1. Two developments have occurred which I think are significant in the light of my conversation with MacArthur on February 7th when I said I felt the important thing was not so much a change of government but an immediate change of policy which would bring about a tightening of economic controls (see my 2 for the Minister February 8th ).
2. I have learnt that on March 24th MacArthur sent a letter to Yoshida written in the firmest language MacArthur has yet used to him and pointing out to him that the Allied Powers are not obliged to maintain any particular standard of living in Japan or to import foodstuffs to meet deficits arising from the failure of Japan to assure the just and impartial distribution of its own food supplies. The letter says there is every indication that at present time Japanese Government is failing to achieve satisfactory distribution of indigenous food. As a consequence special staple food rations cannot be maintained throughout the year'. It draws Yoshida's attention to the Directive 3 of September 22nd 1945 which made it the responsibility of the Japanese Government 'to maintain a firm control over wages and prices and to initiate and maintain a strict rationing programme for essential commodities in short supply to ensure that such commodities are equitably distributed'. It says that what is required is an integrated approach across the entire economic front and that 'unless determined measures are undertaken at once by the Japanese Government the inflationary condition of the economy together with its attendant mal-distribution of food and other necessities will become increasingly serious, industrial recovery will be further retarded and the achievement of the social and political objectives towards which the Japanese people have made such an encouraging start will be endangered'. The letter concludes 'I wish to state in the strongest terms that outside assistance is contingent upon full and optimum utilisation of indigenous resources for which I hold the Japanese Government completely responsible'.
3. It is interesting that the language in the letter is in some passages identical with that employed in the draft policy of the Far Eastern Commission on the supply of food for civilian relief in Japan (F.E.C. paper 026/10) but no reference was made in the letter to the Far Eastern Commission.
4. The second development is a proposal which is being considered to ask the advice of the Allied Council at the next meeting on 'measures to effect a proper and stabilised price-wage relationship'. I gather that there is a strong difference of opinion between the diplomatic section of S.C.A.P. and the economic and scientific section on the expediency of bringing the matter into the open by referring it to the Council and I have been shown several alternative drafts of staff study which has been prepared for the Council's information. The first of these was an extremely frank outline of various ways in which the Government has failed to arrest the economic decline, the chief of which is the ineffectiveness of machinery for enforcing control of raw material. This draft says that the Japanese economy has reached a dangerous position. There is still some doubt whether wages and prices will be put on the Council agenda at all.
5. You will recall that in my monthly report for January I expressed the view that S.C.A.P. should take immediate steps to ensure that economic controls be immediately enforced and that in my February report I said I thought that unless S.C.A.P. announced before the elections basic economic controls which it would insist that the new Government should carry out it would be difficult after the elections to compel a new Government to follow an economic policy which would threaten the interests of the groups which had returned it to power.
6. I think this indication of acknowledgement by S.C.A.P. that the Japanese Government has failed to carry out his directive is more important since as late as his visit to the United States in February Atcheson was still making public expressions of his confidence in the Government's co-operativeness.
7. Since the information on which the telegram is based has been obtained from a highly secret source it is important that no reference should be made to it in communications to other posts, otherwise this source will almost certainly dry up.