SummaryJapan has provided China with ODA since 1979, 75% of this aid has been given as yen loans. The loans have greatly contributed to China’s economic growth through funding of industrial infrastructure projects. Next year when China hosts the Olympic Games in Beijing, Japan will phase out these loans. Although it will continue to provide China with grant assistance and technical cooperation the ending of the loans will have an impact on their future bilateral relationship. This is not only due to the amount of money that has been given but also due to the important role the loans have played since their initiation.The yen loans have been at the core of Japan’s engagement policy towards China. Through engagement Japan has sought to encourage peaceful and stable developments in China, both in terms of an open economy and in terms of a stable society. At the outset of Japan’s aid program to China in 1979, China represented a potential huge market for Japanese trade, and Japan wanted to encourage China to keep up its open and reform policy which had been announced by Deng Xiaoping the previous year.After the Tiananmen Square Incident in 1989, Japan started to reconsider its aid to China. The incident was a clear indication that considering Japan’s motives for engagement, the policy did not achieve the desired results. The Japanese public was outraged by the actions taken on June 4 1989 and the public was to gain a more decisive say in the domestic Japanese politics as the LDP rule came to an end in 1993. That year a coalition government implemented new electoral rules and later governments established administrative reforms which gave the public more insight into and influence over Japan’s foreign aid policy making. As Japan suffered an economic recession after the burst of the bubble economy in the early 1990s, the public started to debate how much aid Japan should give and to which countries. China became a target for this discussion with its rapid economic growth, rising military expenditures, and actions it took that were deemed threatening to Japan’s national interests, such as the nuclear tests in 1995. This paper argues that the decision to end the loans is the result of a process that started in the early 1990s and which caused the Japanese foreign aid policy makers to review their engagement policy towards China. The ending of the yen loans can be seen as the end of a stage in the bilateral relationship, but Japan will continue its engagement policy towards China through grant assistance and technical cooperation. The target areas will no longer be industrial infrastructure but environmental conservation and human resource development in China. These are areas that are important to Japan’s national security today.