Your H.226. [1] Japanese reparations and levels of industry.

Recent United States' proposals cannot be fully examined and
discussed until United States Government submits to F.E.C.

detailed plans for revision or amendment of existing policies. It
will then be possible for Governments represented on F.E.C. to
consider how far United States position can be met. In the
meantime we think opportunity should be taken to discuss these
matters fully with the State Department and try to obtain
clarification on points where the United States reasoning seems
illogical and obscure. It may be possible in this way to prevent
the United States attitude from hardening into proposals which it
may later become difficult to modify.

We are not prepared at this stage to let the principle of Japanese
reparations go by default. To do so would be to abandon completely
what has been a cardinal point of allied policy, namely that the
Japanese should make just amends for the devastation they caused
in allied countries during the war. In our view the United States
authorities have produced no sound and compelling reasons why we
should absolve the Japanese from payment of any more reparations.

The United States contention is that the Japanese need everything
they now possess if they are to become self-supporting in the
shortest possible time, and that removal of any Japanese plant and
equipment would hinder the attainment of self-sufficiency and
would therefore represent in the last analysis a contribution by
the American taxpayer. The validity of this contention depends
upon (a) what economic level the Japanese must reach to become
self-supporting, and (b) how much of their existing facilities the
Japanese can use in reaching that level.

The Far Eastern Commission has defined the peaceful needs of the
Japanese people, during the period of the occupation, as roughly
equivalent in the standard of living attained during the period
1930-34. We agree fully that Japanese should not be prevented from
attaining a self-supporting economy at this standard of living.

But we are not concerned with raising Japan's economic level
beyond that point.

It should be noted that, according to S.C.A.P.'s own figures,
Japan's economic level is still only 70% of that of 1930-34. The
advice we have had up to the present is that Japan can attain a
self-supporting economy at the 1930-34 level without using au
existing plant and equipment. Estimates prepared by S.C.A.P.'s
Economic Section and by the Japanese Stabilisation Board of the
levels of foreign trade and of production in major industries
necessary to realise this objective in 1952-53 bears out this
conclusion. We do not indeed see how the Japanese could possibly
need all their productive capacity in, for example, shipbuilding
and steel in reaching the minimum self-supporting level.

The Strike and Johnston reports, in recommending that the Japanese
will need nearly all their existing facilities for their future
peaceful economic development, are apparently thinking in terms of
a stage of development above the 1930-34 level. This is not our
concern, nor should it we think be the concern of the United
States Government. The resources which are surplus to Japan's
needs for the attainment of a self-supporting economy at a minimum
level are therefore ostensibly available for distribution as
reparations without any hindrance to the realisation of that
objective.

If Japan is to become self-supporting in the shortest possible
time, she must continue to receive allied assistance, and the
speed of recovery will inevitably depend largely on the extent of
United States aid. If the United States should decide to reduce or
cut off aid, recovery would be hindered, whether or not the
Japanese were left in possession of all their present productive
capacity.

To leave surplus facilities in Japanese hands would rule out the
possibility of reparations, on which it is clear the countries
which suffered most severely at Japanese hands feel strongly, and
would aid the Japanese in rebuilding their economy beyond the
self-supporting stage. This latter is no necessary part of our
policy.

We are asking our representative in Washington to discuss the
matter informally with the State Department on the foregoing
lines, making it clear that we are aware of their difficulties and
prepared to consider realistic proposals, but that they cannot
expect us to accept their present line of reasoning unsupported by
convincing facts. We would reiterate our desire to see Japan
become more self-supporting as soon as possible, and re-affirm
that we are prepared to do all we can to this end, particularly in
stimulating Japanese trade. We would also remind them that we are
not ourselves primarily interested in receiving reparations, but
that we are interested in seeing justice done to other claimants.