TOKYO, 21 November 1949
MEMORANDUM OF UNDERSTANDING BETWEEN STERLING AR-EA PARTICIPANTS ON THE TRADE ARRANGEMENT WITH S.C.A.P.
During the negotiations for the first Trade Arrangement with Occupied Japan a Memorandum of Understanding by die Sterling Area representatives on particular aspects of the Trade Arrangement was drawn up in Tokyo.  The changed circumstances in which the second Arrangement was recently negotiated have made this document out of date, and the participating governments have therefore agreed to adopt this revised Memorandum which will serve as a guide to their representatives in Tokyo and to the Sterling Trade Area Co-ordinator.
General 2. Since SCAP has accepted the important principle that, in order to finance his growing sterling trade without dollars, he must be prepared to hold (non-convertible) working capital of at least 10 million sterling, the Sterling Area Participants were able to disregard in the calculation of their purchasing power for 1949-50 the imbalance of payments of approximately this amount in favour of Japan at 30th June 1949.
Nevertheless, to avoid a further imbalance, which is vital, SCAP's new purchases for sterling must at least attain his own minimum estimate of 55 million; and the Participants should endeavour to plan their new purchases, within the allocations shown in the Trade Plan, by such means as will enable them to take corrective action in the event that purchases by SCAP fall short of 55 million. If and when it becomes clear that SCAP will spend more than 55 million, agreed additions to Participants' purchasing power may be possible.
SCAP's Purchases 3. The change in the dollar/sterling rate came when the detailed estimates for SCAP's purchases were nearing agreement. Although, therefore, SCAP was unable to make an analysis by commodities of this figure of 55 million on account of the time needed for the adjustment of the sterling prices of his imports, this total figure is still largely supported by the results of previous discussions on his purchasing programme; and it is agreed that the Sterling Area representatives should set out to induce SCAP as soon as possible to draw up, in collaboration with them, a more detailed plan showing the value of individual commodities which it is estimated will be bought from the Sterling Area during 1949-50.
4. It is further agreed that since the Sterling Area's ability to buy essential goods from Japan is at present limited only by the scale of Japan's purchases, continuous pressure willl be necessary, and should be brought to bear, on the appropriate officials of SCAP and of the Japanese Government, to ensure that no import is made from a non-sterling country which could be made from the Sterling Area.
Sterling Area Purchases 5. Participants recognize that, since the figures in Tab. Ai show the present limits of the new purchases to be made between 1st July 1949 and 30th June 1950, the issue of new licences in accordance with their various import procedures, must have regard to the extent to which their new purchases are already provided for by licences already issued. It is also recognized that contracts placed, but not completed, before 30th June 1949, were taken into account in the calculation of the total Participants' purchasing power for the present year and that the value of such contracts need not be deducted from the figures for new purchases shown in the Trade Plan.
6. The Participants will make available to the Co-ordinator, as soon as the effects of the change in the sterling exchange rate allow, an analysis by commodities of their estimated new purchases for the year. They will also furnish all possible information regarding the issue of licences and the placing of contracts.
While it is agreed that the phasing of imports throughout the year is not a system which can be applied by every Participant, Participants recognize the need to continue to restrict Sterling Area purchases from Japan during the next month or two in order to ensure that at 31st December 1949 no question shall arise of a demand for conversion by SCAP of any sterling balance.
Special Position of South Africa 7. South Africa has made it clear, and the other Participants recognize, that she is unable to guarantee, owing to the absence of detailed import control, that she will limit her purchases of Japanese goods to the figures in the Trade Plan. Nevertheless, South Africa is unlikely, owing to her difficult general exchange position and her relatively small need for Japanese goods, materially to exceed these estimates.
Control and Development of Trade 8. Should any Participant have reason to believe that its sales to Japan are likely to differ to any important extent from those which will have formed the basis of the detailed sales side of the Trade Plan, the Co-ordinator and other Participants will be informed; the Co-ordinator will in any event report any signs of a threatened imbalance of trade and the reasons for it; and the participating governments Will consult as and when necessary to counteract such a threat. If, on the other hand, it appears that additional purchasing power is likely to be available to the Participants, it will be allocated between them by agreement.
The Sterling Area Working Party 9. The Participants recognize that the Sterling Area Working Party in Tokyo, with the notable inclusion of the Sterling Area Trade Co-ordinator, has performed a most useful function in bringing to their notice the general trends of trade and in dealing with day- to-day problems. They consider that with the experience of the past year to work from and with the improved system of accounts and records now in operation in General Headquarters, SCAP, the value of the Working Party will be increased; and they expect that the Working Party will be able to keep Japan's sterling trade under constant review and to draw the attention of the participating governments to any matters which appear to them to require intergovernmental consultation and action.