Doing Business : Japan Changes Rules of Engagement for Mideast Trade : After nearly 20 years of virtual compliance with the Arab boycott, Japanese firms are doing business with Israel

For a clue on how pacifist, mercantile Japan fits into the complex patchwork of political interests in the Middle East, consider its relationship with Israel.

For most of the past two decades, the Jewish state has been a virtual pariah in the eyes of this oil-thirsty and export-hungry economic giant. Japan bluntly and unapologetically chose to serve its strategic energy needs over its avowed commitment to the principles of free trade.

As tribute to the Middle East countries that supply 70 percent of Japan’s oil needs, most Japanese companies have meekly acquiesced to an Arab trade boycott aimed at choking the Israeli economy.

Just as a steady supply of cheap oil was a key ingredient in Japan’s phenomenal boom after World War II, abiding friendship with the Arab world has been the linchpin of a commercially oriented foreign policy since the oil shocks of the 1970s. And Israel has been the fall guy -- sometimes to the irritation of Japan’s closest ally and Israel’s chief benefactor, the United States.

But Japan’s rules of engagement in the Middle East are beginning to change, recent developments suggest.

Two-way trade between Japan and Israel has tripled in five years, for example. The total remains relatively small--about $1.3 billion last year--but it appears headed for continued expansion while trade with Arab nations is contracting. Already, Japan is Israel’s third-largest trading partner.

Both the government and private sector in Japan have been finding ways to circumvent the economic blackmail that traditionally cast a chill on ties with Israel. At the same time, Japan is groping timidly about the world stage for a political role more appropriate to its status as a financial superpower.

Now, with war raging in the Persian Gulf, the region is a proving ground for a fledgling Japanese sense of international destiny that hints at transcending purely economic concerns.

“In the past, there was always an attempt to be as vague as possible, not to commit to either side in Middle East conflicts,” such as the Iran-Iraq War or the Israel-Palestine dispute, said Manabu Shimizu, senior research fellow at Tokyo’s Institute of Developing Economies. “But with the present crisis, we had to take sides.”

The first steps in the adventure were awkward, however, and from the U.S. perspective, seemingly feeble.

Prime Minister Toshiki Kaifu’s administration was befuddled and hesitant in responding to Iraq’s invasion of Kuwait, but in the end it found no alternative but to shake off old habits of appeasement for oil. Kaifu even made what was by Japanese standards a bold attempt to twist the popular interpretation of the postwar constitution, which renounces the sovereign right to wage war, and dispatch Japanese troops to the gulf for non-combat duty. Strident pacifist opposition forced the prime minister to withdraw his plan.

Still, Japan initially committed $2 billion in support for the multinational forces, and Kaifu is now pledging an additional $9 billion and planning to send military transport planes to help ferry refugees out of Amman, Jordan.

Despite the protective cover of its “peace constitution,” Japan on Jan. 21 found itself accused of a “hostile act” by Iraq’s ambassador to Tokyo, Rashid Rifai, who said Japanese will be responsible “for every drop of blood shed in Iraq.” Even if by default, the die is cast.

Taking a clear stand in the convoluted political affairs of the region does not necessarily play play to Japan’s strengths. Again, oil is the culprit, even though Japan has effectively reduced its dependency on imported energ since 1973.

During the Iran hostage crises of 1979, for example, Japan adopted a “neutral” position on the U.S. call for economic sanctions against Tehran. Washington officials were outraged by reports that Japanese buyers snatched up Iranian oil being boycotted by American companies, paying nearly twice the going price.

Japan’s ability to project an image as a reliable U.S. ally in the Persian Gulf may hinge on local public perceptions of what exactly is at stake.

Japan got about one out of every five barrels of its imported oil from Kuwait and Saudi Arabia before the Iraqi aggression. And more than 40 percent of its cumulative direct investment in the Middle East--about $1.4 billion--has been pumped into an oil-drilling concession in the “neutral zone” on the Saudi-Kuwaiti border.

And yet the public’s attitude has an aura of bemused detachment. The Japanese media are chronicling events in the Persian Gulf as America’s war, and a regular stable of pundits and scholars are downplaying Japan’s immediate connections and interests in the shoot-out.

“We have a strong sense of confidence from our ability to withstand the Middle East crises of the 1970s, and this is not a complete fantasy,” Shimizu said. “The real fear among Japanese economists isn’t of direct harm to Japan, but of a decline in the U.S. economy, which could hurt exports or put increased pressure on bilateral trade disputes. The indirect impact through America is the big concern at this point.”

Indeed, Japan’s posture in the Mideast is alternatively a subset of its oil policy, and a subset of its strategic partnership with the United States.

Shimizu observes that when U.S.-Japan trade friction heats up, Tokyo has a tendency to drift from its pro-Arab orientation toward more sympathetic leanings to Israel, presumably to curry favor with America.

In the wake of the first oil shock, after the 1973 Yom Kippur War, Japan staked out an independent position that earned it quick exemption from the Arab oil embargo. Japan demanded Israel withdraw from all occupied territories, recognize the Palestinians’ right to self-determination, and threatened the possibility of breaking relations with Israel, “depending on future developments.”

At the time, 85 percent of Japan’s oil came from the Middle East. That level of dependency was reduced to 78 percent by the time of the second oil shock in 1979, and to about 70 percent in the early 1980s. Meanwhile, a policy of diversifying energy sources to coal and nuclear fuel, backed by nearly five months worth of stockpiled oil, has relaxed the urgency surrounding supply. Also, the rapid appreciation of the yen from 1985 made imported oil deceptively cheap.

“Until the middle of the 1980s, we used to be told by Japan that there’d be no progress in bilateral relations until the confrontation ends in the Middle East,” said Eitan Margalit, minister for political affairs at the Israeli Embassy in Tokyo. “We don’t hear that anymore.”

Margalit sees “an increasing self-confidence” in Japanese officials and a “recognition that they should start to establish a better relationship with us if they hope to play a more significant role in the Middle East.”

In 1988 and 1989, the two countries for the first time exchanged official visits by their foreign ministers, and last year they began annual working-level political talks. “We’re not deceiving ourselves. We still see Arab oil interests as a very important factor in Japan’s policy,” Margalit said. “Although bilateral relations are developing nicely, it’s still not enough. We’d like to see much more free trade, and even now, many Japanese companies are still following the Arab boycott.”

More than a decade ago, the Ministry of International Trade and Industry (MITI) began an unofficial policy of “administrative guidance” to discourage Japanese companies from trading with Israel, government and industry sources say.

“We don’t trade with Israel because the government tells us not to,” said Tsuneo Tanaka, group executive for international operations at Hitachi Ltd.

MITI now denies this, but not very convincingly.

“The government is opposed to the Arab boycott, but we can’t order the private sector to do anything,” said Mitsuyoshi Saito, an official in MITI’s Middle East and Africa Division. “Since there’s a threat of being blacklisted, none of the companies has ties with both sides. It’s a question of choice, whether they want to trade with Israel or the Arab countries. Japan has got to have good relations with both sides, or we can’t survive. Our top priority is oil supply.”

The United States and many European countries have laws prohibiting companies from cooperating with the boycott and impose sanctions against those who do. In 1989, the U.S. Commerce Department imposed civil penalties ranging from $13,500 to $170,000 on the U.S. subsidiaries of three Japanese trading firms--Mitsubishi Corp., Mitsui & Co. and Daiichi Jitsugyo Co.--for cooperating with the Arab boycott.

Japan’s support of the boycott was raised last October by leaders of the American Jewish community, who questioned Matsushita Electric Industrial Co.’s track record. Matsushita was then in the midst of delicate negotiations leading toward its takeover of MCA Communications. Regulations set by the League of Arab States, among other things, ban movies featuring actors with “Zionist tendencies.”

Matsushita was cited as violating the Arab boycott in 1977 for selling televisions to Israel, but it is not clear how or when it was removed from the blacklist. The boycott forbids Arab League members to conduct business with companies that trade with or invest in Israel.

Matsushita both denies that it violated the Arab boycott, and that it restricts trade to Israel.

“There’s no truth in the allegation that we ever ignored the Arab boycott and exported directly to Israel,” said Matsushita spokesman Akira Nagano. “We’ve never exported directly to Israel. But we also have a clear policy of following U.S. law, and we supply our products to all countries, including Israel.”

Typical of many Japanese companies, Matsushita apparently has adopted a policy of serving the Israeli market through an array of intermediate sales agents in third countries.

“I myself bought some good products made by Matsushita in Israel -- a Panasonic TV and a Technics stereo,” said Max Livnat, economic minister in the Israeli Embassy. “If you go there you’ll see a lot of their products on the shelves. If the Japanese have something they want to buy or sell, they’ll find a way to do business with Israel.”

Although top auto makers Toyota and Nissan don’t sell to Israel, Fuji Heavy Industries has been there for many years with its Subaru brand passenger car. Mitsubishi Motors followed a few years ago, and last year Honda announced it would skirt the boycott by shipping cars made at its plant in Ohio.

Autos made up 32.3 percent of Japan’s $317.5 million in exports to Israel in 1989, while three out of every four dollars in imports from Israel were from diamond sales--$567.9 million worth of gems--tilting the balance of trade into a rare deficit for Japan.

In comparison, Japan bought nearly $15 billion in oil from the Arab nations that year and exported a total of $8.3 billion in goods to the gulf region and Egypt--including 239,000 motor vehicles worth $1.9 billion.

Yet Tamiyuki Tanaka, a lawyer who advises corporate clients on how to handle the threat of sanctions from the Arab League, said straightforward decisions of the past are being reshaped by new international pressures.

“This issue is becoming much more complicated to Japanese companies,” Tanaka said. “It used to be two choices: the Arabs or Israel, and the Arabs always had the advantage. But from now, Japanese companies have to struggle with three tough choices: the Arabs, Israel and the United States.”

Japan’s Trade With the Middle East Japan, which imports virtually all of its oil supplies from the Arab nations of the Middle East, has recently began to increase its trade with Israel. Two-way trade between Japan and Israel has tripled in the last five years. JAPAN’S IMPORTED CRUDE AND RAW OIL IN 1989 In millions of U.S. dollars Others: $479 Brunei: $219 Malaysia: $517 Mexico: $959 China: $1,531 Kuwait: $986 Iraq: $1,199 Qatar: $1,329 Indonesia: $2,961 United Arab Emirates: $4,413 Saudi Arabia: $3,736 Iran: $1,689 Oman: $1,524 Mideast Subtotal: $14, 878 or 69.2%. The Mideast share was 78% in 1979 and 85% in 1973. Source: Japanese Ministry of Finance, Ministry of International Trade and Industry.