293 Noel-Baker to Department of External Affairs

Cablegram 200 LONDON, 21 July 1948

SECRET

LEVEL OF ECONOMIC LIFE IN JAPAN

Other Commonwealth Governments will have noticed the trend of thought in the United States (exemplified by the Strike and Johnston reports [1]) towards:-

(A) Building up of Japanese Economy to a level considerably higher than that contemplated in draft policy on level of Economic life in Japan (FEC-242/32) now under consideration in the Far Eastern Commission and (B) Reduction of reparations removals to a minimum. As you are aware FEC242/32 derives from United States' own proposals made in FEC 218 and levels advocated in it correspond generally with those accepted here earlier as sufficient (subject to certain reservations) to give Japan a viable self-supporting economy by 1950 consistent with security and reasonable reparations.

2. It is however clear from Dening's conversations in Washington (an account of which was recently transmitted to other Commonwealth Governments through United Kingdom High Commissioners) that proposals by United States Government for a tightening of the burden of occupation and for a restoration of Japanese economy generally, are to be expected shortly. It seems desirable therefore to consider what steps could usefully be taken to convince the United States that more moderate proposals than those foreshadowed in the Strike and Johnston reports would achieve the ends they desire.

3. In comparing Strike and Johnston proposals with those worked out by United Kingdom in 1946 and those in FEC-242/32 it is evident that assumption in these reports of a later target date modifies premises on which previous estimates were based. For example at the later date population of Japan, which is increasing at rate of one million a year, will require greater volume of trade to support it. Again levels of food and clothing formulated in 1946 in expectation of early peace conference at which Long- term Policy would be thrashed out were minimum ones which could justifiably be applied for first two or three post war years but whose application over longer term would be more difficult to justify. If therefore, later target date is accepted as reasonable postulate, some upward modification of levels may be justified.

4. It now seems probable that a Peace Conference in Japan will be deferred and it is reasonable to consider situation which will consequently arise. In this new situation we suggest that re- examination can usefully be directed to question whether levels of industry embodied in FEC-242/32 need upward revision if objective of Japanese viability is to be attained by 1953 date taken in (Strike and Johnston reports) or 1952 (the Japanese Economic Stabilisation Board's five year recovery plan).

5. Report of Committee of Experts which was endorsed by Canberra Conference said 'within the limits imposed by security needs it is in the long-term interests of the Allied Powers that the Japanese Economy should stand on its own feet. For whatever the level of industrial activity is ultimately to be, the sooner a self sustaining basis is reached the cheaper will be the Allied victory. Security especially in the next year or two does not require the Japanese Economy to be left at a level where minimum needs of the Japanese people can only be satisfied by the continued pumping in of Allied resources.

6. Question of means by which Japanese economy could become viable by 1953, involves many complicated estimates and assumptions and while detailed examination of technical issues is proceeding we cannot pretend to have a complete answer. Certain broad conclusions however, seem to stand out. These raise the most important questions of general policy on which we should be grateful for very early indication of the views of other Commonwealth Governments. These conclusions are 1 . Attainment of viability by Japan depends on earning capacity of three classes of industry viz:-

(A) Textiles (B) Iron and steel (C) Merchant shipping and ship building 2. Even if textile industry were expanded to maximum which appears physically possible in the time it is exceedingly doubtful in view of (a) difficulties in obtaining sufficiently large quantities of raw cotton and of installing vastly greater number of spindles required and (b) possibility that market openings may also restrict output where viability could still be achieved unless steel and shipping are expanded above levels contemplated in FEC- 242/32.

3. This expansion of Steel and Shipping would conflict with our security requirements as hitherto defined. Johnston Report does not contemplate any restriction on size and speed of ships to be built in Japan but it does not seem that any relaxation of restrictions United Kingdom have hitherto advocated would be necessary to achieve Japanese viability.

7. Question therefore arises whether it would nevertheless be advisable to support levels of industry which appear necessary to secure viability. It must be recognised that the assumptions underlying any forecast are subject to wide margins of error. For the present the Japanese plan which postulates much lower levels of industry than those contemplated in Strike and Johnston reports seems to us the most realistic available forecast of Japan's potentialities. This plan however depends on introduction of unspecified amount of foreign capital and makes no allowance for the service of new or old foreign capital invested in Japan or for the recovery of occupation costs.

8. It must be expected that United States would be most reluctant to adopt any course which they felt did not assure Japanese viability within a short term of years land] consequent reduction of cost of Japan to American taxpayer. Since they consider United States to be the best guarantor of safety in the Pacific security arguments adduced by other powers are unlikely to deter them from this objective. If these expectations as to probable attitude of United States were realised choice for other countries concerned might lie between (i) insisting on security requirements with risk that United States would act in disregard of opposition and encourage building up of Japanese industry to very high and dangerous levels and (ii) seeking to persuade the United States that viability could be achieved by adoption of very much lower levels than those suggested in 'Strike' and 'Johnston' reports thus minimising danger to security.

9. We are continuing our examination of technical aspects of problem. Meanwhile, however, we feel it to be unlikely that conclusions in para. 8. above will require modification and our object in addressing you at this stage is to ascertain your views both on these and as to the broad question of policy stated in para. 8. We are at present inclined to think that the balance of advantage lies in adopting the second of the two courses indicated i.e. in seeking to persuade the United States to adopt the minimum levels necessary to achieve viability but we shall be grateful for your observations.

10. Whatever course is pursued in respect of issues set out in this telegram we are very anxious that (in accordance with indication of our views which Dening has already given in Washington) maximum possible use should be made of existing international machinery and in particular that nothing should be done to prejudice right of FEC powers to participate in formation of policy.

11. Similar communication is being made to other Commonwealth Governments concerned.

1 The Strike Report, dated 26 February 1948, made public on 10 March 1948; the Johnston Report, dated 26 April 1948, released on, 19 May 1948.

[AA:A3318, L49/3/1/23]