Views expressed indicating fundamental divergence between Russian and Japanese aims in Far East conveyed to you in telegram No. C.25 of 17th November  are sound. In my view essential should not rely upon this fact but should pursue an active policy designed to bring about a general understanding with Japan, and to remove danger of a Soviet-Japanese understanding. Necessity of such a policy is shown in a joint appreciation by British, French and Polish Ambassadors in Tokyo.  Following are extracts:-
'Liquidation of China incident represents today the primary objective of Japanese, policy. The Japanese army is desperately anxious to liquidate China incident before its wavering prestige at home has seriously shaken its grip upon the country. In Japanese army opinion, although of course normally anti-Russia, is becoming more and more interested in plan of an agreement with U.S.S.R. as offering superficially the quickest method of liquidating China incident. According to information, accuracy of which it is difficult to check from here, U.S.S.R., in order to keep its hands free in Europe, is contemplating political and economic rapprochement with Japan. German propaganda in Japan is busily preparing the way for overtures from U.S.S.R. We cannot ignore the possibility that undue pressure from democracies at this moment might finally drive Japan to committing themselves to U.S.S.R. in form of a general political entente. Unless early steps can be taken to improve relations between this country and western democracies there is a danger that Japanese foreign policy may fall into the hands of inexperienced extremists. In the event of a Soviet-Japanese agreement at best we should be faced with nuisance to ourselves with which the anti-Comintern pact made us familiar. At worst we might have to face the risk of war with a formidable combination of powers. We and Americans can offer a better way out. We should remove from Japanese mind the fatalistic conception now taking shape that a compromise between Japan and democracies with regard to affairs in China is no longer a practical proposition.' This appreciation shows that Japan's major preoccupation is to extricate herself from the impossible position she has involved herself in in China. That if no other way offered she would attempt to do so by an understanding with Soviet and probably Germany, but that we and America can offer her better way out.
With these views I entirely concur.
The opportunity for a move by the United Kingdom and the United States has been strengthened by reactions in Japan to Soviet invasion of Finland.
The British Ambassador in Washington  in a recent conversation with Sumner Welles  took the line of the necessity of some general settlement in the Far East and the broad lines of such a settlement in the following words:-
'Speaking purely personally I thought the right solution was that the Japanese should make up their minds to come to terms with Chiang Kai-shek  on the basis of restoration of full sovereignty to China with face-saving arrangements for Japan in which case United States and Great Britain could bring pressure to bear on Chiang Kai-shek to recognize the difficulties of Japan as condition of obtaining western capital to develop a free China without which neither China nor Japan could prosper nor we recover our trade. I said I thought necessary preliminary to any such solution would not be defeat and collapse of Japan, for we had seen in 1918 the dangers of complete defeat of Germany followed by revolution but a definite change in centre of gravity in Japan which would substitute moderate dominance for military control.' Mr Welles' reaction was agreement with general principle but an expression of doubts with regard to public opinion in United States towards such a policy.
Lothian asks whether views he expressed as being personal represent prevailing views. I have strongly represented to Secretary of State for Foreign Affairs  that Lothian's line is one which should be followed and have supported this view by reference to war dangers brought out in Craigie's telegrams.
I urged as strongly as I could that Lothian should be instructed to approach the United States with the utmost frankness, discuss with them all the possibilities in the event of joint action by German and Soviet as indicated in my telegram No. 695 of 30th November , the seriousness in such circumstances of a Japanese Russian understanding and indicate that in the United Kingdom Government's view a policy of bringing about a settlement in the Far East down the lines of Lothian's suggestion appeared to His Majesty's Government in the United Kingdom wisest course to pursue.
In the event of United States Administration's feeling that in face of their public opinion they were unable to pursue such a policy then an alternative policy should be frankly discussed [indicating]  that one essential is that United States and United Kingdom should not get out of step in policies they are pursuing in the Far East, and making it clear that in last resort we will stand with United States but at the same time emphasizing that we rely upon her to deal with any consequences which resulted in Japanese retaliation against ourselves because of the policy agreed upon.
While the Secretary of State expressed general agreement with these views, I fear that the instructions he will send Lothian will not deal with the position in a broad way but will insist on great caution in approaching the United States Administration and probably limit its[elf]  to minor questions such as Tientsin and silver.
I feel so strongly that the time has come when the Far East position must be discussed with Americans in its broadest aspects and with complete frankness that I suggest a cable from you would be invaluable and above should give you sufficient information to frame it.