The Chargé in Japan (Neville) to the Secretary of State

No. 1424

Sir: I have the honor to report that for some time past there have been vague rumors of differences of opinion between the Kwantung [Page 331]Army and the management of the South Manchuria Railway, which culminated in the resignation on August 2, 1935, of the President of the Railway, Count Hirotaro Hayashi, who had held the post for three years. According to Rengo, Count Hayashi was not in agreement with the Kwantung Army nor with some members of the staff of the Railway, including the Vice-President, Mr. Hatta.…

On the day of the acceptance of Count Hayashi’s resignation, Mr. Yosuke Matsuoka was appointed President of the South Manchuria Railway by the Cabinet, with Imperial sanction. Mr. Matsuoka, who is now fifty-five years of age, was educated in the United States, at Oregon Law College.…

Mr. Matsuoka is a man of wide experience, considerable political ability, great energy and great force of character. He also possesses to some extent that peculiar idealistic vision of which General Araki was the great proponent, but, unlike General Araki, Mr. Matsuoka keeps his feet on the ground as well as his head in the clouds. Because of his force of character, his intense patriotism, his belief in the destiny of the Japanese people, and his idealistic vision, Mr. Matsuoka is popular with the Japanese Army and with the numerous patriotic societies.

Although changes in the head personnel of the South Manchuria Railway have taken place frequently in the past and have aroused little comment, it is generally felt that the appointment of Mr. Matsuoka to the position of President at this particular moment has some special significance. The principal purpose of this despatch, therefore, is to point out the significance of the appointment, as seen by the Embassy.

The obvious purpose of the appointment of Mr. Matsuoka to the position of President of the South Manchuria Railway was to place in the position someone who would not be in conflict with the authorities of the Kwantung Army, as Count Hayashi had been, and who would cooperate with the Army in its projects. The question arises, however, as to the especial necessity which called for the change at this particular time.

The Osaka Mainichi, English Edition, of August 7, 1935, lists the unsettled problems faced by the new head of the South Manchuria Railway as follows:

Reorganization of the business system of the Railway.…
Reorganization of railway enterprises in Manchuria.…
Reorganization of personnel.…
Economic activities of the South Manchuria Railway in China. This problem involves the making of the necessary investigations, decisions as to enterprises to be undertaken, and the raising of the necessary capital.

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Although no official statement has been made on the subject, it is the belief of many observers of the situation, including the foreign newspaper correspondents, that the fourth problem given above, namely, the economic exploitation of North China by the Japanese, is the basic factor causing the appointment of Mr. Matsuoka as President of the Railway at this time.

Since the recent North China incident, as a result of which the anti-Japanese elements in North China were largely eliminated and the Japanese military obtained a measure of political control over the region, reports have appeared from time to time in the newspapers in regard to the projected Japanese exploitation of the natural resources and means of communication in North China. Reports have also appeared to the effect that the Kwantung Army intends to use the South Manchuria Railway as the spear-head in this economic penetration of China. Count Hayashi was a man of moderate views, a good executive of the Railway, but hardly the man to carry out the “positive” policies of the Kwantung Army. Hence the appointment of Mr. Matsuoka, who is a man vastly better suited to the work which the Kwantung Army apparently is planning than is Count Hayashi.

This view of the basic cause of the change in presidents of the Railway is borne out by various hints in the newspapers. The Tokyo Nichi-Nichi on August 3 stated that, under Mr. Matsuoka, the South Manchuria Railway and the Army will work together in trying to formulate a sound plan for investment in North China, “taking into consideration the economic interests of Great Britain, the United States and the Soviet Union in that region”. On August 2, General Minami, in an interview given newspaper men in Hsinking, stated, in reply to a question as to his opinions in regard to the projected move to secure Sino-Japanese economic rapprochement through the South Manchuria Railway, that he believed that not only North China but all China could be included in such a move.…Mr. Matsuoka himself, in a statement which he made to the members of his Society for the Dissolution of the Political Parties on August 4, implied that his principal task as President of the South Manchuria Railway was the penetration of North China. His statement, which also gives some idea of the visionary character of the man, reads in part as follows (Japan Advertiser translation):

“Looking over the northeastern area of the Asiatic mainland, we see that Manchuria and Mongolia have already passed through the first stage, that of reshaping, and are entering on the second stage, that of internal perfection. Because of the activities of the Soviet Union and the situation prevailing in China, Japan is going to start operations in North China. Most of the people of Japan do not yet quite understand the great importance of these future operations, and their lack of understanding, I believe, will beyond doubt bring about a really [Page 333]serious crisis in the nation. Regardless of how serious the crisis may become, Japan cannot halt its North China operations. The arrow has already left the bow. The progress of these operations will decide the destiny of the Yamato race, its rise or fall in the world situation.

“To carry through these operations, domestic renovation is inevitable. It is for this reason that I am championing the cause of the Showa Restoration. I am going to Manchukuo and shall take leave of you for a while. The true spirit of the movement for dissolution of the political parties is in no sense connected with politics. It is a spiritual movement.”

The appointment of Mr. Matsuoka to the position of President of the South Manchuria Railway was received with approval in nearly all circles in Japan and Manchuria.…

. . . . . . . . . . . . . .

It is reported, however, that the financiers of Japan are not greatly pleased with Mr. Matsuoka’s appointment. It appears that they are afraid that Mr. Matsuoka, with his visionary ideas, backed by the Kwantung Army, with equally or perhaps more visionary ideas, may plunge the finances of “Manchukuo” and the South Manchuria Railway into such difficulties that the Japanese backers of enterprises in Manchuria will be faced with ruin.… The Japanese financiers are afraid of this situation, and fear that Mr. Matsuoka, with his Army affiliations, may take some action which will have a disastrous effect upon Japanese finances. The Army, moreover, at first opposed the appearance of “big business” on the Manchurian scene, although later it found that it was necessary to make some concessions to the financiers in order to obtain capital for Japanese enterprises in Manchuria. The Japanese financiers resent this attitude of the Army, and likewise resent the appointment of any man who is sympathetic with Army views as President of the largest Japanese corporation on the Asiatic mainland.

Mr. Matsuoka, in his press interviews, did not comment upon the South Manchuria Railway “mission” in North China. He expressed the opinion that the Railway should now devote itself entirely to economic matters, paying no attention to political matters; that the first consideration should be the increasing of the economic power of the Manchurian farmers, who comprise 90 per cent of the population, as this would increase the earning power of the Railway; that forestry, mining and cotton-raising should be encouraged in Manchuria; and that it would be a mistake to encourage manufacturing industries in Manchuria, as such would waste Japanese capital, exert pressure upon Japanese industries, and bring little benefit to the farmers of Manchuria.

Respectfully yours,

Edwin L. Neville