Your 576 of 18th July, FAR EAST :
Our views on this question remain generally as set out in my telegram of 27th June to Secretary of State.  From the cables we have received it is now clear that United States will continue to adopt a purely negative policy; will not co-operate with us in any general settlement, and will be resentful if we mediate in war between China and Japan at expense of China. Although we were led to expect Burma Road Agreement would be received with understanding and sympathy by United States, statement of Hull  about unwarranted interference with trade was unexpected.
Further, we do not yet know attitude of new Japanese Cabinet to the Agreement of 17th July, but it is reported Konoye  issued statement that new Cabinet have agreed on policy of strengthening ties with Germany and Italy. In view of the circumstances in which the old Government was forced out of office, and the composition of the new Government, it seems doubtful whether anything less than a militant policy will now satisfy the extremists.
It is recognised that the statement by the Prime Minister  in the House of Commons and the conversations between Craigie  and Arita  Committed Great Britain to an attempt to utilize the period of three months under the Burma Road Agreement to investigate the whole position with a view to arriving at a genuine all-round settlement.
We realize the value of achieving a general settlement which will ensure peaceful relations between the British Commonwealth and Japan whilst we are prosecuting the war, and will promote the economic betterment of the respective countries.
As we visualise it, however, the exploratory conversations for such an agreement may in themselves prove a source of embarrassment to the British Government.
The three original demands having been more or less disposed of, Great Britain may be compelled to discuss new issues which, as is customary in Japanese diplomacy, will probably be announced beforehand.
While recognising the obligation to discuss the terms of a wide settlement, our opinion, however, is that there is little hope of promoting any general or lasting settlement with Japan while the European position is as at present.
We make the following observations- (a) Any weakness in bargaining would be regarded as evidence of weakness with consequences of further awkward demands;
(b) The termination of the Sino-Japanese war, unless part of a really satisfactory general settlement, would simply leave Japan free to take full advantage of new opportunities occasioned by any set back in the European war;
(c) Time runs in our favour and the next three months are particularly important.
There seem to be two alternative policies. There is the one suggested in your paragraph 5 of enlisting support of Soviet Russia and U.S.A. for maximum assistance to China. This is the other extreme to a policy of appeasement, and in the case of Russia would appear to be not only difficult but dangerous.
The second alternative is playing for time in discussions for a general settlement while following a policy of working in as close co-operation as obtainable with the U.S.A., informing them in advance of our position and proposals to meet any new issue, giving way only under force majeure on questions which are not absolutely vital. At the discretion of the United Kingdom, Russia might also be consulted. It is a policy which at least keeps Japan at war with China and enables us to play for that necessary three months to demonstrate we are able to withstand the attack of Germany.
This policy should enlist the encouragement and, it is hoped, the more positive support of America after their elections. The recent agreement is a definite contribution to this policy. It has not been repudiated by the new Japanese Government, and the onus should be left on Japan to denounce it or make suggestions for its execution or modification.
In sustaining this policy in the face of further awkward demands which can be anticipated, each issue raised will need careful consideration as to whether it is one about which Great Britain can be conciliatory or whether it is one of vital importance necessitating a firm attitude with a full recognition of all that is consequently involved. It would be fatal to bluff all the time, or take an irrevocable stand on any non-vital issue.
Assuming the information we received from the Acting Government Commissioner, Japan , and repeated to Foreign Office in 1219 of 14th July is correct, to the effect that the amalgamated southern interests will seek to obtain concessions and leases, and that incidents are to be created where possible, it is to be anticipated that the Commonwealth Government will be faced with similar problems and difficulties, and will have to adopt a corresponding policy.
We desire the abovementioned views to be submitted to the United Kingdom Government, and we would ask that we be consulted on any new issue raised by Japan seriously affecting Empire interest before discussions on it are entered into. Further, that while we appreciate the desirability of promoting a general settlement, we cannot but be disturbed by the attitude of the United Kingdom Government towards some of the specific questions, such as dealing with Japan regarding wool, which help to achieve that end.