Japan-North Korea Relations: Selected Issues

CRS Report for Congress
Japan-North Korea Relations: Selected Issues
November 26, 2003
Mark E. Manyin
Analyst in Asian Affairs
Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

Japan-North Korea Relations: Selected Issues
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 two separate states following Japan’s defeat in World War II.
Attempts to establish normal relations in the early 1990s and again in 2000 ended in
failure, due to seemingly unresolvable obstacles. In September 2002, a one-day
summit was held in Pyongyang between Japanese Prime Minister Junichiro Koizumi
and North Korean leader Kim Jong-il, the first ever between the leaders of the two
countries. Koizumi and Kim momentarily appeared to break longstanding stalemates
on several issues and agreed to restart bilateral normalization talks, but the talks
subsequently stalled, due to two developments: North Korea’s apparent admission
to U.S. officials in October 2002 that it had a secret nuclear weapons program based
on the process of uranium enrichment; and popular outrage in Japan at Kim Jong-il’s
admission that North Korea kidnapped 13 Japanese in the 1970s and 1980 and
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-scale economic aid package to compensate for the
Japanese occupation of the Korean Peninsula from 1910-1945, much as it gave South
Korea economic assistance when Tokyo and Seoul normalized relations 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
officials are discussing a package on the order of $5-$10 billion, an enormous sum
for the North Korean economy, the total GDP of which is estimated to be in the $20
billion range. Currently, Japan is a significant source of North Korea’s foreign
exchange, by virtue of the large Japanese market for the North Korean government’s
suspected drug-running operations, and of remittances from Korean permanent
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 taken a number of steps to curtail North Korea’s ability
to earn hard currency and to import dual-use technology. Since North Korea
launched a long-range missile over Japan in 1998, relations with North Korea have
been a highly politicized issue inside Japan, creating strong domestic support for
taking a hard line against Pyongyang. Prime Minister Koizumi, however, has
equivocated on taking more coercive measures against North Korea, such as
economic sanctions, absent an escalation of the situation by Pyongyang. Japan fears
such measures could provoke a military response by North Korea and/or trigger a
surge in refugees.
This report will be updated periodically to track developments in Japan-North
Korea relations.

In troduction ......................................................1
The Pyongyang Declaration..........................................2
The Koizumi-Kim Summit......................................2
The Talks Break Down.........................................3
Selected Issues in Japan’s Policy toward North Korea.....................4
North Korea’s Nuclear Program and Japan’s Increased Willingness to
Consider Coercive Diplomacy................................4
The Kidnapping Issue ..........................................6
An Economic Assistance Package.................................9
North Korean Maritime Spy and Smuggling Operations...............10
North Korean Missiles.........................................11
Japan - North Korea Economic Relations..............................12
Trade Has Fallen Sharply in 2003................................13
Remittances and Chosen Soren..................................14
Food Aid...................................................14
Appendix: Japan’s 1965 Economic Aid Package to South Korea............16
Estimating the Present Value of the 1965 Settlement.................17

Japan-North Korea Relations: Selected
In recent years, Members of Congress have monitored the course of North
Korea-Japan relations because Japan plays a potentially critical role in addressing the1
military threat posed by North Korea, particularly its nuclear weapons program.
Most important, Japan has told North Korea it 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 the
August 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 would be forthcoming if North Korea abandoned its
nuclear program and cooperated on the issue of Japanese 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 the Japanese market also is a major destination for the
North Korean government’s suspected drug-running operations and 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 harboring of Japanese Red Army terrorists — who face charges
in Japan of hijacking a plane in 1970 — as a reason for North Korea’s inclusion on
the U.S. terrorism list, which by law prohibits North Korea from 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 on the 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 Japan shares the objections of other regional states to the use of preemptive
military force, it is more willing than China, South Korea, and Russia to employ
coercive diplomatic measures against Pyongyang. Japan’s position thus is important

1 For more on North Korea’s nuclear weapons program and U.S.-Korean relations, see CRS
Issue Brief IB91141, North Korea’s Nuclear Weapons Program, and CRS Issue Brief
IB98045, Korea: U.S.-Korean Relations, both by Larry Niksch.
2 For more, see CRS Report RL31696, North Korea: Economic Sanctions, by Dianne

to the U.S. effort to deal with the North Korean nuclear program multilaterally, rather
than bilaterally (U.S.-North Korea exclusively), as North Korea had insisted. Indeed,
since the late 1990s, the rising perception of the North Korean threat has prompted
and enabled Japanese leaders to broaden substantially the country’s security posture.3
The Pyongyang Declaration
The Koizumi-Kim Summit
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 talks between the two countries, which had been stalled since
November 2000. Koizumi and Kim signed a short document called the “Pyongyang
Declaration.” Kim pledged conditionally to unilaterally extend his country’s
moratorium on missile testing beyond 2003 (when it was to expire), admitted that
North Korean agents had kidnapped 13 Japanese in the 1970s and 1980s, and issued
a vague promise 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 Korea with a large-scale economic aid package, much as it
gave South Korea economic assistance when Tokyo 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 Bush Administration’s policy. For most of the late 1990s,
Japanese policymakers sought to move slowly and deliberately on normalizing
relations with North Korea, due to the launch of a long-range Taepodong Missile
over the Japanese Islands in August 1998, Pyongyang’s development and deployment
of medium-range Nodong missiles capable of reaching Japan, new revelations about
the abductions of Japanese citizens by North Korean agents, and incursions by North
Korean espionage and drug-running ships into Japanese waters. This cautious
approach often created tension between Tokyo and the Clinton Administration,
which, along with South Korea’s Kim Dae Jung, pursued a policy of engaging North
Korea in the late 1990s. During this time, Japanese policymakers often appeared torn
between a desire to avoid becoming isolated from U.S.-South Korea-North Korea
diplomacy and domestic pressure to proceed cautiously.4 5 This dilemma was

3 See CRS Report RL30256, Japan’s Changing Security Outlook: Implications for
U.S.-Japan Defense Cooperation, by Richard Cronin.
4 Note that Japanese diplomats were anything but passive on the issue of the abductees,
which ultimately (in 2000) they convinced a reluctant Clinton Administration to include on
the bilateral U.S.-North Korean agenda.
5 The most stunning setback to Japanese diplomacy came in 1994, when the United States
— with limited consultations with the Japanese — entered into an Agreed Framework with
North Korea to freeze its nuclear program with the expectation that Japan would contribute
$1 billion towards the construction of two proliferation-proof light water nuclear reactors.

relieved when the Bush Administration came into office in 2001 and pursued a policy
of using public accusations and warnings to pressure North Korea to allow
international inspections of its nuclear facilities and agree to verifiable curbs to its
missile program, including missile exports.6
The Talks Break Down
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 to U.S. officials that it has a secret nuclear weapons
program based on the process of uranium enrichment; and popular outrage in Japan
at Kim Jong-il’s admission that North Korea had kidnapped 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 cooperates
on the abduction issue and begins dismantling its nuclear program. Also, in October,
the five known surviving kidnapees traveled to Japan for a one-to-two week visit, but
were not permitted to bring their 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 refuse to send the five back
to North Korea and to demand that family members be allowed to come to Japan.7
(One complicating factor is that the husband of one of the five is an American
military deserter 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 — and therefore, discussion of economic assistance — would not
proceed until Pyongyang agrees to send the children of Japanese abductees to Japan
and halt its nuclear weapons program. Japanese negotiators 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, and
the meetings ended with no joint statement. Subsequently, a North Korean Foreign
Ministry spokesman warned that if bilateral talks stall over the nuclear issue,
Pyongyang may reconsider its missile moratorium. Separate bilateral discussions of
security issues, which were to have begun in November 2002, have yet to be held.
Throughout 2003, the two countries have held several official and unofficial

5 (...continued)
Construction of the reactors was suspended in November 2003 after a consensus was
reached among the project’s four principal backers, the United States, Japan, South Korea,
and the European Union. Japan has contributed about $300 million to the project since


6 For more on U.S. policy toward North Korea, see CRS Issue Briefs IB91141, North
Korea’s Nuclear Weapons Program, and IB98045, Korea: U.S.-Korean Relations, both by
Larry Niksch.
7 “Koizumi Made Final Decision to Keep 5 Abductees in Japan,” Jiji Press, October 1,


discussions about resolving the kidnapping issue and restarting the normalization
Selected Issues in Japan’s Policy toward North
North Korea’s Nuclear Program and Japan’s Increased
Willingness to Consider Coercive Diplomacy
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 Korean peninsula.” Koizumi reportedly had insisted on including this
in the declaration after being briefed on U.S. intelligence indicating that North
Korea’s clandestine uranium enrichment program was more advanced than had been
thought previously. The international agreements presumably include the 1992
North-South Korean Denuclearization Declaration, which prohibits the possession
of uranium enrichment facilities, the 1992 nuclear safeguards agreement with the
International Atomic Energy Agency (IAEA), and the 1994 U.S.-DPRK Agreed
Framework, which committed North Korea to freezing its plutonium nuclear8
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 Bush Administration’s policy of combining multilateral dialogue and pressure
to convince North Korea to abandon its nuclear program. At President Bush’s side
later that same month, Prime Minister Koizumi stated that full normalization could
not take place until after the nuclear issue was resolved.9 In mid-November 2002,
Japan voted with the United States, South Korea, and the European Union to suspend
shipments of heavy fuel oil to North Korea. The oil was being provided under the
1994 Agreed Framework, ostensibly to compensate Pyongyang for the energy it lost
from shutting 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 to induce North Korea to give up its nuclear
program. Koizumi also declared that Japan would “crack down more vigorously” on

8 For more, see CRS Issue Brief IB91141, North Korea’s Nuclear Weapons Program, by
Larry Niksch. The Agreed Framework also contained a link to uranium enrichment
activities in Section III.2,which commits North Korea to implement the 1992 North-South
Korean Denuclearization Declaration.
9 See, for instance, the October 26, 2002 Joint US-JAPAN-ROK Trilateral Statement, in
which states that “Prime Minister Koizumi stressed that Japan-North Korea normalization
talks would not be concluded without full compliance with the Pyongyang Declaration
between Japan and North Korea, in particular with regard to the security issues, including
the nuclear issue, and abduction issues.”

illegal activities involving North Korea or ethnic Korean supporters in Japan and
would take “tougher measures” if North Korea escalated the situation. Japan is one
of eleven countries participating in the U.S.-led Proliferation Security Initiative,
announced by President Bush in May 2003, which is designed to interdict weapons
of mass destruction shipments to 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 new interpretation of domestic foreign exchange laws that
would make it easier for Tokyo to cut off bilateral trade and shut off the flow of
remittances from ethnic Koreans to their relatives in North Korea. Specifically,
Japan has moved away from its traditional position that sanctions against North
Korea would require United Nations Security Council approval and is now taking
the position that Japan could impose sanctions in cooperation with the United States,
even in the absence of specific United Nations approval. Remittances to North Korea
are estimated to be in the tens of millions of dollars 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 Japanese government, more than 70 percent of the
120 North Korean ships inspected in Japan from January to August 2003 were
ordered to halt operations or received safety warnings, compared with a general
average of 10 percent for all countries’ shipping.12 As discussed in the “Japan-North
Korea Economic Relations” section below, these measures appear to have reduced
bilateral trade significantly. Additionally, Tokyo reportedly has drawn up
contingency plans that would bar banks from remitting funds to North Korea and
deny landing rights to the crew and passengers (except Korean permanent residents
of Japan) of Japan-North Korea ferries if North Korea tests a nuclear device.13 In late
November 2003, the Secretary General of the ruling Liberal Democratic Party (LDP),
Shinzo Abe, a prominent advocate of using pressure tactics against North Korea, said
he would 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 by increasing evidence that firms and organizations run by ethnic
Korean residents in Japan have provided North Korea with key parts for its missile

10 For a discussion of the remittances issue, see CRS Report RL32137, North Korean
Supporters in Japan: Issues for U.S. Policy, by Emma Chanlett-Avery.
11 James Brooke, “Japan Detains 2 North Korean Ships, Part Of Pressure Strategy,” New
York Times, June 11, 2003.
12 James Brooke, “Japan Frees North Korean Ferry After Holding It For Day In Port,” New
York Times, August 27, 2003.
13 “Japan To Cut Visits, Remittances and Talks If Pyongyang Tests a Nuke,” Japan Digest,
September 16, 2003.
14 “Abe Vows To Seek Unilateral Sanctions Against N. Korea in Diet,” Japan Digest,
November 24, 2003.

and nuclear programs. In May 2003, a North Korean defector who once worked as
a scientist in Pyongyang’s missile program testified to a Senate Governmental Affairs
Committee hearing that “over 90 percent” of the parts for North Korea’s missiles are
smuggled aboard passenger ships by the Chosen Soren, the pro-North Korean
Association inside Japan.15 In April 2003, Japanese authorities filed criminal charges
against Meishin, a trading company run by an ethnic Korean resident, that allegedly
tried to ship to North Korea devices that could be used to build weapons of mass
destruction. One shipment of electronic power 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 the situation by Pyongyang. Japan worries that an outbreak
of military hostilities could lead North Korea to launch long or medium range
missiles at Japan — including U.S. bases. The prospect of a collapse of the Kim
Jong-il regime also worries Japanese leaders because of the potential creation of a
massive outflow of refugees. In part for these reasons, some analysts believe that
Tokyo’s policy toward Pyongyang might soften if the two sides were able to reach
an agreement on the abduction issue. Some Japanese leaders favor the idea of
delinking the kidnapping issue from the other 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 against Japan, for a time it opposed Japan’s
inclusion in the second round of six-party talks that are expected to 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 secret talks in the summer of 2003, in which they focused on resolving the
abduction issue. Both sets of initiatives are likely aimed at diminishing Japan’s
influence over the nuclear talks.
The Kidnapping Issue
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. Japanese politicians from all parties, and media outlets from across
the ideological spectrum have warned the Koizumi government not to proceed with
normalization without first making more progress on the abduction issue. Relatives
of the alleged kidnapping victims have formed support groups that have successfully

15 May 20, 2003 Hearing, “Drugs, Counterfeiting, and Weapons Proliferation: the North
Korean Connection,” Senate Governmental Affairs Committee, Financial Management, the
Budget, and International Security Subcommittee.
16 Sebastian Moffett, et. al., “Japan Suspects Firm Has Ties With Pyongyang,” Asian Wall
Street Journal, May 13, 2003.
17 “Pyongyang Offered To Hand Over Five Abductee Children; Tokyo At A Loss,”Japan
Digest, August 1, 2003.

attracted much attention in the Japanese media, and have secured audiences with
influential Japanese and U.S. officials. For years, North Korea denied any
involvement in the disappearance of any Japanese, whom the North Koreans insisted
on referring to as “missing persons” rather than “abductees.” It was only after North
Korea indicated via back-channel negotiations that it was willing to make
concessions on this issue that Koizumi agreed in the summer of 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 State Madeleine Albright raised the issue during her visit to
Pyongyang. During Prime Minister Koizumi’s visit to Crawford in May 2003,
President Bush pledged to continue pressing for a resolution of the abduction issue
in the multilateral talks, a position reaffirmed by the State Department in November
2003.18 China and South 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 pledged verbally and in the two leaders’ joint
declaration that they would not occur again. Kim disavowed any 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.
Some were used in training espionage agents in Japanese language and customs.
Only five of the thirteen are alive, according to the North Koreans, and during the
summit Kim pledged that they could return to Japan, if they wished. A Japanese
delegation on a subsequent fact-finding visit to North Korea was 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 full accounting quickly arose,
particularly among relatives of the kidnapped and conservative groups in the LDP.
Each subsequent revelation has only produced more questions, outrage, and political
pressure to obtain more information from North Korea on the abductions, which
Koizumi has described 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 confirmed abductees — particularly the five still alive who arrived in
Japan — to travel to Japan. A complicating factor is that Charles Jenkins, the
husband of abductee Hitomi Soga, is a former U.S. Army sergeant who defected to

18 “Kelly Okays Tokyo’s Plan To Bring Up Abduction Issue At Six-way Talks,” Japan
Digest, November 18, 2003.
19 “Prime Minister calls abductions for first time ‘acts of terrorism’,” Sankei Shimbun, June

6, 2003.

North Korea in 1965 while being stationed along the demilitarized zone separating
the two Koreas. Interviewed in Pyongyang, where he lives with his and Soga’s two
daughters, 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 Jenkins if he comes to Japan.
Reportedly, the U.S. government has declined to give any assurances to Japan.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 that the one set of remains given by North Korea were
not those of the 43-year-old Kaoru Matsuki, as Pyongyang claimed. Third, many
family members and support groups have raised questions about North Korean
agents’ involvement in the cases of nearly 100 other missing Japanese who
disappeared under mysterious circumstances. During the August 2003 six-party talks
in Beijing, the Japanese delegation reportedly asked North Korea to account for ten
other individuals allegedly kidnapped 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, deputy chief of the North Korean Foreign Ministry’s Asian
bureau, said that the kidnapping issue “has been settled,” 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 policy goal. Two points are noteworthy in that regard.
First, the kidnappings have become an extremely sensitive political issue in Japan.
Years of effort by the relatives of Japanese actually and allegedly kidnapped by North
Korea have successfully focused the attention of the media on the circumstances of
the cases, and have won the support of Japanese from across the ideological
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 officials sold arms to Iran to secure the release of American
hostages, going against both law and the Administration’s broad policy toward Iran.
In 1996, Evan Hunziker, a mentally unstable 26-year-old American swam into North
Korea, where he was charged with espionage. Hunziker’s plight became a 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.

20 “Japan’s Foreign Minister Kawaguchi Asks US Not To Prosecute Jenkins as Deserter,”
Jiji Press, December 17, 2002.
21 “N. Korea warns ‘disproportionate furor’ in Japan,” Kyodo, September 26, 2002.
22 “N. Korea Dismisses Hope Kin of Abductees Come to Japan Early,” Kyodo World Service
September 30, 2003.

An Economic Assistance Package
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 damage and suffering” Japan inflicted during its colonial rule of
Korea from 1910-1945. The size and form of the package were to have been
negotiated as part of the two countries’ normalization talks set to begin in late
October 2002. Using the 1965 Japan-South Korean normalization agreement as a
model, Koizumi agreed that the assistance package would consist of grants, low-
interest long term loans, 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 “economic assistance.” 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 to link the aid
package to the damage from the colonial era, North Korea also firmly backed away
from its 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 two sides. As detailed in the appendix of this report,
estimates of the present value of the 1965 Japan-ROK settlement vary widely, from
as low as $3.4 billion to as high as $20 billion. According to Japanese 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 -
$10 billion range.23 Japanese officials have not denied these reports. It is possible
that Japanese negotiators will try to obtain restitution of the ¥80 billion or so (about
$667 million at $1 = ¥120) 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 claims through 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 half North Korea’s estimated total output (gross
domestic product) each year — raises fears that it will help to sustain the Kim Jong-il
regime without inducing any behavioral changes.25 There are concerns that Japanese

23 See, for instance, Tokyo Shimbun, October 26, 2000.
24 Author’s conversations with Japanese officials and North Korea experts, 2002 and 2003.
25 The U.S. Central Intelligence Agency estimates that North Korea’s gross domestic product

financial assistance could directly or indirectly finance military modernization, for
instance by raising North Korea’s overall economic wealth, by freeing up budgetary
resources to be redirected toward the military, and/or by improving the country’s
infrastructure such as roads, railways and communications networks.26 This issue
now appears to hinge on the outcome of the six-party talks. Should these succeed in
resolving the key security issues, the concerns about fungibility could become less
North Korean Maritime Spy and Smuggling Operations
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 one estimate in the fall of 2002, such ships made the crossing
from their base in North Korea between five and twelve times a year, often releasing
smaller boats that in turn launched rubber rafts to ferry agents to and from the
Japanese coast. The agents’ missions reportedly included gathering information
about the outside world, smuggling money and goods, swaying influential opinion-
makers in Japan regarding North Korea, recruiting ethnic Korean residents in Japan
to gather information about South Korea, conducting surveillance on U.S. and
Japanese military installations, and occasionally identifying solitary Japanese for
kidnapping. The agents reportedly relied heavily upon the roughly 200,000 Korean
residents of Japan who identify themselves as North Korean citizens, often using
threats against family members in North Korea as a means of coercion. North Korea
is thought to be a major supplier of methamphetamines on the Japanese market,
which are believed 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 more than a warning shot upon an intruding vessel. The
confrontation ended when the mystery boat sank inside China’s exclusive economic
zone. It is unclear whether the boat was sunk by Japanese fire or by a self-detonated
charge. Following the incident, the Koizumi government suspended food aid
shipments, which had been resumed only in October 2001 in hopes of obtaining
progress on the kidnapping issue. In the summer of 2002, after protracted
negotiations with Beijing, Japanese salvage teams raised the ship, confirming that it

25 (...continued)
(GDP) was approximately $22 billion in 2002. The CIA’s GDP figures are derived from
purchasing power parity (PPP) calculations, meaning they are designed to show the quantity
of goods and services that can be purchased in the target country. The CIA, World
Factbook 2002.
26 For more on the fungibility argument, see Marcus Noland,”North Korea’s External
Economic Relations,”February 2001, http://www.iie.com/papers/asia.htm
27 For more on allegations of North Korea’s drug trafficking activities, see CRS Report
RS20051, North Korean Drug Trafficking: Allegations and Issues for Congress, by Raphael
28 Washington Post, “N. Korea’s Secret Mission Details Emerge of Long-Term Spy Project
to Gain Influence in Japan,” October 13, 2002.

was of North Korean origin, heavily armed, and was a mother ship to three smaller
craft that presumably were designed for beach landings and other close-to-shore
activities. Coast guard personnel participating in the chase reported seeing North
Korean agents throwing large bags overboard, raising suspicions that the ships were
engaged in drug-smuggling activities.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 sent out ships into Japanese waters, and pledged that
such actions would not occur again.30 The Japanese daily Asahi Shimbun has
published a detailed report that the 1,500-person 727 Liaison Office, the North
Korean agency thought to be responsible for dispatching spy ships to Japan, was
disbanded in the summer of 2002.31 If true, the move may indicate a recognition by
Pyongyang that its ship movements are well-observed by U.S. reconnaissance
satellites. This information is routinely shared with Japanese and South Korean
defense officials.
North Korean Missiles
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 missile launches beyond its 2003, though some security specialists
argue that the value of the moratorium is severely limited because Iran and Pakistan
are thought to act as North Korea’s surrogates in testing missiles.32 While the U.S.
concern about the DPRK’s missile programs centers around proliferation, Japan is
focused on the direct threat. North Korea’s missile program has been high on Japan’s
agenda ever since Pyongyang’s August 1998 Taepodong launch, though for the
moment Tokyo appears to believe that priority should be given to the nuclear issue.
Japanese security officials are most concerned about the North’s cache of up to 100
medium-range (600-900 miles) Nodong missiles that are capable of reaching all of
Japan, including Okinawa. U.S. intelligence officials reportedly 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

29 The ship’s arsenal included rocket launchers, machine guns, an antiaircraft gun, and two
antiaircraft missile launchers. Behind forward-opening double doors at the stern,
investigators found a 33-foot-long boat, an inflatable black rubber raft with outboard motor,
and a one-man underwater scooter. “Japan Says North Korea Boat In Sea Battle Was A Spy
Ship,” New York Times, October 5, 2002.
30 NHK Television, “Koizumi Issues Statement After Historic Summit With DPRK’s Kim
Chong-il,” September 17, 2002, as translated by FBIS, JPP20020917000132.
31 Asahi Shimbun, “Pyongyang Shuts Spy Ship Section,” October 4, 2002.
32 The Pyongyang Declaration reads, “According to the spirit of this declaration, the DPRK
expressed its intention to postpone missile launches until after 2003.” For more on the
North Korea-Pakistan connection, see CRS Report RL31900, Weapons of Mass Destruction:
Trade Between North Korea and Pakistan, by Sharon Squassoni.
33 Bill Gertz, “North Korea To Display New Missiles,” Washington Times, September 9,

Japan - North Korea Economic Relations
Japan has long been one of North Korea’s largest economic partners, though
trade and financial flows have declined in recent years. After the Soviet Union ended
its support for Pyongyang, Japan emerged as North Korea’s second-largest trading
partner (after China), a position it held until it was displaced by South Korea in 2002.
(See Figure 1.)
Figure 1. Japan’s Relative Share of North Korea’s Trade,
Sources: KOTRA (Korea Trade Investment Promotion Agency) and South Korean Ministry of34
Unificatio n.
Notes: North Korea’s total trade was approximately $2.6 billion in 2001 and about $2.9 billion in
2002. The figures include foreign countries assistance to North Korea, which is recorded as
North 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 general machinery. Many of the electronics components and
clothing materials that are sent to North Korea are assembled into finished products
and re-exported to the big discount stores that have sprung up throughout Japan over
the past decade.35 Additionally, North Korea is in default on over ¥80 billion (about
$667 million at $1 = ¥120) in loans from Japanese banks, many of which have
stopped handling transfers to North Korea.

33 (...continued)


34 For an analysis of recent data on North Korea’s trade, see Aidan Foster-Carter,
“Pyongyang Watch: Seoul’s Secret Success,” Asia Times Online, November 19, 2003.
35 “Intelligence,” Far Eastern Economic Review, April 17, 2003.

Below, Table 1 shows that bilateral trade has declined significantly since the
1980s, primarily due to the severe deterioration of North Korea’s economy that began
with the withdrawal of Soviet and Chinese support in the late 1980s and early 1990s.
By 2000, the real value of North Korea’s exports to Japan had fallen to one-third of
1985 levels, and Japanese exports to North Korea had plummeted to one-sixth the
level of 1980. That said, the shrinking of the North Korea economy may mean that
trade with Japan — particularly exports, which generate hard currency — is relatively
more important to North Korea today than was true in the 1980s.
Table 1. Japan-North Korea Trade, 1980-2002
(billions of yen)
Nominal FiguresReal figures(1995 = base year)
¥/$JapaneseDPRK JapaneseDPRK
RateExports to Exports toTotalExports toExports toTotal
DP RK Japan Trade DP RK Japan Trade
1980 85 41 126 129 90 219 204
1985 59 43 102 88 90 178 201
1990 25 43 68 31 59 90 135
1995 24 32 56 24 32 56 103
2000 22 28 50 20 30 50 115
2001 18b 27 45b 17b 30 48 b 131
2002172946 — — — 119

1-9/02122335 — — — —

1-9/0381523 — — — —

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 Japans export and
import indices.
b. 2001 Japanese export figure does not include the 499,999 MT, worth over Y112 billion ($900
million), of husked brown rice that Japan sent to North Korea as food aid.
Trade Has Fallen Sharply in 2003
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. The decline was particularly sharp during the second and third
quarters, when Japan imposed its more rigorous inspection regime on North Korean
shipping. From January through April 2003, trade fell by 17% compared with the
same period in 2002. From May to September, year-on-year trade volume 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 suspended from January to July 2003. The ferry normally makes one or two
runs a month from North Korea to the port of Niigata, Japan.

Remittances and Chosen Soren
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 permanent residents of Japan.36 Chosen Soren also is known to organize
remittances to North Korea. Though several sources have estimated the flows to be
on the order of hundreds or even billions of dollars per year, more recent analysis has
pointed out the implausibility of these estimates, instead placing the actual amounts
below $100 million per year.37 Moreover, the remittances are believed to have
declined 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-Pyongyang Koreans in Japan, but also sent many of Chosen
Soren’s credit unions into bankruptcy.38 Several of these credit unions have been
taken over by the Japanese government, a move that sparked controversy in Japan as
bilateral relations deteriorated, particularly when revelations surfaced that some
credit unions had funneled money to the North Korean government. In 2001, North
Korea halted its investigations into the kidnapping issue after the Japanese
government launched an investigation 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 warm ties 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 crime syndicates.40
Food Aid
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 the remainder was given in 1995 and 1996. Almost all of
Japan’s aid has been channeled through the UN World Food Program. Generally,
Tokyo has linked food shipments to progress in Japan-DPRK relations. Food
shipments were suspended following North Korea’s 1998 Taepodong launch,

36 For more on the Chosen Soren, see CRS Report RL32137, North Korean Supporters in
Japan: Issues for U.S. Policy, by Emma Chanlett-Avery.
37 Nicholas Eberstadt, “Financial Transfers from Japan to North Korea,” Asian Survey, Vol.
XXXVI, No. 5, May 1996; Marcus Noland, Avoiding the Apocalypse, (Washington, DC:
Institute for International Economics), p. 132.
38 See CRS Report RL32137, North Korean Supporters in Japan: Issues for U.S. Policy,
by Emma Chanlett-Avery.
39 Doug Struck, “Japanese Bailouts Benefitted N. Korea, Officials Say,” Washington Post,
December 8, 2001; and “North Korea Must Continue to Search for Abducted Persons,”
Nihon Keizai Shimbun, December 21, 2001, translated by American Embassy, Tokyo, Public
Affairs Section, Office of Translation and Media Analysis.
40 Mindy Kotler, “Interdiction May Not Just Modify North Korea’s Behavior,” Policy
Forum Online, The Nautilus Institute. June 13, 2003.

resumed in 2001 when progress on the kidnapping issue appeared possible, then were
suspended again in December 2001 following the North Korean spy incident. Since
1995, the United States has provided over 1.7 million MT of food assistance to North
Korea. South Korea has sent about 1.5 million MT.

Appendix: Japan’s 1965 Economic Aid Package to
South Korea
On June 22, 1965, Japan and South Korea signed a Treaty of Basic Relations,
normalizing relations between the two countries for the first time since Japan
annexed the Korean peninsula in 1910. As part of the final settlement, Japan agreed
to provide South Korea with a total sum of $800 million41, which consisted of: a) an
outright grant of $300 million, to be distributed over a 10-year period; b) a $200
million loan to be distributed over a 10-year period and repaid over 20 years at 3.5%
interest; c) $300 million in private credits over 10 years from Japanese banks and
financial institutions.
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. Throughout the 1950s, South Korean President Syngman Rhee
adopted a confrontational approach toward Japan, and successive Japanese
governments showed little enthusiasm for accepting Rhee’s demands that Japan
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-led development — as his country’s paramount economic goal. To
this end, Park was eager for Japanese economic assistance, and adopted conciliatory
postures on most outstanding issues. The approximate size and composition of the
compensation package was one of the first issues to be resolved following Park’s
coup. The South Korean side, which at one point had asked for as much as $2
billion, lowered its demands to $700 million in grant aid before agreeing to the $800
million total 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, the Treaty on Basic Relations did
not contain any reference to a Japanese apology. Instead, Japan’s reparations
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 imposed martial law to
suppress anti-government protests around the country, the second time in less than
a year troops were mobilized to curtail protests against the government’s Japan
policy. The agreement also faced strong but eventually ineffectual opposition in
Japan, where the Socialist Party — which had friendly ties with North Korea —

41 According to the South Korean Ministry of Foreign Affairs and Trade, the aid was
distributed in dollars, not yen.
42 Foreign Relations of the United States, 1961-1963, Volume XXII (Northeast Asia), 567-
69; Chong-Sik Lee, Japan and Korea: The Political Dimension (Stanford, CA: Hoover
Institution Press, 1985), 50.

argued that the Treaty would impede Korean unification and was a prelude to an anti-
communist alliance in Asia.43
Estimating the Present Value of the 1965 Settlement
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 a value of approximately $3.4 billion in 1999 dollars.44 At
the high end is a calculation that produces a 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 population
differences yields a present value of ¥418 billion ($3.8 billion using an exchange rate
of ¥110 = $1). If the same disbursement formula used in 1965 were applied today,
the ¥418 billion would break out as ¥157 billion ($1.42 billion) in outright grants,
¥104 billion ($950 million) in concessionary government loans, and ¥157 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 calculation is 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 of North Korea and South
Korea, including the extent of the claims for damage by the occupation authorities.
Finally, the adjustments are made for the total figure of $800 million, even though

43 Lee, Japan and Korea, 55.
44 This method uses the U.S. gross domestic product (GDP) deflator to adjust for inflation
between 1965 and 1999. The GDP deflator is the ratio of nominal GDP in a given year to
real GDP in that same year. In 1999 the GDP deflator was 104.37 (1996 = 100), 4.35 times
the 1965 deflator of 23.98. Thus, $800 million in 1965 dollars would be worth
approximately $3.4 billion in 1999 dollars.
45 Marcus Noland, “The Economics of Korean Unification,” prepared for Foresight
Magazine, February 2000. For his accrued interest adjustment, Noland assumes an annual
rate of return of 5%. Noland acknowledges that the Japanese side is likely to reject the
notion of adjusting for accrued interest, on the grounds that North Korea’s intransigence is
to blame for the perennially stalemated normalization talks. March 2000 conversation
between Marcus Noland and the author. According to the U.S. Census Bureau, in 1965,
North Korea’s population was approximately 11.9 million, approximately 40% the size of
South Korea’s population of 28.7 million in the same year. In 1999, North Korea’s
population was estimated to be 21.4 million, around 45% the South Korean total of 47
46 This method uses the Japanese GDP deflator to adjust for inflation between 1965 and
1999. In 1999 the Japanese GDP deflator was approximately 3.5 times the size of the
deflator in 1965. Using this figure, the 1965 compensation package of ¥288 billion would
be worth roughly ¥1.01 trillion today ($9.2 billion, at ¥110 = $1). To adjust for population
differences, multiply ¥1.01 trillion by 0.41, which is the ratio of North Korea’s 1965
population (11.9 million) to South Korea’s 1965 population (28.7 million). The result is
¥418 billion ($3.8 billion).

the actual value of Japan’s compensation package was lower: Over 60% ($500
million) of the settlement was disbursed as government loans and private credits,
which are less valuable to the recipient than outright grants. Thus, the calculations
presented provide only a preliminary comparative 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 soldiers during World War II. North Korea periodically has
insisted that Japan’s compensation take into account the comfort women’s plight.