Negotiations 2.

So far we have been able to keep SCAP on the defensive and
question of sterling purchases has not yet come up for discussion.

At the first meeting the matter of Japanese observers was raised
and we replied that we would offer no objection to their presence
provided the safeguards previously agreed between ourselves were
implemented. [1] SCAP undertook to do this but pending the formal
exchange of letters Japanese have not yet been present at
negotiations. We still await formal request.

SCAP has indicated that they have several suggestions for
increasing purchases from the Sterling Area particularly if we can
see our way clear later to increase purchases of goods (other than
cotton textiles) which to date have not been freely permitted into
Sterling Area. This applies particularly to ceramics, rubber goods
and similar consumer items but not necessarily bazaar goods.

We have gone carefully through list of import requirements
published by SCAP and U.K. delegates particularly proposed to
mention a number of items; which previously had been supplies from
the U.S. The only additional item we suggested win be rabbit skins
and fur which presumably would be freely available. Please
confirm. Is there any likelihood of nails being available?
SCAP has received advice that has led him to believe that
arrangements for utilisation of GARIOA and EROA funds [2] for
sterling purchasing may be approved and they estimate that an
additional $50 million for purchasing foodstuffs may be possible.

The question is now whether we can supply the items they require
but at first glance we do not appear to have anything like this to
offer.