CANBERRA, 26 July 1948

TOP SECRET
A short reply is being sent to the Commonwealth Relations office
telegram No.200 [1], to which you referred in your personal
message to me of 22nd July regarding the level of economic life in
Japan.

2. This is a matter which we have been considering throughout the
period of occupation. We share your fears, and agree generally
with your views.

3. It has been a cardinal aim of the policy of the present
Australian Government that the United States should share fully in
the future preservation of security in the Pacific. It follows
that we wish to see the United States continue to play an
appropriate part in the supervision of Japan. From this point of
view at least, it is reassuring to note that the Americans at
present appear to have no intention of abandoning their
responsibilities.

4. While we acknowledge the genuineness of the United States
desire to turn the Japanese into a democratic and peace-loving
nation, it is, however, impossible to avoid the conclusion that
American thinking on Japan is at present obsessed to the exclusion
of other considerations by fear of Soviet motives and designs.

There is ground for this fear, but it appears to us that the
Americans are proceeding in a fashion calculated in the long run
to defeat their own ends. In setting out to build up the Japanese
economy to such levels as those contemplated in the Strike and
Johnston Reports, they are in our view, not only unnecessarily
provoking Soviet Russia, but are seeking to restore Japan to a
position of power and assertiveness in which she would soon want
to be entirely rid of American control, however administered. The
United States could thus conceivably find itself forced to
withdraw from Japan without any guarantee that a resurgent Japan
would not seek alliances with other powers and pursue policies
dangerous to all of us.

5. We fully agree, therefore, that one or our principal objectives
at this time should be to persuade the Americans that their
insistence on building up the Japanese economy to levels which
they appear to contemplate is against their long term interests as
well as our own. The United States desire to be relieved of the
heavy burden which the maintenance of Japan imposes at present on
the American taxpayer is readily understandable. It seems clear
that some revision upward in levels of certain basic industries,
such as are suggested in paragraph 6 of telegram 200, Will become
necessary. But further detailed study will be required before any
such increases can be brought into balance with our minimum
security requirements.

6. We are doubtful whether the attempt at persuasion envisaged in
paragraph 8(ii) of your 200 will alone have much effect on the
United States. We share your view that the Americans are unlikely
to initiate any move towards a Japanese peace settlement, at least
until the United States presidential election is over.

Nevertheless, it is artificial to try to separate economic from
political and strategical considerations in this matter, and we
feel that the approach to the Americans should be on a basis which
includes the arguments set out in paragraph 4 above. We sense from
Mr. Dening's conversations in Washington that the United States
Government has not really faced up to these arguments. We agree
with you that an early peace settlement, accompanied by a treaty
between the United States and Japan under which the United States
would receive base facilities in Japan, offers the best assurance
of security in the Pacific, and we feel that, if the Americans
could be convinced that this would best serve their political and
strategical interests, they might be more disposed to agree to the
fixing of economic levels which would make Japan self-sufficient
but not dangerous.

7. We are anxious that the authority of the F.E.C., as the body
responsible for the formulation of policy towards Japan, should
not be prejudiced, as it will be to an increasing extent if the
United States continues to follow its present course unchecked.

8. Two important considerations remain to be mentioned. The first
is that early attainment of a reasonable standard of living for
the Japanese, as envisaged by the Canberra Conference, is in our
view a guarantee against the spread of Communism in Japan and a
service to world peace. The second is that the Japanese economy
should not, on the other hand, be built up out of proportion with
the economics of the countries of South-East Asia, and
particularly those which suffered by Japanese invasion. It was
with this in mind that we put it to F.E.C. some time ago that we
would agree to forgo all but a token quantity of reparations, the
rest to be devoted to re-building the countries of South-East
Asia. Our security depends to an important extent on the economic
stability and welfare of the peoples of South-East Asia, as it is
only progressively improving living standards in this area which
can prevent natural aspirations towards nationalism being
exploited by subversive elements whose objectives are totally
different and contrary to our security interests.