894.5151/234
Memorandum by Mr. Joseph M. Jones of the Division of Far Eastern Affairs42
The British Government proposes to release Japanese funds held in the sterling area against a reciprocal release of British funds held [Page 801] in Japan. According to the attached despatch43 this proposal has been favorably received in Japan. The reason for its favorable reception is clearly that blocked funds belonging to Japanese individuals and business firms may be repatriated from the sterling area without net loss of foreign exchange by Japan. The Japanese would certainly not favor a similar arrangement proposed by this country at the present time because Japanese funds may move freely in and out of the United States, there not having occurred any blocking of Japanese funds in this country. An agreement to allow reciprocal repatriation of assets would mean a net loss of foreign exchange to Japan because at present she is free to use her assets here to purchase commodities for shipment to Japan and for other purposes. But if we should freeze Japan’s assets in the United States, as our assets are frozen in Japan, our position vis-à-vis Japan would except as noted in the last paragraph hereof be similar to that of Great Britain vis-à-vis Japan. Each would be in the position of blocking the other’s funds. Under such circumstances, Japan might be willing to negotiate a reciprocal release of funds with us as she is doing with Great Britain. If Japan were not willing to negotiate immediately for the release of American-blocked funds in Japan those funds could be given certain protection by refusal on our part to unblock Japanese funds of equal quantity except on a quid pro quo basis. The bulk of Japanese assets in the United States consists of liquid assets (bank balances) whereas the bulk of American assets in Japan consists of American holdings of Japanese bonds and lesser amounts of direct investments and liquid assets in the form of bank balances. Presumably, in case of freezing by this country, there would not be any great rush to dispose of Japanese bonds or to liquidate direct investments (this process is always slow). There could, however, be a mutual transfer of liquid assets.
Action on the part of this Government in freezing Japanese funds would undoubtedly be resented in Japan much more than was the British action in blocking Japanese funds in the Empire by means of exchange control. The British Government is engaged in a war for survival and exchange control has been imposed globally as a means of husbanding her resources for the war effort, an action which the Japanese can fully appreciate since they arrived at exchange control for the same reason. The Japanese reaction to a freezing of Japanese assets in the United States, however, especially if Japan were singled out for such treatment, would probably be far different; it would probably be resented as further economic pressure by this country on Japan.