Canberra,

Trade with Japan

In a Note Verbale dated l2th May 1953,the Japanese Government drew
attention to its rapidly diminishing sterling holdings and said
that further deterioration might force it to taper off Japan's
purchases of sterling area goods.

2. Japan's sterling holdings reached a peak stg.127m. in June
1952. Since then they have declined steadily and in April this
year were estimated at stg.30m.

3. In view of this change in Japan's sterling position the United
Kingdom has eased colonial restrictions on imports from Japan. New
Zealand also announced on 5th June, a limited relaxation of the
import restrictions on Japanese goods.

4. The Australian balance of trade position with Japan is shown in
the following figures:

Year Exports to Japan Imports from Japan
A million (f.o.b) A million (f.o.b.)

1950/51 61.6 15.6
1951/52 48.6 43.6
1952/53 76.0 5.0
(11 months only)

5. In the eleven months of the present financial year, Japan has
become the second best customer for Australian exports being the
second largest buyer of wool and the largest buyer of barley.

6. How far action taken by other sterling area countries will
assist the sterling position of Japan is not certain. It is,
however, clear that if Japan's reserves do not improve or if they
fall further she will be forced to restrict imports more
seriously, even imports of raw materials such as wool. There are
in fact some signs that she may already be economising in such
purchases. For example, in recent years Japan has promptly
allocated sterling to wool importers to cover firm orders. This is
apparently not being done now-there are reports that Australian
brokers are financing Japanese clients for 30 days or more and
some wools actually loaded for Japan have been unloaded because of
financial difficulties. Japan is buying quite limited quantities
at the Brisbane sales which she normally patronises rather well.

7. The main point about Japan as a wool market is that almost all
the wool manufacturers are used inside the country. Hence any cut
in wool imports gives a corresponding direct saving in foreign
exchange. Another important point is that Japanese buying
frequently strengthens the bidding on the auction floors for those
types of wool favoured by Bradford.

8. Since March 1952, when import restrictions were intensified by
the Australian Government, imports from Japan have been limited by
licensing controls to goods of an essential nature which were not
available from local production or from other non-dollar sources.

This policy has had a highly restrictive effect on the volume of
imports from Japan and coupled with the falling off in demand for
Japanese iron and steel has reduced the effective licensing on
Japan to a total of only A729 thousand, during the quarter ended
31st March, 1953.

9. Relaxations on licensing of Japanese goods for the quarter
ending 30 June l953, are expected to bring the value of licences
to be issued during the present quarter to approximately
A1,500,000.

10. With the relaxations on non-dollar, non-Japanese licensing
already announced and with the possibility of further relaxations
being made in the near future the justification for maintaining
highly restrictive licensing on Japanese goods no longer obtains.

11. The Treasury has no objection on balance of payments grounds
to some further relaxation of the restrictions.

12. However, an easing of restrictions on imports from Japan has a
significance beyond the currency question. The main considerations
are:

(a) Australia's trade policy towards Japan should take account of
the political objective of keeping Japan in the non-communist
world;

(b) the United Kingdom is concerned that any substantial
relaxations on Japan should not seriously prejudice the level of
her export trade to Australia;

(c) further relaxations on Japan to be worthwhile must include
some types of goods, eg. textiles and toys, which are likely to be
competitive with Australian production; and
(d) the announcement of further relaxations on non-dollar, non-
Japanese trade without a substantial relaxation on Japanese goods
also would throw into sharper relief the discrimination on non-
currency grounds which is being applied against Japan.

13. The permanent heads of Treasury, Trade and Customs, External
Affairs and Commerce and Agriculture are unanimous in the view
that this matter is important and urgent. They consider that
maintenance of the present level of the restrictions would involve
major external economic problems (with some international
political implications). It is difficult to see that there can be
any satisfactory reply to the Japanese note other than to relax
the restrictions to some extent. Any relaxation of the
restrictions is, however, a matter for decision by Cabinet. The
permanent heads, therefore, suggest that this question be given
priority in the Agenda for the Cabinet Meeting set down for 2nd
July next. A submission will be forwarded to Ministers before that
date.