No.518. [1] Situation today is that press, no doubt by Government
orders, continues attitude of restraint to the United States-Japan
conversations though the more extreme papers are beginning to talk
again of the necessity for putting a time limit to the
conversations and there is a general emphasis on the impossibility
of Japan giving way on matters which affect its vital interests in
East Asia.

I have referred in my telegram No.518 to reports of large scale
naval and military movements. I understand that detailed reports
are always sent to Singapore who repeat them to D.N.I. [2]
Melbourne.

My appreciation of the situation is:

(1) The Government realize that, as the effect of freezing,
Japan's capacity to attack is beginning to decline.

(2) The Government was genuinely desirous of avoiding a conflict
with the United States and consequently will go some considerable
way to secure an agreement with the United States. The principal
difficulty will be that the Japanese Government must save their
face with regard to their position in China but there should be
wide grounds of bargaining as to the details of the eventual
evacuation.

(3) In default of an agreement the Government will attempt to
secure their sources of supply and end the China incident by
force. Consequently they are proceeding with preparations for some
move probably in the south cast against the Burma Road, Thailand
or the Netherlands East Indies and will undertake one or the other
if the conversations break down. If Tatsuta Maru sails as at
present arranged for Los Angeles and Balboa on 2nd December it
suggests that they are prepared to wait at least until the
commencement of the New Year.

[4] An extremist element in the Army, who no doubt are influenced
by the Germans, believe that now is Japan's last chance to seize
whatever she requires and will endeavour to prevent agreement with
America and may do so by precipitating some action in South East
Asia which the Government as in the past will be unwilling to
repudiate.

(5) Possibly the first result of the breakdown of the
conversations with America would be the resignation or
reorganisation of the Cabinet. Any such move would certainly be a
dangerous sign.

OFFICER