The Japanese Embassy to the Department of State65

With reference to the memorandum of the Department of State under date of August 9, 1940,66 dealing generally with developments in China and specifically to a series of incidents occurring in the Japanese occupied areas there during June and July of this year, involving American nationals and interests, observations are made as follows:


The economic measures and restrictions now being enforced in portions of China under Japanese occupation are intended solely to establish economic integrity in the regions concerned and have been necessitated by the requirements of military operations. No discrimination whatever has been intended toward the United States or toward any third power.

The difficulties in obtaining permits for shipments by American firms out of Shanghai to the hinterland and the Yangtze Valley (either by rail or by boat) are attributable to the fact that the preparations for the opening of the Yangtze River to general traffic are not yet completed and that, owing to the conditions prevailing along the route, railway facilities are not available to meet all demands. The further fact that military operations had to be launched as recently as July of this year in the upper Yangtze region may account for the difficulties.

In North China, exchange drawn on all exports and interport exports from that area are purchased by the Federal Reserve Bank of China, which makes 90% of the export exchange available to banks as “cover” for imports and interport imports. Thus a system [Page 867]of “linking” has been worked out between 90% of the export values and the total of import values. However, due to the recent introduction of non-exchange import measures, and the necessity of adjusting the distribution of the concentrated exchange of the Federal Reserve Bank of China among the exchange banks, it was made obligatory to obtain the prior approval of the Federal Reserve Bank of China for import and interport import shipments of all commodities, except food stuffs, within the limits of the above-mentioned export-import linking system. The reasons for the adoption of the new measures may be summarized as follows:

In order to prevent a food shortage such as occurred in North China last year, the North China authorities have found it necessary to appropriate for the importation of food stuffs the limited amount of available exchange. However, in order that the actual application of the measures should not obstruct the normal transaction of business, due consideration has been given to shipments already under contract. Essential commodities other than food stuffs are also accorded preferential treatment.
Recently the trade of North China has shown an excess of imports over exports. This undesirable situation has been due in part to non-exchange imports effected by the illegal use of fapi, circulation of which is prohibited in North China. The authorities have had to adopt corrective measures for the stabilization of the financial and currency system.

The above-mentioned measures are not applicable to imports from Japan and Manchoukuo. These exceptions, however, have not been made exclusively to benefit Japanese and Manchoukuoan concerns at the expense of nationals of third powers. The reasons why imports from Japan and Manchoukuo are not subject to these controls will be clear from the following facts:

A common currency system prevails throughout Japan, Manchoukuo, and North China on the basis of parity between the yen and yuan. It is therefore only natural that there is a difference between the treatment accorded to Japan and Manchoukuo and that applied to third powers with a currency basis different from that of North China.
Japan holds herself responsible for the maintenance of the value of bank notes issued by the Federal Reserve Bank of China. Therefore, in order to keep a sufficient supply of essential commodities and to maintain the value of Federal Reserve bank notes, the import of an enormous amount of such commodities into North China is necessary. Such importation, however, has to be made without impairing the exchange situation of North China. On account of the parity of currencies, imports from Japan and Manchoukuo do not affect the exchange situation, but imports from third powers must be placed under control.

In short, the trade and exchange restrictions have been adopted by the North China authorities only as an indispensable aid to [Page 868]establishment of economic integrity and of a sound currency system. As long as foreign exchange banks and foreign trade merchants operating in North China adjust themselves to the policies of the authorities in a true spirit of understanding and cooperation, there will be no difficulty in their obtaining the necessary permits, or in their conduct of business. It is therefore desired that the Government of the United States advise American business men in North China that to conduct their business in a manner suited to the special conditions of the region will best serve their own interests in the long run.


It is noted that the Department of State asserts that there have been “agitation directed against American interests which has taken the form of mass meetings and demonstrations by Japanese residents and an inflammatory press campaign in the Japanese-controlled press” in the Japanese occupied territories in China and similar developments in Japan “which have raised questions as to the welfare and security of American nationals residing in that country.”

Investigations by Japanese authorities show that most of these incidents may be regarded as an aftermath of the arrest and rough treatment of Japanese gendarmes by United States marines.67 These incidents will automatically be solved when the gendarmes incident is brought to an amicable settlement. Others are of a sporadic nature occurring under circumstances peculiar to themselves. Incidents during the past months are either cases associated with the gendarmes incident or non-connected cases occurring at short intervals, but they should not be construed as manifestations of a general anti-American movement under official Japanese auspices.

In connection with the case of the arrest and rough treatment of Japanese gendarmes by United States marines, it has been reported that the Japanese authorities have intentionally tried to capitalize the incident in order to stimulate anti-Americanism. This is an utterly false accusation. It is true that the Japanese press in Shanghai voiced a strong protest against the arrest and that Japanese civilian groups held mass meetings and denounced the action of the United States marines. However, such actions were entirely spontaneous and should not be taken as an attempt to create anti-American feeling. Natural resentment against maltreatment of members of the regular forces of the Army and a desire to obtain a speedy settlement of the incident were primarily responsible for those popular manifestations of feeling. Needless to say, neither newspaper editorials nor mass meetings have anything to do with the Japanese authorities [Page 869]in Shanghai, who, in keeping with their established policy, maintained strict supervision over the activities of Japanese nationals.

It is essential that the gendarmes incident should be settled at the earliest possible moment. The State Department is understood to have sent instructions to the American authorities in China, vetoing the local settlement which had tentatively been reached. That step is much to be regretted, especially in that the instructions apparently failed to evaluate properly the circumstances under which the incident took place and disregarded a practical proposal by which the incident was about to be brought to an amicable settlement by the parties directly concerned. It is sincerely hoped that in situations of this kind the Department of State will follow a policy of recognizing local settlements reached on the spot by the highest military authorities of the two countries.

The order of expulsion from Shanghai of foreign press correspondents was aimed solely at those correspondents who, under the cloak of Chinese language newspapers, have engaged in offensive propaganda against the Nanking regime, including some who have been in secret league with rebels and have been aiding them in conspiracies to overthrow the new regime. It was under such circumstances that Mayor Fu of Shanghai, presumably following the Nanking Government’s instructions, sent a letter to the British and American consuls requesting them to see to it that these correspondents would leave Shanghai. The above step may be construed as a mere measure of self-protection.


“Terrorism” in Shanghai is no new phenomenon. At the outset of the present Sino-Japanese incident, Japanese were the victims of such terrorism, but since last year, violence has been directed largely against the followers of Wang Ching-wei.67a Terroristic violence was first resorted to by special agents of the Chungking regime, and statistics show that the victims among adherents of the Wang Ching-wei regime out-number by far those of the Chungking elements. The inability on the part of the police authorities of the Settlement to counteract the terrorism of the Chungking agents in turn left room for retaliations by the adherents of Wang Ching-wei, who sought therein a form of self-protection.

Notwithstanding this obvious fact, the Settlement authorities and third power nationals, influenced by preconceived opinions, have closed their eyes to the violent measures of the Chungking agents, but have singled out for censure the reacting measures taken by supporters of Wang Ching-wei. It is interesting to note that while the [Page 870]assassination of Mo Shih-ying, publicity agent for Wang Ching-wei, on June 28, 1940, received little notice by the Settlement authorities or the Consular Body, the assassination three weeks later of Samuel H. Chang, publisher of “The Shanghai Evening Post and Mercury,” and the issuance of an order for the arrest of an enemy of the Wang Ching-wei regime last July, suddenly attracted their attention to the extent of “terrorism” in Shanghai and caused them to clamor for measures to combat it. Be that as it may, one must recognize the fact that the Chungking regime is no longer in a position to maintain peace and order in the International Settlement and its vicinity and that the Nanking Government, with the support of the Japanese Army, is the only authority that can be responsible for the maintenance of order there. Nothing but candid recognition of the realities of the changed situation and support of a genuinely practicable system will be conducive to the firm establishment of peace and order in the Settlement.

Consul-General Miura’s statement with reference to a resolution introduced before the meeting of the Shanghai Consular Body on July 25 in regard to terrorism is considered appropriate in the light of the actualities referred to above. He asserted that in order to maintain peace and order in Shanghai it is primarily imperative that all acts of terrorism committed by Chungking elements be terminated. He further stated that any resolution or discussion dealing with terrorism which overlooks this basic point would be useless.

It is obvious that the Nanking Government cannot afford to tolerate acts of violence against its leaders, or any speech or discussion which seeks to repudiate the Government within its own jurisdiction. It must therefore be conceded that measures for the suppression of such seditious activities are within the purview of its right to defend itself against its enemies. So far as the Nanking Government is concerned, it is needless to add that seditious activities committed under the guise of an alien status or of the extra-territoriality of the Settlement cannot be tolerated.


With regard to the case of breaking into the apartment of Mr. Hallett Abend, Shanghai correspondent of the New York Times, by two hoodlums on July 20, and their seizure of Mr. Abend’s manuscript, it seems that certain foreign residents of that city entertain the idea that Japanese officials were behind this incident. However, investigation up to date has failed to establish any ground for the suspicion. Therefore, this incident, which is still under close investigation by the consular police, the Japanese military police, and the municipal police authorities, should be treated as an ordinary criminal case.

The taking of Mr. Relman Morin, Tokyo correspondent for the Associated Press, to the Tokyo gendarmerie headquarters on July 31 [Page 871]was for the investigation of the circumstances of his sending a press dispatch which glaringly contrasted with the official findings. It has transpired that his dispatch was based on information supplied by a member of the British Embassy in Tokyo which distorted the facts connected with the farewell note of Mr. Melville James Cox, correspondent in Tokyo for Reuters, who committed suicide on July 29. Mr. Morin’s report asserted that Mr. Cox’s farewell note was a forgery, a statement contrary to fact. On August 3, the gendarmerie authorities presented the note to the British Consul-General and to the Chief of the Far Eastern Bureau of Reuters, at their request. They both agreed that the note was unmistakably in Mr. Cox’s own handwriting.


The foregoing statements will make clear:

That the recent economic measures introduced by the North China authorities are designed to maintain economic integrity and to stabilize currency; they are not intended as a discrimination against the nationals of third powers; they are essential for the financial and economic welfare of the region, and as such deserve the compliance and cooperation of foreign business men.
That difficulties involved in freight shipments to the hinterland and the Yangtze Valley are due to actual conditions in that area and the necessity for military operations.
That recent series of incidents in Shanghai involving American nationals and interests are spontaneous and natural manifestations, for the most part caused by the mistreatment of Japanese gendarmes by United States marines. These and similar incidents are sporadic and disconnected; it is erroneous to consider them as a systematic or supervised anti-American movement. Settlement of the gendarmes incident should be made by a compromise appropriate in the light of the actual circumstances, as suggested by the local authorities.
That in view of the fact that terrorism in Shanghai originates in most cases in the acts of Chungking agents, it is essential for the maintenance of peace and order that they be removed from the city. It is also necessary to recognize that the Japanese army and the Nanking Government are conjointly the only power capable of maintaining order in Shanghai.
That settlement of local incidents occurring in Japanese occupied areas in China will be possible only through negotiations with the local authorities, regardless of whether or not legal recognition is extended to the central government.

In the light of the above-mentioned views and observations, it is ardently hoped that the Government of the United States will endeavor to solve its problems involving American interests in China by practical methods in keeping with actual realities in that part of the world.

  1. Handed, on August 23, 1940, to the Under Secretary of State (Welles) by the Japanese Ambassador (Horinouchi).
  2. See telegram No. 297, Aug. 9, 1940, to the Ambassador in Japan, p. 862.
  3. See telegram No. 671, July 22, 1940, from the Consul at Shanghai, vol. ii, p. 101.
  4. Head of the Nanking regime and former member of the Chinese Government.