Your telegrams 226 and 227 [1]-Trade with Japan.

1. Conclusion of Interim Sterling Payments Agreement will provide
banking machinery for settlement of private trading transactions
between Japan and those parts of the Sterling Area which are
parties to the Agreement but it appears to us that, unless the
Interim Agreement is followed up by positive steps to promote a
reasonable exchange of goods, little actual trade is likely to
result.

2. We understand that, because of S.C.A.P's insistence on the
inclusion of a convertibility clause in the Interim Agreement you
still consider it necessary to treat Japan as a 'hard' currency
country for import licensing purposes.

3. If this is to be interpreted as meaning that Japan is to be
treated as a 'dollar' country, the possibilities of trade will be
severely limited. Because of the growing gravity of the dollar
crisis, restrictions on dollar imports have recently been greatly
intensified and, on present standards of screening, few, if any,
licences would be granted to Australian importers to purchase
goods from Japan. We presume the position would be similar in
other sterling countries party to the Interim Agreement (with the
exception of South Africa).

4. However, unless Japan is permitted to develop a reasonable
level of exports to the sterling area, the Japanese will be unable
to finance purchases of the raw materials they need from sterling
sources of supply and no revival of trade will be possible.

5. Restoration of trade between the sterling area and Japan
appears to us to be indispensable to the economic rehabilitation
of Japan. Further delays in reviving trade must inevitably add to
the burden on the Allied powers. On the other hand, as Japan is
clearly in need of substantial imports of raw materials from the
sterling area we feel that it should be possible to develop the
exchange of goods with Japan on a basis which would leave no
margin of sterling balances for conversion into dollars and would
enable Japan to be developed as a source of supply of items which
might otherwise be available only from hard currency sources.

6. S.C.A.P. Officials have recently informed our representatives
in Tokyo that they cannot visualise that S.C.A.P.'s interim
sterling account will at any time have a surplus for conversion
into dollars. The S.C.A.P. view is that during the term of the
interim agreement the raw materials required and obtainable only
from the sterling area will exceed considerably the sale of
manufactured goods to that area.

7. This view does not seem to us to be unreasonable and position
would be safeguarded to some extent by Gentleman's agreement about
conversion referred to in your 246 on which you apparently feel
you can place some reliance. [2]

8. For the foregoing reasons we feel that the interim sterling
payments arrangement should look forward to some loosening of
import restrictions against Japanese goods throughout the sterling
area generally with the object of promoting a greater volume of
two-way trade.

9. If Japan is not to be permitted to earn sterling by exporting
to the sterling area the only alternative method by which her
essential imports of sterling raw materials could be financed
would be by obtaining sterling credits. Extension of credits to
Japan would be objectionable and in any event it would be
paradoxical to extend credits to a country and at the same time to
refuse to take payment in the form of exports of useful goods.

10. We should be grateful if you would let us have an early
expression of your views on this whole question which we feel to
be of considerable importance.

11. Please see also our separate telegrams of today's date on the
mechanics of the Interim Agreement and on the contract between
Scott and English and the Japanese Board of Trade.