I am enclosing the following papers on Japan and on Australian/Japanese relations, which you might find helpful:
Australian Policy Towards Japan (Departmental) 
Australian Economic Relations with Japan (Departmental) 
Australian Policy Towards Japan with Appendices A, B, C, D, E, F, G, I, J, K, L, M (Cabinet Submission 28//54) 
Digest of Despatches J1, Japan: Retrospect, E.R. Walker 
Digest of Despatches J2, Japan's Economic Situation, E.R. Walker Digest of Despatches J3, The Rearming of Japan, E.R. Walker Digest of Despatches J4, Japan's Foreign Policy, E.R. Walker Digest of Despatches J5, The Political Outlook, E.R. Walker.
The following are some of the things which you might find it useful to watch in Japan. Perhaps the most important is the development of anti-American feeling and a trend towards neutralism. Despatches from our posts in Manila and Karachi have recently described the growth of anti-American reaction in the Philippines and Pakistan, and we have the impression that the same influences are at work in Thailand. Walker has touched on the problem of anti-American feeling in Japan in some of his despatches describing Japanese/American negotiations concerning the retention of American bases in Japan. The Japanese people were certainly a model of good behaviour under the Allied Occupation but they are now showing some signs of irritation over continued manifestations of American influence, such as the presence of uniformed soldiers.
The danger of anti-American feeling is the impetus it gives to neutralism. We have not heard that neutralism is a strong force in Japan yet but perhaps it could develop. If it did, it would probably be much more friendlily disposed towards the Western democracies than Indian neutralism for example. The Japanese are far removed in temperament from the Indians, whom they rather despise. Japanese pragmatism and common sense would probably save them from the philosophical woolliness of Indian thinking.
The possible development of a Japanese brand of neutralism, based on Japan's own claim to leadership in Asia and the demand for a foreign policy more completely independent of the United States, is something which we should watch for.
Such a development might be linked to the strong attraction which mainland China still has for Japan. While the Japanese have a deep-seated distrust of the U.S.S.R., they believe that they can get on with the Chinese despite the new regime in Peking. There have been a number of Japanese cultural and at least one trade mission to Communist China and the new China is widely publicised in Japan in generally favourable terms.
One main drive towards closer relations between Japan and China comes from the business men who purport to see vast trade opportunities with the Asian mainland. These hopes may well be illusory in view of the changed pattern of the Chinese economy but
the fact is that numbers of influential Japanese wish to find out for themselves what can be done in the way of closer trade links with China.
It may well be that the Japanese economic, political and social structure is firmly enough based to withstand the sort of pressures which might develop from a closer association of Japan with Communist China. This is something on which your views would be helpful, as it seems almost inevitable that such close relations will in fact come about in the coming years.
The Japanese to some extent hold the United States responsible for their present policy of recognition of the Chinese Nationalist Government on Formosa. You may be asked by the Japanese what Australian policy is towards Formosa and the Chinese mainland with a view to the Japanese seeking to develop what they would call a more 'independent' foreign policy.
I doubt whether the question of Japanese rearmament, which was a matter of such concern to Australia in the post-war years, will come to a head in Japan for some time yet. A clear two-thirds majority of the two Houses of the Diet would be required before a constitutional amendment could be put before the people for a referendum. It will be hard to obtain such a majority in the present Diet and the issue is a real one in Japan. Anti-war sentiment is strong amongst women and the class of men who came to maturity in the war period. It is shared by such conservatives as Yoshida, the former Prime Minister, who suffered at the hands of the Japanese Army.
In the meantime the ad hoc situation is being met, perhaps rather illogically, by the Japanese Self Defence Corps which, in conjunction with the American Forces, provides a nucleus for home defence. On the question of constitutional change and the re- creation of Japanese Armed Forces, the Americans and ourselves should be chary before becoming involved in what is a live domestic issue, despite its importance to us in relation to Pacific defence.
We have not been conscious that the Japanese are looking to South East Asia for a renewal of their sphere of political influence.
The Japanese would certainly like to trade more with the countries of South East Asia and send to them some of their surplus technical skill. They feel that those countries are over suspicious of Japan and too demanding in their reparations requirements. As you know, Australia sponsored Japan's entry into the Colombo Plan in the belief that Japan could in fact contribute something to the development of South and South East Asia.
In Australia and elsewhere there are periodical references to the failure of democracy to strike deep roots in Japan. I do not think we need be too cynical about this. Certainly some of the reforms of the Occupation did not go very deep. We have seen a regroupment of the banks and big industries take place despite the MacArthur anti-combination laws. The re-cartelisation of Japanese banking and industry has been to some degree inevitable and is not necessarily a bad thing entirely in itself. The objections to the [pre]-war economic structure in Japan lay rather in the unfair trade practices carried on by big business and by the inter- relation between big business and the Japanese imperialists.
Other democratic reforms seem to have a firm hold in Japan. The Parliamentary system works. Elections are held in what can be termed a fairly normal way, and the Diet Committees work in the open and are subject to a good deal of public interest and criticism. Perhaps the Occupation decentralisation of provincial and local government went too far to suit a crowded small country like Japan. However, there seems to be a real and healthy public interest in the working of political affairs at all levels. We have not seen much to substantiate reports of the rebirth of the old nationalist societies but you may care to make your own enquiries about this aspect of modem Japan.
On the question of Australian/Japanese relations, we have really narrowed down the controversial issues to three namely, trade relations, pearl fishing, parole for minor war criminals. On trade, we have to some extent satisfied the Japanese by liberalising our import licensing administration to the extent that Japanese imports into Australia have shown a marked increase.
This, of course, is their main concern and they have spoken less to us recently about the need for a trade agreement or for a granting of most-favoured-nation customs treatment to Japanese imports. I am not sure that we can avoid in the long run making some more substantial gesture to the Japanese in the direction of at least limited most-favoured-nation treatment but at present our trade talks are not directed to this end.
On pearl fishing, we have two problems-the handling of the case before the International Court of Justice, on which the Solicitor- General seems to be adopting rather a go-slow tactic; and the immediate yearly task of working out a regime under which the Japanese can pearl fish in waters off Australia to the extent that they can be allowed to take a reasonable catch. This raises internal political problems. The subject of war criminals is dealt with in the attached papers. What we want to guard against is a position in which we find ourselves as the only country holding substantial numbers of Japanese war criminals.
On the whole I believe that the Japanese have been rather favourably impressed by the efforts which Australia has made to resolve outstanding difficulties. The Japanese come to Australia with some feeling of apprehension arising from their guilty recollections of their war-time excesses. Usually they depart feeling that they have been made more welcome in Australia than in any Asian country. Their Embassy in Canberra has been staffed by competent officials and headed by most competent Ambassadors. We have good working relations with them here and I should think that you should also be able to establish good working relations with the Japanese Government in Tokyo. If you find that this assessment has been over optimistic, please let us know.