Yeltsin 'insult' angers Japanese: Moscow accuses Tokyo of meanness and threatens to stall negotiations on Pacific islands seized in the Second World War

THE long-standing territorial dispute between Russia and Japan over the Kurile Islands in the Far East flared up again yesterday. Japan reacted angrily to a bitter accusation by Boris Yeltsin, who claimed that, since Tokyo had not contributed one penny to his radical economic reforms, it could not expect a solution to the 47-year- old argument that is crucial to future investment by Japan in the Russian economy.

'We hope it was a slip of the tongue,' said a Japanese Foreign Ministry official in Tokyo. 'It was an insult. By the sweat of its brow Japan has made a considerable financial contribution. We need to clarify his misunderstanding.'

Since Boris Yeltsin became President of Russia a year ago he has resisted overtures from Tokyo to give back a group of four remote islands off the east coast of the vast Russian land mass that have been claimed by Japan. Russian nationalists have declared they will not tolerate the islands being returned to Japan.

The islands were seized by Soviet troops at the end of the Second World War and the inability of the two sides to agree on who now owns them has prevented Tokyo and Moscow from signing a peace treaty, formally ending hostilities from the 1940s. It has also stalled Japanese firms from investing in the disastrous Russian economy because they are not prepared to do so without their government's support.

Tokyo insists that there will be no large-scale aid, or investment, for Russia until the peace treaty is signed, but Mr Yeltsin, in advance of the G7 meeting in Munich next Wednesday, where Japan is a crucial player in deciding whether to release aid to Moscow, was defiant.

'Japan is the only country which has not contributed a penny, a half dollar or even half a yen to Russia,' he said during a telephone call-in this week with readers of the former Communist youth newspaper, Komsomolskaya Pravda. The paper is one of the leading lights of the democratic movement in Russia. 'The other six G7 countries are contributing, some more some less, most of all Germany, but Japan gives nothing . . . what kind of an attitude is that?' Mr Yeltsin said.

In fact, Tokyo, looking at the emerging Russian market, was one of the first off the mark in extending aid. In October 1991, shortly before the Soviet Union collapsed, Tokyo announced a dollars 2.5bn ( pounds 1.3bn) aid package to Moscow. It included a dollars 1.88bn in trade insurance guarantees, dollars 200m in export credits and dollars 500m in emergency food and medicine. That, however, is Tokyo's limit before the Kurile Islands dispute is settled.

Facing Russian nationalist opposition to any suggestion that he might give back the Kurile Islands, Mr Yeltsin would like to de-link economic aid and a political solution to the dispute over the islands. But the Japanese Foreign Ministry said yesterday it could not do that. 'We will tell them when they are wrong, but emotional debate will never bear fruit,' the spokesman said.

Russia would like to become a permanent participant in the G7 club of the world's top industrialised democracies, but Britain has reservations about the country's immediate admission - chiefly because it believes others, notably Japan, would find it difficult.

British officials yesterday pointed to the Kuriles dispute. They said that while John Major expects Russia's admission to be discussed early at the G7 meeting next week, his current stance is to prefer a 'G7 plus one' arrangement rather than a full G8 - with hopes that any difficulties between Japan and Russia can be resolved when Boris Yeltsin visits Japan in September.

George Bush has said he is prepared to discuss the matter of Russian membership next week. However Germany does not agree with the President that it is time to consider adding Russia to the G7 group, the government spokesman, Dieter Vogel, said yesterday.