Foreign Relations of the United States, 1950, East Asia and the Pacific, Volume VI

890.10/6–2050

Memorandum by the Financial Attaché of the Mission at Tokyo (Diehl) to the Acting United States Political Adviser for Japan (Sebald)

confidential

Tokyo, June 20, 1950.¹

Subject: The Allison Memorandum² on Creation of a Special Yen Fund to be Paid by the Japanese Government for United States Aid to be Granted or Loaned by the United States to South Asian Countries.

The Proposal rests upon two basic assumptions:

1) That Japan will require about $160 million in aid from the United States in FY 1952 and OIR estimates that with the adoption of the proposed program it will be at least five years before Japan achieves self-support and if the program is not carried out it is unlikely “that Japan will be able to maintain politically tolerable living standards on a self-supporting basis at any time in the foreseeable future”.

2) “Countries which should be markets for Japanese goods and which desire them are unable to make payment either in usable currencies or in foodstuffs and raw materials which Japan might need.”

1. These assumptions are open to serious question. Cumulative evidence indicates that Japan is in fact much closer to self-support than the above forecast. The Japanese Government is currently providing, through the Termination of War Account, unrequited goods and services to the Occupation which, under normal accounting procedures, would be counted as invisible exports. This item now approximates the value of U.S. aid; hence, Japan is very close to paying its own way.

During the last year, Japan’s dollar balances have risen steadily and are now in excess of $270 million, exclusive of $125 million in gold. OJEIRF and PL 820³ financing, totaling about $100 million, has been fully repaid. The Japanese standard of living has risen substantially since 1945. Average calorie consumption was estimated at 1830 per capita in FY 1946 (by the Department of the Army) and at 2075 for FY 1950. The Japanese Welfare Ministry, in a survey completed in May 1950, estimates that urban inhabitants averaged 2016 calories a day in 1949 and that in agrarian communities the figure was 2280; poulation increased by 1,700,000. That the standard of health has improved substantially is verified by the Education Ministry which surveyed 16,390,000 school children in 1949, the survey revealing measurable increases in height and weight for both boys and girls. Despite a steadily expanding volume of exports and increasing domestic consumption, nearly $100 million worth of unsold stocks have accumulated. Rejection of staple cereal rations exceeded 40,000 tons in March and April, and in some areas it is reported that stockpiles grew moldy and had to be disposed of as fodder.

In the face of this substantial improvement and current strong position, the assumption that Japan has and will continue to have a serious balance of payments gap as a fixed point of reference it seems to me is misleading and unsound. It represents a substantial underestimation of the strength, ability and industry of the Japanese economy. It may be well to recall that prior to the war in the fields of shipping, banking, trade, and scientific and industrial development the Japanese were the unquestioned leaders of the Far East. Japan’s productive efficiency even under present conditions is so highly regarded (and feared) by foreign private and government competitors that powerful pressures are constantly applied to prevent Japanese economic resurgence.

2. The balance of payments position of Japan is a result not of one but of manifold causes, including the following:

a) The pursuit of intensely nationalistic policies particularly by the newly independent states of the Far East. These policies have resulted in the fixing of absolute quotas on or prohibition against the importations of Japanese goods.

b) Prejudice against dealing with Japan.

c) Heavy military and other domestic expenditures throughout Southeast Asia in preference to economic development projects which might utilize Japanese goods.

d) The prevention of the development of a full-sized, major power Japanese merchant marine. (This has required Japan to pay about $250 million annually to foreign shipping companies while its own ships lie idle. Japan’s tonnage which is now tied up is reported at 900,000.)

e) Refusal to permit the opening of Japanese commercial and industrial branches and offices abroad.

f) Refusal to admit Japanese foreign traders in certain important foreign markets.

g) Refusal to permit Japanese banks and insurance companies to perform customary financial services to facilitate foreign trade.

h) The enforcement of limitations on tourist facilities offered by Japan.

i) The continuance of Japan’s default on its external debt and uncertainty on the part of foreign investors with regard to Japan’s ultimate economic position, with perhaps heavy reparations claims.

j) Political and economic instability approaching chaos in areas which were formerly important trading centers throughout the area. Notable is the decimation of Japanese-Chinese trade.

k) Absence of a trade agreement with the United States.

A glance at the above items, which are indicative rather than inclusive, points away from any credit scheme as a primary solution to Japan’s balance of payments deficit. The basic postwar economic disequilibrium in the Far East in the form of over-consumption and under-production with ever increasing populations cannot be solved by means of one shot or perpetual U.S. financial subsidy. In contrast, alteration of any one of the above factors could materially improve not only the Japanese balance of payments position but other areas in the Far East. The one commodity which Japan has in superabundance is labor in its variety of skills, Japan produces and can greatly expand its production of luxuries for a luxury market. Silk brocades of high value and containing little raw material, lacquered articles, porcelain and china, oriental objets d’art, Chinese-type rugs, and handicraft silver products, are indicative of this type of potential export. But the Far East in general is swinging to austerity. India, Pakistan and Korea have applied strict controls to prevent the importation of luxuries. In contrast, the United States as the biggest luxury market in the world could provide a substantial increase hi dollars to Japan if an arrangement were made to cut the U.S. tariff on Japanese goods, say by 50 per cent. Any program to balance Japanese trade on the basis of the manufacture and export of capital goods may develop a trade pattern so artificial that it could not be continued on a business basis after the termination of American aid; therefore, an extended period of further aid might be regarded as necessary. Without indigenous sources of iron and steel and most other basic raw materials, it is erroneous to assume that Japan’s recovery must rest upon capital goods export.

3. Other factors endangering success under the proposal are:

a) Adoption of the program would remove an effective instrument of fiscal policy under American control to achieve stabilization of the Japanese economy. Inflationary factors have not been fully eliminated, and, were the Counterpart Fund to be restricted solely to export financing, inflationary factors might again regain control in Japan.

b) The adoption of this program and creation of an agency to administer it could easily become an important element in perpetuating aid to Japan longer than necessary to the detriment of a strong, viable Japanese economy and at unjustified cost to the U.S. taxpayer.

c) Pressures to utilize the full amount of the funds available would inevitably arise and might result in ill-conceived projects and wasteful administration.

d) There have been repeated assertions from responsible U.S. Government officials to the effect that a greater degree of operational responsibility is being given to the Japanese Government in controlling its own affairs. These statements and implementing actions have been warmly received by the Japanese. Under current procedures the Economic Stabilization Board and Ministry of Finance, Japanese Government, prepare plans and programs involving the use of Counterpart funds. Of course, these plans are subject to SCAP and Washington review; but the Japanese feel that they have an important voice in determining the uses to which these funds are put. It would be regarded as a major step in the opposite direction if the Counterpart Fund were removed entirely from Japanese control and administered by any outside agency. It further appears appropriate to afford the Japanese the right to select those imports deemed most essential to its requirements and to purchase them wherever the purchase can be made to best advantage if the Japanese Government is required to make full payment for U.S. aid imports either in yen or in dollars.

e) To create a U.S. agency to loan as much as ¥72 billion annually to other areas would render exceedingly difficult exchange control operations by the Foreign Exchange Control Board. Rather than creating this new external organization, it would seem more advisable to give a maximum of discretion and responsibility to the Japanese in financing its foreign trade, emphasizing the mutuality of U.S. and Japanese objectives. Many Japanese leaders are disturbed at Soviet expansion in Asia and not only oppose it, but would like to line up with us in opposition. That cooperation, however, is a far cry from being placed in a position where they are told: “Here are the goods you need from the United States. You are directed to pay for them in yen and we will spend the yen as we see fit.”⁴

W. W. Diehl

1. This memorandum was handed to Mr. Allison at some time during the second visit of the Dulles mission to Japan: June 21–27. (Memorandum by Mr. Sebald to Mr. Allison, June 28, 890.10/6–2850)

2. Not found in State Department files. Documents in files 890.00, 890.10, 890.131, 894.13, and 894.131 for 1950 indicate that variations on the proposal described and analyzed above had been under intensive consideration in both E and FE that spring. In a letter of June 16 to Joseph M. Dodge, Financial Adviser to SCAP and Fiscal Adviser to the Under Secretary of the Army, Edward W. Doherty, Officer in Charge of Economic Affairs in the Office of Northeast Asian Affairs, had said in part that the yen fund proposal had been “tentatively” approved in the Department. (894.10/6–1650)

   In a memorandum of March 14 to Mr. Butterworth, Mr. Allison had said in part that the yen fund proposal, “… if approved, may be the answer to the Army’s proposal set forth in NAC [ NSC ] 61 for coordination of Far Eastern Aid programs.” (894.00/3–1450) NSC 61 of January 27, 1950, and its later variants are not printed. (Executive Secretariat Files: Lot 63D351) Neither the yen fund nor the NSC 61 proposal was effected.

3. Approved June 29, 1948. For text, see 62 Stat. 1098.

4. NA’s monthly economic report for the period June 9 to July 19 read in part: “Proposals to make yen proceeds of U.S. aid supplies to Japan available to countries of South and Southeast Asia for development purposes were discussed by Mr. Thorp … with General Magruder … [who] raised a number of objections of which the principal one was that it would not be fitting to exact payment for U.S. aid imports at the same time that Japan was making large expenditures to maintain U.S. forces. It was agreed to establish a Working Party of State and Army officers to examine the proposals further.” (Attachment to memorandum from Mr. Allison to Mr. Rusk, July 21, 894.00/7–2150)

   Evidence of further consideration of this proposal during 1950 has not been found in State Department files.