Your M. 40 of 26th June, Japan and Far Eastern position.  Commonwealth Government has given prolonged consideration to the questions in issue, and is in full agreement with the conclusion of the British Ambassador, Tokyo , that a readjustment of Far Eastern policy is urgently necessary.
From reports and information from various quarters, it seems to us that Japan will take advantage of the present European situation to further her extreme interests, even to the extent of war with the Empire, if immediate steps are not taken to meet the new position.
To our mind it is imperative at the outset to have a clear indication of United States policy, how far she is prepared to act beyond her recent negative policy, and especially her intentions regarding future disposition of Fleet.
From point of view of holding our position in Pacific and Far East, the continued maintenance of Fleet on Hawaii is essential, and so long as the British Fleet, the main defence of America on the Atlantic, remains undefeated, there would seem no reason outside American sentiment for it to be transferred to Atlantic.
We consider the present three Japanese demands do not in themselves vitally affect future or present security of Empire.
The French acceptance of similar demands has further strengthened the Japanese position, and we can only arrive at the conclusion that if the United States is not prepared to give the most complete support, these demands should be conceded. The alternative is a grave risk of war, against Japan, which cannot be contemplated in our present position.
As to the suggestions of Craigie for a general settlement the bases of negotiation so far as they visualise the complete independence and integrity of China appear to us as quite impossible of acceptance by Japan. They would put her in a worse position than at commencement of hostilities in 1937.
Further, we cannot believe that Japan would herself make an approach to the United States of America and United Kingdom on such a basis.
In this respect, it is strongly urged that if there is to be mediation, the original proposal should go to the limit of concessions at the outset, rather than to raise the stakes when it is too late.
At the same time, we see virtue in this proposal of mediation for the termination of the Sino-Japanese war only if the specific object and result is a tripartite declaration regarding the status quo in the Western Pacific, and guarantees as to respective territorial integrity in designated spheres, to which the U.S.A.
must be definitely committed.
This latter may in fact prove difficult to obtain but failing it, the United Kingdom herself should not offer to mediate.
Generally, we agree with view that it would be contrary to successful prosecution of war for the U.S.A. to become involved in war in the Pacific, and policy therefore must be based on realities of situation and common sense that we should not at moment take such action or by omission of reasonable action as will cause Japan to become involved in this war.