CANBERRA

Trading Arrangements with Japan

There were two major reasons for Australia's early action in
engaging in trade with Japan after the war. First there was the
moral obligation to assist SCAP in the rehabilitation of the
Japanese economy in order to relieve the burden of financial
assistance from the United States, and secondly the desirability
of reviving Australia's market, especially for wool, in Japan.

Japan, like Great Britain, depends largely on overseas trade for
her livelihood, importing raw materials and foodstuffs and
exporting manufactured goods. At the very inception of the
Occupation, SCAP took steps to revive this vital commerce. Sales
were conducted on a Government-to-Government basis through the
Japanese Board of Trade (Boeki-Cho), an official body appointed by
SCAP, and through official trade representatives in Tokyo of
Allied and neutral Governments. From September, 1945, to August,
1947, Japanese exports under this system of government trading,
amounted to 70 millions, and imports to 170 millions, the latter
being mainly United States purchases made under the special
appropriations available to SCAP for supplies to prevent disease
and unrest in Japan.

On August 15, 1947, Japan was formally opened to private trade.

The resumption of private trade immediately brought a number of
pressing financial problems to the forefront, affecting both SCAP
and the sterling area. One of SCAP's main problems was the initial
financing of the raw materials required from abroad to produce
manufactured goods for subsequent export, for Japan in her
bankrupt condition had no reserves of foreign exchange which SCAP
could use for this purpose. The great problem for the sterling
area was the conservation of dollars, because trade with Japan was
then on a dollar basis.

A partial solution to SCAP's problem of securing raw materials was
provided by the release on loan of over a million bales of cotton
from the accumulated stocks of the U.S. Commodity Credit
Corporation. A second scheme to facilitate imports was the
formation of the Occupied Japan Import-Export Revolving Fund,
backed by a fund of $137 millions of gold and silver of Japanese
ownership seized by the Allies. A further United States Government
revolving fund financed shipments of cotton, wool, and other
fibres of American origin for processing in Japan.

So far as the sterling area is concerned, a trade conducted on a
Government-to-Government level, i.e. up to August, 1947, had been
financed in dollars. Goods such as raw silk and textiles supplied
to sterling countries were paid for with dollars, while SCAP paid
dollars for Australian wool, Malayan rubber, and other commodities
purchased in the sterling area. The resumption of private trade on
August 15, 1947, emphasised the necessity for a financial
agreement to enable trade with Japan to be conducted in sterling.

After a lengthy process of negotiation, an Interim Agreement for
the financing of private trade in sterling was signed on November
14, 1947. This interim agreement provided that importers in the
sterling area could pay for Japanese goods in sterling and SCAP
would use the sterling for purchases of raw materials in the
sterling area. It was expressly added, however, that if SCAP
accumulated a surplus of sterling i.e. if sales exceeded purchases
in the sterling area, SCAP should have the right to convert such
surplus sterling into dollars at stated intervals. This
convertibility clause introduced an element of uncertainty over
the conservation of dollars, hence the sterling countries
continued to keep Japan in the 'hard currency' category for
purposes of import licensing. In the case of Australia this
involved severe restrictions on Japanese goods.

The Interim Sterling Payments Agreement was intended to cover a
period not to exceed six months from the date of signing, i.e.,
November 14, 1947, unless the terms of a final agreement should
serve to supersede or nullify the provisions of the interim
agreement. A final payments arrangement was subsequently agreed
upon and became effective as from May 31, 1948.

Whereas the interim agreement covered private trading transactions
only, the new overall agreement covered both government and
private trade payments, including all Australian payments. The
contingent liability of the sterling area to convert to dollars
any favourable net balances owing to SCAP remained in the new
agreement. The payments agreement was essentially a machinery
provision for the financing of trade between the participating
sterling area countries and Japan, not a trade agreement providing
for the physical movement of goods. It provided for the use of
sterling in current transactions, but in view of the
convertibility clause still obliged the sterling area to settle
any deficit trade balances in dollars.

The dollar crisis in 1947/48 greatly complicated the situation.

Australia and other sterling countries were unable to buy Japanese
goods, and SCAP was unable to buy sterling area goods because
adequate credits could not be obtained by exporting to sterling
countries. This position was serious for both parties, for Japan
normally conducts a major portion of her trade with the sterling
area, and seeks raw materials from those countries as well as an
outlet there for her textiles and other manufactures, while the
sterling area requires Japanese goods and the Japanese market.

Australia took the initiative in attempting to break through this
financial problem which was preventing any resumption of trade
with Japan. The importance of stimulating trade to assist SCAP to
achieve the purposes of the Occupation was realised. Also, as
there was no danger of any loss of dollars by virtue of the
operation of the convertibility clause in the Payments Agreement
if trade were properly balanced, Australia proposed to SCAP that
she would grant licences for the purchase of 2,000,000 million
worth of Japanese goods provided SCAP undertook to use the whole
of the proceeds of sales to Australia to buy Australian wool and
other products. Australia offered further to increase her
purchases if cotton textiles were made available for sterling.

SCAP accepted the A2m. proposition on February 17, 1948, and the
Australian Government announced its willingness to issue import
licences up to that amount for the Japanese goods specified. To
enable a start to be made on wool purchases, SCAP agreed that an
amount already owing (in dollars) for raw silk purchased earlier
by the Commonwealth Government should be paid into SCAP sterling
accounts with the Hong Kong and Chartered Banks in London.

FIRST SERIES OF STERLING AREA NEGOTIATIONS

The Australian bilateral agreement stimulated the completion of a
much wider trade arrangement between SCAP and the sterling area
countries. This new arrangement was concluded on the 31st November
1948 and provided for an exchange of goods on a balances basis
without any limitation on the actual level of trade.

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The value of Australian trade with Japan has increased
considerably during the life of the two Sterling Area trade
arrangements, and the Australian bilateral arrangement which
preceded them. In general, these arrangements have undoubtedly
opened the way for the resumption and development of Sterling Area
trade with Japan. They have served the purpose of giving SCAP a
reasonable assurance that Japan could earn the sterling necessary
to pay for its imports from the Sterling Area. Moreover, from the
point of view of the Sterling Area countries, the arrangements
have prevented Sterling Area trade with Japan from getting too far
out of balance and SCAP has not had occasion to exercise his right
under the Overall Payments Agreement to convert surplus sterling
into dollars.