424 Department of External Affairs to Forsyth

Cablegram 1853 CANBERRA, 3 December 1945

MOST IMMEDIATE SECRET

Our 1845 [1] re Zaibatsu.

Reference D.2116 [2] and 468 [3] from Dominions Office.

1. The following comments represent Departmental view on above cables. Please inform us if you decide to forward any comments direct to the Secretary of State for Dominion Affairs as we shall be anxious to keep New Zealand informed to our views on the United Kingdom cables.

2. We are opposed to the Zaibatsu not merely because they were economic buttresses for Japan's military strength but also because a Government over influenced by these powerful industrial organisations never to any marked extent concerned itself with the welfare of the Japanese people as a whole. We desire to see in Japan a system of government whose primary concern is to organise the economic and social life in such a way that the welfare of the mass of the people is ensured. We would view with some trepidation granting equal access to the raw materials and markets to a government dependent to a large extent on the support of a group of highly powerful companies such as the Zaibatsu are. The existence of the Zaibatsu in their present form is incompatible with a welfare economy and invites the consequent danger that productive activity will be directed towards a militaristic revival or at least to providing the heavy industrial basis for such a revival.

3. In regard to the summary of the actual study [4] (the full text of which we have not yet received) we wish to make the following observations- (a) Reference paragraph 2 (a) we are in agreement that the existence of the Zaibatsu facilitated the rapid development of the Japanese economy especially the strategic industries.

(b) Reference to paragraph 2 (b) we also agree that the Zaibatsu could play a prominent part in rebuilding Japan's strategic industries in the event of the re-establishment of a strong militarist government and that their immediate existence will at all times induce the restoration of a distorted economy aimed at maximising profit opportunities in the heavy industries with attendant expansionist effects.

(c) In regard to paragraph 2 (C) it is possible that the Zaibatsu did not realise that they could not profit ultimately from a policy favouring military aggression. Nevertheless their very existence was a hindrance to the development of a policy of social reform in the 20's and early 30's. Their control over political parties was notorious and was a substantial factor in obstructing the development of any real progressive or working class movement.

At the same time the very concentration of power and centralisation of control characteristic of their organisations made them a facile weapon in the hands of the militarists when the latter assumed more complete control over the government.

(d) Reference paragraph 2 (d) we fear that it was the control exercised by the Zaibatsu over political parties in the 20's and 30's which as indicated in our paragraph (c) helped to frustrate the tentative growth of a restricted political democracy in Japan at that period. The Zaibatsu had such a disproportionate share of the national income at their disposal that it was inevitable that they should prove overpowerful in the political sphere. Even in the absence of an aggressively inclined government we feel that their position of predominance in the economic sphere would cause them to be overpowerful in political life, particularly in a country where political democracy has never been deeply rooted.

(e) Reference paragraph 2 (e) we feel that the argument that the Zaibatsu engaged in keen competition between themselves is hardly material to the main issue which is concerned rather with the effect of the existence of such aggregations of economic power on the social, economic and political life of the country.

(f) Reference paragraphs 2 (f) and 2 (g), even if we subtract from the sum total of the organising ability and experience of the Zaibatsu the resources of the individual members of the controlling families we still retain the vast amount of organising ability and experience possessed by key personnel concerned with the administration of the various companies, in other words, the managers, technicians and clerical officers of those concerns.

Their ability if properly supervised can and possibly is now being directed to the purpose of averting disruption of the economy.

(g) Reference paragraph 2 (h) we are very conscious of the close historical connection between the leading feudal families and the modern commercial concerns. Their close identity was an important factor contributing to the enormous accumulation of wealth and centralisation of power in the Zaibatsu. We feel that their continued existence will prejudice Japan's advance towards a democratic way of life bearing in mind the experiences of the twenties and thirties.

(h) Reference paragraph 2 (i) the question of the filling of the void following the destruction of the Zaibatsu is, we appreciate, a very difficult and important factor. We therefore deal with this question at length in our following paragraphs.

4. The crux of the problem is to adapt an economy already distorted by an unparallelled concentration of capital ownership and centralisation on control in Zaibatsu [to] the objectives of economic and social welfare and genuinely democratic conditions of life for the Japanese people. We feel conscious of the difficulties entailed in the destruction of such long established concerns and of the necessity for preventing economic chaos in the immediate postwar period.

5. Nevertheless, we consider that this task of destruction if it is not possible as a first step has to be effected eventually. It will entail replacing the Zaibatsu's controlling position by public ownership and control of at least the key heavy industries such as iron and steel, power, fuel, transport and chemicals together with State control over investment and credit institutions. This must be progressively achieved over the shortest possible period. Without such control by the State there would be no assurance that the former concentration of economic power in the case of the big families would not be resumed or be reasserted.

6. On this basis [of] the State ownership and control of the key heavy industries and credit resources it might be possible to develop economic activity along lines which would improve living standards and expand consumer goods industries previously obstructed by Zaibatsu concentration of heavy industry development for war purposes. Such orientation can be supported by (a) Measures designed to extend ownership in production as a whole.

(b) Encouragement of co-operative enterprise particularly in agriculture.

(c) State action to ensure improved conditions of work, higher wages and improved social security standards.

(d) In the first stage State supervision of private enterprise to maintain at least subsistence levels and to aim at increased consumer goods and production and distribution according to needs.

It is fully appreciated that the benefits to be gained from the increased State supervision envisaged above will depend ultimately on a reformed political system ensuring that the State is controlled by a Government genuinely devoted to the purpose of improving the living standards of the people.

The freeing of the political system from the domination of the financial groups apparent [in] even the brightest period of democratic political activity in Japan between the two world wars will contribute towards the establishment of genuinely democratic political system in that country. Such a result will not of course be obtained merely by destroying the Zaibatsu but will depend also upon the vigour with which trade union movements and workers organisations are encouraged and enabled to participate actively in political life.

1 Dispatched 2 December. On file AA : A3196, 1945, O.30341.

2 Dispatched 15 November. It contained the main points of a U.K.

study of the place of the Zaibatsu in the Japanese economy. On file A1067, ER46/13/20.

3 Dispatched 15 November. It requested further comments on cablegram D2116, particularly 'any proposal which you have in mind for filling void which may be create in Japan's economic structure by immediate destruction of the Zaibatsu'. In AA : A5954, box 1654.

4 i.e. the document referred to in note 2.

[AA : A1067, ER46/13/20]