CANBERRA

Trade with Japan
We have received from the Australian Trade Commissioner in Tokyo,
a Japanese Note Verbale dated 12th May, 1953 [1], in which the
Japanese point to:

(a) the effect on Japanese exports of the licensing restrictions
applied in Australia;

(b) the United Kingdom recommendation to Colonial Governments to
relax import licensing on Japanese trade; and
(c) the deterioration of Japan's sterling holdings and pressure
this could exert on Japan to taper sterling purchases off,
and suggest informal talks in Tokyo with a view to discussing the
points raised in the Note, particularly soft currency treatment
for Japanese goods.

Japan has now assumed, as will be seen from the following
statistics, something like her old importance as a market for
Australia's exports:

Australian exports to main markets as at end March 1953

1951-2 1952-3
(9 mths) (9 mths)
m Rank m Rank
1. UK 149 (1) 266 (1)
2. Japan 38 (4) 59 (2)
3. France 44 (3) 56 (3)
4. USA 60 (2) 46 (4)
5. Italy 31 (5) 33 (5)
6. New Zealand 29 (6) 22 (6)

Meanwhile Japanese exports to Australia are declining and while
the fall in Japanese exports to Australia this year as compared
with last is not entirely due to the licensing of March 1952,
there is no doubt that licensing has had some considerable effect
in reducing imports from Japan to their present low level.

From Japan's position, the deficit in trade with Australia is the
most important deficit she has with the Sterling Area. It arises
because of Japan's large purchases of wool.

France has a similar problem in relation to Australia, but her
purchases of wool are important for her export industries and therefore come in a very
different category to Japan's which are required mainly for the
home trade. Australia's market for wool in Japan is therefore
vulnerable to some extent and the Japanese have already given some
indication that they are prepared to cut imports of wool this
year. Their allocation for the six months ending September, 1953,
is 180,000 bales from the sterling area or 60,000 bales down on
the allocation of the six months ended September, 1952.

The trade figures of the first nine months of 51/52 and 52/53 are
as follows:

1951-52 1952-53
(9 mths) (9 mths)
Australian Imports 36.8m 4.3m
Australian Exports 37.8m 59.3m

The reports from Tokyo of intended Australian purchases for the
rest of the Australian wool season indicate that Japan will keep
within her allocation as was the case last year.

Japan is reported to have taken measures to restrict purchases of
Indian coal, and we are having the report of Japanese intentions
to switch purchases of rubber from Malaya to Indonesia examined.

Both Japanese actions are linked with shortage of sterling.

If Japan resorts to measures restrictive of Australian trade
because of her sterling position, she will be confronted with
difficulties because of the importance of Australian supplies for
the Japanese wool industry. But she should not find a boycott of
Australian wools any more difficult now than it was in the trade
dispute of 1936. Then, of course, Japan's stocks were high and
allowed some breathing space for a readjustment of the industry.

But the present situation is analogous because Japan's stocks of
wool are estimated to reach 42 million by June, 1953, and be
sufficient for about six months' operations on a one shift basis.

Complementary measures that could be adopted if Japan were to
follow the pattern of the earlier trade dispute would be a switch
to substitutes or other sources of supply. A switch to other
sources of supply might be difficult; but in that case the
Japanese would have to give greater attention to the use of
substitutes or reduce total consumption of wool, if they were to
embark on a serious programme of reprisals against the Australian
wool trade. The Japanese will undoubtedly continue to pay
attention to substitutes irrespective of the course of trade
relations with Australia, but it would be unwise for Australia to
give any special fillip to the use of substitutes.

The main point when considering increased use of substitutes or
reduced consumption is, however, to point out that if these
measures were once taken they could result in the permanent
reduction of the wool trade.

Japan's position in trade with the sterling area was examined by
the United Kingdom and Japanese representatives in March of this
year, after which the United Kingdom Government decided to effect
some relaxation in Hong Kong, Singapore and the Colonies as a
whole and to advise the rest of the sterling area of this
relaxation.

The relaxation in Colonial imports will permit the Colonies to
import at a rate 20 per cent greater than the annual rate of
Colonial payments for Japan's goods at the second half of 1952.

The relaxations on Hong Kong and Singapore will merely benefit the
re-export trade of those places.

Japan's trade with the sterling area is controlled by the United
Kingdom with a view to ensuring that Japan's earnings of sterling
never become so great that she cannot use them for imports of
sterling area goods and consequently seeks to convert into
dollars.

The United Kingdom discussions in March were based upon sterling
area imports of 168 million from Japan during 1953, which taking
other Japanese payments and receipts into account, should allow
the Japanese to hold 50-55 million sterling at the end of 1953.

The sterling area purchases of 168 million is as noted by the
British Embassy, Tokyo, a considerable advance over the estimated
current rate of imports.

There should, therefore, from a sterling point of view, be the
same latitude for Australia to provide for increased imports of
Japan's goods, although it is not suggested that we could, or
need, even allow imports of goods from Japan on the basis of
imports from soft currency countries.

New Zealand has announced some relaxation of Japanese imports and
although we do not yet possess complete information as to the
exact extent of the relaxations, our Trade Commission in New
Zealand considers that they may allow Japan to export to New
Zealand as much as 1 million more per annum than she has done in
the past. On Japan's statistics of expenditure of receipts and
sterling, New Zealand's trade with Japan almost balanced at
somewhere around 3 million sterling for each of the years 1951
and 1952.

The action called for by the Note Verbale falls entirely within
the province of the Minister for Trade and Customs, but in view of
the possible importance of import licensing measures in Australia
for exports of wool from Japan, I am attaching for your signature
a letter to the Acting Minister of Trade and Customs.