TOKYO, 21 November 1949

MEMORANDUM OF UNDERSTANDING BETWEEN STERLING AR-EA PARTICIPANTS ON
THE TRADE ARRANGEMENT WITH S.C.A.P.

During the negotiations for the first Trade Arrangement with
Occupied Japan a Memorandum of Understanding by die Sterling Area
representatives on particular aspects of the Trade Arrangement was
drawn up in Tokyo. [1] The changed circumstances in which the
second Arrangement was recently negotiated have made this document
out of date, and the participating governments have therefore
agreed to adopt this revised Memorandum which will serve as a
guide to their representatives in Tokyo and to the Sterling Trade
Area Co-ordinator.

General
2. Since SCAP has accepted the important principle that, in order
to finance his growing sterling trade without dollars, he must be
prepared to hold (non-convertible) working capital of at least 10
million sterling, the Sterling Area Participants were able to
disregard in the calculation of their purchasing power for 1949-50
the imbalance of payments of approximately this amount in favour
of Japan at 30th June 1949.

Nevertheless, to avoid a further imbalance, which is vital, SCAP's
new purchases for sterling must at least attain his own minimum
estimate of 55 million; and the Participants should endeavour to
plan their new purchases, within the allocations shown in the
Trade Plan, by such means as will enable them to take corrective
action in the event that purchases by SCAP fall short of 55
million. If and when it becomes clear that SCAP will spend more
than 55 million, agreed additions to Participants' purchasing
power may be possible.

SCAP's Purchases
3. The change in the dollar/sterling rate came when the detailed
estimates for SCAP's purchases were nearing agreement. Although,
therefore, SCAP was unable to make an analysis by commodities of
this figure of 55 million on account of the time needed for the
adjustment of the sterling prices of his imports, this total
figure is still largely supported by the results of previous
discussions on his purchasing programme; and it is agreed that the
Sterling Area representatives should set out to induce SCAP as
soon as possible to draw up, in collaboration with them, a more
detailed plan showing the value of individual commodities which it
is estimated will be bought from the
Sterling Area during 1949-50.

4. It is further agreed that since the Sterling Area's ability to
buy essential goods from Japan is at present limited only by the
scale of Japan's purchases, continuous pressure willl be
necessary, and should be brought to bear, on the appropriate
officials of SCAP and of the Japanese Government, to ensure that
no import is made from a non-sterling country which could be made
from the Sterling Area.

Sterling Area Purchases
5. Participants recognize that, since the figures in Tab. Ai show
the present limits of the new purchases to be made between 1st
July 1949 and 30th June 1950, the issue of new licences in
accordance with their various import procedures, must have regard
to the extent to which their new purchases are already provided
for by licences already issued. It is also recognized that
contracts placed, but not completed, before 30th June 1949, were
taken into account in the calculation of the total Participants'
purchasing power for the present year and that the value of such
contracts need not be deducted from the figures for new purchases
shown in the Trade Plan.

6. The Participants will make available to the Co-ordinator, as
soon as the effects of the change in the sterling exchange rate
allow, an analysis by commodities of their estimated new purchases
for the year. They will also furnish all possible information
regarding the issue of licences and the placing of contracts.

While it is agreed that the phasing of imports throughout the year
is not a system which can be applied by every Participant,
Participants recognize the need to continue to restrict Sterling
Area purchases from Japan during the next month or two in order to
ensure that at 31st December 1949 no question shall arise of a
demand for conversion by SCAP of any sterling balance.

Special Position of South Africa
7. South Africa has made it clear, and the other Participants
recognize, that she is unable to guarantee, owing to the absence
of detailed import control, that she will limit her purchases of
Japanese goods to the figures in the Trade Plan. Nevertheless,
South Africa is unlikely, owing to her difficult general exchange
position and her relatively small need for Japanese goods,
materially to exceed these estimates.

Control and Development of Trade
8. Should any Participant have reason to believe that its sales to
Japan are likely to differ to any important extent from those
which will have formed the basis of the detailed sales side of the
Trade Plan, the Co-ordinator and other Participants will be
informed; the Co-ordinator will in any event report any signs of a
threatened imbalance of trade and the reasons for it; and the
participating governments Will consult as and when necessary to
counteract such a threat. If, on the other hand, it appears that
additional purchasing power is likely to be available to the
Participants, it will be allocated between them by agreement.

The Sterling Area Working Party
9. The Participants recognize that the Sterling Area Working Party
in Tokyo, with the notable inclusion of the Sterling Area Trade
Co-ordinator, has performed a most useful function in bringing to
their notice the general trends of trade and in dealing with day-
to-day problems. They consider that with the experience of the
past year to work from and with the improved system of accounts
and records now in operation in General Headquarters, SCAP, the
value of the Working Party will be increased; and they expect that
the Working Party will be able to keep Japan's sterling trade
under constant review and to draw the attention of the
participating governments to any matters which appear to them to
require intergovernmental consultation and action.