When criticisms from industrial nations against the large trade surplus of Japan became increasingly vocal, the Japanese government clearly announced its position in 1978 (in a joint communique with the United States) to increase the ratio of united loans, and has since increased the untied portion steadily. In FY 1996, 100 percent of Japan's ODA loans are untied.

In the process of development, what is needed is not just grant aid for the social sector. The construction of economic and social infrastructure, which requires huge sums of money, is also extremely important. By utilizing low-cost funds from the Japanese national investment and loan program, as well as the national budget, ODA loans (yen loans) realize the extension of a large amount of money on concessional terms to meet the financial needs of developing countries. As most of the ODA loans are untied, they are highly appreciated by developing countries as well as the international community as efficient assistance funds which make it possible for recipient countries to procure higher quality goods at competitive cost from all over the world without causing trade friction.

For some years now, the Japanese government has been under growing pressure to resume offering ODA loans on a tied basis because Japanese companies receive an inordinately small percentage (less than 30%) of the contracts awarded under projects that are now financed with ODA loans. Even if the part of ODA loans which will be used for local currency costs (for wages to local workers, local purchases of such things as gravel, and other items of no concern to Japanese corporations) is excluded, Japanese corporations receive project contracts equivalent to less than half of the total in loans.

The guidelines adopted by the member countries of the OECD ban tying ODA loans when the concessionality level is lower than a certain level. Therefore, ODA loans cannot be tied with their usual interest rate levels (averaging around 2.5 percent).

Role of the private sector is essential to the promotion of development of developing countries. ODA loans have facilitated private sector's activities by improving economic infrastructure. Private investment promoted by such improvement of economic infrastructure has contributed to the economic growth of China and Southeast Asia. The Japanese government will continue to pay attention to private sector's concern while maintaining its general policy of united loans.

Chart 9 Trends in Procurement Conditions on Japan's ODA Loans

Chart 10 Trends in ODA Loan-Funded Corporate Contracts (By Country, Local Currency Costs Excluded)