Copies to Mr J. A. Lyons, Prime Minister, and Director of Naval Intelligence, Melbourne
Dispatch 84E BATAVIA, 17 June 1937 Received in Canberra 21 July 1937 
According to a 'Domei' telegram from Tokyo published here yesterday, the Nanyo Kohatsu Kaisha (South Seas Development Company) has decided to enter into trade relations with Portuguese Timor, where it is intended to establish a combined Japanese- Portuguese concern with a capital of five million yen.
2. While this announcement is consistent with recent turnouts of a Japanese-Portuguese deal over economic interests in Timor, it remains doubtful how far actual preparations have gone, and this may to some extent be but another instance of a Japanese wish fathering a thought.
3. Nevertheless, its possibility must be accepted. Despite the assurances given me a year and a half ago by Dr Manso Preto Cruz, then Governor of Portuguese Timor, I have, since my return from leave last November, been uneasy as to Japanese developments in that territory since Dr Cruz's departure, as I have reported in my despatch No. 150 Confidential of December 8th, 1936 and subsequent correspondence. Indeed, the present announcement seems but a step from the deal recently reported by His Majesty's naval authorities on the China Station (vide my despatch No. 79 Secret of June 1st 1937) ; the step is however an important one, as it would involve a complete change of policy on the part of the Portuguese Government from the attitude voiced by Dr Cruz. It seems that the actual facts of the matter are likely, as I have already suggested in my despatch of June 1st just quoted, to be ascertainable only at Lisbon.
4. Whether the present announcement is entirely true or not, it is clear that the Nanyo Kohatsu Kaisha is now attaching great importance to establishing a base of operations in Portuguese Timor, and is likely to make every effort to realise this aim. It may therefore be worth emphasizing the significance of such a development. If Japan puts into impecunious Portuguese Timor the capital suggested, harbour, godown and other improvements are likely to follow, and she might even, before long, obtain a permanent hold on that colony analogous to the position she has achieved at Davao, in Mindanao. The Nanyo Kohatsu Kaisha has already indicated in New Guinea and elsewhere its readiness to undertake agricultural, mineral and fishery enterprises even when profits are problematical, and would be likely soon to gain a dominating position in the colony. It must, too, be borne in mind that Timor would make an admirable base for those Japanese fishery activities which have so greatly increased in the last year or two and have become so embarrassing to the Governments both of Australia and of the Netherlands East Indies.
5. It seems possible that the significance of admitting Japanese enterprise on a large scale has not been fully appreciated by the Portuguese authorities concerned.
6. If the Portuguese Government with a knowledge of the facts, is nevertheless favourable to Japanese economic activity in Timor, some counterbalancing influence appears desirable. I would therefore venture to suggest that the time has come to consider taking such steps, which might perhaps be most suitably taken by the Government of Australia, to whom the matter is of the most immediate interest. Two alternative channels seem to present themselves,-the Staughton concession and the Allied Mining Corporation.
7. The position of the Allied Mining Corporation is still enigmatical. As you are aware from previous correspondence I put no great trust in Mr Wittouck  who directs this concern. His object may be either (1) a bona fide mining proposition, or (2) flotation of a mining company to be unloaded on to credulous shareholders, or (3) disposal to the best purchaser of a going concern. Mr Wittouck has certainly stated to His Majesty's naval authorities in Hong Kong that he has no intention of any deal with Japanese; but, if his mining or company-promoting venture is unpromising, it does not seem very unlikely that he may dispose of his assets in the best market, and the Nanyo Kohatsu Kaisha have already shown in New Guinea that they are prepared to buy unpromising concessions in order to extend their sphere of activities.
8. The Staughton concession seems to offer better possibilities to the Australian Government, and may be controllable without undue expenditure. As you are aware, the Portuguese Government has recently given an assurance that this concession holds good, but wishes it to be exploited, while alleged transferees such as the Timor Oil Company have been refused recognition. The field seems therefore open for the Australian Government to back exploitation of the Staughton concession, and in view of the threatened extension of Japanese influence I think it may be worth while to take a leaf from the Japanese book and secure backing for and control of the concession even if it is not financially a promising proposition. If Mr Staughton  is not backed and loses his concession, Mr Wittouck's group will be strengthened, and both Australian and British interest will either be shut out or will only attain a footing by making terms with the astute Mr Wittouck- at his price.
9. There is no need for me to write at length in this despatch on the details of Mr Staughton's concession, which have been discussed in my despatch No. 41E of March 23rd 1937  and previous correspondence; these details are of course well known to the Australian Government.
10. I am sending a copy of this despatch to the Department of Overseas Trade.