611.9431/132: Telegram

The Ambassador in Japan (Grew) to the Secretary of State

184. My 180, July 6, 7 p.m.9

1. The following are our conclusions reached after study of the proposition as set forth in the Department’s telegram No. 105, July 2, 7 p.m.

2. Toward the end of last year, there began a sharp increase in Japanese purchases of certain commodities likely to be affected by, (a) Japan’s rearmament program; (b) increasing prices in world markets; (c) anticipated increase in Japanese import duties, as announced by Minister of Finance.

There resulted a widespread wave of speculation, as indicated by an increase during the past 6 months of 95 per cent in warehouse stocks of raw cotton alone. There have been also alarmingly heavy purchases of steel and other essential commodities. Although the purchases by the individual traders have been speculative in character, the fact that there have been increased importations of commodities required for the rearmament program and of primary commodities entering into the manufacture of articles for export indicates that it is the considered intention of the Japanese Government to promote such importations in order to permit the carrying out of certain fixed policies. From evidence available it appears very doubtful that Japan can continue to finance such imports without either drastically reducing export of capital funds to Manchukuo or curtailing imports of nonessential commodities.

3. The change reported in my No. 182, July 7, 4 p.m., in the existing exchange control regulations in the direction of more drastic and rigid control indicates that, even though the exchange situation has not improved, and has probably deteriorated since last January, the Japanese Government will endeavor to regulate the exchange situation by restricting imports of goods which do not have bearing on the rearmament program or which do not enter into the manufacture of goods for export rather than to modify national policies contributing largely toward creation of such situation.

4. Capital transferred to Manchukuo for military expenditures and for the industrial and economic development of that area is roughly estimated at about yen 400 million per annum. There is no evidence that notwithstanding the extreme difficulty of Japan’s present exchange position this amount is being substantially curtailed.

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5. Although the present adverse trade situation has been brought to a head by speculation due to certain economic causes, such as rising world prices and the probable increase in Japanese import duties, it is in the main due to increased purchases of commodities needed for the carrying out of national policies. The degree of dislocation in Japan’s trade position which can be traced to such purchases, aggravated as the dislocation is by continued export of capital to Manchukuo, has now become an integral factor in Japan’s economic situation and to that extent may be regarded as a matter of deliberate and calculated policy.

6. It is our opinion that an expression of concern by the American Government over the Japanese exchange control system, for the reason that such control tends to prevent expansion of trade, would probably be met with the rejoinder that Japan had substantially increased its total imports since the exchange control regulations became effective, its imports from the United States having increased in point of value by 30% as compared with the corresponding period of last year. While such increase has been caused chiefly by greater purchases at higher prices of certain primary commodities and semi-manufactured articles there has been increasing difficulty in effecting imports into Japan of other commodities not falling within these two categories. Although it is our opinion that exchange control as now applied is so closely tied up with certain Japanese national policies that it is unlikely that an expression of concern by the American Government would bear useful result, nevertheless we feel that as exchange control is irreconcilable with American commercial policy and as it is being used to restrict imports of certain types of American products, an expression of concern such as that outlined in Department’s telegram under reference might properly be made.

  1. Not printed.