Should Japan join a Chinese-led banking body?

Earlier this year China unveiled its Asia Infrastructure Investment Bank (AIIB), an international financial institution with goals to promote infrastructure development in the Asia-Pacific region.

The initial capital for the AIIB, which will be based in Beijing, is expected to be $50 billion, of which half will be provided by China. And the AIIB is one key element of the rapidly growing economic architecture in the region. The recently concluded negotiations for the Trans Pacific Partnership (TPP) — a massive U.S.-led international trade agreement that links 12 of the major economies in the Asia-Pacific — would, if ratified, combine nearly 40 percent of the world’s GDP and bolster Washington’s role in guiding the economic trajectory of the Asia-Pacific.

For now, the TPP is an exclusive club. It does not include China, India or many other developing countries in Asia. It is a trade agreement, not an organization like the Chinese-led bank. By contrast, AAIB membership is open to countries all around the world, and key Western countries — including the U.K., France, Germany, Italy and Spain — have overcome their initial skepticism about the transparency and management of the bank and joined.

The bank has also attracted countries from most of the Asia-Pacific region, including such key U.S. allies as Australia and South Korea. Even the Philippines, which is embroiled in a contentious territorial dispute with Beijing in the South China Sea, indicated its desire to join the AIIB. In fact, nearly every country in the Asia-Pacific has joined the bank, with the exception of Papua New Guinea, Bhutan (which has no diplomatic relations with China) and North Korea.

There are two other key outliers: the United States and Japan, the world’s largest and third-largest economies, respectively, and the two main power brokers in the International Monetary Fund and World Bank. While they are not opposed to the AIIB in principle, these states say they are unwilling to join until its governance structure and recipient debt sustainability are more clearly defined. But aside from these technical reservations, there is concern in Washington and Tokyo that the AIIB will elevate Chinese influence in the region and erode their long-standing positions. Should Japan sit this one out, it will be the only country in East Asia aside from North Korea to remain outside the AIIB.

The U.S. expressed its disapproval with the AIIB, in its current standing, to its keys allies in Europe and Asia, noting that the bank still lacks the proper governance structure. Up until this point, only Japan — along with Canada and Mexico — have agreed with the U.S. assessment and refrained from signing on. Tokyo’s other main reason for not joining the AIIB is Japan’s leadership role in the more established Asian Development Bank (ADB), a bank based in Manila that focuses on sustainable investment in Asia. The ADB does a lot of work in China, whereas the AIIB’s focus will be exclusively on projects outside the country. 

The U.S.- and Japanese-led ADB gets more than 30 percent of its capital flows from Tokyo and Washington; Beijing contributes a mere 6 percent. Tokyo rightfully fears that the ADB will significantly lose influence if the AIIB takes hold in the region. And Japan is also concerned with the current makeup of the AIIB in terms of granting and approving loans. The ADB screening process ensures that one state cannot drive the agenda; the AIIB setup is still developing, but it appears that China will have an outsize influence on determining the approval of investments.

Another point of contention between the U.S.-Japan bloc and China is the TPP, which Barack Obama’s administration has framed as an alternative to China’s rewriting the rules in Asia. The TPP agreement was struck earlier this week after marathon negotiations in Atlanta among trade ministers of the 12 participating states. The next step involves ratification of the agreement by those nations’ legislatures. While the conclusion of the TPP talks is positive news for Obama’s rebalance, the exclusion of China, along with the pointed language on the AIIB, has widened the divide between Beijing and Tokyo.

Of course, the broader strategic rivalry between the U.S. and China also feeds into the tension; Washington’s rebalance is largely seen by Beijing as a thinly veiled containment strategy. Similarly, Japan-China tensions over history and their territorial dispute in the East China Sea have further magnified the persistent mistrust between Asia’s two largest economies.

All these drivers have pushed Japan to opt out of the AIIB for now. But there remain enticing reasons to join. Japan risks being left out a membership roster that includes nearly the entire Asia-Pacific region, not to mention most of Europe; while its concerns about the integrity of the AIIB are valid, they could be addressed through the large influx of Western states as the group’s founding members. Moreover, the U.S.- and Japan-led ADB will have to adapt to the creation of the AIIB, which would work better if Tokyo and Washington had clout in the newer banking body.

Finally, exclusion from the AIIB — along with the TPP and enhanced security ties with the U.S. — can be counterproductive because it reinforces the idea that Asia’s future will be defined by China’s rivalries with the U.S. and Japan.

Taking these considerations in hand, Japan should continue discussions about joining the AIIB with China. It should also discuss with Western member states the bank’s evolution and organization.

Japan will not sign on overnight — nor should it. That said, it’s high time for Japan to adapt to the realities of the body’s creation and its future role in the region.