1. Two developments have occurred which I think are significant in
the light of my conversation with MacArthur on February 7th when I
said I felt the important thing was not so much a change of
government but an immediate change of policy which would bring
about a tightening of economic controls (see my 2 for the Minister
February 8th [1]).

2. I have learnt that on March 24th MacArthur sent a letter to
Yoshida written in the firmest language MacArthur has yet used to
him and pointing out to him that the Allied Powers are not obliged
to maintain any particular standard of living in Japan or to
import foodstuffs to meet deficits arising from the failure of
Japan to assure the just and impartial distribution of its own
food supplies. The letter says there is every indication that at
present time Japanese Government is failing to achieve
satisfactory distribution of indigenous food. As a consequence
special staple food rations cannot be maintained throughout the
year'. It draws Yoshida's attention to the Directive 3 of
September 22nd 1945 which made it the responsibility of the
Japanese Government 'to maintain a firm control over wages and
prices and to initiate and maintain a strict rationing programme
for essential commodities in short supply to ensure that such
commodities are equitably distributed'. It says that what is
required is an integrated approach across the entire economic
front and that 'unless determined measures are undertaken at once
by the Japanese Government the inflationary condition of the
economy together with its attendant mal-distribution of food and
other necessities will become increasingly serious, industrial
recovery will be further retarded and the achievement of the
social and political objectives towards which the Japanese people
have made such an encouraging start will be endangered'. The
letter concludes 'I wish to state in the strongest terms that
outside assistance is contingent upon full and optimum utilisation
of indigenous resources for which I hold the Japanese Government
completely responsible'.

3. It is interesting that the language in the letter is in some
passages identical with that employed in the draft policy of the
Far Eastern Commission on the supply of food for civilian relief
in Japan (F.E.C. paper 026/10) but no reference was made in the
letter to the Far Eastern Commission.

4. The second development is a proposal which is being considered
to ask the advice of the Allied Council at the next meeting on
'measures to effect a proper and stabilised price-wage
relationship'. I gather that there is a strong difference of
opinion between the diplomatic section of S.C.A.P. and the
economic and scientific section on the expediency of bringing the
matter into the open by referring it to the Council and I have
been shown several alternative drafts of staff study which has
been prepared for the Council's information. The first of these
was an extremely frank outline of various ways in which the
Government has failed to arrest the economic decline, the chief of
which is the ineffectiveness of machinery for enforcing control of
raw material. This draft says that the Japanese economy has
reached a dangerous position. There is still some doubt whether
wages and prices will be put on the Council agenda at all.

5. You will recall that in my monthly report for January I
expressed the view that S.C.A.P. should take immediate steps to
ensure that economic controls be immediately enforced and that in
my February report I said I thought that unless S.C.A.P. announced
before the elections basic economic controls which it would insist
that the new Government should carry out it would be difficult
after the elections to compel a new Government to follow an
economic policy which would threaten the interests of the groups
which had returned it to power.

6. I think this indication of acknowledgement by S.C.A.P. that the
Japanese Government has failed to carry out his directive is more
important since as late as his visit to the United States in
February Atcheson was still making public expressions of his
confidence in the Government's co-operativeness.

7. Since the information on which the telegram is based has been
obtained from a highly secret source it is important that no
reference should be made to it in communications to other posts,
otherwise this source will almost certainly dry up.