In recent years, Members of Congress have monitored the course of North Korea-Japanrelations because Japan plays a potentially critical role in addressing the military threat posed byNorth Korea, particularly its nuclear weapons program. (1) Most important, Japan has told North Koreait is prepared to offer a large-scale economic aid package -- on the order of $5 billion - $10 billion-- to compensate for the Japanese occupation of the Korean Peninsula from 1910-1945. During theAugust 2003 six-party talks in Beijing among North Korea, the United States, South Korea, China,Japan, and Russia, the Japanese delegation reportedly reiterated its position that significant aid wouldbe forthcoming if North Korea abandoned its nuclear program and cooperated on the issue ofJapanese citizens kidnapped by North Korean agents in the 1970s and 1980s. Japan also is important to the North Korean situation because it is a significant source of North Korea's foreign exchange. Not only is Japan North Korea's third-largest trading partner, but theJapanese market also is a major destination for the North Korean government's suspected drug-running operationsand of remittances from Korean permanent residents in Japan. Congress also has an interest in Japan-North Korea relations because Japan's bilateral issues with North Korea influence U.S. policy. The United States has long cited Pyongyang's harboringof Japanese Red Army terrorists -- who face charges in Japan of hijacking a plane in 1970 -- as areason for North Korea's inclusion on the U.S. terrorism list, which by law prohibits North Koreafrom receiving many forms of U.S. economic assistance and some trading rights. (2) At Japan's urging,the United States reportedly also has linked delisting to North Korea's cooperation with Japan onthe abduction issue. Finally, Japan arguably has been the strongest supporter in East Asia of the Bush Administration's policy of pressuring North Korea to abandon its nuclear program. Although Japanshares the objections of other regional states to the use of preemptive military force, it is morewilling than China, South Korea, and Russia to employ coercive diplomatic measures againstPyongyang. Japan's position thus is important to the U.S. effort to deal with the North Koreannuclear program multilaterally, rather than bilaterally (U.S.-North Korea exclusively), as NorthKorea had insisted. Indeed, since the late 1990s, the rising perception of the North Korean threat hasprompted and enabled Japanese leaders to broaden substantially the country's security posture. (3) On September 17, 2002, Japanese Prime Minister Junichiro Koizumi and North Korean leader Kim Jong-il held a one-day summit in Pyongyang that momentarily restarted normalization talksbetween the two countries, which had been stalled since November 2000. Koizumi and Kim signeda short document called the "Pyongyang Declaration." Kim pledged conditionally to unilaterallyextend his country's moratorium on missile testing beyond 2003 (when it was to expire), admittedthat North Korean agents had kidnapped 13 Japanese in the 1970s and 1980s, and issued a vaguepromise to comply with international agreements related to nuclear issues. Koizumi, in turn,apologized for Japan's colonization of the Korean Peninsula and offered to provide North Koreawith a large-scale economic aid package, much as it gave South Korea economic assistance whenTokyo and Seoul normalized relations in 1965. At the time, Koizumi's trip to Pyongyang was a significant departure from Tokyo's increasingly hard-line stance toward North Korea and had the potential to put Japan at odds with the BushAdministration's policy. For most of the late 1990s, Japanese policymakers sought to move slowlyand deliberately on normalizing relations with North Korea, due to the launch of a long-rangeTaepodong Missile over the Japanese Islands in August 1998, Pyongyang's development anddeployment of medium-range Nodong missiles capable of reaching Japan, new revelations about theabductions of Japanese citizens by North Korean agents, and incursions by North Korean espionageand drug-running ships into Japanese waters. This cautious approach often created tension betweenTokyo and the Clinton Administration, which, along with South Korea's Kim Dae Jung, pursued apolicy of engaging North Korea in the late 1990s. During this time, Japanese policymakers oftenappeared torn between a desire to avoid becoming isolated from U.S.-South Korea-North Koreadiplomacy and domestic pressure to proceed cautiously. (4) (5) This dilemma was relieved whentheBush Administration came into office in 2001 and pursued a policy of using public accusations andwarnings to pressure North Korea to allow international inspections of its nuclear facilities and agreeto verifiable curbs to its missile program, including missile exports. (6) The Japan-North Korea normalization talks and parallel security talks stalled due to two developments shortly after the Koizumi-Kim summit: North Korea's October 2002 admission toU.S. officials that it has a secret nuclear weapons program based on the process of uraniumenrichment; and popular outrage in Japan at Kim Jong-il's admission that North Korea hadkidnapped 13 Japanese, eight of whom the North Koreans said had died since their abductions. Prime Minister Koizumi has said normalization talks will not continue unless Pyongyang cooperateson the abduction issue and begins dismantling its nuclear program. Also, in October, the five knownsurviving kidnapees traveled to Japan for a one-to-two week visit, but were not permitted to bringtheir children -- some of whom do not know their parents are Japanese -- or spouses with them. The ensuing public outcry that these relatives were being held as "hostages" led Koizumi to refuseto send the five back to North Korea and to demand that family members be allowed to come toJapan. (7) (One complicating factor is that the husbandof one of the five is an American militarydeserter living in North Korea.) The five continue to live in Japan, and reportedly have taken steps,such as finding jobs and buying property, to reintegrate into Japanese society. On October 29, 2002, Japan and the DPRK held normalization talks in Kuala Lumpur, Malaysia. The Japanese delegation reportedly told the North Korean side that normalization -- andtherefore, discussion of economic assistance -- would not proceed until Pyongyang agrees to sendthe children of Japanese abductees to Japan and halt its nuclear weapons program. Japanesenegotiators also requested that the North dismantle its medium-range Nodong missiles. North Korea,accusing the Japanese side of breaking with the Pyongyang Declaration, made no concessions, andthe meetings ended with no joint statement. Subsequently, a North Korean Foreign Ministryspokesman warned that if bilateral talks stall over the nuclear issue, Pyongyang may reconsider itsmissile moratorium. Separate bilateral discussions of security issues, which were to have begun inNovember 2002, have yet to be held. Throughout 2003, the two countries have held several officialand unofficial discussions about resolving the kidnapping issue and restarting the normalizationtalks. In the Pyongyang Declaration, Japan and North Korea promised to "abide by all relevant international agreements in order to comprehensively resolve the nuclear issue on the Koreanpeninsula." Koizumi reportedly had insisted on including this in the declaration after being briefedon U.S. intelligence indicating that North Korea's clandestine uranium enrichment program wasmore advanced than had been thought previously. The international agreements presumably includethe 1992 North-South Korean Denuclearization Declaration, which prohibits the possession ofuranium enrichment facilities, the 1992 nuclear safeguards agreement with the International AtomicEnergy Agency (IAEA), and the 1994 U.S.-DPRK Agreed Framework, which committed NorthKorea to freezing its plutonium nuclear program. (8) Since the revelations about North Korea's uranium nuclear program were made public in October 2002, Japan has been the Northeast Asian country most supportive of the BushAdministration's policy of combining multilateral dialogue and pressure to convince North Koreato abandon its nuclear program. At President Bush's side later that same month, Prime MinisterKoizumi stated that full normalization could not take place until after the nuclear issue wasresolved. (9) In mid-November 2002, Japan voted withthe United States, South Korea, and theEuropean Union to suspend shipments of heavy fuel oil to North Korea. The oil was being providedunder the 1994 Agreed Framework, ostensibly to compensate Pyongyang for the energy it lost fromshutting down its plutonium nuclear reactors. Japanese policy hardened further in the aftermath of the April 2003 trilateral U.S.-North Korea-China meeting in Beijing. The following month, during a bilateral summit in Crawford, Texas,Koizumi agreed with Bush that a policy of "dialogue and pressure" should be used peacefully toinduce North Korea to give up its nuclear program. Koizumi also declared that Japan would "crackdown more vigorously" on illegal activities involving North Korea or ethnic Korean supporters inJapan and would take "tougher measures" if North Korea escalated the situation. Japan is one ofeleven countries participating in the U.S.-led Proliferation Security Initiative, announced byPresident Bush in May 2003, which is designed to interdict weapons of mass destruction shipmentsto and from countries of proliferation concern, such as North Korea. Concurrently, since early 2003, the Japanese government has toughened enforcement of its controls on the export of potential dual-use items to North Korea and has announced a newinterpretation of domestic foreign exchange laws that would make it easier for Tokyo to cut offbilateral trade and shut off the flow of remittances from ethnic Koreans to their relatives in NorthKorea. Specifically, Japan has moved away from its traditional position that sanctions against NorthKorea would require United Nations Security Council approval and is now taking the position thatJapan could impose sanctions in cooperation with the United States, even in the absence of specificUnited Nations approval. Remittances to North Korea are estimated to be in the tens of millions ofdollars annually. (10) Additionally, in June 2003, Japan ordered its customs, immigration, and coast guard to expand safety inspections and searches for illicit contraband on North Korean cargo and passenger ships,which made more than 1,300 calls at Japanese ports in 2002. (11) According to the Japanesegovernment, more than 70 percent of the 120 North Korean ships inspected in Japan from Januaryto August 2003 were ordered to halt operations or received safety warnings, compared with a generalaverage of 10 percent for all countries' shipping. (12) As discussed in the "Japan-North KoreaEconomic Relations" section below, these measures appear to have reduced bilateral tradesignificantly. Additionally, Tokyo reportedly has drawn up contingency plans that would bar banksfrom remitting funds to North Korea and deny landing rights to the crew and passengers (exceptKorean permanent residents of Japan) of Japan-North Korea ferries if North Korea tests a nucleardevice. (13) In late November 2003, the SecretaryGeneral of the ruling Liberal Democratic Party(LDP), Shinzo Abe, a prominent advocate of using pressure tactics against North Korea, said hewould try to convince the Japanese Diet to approve these measures in early 2004. (14) Japan's tightening of restrictions against exports to North Korea has been prompted in part byincreasing evidence that firms and organizations run by ethnic Korean residents in Japan haveprovided North Korea with key parts for its missile and nuclear programs. In May 2003, a NorthKorean defector who once worked as a scientist in Pyongyang's missile program testified to a SenateGovernmental Affairs Committee hearing that "over 90 percent" of the parts for North Korea'smissiles are smuggled aboard passenger ships by the Chosen Soren, the pro-North KoreanAssociation inside Japan. (15) In April 2003,Japanese authorities filed criminal charges againstMeishin, a trading company run by an ethnic Korean resident, that allegedly tried to ship to NorthKorea devices that could be used to build weapons of mass destruction. One shipment of electronicpower control devices from Meishin was seized by Hong Kong customs officials at Japan's request. The shipment reportedly was bound for Thailand, and from there was to be sent to North Korea. (16) Like most Japanese leaders, however, Koizumi has equivocated on the subject of taking more coercive measures against North Korea, such as economic sanctions, absent an escalation of thesituation by Pyongyang. Japan worries that an outbreak of military hostilities could lead NorthKorea to launch long or medium range missiles at Japan -- including U.S. bases. The prospect ofa collapse of the Kim Jong-il regime also worries Japanese leaders because of the potential creationof a massive outflow of refugees. In part for these reasons, some analysts believe that Tokyo'spolicy toward Pyongyang might soften if the two sides were able to reach an agreement on theabduction issue. Some Japanese leaders favor the idea of delinking the kidnapping issue from theother outstanding issues. (17) North Korea's response to Japan's toughened policy often has appeared contradictory. On the one hand, it periodically has increased the volume and intensity of its rhetorical attacks againstJapan, for a time it opposed Japan's inclusion in the second round of six-party talks that are expectedto be held in December 2003, and has insisted that the abduction issue not be included in the talks'agenda. On the other hand, diplomats from Pyongyang and Tokyo reportedly held several secrettalks in the summer of 2003, in which they focused on resolving the abduction issue. Both sets ofinitiatives are likely aimed at diminishing Japan's influence over the nuclear talks. For most Japanese, the most important issue in dealing with North Korea is the status of Japanese citizens kidnapped or thought to have been kidnapped by North Korean agents. Japanesepoliticians from all parties, and media outlets from across the ideological spectrum have warned theKoizumi government not to proceed with normalization without first making more progress on theabduction issue. Relatives of the alleged kidnapping victims have formed support groups that havesuccessfully attracted much attention in the Japanese media, and have secured audiences withinfluential Japanese and U.S. officials. For years, North Korea denied any involvement in thedisappearance of any Japanese, whom the North Koreans insisted on referring to as "missingpersons" rather than "abductees." It was only after North Korea indicated via back-channelnegotiations that it was willing to make concessions on this issue that Koizumi agreed in the summerof 2002 to travel to North Korea. Since the late 1990s, Japanese leaders have pressed the United States to support the Japanese position on the kidnapping issue, a goal they achieved in late 2000, when then-Secretary of StateMadeleine Albright raised the issue during her visit to Pyongyang. During Prime MinisterKoizumi's visit to Crawford in May 2003, President Bush pledged to continue pressing for aresolution of the abduction issue in the multilateral talks, a position reaffirmed by the StateDepartment in November 2003. (18) China andSouth Korea -- key participants in the six-party talks-- are believed to oppose discussion of the issue in the six-party talks. At the Koizumi-Kim summit, Kim admitted that North Korea's security service abducted 13 Japanese from Japan and Europe from 1977-1982. Kim apologized to Koizumi for the kidnappings,which he attributed to overzealous individuals in North Korea's security services, and pledgedverbally and in the two leaders' joint declaration that they would not occur again. Kim disavowedany prior knowledge of the kidnappings, and said the responsible individuals had been punished. Most of the 13 were teenagers or in their early 20s when they were abducted to North Korea. Somewere used in training espionage agents in Japanese language and customs. Only five of the thirteenare alive, according to the North Koreans, and during the summit Kim pledged that they could returnto Japan, if they wished. A Japanese delegation on a subsequent fact-finding visit to North Koreawas told that the remains of all but one of the dead were unavailable. If Kim Jong-il had hoped his admission and apology would put the kidnapping matter to rest, he was mistaken. Although a majority of Japanese supported the reopening of normalization talks,the Japanese public was shocked that so many of the kidnappees had died, and demands for a fullaccounting quickly arose, particularly among relatives of the kidnapped and conservative groups inthe LDP. Each subsequent revelation has only produced more questions, outrage, and politicalpressure to obtain more information from North Korea on the abductions, which Koizumi hasdescribed as "act[s] of terrorism." (19) Essentially, there are three difficulties to resolving the abduction issue. First, Japan has demanded that North Korea allow the nine immediate family members of the thirteen confirmedabductees -- particularly the five still alive who arrived in Japan -- to travel to Japan. Acomplicating factor is that Charles Jenkins, the husband of abductee Hitomi Soga, is a former U.S.Army sergeant who defected to North Korea in 1965 while being stationed along the demilitarizedzone separating the two Koreas. Interviewed in Pyongyang, where he lives with his and Soga's twodaughters, Jenkins has said that he fears being arrested by the United States if he travels to Japan. In December 2002, Japanese Foreign Minister Yoriko Kawaguchi Monday reportedly asked U.S.Secretary of State Colin Powell and Secretary of Defense Donald Rumsfeld not to prosecute Jenkinsif he comes to Japan. Reportedly, the U.S. government has declined to give any assurances toJapan. (20) Second, there are reports that some of the eight Japanese declared to be dead by North Korea are still alive. These suspicions were heightened when Japanese forensic specialists determined thatthe one set of remains given by North Korea were not those of the 43-year-old Kaoru Matsuki, asPyongyang claimed. Third, many family members and support groups have raised questions aboutNorth Korean agents' involvement in the cases of nearly 100 other missing Japanese whodisappeared under mysterious circumstances. During the August 2003 six-party talks in Beijing, theJapanese delegation reportedly asked North Korea to account for ten other individuals allegedlykidnapped by DPRK agents. Meanwhile, North Korea's state-run Korean Central News Agency has warned Japanese against making "a disproportionate furor" over the abductions. (21) In October 2003, Pak Ryong Yon, deputychief of the North Korean Foreign Ministry's Asian bureau, said that the kidnapping issue "has beensettled," and that the family members would not be allowed to travel to Japan any time soon. (22) Some U.S. observers have expressed surprise over Japan's apparent willingness to allow the fate of a relatively small number of its citizens to interfere with achieving a major foreign policygoal. Two points are noteworthy in that regard. First, the kidnappings have become an extremelysensitive political issue in Japan. Years of effort by the relatives of Japanese actually and allegedlykidnapped by North Korea have successfully focused the attention of the media on the circumstancesof the cases, and have won the support of Japanese from across the ideological spectrum. Second, Japan is not unique in altering its foreign policy due to concerns about the safety of its citizens held in captivity by foreigners. In the 1980s, for instance, Reagan Administration officialssold arms to Iran to secure the release of American hostages, going against both law and theAdministration's broad policy toward Iran. In 1996, Evan Hunziker, a mentally unstable 26-year-oldAmerican swam into North Korea, where he was charged with espionage. Hunziker's plight becamea major issue in US-DPRK relations, holding up sensitive policy initiatives until he was released. Neither of these cases involved the abduction of American citizens from U.S. soil by foreign agents. In their joint September 2002 statement, Koizumi and Kim agreed that Japan would provide North Korea with an "economic cooperation" package in recognition of the "tremendous damageand suffering" Japan inflicted during its colonial rule of Korea from 1910-1945. The size and formof the package were to have been negotiated as part of the two countries' normalization talks set tobegin in late October 2002. Using the 1965 Japan-South Korean normalization agreement as amodel, Koizumi agreed that the assistance package would consist of grants, low-interest long termloans, humanitarian assistance, and financing credit for private firms. In their joint statement,Koizumi expressed a "deep remorse and heartfelt apology" for Korea's colonization. Significantly,the agreement stipulates that the economic assistance will begin only after relations are normalized. Accepting this outline for an economic assistance package was a significant shift for North Korea. Previously, Pyongyang had demanded that the package be labeled as "reparations," or"compensation" and in November 2000 had flatly rejected Japan's formal offer of "economicassistance." At the summit, North Korea also dropped its insistence that Japan issue a more formal,legally binding apology from the Japanese emperor and/or prime minister. Finally, by agreeing tolink the aid package to the damage from the colonial era, North Korea also firmly backed away fromits periodic insistence that Japan provide compensation for harms allegedly inflicted since 1945. Should the larger issues of North Korea's nuclear program and the abductees be resolved, the size of Japan's economic package is likely to be the subject of considerable debate between the twosides. As detailed in the appendix of this report, estimates of the present value of the 1965 Japan-ROK settlementvary widely, from as low as $3.4 billion to as high as $20 billion. According toJapanese North Korea-watchers, no consensus has been reached in Tokyo on Japan's bottom line,but media outlets have speculated that the final sum will be at the upper end of the $5 billion - $10billion range. (23) Japanese officials have not deniedthese reports. It is possible that Japanesenegotiators will try to obtain restitution of the ï¿½80 billion or so (about $667 million at $1 = ï¿½120)that North Korean enterprises owe Japanese banks from deals carried out in the 1970s and 1980s. In private conversations, Japanese officials say it is more likely they will seek to settle these claimsthrough an internationally-mediated process. (24) A major concern associated with Japan's possible financial assistance package is fungibility. The massive size of Japanese aid relative to the North Korean economy -- $10 billion is roughly halfNorth Korea's estimated total output (gross domestic product) each year -- raises fears that it willhelp to sustain the Kim Jong-il regime without inducing any behavioral changes. (25) Thereareconcerns that Japanese financial assistance could directly or indirectly finance militarymodernization, for instance by raising North Korea's overall economic wealth, by freeing upbudgetary resources to be redirected toward the military, and/or by improving the country'sinfrastructure such as roads, railways and communications networks. (26) This issue now appears tohinge on the outcome of the six-party talks. Should these succeed in resolving the key securityissues, the concerns about fungibility could become less relevant. In 2001 and 2002, Tokyo became increasingly alarmed by incursions of espionage and drug-running ships thought to be of North Korean origin into Japanese waters. (27) According to oneestimate in the fall of 2002, such ships made the crossing from their base in North Korea betweenfive and twelve times a year, often releasing smaller boats that in turn launched rubber rafts to ferryagents to and from the Japanese coast. The agents' missions reportedly included gatheringinformation about the outside world, smuggling money and goods, swaying influential opinion-makers in Japanregarding North Korea, recruiting ethnic Korean residents in Japan to gatherinformation about South Korea, conducting surveillance on U.S. and Japanese military installations,and occasionally identifying solitary Japanese for kidnapping. The agents reportedly relied heavilyupon the roughly 200,000 Korean residents of Japan who identify themselves as North Koreancitizens, often using threats against family members in North Korea as a means of coercion. NorthKorea is thought to be a major supplier of methamphetamines on the Japanese market, which arebelieved to be sold to Japanese organized crime syndicates. (28) In December 2001, Japanese coast guard patrol boats chased and exchanged fire with one suspected North Korean spy ship, the first time since World War II Japanese vessels had fired morethan a warning shot upon an intruding vessel. The confrontation ended when the mystery boat sankinside China's exclusive economic zone. It is unclear whether the boat was sunk by Japanese fireor by a self-detonated charge. Following the incident, the Koizumi government suspended food aidshipments, which had been resumed only in October 2001 in hopes of obtaining progress on thekidnapping issue. In the summer of 2002, after protracted negotiations with Beijing, Japanesesalvage teams raised the ship, confirming that it was of North Korean origin, heavily armed, and wasa mother ship to three smaller craft that presumably were designed for beach landings and otherclose-to-shore activities. Coast guard personnel participating in the chase reported seeing NorthKorean agents throwing large bags overboard, raising suspicions that the ships were engaged in drug-smugglingactivities. (29) Until Koizumi's trip to Pyongyang, North Korea had denied any connection to the suspicious ships. At the summit, Koizumi said that Kim acknowledged that "certain military officers" had sentout ships into Japanese waters, and pledged that such actions would not occur again. (30) The Japanesedaily Asahi Shimbun has published a detailed report that the 1,500-person 727 Liaison Office, theNorth Korean agency thought to be responsible for dispatching spy ships to Japan, was disbandedin the summer of 2002. (31) If true, the move mayindicate a recognition by Pyongyang that its shipmovements are well-observed by U.S. reconnaissance satellites. This information is routinely sharedwith Japanese and South Korean defense officials. Aside from Kim Jong-il's admission on the abductees, the most tangible result of the Koizumi-Kim summit was Kim's pledge to extend North Korea's self-imposed moratorium on missilelaunches beyond its 2003, though some security specialists argue that the value of the moratoriumis severely limited because Iran and Pakistan are thought to act as North Korea's surrogates in testingmissiles. (32) While the U.S. concern about theDPRK's missile programs centers around proliferation,Japan is focused on the direct threat. North Korea's missile program has been high on Japan'sagenda ever since Pyongyang's August 1998 Taepodong launch, though for the moment Tokyoappears to believe that priority should be given to the nuclear issue. Japanese security officials aremost concerned about the North's cache of up to 100 medium-range (600-900 miles) Nodongmissiles that are capable of reaching all of Japan, including Okinawa. U.S. intelligence officialsreportedly believe that North Korea has developed or is developing new long-range and medium-range missiles,both of which would be capable of reaching all of Japan. (33) Japan has long been one of North Korea's largest economic partners, though trade and financialflows have declined in recent years. After the Soviet Union ended its support for Pyongyang, Japanemerged as North Korea's second-largest trading partner (after China), a position it held until it wasdisplaced by South Korea in 2002. (See Figure 1 .) Figure 1. Japan's Relative Share of North Korea's Trade, 2001-2002 Sources: KOTRA (Korea Trade Investment Promotion Agency) and South KoreanMinistry ofUnification. (34) Notes: North Korea's total trade was approximately $2.6 billion in 2001 and about $2.9billion in2002. The figures include foreign countries' assistance to North Korea, which is recorded asNorth Korean imports. North Korea's main export items to Japan are clams, men's suits, mushrooms, and coal. Japan's primary exports to North Korea are cars, electrical components, woolen fabrics, and generalmachinery. Many of the electronics components and clothing materials that are sent to North Koreaare assembled into finished products and re-exported to the big discount stores that have sprung upthroughout Japan over the past decade. (35) Additionally, North Korea is in default on over ï¿½80 billion(about $667 million at $1 = ï¿½120) in loans from Japanese banks, many of which have stoppedhandling transfers to North Korea. Below, Table 1 shows that bilateral trade has declined significantly since the 1980s, primarilydue to the severe deterioration of North Korea's economy that began with the withdrawal of Sovietand Chinese support in the late 1980s and early 1990s. By 2000, the real value of North Korea'sexports to Japan had fallen to one-third of 1985 levels, and Japanese exports to North Korea hadplummeted to one-sixth the level of 1980. That said, the shrinking of the North Korea economy maymean that trade with Japan -- particularly exports, which generate hard currency -- is relativelymore important to North Korea today than was true in the 1980s. Table 1. Japan-North Korea Trade, 1980-2002 (billions of yen) Source: Source: Japan Statistical Yearbook 2003; 2002 and 2003 figures from Japan Customs. a. Real figures, which adjust for price changes, are calculated using the Bank of Japan's export andimport indices. b. 2001 Japanese export figure does not include the 499,999 MT, worth over Y112 billion ($900million), of husked brown rice that Japan sent to North Korea as food aid. As shown by the bottom portion of Table 1, which compares trade figures for the first nine months of 2002 and 2003, trade in 2003 has declined by approximately one-third since 2002. Thedecline was particularly sharp during the second and third quarters, when Japan imposed its morerigorous inspection regime on North Korean shipping. From January through April 2003, trade fellby 17% compared with the same period in 2002. From May to September, year-on-year tradevolume dropped by 43%. What is particularly surprising about these figures is that trade has fallen,not increased, since North Korea resumed the Mangyongbong ferry service that had been suspendedfrom January to July 2003. The ferry normally makes one or two runs a month from North Koreato the port of Niigata, Japan. Much of Japan's trade with North Korea is said to be facilitated by the Chosen Soren ( Chochongryun in Korean), the organization of pro-Pyongyang ethnic Koreans who are permanentresidents of Japan. (36) Chosen Soren also is known to organize remittances to North Korea. Thoughseveral sources have estimated the flows to be on the order of hundreds or even billions of dollarsper year, more recent analysis has pointed out the implausibility of these estimates, instead placingthe actual amounts below $100 million per year. (37) Moreover, the remittances are believed to havedeclined to the $30 million level since the early 1990s, following the bursting of Japan's economic"bubble,"a development that not only presumably reduced the personal wealth of pro-PyongyangKoreans in Japan, but also sent many of Chosen Soren's credit unions into bankruptcy. (38) Several ofthese credit unions have been taken over by the Japanese government, a move that sparkedcontroversy in Japan as bilateral relations deteriorated, particularly when revelations surfaced thatsome credit unions had funneled money to the North Korean government. In 2001, North Koreahalted its investigations into the kidnapping issue after the Japanese government launched aninvestigation of the finances of Chosen Soren and its associated credit unions. (39) The takeovers marked a break from the Japanese political establishment's previously tolerance of Chosen Soren . Indeed, many leaders of Japan's ruling Liberal Democratic Party (LDP) had warmties with the organization, exempting it from paying local taxes, for instance. Some have argued that Chosen Soren members provided a link between the LDP and yakuza organized crimesyndicates. (40) Since the mid-1990s, Japan has sent 766,000 MT of food aid to North Korea to help alleviate the effects of severe food shortages. About two-thirds (500,000 MT) was donated in 2000, and theremainder was given in 1995 and 1996. Almost all of Japan's aid has been channeled through theUN World Food Program. Generally, Tokyo has linked food shipments to progress in Japan-DPRKrelations. Food shipments were suspended following North Korea's 1998 Taepodong launch,resumed in 2001 when progress on the kidnapping issue appeared possible, then were suspendedagain in December 2001 following the North Korean spy incident. Since 1995, the United Stateshas provided over 1.7 million MT of food assistance to North Korea. South Korea has sent about1.5 million MT. On June 22, 1965, Japan and South Korea signed a Treaty of Basic Relations, normalizingrelations between the two countries for the first time since Japan annexed the Korean peninsula in1910. As part of the final settlement, Japan agreed to provide South Korea with a total sum of $800million (41) , which consisted of: a) an outright grantof $300 million, to be distributed over a 10-yearperiod; b) a $200 million loan to be distributed over a 10-year period and repaid over 20 years at3.5% interest; c) $300 million in private credits over 10 years from Japanese banks and financialinstitutions. Prior to the 1965 agreement, the normalization negotiations between Tokyo and Seoul had dragged on for over fourteen years, and had triggered strong emotions in both countries. Throughoutthe 1950s, South Korean President Syngman Rhee adopted a confrontational approach toward Japan,and successive Japanese governments showed little enthusiasm for accepting Rhee's demands thatJapan apologize and compensate for its colonization of the Korean peninsula. Relations warmed dramatically following a military coup in 1961, led by general Park Chung-Hee, who established rapid industrialization -- following the Japanese model of export-leddevelopment -- as his country's paramount economic goal. To this end, Park was eager for Japaneseeconomic assistance, and adopted conciliatory postures on most outstanding issues. Theapproximate size and composition of the compensation package was one of the first issues to beresolved following Park's coup. The South Korean side, which at one point had asked for as muchas $2 billion, lowered its demands to $700 million in grant aid before agreeing to the $800 milliontotal package. Reportedly, until late 1962, Japan had offered only $70 million in total compensation,a figure the U.S. State Department at the time described as "unrealistically low." (42) Furthermore, theTreaty on Basic Relations did not contain any reference to a Japanese apology. Instead, Japan'sreparations payment was characterized as "economic assistance." The terms of the Treaty enraged many South Koreans. Charging that the agreement amounted to a "sellout," Korea's opposition parties boycotted the ratification process in the National Assembly.Violent anti-government protests erupted throughout the country, and the Park government imposedmartial law to suppress anti-government protests around the country, the second time in less than ayear troops were mobilized to curtail protests against the government's Japan policy. The agreementalso faced strong but eventually ineffectual opposition in Japan, where the Socialist Party -- whichhad friendly ties with North Korea -- argued that the Treaty would impede Korean unification andwas a prelude to an anti-communist alliance in Asia. (43) There are a wide range of estimates for the present value of the 1965 Japan-South Korea settlement. At the low end is a method that adjusts for inflation in the U.S. economy, yielding avalue of approximately $3.4 billion in 1999 dollars. (44) At the high end is a calculation that producesa value of $20 billion in today's dollars by adjusting for inflation in the Japanese economy,appreciation of the yen, accrued interest, and differences in population in North and South Korea. (45) One methodology that adjusts for Japanese inflation since 1965 and for inter-Korean populationdifferences yields a present value of ï¿½418 billion ($3.8 billion using an exchange rate of ï¿½110 = $1). If the same disbursement formula used in 1965 were applied today, the ï¿½418 billion would break outas ï¿½157 billion ($1.42 billion) in outright grants, ï¿½104 billion ($950 million) in concessionarygovernment loans, and ï¿½157 billion ($1.42 billion) in private credits. (46) The above figures should be interpreted as rough approximations. Computing the present value of a past sum is an inherently inexact task. When more than one country is involved, the calculationis made even less precise by long-term changes and short-term fluctuations in exchange rates. Additionally, a calculation might also take into account differences between Japan's occupation ofNorth Korea and South Korea, including the extent of the claims for damage by the occupationauthorities. Finally, the adjustments are made for the total figure of $800 million, even though theactual value of Japan's compensation package was lower: Over 60% ($500 million) of thesettlement was disbursed as government loans and private credits, which are less valuable to therecipient than outright grants. Thus, the calculations presented provide only a preliminarycomparative baseline, with many qualifications. On the other hand, the 1965 settlement occurred before the revelation that Japan had forcibly used tens of thousands of Korean "comfort women" to provide sexual services to Japanese soldiersduring World War II. North Korea periodically has insisted that Japan's compensation take intoaccount the comfort women's plight.

Summary: Japan and North Korea have not established official relations since the Korean Peninsula, which the Japanese Empire annexed in 1910, was liberated from Japanese rule and divided into twoseparate states following Japan's defeat in World War II. Attempts to establish normal relations inthe early 1990s and again in 2000 ended in failure, due to seemingly unresolvable obstacles. InSeptember 2002, a one-day summit was held in Pyongyang between Japanese Prime MinisterJunichiro Koizumi and North Korean leader Kim Jong-il, the first ever between the leaders of thetwo countries. Koizumi and Kim momentarily appeared to break longstanding stalemates on severalissues and agreed to restart bilateral normalization talks, but the talks subsequently stalled, due totwo developments: North Korea's apparent admission to U.S. officials in October 2002 that it hada secret nuclear weapons program based on the process of uranium enrichment; and popular outragein Japan at Kim Jong-il's admission that North Korea kidnapped 13 Japanese in the 1970s and 1980and brought them to North Korea to live. Subsequently, according to the North Korean government,eight of whom died. Japan's role is potentially critical in the current crisis over North Korea's nuclear weapons programs for a number of reasons. Most importantly, Japan has promised North Korea a large-scaleeconomic aid package to compensate for the Japanese occupation of the Korean Peninsula from1910-1945, much as it gave South Korea economic assistance when Tokyo and Seoul normalizedrelations in 1965. The assistance is to be provided after the countries agree to normalize relations,a process that Japan now links to a resolution of the nuclear issue. Reportedly, Japanese officialsare discussing a package on the order of $5-$10 billion, an enormous sum for the North Koreaneconomy, the total GDP of which is estimated to be in the $20 billion range. Currently, Japan is asignificant source of North Korea's foreign exchange, by virtue of the large Japanese market for theNorth Korean government's suspected drug-running operations, and of remittances from Koreanpermanent residents in Japan. Japan is North Korea's third-largest trading partner. Since the fall of 2002, Japan has been the Northeast Asian country most supportive of the Bush Administration's policy of pressuring North Korea to abandon its nuclear program, and has takena number of steps to curtail North Korea's ability to earn hard currency and to import dual-usetechnology. Since North Korea launched a long-range missile over Japan in 1998, relations withNorth Korea have been a highly politicized issue inside Japan, creating strong domestic support fortaking a hard line against Pyongyang. Prime Minister Koizumi, however, has equivocated on takingmore coercive measures against North Korea, such as economic sanctions, absent an escalation ofthe situation by Pyongyang. Japan fears such measures could provoke a military response by NorthKorea and/or trigger a surge in refugees. This report will be updated periodically to track developments in Japan-North Korea relations.