Your telegram re Yampi [1] received and carefully considered.

As regards your first suggestion we think that in view of issues
involved it is desirable that we should appear to be treating
generously interests which are likely to be affected by our
proposed action. We feel that sentence 'Government will be
prepared to examine and consider equitable claims for
reimbursement of expenditure which has up to this date actually
taken place in connection with development operations directed
towards exploitation of our iron ore resources for export' and
particularly the words 'examine and consider' and 'equitable
claims' adequately safeguard the Commonwealth. We think a claim
for expenditure on plant or ships which could be utilized
elsewhere or for other purposes would not be equitable.

With respect to your second recommendation, we desire point out
that our letter to Consul-General [2] is in reply to lengthy and
most emphatic letters received from him in which under
instructions from his Government he protests specifically against
any disturbance to 'basic foundations on which a vast amount of
Japanese capital has been invested in Yampi Sound with definite
approval and generous support of Western Australian Government'.

We feel we cannot possibly ignore the precise nature of this
correspondence and write to Consul-Gencral as though merely
conveying information of Government's decision as your previous
telegram suggested. We gather from Thorby [3] that you think
desirable refer to claims being investigated by Commerce
Department. We think Government would necessarily be committed by
anything any named Department did and reference to any particular
Department would possibly be looked upon as having some concealed
significance.

We share with you some uneasiness regarding the effect on Japanese
Government of our action and we believe that reasonable method of
avoiding unpleasant reactions by them is to adopt fair attitude
regarding compensation. After all we have to avoid any suggestion
in minds of world generally that we are another Mexico.

In view of foregoing Cabinet has decided on broad grounds to
adhere to text of letter and statement cabled you yesterday. [4]

LYONS