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Targetting the Gulf.

Japanese exports to the Gulf have risen sharply since the Kuwait crisis as Japan seeks to struggle its way out of recession. At the same time, Tokyo appears to have reconciled itself to long-term dependence on the Gulf countries as its most important source of energy imports.

JAPAN FACES ITS worst recession for 20 years, prompting a $43 billion fiscal stimulus programme adopted by the government last summer. Besides boosting its domestic economy, however, Japan is also resorting to its proven success as an exporter to contribute to reviving economic growth.

This will inevitably heighten resentment in the United States and Europe, so it is not surprising that the Gulf has been singled out as a particularly important target, partly because Japan is so well-established there and partly because it has been unable to reduce its dependence on oil imports from the region.
Unaccustomed deficit
Japan's trade imbalance with Gulf ($ billion)
 Exports Imports
 Jan-Sep Jan-Sep Jan-Sep Jan-Sep
 1992 1991 1992 1991
Saudi Arabia 3.68 2.63 7.44 7.24
UAE 1.96 1.45 7.14 7.50
GCC total 7.11 4.94 20.25 20.08
Iran 2.09 1.75 2.03 2.13
Middle East total 11.98 9.03 21.65 21.83
World total 250.61 229.39 171.15 175.25
Source: Japan External Trade Organisation

In the first nine months of 1992, Japanese exports rose 9.2% worldwide over the first three quarters of the previous year, but leapt 43.8% to GCC customers and 19.3% to Iran. The share of GCC and Iranian markets in Japan's total export trade grew from 2.9% to 3.6% over the same period. The rest of the Middle East is hardly in contention. The GCC and Iran together account for more than 75% of Japanese exports to the entire region.

Iran is second only to Saudi Arabia as a market for Japanese goods. There are acknowledged problems in trading with Iran. Payment difficulties are endemic, with Tokyo businessmen blaming Tehran for being over-optimistic about oil revenues, delays in agreeing terms with Western export credit organisations and poorly managed financial liberalisation. The United States is also trying to get the industrialised countries to restrict trade and technology transfers to Iran. But Japanese exporters seem determined to persist in gaining a large share of a market they see as increasingly lucrative in years to come.

Unlike the European Community countries which all enjoy a substantial trade surplus with the GCC states, Japan has a serious deficit in its trade balance with the Arab Gulf countries. The relative weakness of oil prices over the past year has helped to narrow this, but Japan now seems reconciled to long-term reliance on the Gulf as its primary source of energy imports. Hopes of diversifying towards East Asia and the former Soviet Union have been disappointed by the contracting export capacity of these potential alternative producers.

Dependence on the Gulf is emphasised by Japan's growing demand for liquefied natural gas (LNG). Japan now accounts for around two-thirds of the world's LNG imports. Despite large-scale involvement in East Asian LNG projects, Japanese companies are now lined up to be among the largest purchasers of LNG from Abu Dhabi, Qatar and Oman.

All too well aware that Japan is locked irretrievably into a trade relationship with the Gulf, the GCC countries are looking for something more than cash in return. There is a widespread feeling that Japan has not committed itself to investment in the region on the scale of its other major trading partners, the United States and Western Europe.

The Japanese dispute this assessment. According to the Dubai office of the Japan External Trade Organisation (Jetro), direct Japanese investments in the Gulf have totalled $3.5bn since 1951, of which $1.5bn is invested in Saudi Arabia and Kuwait, mainly in the oil and gas sector. Another $1bn is invested in Iran and a further $500m in the UAE and the rest of the GCC states. In the decade 1980-1990, direct investment flows into the GCC totalled $1.05 billion, ranking third after the United States with $2.56 billion and the EC with $1.26 billion.

As the after-effects of the Gulf war receded, Japanese companies invested $90 million in 1991 in the Gulf states compared with negligible investment in the previous year. According to Jetro's Mitsuhito Ono, Japanese investment in the Gulf increased markedly in 1992, particularly after the signing of agreements between Japanese companies and Qatar and the UAE for long-term gas supplies and the development of the gas sector.

Mitsui and Marubeni are joint venture partners in Qatargas which now has a long-term supply contract for LNG to Chubu Electrical Power Company. Sumitomo will participate in the second-phase development of Qatar's gas programme. Mitsui is the Japanese partner in Abu Dhabi's Das island LNG project which is doubling capacity to supply Tokyo Electric Power Company. Chiyoda Corporation is the leading contractor in the expansion scheme and is also competing for the Qatargas engineering, procurement and construction contract.

Several Japanese firms have also applied for investment licences in Dubai's Jebel Ali Free Trade Zone. Sony International was the first to take advantage of new regulations allowing TABULAR DATA OMITTED 100% foreign ownership of locally registered companies.

In 1991, the UAE, accounted for $46m of Japanese investment in the Gulf, followed by Saudi Arabia with $25m and Bahrain with $5m. However, investment is only one way, for Gulf states have directly invested a mere $1.5m in Japan. According to Gulf bankers and economists, Arab investment in Japan is low because the market is not known well enough to Gulf businessmen. There is also considerable hesitancy on the part of Japanese businesses. Saudi Aramco has proposed three refinery joint ventures with Japanese companies, possibly costing as much as $8 billion. Independent Japanese refiners, hitherto closely regulated and not well-known for their efficiency, are highly dubious about the idea.

Gulf states are particularly keen for Japanese companies to participate in regional joint ventures which involve technology transfer. A number of them have launched foreign investment and export promotion drives over the last few months, partly to attract investment and aimed at covering chronic Gulf budget shortfalls.

A Japanese business delegation visited Saudi Arabia last November. As a result Japan is planning to set up five medium-scale joint venture projects in the kingdom's non-oil sector. Total Japanese equity share in the five projects, according to Shinichi Yufu, president of the Japan International Development Organisation (Jaido), will be $100m on a 40:60 equity ratio. The joint ventures will be in the manufacture of pharmaceuticals, food processing, hydroponics, copper smelting, and in downstream petrochemicals.

The projects will be implemented in early 1993. But they are a far cry from Japan's joint ventures of the 1970s in the Ar Razi and Sharq petrochemical projects at Jubail and at present there is nothing else on the horizon.

Japan is also reluctant to become involved in Iran. Investment prospects have dimmed since the dispute over compensation after Mitsui abandoned its unfinished Bandar Abbas petrochemical plant at the height of the Iran-Iraq war. There are signs, however, of a thaw in relations between Tehran and Tokyo since Japanese firms are returning to the Iranian market where they were once leaders. Nippon Steel of Japan, for instance, has just won a $1.6m contract to advise Iran's National Steel Company over its restructuring and technology plans.

Turkey is a much more promising prospect. It hopes to attract Japanese funding and know-how for the proposed $6bn high-speed rail link between the capital Ankara and Istanbul, as well as a proposed oil and gas pipeline from Kazakhstan and Azerbaijan to the Turkish Mediterranean terminal at Yumurtuluk, and cooperation on the joint development of the Central Asian republics. During a visit to Tokyo last December by Turkey's prime minister, Suleiman Demirel, the Japanese government claimed to be seriously interested in investment in Central Asia provided it could be coordinated through Ankara.
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Title Annotation:Business and Finance; stronger Japan-Gulf states economic relations
Publication:The Middle East
Date:Mar 1, 1993
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