Copies to Mr J. A. Lyons, Prime Minister, and Director of Naval
Intelligence, Melbourne

Dispatch 84E BATAVIA, 17 June 1937
Received in Canberra 21 July 1937 [1]

SECRET

According to a 'Domei' telegram from Tokyo published here
yesterday, the Nanyo Kohatsu Kaisha (South Seas Development
Company) has decided to enter into trade relations with Portuguese
Timor, where it is intended to establish a combined Japanese-
Portuguese concern with a capital of five million yen.

2. While this announcement is consistent with recent turnouts of a
Japanese-Portuguese deal over economic interests in Timor, it
remains doubtful how far actual preparations have gone, and this
may to some extent be but another instance of a Japanese wish
fathering a thought.

3. Nevertheless, its possibility must be accepted. Despite the
assurances given me a year and a half ago by Dr Manso Preto Cruz,
then Governor of Portuguese Timor, I have, since my return from
leave last November, been uneasy as to Japanese developments in
that territory since Dr Cruz's departure, as I have reported in my
despatch No. 150 Confidential of December 8th, 1936 and subsequent
correspondence. Indeed, the present announcement seems but a step
from the deal recently reported by His Majesty's naval authorities
on the China Station (vide my despatch No. 79 Secret of June 1st
1937) [2]; the step is however an important one, as it would
involve a complete change of policy on the part of the Portuguese
Government from the attitude voiced by Dr Cruz. It seems that the
actual facts of the matter are likely, as I have already suggested
in my despatch of June 1st just quoted, to be ascertainable only
at Lisbon.

4. Whether the present announcement is entirely true or not, it is
clear that the Nanyo Kohatsu Kaisha is now attaching great
importance to establishing a base of operations in Portuguese
Timor, and is likely to make every effort to realise this aim. It
may therefore be worth emphasizing the significance of such a
development. If Japan puts into impecunious Portuguese Timor the
capital suggested, harbour, godown and other improvements are
likely to follow, and she might even, before long, obtain a
permanent hold on that colony analogous to the position she has
achieved at Davao, in Mindanao. The Nanyo Kohatsu Kaisha has
already indicated in New Guinea and elsewhere its readiness to
undertake agricultural, mineral and fishery enterprises even when
profits are problematical, and would be likely soon to gain a
dominating position in the colony. It must, too, be borne in mind
that Timor would make an admirable base for those Japanese fishery
activities which have so greatly increased in the last year or two
and have become so embarrassing to the Governments both of
Australia and of the Netherlands East Indies.

5. It seems possible that the significance of admitting Japanese
enterprise on a large scale has not been fully appreciated by the
Portuguese authorities concerned.

6. If the Portuguese Government with a knowledge of the facts, is
nevertheless favourable to Japanese economic activity in Timor,
some counterbalancing influence appears desirable. I would
therefore venture to suggest that the time has come to consider
taking such steps, which might perhaps be most suitably taken by
the Government of Australia, to whom the matter is of the most
immediate interest. Two alternative channels seem to present
themselves,-the Staughton concession and the Allied Mining
Corporation.

7. The position of the Allied Mining Corporation is still
enigmatical. As you are aware from previous correspondence I put
no great trust in Mr Wittouck [3] who directs this concern. His
object may be either
(1) a bona fide mining proposition, or
(2) flotation of a mining company to be unloaded on to credulous
shareholders, or
(3) disposal to the best purchaser of a going concern. Mr Wittouck
has certainly stated to His Majesty's naval authorities in Hong
Kong that he has no intention of any deal with Japanese; but, if
his mining or company-promoting venture is unpromising, it does
not seem very unlikely that he may dispose of his assets in the
best market, and the Nanyo Kohatsu Kaisha have already shown in
New Guinea that they are prepared to buy unpromising concessions
in order to extend their sphere of activities.

8. The Staughton concession seems to offer better possibilities to
the Australian Government, and may be controllable without undue
expenditure. As you are aware, the Portuguese Government has
recently given an assurance that this concession holds good, but
wishes it to be exploited, while alleged transferees such as the
Timor Oil Company have been refused recognition. The field seems
therefore open for the Australian Government to back exploitation
of the Staughton concession, and in view of the threatened
extension of Japanese influence I think it may be worth while to
take a leaf from the Japanese book and secure backing for and
control of the concession even if it is not financially a
promising proposition. If Mr Staughton [4] is not backed and loses
his concession, Mr Wittouck's group will be strengthened, and both
Australian and British interest will either be shut out or will
only attain a footing by making terms with the astute Mr Wittouck-
at his price.

9. There is no need for me to write at length in this despatch on
the details of Mr Staughton's concession, which have been
discussed in my despatch No. 41E of March 23rd 1937 [5] and
previous correspondence; these details are of course well known to
the Australian Government.

10. I am sending a copy of this despatch to the Department of
Overseas
Trade.

H. FITZMAURICE