My telegram No. 771. 
While I fully appreciate grave reasons which have impelled the Commonwealth Government take this step there can be no doubt but that, coming particularly at the present juncture, it has had an unfortunate effect on Japanese official opinion. There is at the best of times a tendency amongst some sections of Japanese public opinion to align themselves with those in Germany and Italy who consider that the only means by which the 'have-not' States can ensure themselves adequate supplies of raw materials is so to strengthen their armaments that they can eventually 'take' what they require; this tendency is likely to be increased by what has occurred and the faith of those who have placed reliance in public declarations relating to freedom of access to raw materials may well be shaken.
Furthermore, at a moment when we are making such efforts to secure adequate protection for all British interests in China and when the outlook in this respect shows slight signs of improvement, our difficulties must necessarily be increased by this new, though inevitable, cause of disagreement.
I mention the above considerations merely in the hope that the Japanese may be let down as lightly as possible in this matter. I do not recommend any hint of compromise at present juncture but if at a later stage Japanese Government shows signs of adopting a more reasonable attitude perhaps export to Japan of relatively small supplies of iron ore from South Australia over a limited period might be considered as an act of grace? I must [group undecipherable] is doubtful if this would be practicable or even desirable. But I am confident that if shortage is not too acute such a solution, combined with adequate compensation, would facilitate an amicable settlement of this dispute.
Not repeated.