Japan has rejected a proposal that G7 members participate in the Reparation Loan to raise over a hundred billion euros to fund Ukraine in its war with Russia in the next two years.

At a a meeting of G7 finance ministers, two European diplomats told Politico that Japan "made it clear" that it cannot use approximately $30bn worth of frozen Russian assets in its banks to issue a loan to Ukraine.

Japanese Finance Minister Satsuki Katayama cited legal concerns for ruling out using Japanese-held Russian assets to back the Reparation Loan, according to an EU diplomat who was briefed on the meeting.

Other officials claimed that Tokyo had also come under US pressure to reject the loan plan, as the Trump administration is against the EU plan and also wants access to the same frozen funds as part of its mooted peace deal with the Kremlin.

At the same, US representatives informed their partners that they plan to reduce their support for Ukraine after the final tranches of the G7 loan agreed upon in 2024 are paid. 

The decision destroys European Commission (EC) hopes of rallying more non-EU countries to provide funding for Ukraine in 2026 using Russian frozen assets outside of Europe.

Ukraine’s government will run out of money early next year if a new source of funding is not found. The Trump administration has sent no money to Ukraine since the start of this year, transferring the entire burden to the EU. The Biden administration previously accounted for 40% of Bankova’s funding.

The issue of the Reparation Loan has sharply divided the EU. Seven EU member states from the bloc’s northeast corner have been ardent supporters of Ukraine and want to see the frozen Russian money seized to fund the war and pay for reconstruction.

"Supporting Ukraine in their fight for freedom and independence is not only a moral obligation – it is also in our own self-interest," the leaders from Estonia, Finland, Ireland, Latvia, Lithuania, Poland and Sweden said in a letter to EU Council President Antonio Costa and EU Commission President Ursula von der Leyen, Reuters reports. "We must therefore move ahead quickly on the Commission's proposals to use the cash balances from Russia's immobilized assets for a reparations loan to Ukraine."

Germany has also thrown its weight behind grabbing the Russian money, as it would be liable for about a third of the funding of Ukraine if the EU member states are forced to tap their own resources to fund Ukraine in 2026, at a time when the German economy has been in recession for three straight years and is watching its budget deficits swell. The other members of the so-called E3, France and the UK, are also both in dire economic truble, with swelling deficits and rapidly rising debt.

Central European states, including Hungary, Slovakia and more recently Czechia, have rejected the idea and want to return to normal commercial relations with Russia.

But it is Belgium that has become the main obstacle. Belgium’s Prime Minister Bart De Wever flatly refuses to contemplate tapping the cash pile that has built up in Belgium-based depository Euroclear, citing legal risks that could make Brussels liable for a €140bn payment to Russia, should it successfully challenge the legal basis of the loan in court.

Wever has demanded that the rest of the EU make legally binding commitments to share the risk with Belgium – something the other members of the EU have refused to do.

Those legal risks are real as seizing a central bank’s reserves is unprecedented and runs counter to a bevy of legal norms and treaties. The chances of Russia winning a legal challenge to the seizure of its money are high, experts say.

Japan joins a growing number of naysayers. Both the European Central Bank (ECB) and the International Monetary Fund (IMF) have also come out recently to reject the idea of the loan, because of its dubious legality.

"Management have consistently advised that any action relating to the use of Russia's immobilized assets should respect international and domestic law and not undermine the functioning of the international monetary system," the IMF spokesperson, Julie Kozack, said last week.

Kozack added that the IMF’s new Extended Fund Facility (EFF) worth $8bn is also dependent on Europe securing “secure financial guarantees” for funding Ukraine over the next two years. That means if the decision  Reparation Loan fails then Ukraine’s financial crisis will only deepen as it will also be shorn of the IMF’s funds as well.

But pressure amongst Ukraine’s supporters is building as it becomes increasingly obvious that Kyiv faces a macroeconomic collapse in the first quarter of next year without more cash.

As bne IntelliNews reported, Europe can’t afford to take over the burden of supporting Ukraine, as most EU countries are either in recession or approaching a crisis.

The European Commission (EC) is desperately hunting for a legal formula that dodges the allegation of “seizing” the funds, which the Kremlin has already called “theft” if the decision goes ahead.

"Whenever we put our legal proposal on the table, we are sure that it is court-proof and it meets the requirements and concerns, including in this case financial markets," European Commission President Ursula von der Leyen told reporters in Brussels on December 8. "So we are reassuring on that front, because obviously these issues have been looked into."

The proposals for the Reparation Loan keep changing, but according to the most recently draft, a total of €210bn will be made available with a fist tranche of €90bn paid out in the new year. Of this amount €115bn is planned to support Ukraine's defence industry over five years. Another €50bn is to cover budgetary needs, and €45bn is to repay the G7 loan granted to Kyiv last year.

Germany will be the main guarantor of the Reparation Loan  to Ukraine. EU countries will have to allocate funds to guarantee a €210bn loan. Germany will account for approximately €52bn, followed by France (€34bn) and Italy (€25.1bn).