CANBERRA

Japanese Woollen Industry
According to statistics up to the 31st March, 1953, Japan is the
second best customer for Australian goods as a whole during the
current trading year. This, of course, is largely due to her
extensive purchases of wool, in which item she is also our second
largest buyer.

It will be remembered that at the commencement of the present
season Japanese mills were exceedingly short of stock and
commenced to buy as soon as the sales opened. This undoubtedly had
a firming effect on the market at that time. They then withdrew
temporarily until November in the expectation that prices would
recede and that they would be able to buy the bulk of their
requirements in their own time and at more advantageous prices.

This, of course, did not happen but the main point was that in the
early part of the season a satisfactory price level was
established because of active competition, even though several of
the more prominent buying countries were missing from the market.

Japan's purchases to date apparently aggregate about 430,000 bales
and the expectations are that a further 170,000 bales will be
purchased, making a total for the season of 600,000 bales, This, I
think, is the second highest figure ever reached by Japanese
purchases and is second only to the 800,000 bales bought for pre-
war stockpiling.

Information received from the Commercial Counsellor, Tokyo,
indicates that estimated stocks of wool which will be held by
Japan as at 30th June, 1953, will be of the order of 240,000
bales, which is approximately six months stock on a one shift
basis, thus putting them in a much stronger position than last
year.

The Japanese active participation in the Australian market imparts
two features to the price level. Firstly, by reason of their
quantity and secondly, by the fact that as they operate on a
relatively limited section of the clip and compete actively among
themselves, the tendency is for the gap between the top grades and
the medium grades (centring around types 77B and 78B) to be
narrowed by the raising of the latter group.

There are four main features of the Japanese woollen industry
which are inclined to distinguish it from similar industries in
the other main purchasing countries, viz.:

(1) The industry is equipped largely with French combs, which
means that they have specialised on short staple wool, thus
leading to the limitation of types of purchases referred to above.

(The historical reason, I believe, for this concentration was that
the woollen industry was originally established by firms engaged
in the cotton industry who were used to the relatively short
fibres for cotton and they adapted their techniques to wool).

(2) Nearly all the wool purchased by and processed in Japan is
used domestically, except for export to Asiatic and dollar
countries, USA and UN military or semi-military purchases, both of
which are comparatively small. The industry, therefore, whilst
being a considerable drain on Japan's foreign exchange resources,
contributes little to the accumulation of those funds.

(3) The Japanese woollen industry since the war has purchased the
greater part of her wool requirements from Australia (one writer
puts it as high as 82% and even he, I think, is conservative). My
opinion is that the industry would be quite happy and, in fact,
anxious to continue this arrangement as long as they have no
substantial reason to change or unless they are forced into it by
pressure of circumstances or from other sources-for political or
financial reasons.

(4) The Japanese woollen industry is still relatively in poor
financial straits and makes extensive use of credit in their
purchases. This is aggravated by the very high rate of interest
charged by Japanese banks which is somewhere between 9 and 10%,
whereas they can get financial accommodation in Australia at
roughly half that figure.

It will be noted that in these four points there are elements of
danger for our wool trade, based purely on internal factors in the
woollen industry of Japan itself. In addition there are four
factors which may condition future developments. These are:

Firstly, the state of balance of trade between Australia and
Japan. According to Commonwealth Statistician's figures for the
nine months ended 31 March, Australian imports from Japan
aggregated in value 4,289,040 and exports 59,109,000. This
compares with figures of 36,816,000 and 37,935,000 for the
corresponding period of 1951/52.

The Japanese Government have already on several occasions
indicated their uneasiness about this position.

Secondly, as all trade between Australia and Japan is conducted
within the terms of the sterling area payments arrangement signed
in November 1951, Australian sales could be vitally affected by
the level of Japanese holdings of sterling.

These holdings reached the peak figure of 127million pounds
sterling towards the end of last year and have now dropped to
approximately 30 million, this level being too low for the
financing of current trade and negotiations have therefore been
proceeding for some time to alleviate the position. Although most
sterling countries have acted to facilitate the importation of
Japanese goods, Australia, which has by far the largest active
trade balance with Japan, so far has adopted an extremely rigid
attitude.

Thirdly, the general attitude at present in Australia to trade
with Japan is certainly not conducive to the development of any
soft feeling on the part of the Japanese to Australia if they are
forced to the position of restricting sterling area purchases and
they will have no reason to endeavour to give favourable treatment
to our claims. Their dissatisfaction on these grounds relates to:

(a) the Australian import licensing policy as mentioned above;

(b) our refusal so far to favour Japan's entry to GATT; and
(c) the current negotiations on pearling and fishing practices.

Fourthly, it must not be overlooked that Japan is one of the
principal textile countries of the world. She is the largest
exporter of cotton piece goods and has a very great rayon and
substitute fibre industry. Japanese mills are continually
experimenting with substitute fibres and a number of them have
established technological agreements with American concerns who
specialise on this type of production. There seems to be little
doubt that development in this field will continue, particularly
as the substitute fibre industry and the silk industry are the
only two branches of the textile trade where Japan has some
domestic source of raw material. In the case of cotton she is
wholly dependent, and in the case of wool virtually dependent on
imported supplies as it is considered that production of wool in
Japan will never be a factor in the industry.

There is considerable unrest in the Japanese wool trade at the
present time because of these factors, allied to the general
unstable condition of Japanese economy as a whole and the
straight-jacket imposed on Japanese trade by her inability under
present conditions to trade with China, Manchuria and Eastern
Russia. One Japanese writer recently commented that the woollen
industry of Japan was enjoying 'prosperity in a fools' paradise'.

He forecasts that the Japanese industry would tend towards the use
of wools other than Australian to enable them to buy better and to
get a wider range of wools. A recent agreement between Japan and
the Argentine proposed expenditure of approximately 9 million for
the purchase of 100 00 bales of Argentine wool. Whilst, therefore,
every apparent prospect pleases in our wool trade with Japan,
there are considerable grounds for apprehension.

It is true that there are certain of these which are entirely in
the control of the Japanese themselves. However those factors
dealing with the financial position and international relations
can be considerably influenced by Australian action.

It is my considered view that by comparatively small concessions
in principle to the Japanese-particularly in the import licensing
field-we can do a great deal to safeguard our position in this
immensely important market for Australian wool. Moreover, it
appears that certain advantages which Japan is seeking,
particularly in regard to entry into GATT, will eventually be
obtained and if we oppose them to that stage and then are
compelled into acceptance we will certainly gain no goodwill from
Japan while slight concessions at the present time and an
apparently cheerful acquiescence in the seemingly inevitable could
do much to help the future potentially difficult position.