No.518.  Situation today is that press, no doubt by Government orders, continues attitude of restraint to the United States-Japan conversations though the more extreme papers are beginning to talk again of the necessity for putting a time limit to the conversations and there is a general emphasis on the impossibility of Japan giving way on matters which affect its vital interests in East Asia.
I have referred in my telegram No.518 to reports of large scale naval and military movements. I understand that detailed reports are always sent to Singapore who repeat them to D.N.I.  Melbourne.
My appreciation of the situation is:
(1) The Government realize that, as the effect of freezing, Japan's capacity to attack is beginning to decline.
(2) The Government was genuinely desirous of avoiding a conflict with the United States and consequently will go some considerable way to secure an agreement with the United States. The principal difficulty will be that the Japanese Government must save their face with regard to their position in China but there should be wide grounds of bargaining as to the details of the eventual evacuation.
(3) In default of an agreement the Government will attempt to secure their sources of supply and end the China incident by force. Consequently they are proceeding with preparations for some move probably in the south cast against the Burma Road, Thailand or the Netherlands East Indies and will undertake one or the other if the conversations break down. If Tatsuta Maru sails as at present arranged for Los Angeles and Balboa on 2nd December it suggests that they are prepared to wait at least until the commencement of the New Year.
 An extremist element in the Army, who no doubt are influenced by the Germans, believe that now is Japan's last chance to seize whatever she requires and will endeavour to prevent agreement with America and may do so by precipitating some action in South East Asia which the Government as in the past will be unwilling to repudiate.
(5) Possibly the first result of the breakdown of the conversations with America would be the resignation or reorganisation of the Cabinet. Any such move would certainly be a dangerous sign.