The yen has fallen, but JICA has grown. How is Japanese aid keeping up?

Over the past two years, the Japanese yen has been in freefall. In July, the currency tumbled to a 34-year-low against the dollar — and though its value has inched upward since, the yen continues to stand on shaky ground. But while Japan’s currency has spiraled, the country’s official development assistance has soared. And for Akihiko Tanaka, the president of the Japan International Cooperation Agency, or JICA, that’s been made possible by the country’s heavily loan-based approach to foreign aid. “By utilizing our borrowing from the government, as well as utilizing the repaying of funds from our partner countries, we can extend loans further,” Tanaka said. “That way, we can increase lending despite the slow growth of Japanese GDP.” For years, Japan has relied on concessional lending to deliver its foreign assistance, directing low-interest, flexible loans to countries across the Indo-Pacific region. Money that’s repaid goes back into JICA’s bank account to lend again, and more money can be sourced by borrowing from the Japanese government — which JICA can currently do at rock-bottom rates. Because of that, JICA’s continued to grow its official development assistance, or ODA, despite the yen’s depreciation. “If we exclusively use grants, the decline of budgets means the decline of grants,” Tanaka told Devex. “But we can utilize lending to increase our ODA, and that’s the reason we have a historic high.” A history of loans Loan-style foreign assistance is nothing new for Japan. Six decades ago, a loan from the World Bank led to the construction of the high-speed railway between Tokyo and Osaka — and 30 other loans worth more than $863 million financed highways, power stations, and steel mills across Japan. The country’s last payment to the World Bank was in July of 1990, and in the years since, Japan has become a powerhouse lender of its own. Last year, nearly half of Japan’s ODA — some $9.5 billion — was delivered through bilateral loans, eight times the average for members of the OECD Development Assistance Committee. “The Japanese know that utilizing loans from others will make a difference that you alone cannot achieve,” Tanaka told Devex. As one of the world’s largest bilateral donors, JICA’s approach — and how it has evolved over time — matters. By 2022, Japan had become the world’s fourth-largest bilateral donor — and last year, it held onto that rank once more, allocating more official development assistance than ever before. <div class="flourish-embed flourish-chart" data-src="visualisation/19129051"><script src="https://public.flourish.studio/resources/embed.js"></script><noscript><img src="https://public.flourish.studio/visualisation/19129051/thumbnail" width="100%" alt="chart visualization" /></noscript></div> Over the last decade, Japan has also doubled the percentage of its gross national income directed toward official development assistance, shooting from 0.2% to 0.4%. That proportion is still well below the OECD target of 0.7%, one that today, only five of the world’s countries reach. But still, the jump in Japanese aid spending accounted for an extra $12.3 billion in foreign assistance across 10 years. There is one caveat: Though ODA is the aid world’s primary measure of development spending, it’s also been criticized for overcounting the generosity of loans — with some experts saying that with a different counting measurement, concessional loans such as the ones JICA disburses might actually be much less valuable than reported through the Organisation for Economic Co-operation and Development, or OECD. The big picture The increase in Japan’s foreign aid hasn’t happened in a vacuum. In late 2022, Japan revised its national security strategy for the first time in nine years. It highlighted two foreign assistance schemes — ODA and a new military assistance strategy, coined official security assistance — as tools to increase stability throughout the Indo-Pacific region. “Japan’s approach is to keep this area in sound international order,” Tanaka said. “So we, the Japanese government, have continued to use the words ‘free and open Indo-Pacific.’ If this area of promising economy is closed — and not free — Japan as well as many other countries cannot gain benefit from it.” The year following, the country updated its international development policy to reflect using ODA more strategically, citing “changes in the balance of power,” “intensifying geopolitical competition,” and “fragmentation of the international community.” “There’s a recognition by the government that in a very complicated international environment, Japan’s voice and leadership in the developing world is critical to its national interests,” said Nicholas Szechenyi, a senior fellow at the Center for Strategic and International Studies, or CSIS, a think tank based in Washington, D.C. “I’m very encouraged that Japan’s ODA budget is increasing, but I think strategically it’s even more significant that the government is looking at ODA in a much more comprehensive way, and as part of a long-term strategy for Japanese diplomacy,” Szechenyi added. Though China is not mentioned in Japan’s strategy document, the country’s influence is undoubtedly the undercurrent, with references to the “rise of emerging donor countries” lending money that have led to debt issues across the world. For years, Western leaders have criticized China’s lending practices — namely through its flagship global infrastructure campaign, the Belt and Road Initiative — as debt-trap diplomacy. Countries such as Sri Lanka and Zambia have buckled after defaulting on Chinese loans, which are largely seen as transactional and opaque, at least by those in the West. That wasn’t lost on Japan, the largest aid donor in the region. From 2018 to 2022, Japan’s ODA investments in infrastructure grew by 81%, according to the statistics portal Donor Tracker. In 2023, the Japanese government announced plans to expand that support further, prioritizing emerging economies in the Indo-Pacific region. And today, JICA focuses its aid across not just the Asia Pacific, but through South Asia, the Middle East, and Africa, largely due to the shifting “center of economic gravity,” Tanaka said. “Some developing countries have achieved significant economic growth,” he added. “But while these regions are very promising in the economic sense, they also suffer from threats from compounded crises.” Belt and loan Japan does not extend large-scale loans to countries that are unlikely to repay their debt, he added, instead opting to provide low-income countries with smaller-scale grants. The majority of Japan’s bilateral ODA goes to lower-middle-income countries such as India, Bangladesh, and the Philippines, while low-income countries received less than 5% of such aid in 2022, according to data from Donor Tracker. In 2022, one-fifth of all JICA’s bilateral ODA went to India — a country with both economic promise, Tanaka said, and a need for financial support. “Loans can be beneficial, but unless managed carefully, they can be very dangerous to the recipient economy,” Tanaka said. “In very poor countries, unless our partner reaches a certain level of development, it may not be able to capitalize on big loan projects.” In a 2021 assessment by Aid Data, a lab run by William & Mary Global Research Institute, the researchers found the average loan from China has a 4.2% interest rate, a grace period of less than two years, and a maturity length of less than 10 years. Japanese loans, on the other hand, have interest rates between 0.5% to 2.6%, with grace periods of five to 10 years and repayment periods of 15 to 40 years, depending on a country’s income level. “If China is designing good development projects with many developing countries, that’s a good thing,” Tanaka said. “I believe eventually, we would like to have more collaboration with our Chinese partners … but then, looking at recent Chinese practices, it is hard [to have] significant collaboration, because Chinese lending practices appear to be rather contradictory to what I’ve said.” Despite that, Tanaka did say he’s hopeful. The world has a dizzying array of challenges, and they can’t all be solved by a single donor — and with China once being the largest recipient of Japanese official development assistance, the two countries have a rich history to draw from, Tanaka explained. “If we can coordinate better with our Chinese friends, that would be beneficial for the entire world,” he added. “But to do that, I think we need to have much better diplomatic relations — and [there need to be] attempts to reduce tensions between the United States and China.” A different kind of localization There’s one other reason JICA prioritizes lending, the agency’s head explained — and it goes back to Japan’s own history with the World Bank. “If you ask any Japanese who made our high-speed rail, they’ll say the Japanese,” said Tanaka, referring to the transit line between Osaka and Tokyo. “It was [created through] a loan from the World Bank, but the Japanese consider it our own. This sense of local ownership is, I think, quite similar to what we find [in JICA’s work today].” Tanaka pointed to the New Delhi metro as an example: Though it was financed by JICA about 20 years ago, today, the railway has a strong sense of Indian ownership. JICA recently referred to the project, which is now in its fourth phase, as a “shining example of Indo-Japanese cooperation.” It’s a very different model than what USAID — the world’s largest bilateral donor — has been pushing toward. With USAID-style localization, the hope is for more flexible grant money to go directly to local groups, and to have decisions steered by communities themselves. Lending is, obviously, quite different — especially as much of Japan’s ODA goes to governments instead of civil society groups, Szechenyi explained. But in a country whose currency is failing to keep pace, it may serve as the most viable option to keep cash flowing. “A loan can be a very efficient means to create ownership, and then mobilize more funds,” Tanaka said. “If it is a simple grant, then that’s good for now — but if you use it up, that’s the end.” Though JICA does provide both grants and technical assistance through its ODA, its loan approach mirrors that of an international financial institution. And despite the differences between USAID and JICA, many of the aims are the same: Local ownership, sustainability, and community buy-in. JICA’s technical assistance plays a key role in that process, Tanaka explained, allowing the effect of each loan to multiply. Throughout the construction of the New Delhi metro, Indian administrators and professionals working on the project were invited to Japan, where they could learn from Japanese operators before, during, and after the metro’s construction. “I think that what is important is to really combine the benefits of various different schemes,” said Tanaka. “Loans have their own merits, and grants have their own roles, and technical cooperation can usually multiply the effects of grants and loans.”