Our 1845 [1] re Zaibatsu.

Reference D.2116 [2] and 468 [3] from Dominions Office.

1. The following comments represent Departmental view on above
cables. Please inform us if you decide to forward any comments
direct to the Secretary of State for Dominion Affairs as we shall
be anxious to keep New Zealand informed to our views on the United
Kingdom cables.

2. We are opposed to the Zaibatsu not merely because they were
economic buttresses for Japan's military strength but also because
a Government over influenced by these powerful industrial
organisations never to any marked extent concerned itself with the
welfare of the Japanese people as a whole. We desire to see in
Japan a system of government whose primary concern is to organise
the economic and social life in such a way that the welfare of the
mass of the people is ensured. We would view with some trepidation
granting equal access to the raw materials and markets to a
government dependent to a large extent on the support of a group
of highly powerful companies such as the Zaibatsu are. The
existence of the Zaibatsu in their present form is incompatible
with a welfare economy and invites the consequent danger that
productive activity will be directed towards a militaristic
revival or at least to providing the heavy industrial basis for
such a revival.

3. In regard to the summary of the actual study [4] (the full text
of which we have not yet received) we wish to make the following
observations-
(a) Reference paragraph 2 (a) we are in agreement that the
existence of the Zaibatsu facilitated the rapid development of the
Japanese economy especially the strategic industries.

(b) Reference to paragraph 2 (b) we also agree that the Zaibatsu
could play a prominent part in rebuilding Japan's strategic
industries in the event of the re-establishment of a strong
militarist government and that their immediate existence will at
all times induce the restoration of a distorted economy aimed at
maximising profit opportunities in the heavy industries with
attendant expansionist effects.

(c) In regard to paragraph 2 (C) it is possible that the Zaibatsu
did not realise that they could not profit ultimately from a
policy favouring military aggression. Nevertheless their very
existence was a hindrance to the development of a policy of social
reform in the 20's and early 30's. Their control over political
parties was notorious and was a substantial factor in obstructing
the development of any real progressive or working class movement.

At the same time the very concentration of power and
centralisation of control characteristic of their organisations
made them a facile weapon in the hands of the militarists when the
latter assumed more complete control over the government.

(d) Reference paragraph 2 (d) we fear that it was the control
exercised by the Zaibatsu over political parties in the 20's and
30's which as indicated in our paragraph (c) helped to frustrate
the tentative growth of a restricted political democracy in Japan
at that period. The Zaibatsu had such a disproportionate share of
the national income at their disposal that it was inevitable that
they should prove overpowerful in the political sphere. Even in
the absence of an aggressively inclined government we feel that
their position of predominance in the economic sphere would cause
them to be overpowerful in political life, particularly in a
country where political democracy has never been deeply rooted.

(e) Reference paragraph 2 (e) we feel that the argument that the
Zaibatsu engaged in keen competition between themselves is hardly
material to the main issue which is concerned rather with the
effect of the existence of such aggregations of economic power on
the social, economic and political life of the country.

(f) Reference paragraphs 2 (f) and 2 (g), even if we subtract from
the sum total of the organising ability and experience of the
Zaibatsu the resources of the individual members of the
controlling families we still retain the vast amount of organising
ability and experience possessed by key personnel concerned with
the administration of the various companies, in other words, the
managers, technicians and clerical officers of those concerns.

Their ability if properly supervised can and possibly is now being
directed to the purpose of averting disruption of the economy.

(g) Reference paragraph 2 (h) we are very conscious of the close
historical connection between the leading feudal families and the
modern commercial concerns. Their close identity was an important
factor contributing to the enormous accumulation of wealth and
centralisation of power in the Zaibatsu. We feel that their
continued existence will prejudice Japan's advance towards a
democratic way of life bearing in mind the experiences of the
twenties and thirties.

(h) Reference paragraph 2 (i) the question of the filling of the
void following the destruction of the Zaibatsu is, we appreciate,
a very difficult and important factor. We therefore deal with this
question at length in our following paragraphs.

4. The crux of the problem is to adapt an economy already
distorted by an unparallelled concentration of capital ownership
and centralisation on control in Zaibatsu [to] the objectives of
economic and social welfare and genuinely democratic conditions of
life for the Japanese people. We feel conscious of the
difficulties entailed in the destruction of such long established
concerns and of the necessity for preventing economic chaos in the
immediate postwar period.

5. Nevertheless, we consider that this task of destruction if it
is not possible as a first step has to be effected eventually. It
will entail replacing the Zaibatsu's controlling position by
public ownership and control of at least the key heavy industries
such as iron and steel, power, fuel, transport and chemicals
together with State control over investment and credit
institutions. This must be progressively achieved over the
shortest possible period. Without such control by the State there
would be no assurance that the former concentration of economic
power in the case of the big families would not be resumed or be
reasserted.

6. On this basis [of] the State ownership and control of the key
heavy industries and credit resources it might be possible to
develop economic activity along lines which would improve living
standards and expand consumer goods industries previously
obstructed by Zaibatsu concentration of heavy industry development
for war purposes. Such orientation can be supported by
(a) Measures designed to extend ownership in production as a
whole.

(b) Encouragement of co-operative enterprise particularly in
agriculture.

(c) State action to ensure improved conditions of work, higher
wages and improved social security standards.

(d) In the first stage State supervision of private enterprise to
maintain at least subsistence levels and to aim at increased
consumer goods and production and distribution according to needs.

It is fully appreciated that the benefits to be gained from the
increased State supervision envisaged above will depend ultimately
on a reformed political system ensuring that the State is
controlled by a Government genuinely devoted to the purpose of
improving the living standards of the people.

The freeing of the political system from the domination of the
financial groups apparent [in] even the brightest period of
democratic political activity in Japan between the two world wars
will contribute towards the establishment of genuinely democratic
political system in that country. Such a result will not of course
be obtained merely by destroying the Zaibatsu but will depend also
upon the vigour with which trade union movements and workers
organisations are encouraged and enabled to participate actively
in political life.