Japanese government to denominate its ODA loans in the recipient's own currency or to allow the recipient to choose the currency of debt denomination (as the World Bank has done in some cases). It should be noted, however, that currency risk can be hedged effectively through swap and other arrangements, albeit at a cost. Yen-denominated debt can also be better managed by a prudent exchange rate and reserve policy, directed at reducing the negative impact of yen rate fluctuations.<sup>14</sup>

# **2. Dominance of Untied Aid**

The other side of the high loan share (and the correspondingly low grant share) is that Japanese ODA is generally untied to the purchases of goods or services from domestic suppliers. According to the international norm, loans should not be tied, but grants can be, so that donor country firms benefit outright only from free money. In 1980, only 25.8 percent of Japanese ODA was untied, one of the lowest among the DAC members. As a result of the MOFA's conscious effort, the share of untied aid rose rapidly in the 1980s, and became the highest among the top donors. In 1999, 96.4 percent of Japan's total bilateral ODA commitments was untied (an additional 2.9 percent was partially untied), whereas the untied ratio was 84.7 percent for Germany and 91.8 percent for the United Kingdom (Table 5). The EU average was 81.2 percent. It is believed that the figure for the United States is much lower, close to zero.

**Table 5. Share of Untied Bilateral Assistance (Percentage)**

||1980|1985|1990|1995|1998|1999|
|---|---|---|---|---|---|---|
|**Japan**|25.8|60.8|77.0|96.3|93.6|96.4|
|**United States(a)**|26.8|40.9|69.5|27.3|NA|NA|
|**European Union**|54.7|47.4|43.5|64.1|72.9|81.2|
|**France**|43.3|42.5|47.1|58.4|66.8|NA|
|**Germany**|82.2|63.7|43.6|60.3|86.5|84.7|
|**United Kingdom**|25.2|27.6|NA|86.2|79.6|91.8|
|**DAC Total**|44.1|47.3|59.4|69.6|81.4|87.8|

_Note:_ (a) The latest figure for the United States is not available, but it is believed to be virtually zero. _Source:_ OECD, DAC.

The large volume of Japanese ODA loans has created a large "untied market" for non-Japanese firms. In fact, the share of Japanese firms in the procurements of ODArelated contracts has been declining in recent years, in part reflecting their increasingly higher cost structure. Fujisaki et al. (1996-97), for example, report that the share of contracts given to Japanese firms in ODA loan projects declined from nearly 70 percent in the 1980s to 27 percent in 1994. Table 6 shows that the share declined to a mere 19 percent in 1999 (and 24 percent in 2000) while fluctuating in the rest of the 1 990s. '<sup>5</sup> As a result of this low and declining share of Japanese firms in ODA loan procurements, many in the Japanese business community have come to perceive that ODA does not serve the economic interests of Japan. This perception has weakened the business community's

> **14** This can be done through, for example, the adoption of a currency basket system (by stabilizing the exchange rate against a basket of currencies where the weight of the yen is reasonably large) and holding a more balanced portfolio of foreign exchange reserves (by increasing the yen's share).

> **'5** According to the Overseas Construction Association of Japan, Japanese firms currently account for only about 15 percent of ODA-related construction contracts.

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