Order Code RS20526
Updated September 12, 2002
CRS Report for Congress
Received through the CRS Web
North Korea-Japan Relations:
The Normalization Talks and the
Compensation/Reparations Issue
Mark E. Manyin
Analyst in Asian Affairs
Foreign Affairs, Defense, and Trade Division
Summary
Japan and North Korea have not established official relations since North Korea
was founded in 1948. In 2000, the two countries held three rounds of normalization
talks, which had been frozen since 1992. The negotiations, however, broke down in
November 2000. In late August 2002, Japanese Prime Minister Junichiro Koizumi
announced that, after months of behind-the-scenes negotiations with North Korea, he
would travel to Pyongyang on September 17 for a day-long summit with North Korean
leader Kim Jong-il to attempt to restart the normalization talks.
The most pressing issue for Prime Minister Koizumi is obtaining North Korean
cooperation in resolving the cases of several Japanese allegedly kidnapped by North
Korean agents in the 1970s and 1980s. Apparently, it was after receiving signs of
progress on this issue that Koizumi decided to make the trip to Pyongyang. Japan also
is seeking North Korean commitments to curb its missile program and to allow
international inspections of its nuclear facilities. Koizumi is also likely to raise the
incursions by espionage and drug-running ships thought to be of North Korean origin
into Japanese waters.
For its part, one of Pyongyang’s key demands is that Tokyo compensate North
Korea for Japan’s colonization of the Korean Peninsula from 1910-1945. Though Japan
has resisted using terms such as “compensation” and “reparations,” Tokyo has 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. North
Korea, however, insists that it will only accept “compensation.” This disagreement
over terminology has contributed to the current deadlock in the normalization
negotiations. There are a number of estimates for the present value of the 1965 Japan-
South Korea settlement, ranging from as low as $3.4 billion to over $20 billion.
Reportedly, Japanese officials are discussing a package on the order of $5-$10 billion.
Congressional Research Service ˜ The Library of Congress

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Background
Many medium- and long-term policy approaches to engaging North Korea envision
the eventual provision of a large-scale economic assistance package to Pyongyang,
conditional upon North Korea’s cooperation on various military and economic issues. It
is widely believed that one of the largest source of economic aid to Pyongyang would
come from a prospective Japanese offer of monetary “compensation” for its colonization
of the Korean peninsula in the first half of the 20th Century. Japan has agreed in principle
to offer an economic package to North Korea, but has been vague about its amount, form,
timing, and characterization. Tokyo has played an important economic role in other
diplomatic initiatives toward North Korea. Japan, for instance, funds nearly one-quarter
of the operations of the Korean Peninsula Energy Development Organization (KEDO),
the organization established under the 1994 U.S.-DPRK Agreed Framework to provide
North Korea with light-water nuclear reactors in exchange for North Korea’s commitment
to halt its existing nuclear program.
Ever since the signing of the Agreed Framework, Japan has often appeared torn
between a desire to move slowly and deliberately on normalizing relations with North
Korea, and worry about becoming isolated from U.S.-South Korea-North Korea
diplomacy. Such worries mounted after Kim Dae Jung was elected president of South
Korea in 1997 and began pursuing a “sunshine policy” of engaging North Korea, with the
support of the Clinton Administration. Tokyo’s policy toward Pyongyang has been
hardened by North Korea’s launching of a long-range Taepodong Missile over Japan in
August 1998, new revelations about alleged kidnappings by North Korean agents, and
incursions by espionage and drug-running ships thought to be of North Korean origin into
Japanese waters. Most recently, in January 2002 Japan suspended food aid shipments –
which had been resumed only in October 2001 in hopes of obtaining progress on the
alleged kidnapping issue – to North Korea after a confrontation at sea with a suspected
North Korean spy boat, which had penetrated into Japan’s territorial waters. Japanese
officials and commentators generally have welcomed the Bush Administration’s hard-line
stance toward North Korea, though many have said they are in favor of the two countries
resuming a high-level dialogue.
Thus, Prime Minister Koizumi’s August 30 announcement that he would travel to
Pyongyang came as a surprise to most observers, notwithstanding the fact that Japanese
and North Korean officials had made some incremental progress in bilateral talks during
the spring and summer of 2002. The most pressing issue for Koizumi is obtaining North
Korean cooperation in resolving the alleged kidnapping cases. According to Japanese
press reports, the prime minister also is likely to press Kim Jong-il to unilaterally extend
its missile-testing moratorium – due to expire in 2003 – and to allow international
inspections of its nuclear facilities, one of the Bush Administration’s key demands of
North Korea. Koizumi reportedly will deliver a message from President Bush to Kim
Jong-il regarding steps necessary to restarting U.S.-North Korea diplomatic talks, which
have been stalled since the Bush Administration took office.
Koizumi’s trip to Pyongyang poses some risks at home and abroad. Although the
impending trip has boosted his public opinion ratings in Japan, his political standing is
likely to take a sharp fall if he does not return home with evidence of tangible progress
on the abduction issue, particularly if North Korea is seen as winning concessions on
Japanese economic and humanitarian assistance. Diplomatically, Pyongyang’s overtures

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to Tokyo – coinciding with recent improvement in talks between North and South Korea
and with significant economic policy changes in North Korea – may be a tactic by North
Korea to isolate the U.S. from its Northeast Asian allies, thereby increasing pressure on
the Bush Administration to enter into talks with North Korea.1 The outcome of the
Koizumi-Kim summit is likely to factor into the Administration decision on whether and
when to restart high-level talks, which had been scheduled for July but were postponed
indefinitely following a North-South Korean naval battle in June.
The Japan-North Korea Normalization Talks
Disagreements over the Economic Settlement Package. Regarding the
size of Japan’s economic package to North Korea, official figures have not been released
by either side, though Pyongyang reportedly has demanded $10 billion at minimum. Some
Japanese experts believe that North Korea will ask for a settlement in the $20 billion
range. According to Japanese North Korea-watchers, no consensus has been reached in
Tokyo on Japan’s bottom line, though there have been reports that Japanese officials are
discussing a package on the order of $5-$10 billion. According to one report in the
Japanese press, Japanese officials in October 2000 were considering a $9 billion package.2
Observers suggest that Tokyo will argue that $2 billion be deducted from the final amount
in order to give Japan credit for its $1 billion contribution to the Korean Peninsula Energy
Development Organization (KEDO) and the $1 billion North Korea owes Japanese
sources (mainly Japanese banks) from unpaid debts incurred in the 1970s and 1980s.3
In addition to the size of the settlement, the two sides have clashed over terminology.
Japan is refusing North Korea’s demand that the package be labeled as “reparations,” or
even “compensation.” Instead, Tokyo has offered to characterize the monies as
“economic assistance,” as it did in the 1965 Japan-South Korean normalization
negotiations.4 This semantic dispute has momentarily stalled the talks. Other issues
likely to be contentious include the conditions placed on Pyongyang’s use of the
aid/reparations, and the composition of the money – grants or loans.5 Additionally, North
Korea is demanding that Japan issue a formal, “legally binding apology” from the
Japanese emperor and/or prime minister. Japan has countered that a sufficient apology
was extended as part of 1995 statement by then-Prime Minister Tomiichi Murayama
expressing regret for Japan’s past actions.
Other Issues. Any normalization agreement will be politically difficult for the
Japanese government. In recent years, relations with North Korea have become a high-
profile political issue in Japan, due to North Korea’s 1998 Taepodong missile launch over
Japan, its 1999 naval incursion into Japanese waters, and the release of new evidence that
1 “Koizumi’s Pointless Pilgrimage,” The Asian Wall Street Journal, September 4, 2002.
2 Tokyo Shimbun, October 26, 2000.
3 Author’s conversations with Japanese North Korea experts following CRS Workshop, “Dealing
with North Korea,” March 2, 2000; see also Cha, “DPRK Dialogue.”
4 “Kono Confirms Offering Economic Cooperation to N. Korea,” Kyodo, August 25, 2000.
Japan’s position is that since it has never been at war with North Korea, it is not required to pay
reparations.
5 Cha, “DPRK Dialogue.”

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Pyongyang kidnapped Japanese citizens in the 1970s and 1980s.6 Public opinion polls
indicate that most Japanese favor adopting a cautious approach toward North Korea.7
Conservative groups in Japan – including many members of the dominant Liberal
Democratic Party – opposed the government’s decisions in March and October 2000 to
resume shipments of food aid to North Korea, arguing that Japanese assistance should be
conditioned on Pyongyang’s cooperation on the abduction cases and on missile and
nuclear weapons issues.8 An additional concern expressed by these groups is that
Japanese compensation or food aid might be used for North Korea’s military rather than
for its populace. During the April 2000 talks, the Japanese delegation also raised the
issues of North Korea’s alleged drug-trafficking, and its alleged biological and chemical
weapons programs.
North Korea may raise the issue of the status of the estimated 200,000-plus pro-
Pyongyang ethnic Korean residents of Japan. In late 2001, Japanese authorities arrested
a number of officials from credit unions serving this community, on charges of secretly
channeling hundreds of millions of dollars to North Korea. Many of these unions have
collapsed in recent years, requiring the Japanese government to spend over $4 billion to
repay depositors, a move that has been politically unpopular in Japan. The prospect of
future government bailouts could be affected by a negative outcome of the Koizumi-Kim
summit.
April 2000 Talks. In the April 2000 Japan-North Korea talks, North Korea insisted
that relations be normalized only after completing a “settlement of the past,” a phrase
Pyongyang defines to include four items: an apology, compensation, the return of cultural
assets taken from Korea during the occupation, and the granting of legal status to ethnic
Koreans living in Japan. For future negotiating rounds, North Korea proposed
establishing panels to deal with other outstanding issues, including Pyongyang’s missile
development program and the whereabouts of ten Japanese allegedly kidnapped by North
Korean agents. Japan, seeking to avoid decoupling the compensation/apology issue from
the kidnaping and missile disputes, rejected the North Korean proposal.
August 2000 Talks. On July 26, 2000, the Japanese and North Korean Foreign
Minister staged an unprecedented meeting at the ASEAN Regional Forum meeting in
Bangkok. The two officials agreed to hold another round of talks in Tokyo in August.
They also agreed to resume discussions over further visitations to Japan by women who
married Korean husbands and emigrated to North Korea. At the August 21-24, 2000
bilateral meetings in Japan for the first time formally raised the possibility of providing
an economic assistance package – i.e. not a compensation payment – to North Korea.
6 For more on how the North Korea threat has caused many Japanese policymakers to rethink
Japan’s defense posture, see Richard Cronin, Japan’s Changing Security Outlook, CRS Report
RL30256, July 9, 1999. See also Rinn-Sup Shinn, North Korea: A Chronology of Provocations,
1950-2000, March 15, 2000.
7 According to a 2000 poll, only 36% of Japanese surveyed believed Japan should resume food
aid to North Korea, compared with 51% in August 1997. Mainichi Shimbun, February 27, 2000.
8 On March 7, 2000, Japan announced its intention to deliver 100,000 tons of rice to North Korea,
its first shipment since the food aid program was suspended following Pyongyang’s launch of a
two-stage Taepodong missile over Japan in August 1998. In October 2000, Japan announced it
would send an additional 500,000 tons of rice aid to North Korea.

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Reportedly, no figures were discussed, and North Korea did not respond to the offer. The
two sides agreed to hold another round of talks in a third country in October, with a goal
of establishing diplomatic ties by the end of 2000. The negotiators also agreed to expand
bilateral contacts to include politicians and business enterprises, and to set up committees
to handle two of North Korea’s demands: the return of cultural treasures taken from
Korea during the Japanese occupation, and improving the legal status of Koreans living
in Japan. Reportedly, North Korea asked Japan to resume trade insurance and full-scale
economic aid, but Japanese negotiators declined.
October 2000 Talks. Almost no progress was achieved during the October 30-
November 1, 2000 bilateral meetings in Beijing. Reportedly, North Korea flatly rejected
Japan’s proposal to offer economic assistance in lieu of compensation. Japan again
turned down North Korea’s demand that the abduction issue be discussed outside the
normalization talks.
2002 Talks. Several official and unofficial bilateral meetings were held in 2002,
most notably talks between the two nations’ Foreign Ministers in July and between Red
Cross societies in April and August. At the August Red Cross meeting, North Korea
agreed to broaden its investigation into the “missing Japanese” that Tokyo alleges were
abducted. Pyongyang also took the unprecedented step of allowing Japanese officials to
discuss the issue with an official with North Korea’s Public Security Ministry.
Additionally, in July 2002, the four remaining Japanese Red Army terrorists living in
North Korea announced their desire to return to Japan. The Japanese government has
called for their return to face charges of hijacking a plane to North Korea in 1970. The
U.S. State Department has cited North Korea’s harboring of Japanese Red Army terrorists
as a reason for North Korea’s inclusion on the U.S. terrorism list.
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 million, 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. The disbursements
were made in dollars.
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.9 At the high end
9 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
(continued...)

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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.10 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.11
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, an exact calculation would take into account
differences between North Korea and South Korea, including the extent of the claims for
damage by the Japanese occupation. Finally, 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. In the past, North
Korea has insisted that Japan’s compensation take into account the comfort women’s
plight, a demand that (if it is met) presumably would raise the value of the settlement
package.
9 (...continued)
in 1999 dollars.
10 Noland, “The Economics of Korean Unification,” Foresight Magazine, February 2000. For
his accrued interest adjustment, Noland assumes an annual rate of return of 5%. 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 million.
11 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).

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