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Japanese weary of North Korea's investment past

A source of cheap labor it may well be, but North Korea's unpaid debts and its history of unpredictability are making Japanese firms wary of investing in the reclusive communist state despite signs it is opening up.

"It's not a situation where you can expect Japanese firms to reach out ... The risks are very high," said Masahiko Nakagawa, a researcher at the Japan External Trade Organization's Institute of Developing Economies (IDE).

"Japanese firms have had some painful experiences," he said.

Exact amounts are unclear, but Nakagawa said North Korea had failed to pay Japanese firms about ?100 billion (US$800 million) in principal and interest on trade deals decades ago.

Most big Japanese companies stopped trading with North Korea after the 1970s when the Japanese government stopped underwriting trade insurance because of the unpaid debt, and indications are they aren't about to jump back in any time soon.

At a summit in Pyongyang last week, Japanese Prime Minister Junichiro Koizumi agreed to resume talks on establishing diplomatic ties next month after North Korean leader Kim Jong-il apologized for abductions of Japanese citizens.

North Korea admitted that 13 Japanese had been kidnapped and said eight of them were dead.

Koizumi, in turn, apologized for Japan's harsh 1910 to 1945 colonial rule of the Korean peninsula and the two agreed to discuss Japanese aid for Pyongyang later.

"At this point, we don't know how normalization talks may progress so we are watching developments," said Jun Nishizawa, a spokesman for Mitsubishi Corp, the biggest of Japan's trading houses.

Tokyo gave the South US$500 million when they normalized ties in 1965. Analysts have said Tokyo could provide up to US$10 billion to the economically crippled North.

Even as a source of labor, North Korea's allure is slight.

"China has gained acceptance in Japan as a base for processing brought-in materials," said Hidehiko Mukoyama, a senior economist at Japan Research Institute.

An economic zone to be set up in North Korea's Sinuiju zone bordering China also would likely be more attractive to Chinese investors than Japanese, IDE's Nakagawa said.

"Geographically speaking, it is something China is looking at. I don't think it will spur talk about investment from Japan."

Some South Korean analysts have said they expect North Korea to soon unveil another special zone at Wonsan on its eastern coast in an effort to attract Japanese money.

But Nakagawa said it was difficult to expect companies to rush toward investing before diplomatic ties were established and unless Japan agreed on economic aid.

Japan's total trade with North Korea has stood at around US$400 million to US$500 million annually in recent years, most of which has been handled by ethnic Koreans in Japan.

Japan imports products such as men's business suits, seafood and matsutake mushrooms. Used cars and trucks and fabric are among the main exports.
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