CANBERRA

Australian Policy Towards Japan
1. Australian policy towards Japan must necessarily be directed to
protecting Australia against the dangers of possible future
aggression.

2. Japanese aggression in South-East Asia in the last war was
dependent on control of Manchuria. Now lacking the raw materials
and resources necessary to wage an aggressive war on her own, the
principal danger of future Japanese aggression lies in the risk
that she may form an alliance with, or come under the control of,
the Communist powers. Once such an alliance were formed, the
balance of power in Asia would be weighted against us. Our policy
must therefore be to prevent this.

3. Since the peace treaty under which Japan regained her sovereign
independence, Japan has been free to modify, and has in fact
modified, many of the reforms introduced during the Occupation.

But the present Government, whilst strongly conservative in
character, is pursuing a policy at home of moderation and abroad
of alignment with the Western bloc.

4. Recently, the Japanese Government has faced a series of
political crises, which have tended to weaken the prestige of
parliamentary democracy in Japan. On the one hand, extreme right-
wing nationalist groups have become more active and, on the other
hand, there have been gains in numbers and influence by the
Communists and their sympathisers. Parliamentary democracy has no
firm roots in Japan-it might give way before an economic crisis or
in the face of persistent hostility towards Japan overseas. It is
of the greatest importance to Australia that Japan should continue
to have a moderate and peaceful form of Government, and Australia
should accordingly place as few hindrances as possible before it.

5. Anti-Japanese bitterness and fear of Japan in Australia, though
understandable, could result in policies which are more likely to
increase the potential dangers than to guard against them.

6. For example, if Japan is denied reasonable trading facilities
and access to the food supplies and raw materials necessary to
maintain her economic solvency, Communism in that country will be
encouraged. Not only will Japan be obliged to trade with China on
Communist terms, but the fall in living standards and growth in
unemployment could greatly facilitate Communist subversion within
the country. Some Japanese trade with China is inevitable; but the
more Japan can develop her commercial relations with the non-
Communist world, the less dependent she will be on the Communists.

7. Similarly, if reasonable Japanese overtures for friendly
relations with countries such as Australia are rebuffed, the
resulting frustration will encourage militant nationalism in
Japan. This would help the extremists, who are a group likely to
contemplate a deal with the Communists as a means of reasserting
Japan's position.

8. We should therefore endeavour to avoid policies which are
likely to encourage the growth of Communism or extreme nationalism
in Japan. Instead, Australia should aim at encouraging a moderate
Government, such as exists at present, and at helping to keep
Japan in the Western camp. In practice, this approach means that,
subject to our essential interests, Australia should be prepared
to encourage trade with Japan and that we should bear in mind at
all times the dangers of provoking Japan in ways which are likely
to stimulate aggressive nationalism. As the Australian Prime
Minister suggested in his 'Man to Man' broadcast on 17th March
[1], Australia should behave as a 'grown-up nation which knows
that the greatest stumbling block to peace is the perpetuation of
enmities'.

9. Such a policy accords with the views of the United States and
the United Kingdom.

10. The attitude of the United States was clearly set out in an
address made by President Eisenhower on 22nd June to the National
Editorial Association. He said that the preservation of a free
Japan was the keystone of United States policy in South-East Asia
and the Pacific. If the Kremlin and the rulers of Communist China
were able to control the vast resources of Asia and give Japan the
task of providing naval strength, the Pacific could become a
'Communist lake'.

11. In a paper communicated to the Australian Government on 17th
June [2], the United Kingdom argued that Japan represents a
potential danger to the Commonwealth and to the western world, in
that, if Japan were to throw in her lot with China, the
combination of Japanese technical skill, equipment, and drive with
Chinese man-power, would mean a decisive shift in the world
balance of power. The United Kingdom therefore considers that its
cardinal aim in the Far East should be to prevent Chinese/Japanese
association and that this can only be done by bolstering Western
influence and proving to the Japanese that it is in their interest
to cooperate with the West. In order to carry out this aim, the
United Kingdom says it is prepared:

(a) to play its part in preventing economic distress which might
foster Communism in Japan, by maintaining as high a level of trade
between Japan and the sterling area as is consistent with the
national interest; and
(b) to take whatever opportunities occur to effect a change in the
climate of United Kingdom opinion towards Japan so as to bring it
into closer accord with the overriding requirements of the
national policy and interest.

12. At present, the development of Australian/Japanese relations
is bound up with a number of outstanding issues, brief details [3]
on which are attached to this submission. They are:

Trade with Japan
Japanese Defence Forces
Pearl Fisheries Dispute
Compensation for Former Prisoners of War of the Japanese
Japanese Violation of Australian Territorial Waters
Japanese Class 'A' War Criminals
Japanese Class 'B' and 'C' War Criminals
Criminal Jurisdiction over UN Forces in Japan
B.C.O.F. Diverted Stocks Account
Japanese War Dead in Australian Territories Japan and the Colombo
Plan
Inclusion of Japan in S.E.A.T.O.

Japanese Activity in New Guinea.

13. It is recommended that, in handling issues involving our
relations with Japan, Australia should give special attention to
the need to prevent the formation of a close alliance between
Japan and Communist China; and Australia should be guided by the
principle of allowing Japan, through cooperation with non-
communist nations, to have reasonable facilities for taking a part
in her own defence, for meeting her economic difficulties by
expanding her export trade, and for developing her political and
economic life and institutions in a way that will strengthen
Japan's association with the West.

Appendix A

SECRET

AUSTRALIAN TRADE WITH JAPAN

Postwar Changes in the Japanese economy
1. Today Japan's exports are only 30% of what they were before the
war.

2. Japan has lost her pre-war revenue from shipping and
investments abroad. She has been cut off from her pre-war sources
of cheap foodstuffs and raw materials (cotton, coal, iron ore,
metals, etc.) in her former overseas possessions, Manchuria and
North China; and has lost these formerly important outlets for her
exports.

3. Her industrial costs have been further increased by the higher
transport costs (compared with the previous sources) from the USA
and other sources of essential imports; by heavy inflation within
Japan itself, and by the social reforms instituted during the
occupation period resulting in higher wage costs.

4. Apart from the increased costs of her exports Japan's export
trade has suffered from an over-concentration of Japanese
production in certain directions, notably in the iron and steel,
chemical and textile industries. Moreover, until recently most
countries discriminated against Japanese goods (as some still do
including Australia) through import restrictions and the
application of higher rates of duty than those generally levied.

5. Further difficulties are caused by the rapid increase in
population.

Balance of Trade
6. Japanese trade from 1949 to 1953 was as follows:-

Exports Imports Trade Deficit
US $m. US $m. US $m.

1949 509.7 904.8 395.1
1950 820.1 974.3 154.2
1951 1354.5 1995.0 640.5
1952 1272.9 2028.0 755.1
1953 1029.1 1962.8 933.7
(10 months)

Financing of Payments Deficit
7. Total Japanese external payments from l945 to 1952 were $8.4
billion, but only $5.5 billion were covered by export receipts.

The deficit plus an accumulation in reserves of about $1.0 billion
at the end of May, 1953, were covered by US aid imports and other
forms of relief, and later by special procurement for, and
expenditures of, the US armed forces. Between the end of the war
and March, 1953, extraordinary financing received by Japan
amounted to $4016 million. Without this the Japanese economy could
not have recovered even to present levels. A continuation of US
aid, on a substantial scale, will be necessary for some time until
Japan can rectify the position through more efficient and cheaper
production and by a considerable increase in exports. At present
the Japanese economy is not self-sustaining.

The future pattern of trade
8. Japan is at present seeking to expand her exports throughout
the world by securing accession to the GATT and by other avenues
of trade promotion.

9. While there are substantial pressures from Japanese
manufacturing and trading interests to restore some of Japan's
pre-war import and export trade with China, this is limited by two
factors:

(i) The strategic controls at present enforced by the majority of
countries over exports to China, covering a wide range of goods.

(ii) An appreciation in informed quarters in Japan that, since
China has launched upon a comprehensive programme of
industrialization, a large-scale resumption of trade with Japan is
unlikely, either in imports from China of raw materials or in
exports of cotton fabrics. However, at some future time some
exchange of Japanese capital goods for foodstuffs must be
expected.

10. Japan has also been cultivating South-East Asia as a source of
raw materials (e.g. iron ore) and as a potentially large market
for capital equipment and for textiles and other consumption
goods. Up to the present, this drive has not been very successful,
due in part to the slow process of Asian industrialization, and in
part to competition from European suppliers. Disputes with
countries such as Indonesia and the Philippines over reparations
have also retarded Japanese trade.

Effects of failure in Japan's export objectives
11. Up to the present Japan's economy has been maintained by
American assistance. With this assistance, Japan has been able
steadily to increase production, maintain a high level of
employment, and cover her payments deficit. If U.S. assistance
were to decline, and were not offset by some increase in trade
with other countries, the internal consequences in Japan would be
serious. Growing unemployment, food shortages, and other economic
difficulties, following upon a further deterioration of the trade
position or a diminution of aid, could complicate the internal
political situation in Japan and create opportunities for labour
troubles and Communist pressures, or to an extreme nationalist
group coming to power and ready to do a deal with its communist
neighbours.

Trade policy towards Japan
12. The foregoing points to the adoption by other countries of a
trade policy towards Japan in line with her own objective, namely
a broadening of opportunities of trade with the 'free world'. This
would have the twofold merit of not forcing her into undue
reliance on trade with China, and reducing any incentive towards
over-concentration of Japan's commercial activities on South-East
Asia.

13. The Sterling Area could play an important role in this
connexion. Japan must try to reduce her present reliance upon high
cost imports from the U.S.A. To achieve this her present adverse
balance of trade with the Sterling Area as a whole must be
adjusted in such a way as to enable Japan to pay for her imports
from non-dollar countries through increased exports to them.

Attitude of other countries
14. 23 member countries of the GATT agreed at the end of 1953 or
since to apply that agreement between themselves and Japan. This
means that they undertook to extend most-favoured-nation tariff
treatment to imports from Japan and to accord Japanese products
the same import licensing treatment as that accorded to imports
from the majority of other countries. The countries concerned
were:-

Austria
Belgium
Brazil
Burma
Canada
Ceylon
Chile
Denmark
Dominican Republic
Finland
Haiti
India
Italy
Luxembourg
Netherlands
Nicaragua
Norway
Pakistan
Sweden
Turkey
U.S.A.

Uruguay

15. The member countries of GATT which have declined to extend the
GATT to Japan are Australia, United Kingdom, New Zealand,
Federation of Southern Rhodesia and Nyasaland, France, Indonesia,
Cuba and Peru. However, of these the U.K. accords m.f.n. tariff
treatment to Japan de facto. The U.K. also renegotiated in
January, 1954, a payments agreement with Japan, which provided
despite protests from Lancashire cotton interests for imports of
Japanese textiles and other goods. New Zealand recently concluded
with Japan, subject to ratification, an agreement under which
m.f.n. tariff treatment and soft currency licensing treatment will
be accorded over a range of goods which according to Japanese
reports covers about 90% of the trade.

16. Of the Commonwealth countries which face difficulties in
reconciling the application of GATT with their internal problems,
Canada has concluded an agreement with Japan which enables Canada
to control the duty-paid price at which Japanese goods are sold in
Canada. This has apparently met the fears of Canadian
manufacturers while allowing Canada to apply GATT concessions to
Japan.

17. Indonesia's non-compliance is believed to be due to the
absence of a Peace Treaty and reparations agreement with Japan.

Apart from Australia, France is the only major trading nation
which has not yet liberalised its treatment of Japanese goods,
France's attitude is doubtless dictated by her own difficult
economic position and high costs of production.

18. The U.S.A. has strongly and consistently supported Japan's
attempts to accede to the GATT. The U.S. considers that the
strengthening of Japan's trading position and making her economy
self-sustaining are essential to retain Japan within the Western
World; the U.S. points to the gap in the NATO alliance because of
Germany's position and are anxious that this deficiency will not
be repeated in Asia. U.S. efforts were responsible for the
extension to Japan of the provisions of the GATT by the countries
listed above. To make Japan's association with the GATT more
permanent the U.S.A. has now offered to negotiate further
reductions in the U.S. tariff with those countries which are
willing to undertake tariff negotiations with Japan under the
GATT, with a view to Japan's eventual full accession to the
Agreement.

19. U.S. endeavours to assist Japan are further demonstrated by
their approaches to Australia on the possibility of establishing a
source of coking coal here for Japan to replace high-cost American
coal.

Australia's position
20. Australia is the largest Sterling Area exporter to Japan. Our
exports amounted to �84m. in 1952/53 against imports of �4.7m. We
discriminate against Japan in our import licensing measures as
well as by applying the General Tariff (the highest rate) to
Japanese goods. Some relaxation has been made in import licensing
treatment, but the present maximum permissible level of licensing
is only �A21m. per annum; even so, imports for the year 1953/54
were only �A6.5m.

21. Japan has already begun to seek alternative sources for goods
hitherto imported from Australia. Whereas Japan has so far been
buying 90% of its wool from Australia, it will this year buy only
50% from Australia.

22. It is natural that Japan should attach great importance to an
adjustment of its trade relations with Australia, and has made
formal approaches to this end, which await reply. Not merely from
the commercial viewpoint, but for wider considerations of
international policy, it is necessary for the Australian
government to re-examine the position.