LEVEL OF ECONOMIC LIFE IN JAPAN

Other Commonwealth Governments will have noticed the trend of
thought in the United States (exemplified by the Strike and
Johnston reports [1]) towards:-

(A) Building up of Japanese Economy to a level considerably higher
than that contemplated in draft policy on level of Economic life
in Japan (FEC-242/32) now under consideration in the Far Eastern
Commission and
(B) Reduction of reparations removals to a minimum. As you are
aware FEC242/32 derives from United States' own proposals made in
FEC 218 and levels advocated in it correspond generally with those
accepted here earlier as sufficient (subject to certain
reservations) to give Japan a viable self-supporting economy by
1950 consistent with security and reasonable reparations.

2. It is however clear from Dening's conversations in Washington
(an account of which was recently transmitted to other
Commonwealth Governments through United Kingdom High
Commissioners) that proposals by United States Government for a
tightening of the burden of occupation and for a restoration of
Japanese economy generally, are to be expected shortly. It seems
desirable therefore to consider what steps could usefully be taken
to convince the United States that more moderate proposals than
those foreshadowed in the Strike and Johnston reports would
achieve the ends they desire.

3. In comparing Strike and Johnston proposals with those worked
out by United Kingdom in 1946 and those in FEC-242/32 it is
evident that assumption in these reports of a later target date
modifies premises on which previous estimates were based. For
example at the later date population of Japan, which is increasing
at rate of one million a year, will require greater volume of
trade to support it. Again levels of food and clothing formulated
in 1946 in expectation of early peace conference at which Long-
term Policy would be thrashed out were minimum ones which could
justifiably be applied for first two or three post war years but
whose application over longer term would be more difficult to
justify. If therefore, later target date is accepted as reasonable
postulate, some upward modification of levels may be justified.

4. It now seems probable that a Peace Conference in Japan will be
deferred and it is reasonable to consider situation which will
consequently arise. In this new situation we suggest that re-
examination can usefully be directed to question whether levels of
industry embodied in FEC-242/32 need upward revision if objective
of Japanese viability is to be attained by 1953 date taken in
(Strike and Johnston reports) or 1952 (the Japanese Economic
Stabilisation Board's five year recovery plan).

5. Report of Committee of Experts which was endorsed by Canberra
Conference said 'within the limits imposed by security needs it is
in the long-term interests of the Allied Powers that the Japanese
Economy should stand on its own feet. For whatever the level of
industrial activity is ultimately to be, the sooner a self
sustaining basis is reached the cheaper will be the Allied
victory. Security especially in the next year or two does not
require the Japanese Economy to be left at a level where minimum
needs of the Japanese people can only be satisfied by the
continued pumping in of Allied resources.

6. Question of means by which Japanese economy could become viable
by 1953, involves many complicated estimates and assumptions and
while detailed examination of technical issues is proceeding we
cannot pretend to have a complete answer. Certain broad
conclusions however, seem to stand out. These raise the most
important questions of general policy on which we should be
grateful for very early indication of the views of other
Commonwealth Governments. These conclusions are
1 . Attainment of viability by Japan depends on earning capacity
of three classes of industry viz:-

(A) Textiles
(B) Iron and steel
(C) Merchant shipping and ship building
2. Even if textile industry were expanded to maximum which appears
physically possible in the time it is exceedingly doubtful in view
of (a) difficulties in obtaining sufficiently large quantities of
raw cotton and of installing vastly greater number of spindles
required and (b) possibility that market openings may also
restrict output where viability could still be achieved unless
steel and shipping are expanded above levels contemplated in FEC-
242/32.

3. This expansion of Steel and Shipping would conflict with our
security requirements as hitherto defined. Johnston Report does
not contemplate any restriction on size and speed of ships to be
built in Japan but it does not seem that any relaxation of
restrictions United Kingdom have hitherto advocated would be
necessary to achieve Japanese viability.

7. Question therefore arises whether it would nevertheless be
advisable to support levels of industry which appear necessary to
secure viability. It must be recognised that the assumptions
underlying any forecast are subject to wide margins of error. For
the present the Japanese plan which postulates much lower levels
of industry than those contemplated in Strike and Johnston reports
seems to us the most realistic available forecast of Japan's
potentialities. This plan however depends on introduction of
unspecified amount of foreign capital and makes no allowance for
the service of new or old foreign capital invested in Japan or for
the recovery of occupation costs.

8. It must be expected that United States would be most reluctant
to adopt any course which they felt did not assure Japanese
viability within a short term of years land] consequent reduction
of cost of Japan to American taxpayer. Since they consider United
States to be the best guarantor of safety in the Pacific security
arguments adduced by other powers are unlikely to deter them from
this objective. If these expectations as to probable attitude of
United States were realised choice for other countries concerned
might lie between
(i) insisting on security requirements with risk that United
States would act in disregard of opposition and encourage building
up of Japanese industry to very high and dangerous levels and
(ii) seeking to persuade the United States that viability could be
achieved by adoption of very much lower levels than those
suggested in 'Strike' and 'Johnston' reports thus minimising
danger to security.

9. We are continuing our examination of technical aspects of
problem. Meanwhile, however, we feel it to be unlikely that
conclusions in para. 8. above will require modification and our
object in addressing you at this stage is to ascertain your views
both on these and as to the broad question of policy stated in
para. 8. We are at present inclined to think that the balance of
advantage lies in adopting the second of the two courses indicated
i.e. in seeking to persuade the United States to adopt the minimum
levels necessary to achieve viability but we shall be grateful for
your observations.

10. Whatever course is pursued in respect of issues set out in
this telegram we are very anxious that (in accordance with
indication of our views which Dening has already given in
Washington) maximum possible use should be made of existing
international machinery and in particular that nothing should be
done to prejudice right of FEC powers to participate in formation
of policy.

11. Similar communication is being made to other Commonwealth
Governments concerned.