is a counter to China's Belt and Road Initiative. We formulated a partnership among like-minded countries: U.S., Japan, Australia, and later India (Quad). During the Trump administration, the U.S. DFC was created. Australia's DFAT and Export Finance Australia are also involved. We have a platform for sharing information and have dispatched joint missions to ASEAN countries like Indonesia and Vietnam. The first project under this partnership was a submarine cable connection from Singapore to the U.S. West Coast, signed in December 2021. JBIC participated in the Quad vaccine expert group. Since Japanese pharmaceutical industry is not prepared to produce vaccines, we supported expansion of manufacturing capabilities in India for vaccines, with about $100 million expected, as cited in the Quad summit factsheet. On critical minerals, JBIC has been supporting supply, especially after China's ban on rare earths 10 years ago. We have outreached to Vietnam, Indonesia, and others to develop alternative sources. JBIC conducted a survey of over 600 Japanese companies on overseas direct investment. Recently, we announced that 65% of Japanese companies recognize negative impact of semiconductor shortage, and 6% are already diversifying procurement. Japanese companies are very worried about U.S.-China decoupling; China is our neighbor, so we cannot escape Chinese threat. Japan is keen on stable U.S.-China relations but must stand with like-minded countries against illegal actions. Japanese companies see India as the most promising long-term destination, but medium-term, China is still number one. Only Germany is in the top 20; no other European countries are listed. Therefore, JBIC created a private equity fund of 100 million euros to support startups in Nordic and Baltic countries, focused on startups, with three limited partners from Japanese industries. We are preparing a similar platform for Central and Eastern European countries, expected to launch within six to nine months. We know Chinese companies like CATL have invested in Poland, and Korean companies like SK in Hungary for EV batteries. We need to encourage Japanese companies to look at these regions. JBIC is pleased to be a spearhead. We have good relationships with U.S. DFC and other agencies. Despite COVID, I received key visitors from the U.S., including Dr. Campbell, Anne Neuberger, and Undersecretary Jose Fernandez. JBIC is also promoting carbon neutrality, investing in hydrogen stations in California. Our playing field has expanded from traditional countries to global activities. That's a very quick review of my activities. Thank you, Dr. Green.

Well, one of the results of our surveys of overseas direct investment of Japanese companies is that those already doing business in China have to keep their business, but they are becoming more nervous and paying more attention to vulnerability. They have to understand the abandonment of key technologies and hacking using devices of Chinese companies. The element has been embedded. Therefore, they try to make more professional and defensive approaches to China. They are now clearly differentiating the market for business in the West and business in China. This is not a couple, but a very defensive approach by Japanese companies. Also, new entry from Japanese companies to the Chinese market is becoming very difficult right now, so they are more reluctant to do new business, especially in critical sectors like telecommunications, quantum computing, AI, or robotics. Also, shifting manufacturing centers from China to other countries. The Japanese government, especially METI, announced a new program to support this shift, and the biggest beneficiary of this program is Vietnam. That's one point. Second point is that now in our survey, the United States scores remarkably up. Japanese companies now understand the big market besides China in North America. The US becomes more prominent for direct investment from Japanese companies' point of view, so they are very active right now in the United States. Also, new good circumstances in the US to do business: more rule-based economy and very transparent framework. But at the same time, Japan has a long history of attention or economic conflict with the United States, even though we are allies for more than two decades. Therefore, as I stated in a document of the LDP's task force, we need to create indispensability and autonomy of Japan and a long supply chain of critical sectors, in particular semiconductor levels. We are now very much practicing the approach to the semiconductor industry in Taiwan, and they will respond very favorably to the approach of Japan.

Well, I listened to leaders from business industry in Japan, like Mr. Morita of NEC, for example. They clearly experienced already that some of the legislation when they try to acquire US companies by the CFIUS process, he said it takes months to clear up those regulations. He said this is a disadvantage for non-US companies to acquire US companies. Therefore, there's no loophole, but they don't have any intention to do loophole. However, more support from the Japanese government to organize and coordinate with the US counterpart would be better. But it's not going to happen, and it's called not made yet. The long-term kind of negative experience for senior officials of the Japanese government to have very controversial dialogue with the US counterpart, USTR, therefore in some sense they were skeptical. That's my sense. But at the same time, now they can do our use of technologies and they are using the Wassenaar arrangement, for example. And if WTO more completely works, they will use the WTO framework. However, unfortunately that is not done well, so we need some more bilateral core nation, most importantly the United States.

It's clear to me it's not clear yet because he's a key job right now. He's now focusing on passing this new bill of his piece registration right now, and he does not have enough staffers to work for him right now. Therefore, this is still unclear. After this bill is enacted and he is still remaining in a position to take a lead of this bilateral coordination with US counterparts, it could be. But probably from a legal point of view, he is not in charge. My view is that METI's minister must be in charge.

My very sense is that they have to be easier for coordination among Japan, US, and Australia. These triangles, this framework is working very well, but quietly. India is very more difficult to work with, especially there are some regulations of the central bank of India for external borrowing. Therefore, if we try to make loans in US dollars to Indian companies, India's legal framework of so-called HTV, this is a central bank regulation, is not converting from US dollar to Indian local currency rupee, not allowed. So this is still, you know, Indian economy is still very much inward-looking. Therefore, from the security point of view, India's participation is very key. However, we need to ask the Indian leadership to change their regulations more open to the like-minded countries. That's one point. Two, other Asian countries, some countries are very skeptical of this Quad framework. So they focus, for example, Indonesia, they need to have the so-called centrality of ASEAN. So ASEAN Plus Three or ASEAN, historically this was the central framework of coordination among the countries. So they feel that the US, Japan, China, South Korea are external partners. Therefore, in approaching to the other countries, we are very careful on using terms of Quad.

So I need just more coordination, more precise condition of the different legal framework. And also we need to engage those countries, for example Vietnam. Vietnam has a trade surplus to the United States, therefore they are very concerned about the vulnerability of criticism from US on this trading balance, which we experienced lastly. Therefore, all issues starting from bilateral coordination, and then we are more than happy to coordinate with the United States right now. So we can be a trainer, we can play some role of bridging between the ASEAN member countries and the United States. And also I understand that because of the aggression from China on the South China Sea in particular, and code of conduct is not created yet, therefore they are very much welcome the US presence right now. Therefore, the US must understand, US government I mean, understand this kind of sensitivity, and also using Japan as a kind of bridge to fix the gap.

Well, Prime Minister is really keen on a physical meeting with President Biden as soon as possible. But now in the Diet session, the budget for fiscal 2022 must be completed. And also they are now focusing on the fight against COVID-19, especially the new Omicron variant, and numbers of infections are very quickly upsurging, increasing. In Tokyo yesterday, new patients of Omicron were more than 7,000, while one month ago it was only 30 or 40. So this is very dramatically changed. Therefore, he needs to fix this issue as a first priority. And also the Prime Minister must win the Upper House election to try. Therefore, in my view, politically, except the meeting with President Biden, his foreign policy will not be so moving quickly, and he is more focused on internal domestic issues.

Well, as you know, Japan does not have a legal framework like the Magnitsky Act, and in my view it is not likely in the near future that they will create a similar legal system. Therefore, but at the same time, we need to pay due attention to this abuse of human rights issues, especially Xinjiang, definitely the forced laborers in Xinjiang. And in any sense of product of Xinjiang, besides textile, the key is polysilicon, which is a key element of solar power. Therefore, we are very much nervous about using this polysilicon. We need to make some certain research on what this product will come from, and also we need to make sure that there is no using forced labor and abuse of human rights in the process, in the products of first aid full circle. And textiles are very famous right now. This is a new and more and more critical issue, I think.

Well, we are actually working on carbon neutrality. We already created our fourth mid-term management plan and already announced in 2020, and we prioritize carbon neutrality and ESG. First, we already announced our own ESG policy, and we successfully launched a new green bond which is 500 million dollars, the first time for Japanese government-created entities to launch a green bond. We substituted it. And also we are more actually engaged with carbon neutrality, especially by means of supporting key technology and key materials like hydrogen and ammonia, and so forth. But we need to make these still very costly, so we need these alternative materials which are indispensable for carbon neutrality because we will have fossil fuel resources in Japan. Therefore, this is very key, and we also that this cost must be reduced and then to be affordable for the consumers. Therefore, we are paying due attention to supply chains and also cost elements of hydrogen, for example, both demand side and supply side. And also we stopped, we already announced to stop financing to coal-fired power plants. And also a key missing piece is the transitional source of energy, in particular natural gas, not pipeline gas but LNG. But we need to make clear that this is a transitional one, so we need to focus on the long-term goal. That's a very key point that we already stated.

Right. The strong viewpoint of the for offshore financial support from JBIC to this defense materials is that we need a clear action by the National Security Secretariat and also the NSC chaired by the Prime Minister. Without this direction, we are not able to make financial support. Number one. Number two, we already had a case, it's still ongoing, not finished yet. That is one big confidential so I cannot disclose everything, but this is a deployment of the frigates to Indonesia. Defense Minister Kishi and Defense Minister of Indonesia probably already signed a couple of memoranda of understanding. I participated in that very initial negotiation and I took a lead of financial negotiation with Defense Minister Prabowo Subianto of Indonesia. This is not fully completed yet, but now still under negotiation between the defense ministry of Indonesia and also the Ministry of Defense of Japan. But it's a, frankly, the defense side does not have any expertise especially on financial issues, so on a daily basis our staffers are supporting the negotiations and discussion with Indonesia. I know of course in legend part that not just only defense but also that is a key industry like Ministry of Finance. Therefore, I had some initial contact with Sri Mulyani, who was the finance minister of Indonesia, and also the Minister for Investment and Maritime Affairs, Luhut Pandjaitan, on this issue.

Thank you. Talk to me in my owners? I also hope that we can get together physically in the near future. Thank you.