Recent figures on Japan’s official development assistance demonstrate that its engagement with Central Asia could be waning. Despite great expectations over the past few years, aid has fallen dramatically as Japan appears somewhat disillusioned, realizing among other the difficulties in obtaining access to the region’s oil and gas. Japan will not vanish from Central Asia, but its involvement may stagnate rather than expand, focusing on uranium and minor development assistance.

BACKGROUND: As a country with few indigenous energy resources, Japan has long considered energy security a central pillar of its national security framework. Japan’s assessment of Central Asia’s importance rose in 1992 and, since that time, it has hoped to use the oil and gas reserves of Kazakhstan, Uzbekistan and Turkmenistan to diversify its energy imports away from the Middle East and Southeast Asia. Japan’s early diplomatic forays into Central Asia were centered on providing financial aid and loans to develop a range of energy-related and other infrastructure. Japanese businesses — notably Itochu Oil Exploration — and government-backed organizations provided finance for the development of oil and gas fields in the region. In parallel, the Japanese government registered an interest in improving regional governance and investment stability. Japan has also played a role in connecting Central Asia to the wider Asia-Pacific region; as a result of direct lobbying by MOFA, four of the five republics became members of the Asian Development Bank between 1994 and 2000.

The 2004 launch of the ‘Central Asia plus Japan Dialogue’ suggested a new high for Japan’s fifteen years of resource diplomacy. Japan’s diplomacy seemed to offer substantial economic benefits and Central Asian leaders’ hopes rose accordingly. Of particular interest is the potential to attract investment from Japanese companies, a source of capital seen as large and promising. Yet, although it has concluded sizeable uranium contracts with Kazakhstan and Uzbekistan, Japan’s outpouring of financial aid has yet to translate into oil or gas deliveries. The proposed Turkmenistan-China-Japan pipeline remains technically, economically and politically unfeasible. Japan’s Inpex Corporation has an 8.33 percent stake in the consortium developing Kazakhstan’s Kashagan oilfield, but the group is suffering severe cost overruns and production will be several years late, sometime after 2011. Furthermore, state-owned KazMunaiGas looks set to significantly increase its stake in the project, a decision that would make investment unprofitable for the current consortium – including Japan’s Inpex - and may well lead to the project’s collapse.

The ‘Central Asia plus Japan Dialogue’ was never couched in terms of energy cooperation alone. In August 2004, Japanese Foreign Minister, Yuriko Kawaguchi, told an audience in Tashkent that ‘Japan has no selfish objectives towards Central Asia’, and the five republics have received more than $US2.5 billion for both humanitarian projects as well as those related to energy development.

With 2004 as the high point, Japanese political momentum was enough to send Prime Minister Junichiro Koizumi to Central Asia in 2006. However, by this time Japan’s practical engagement was already in decline. Official development assistance figures for the past two years indicate a marked reduction in Japanese aid, particularly to the potential energy exporters. Between 2004 and 2006, aid to Kazakhstan and Turkmenistan was cut entirely. The biggest recipient, Uzbekistan, saw its allocation reduced by 92 percent, receiving $US7.5 million in 2006 — the same amount as the Ivory Coast and far less than Indonesia, in which Japan continues an energetic hunt for gas. Japan’s remaining aid to Central Asia is now focused on more traditionally humanitarian areas, such as the development of education and medical infrastructure. While it would be unfair to characterize Japan’s objectives in Central Asia as ‘selfish’, Japan’s aid appears to have fallen in line with its realization that resource diplomacy will not be fruitful in Central Asia.

IMPLICATIONS: The barriers to stronger Japanese engagement in Central Asia are high for three reasons. Firstly, Japan is constrained by the same concerns for democratic governance as other Western countries, but unlike the United States, for example, it has less ability to offer military cooperation and power balancing against China and Russia. The risks to government and business reputations are considered high and limit the scope for meaningful and long-term partnerships. As the Central Asian republics expand their foreign contacts, there have been very few mid-level political exchanges with Japan to deepen and broaden any impact from Koizumi’s visit.

Secondly, Japanese companies are unlikely to commit to greater investment for the same reason that most companies do not: Central Asia remains a difficult place to do business. The travails of other corporations – such as Coca-Cola in Uzbekistan – continue to provide warnings to would-be investors, Japanese included. Beyond uranium, there is a notable lack of Japanese business activity in Central Asia when compared with the region’s more natural partners, such as China, Russia and Turkey. As with investment, so with trade: Japan views Central Asia as neither a source of cheap exports, nor as a market for its own goods and services.

Thirdly, as with much of the diplomatic maneuvering in Central Asia, Japan’s major motivation has been to chase resources. The enthusiasm of MOFA officials for building ties with Central Asia came from its geographical proximity, but this has proved illusory. The most feasible routes to move oil and gas to Japan run through China and Russia. Of the southern trajectories, Afghanistan remains insecure and Japan recently reduced its energy interests in Iran under U.S. pressure. Japan has obvious concerns with entrusting its energy security to China. When Central Asian deliveries rely on Russia, in the medium term it is more cost-effective for Japan to put its diplomatic capital into developing nearby Russian gas and oil fields rather than attempting to link with Central Asia via long pipelines. From Japan’s perspective, because Central Asia’s resources lie on the other side of China and Russia, they come with substantial cost premiums.

Given these barriers, it is likely that Japan’s engagement will be maintained at its present level. The troubles and trends in Japan’s engagement with Central Asia are in stark contrast to the burgeoning and diversifying relations between China and the region. Japanese development assistance can benefit Central Asia, but perhaps the biggest gains would be made from attracting greater Japanese investment in the energy sector. Japan has the money and expertise to develop energy resources and Central Asian governments need to press the case that any extra oil or gas on the market suppresses global prices, even if China and Russia stand in the way of direct links.

CONCLUSIONS: Given Japan’s dependence on the Middle East and Southeast Asia for 90 percent of oil and natural gas supplies, its interest in Central Asia as a means of diversifying imports is of little surprise. Yet, despite sending more than $US2.5 billion in aid to the region since 1992, Japan’s resource diplomacy in Central Asia has met with little success. The political, technical and financial difficulties associated with exporting oil and gas from the region cannot be overcome through aid alone. There is certainly money to be made for     investors willing to engage the risky Central Asian republics in developing oil and gas fields, but, if declining aid figures to the region are anything to go by, Japan appears less willing to play that role. Its attention has shifted to the other great resource hope - Africa - with negative impacts for its Central Asian engagement.

That said, the ‘Central Asia plus Japan Dialogue’ is likely to continue, and Japan will continue to deliver smaller, mainly humanitarian aid programs. Ongoing dialogue will also allow Japan to offset some of the political influence exerted by China and Russia in the Central Asian sphere. Nevertheless, apart from generating minor goodwill and more significant uranium contracts, relations with Central Asia are not likely to deliver many tangible benefits to Japan. For now, it remains up to the Central Asian republics to convince Japan to remain engaged in their oil and gas industries.

AUTHORS’ BIO: Amy King and Jacob Townsend are research analysts with the Australian Strategic Policy Institute.