Your 185  and 202.  Japanese exchange. Australian Government has now reconsidered question, but regrets that it must adhere to its previous decision not to include the 331 merchant seamen in the exchange, for security reasons.
2. The Security and Naval and Military Intelligence Services have confirmed their previous view that these men should in no circumstances be released at present because of:
(a) their specialised knowledge, not only of coastline of Australia, but of northern waters in South-West Pacific theatre;
(b) their value in salvaging operations. 
3. In this connection we have noted the Admiralty comments contained in your Cable No. 202, but would point out that our request for high priority for persons whose services are required for the war effort was intended as a guide in the selection of individual British repatriatees. Moreover, this principle could not have been communicated to the Japanese Government. In any event we feel that this particular question is not so much one of 'utility for war effort' as of 'being of vital use for enemy's military operations'.
4. In view of the importance of the question, the views of General MacArthur were sought , and the following opinion has now been received from him.
'I have just received and given most careful consideration to your letter of October 21st and its enclosures.  The situation is a typical example of the conflicting claims of local as compared to general interests. There can be no question of the soundness of the views expressed by your Military and Naval Advisers. They have actually materially understated the danger involved. The special knowledge the prisoners possess of the waters in which we are now fighting-waters of which our own knowledge is limited-might well lead to the enemy's marked benefit. This special situation must be weighed against the general reasons set forth in opposition by the Dominions Office. In such questions it is always my general policy to yield local to general interests, unless fraught with too dire consequences. In this case, it is my considered opinion that the danger involved is too acute to warrant such an attitude and I recommend that the Australian Government not yield in the matter, the military necessities in the case outweighing all other considerations.' 5. Please arrange therefore for a Note in the following terms to be transmitted to the Swiss Government for presentation to the Japanese Government in reply to the latter's Note (see Cable No.
308 from the Dominions Office ).
BEGINS- The Japanese Government alleges that the refusal of the Australian Government to repatriate the Japanese subjects in question is based 'on the new and undue grounds of their being seamen'. The Australian Government cannot accept this description of the reason for its refusal to agree to the repatriation of these persons.
2.(a) The attitude of the Australian Government in this matter is not 'new' in that the policy of treating enemy merchant seamen as prisoners of war is a joint British Commonwealth policy, covers seamen of all enemy nationalities and was operative in Australia long before the current exchange negotiations with Japan had been set on foot. Moreover, action was taken in June of this year to acquaint the Protecting Power with this fact, for transmission to the Japanese Government, well before the Japanese Government's list of nominees for repatriation had been received. 
(b) Similarly, the Australian Government rejects the Japanese contention that the definition of these individuals as merchant seamen is an 'undue' definition.
(i) In the opinion of the Australian Government, the accidental fact that an individual was resident in Australian territory or territory under Australian control before the outbreak of war has no bearing whatever on the question whether or not he is a merchant seaman. The deciding fact is that these individuals were members of the crews of Japanese vessels which do not come within the restrictive categories as set out in Article III of the Hague Convention, No. II, 1907. It is irrelevant for the Japanese Government to appeal to the spirit of the provisions of Article III of this Convention. By no possible stretch can the provisions of Article III be made to apply to the case of Japanese vessels operating in or near Australian territorial waters.
(ii) The Japanese Government also appears to maintain that the fact that these individuals were interned at the commencement of the war invalidates their definition as merchant seamen. The Australian Government can see no substance in this argument. It is true that had these Japanese subjects actually been in internment when war broke out, the case might have been different. In point of fact, however, they were members of crews of Japanese vessels at the outbreak of war and the fact that they were then detained does not in any way affect their status as merchant seamen. 
3. The Commonwealth Government has consistently understood that from the point of view of the British Commonwealth, the exchange at present under negotiation was based upon humanitarian considerations and designed to secure the release of internees, especially aged and infirm persons and women and children. Even if the Japanese subjects in question had not come within the category of prisoners of war and thereby been ipso facto excluded from exchange, the Australian Government would have noted it as strange that, as an examination of the lists supplied by the Japanese Government reveals, almost all of the persons in question asked for are of military age and of immediate and direct value in Japanese military operations.
4. For the sake of the humanitarian purpose of the exchange, the Australian Government earnestly hopes that the Japanese Government will recognise the force of the above considerations and will intimate its readiness to proceed with the arrangements on the lines already agreed to. However, should the threat of the Japanese Government to break off the negotiations unfortunately be realised, the Australian Government would feel impelled to publish for world opinion the full circumstances in which the breakdown took place.