34 Note For Ministers [1] Agreed By Departments Of Commerce &

AGRICULTURE, EXTERNAL AFFAIRS, TRADE & CUSTOMS AND TREASURY, 23rd June, 1953

[SECRET]

Canberra,

Trade with Japan

In a Note Verbale dated l2th May 1953,the Japanese Government drew attention to its rapidly diminishing sterling holdings and said that further deterioration might force it to taper off Japan's purchases of sterling area goods.

2. Japan's sterling holdings reached a peak stg.127m. in June 1952. Since then they have declined steadily and in April this year were estimated at stg.30m.

3. In view of this change in Japan's sterling position the United Kingdom has eased colonial restrictions on imports from Japan. New Zealand also announced on 5th June, a limited relaxation of the import restrictions on Japanese goods.

4. The Australian balance of trade position with Japan is shown in the following figures:

Year Exports to Japan Imports from Japan A million (f.o.b) A million (f.o.b.)

1950/51 61.6 15.6 1951/52 48.6 43.6 1952/53 76.0 5.0 (11 months only)

5. In the eleven months of the present financial year, Japan has become the second best customer for Australian exports being the second largest buyer of wool and the largest buyer of barley.

6. How far action taken by other sterling area countries will assist the sterling position of Japan is not certain. It is, however, clear that if Japan's reserves do not improve or if they fall further she will be forced to restrict imports more seriously, even imports of raw materials such as wool. There are in fact some signs that she may already be economising in such purchases. For example, in recent years Japan has promptly allocated sterling to wool importers to cover firm orders. This is apparently not being done now-there are reports that Australian brokers are financing Japanese clients for 30 days or more and some wools actually loaded for Japan have been unloaded because of financial difficulties. Japan is buying quite limited quantities at the Brisbane sales which she normally patronises rather well.

7. The main point about Japan as a wool market is that almost all the wool manufacturers are used inside the country. Hence any cut in wool imports gives a corresponding direct saving in foreign exchange. Another important point is that Japanese buying frequently strengthens the bidding on the auction floors for those types of wool favoured by Bradford.

8. Since March 1952, when import restrictions were intensified by the Australian Government, imports from Japan have been limited by licensing controls to goods of an essential nature which were not available from local production or from other non-dollar sources.

This policy has had a highly restrictive effect on the volume of imports from Japan and coupled with the falling off in demand for Japanese iron and steel has reduced the effective licensing on Japan to a total of only A729 thousand, during the quarter ended 31st March, 1953.

9. Relaxations on licensing of Japanese goods for the quarter ending 30 June l953, are expected to bring the value of licences to be issued during the present quarter to approximately A1,500,000.

10. With the relaxations on non-dollar, non-Japanese licensing already announced and with the possibility of further relaxations being made in the near future the justification for maintaining highly restrictive licensing on Japanese goods no longer obtains.

11. The Treasury has no objection on balance of payments grounds to some further relaxation of the restrictions.

12. However, an easing of restrictions on imports from Japan has a significance beyond the currency question. The main considerations are:

(a) Australia's trade policy towards Japan should take account of the political objective of keeping Japan in the non-communist world;

(b) the United Kingdom is concerned that any substantial relaxations on Japan should not seriously prejudice the level of her export trade to Australia;

(c) further relaxations on Japan to be worthwhile must include some types of goods, eg. textiles and toys, which are likely to be competitive with Australian production; and (d) the announcement of further relaxations on non-dollar, non- Japanese trade without a substantial relaxation on Japanese goods also would throw into sharper relief the discrimination on non- currency grounds which is being applied against Japan.

13. The permanent heads of Treasury, Trade and Customs, External Affairs and Commerce and Agriculture are unanimous in the view that this matter is important and urgent. They consider that maintenance of the present level of the restrictions would involve major external economic problems (with some international political implications). It is difficult to see that there can be any satisfactory reply to the Japanese note other than to relax the restrictions to some extent. Any relaxation of the restrictions is, however, a matter for decision by Cabinet. The permanent heads, therefore, suggest that this question be given priority in the Agenda for the Cabinet Meeting set down for 2nd July next. A submission will be forwarded to Ministers before that date.

1 The Departments agreed that this document be submitted to an 'unscheduled meeting of Ministers' in Melbourne on 23 June. E.J.

Bunting, Assistant Secretary, Cabinet, Prime Minister's Department, also attended the meeting.

[AA : A609/1, 317/20/7]