The following suggestions are put forward as the basis of a policy
we might adopt to meet the new turn in the Japanese Reparations
problem arising from the change in the United States policy. [1]

2. Japan's post-war economic development may be divided into two
stages
Stage 1 .-the attainment of a self-supporting economy, i.e., a
situation in which Japan's exports are sufficient to pay for all
imports required to sustain a reasonable standard of living. This
standard has been defined by the Far Eastern Commission as
approximately equivalent to that which existed in the period 1930-
1934. Japan still has some distance to go before this objective is
reached-the most optimistic estimate of its attainment is 1952-
1953.

Stage 2.-development beyond the first stage, characterised, most
likely, by steadily rising standards of living. At this stage most
allied responsibilities would have terminated, except such overall
supervision as might be determined by the Peace Settlement.

3. We are directly concerned with Stage 1 because the Far Eastern
Commission has already determined what Japan's minimum living
standard might be and also because deficits in Japan's balance of
payments which arise from imports of food and raw materials
necessary to sustain even the lower standard which exists at
present, are being met by the United States. It is desirable that
the Japanese economy should reach the goal of Stage 1 as quickly
as possible. The reasons for this are sufficiently forceful and
well-known not to need further elaboration. This might be adopted
as a basic point in our policy, that is to say, we should state
quite clearly that we do not wish the attainment by Japan of a
self-supporting economy to be delayed, and we believe that no
avoidable obstacle should be placed in the way of such an
attainment. Hence reparations should only be taken from such
productive facilities as it is reasonable to assume are not
required to enable Japan to reach the state of self-support in the
shortest possible time.

4. Having stated this basic tenet of our policy, the next question
is its relation to the reparations problem as it now stands. The
United States representative on the Far Eastern Commission said,
in effect, that the removal of plant etc., estimated at present as
available for reparations would hinder the attainment of a self-
supporting economy and would, therefore, finally come out of the
pockets of the American taxpayer. This simply says in a round-
about way that, in the United States' view, Japan needs all her
existing manufacturing capacity to reach the goal of a self-
supporting economy in the shortest possible time.

5. No evidence is produced to support this view, except, some
general references to the Strike and Johnston Reports. [2] These
Reports, however, do not deal with the problem of Stage 1-they
simply state that Japan needs all, or nearly an, her existing
capacity in 'war-supporting' industries for her future peacetime
economic development, i.e. Stage 2. This is perfectly true but we
are not concerned with this problem. Our concern is with Stage 1
where our responsibilities lie, and there is nothing in either the
Strike or the Johnston Reports which says that all of this
capacity is needed for the attainment of a self-supporting economy
and so to relieve the American taxpayer of his present burden. The
estimates of both SCAP's economic section and the Japanese
Stabilisation Board (5 Year Plan) which are concerned with Stage
1, do not contemplate the use of all of Japan's existing
manufacturing capacity for this purpose. The target year of both
estimates is 1952 or 1953, and in many cases, particularly in iron
and steel, machine tools, and some of the chemical industries, a
good deal of existing capacity would still remain unused at the
time when, it is estimated, Japan would become self-supporting.

6. We might therefore point out to the United States that,
although we agree that conditions should be established which
would enable Japan to reach the stage of self-support as quickly
as possible, we do not agree that this eliminates the possibility
of reparations. On the contrary, the best evidence on the subject
indicates that there would be quite an appreciable surplus in some
industries after the self-supporting stage has been reached. This
surplus would provide a pool for reparations. It is possible that
the United States might concede this contention but point out that
the removal of plant and facilities for reparations would hamper
Japan's ultimate peacetime development. This we would not
question, but we would point out that this is exactly the
implication of a reparations policy, and it is the means by which
Japan makes some amends to the countries on whom she declared war.

Such a contention by the United States would simply amount to an
attempt to overthrow the principle of reparations altogether.

7. Once the ground is shifted to the basic question of the general
principle of reparations, we come up against some highly complex
political issues. In the early thinking on reparations there was a
feeling that by this means the relatively underdeveloped countries
of Asia could gain considerably in their own industrial
development by reparations from Japan. The experience since has
shown, however, that industrialisation is not just a matter of
shipping plant from one country to another. In the first place it
is wasteful to ship some sorts of plant, and the mere process of
dismantling and shipping either entails a greater cost than the
replacement value of the plant or reduces considerably the
usefulness of the plant or even both. Where plant is approaching
obsolescence considerations of cost are even more important. In
the second place, countries at the receiving end must have all the
auxiliary facilities to use the plant effectively. They must have
the trained labour force, the executives and the basic development
work such as transport, housing and many other factors which must
precede the higher stages of industrial development. There are not
many countries in Asia who are in a position to introduce new
types of highly complicated industrial plant. There have been
several reports of reparations plant which has already been
delivered from Japan rusting away on wharves and obviously not
likely to be properly used.

8. Realistically, therefore, the economic potential of Asia would
be much higher if much of the plant designated as reparations were
left in Japan where it could be properly used. However, so long as
the reparations question is important politically in Asian
countries, and it seems to be so with China (Nationalist) and the
Philippines, it would not be very wise for Australia to advocate
the abolition of reparations as an official policy. However, it is
suggested that after putting forward the arguments set out above
Australia might then declare that she is willing to forgo all but
a nominal part of her reparations claim. This would still maintain
our adherence to the principle of reparations but at the same time
perhaps induce other countries to take a more realistic view of
the problem.

9. To sum up, it is suggested that we should adopt the following
policy towards reparations from Japan:-

(a) Maintain the principle of reparations.

(b) Reparations should not unduly interfere with the attainment of
a self-supporting economy in Japan.

(c) Reparations should be taken from plant and facilities surplus
to those required by Japan to reach a self-supporting economy.

(d) Submit to the United States that they have produced no
adequate evidence to show that such a surplus does not exist.

(e) Suggest a re-examination of Japan's capacity to provide
reparations in the light of the above considerations. (SCAP might
be asked to submit an estimate of the requirements for a balanced
economy in Japan.)
(f) We should waive all but a nominal proportion of our claim for
reparations on Japan.