309 Ward to McIntyre

Minute [CANBERRA], 3 June 1949

The following suggestions are put forward as the basis of a policy we might adopt to meet the new turn in the Japanese Reparations problem arising from the change in the United States policy. [1]

2. Japan's post-war economic development may be divided into two stages Stage 1 .-the attainment of a self-supporting economy, i.e., a situation in which Japan's exports are sufficient to pay for all imports required to sustain a reasonable standard of living. This standard has been defined by the Far Eastern Commission as approximately equivalent to that which existed in the period 1930- 1934. Japan still has some distance to go before this objective is reached-the most optimistic estimate of its attainment is 1952- 1953.

Stage 2.-development beyond the first stage, characterised, most likely, by steadily rising standards of living. At this stage most allied responsibilities would have terminated, except such overall supervision as might be determined by the Peace Settlement.

3. We are directly concerned with Stage 1 because the Far Eastern Commission has already determined what Japan's minimum living standard might be and also because deficits in Japan's balance of payments which arise from imports of food and raw materials necessary to sustain even the lower standard which exists at present, are being met by the United States. It is desirable that the Japanese economy should reach the goal of Stage 1 as quickly as possible. The reasons for this are sufficiently forceful and well-known not to need further elaboration. This might be adopted as a basic point in our policy, that is to say, we should state quite clearly that we do not wish the attainment by Japan of a self-supporting economy to be delayed, and we believe that no avoidable obstacle should be placed in the way of such an attainment. Hence reparations should only be taken from such productive facilities as it is reasonable to assume are not required to enable Japan to reach the state of self-support in the shortest possible time.

4. Having stated this basic tenet of our policy, the next question is its relation to the reparations problem as it now stands. The United States representative on the Far Eastern Commission said, in effect, that the removal of plant etc., estimated at present as available for reparations would hinder the attainment of a self- supporting economy and would, therefore, finally come out of the pockets of the American taxpayer. This simply says in a round- about way that, in the United States' view, Japan needs all her existing manufacturing capacity to reach the goal of a self- supporting economy in the shortest possible time.

5. No evidence is produced to support this view, except, some general references to the Strike and Johnston Reports. [2] These Reports, however, do not deal with the problem of Stage 1-they simply state that Japan needs all, or nearly an, her existing capacity in 'war-supporting' industries for her future peacetime economic development, i.e. Stage 2. This is perfectly true but we are not concerned with this problem. Our concern is with Stage 1 where our responsibilities lie, and there is nothing in either the Strike or the Johnston Reports which says that all of this capacity is needed for the attainment of a self-supporting economy and so to relieve the American taxpayer of his present burden. The estimates of both SCAP's economic section and the Japanese Stabilisation Board (5 Year Plan) which are concerned with Stage 1, do not contemplate the use of all of Japan's existing manufacturing capacity for this purpose. The target year of both estimates is 1952 or 1953, and in many cases, particularly in iron and steel, machine tools, and some of the chemical industries, a good deal of existing capacity would still remain unused at the time when, it is estimated, Japan would become self-supporting.

6. We might therefore point out to the United States that, although we agree that conditions should be established which would enable Japan to reach the stage of self-support as quickly as possible, we do not agree that this eliminates the possibility of reparations. On the contrary, the best evidence on the subject indicates that there would be quite an appreciable surplus in some industries after the self-supporting stage has been reached. This surplus would provide a pool for reparations. It is possible that the United States might concede this contention but point out that the removal of plant and facilities for reparations would hamper Japan's ultimate peacetime development. This we would not question, but we would point out that this is exactly the implication of a reparations policy, and it is the means by which Japan makes some amends to the countries on whom she declared war.

Such a contention by the United States would simply amount to an attempt to overthrow the principle of reparations altogether.

7. Once the ground is shifted to the basic question of the general principle of reparations, we come up against some highly complex political issues. In the early thinking on reparations there was a feeling that by this means the relatively underdeveloped countries of Asia could gain considerably in their own industrial development by reparations from Japan. The experience since has shown, however, that industrialisation is not just a matter of shipping plant from one country to another. In the first place it is wasteful to ship some sorts of plant, and the mere process of dismantling and shipping either entails a greater cost than the replacement value of the plant or reduces considerably the usefulness of the plant or even both. Where plant is approaching obsolescence considerations of cost are even more important. In the second place, countries at the receiving end must have all the auxiliary facilities to use the plant effectively. They must have the trained labour force, the executives and the basic development work such as transport, housing and many other factors which must precede the higher stages of industrial development. There are not many countries in Asia who are in a position to introduce new types of highly complicated industrial plant. There have been several reports of reparations plant which has already been delivered from Japan rusting away on wharves and obviously not likely to be properly used.

8. Realistically, therefore, the economic potential of Asia would be much higher if much of the plant designated as reparations were left in Japan where it could be properly used. However, so long as the reparations question is important politically in Asian countries, and it seems to be so with China (Nationalist) and the Philippines, it would not be very wise for Australia to advocate the abolition of reparations as an official policy. However, it is suggested that after putting forward the arguments set out above Australia might then declare that she is willing to forgo all but a nominal part of her reparations claim. This would still maintain our adherence to the principle of reparations but at the same time perhaps induce other countries to take a more realistic view of the problem.

9. To sum up, it is suggested that we should adopt the following policy towards reparations from Japan:-

(a) Maintain the principle of reparations.

(b) Reparations should not unduly interfere with the attainment of a self-supporting economy in Japan.

(c) Reparations should be taken from plant and facilities surplus to those required by Japan to reach a self-supporting economy.

(d) Submit to the United States that they have produced no adequate evidence to show that such a surplus does not exist.

(e) Suggest a re-examination of Japan's capacity to provide reparations in the light of the above considerations. (SCAP might be asked to submit an estimate of the requirements for a balanced economy in Japan.) (f) We should waive all but a nominal proportion of our claim for reparations on Japan.

1 See Document 307.

2 The Strike Report, dated 26 February 1948 and made public on 10 March 1948, recommended against the removal of productive facilities, except primary war products from Japan as reparations.

The Johnston Report, dated 26 April 1948, released on 19 May 1948, reached similar conclusions.

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