Foreign Relations of the United States, 1951, Asia and the Pacific, Volume VI, Part 1

Lot 54D423

Memorandum by the Officer in Chargé of Economic Affairs in the Office of Northeast Asian Affairs (Hemmendinger) to the Deputy to the Consultant (Allison)¹

secret

[Washington,] April 24, 1951.

Subject: Comments on British Draft

The following preliminary comments on the British draft of the Japanese peace treaty are submitted for your consideration.

Article 14—Congo Basin Treaties

The British propose that Japan renounce all rights, titles, interests and claims deriving from Conventions signed at St. Germain-en-Laye on September 10, 1919.

One of the Conventions is that signed by the U.S., Belgium, the British Empire, France, Italy, Japan and Portugal, (TS No. 877) which provides for free trade and commercial equality in the Congo basin, for national treatment with regard to the protection of persons and property, and for freedom of navigation of the rivers in the Congo basin.

Article 17—Bank for International Settlements

The British propose that Japan renounce all rights, title and interests resulting from the agreement with Germany of January 20, 1930, the Convention of January 20, 1930 and its annexes concerning the Bank for International Settlement and the Trust Agreement dated May 17, 1930.

The only rights, title, and interests which are held under the Convention and the trust agreement are the stock interests in the BIS. No stock interests are held by the Japanese Government, itself, but interests are held by a group of Japanese banks. The Japanese banks subscribed to $12 million of the stock of the BIS, and their subscription is 25% paid up. The book value of their interests is now about $6 million.

The British proposal makes no mention of the payment of compensation to Japan in return for the renunciation of the interests of the Japanese banks. It is assumed, therefore, that the British have in mind the forfeiture of the interests of the Japanese banks. There appears to be no justification for such a forfeiture. The forfeiture would benefit the other holders of stock interests: Belgium, France, Germany, Great Britain, Italy, and a consortium of U.S. banks.

We know of no reason why Japanese banks should continue to hold interests in the BIS, which functions as a clearing house for intra-European payments. It was established in 1930 in Basle, Switzerland primarily for the handling of reparations transactions arising out of the operations of the Young plan. However, if the other stockholders of the BIS wish to arrange for the termination of the interests of the Japanese banks, they need not include such an arrangement in the peace treaty, but may, more appropriately, negotiate a separate agreement with Japan, providing compensation for Japan’s interest.

If the British contemplate that the Japanese interests in the BIS may be liquidated as external Japanese assets in a neutral country (Switzerland), our comments under Article 28 are pertinent. It may be noted, however, that the Charter of the Bank, which forms a part of the international agreement establishing the Bank and also a part of Swiss law, stipulates that the property of the Bank shall be immune from expropriation, etc. in time of war.

Article 22—End of Occupation

It is doubtful that agreements providing for the withdrawal of occupation forces, and for the return to the Japanese Government of Japanese goods and bank and cash balances of yen in the hands of the occupation forces are necessary. If they are thought necessary, however, they can, more appropriately, be negotiated separately from the peace treaty.

Paragraph 3 requires the return of all bank and cash balances of Japanese yen in the hands of the occupation forces which have been supplied free of cost. Yen was supplied free of cost only to the occupation forces of countries other than the United States.

Article 23—Reparation

This article proposes that the Japanese Government turn over for distribution as reparation its stocks of monetary gold and bullion and of precious metals and jewels.

The value of stocks of gold and precious metals owned by the Japanese Government is about $200,000,000. Recent estimates, prepared by Sherwood Fine of the Economic and Scientific Section of SCAP indicate that Japan will have a foreign exchange balance of approximately $500,000,000 at the end of the present fiscal year, while Japan will need a balance of from $700,000,000 to $800,000,000 to meet its minimum requirements in foreign trade. The $500,000,000 figure does not include the value of Japan’s stocks of gold and precious metals. The estimate of Japan’s minimum requirements is based on the projected discontinuance of U.S. aid to Japan.

Even if Japan’s holdings of foreign exchange equalled or exceeded its minimum needs, the U.S. could still oppose the transfer of Japan’s stocks of gold and precious metals as reparations on the ground that U.S. expenditures for relief, economic aid, and military purposes should be a charge upon Japan’s holdings of foreign exchange, gold stocks and precious metals prior to any claims for reparation. U.S. expenditures for relief and economic aid total about $2 billion.

A further objection to the British proposal that Japan turn over its stocks of gold and precious metals for distribution as reparations is the lack of any feasible method of distribution. The British propose that the U.S., the UK, Communist China, and the USSR agree on the countries to which, and the proportions in which, the fund should be distributed. There is no reason to expect that the designated four parties would be able to reach agreement, unless, perhaps, simply agreement to divide in four equal parts, which would leave Philippine and other reparation demands unsatisfied. There is also, of course, the question what Chinese Government would participate in these arrangements.

Article 24—Restitution of UN Property

This article appears unnecessary and inadvisable. It is a re-hash of the FEC policy decision on restitution of looted property,² implementation of which has been virtually completed by SCAP in a most satisfactory manner. It is highly unlikely that any significant quantity of identifiable looted property could be turned up in Japan even by the virtually unlimited search and seizure procedure here proposed.

The British proposal would require that in addition to restoring all looted monetary gold found in Japan, the Japanese Government should transfer to the government concerned gold equivalent in amount to any looted monetary gold not found in Japan. It is not clear whether the British intend that the Japanese should give up all their gold stocks as reparations (Article 23) and buy additional gold for restitution purposes, or whether implementation of the restitution provision would take precedence. It may be assumed, however, that the British intend that Japan be obliged, first, to replace looted gold, and second, to turn over for distribution as reparations any remaining stocks of gold.

The position that Japan cannot provide compensation for war losses and maintain a viable economy applies to either form of compensation, compensation in kind, or compensation in currency. We can contend, therefore, that, to provide compensation in kind for governments whose monetary gold was looted by the Japanese is to discriminate against all other claimants who suffered war losses.

We have requested Tokyo for information on the amount of the unsatisfied claims of governments for looted monetary gold.

Article 25—Renunciation of Claims by Japan

Paragraphs 1 and 4 particularize the claims which Japan waives. The question is, therefore, whether the general waiver provision in the U.S. draft would cover all the particularized claims. This question is one for the Legal Adviser’s office.

Paragraph 2 requires Japan to compensate persons who furnished supplies to the occupation forces in Japan and persons who hold noncombat damage claims against the occupation forces. There is no corresponding provision in the U.S. draft. Japan has already undertaken, pursuant to SCAP directives, to provide some compensation for the two classes of claimants. The assumption by Japan of responsibility to provide compensation in full to the two classes of claimants would not place too heavy a burden on the Japanese economy.

Paragraph 3 broadens the U.S. waiver provision to include waiver of claims by Japan against UN nations which were not Allied Powers.

Paragraph 5 of the Article appears to be inconsistent with the provisions of Article 28. Article 28 provides for a transfer by Japan to designated Allied Powers of Japanese assets in Germany. Paragraph 5, however, excepts from Japan’s renunciation of claims against Germany and German nationals “claims arising from contracts and rights acquired before 1st September 1939.”

Article 26—UN Property in Japan

This Article particularizes the manner in which Japan is obliged to restore UN property in Japan. The question is whether the general paragraph in the U.S. draft on restoration adequately covers the restoration of UN property. This question is one for the Legal Adviser’s office. One difference between the two drafts is that the British draft specifies that property, rights and interests be restored as they existed on September 1, 1939, while the U.S. draft requires restoration of property, rights and interests unless the owner has freely disposed thereof without fraud or duress.

The British draft imposes upon Japan the obligation to compensate in yen for the loss of UN property in Japan. The U.S. draft does not impose upon Japan any such obligation. The British proposal raises the issue whether the imposition of such an obligation would create an untenable moral position vis-à-vis the Philippines and other Asiatic countries which have negligible interests in property in Japan, but have substantial reparations claims for which it is not proposed that Japan provide compensation, except, in the British draft, through transfer of gold and external assets.

The issue is a difficult one. It is whether it is justifiable to segregate claims against Japan into two categories: (1) claims payable in non-yen currencies, the satisfaction of which is limited by Japan’s capacity to incur additional obligations in non-yen currencies; and (2) claims payable in yen, the satisfaction of which is limited only by Japan’s capacity to incur additional obligations in yen. If it is justifiable to segregate claims, then it need not be regarded as discriminatory to relieve Japan of the obligation to pay claims in category (1), while imposing upon Japan the obligation to pay claims in category (2).

In support of the U.S. position that it is not justifiable to divide claims against Japan into (1) non-yen claims and (2) yen claims, we can refer to the fact that holders of non-yen claims might be willing to accept compensation in yen, if Japan is incapable of providing compensation in non-yen currencies. We can say that even yen claims, when held by Allied nationals, are claims which ultimately have to be met by transfers of foreign exchange. We can also contend that it is not possible to divorce completely the capacity of Japan to incur additional obligations in non-yen currencies from its capacity to incur additional obligations in yen currencies.

The British may point out that non-yen funds (Japanese external assets) have been made available to the Allied Powers in partial satisfaction, presumably, of non-yen claims. The British can argue, therefore, that to make yen funds available to pay yen claims in Japan is merely to achieve a rough sort of balance between non-yen and yen claims.

If we do wish to reconsider our position on the payment of compensation for UN property in Japan, we might require that the claimants use the compensation to repair and replace property in Japan. The compensation provisions would then be revised to relate them directly to the rehabilitation of Japan.

Paragraph 6 of the British draft exempts UN property from any taxes imposed by Japan, between September 2, 1945 and the coming into force of the treaty, to meet war, occupation or reparation costs. The U.S. draft contains no such exemption. In accordance with an FEC policy decision, SCAP has required the Japanese Government to exempt UN property from a capital levy, and other taxes of an extraordinary nature. This point, which has been the subject of controversy with the British in Germany, requires further examination.

Article 27—Japanese Assets in Allied Territory

Both the British and the U.S. drafts authorize the vesting of Japanese assets in Allied territory, but there are a number of differences in the pertinent provisions of the two drafts.

The U.S. draft specifically authorizes the seizure of Japanese assets in territory administered by an Allied Power under UN trusteeship; the British draft does not.

The British draft requires Japan to compensate its nationals for property vested by the Allied Powers; the U.S. draft does not. The provision was omitted from the U.S. draft because of doubts that the Japanese economy could bear the burden of such compensation. The value of Japanese assets in Allied territory, including Manchuria, is believed to be about $4 billion.

The U.S. draft states that the Allied Powers may not vest Japanese diplomatic and consular property, while the British draft contains no such prohibition. Where the British exclude from vesting “literary and artistic property rights”, the U.S. exclude “trade marks identifying property originating in Japan”. There is no provision in the British draft to correspond with the provision in the U.S. draft that there shall be excluded from vesting “property located in Japan despite the presence elsewhere of paper or similar evidence of right, title or interest in such property, or any debt claim with respect thereto”.

Article 28—Japanese Assets in Neutral and Ex-Enemy Countries and in Germany and Austria

The British propose that Japanese assets in neutral and ex-enemy countries be liquidated and used as reparations; the U.S. draft contains no such proposal. The British proposal would designate the USSR and/or China (in several cases Commie China) as recipients in nine of the fourteen countries concerned. There would, therefore, be difficulty in reaching agreement regarding the division of shares.

The value of Japanese assets in the neutral countries has been estimated to be $20,000,000. The value of Japanese assets in the ex-enemy countries has been estimated by the Japanese to be $11 million, therefore, the value of assets that might be obtained under the British proposal would be small in comparison with the difficulty of obtaining them.

The question whether the neutral countries could be expected to give effect to a treaty provision transferring Japanese assets in the neutral countries to the Allied Powers is a question, in the first instance, for the Legal Adviser’s office.

Article 29—German Property in Japan

The British propose that Japan recognize SCAP’s action in liquidating German assets in Japan and placing the proceeds at the disposal of IARA. There is no corresponding provision in the U.S. draft. Since the liquidation of German assets in Japan has not been completed, and action by the Japanese Government is still required, it is desirable to secure an agreement with Japan on this subject. The agreement, however, can be negotiated separately from the peace treaty. It should be concluded, however, either before, or at the time the peace treaty is concluded.

Article 30—Debts

Paragraph 1 is not necessary because it can be assumed that Japan recognizes the principle stated.

Paragraph 2 is too vague to be of value.

Paragraph 3 is irrelevant if the other paragraphs of the Article are deleted.

Paragraph 4 is not necessary as it specifies a construction of the treaty which would be given to the treaty in the absence of the specification.

Neither this Article nor the U.S. draft deals with the effect of payment of debts owed to Allied nationals made by residents of Japan to the Japanese Government during the war. This subject can, however, be dealt with in an agreement separate from the treaty, or can be left to be decided by Japanese law.

Article 31—Pre-war Claims

This Article is not necessary as it can be assumed that Japan recognizes the principle stated.

Article 32—General Economic Relations

The British draft reflects a high degree of craftsmanship. However, it enumerates the various categories of commitments in detail, in contrast with the approach of stipulating brief and simple but none the less comprehensive and sufficient terms finally adopted by the Department.

If it should prove necessary to revert to the detailed approach, the earlier detailed draft prepared in the Department should be compared with the British proposal with a view to a consolidated redraft embodying the best features of both. It may be noted in this connection that provisions similar to paragraphs 2, 3, and 4 of the British draft were not included in any of the Department’s drafts. Nor does the Department’s draft include such an item as 1 (d) of the British draft relevant to the delicate subject of immigration. With respect to the latter subject, the Senate has usually frowned upon the inclusion in treaties of provisions which contain or appear to contain provisions which may commit the United States.

In any event, it would appear necessary to establish a time limit on the type of commitments contained in the reference article. As drafted, these provisions would appear to run in perpetuity subject only to the provisions of paragraph 1 of Article 20. The latest United States draft provides that such treatment shall be accorded for three years from the first coming into force of the treaty. It would also appear necessary to include certain general reservations which would enable Japan to apply measures to safeguard its external financial position and balance of payments or its essential interests, and the exceptions customarily included in commercial agreements.

Article 36—War Graves

The Article refers to the necessity for the negotiation of agreements on war graves. The subject need not, therefore, be dealt with in the treaty.

Annex II—Special Provisions Relating to Certain Kinds of Property

It is recommended that Section A (Industrial, Literary and Artistic Property) of Annex II which the British have proposed in connection with the Japanese Peace Treaty be opposed.

The patent and trade mark provisions of the FEC policy statements³ promulgated in 1949 should not be contradicted or unduly modified by the Treaty. Any provisions in the treaty differing greatly from the FEC policy provisions would cause confusion and create conflicting rights since the Japanese Government has already undertaken extensive measures, on the basis of SCAP directives, to implement the FEC provisions. The proposed British draft differs considerably from the FEC policy statements particularly in the “effective date of loss” provisions governing restoration and the stipulation of a deadline date for applicants to seek restoration rights.

Any provisions incorporated into the Treaty relating to industrial, literary or artistic property should conform strictly to the FEC policy statements. However it is believed that there is no need for dealing with this subject in the peace treaty. If, by the time the treaty is finally negotiated, the programs for restoration of Allied rights have been completed, or are nearing completion by the Japanese Government, no agreement with Japan on this subject will be required. If the programs are not nearing completion, a separate agreement can be negotiated.

Section B (Insurance) of Annex II concerns the terms under which foreign (UN) insurers can resume their activities in Japan. Such terms can more appropriately be made the subject of commercial agreements between interested governments and the Japanese Government after the peace treaty is concluded.

1. Drafted by Charles A. Fraleigh of the Office of Northeast Asian Affairs. Routed to Mr. Allison through U. Alexis Johnson.
2. For the text of the decision of July 29, 1948, “Restitution of Looted Property”, see Far Eastern Commission: Second Report, pp. 37–41.
3. For texts of the policy decision of March 17, 1949, “Policy toward Patents, Utility Models, and Designs in Japan,” and the decision of July 28, 1949, “Trade-Marks, Trade Names and Marking of Merchandise in Japan,” see Department of State Press Releases, 1950, No. 61, August 10, “Third Report by the Secretary General on the Activities of the Far Eastern Commission, 24 December 1948–30 June 1950,” pp. 16–20.