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

794.0221/12–2950

Memorandum by the Deputy Director of the Office of Northeast Asian Affairs (Johnson) to the Deputy Assistant Secretary of State for Far Eastern Affairs (Merchant)

top secret

[Washington,] December 29, 1950.

Subject: Partial “Pay-As-You-Go” Arrangement for Japan

This memorandum constitutes a proposed position for the Department of State regarding the “pay-as-you-go” arrangements for Japan put forward by the Department of the Army. There have been no formal discussions of the various proposals with the Department of the Army which have been presented to us in a staff study dated December 4, 1950 and revised December 26, 1950,¹ on which the following comments and observations are based.

Problem:

President Truman and General MacArthur having agreed at Wake Island that a partial “pay-as-you-go” arrangement should be instituted to cover the expenses of our forces in Japan beginning July 1, 1951; how should the burden of these expenses be divided as between the U.S. government and the Japanese government and how much appropriated funds should be provided to defray such expenses in Japan in U.S. fiscal year 1952?

Facts Bearing on the Problem:

1. “Pay-as-you-go” refers to any arrangement whereby the local currency expenses of U.S. forces in a foreign country are defrayed out of U.S. appropriated funds rather than from funds appropriated by the government of the foreign country. Dollars received by the foreign country may be an important item of receipt in its current balance of payments.

2. At the Wake Island conference General MacArthur suggested that “we pay our way in Japan for part of the cost of the troops in lieu of GARIOA funds” and the President directed the Department of the Army and the Department of State to “get together and work it out”.

3. Up to the present time the local expenses of U.S. forces in Japan have been borne by the Japanese government out of funds appropriated in the Japanese budget under the title Termination of War expenses. Expenditures under this account in the Japanese fiscal year 1949–50 amounted to ¥94.2 billion. The appropriation for the current Japanese fiscal year amounts to ¥109.5 billion and the proposed appropriation for the Japanese fiscal year 1951–52 is ¥102.5 billion. At 360 yen to the dollar, dollar equivalents are $261.94 million, $304.16 million and $280.47 million.

4. The Department of the Army’s estimate of the dollar deficit in the Japanese balance of payments for the U.S. fiscal year 1952 is approximately $140 million, provision for which is included in the Army Department’s GARIOA appropriation request. It will be noted that if the entire amount of the local expenses of U.S. forces in Japan, as projected in the Japanese budget for the Japanese fiscal year beginning April 1, 1951 were financed with U.S. dollars, Japanese current dollar receipts on this amount would be about $280.5 million or more than twice the amount of the estimated dollar deficit in the Japanese balance of payments.

5. According to advices from the Army’s Far East Command,² SCAP had previously decided that “the cost of all operations of FEC in Japan incident to any personnel increase over authorized strength for June 1950 shall be a charge against United States appropriated funds.” The budget already submitted to the Japanese Diet provides ¥102.5 billion for Termination of War expenses, based on the authorized personnel for June 1950. On the basis of this decision the Department of Defense had included approximately $80 millions (equals ¥21.6 billion) to defray the expenses of maintaining personnel in Japan in excess of the June 1950 strength. Thus if planned personnel increases are realized, total yen expenses in Japan of the U.S. occupation forces would amount to about ¥124.1 billion (102.5 plus 21.6).

Recommendations:

1. Whatever arrangements are adopted should represent a real implementation of the “pay-as-you-go” decision, i.e. an arrangement which would substantially reduce the burden of occupation force expenditures on the Japanese people and under which the dollars received by Japan would vary in proportion to changes in the expenses incurred.

2. To give the appearance of equity, the “normal” occupation force expenses should be divided equally between the Japanese Government and the United States Government. This would involve an equal division of the ¥102.5 billion “Termination of War” expenses in the Japanese fiscal year 1951–52 budget since this figure is based on the authorized personnel strength for June 1950. Japan would receive, under such an arrangement about $142.3 million which could be covered almost entirely by transfer from the Japan economic aid portion of the U.S. fiscal year 1952 GARIOA appropriation, or by new appropriations which to the extent utilized would permit a reversion of GARIOA funds to the U.S. Treasury.

3. Increased US. expenses in Japan resulting from increased personnel strength above the June 1950 levels should be paid for entirely with dollars in accordance with the SCAP decision referred under “Facts Bearing on the Problem”, paragraph 5, out of the $80 million included in the U.S. military appropriations for this purpose.

4. During U.S. fiscal year 1952, the first year of “pay-as-you-go” expenditure from U.S. appropriations in Japan should be by way of periodic reimbursement to the Japanese Government for 50% of the expenses incurred by it out of the Termination of War account. All yen expenses incurred by Japan in excess of the amount provided in the “Termination of War” budget should be fully reimbursed with dollars. In succeeding years, when the division of expenses would presumably be negotiated under a bilateral agreement, U.S. funds should be expended directly (i.e. for the purchase of yen for specific expenditure objects) with the Japanese Government contributing its share either in the form of yen funds or goods and services.

Discussion:

1. A “partial” pay-as-you-go arrangement for Japan implies a sharing of military expenses between Japan and the United States. For such an arrangement to produce the desired psychological effect in Japan, the Japanese should feel that the sharing is equitable and represents a reduction in the burden of occupation expenses hitherto borne entirely by them. The Japanese should also, theoretically, feel that the expenses which are shared are in the mutual interest. This latter feeling is not automatically evoked merely by proposing a division of the expenses. The less of this feeling there is, the less likely are the Japanese to regard as equitable an arrangement which, leaves them still carrying the larger proportion of the expenses and which produces a saving in the Japanese budget barely large enough to cover the expenses of the new police reserve. Moreover, a sharing arrangement which does not in fact share the cost of increased U.S. troops in Japan over the normal pre-Korea occupation force levels but puts this cost entirely on the Japanese is not likely to be regarded as anything but GARIOA under a different guise since the amount of dollars received is limited to the estimated amount of the dollar deficit.

The recommendations given above would provide in effect a 50–50 sharing of the occupation expenses associated with the normal, pre-Korean, troop strength levels. In addition, they would provide for 100% dollar funding of all increases in occupation force expenses above the authorized level for June 1950. If the expenses of maintaining the new Japanese police reserve (about ¥30 billion) are added to occupation force expenses, the division of total expenses in Japan for security and defense would, according to these recommendations, be roughly half and half.

2. The proposal of the Army Department in its staff study dated December 26, 1950 would provide in the military appropriations for U.S. fiscal year 1952 a total of $137 million (¥49.3 billion) to finance U.S. procurement in Japan of all the items in a list of selected major commodities and services including coal, transportation, communications and certain contractual services. The Japanese Government, through the TOW account, would pay for labor, rental and maintenance of real estate and furnishings, fire loss, utilities and other services which, based on planned troop strength would total about $220 million or ¥78.4 billion. If U.S. personnel in Japan remained at or fell below the June 1950 levels, U.S. expenses in Japan would be paid for in dollars from the military appropriations. Any dollar deficit remaining in the balance of payments would be financed from the GARIOA appropriation with any unexpended balance in this appropriation reverting to the U.S. Treasury. If U.S. personnel in Japan exceeded the June 1950 levels, the whole cost of the increase would be borne by the Japanese Government. Dollars received by Japan whether from pay-as-you-go or from GARIOA would be equal to the estimated dollar deficit in the Japanese balance of payments but no more. If troop strength remained at the June 1950 level, the U.S. would bear a little less than one-half ($137 million) of the total occupation force expenditures (¥102.5 billion or $280.5 million); but if troop strength increased to planned levels (a total of ¥127.7 billion or $354.7 million) the U.S. share of occupation force expenses in Japan would decline to only about 38%. At the same time, the yen expenses borne by the Japanese Government would amount to about ¥79 billion, a reduction of only about ¥23 billion from the budgeted figure for Japanese fiscal year 1951–52 which is more than offset by the estimated cost of the new police reserve.

3. Under the latest Army Department proposal the $80 million included in the military appropriations for fiscal year 1952 would be increased to $137 million for use as described above. The GARIOA economic aid appropriation of $140 million for Japan would be retained but only on the understanding that it would be utilized only to the extent that pay-as-you-go receipts by Japan fell below $140 million. A rider would be attached to the GARIOA appropriation permitting its use to finance pay-as-you-go obligations by transfer to the military appropriations. If the dollars required to implement pay-as-you-go in Japan are included in the regular military appropriations, it is believed that the Japan economic aid portion of the GARIOA appropriation request should be dropped. If the Defense Department is apprehensive that the military appropriation wall not be forthcoming, the provision should be made, as approved by the Foreign Aid Steering Group, by an authorized transfer from GARIOA.

4. The items selected by CINCFE to go into the total appropriation of $137 million are the items “most readily defended before Congress, most readily paid for on a small number of large amount vouchers, and which fluctuate the least with varying troop strength.” It is believed that this method may have the disadvantage of calling attention in Japan to the non-essential but expensive character of the items which are left to Japan to finance. For this reason it is suggested that, as a temporary device during the first year of pay-as-you-go, dollar expenditure in Japan be on the basis of reimbursement to the Japanese Government rather than direct expenditure. Reimbursement would, of course, have to be on the basis of vouchers showing the amount and character of the items being reimbursed, but this would permit an administrative selection of the items to be reimbursed which would (a) make the non-essential character of items financed by Japan easier to conceal and (b) make it easier to obtain a division of the expenses according to the formula set forth in recommendations 2 and 3. In the following year the selection of items to be financed by the U.S. and those to be left to the Japanese Government could be determined by negotiation.

1. Neither found in State Department files. A version of this study dated December 29 is filed under 794.0221/1–2551.
2. The Far East Command was a unified command under the joint Chiefs of Staff for whom the Chief of Staff, U.S. Army, served as executive agent.