TOKYO (Reuters) - Japan has agreed to forgive Myanmar's 303.5 billion yen ($3.72 billion) debt and resume development aid, the two sides said on Saturday, in a further move to end the Southeast Asian nation's isolation and strengthen its nascent democracy.
The announcement was made jointly by Japanese Prime Minister Yoshihiko Noda and President Thein Sein, Myanmar's first head of state to visit Japan in nearly three decades.
"In order to support Myanmar's efforts for reforms in various areas towards its democratization, national reconciliation and sustainable development, Japan will extend economic cooperation ... while continuously observing the progress of these efforts ...," Noda said in a joint statement.
Myanmar, run by the military for five decades until a year ago, has undertaken a series of reforms, allowing the main opposition to run in parliamentary by-elections, releasing political prisoners and easing restrictions on the press.
Thein Sein has stunned critics with bold moves that were unthinkable just a year ago, prompting the West to ease sanctions on a nation rich in untapped resources and seen as one of Asia's last frontier markets.
The Obama administration announced this month that it planned to gradually ease certain sanctions on Myanmar, while French Foreign Minister Alain Juppe said on Friday European union governments will suspend its punitive measures next week.
But Western governments are keen to maintain pressure on the country's quasi-civilian government to keep up democratic transition and say sanctions are being suspended and not lifted altogether.
Thein Sein's five-day visit to Tokyo is his first to a major industrialized power since reforms were introduced, though he has already been to China and India.
Myanmar owes Japan about 500 billion yen as a result of delayed repayment of past development loans.
Of the total, 127.4 billion yen is what Japan decided to forgive a decade ago, but it held off on the waiver citing human rights conditions in Myanmar. Another 176.1 billion yen in overdue charges will be waived off after monitoring the country's reform effort for one year.
Japan also decided to restart full-fledged development loans to Myanmar to help upgrade the nation's infrastructure.
Myanmar is setting up Special Economic Zones in Thilawa, south of Yangon, Kyaukphyu, on the Bay of Bengal and a $50 billion project to the south in Dawei, which could become Southeast Asia's biggest industrial estate.
Tokyo will help draw up a blueprint for the Thilawa Special Economic Zone, potentially giving Japanese firms a leg-up over rivals in winning infrastructure projects for the area.
Japanese companies have long conducted business in Myanmar, but interest has grown since the reform-minded government took office, particularly in its planned industrial zones.
The limitations of Myanmar's transport system could present logistical problems for investors planning to use the country as a manufacturing base.
Railways cover only a handful of routes and many roads are in poor condition, even its new ones, while an estimated 75 percent of the country is without access to reliable electricity.
Tokyo has been offering Myanmar grants for humanitarian purposes, but has withheld low-interest, long-term loans, which are used to finance road, port, railway and other big projects, since a crackdown on pro-democracy demonstrations in 1988.
A typical loan of this nature extended by Japan is in tens of billions of yen.
He joined a six-way summit meeting earlier on Saturday with Noda and top leaders from the Mekong region countries - Cambodia, Thailand, Laos and Vietnam, besides Myanmar.
Following the morning meeting, Noda announced Japan will provide 600 billion yen in official development aid to the Mekong region countries in three years from April 2013 to help improve their infrastructure and boost the area's economy. (Additional reporting by Martin Petty)
(Reporting by Kiyoshi Takenaka; Editing by Sanjeev Miglani)