Extracts January 1946 
REPORT ON VISIT TO JAPAN WITH THE FAR EASTERN ADVISORY COMMISSION
Introduction 1. Japan is now an economy of extreme scarcity. This has two important consequences for administration: it makes certain controls necessary at a time when the Allied Powers wish to encourage personal freedom, and it reduces the margin of error that can be taken for granted in calculating lines of policy.
2. An economy of scarcity involves severe restrictions on the individual's right to purchase on the open market, to accept employment, to travel freely, or even to advocate courses of action. A police force is necessary to enforce these controls ...
The Japanese Government professes itself unable to stamp out the black market; first because it can no longer allow the remaining police force to employ the drastic methods of the past to enforce regulations, and secondly because it claims that Allied emphasis in propaganda on the freedom of the individual, without much reference to his responsibilities, has encouraged a wide-spread belief that there is something 'democratic' in avoiding observance of government controls. The dilemma between encouraging personal freedom and imposing government controls, which has appeared in a lesser form in the democratic countries during the war, enters most economic and many political problems in Japan today.
3. Very little margin can be safely allowed for error in calculations. For example, one of the more crucial matters is the food situation. The Japanese Government and a number of senior US Army officers believe that Japan will face starvation on a large scale within the next few months if food is not imported. others dispute this. Whatever the position, it will be touch and go, and even a comparatively small error can mean many deaths. Where basic commodities like food, fuel, and clothing are close to bedrock, and where accurate statistics for them do not exist, one cannot but be conscious of the grave consequences that will follow a miscalculation. Again, the scope for experimentation in social reform is reduced.
While it is desirable to bring about as many reforms as possible as quickly as possible, we must be careful not to impose so many at once that the economic machine or essential parts of it comes to a standstill, either because key Japanese refuse to go any further in accepting SCAP orders, or because the new system has become incomprehensible to them. This is not an argument for avoiding reforms, but rather for careful timing.
4. The possibility of a collapse of Japanese Government must always be kept in mind. For a few days in January, 1946, it seemed possible that Baron Shidehara, would be unable to hold a Cabinet together and that a successor might not be found. The absence of a Japanese Government would alter the whole structure of the occupation by making it necessary to introduce some degree of direct military government, with the consequent need for more occupation troops and better-trained experts to involve themselves in the enormous task of governing a foreign country with little knowledge even of the language and with little co-operation from the inhabitants.
7. ... American officers at SCAP mostly believe that there is no serious deliberate falsification of statistics and data by the Japanese and that the many inaccuracies are the results of inefficiency or misunderstanding. The chief item where deliberate falsification would be profitable at present is stocks of commodities, raw materials, or equipment. Understatement of food Stocks, with a consequent implication of starvation, might stimulate the Allied Powers to send food to Japan. The food shortage has become an obsession with the Japanese, and exaggeration of the position by them is certainly occurring.
Failure to specify holdings of machinery offers an opportunity to spare those not disclosed from being seized as reparations.
Concealment has occurred. Machines have been taken from factories even during the past month and hidden in smaller factories or caves. It is hoped to prevent this happening in future by taking a precise inventory of all machine tools as soon as the labour and organization required can be assembled, but lack of experienced men, Allied or Japanese, is the stumbling block. Few more important tasks await SCAP than the institution of an adequate statistical system in Japan, and until it is done, basic decisions will have to be made, as at present, on inadequate and often false data.
12. Finally, it should be observed that many of the problems confronting Japan and SCAP today are those which trouble any modern community-the control of big business, the struggle between free enterprise and government control, and rural indebtedness. It is unreasonable to expect the Supreme Commander to pull ready-made solutions out of his hat. In many cases no permanent solution exists, since continuous social change requires continuous social adjustment. But all these problems, no matter how familiar they may seem to Western eyes, have certain peculiar twists given by the oriental, religious and historical setting. The agrarian problem, for example, is basically coloured by Japan's recent emergence from a type of feudalism. The Zaibatsu is not simply a problem of monopoly, but is complicated by semi-feudal family loyalties and by a devotion to nationalistic expansion going back to the Meiji period. State control is not the impersonal thing that comes to Western minds steeped in parliamentary tradition, but implies a personal devotion to a myth-enshrouded Emperor. In short, economic reform must be accompanied by basic social reform.
Implementation of Basic Policy
30. A brief survey of the general economic position and the most pressing problems having been given, it is now proposed to take the statement of US basic policy point by point, and examine how far its economic provisions have been carried out.
35. The best guarantee of permanent economic disarmament of Japan is the restriction of her sovereignty to the four main islands.
This effectively makes her dependent on the rest of the world for such vital materials as petroleum, rubber, tin, lead, tungsten, molybdenum, phosphate, and salt. In the absence of assistance from another Power, this restriction alone might be an effective barrier to further aggression on Japan's part. Allied policy, however, will go a step further and try to destroy or remove war- making potential that still remains on the Home islands. Three points of warning need to be uttered here. First, many industries which formed a basic part of the Japanese war machine also are essential to the peace-time economy, and it will be very difficult to root out the heavy industries and allied branches without, at the same time, either causing the Japanese economy to collapse or making it necessary for the rest of the world permanently to send more exports to Japan than she can pay for. This does not mean that an attempt to disarm Japan economically should not be made, or that good results cannot be achieved, but it is a warning not to trust too completely to this as a safeguard. We must be reconciled to the fact that some heavy industry, some chemical works, some shipbuilding will have to be left. We must also look forward to a steady whittling away at Allied conferences of any stern initial principle, as exceptions are gradually admitted in the various industries. Secondly, over the next few years there will be a relaxation in Allied willingness to enforce a hard peace against Japan. The pressure at home to reduce the forces and expenditure involved, and even a growth in public sympathy for a defeated foe, can be expected to push towards a relaxation of controls. The most perfect controls in the world are useless if the will to apply them does not exist ... Finally, it is impossible to forecast accurately what new forms of armament another war would call for. The atomic bomb, coupled with the rocket and possibly still undevised weapons, might render laughable any forms of control selected. Entirely new industries might be catapulted to the fore as a basis for war-making.
Particularly is that so when we plan, not in terms of years or even decades, but of fifty and a hundred years. The conclusion to be drawn is that, though the physical removal or conversion of plant can play an essential part, the best hope of safety is a complete change in the outlook and desires of the Japanese people.
The Allies' aim must be so to reform the Japanese that they will never again wish to go to war or, taking the most pessimistic view, that if they do go to war they will wage it in a more humane and civilized manner. One of the chief objects sought last year by the Australian Delegation to the Far Eastern Advisory Commission was an amendment of the US statement of basic policy so that the promotion of a peaceful and democratic Japan became a positive obligation of the Supreme Commander instead of merely a consummation devoutly to be hoped for.  This point is worth emphasizing here, even in an economic paper, because of a growing attitude at SCAP to feel that the social reform of Japan is of only secondary importance, and that the Allied occupation troops could withdraw fairly soon and with the aid of naval patrols and a fleet of bombers could effectively put an end to any renewed attempts at rearming, without having to bother now about making Japan democratic. This belief can be expected to grow with the increasing clamour to 'bring the boys back home'. Against this, the Australian attitude has been that the democratic reform of Japan is as important an element in disarmament as the destruction of arms or factories.
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