My telegram 15th January No.12, paragraph 2.

Trade with Japan.

Australian High Commissioner's Office in London have shown us
Commonwealth Government's three telegrams of 23rd January to the
Australian Mission Tokyo (repeated to Washington and London) Nos.

25, 26 and 27 [1] regarding measures contemplated by Australian
Government for reviving trade between Australia and Japan.

2. We are especially interested in Australian proposals since we
have ourselves been preparing at official level a scheme on
somewhat similar lines (which we expect will be submitted for
Ministerial approval shortly) for increasing and balancing trade
with Japan if possible on a sterling area rather than a United
Kingdom and Colonies basis.

3. Like you we contemplate an arrangement under which S.C.A.P.

would undertake to buy a certain range of commodities in return
for e.g. textiles, raw silk and other Japanese goods, the
commodities and quantities involved on each side would be
specified in the agreement on the basis of keeping the account
reasonably level. As we see it such an arrangement would have the
double advantage of ensuring that S.C.A.P. procured his raw
materials in the sterling area to the maximum degree possible and
of enabling us all to obtain useful supplies without incurring
dollar deficits.

4. We have been working on basis that-
(1) Most effective and useful type of arrangement would be one
which aims not at a balance on sectional basis between individual
parts of sterling area and Japan but at balance on a wider
sterling area basis which would provide greater elasticity,
(2) Trade agreement with S.C.A.P. should be implemented through
both private trade and Government channels,
(3) Trade agreement accordingly should not be brought into force
until the overall payments agreement which has so long been under
negotiation with the United States is concluded,
(4) Trade agreement should not come into force until S.C.A.P.

agrees to sell cotton textile on same basis as other commodities
covered by agreement.

5. Latest news from Washington indicates that negotiations for
payments agreement are now being transferred to Tokyo, agreement
on principle having been reached all that is required being
transformation of Interim Agreement into full scale agreement, and
notification of sterling area countries participating. Other
British Commonwealth representatives in Washington have been
informed by United Kingdom Ambassador. We hope accordingly to lay
our proposals for trade agreement before Ministers as a
preliminary to approaching other Commonwealth countries concerned
in the very near future.

6. As you see we are very much at one with you in thinking that
trade with Japan can and should be increased and have been working
though on a wider basis on same general principles as Commonwealth
Government. In the light of latest news about overall payments
agreement and of what is said above about lines on which we have
been thinking Australian Government may, however, wish before
Australian Mission in Tokyo broaches to S.C.A.P. subject of
bilateral trade agreement between S.C.A.P. and Australia based on
the Interim Payments Agreement to consider possibility of either-
(a) Delaying approach to S.C.A.P. by Australian Mission until
overall payments agreement is concluded and until further
consultation can take place between us, or
(b) (If this would help with your immediate raw silk-wool
difficulty) providing that any bilateral arrangement with S.C.A.P.

on lines proposed in telegram to Australian Mission Tokyo No.25
would be provisional only and subject to modification or
supersession in the event of a wider trade agreement of kind we
have been considering being successfully negotiated later.

7. We should be grateful for your very early comments.

8. We are repeating substance of this telegram to the United
Kingdom Liaison
Mission Tokyo for their information.