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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of. the information contained herein. R E S T R I C T E D Report No.P-123 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING A PROPOSED LOAN TO THE AGRICULTURAL LAND DEVELOPMENT MACHINERY PUBLIC CORPORATION JAPAN November 30, 1956

2 INTERNJATIONAL BANK FOR R 7CONSTRUCTIOH AND DEVELOPENT REPORT AND RECO`7rFBND!TI3NS OF THE PRESIDENT TO THE EXECUTIVE D1RTECTORS CONCERNING A PROPOSED LOAM TO THE AGRICULTTJRAL TAND DEVELOP?EI T MAICHTIERY PUBLIC CORPORATION 1. I submit herewith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $4.3 million to the Agricultural Land Development Machinery Public Corporation to help finance projects for land reclamation in Northern Japan and for import of dairy cattle. PART I - HISTORICAL 2. An agricultural mission organized by the Bank at the request of the Japanese Government visited Japan in July and August of Among other things the mission recommended that pilot schemes to test the applicability of modern mechanical methods in Japan's land reclamation program would be desirable and would constitute an appropriate field for Bank lending. It also noted the importance of importing dairy cattle in order to permit the extension of mixed farming in areas not suitable for rice cultivation. 3. Early in i955 the Bank communicated these views to the Japanese Government which has since applied for a Bank loan to finance the foreign exchange cost of machinery for reclamation of waste lands in three areas in Northern Japan and for import of breeding cattle. 4. Detailed field investigations of the projects involved have been carried out by Bank technicians and at Japan's request the Bank has advised from time to time as to methods and equipment to be employed, and concerning certain organizational problems. Four projects and three separate Govermnent agencies, the Agricultural Land Deve'opment Machinery Public Corporation, the Hokkaido Development Bureau and the Livestock Bureau of the M1inistry of Agriculture are concerned in the proposed loan. Preliminary discussions have been held from time to time in 17ashington and Tokyo since the fall of Loan negotiations began on October 16, 1956 and were concluded on November 21, If the proposed loan and the $20.0 million loan to the Japan Development Bank for the Kawasaki steel strip mill project which is also under consideration were made, the total loans to Japan would be increased to $76,077,000 equivalent, net of cancellations. The loans previously made are as follows: Amount Year Serial No. (net o-f &csellahi&s) JA Electric Power Development 21,500, JA if if 10,690, JA is n 6,500, JA Steel Plate mill 5,200, JA Industrial projects 7,887,000 51,777,000 As of October 31, 1956 no repayments had been due; $10,503,355 remained undisbursed. The first repayment wi'll fall due on January 1, 1957.

3 - 2 - PART II - DESCRIPTION OF THE PROPOSED LOAN 6. It is proposed that the Bank make a loan to provide foreign exchange needed for (a) the importation of modern land reclamation machinery; some of it is to be used by the Borrower in the execution of upland reclamation beginning with two pilot projects, Kamikita and Konsen; the remaining portion is to be leased to the Hokkaido Development Bureau for carrying out in the Shinotsu area part of a program for the reclamation of peatland in the Ishikari Valley; and (b) Borrower: increasing the import of dairy cattle breeding stock by the Livestock Bureau in order to foster the development of mixed farming. Agricultural Land Development Machinery Public Corporation Guarantor: Amount: Amortization: Interest Rate: Commitment Charge: The Government of Japan The equivalent in various currencies of $4.3 million 25 semi-annual installments, November 1, 1959 to November 1, /4% per annum including 1% commission 3/4% per annum Payment Dates: May 1 and November 1 PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 7. Attached are drafts of the following legal instruments which would give effect to the proposed loan: (a) Loan Agreement between the Bank and Agricultural Land Development Machinery Public Corporation (Nochi Kaihatsu Kikai Kodan) (No. 1) (b) Guarantee Agreement between Japan and the Bank (No. 2) (c) Letter from Japan to the Bank re Shinotsu lease and cattle (No. 3) Also attached is the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank (No. 4)

4 8. The prospective Borrower is a public corporation authorized by the law which constitutes its charter (Law No. 142 of 1955) to borrow from the Bank. That law also authorizes the Government to guarantee any such loans. 9. Japan has proposed that a single loan be made to the Corporation covering all the projects even though the Corporation itself will carry out only two of them. As to the other two, it would be acting only as an intermediary. To prevent the Corporation from becoming involved too deeply financially and administratively in projects which are to be executed by others, loan arrangements are proposed which would produce much the same result as three separate loans. 10. Regarding the Borrower's own use of equipment, the Borrower would undertake to carry out the Kamikita and Konsen Projects plus additional agreed projects to be carried out with the imported machinery when the initial projects have been completed (all such projects being defined as the "Kamikita and Konsen Programs"'), to keep books and records, permit inspection, etc. (Loan Agreement, Section 5.01). The Guarantor would give what is essentially a guarantee of performance (Guarantee Agreement, Section 3.01), and would be required to keep the Corporation in funds needed to enable it to carry out the programs (Guarantee Agreement, Section 2.02). The Guarantor would, in addition, undertake to settle farmers on the lands comprised in these projects (Guarantee Agreement, Section 3.05). 11. As to the Shinotsu Project, the Corporation's only function is to procure equipment and to lease it to Hokkaido Development Bureau on compensatory terms satisfactory to the Bank (Loan Agreement, Sections 5.01 (a) and 5.02). The lease w uld be on a one-year renewiable basis. Its initial execution would be dependent on Japanese budgetary authorization and such execution would be a condition of effectiveness as to the Shinotsu part of the loan. If the lease is not renewed or if the required rental payments are not made to the Corporation, Hokkaido Development Bureau would be obliged to purchase the ] ased machinery at a price equivalent to that portion of the Bank's loan relating to the Shinotsu Project ihich is then outstanding and unpaid (Loan Agreement, Section 5.02). If any such purchase is made, the Corporation may, at the Bank's option, be required to make a corresponding prepayment of the Bank's loan (Loan Agreement, Section 5.10). 12. The Guarantor (not the Borrower) would undertake that the Shinotsu Project would be carried out through its agency, the Hokkaido Development Bureau. Hence, as to this project, the Guarantee Agreement contains the protective covenants usually folnd in loan agreements concerning plans and specifications for the Project, operation and maintenance of the machinery, maintaining books and records, etc. (Sections 3.03, 3.04, 3.07). The Guarantor vould also undertake to settle farmers on the lands comprised in the Shinotsu Project (Guarantee Agreement, Section 3.05). 13. The Japanese Government is satisfied of its authority to implement these undertakings. However, in order to provide against the possibility that further legislation might be needed to carry out the Shinotsu Project, or to provide funds for the projects and programs or for the settlement of farmers in the project areas, it has been agreed to include a provision authorizing the Bank to premature the loan "if any action which in the Guarantee Agreement is expressed to be performed or caused to be performed by the Guarantor shall not be so performed" (Loan Agreement, Section 6.01 and Schedule 3, paragraph (e)).

5 - h - 1i. In respect of the Cattle Importation Project, the Corporationts only obligation would be to enter into appropriate arrangements with the Livestock Bureau of the Ministry of Agriculture and Forestry for importation and with prefectural governments in Japan for sale of cattle (Loan Agreement, Section 5.01). The Guarantor would undertake to carrv out the Project, to keep books and records, permit inspection and so forth. The Guarantor would in a separate letter (No. 3) state its intention to seek necessary budgetary authorizations and, subject to the granting of such authorizations, to make sufficient funds available to cover the Corporation's out-of-pocket and administrative expenses in connection with the project to the extent that they are not fully covered in the Corporation's contracts with prefectural governments. 15. Prepayments of principal associated with any one project or group of projects would be applied pro-rata to all outstanding maturities. PART IV - APPRAISAL OF THE PROPOSED LOAN 16. A report on "Mechanical Land Reclamation Project, Japan", No. T.O. 100-b, dated November 22,1956 is attached (No. 5). Justification of the Project 17. General - Japan at present must import about 20% of her food requirements, and her population is increasing at a rate of about one million annually. Each year substantial areas of arable land are destroyed by natural causes or taken out of cultivation for other essential uses. Only by vigorous efforts toward better utilization of presentlv cropded lands and by cultivating lands not now used for agriculture can Japan hope to avoid a growing food deficit. In order to prevent deterioration in her position, Japan must increase her agricultural production by 15% within ten years. This is well understood in Japan and in recent years the Government has been devoting about 12% of its total expenditure to the support and increase of agricultural production. The projects which would be partly financed by the proposed loan are in furtherance of this overall program. 18. Reclamation of Waste Upland (Kamikita and Konsen) - Japan possesses several hundred thousand hectares of potentially arable land which for a variety of reasons has not hitherto been brought under cultivation. Japan's recent efforts to reclaim portions of these areas had been confined to settling new farmers on these lands and supporting them while they attempted to clear and prepare the lands for agriculture by their own hand labor. The Kamikita and Konsen Projects located in Northern Honshu and Hokkaido respectively, are pilot projects which would test the feasibility of large-scale and rapid reclamation of this type of land by the use of modern land clearing and earthmoving equipment. If, as expected, mechanized land reclamation proves successful, the methods developed should be applicable on a larger scale in many other areas in Japan. 19. The amount allocated to these projects is $1 million. 20. Shinotsu Project - Some 140,000 hectares of reclaimable peatlands are located in the Ishikari Valley on the island of Hokkaido. Climatic conditions are such that when these lands have been properly drained and top dressed, good rice crops can be produced. An extensive program for reclamation of these lands is already underway under the direction of the Hokkaido Development Bureau, an agency of the Japanese

6 Government. It is believed, howuever, that the use of modern earthmoving and construction equipment on this Project will reduce costs and will enable the work to be carried out more rapidly. 21. The amount allocated to this project is about $2.4 million. 22. Dairy Cattle - As part of its program of increasing domestic food production Japan has been encouraging the growth of dairying particularly on farms which have been or will be established as a result of its general land reclamation program. Muc of this land is best suited to mixed farming in wrhich dairying must play an important part. Neither the natural increase of the cattle already in the country nor the government's existing cattle import program have been sufficient to meet demand. It is therefore proposed that the import program be enlarged. The loan requested would finance the import of 5,000 head of dairy cattle breeding stock over a period of two or three years. 23. The amount allocated to this project is about $0.9 million. Economic Situation 2h. Japan's economic situation as of October 1955 was reviewed in a report entitled "Japan - Recent Economic and Financial Developments in Japan" (A.S.-44a) submitted to the Board on October 17, Economic developments in Japan since that date have continued favorable. 25. During the past 12 months gross national product and industrial production, attained the highest levels in Japan's history. Harvests have for the second consecutive year been well above average. Substantial increases in the labor force have been successfully absorbed and unemployment is at near record low levels despite increase in labor productivity generally. Consumption has increased notably, but not as rapidly as production, and the rate of saving has remained high. Record corporate profits have permitted a larger measure of self-financing of capital expenditures. As full utilization of industrial plant has been approached in many fields, major capital expansion has been widely undertaken, and industrial and comm.rcial construction has set new records. 26. Wholesale prices, having been stable throughout 1955, increased by 6% in the first nine months of 1956, mainly because of steep increases in iron and steel prices. There has as yet been no substantial increase in the consumer goods index. 27. During the first half of the teeriod credit bocame easter, intere9t rates declined and commnrcial banks were able to retire most of their loans from the Bank of Japan. The trend has been reversed during recent months, but interest rates and Bank of Japan loans to commercial banks are still below last year's levels. 28. The financial policy of the national government continued to be based upon a balanced budget. 29. For the first time in many years Japan achieved a small favorable balance in visible trade during the fiscal year ended March 31, There was a deficit in normal invisible transactions which, however, was far outweighed by receipts from U.S. troop and special expenditures. As a result of this, Japan had a balance of payments surplus of more than $500 million.

7 For the current fiscal year Japan has budgeted for large increases in imoorts, principally of industrial raw materials, and now appears to be planning upon a rough balance between foreign trade receipts and expenditures. During the first six months of the fiscal yrear a further surplus of receipts of A132 million has been realized, but an additional sharp increase in imports during the second half of the fiscal year is contemplated in the foreign exchange budget, and it seems possible that for a number of months to come Japan's international accounts will be in deficit. Foreign exchange reserves at present exceed $1,500 million, of which nearly $1,000 million are in dollars. 31. It seems questionable whether the spectacular rate of progress of the past twelve months can be maintained in the coming year. In view of the shortage of iron and steel, and existing demands on industrial capacity generally, any further large increase in output can only follow the completion of extensive capital expansion programs. The execution of such programs, however, may well generate inflationary pressure. In the field of public finance it may become more difficult to hold the line. The Government is faced with a strong pressure for reduction in income taxes, while at the same time there are large unsatisfied needs for capital expenditures in the public sector, particularly for transportation, and strong demands for an improved social securitv system. As to exports, Japan's recent successes are leading to strong resistance in receiving countries against further expansion of Japanese trade in certain lines. The effects of the iron and sheet shortage and the increase of wholesale prices, neither of which have yet been fully reflected in domestic or exdort prices, could also influence Japan's exports adversely. 32. The Japanese Government appears to feel that despite the rapid advance of the past year over-confidence rust be avoided. The Bank of Japan has been alert to possible inflationary dangers. Steps have been taken to tighten bank credit through increasing the discount rate and by calling for the same sort of informal and voluntary credit restriction by the commercial banks which was effectively employed in 195h. The Finance Minister has recently reaffirmed the Government's adherence to a balanced budget policy for the coming fiscal year. The raising of rigid barriers against Japanese goods has so far been prevented by prudent retreat and voluntary restrictions wher- protectionist objections of other countries have become strong. Prospects of Fulfillment of Obligations 33. The Borrower is a newly established agency of the Japanese Government. It has been provided with sufficient working capital and has adequate access to funds. The Borrower's revenues derived from its reclamation work at Kamikita and Konsen and from its contractual arrangements both with the Hokkaido Development Bureau in regard to the Shinotsu Project and the prefectures concerned as to cattle sales, should more than cover its expenses and permit the punctual servicing of the proposed loan. 34. As to management the Borrower is staffed by civil servants with a commendable record of accomplishment in the field of land reclamation, and the Hokkaido Development Bureau and the Livestock Bureau of the Ministry of Agriculture and Forestry are well organized government agencies which have been operating on a successful basis for some years.

8 Japan has a good record of meeting its debt obligations. It has previously been noted that payment has been resumed on all prewar obligations except two comparatively small French franc issues as to which disputes regarding the applicable exchange rate have been outstanding since the French franc devaluation of the 'Thlirties'. On one issue settlement has now been reached between the parties, subject to ratification by the Japanese Diet and approval by foreign bondholder groups which have ne-otiated previous sttlements with Japan and Germany. The settlement is scheduled to be submitted to the Diet of Japan in February As to the second and smaller issue, the City of Tokyo franc loan, negotiations have recently been resumed. 36. In May 1956 Japan and the Philippines reached an agreement in regard to war reparations calling for deliveries of goods and services valued at an average of i27.5 million per year for 20 years. The addl-itional burden on Japan's balance of payments is less than 1 of its 1955 foreign exchange receipts. Deliveries under the reparations agreement with Burma and the war claims settlement with Thailand are proceeding, and there is no indication that these obligations are proving unduly burdensome. Indonesia's reparations claims are under discussion between the parties. Method of Procurement 37. All procurement has been and will be based, to the extent practicable, on international competition. PA'RT V - COI^PLIAI'TCE WITH ARTICLES OF AGREEMENT 38. I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Bank. PART VI - RECC;-- 7XDATTC1TS 39. I recolmmend that the Bank grant a loan to the Agricultural Land Development Machinery Public Corporation in various currencies equivalent to million for a term of 15 years at an interest rate of 4-3/4% per annum with the guarantee of Japan, and on such other terms and conditions as are specified in the draft Loan and Guarantee Agreements attached, and that the Executive Directors adopt a Resolution to that effect in the form attached (No.6). Attachments Washington, D.C. lnovember 30, 1956 Eugene R. Black