Your telegram 26th July. [1]

1. We did not reply to the request in telegram 254 of 17th July
paragraph 6 [2] because we thought that request was superseded by
amended proposals in Dominions Office telegram No. 269 [3] for a
payments agreement the basis of which we agreed to.

2. We are anxious to meet request of the United Kingdom Government
to delete the option of payment in yen pending conclusion of
payments agreement but this requires further consideration because
of the following difficulties:-

(a) Japan will not accept payment in sterling. We do not know
whether she would accept payment in Australian currency which had
to be converted into sterling on maturity of the drafts but this
is unlikely;

(b) The Yokohama Specie Bank particularly and the Australian Banks
to a less extent have developed a direct exchange business in yen
between Australia and Japan. This would have to be discontinued if
we insisted on sterling.

3. These difficulties need further consideration before we can
agree to insist on payment in sterling particularly because trade
between Australia and Japan may be seriously obstructed if we do
insist. Japan may be willing to accept payment in Australian
currency (blocked except with our approval) if this need not be
converted into sterling on the maturity of the drafts. What would
be the attitude of the United Kingdom authorities to this
proposal?
4. Meanwhile we cannot see in what way shipment of wool to Japan
is connected with our exchange arrangements. We consider that
these two matters should be kept separate particularly as we have
agreed to the basis of the proposed agreement between the Bank of
England and the Bank of Japan.

5. We desire you to inform the United Kingdom authorities of the
foregoing and urge in the strongest possible terms the release of
wool immediately leaving outstanding exchange difficulties which
are receiving immediate consideration to be negotiated separately.

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