My telegram No. 771. [1]

While I fully appreciate grave reasons which have impelled the
Commonwealth Government take this step there can be no doubt but
that, coming particularly at the present juncture, it has had an
unfortunate effect on Japanese official opinion. There is at the
best of times a tendency amongst some sections of Japanese public
opinion to align themselves with those in Germany and Italy who
consider that the only means by which the 'have-not' States can
ensure themselves adequate supplies of raw materials is so to
strengthen their armaments that they can eventually 'take' what
they require; this tendency is likely to be increased by what has
occurred and the faith of those who have placed reliance in public
declarations relating to freedom of access to raw materials may
well be shaken.

Furthermore, at a moment when we are making such efforts to secure
adequate protection for all British interests in China and when
the outlook in this respect shows slight signs of improvement, our
difficulties must necessarily be increased by this new, though
inevitable, cause of disagreement.

I mention the above considerations merely in the hope that the
Japanese may be let down as lightly as possible in this matter. I
do not recommend any hint of compromise at present juncture but if
at a later stage Japanese Government shows signs of adopting a
more reasonable attitude perhaps export to Japan of relatively
small supplies of iron ore from South Australia over a limited
period might be considered as an act of grace? I must [group
undecipherable] is doubtful if this would be practicable or even
desirable. But I am confident that if shortage is not too acute
such a solution, combined with adequate compensation, would
facilitate an amicable settlement of this dispute.

Not repeated. [2]