033.9411/9–753: Telegram

No. 684
The Ambassador in Japan (Allison) to the Department of State1


614. Reference Embassy telegram 607, September 4.2

I think Yoshida is sending Ikeda, the ablest and most trusted of his associates to Washington to see whether, in spite of constant advice to contrary from Embassy here and Japanese Embassy in Washington, the climate may not be right for FOA economic assistance and large loans to stabilize the Japanese political and economic situation. (The press has carried inspired stories about a billion dollar “political loan”). As secondary matters, Ikeda will probably urge either postponement or a very favorable GARIOA settlement; relaxation of China trade controls; relaxation of United States pressure for higher force goals; special United States assistance to develop Japanese-Southeast Asian trade; and the exertion of [Page 1498] United States influence in claimant countries to reduce their reparation demands. About the only specific thing we think he will offer on Japanese side is an increase in ground forces of 20,000 to 40,000 during year beginning April 1954, and an increase in the defense budget of some 20 billion yen, and he will regard this as substantial concession to United States demands. He will talk of Japan’s mounting economic difficulties and will not hesitate to admit shortcomings in Japanese financial and economic policies. He will probably indicate that plans are being formulated behind the scenes to correct these. For example, Finance Minister Ogasawara told me the government was considering some form of credit controls. Ikeda will also probably tell about current efforts to form a Conservative coalition in order give Japan a stronger government to carry out these reforms.
Yoshida hopes Ikeda will receive enough encouragement in Washington along the lines of his proposals to report back that Yoshida can undertake his visit with every hope of success. Yoshida would then go to Washington in the expectation of concessions which would put him in a better position to dominate any possible coalition, or to govern without it if a coalition should fail to materialize.
We are sure Ikeda will argue his case with skill and prizes he will hold out—i.e., increased ground forces and greater political and economic stability—will sound tempting. Because I know the Department has no present intention of making concessions along these lines the Ikeda visit may serve no constructive purpose, might cause Yoshida to postpone his visit and possibly precipitate mutual recriminations that will impose most serious strains on our relations.
There are, however, constructive possibilities in the Ikeda visit if we are well prepared for it and know what we want it to achieve. With this in mind I think our main emphasis should be on driving home in unmistakable terms our alarm over the drifting character of Japanese Government’s financial and economic policies.
In recent months there has been a consumption boom in domestic market; at same time evidence is accumulating of serious deterioration underneath surface of this prosperity. Inflationary pressures are accelerating by reason of past shortcomings in governmental policy, i.e., tax reduction, deficit financing, bank loans in excess of deposits, easy credit facilities, non-essential investment, too high a proportion of increased production going into domestic consumption, etc.
In this situation the latest Embassy estimate of special dollar earnings for the fiscal year ending June 30, 1954 shows they may reach between 1 and 1.3 billion dollars compared with 816 million [Page 1499] last year. Given prudent economic and financial policies these special dollar earnings could be of the greatest long-term benefit to Japan and could help prepare her for the time when this windfall declines. But there is no evidence of any disposition by this government to be prudent. In the absence of wise policies these higher special dollar earnings are only adding to the inflationary pressures and maintaining an unhealthy domestic boom. Japanese exports, already handicapped by high prices, will encounter still greater difficulties and the already strong inducement of producers to sell in the soft domestic market rather than seek markets abroad will be encouraged. We therefore, anticipate a further increase in Japan’s foreign trade deficit.
Thus the rising special dollar earnings which could greatly strengthen the basic economic structure of Japan are actually contributing to its difficulties. They invite and make possible continued refusal by the government to face up to economic problems. Moreover, the higher the level of special dollar earnings in the face of deficient financial and economic policies, the more difficult will be the ultimate readjustment when special receipts begin to dwindle. This combination of high special dollar earnings and lack of action by Japanese Government is building up to situation which one day will culminate in economic crisis, endanger the moderate conservative forces, and compromise the whole policy of United States–Japan cooperation.
The present government brings to these problems the attitude of a prodigal, wasteful of its substance and confident that the United States will bail it out through special procurement, Korean rehabilitation, or new loans. Moreover, our recent lack of coordinated policy in programming these special dollar earnings has contributed in no small measure to this state of affairs.
It seems to me what we need is a changed emphasis in United States policy, and that Ikeda’s visit provides a suitable opportunity to develop the following:
If Japan-United States relations are to be put on an enduring basis, our joint self-interest requires that the defects in Japan’s present policies listed in paragraph 5 be corrected. Since I have no confidence we can accomplish this by exhortation, and continual public exhortation will be self-defeating, we should only allow the higher flow of special dollar earnings to continue if the Japanese Government begins soon to deal with these defects. If it does not, we should take positive steps to reduce the volume of these earnings in order to compel remedial action. This will require much more coordination in Washington on defense and FOA expenditures in Japan than now exists.
Until remedial measures are adopted we should make no further dollar loans except for cotton and the pending thermal power [Page 1500] application. When sound policies are adopted we should be prepared to consider further dollar loans or economic assistance.
Our recent emphasis in Japan has been concentrated almost exclusively on an expansion in defense forces. While maintaining pressure in this regard, we should also devote much more attention to getting Japan to adopt corrective economic and financial measures. I suggest this partly because I do not think we can at this time induce a substantially greater effort than is now contemplated here for next year although I think we can do perhaps a little better than is indicated in paragraph 1 by hard bargaining with FOA funds. More important however, is fact that unless Japanese can be induced in some way to shore up their economic base, development of sound defense structure is impossible.
I feel strongly it will be major mistake not to proceed immediately to negotiate a GARIOA settlement along lines of German settlement while special dollar earnings are still high and rising. The moment there is any marked decline in these dollar earnings or the Yoshida forces lose power, it will become extraordinarily difficult if not impossible to negotiate any settlement whatever. In this connection Ikeda has hinted he may put forward some interesting proposals on how a GARIOA settlement might be used in conjunction with a regional approach to Southeast Asian development; if he does, we should give close consideration to this point. Embassy hopes to be able furnish more details this point before Ikeda’s arrival in United States.
Judging from latest Department’s stand for a limited relaxation of China trade controls as indicated in Secretary’s recent press conference,3 I do not think this will be a problem in the Ikeda visit.
If our overall commitments permit we should seriously consider informing Ikeda that if Japan adopts sound policies, so that one can look forward to the time when the yen might be convertible, the United States would then be prepared to consider a stabilization credit to make convertibility possible. This might be considered [Page 1501] in connection with a similar conference with the British on the problem of the convertibility of sterling.
In short what I am prescribing is another dose of Dodge’s medicine, which enabled Japan to surge forward so remarkably between 1949 and 1951, as a condition of further United States special direct assistance. However, it is important to remember that Japan is not now an occupied nation and that it will not take this medicine merely upon demand.
Both the presentation we think Ikeda will make and our suggested approach are attacks from different points of view on the weakness, drift, and instability which exist here:
Yoshida’s point of view what he hopes to get from the United States is the increased strength he has not yet been able to summon from inside Japan to compel coalition, attract more support, or win an absolute majority for his Liberals in a new election. With time purchased by United States loans and pork barrel persuasion financed by United States he would be, he would claim, be in a position to address himself more seriously to Japan’s problems.
As we see it, if we fell in with this IkedaYoshida plan of underwriting their shortcomings, it is almost certain effect would be to postpone once again the taking of unpopular measures, with a consequent further deterioration in the underlying economic situation and to the detriment of long term United States–Japanese relations. Meanwhile United States political influence in Japan would continue to be mortgaged to Yoshida’s personal machine and our intervention in his behalf not only could contribute further to antiAmerican sentiment which has risen here in recent months, but also could become the issue which would split the moderate Conservative field beyond possibility of early reconciliation.
Frankly we do not know whether the factionalism and personal animosities (particularly those directed against Yoshida) that now divide the Conservatives can be resolved. However, it may well be that United States pressure for economic reform would promote closer Conservative cooperation in and out of the Diet. In any event it seems to me that our policy should be directed to ends that make sense in themselves, and which have the merit of being endorsed by the most responsible elements0 in Japan.
This much, however, is clear. A basic assumption of our Pacific policy since the war has been that Japan would become a stabilizing power both economically and politically in the Far East and was thus vital to the defense of America and the free world. A continued drift in current policies will delay the time when Japan can fulfill that role and will compel us to resort to an unending series of measures to provide dollars to keep Japan going. Japan must take remedial measures and our best hope of getting the government to do so is by a combination of compulsion and inducement such as suggested in this telegram.
Treasury Attaché Diehl participated in drafting this message. Department may wish to consider desirability of having Embassy representative and Diehl present for these talks.
  1. In telegram 615 from Tokyo, also dated Sept. 7, marked “For the Secretary”, Allison stated: “I want to call your attention to Embassy telegram 614 which should also be urgently considered by Humphrey, Wilson, Dodge and Stassen.” Marginalia indicate copies were forwarded to Humphrey, Dodge, and Stassen, and that eight copies were delivered to the Department of Defense. (033.9411/9–753)
  2. Not printed.
  3. The following exchange occurred during the Secretary’s press conference held in Washington on Sept. 3:

    “Q. Mr. Secretary, in connection with the Japanese economic problem, there have been some stories from Tokyo that the Japanese Government has asked us to approve wider trade with Communist China, both as to its extent and types of items. Can you comment on that?

    “A. The matter is primarily for the Japanese themselves to determine once you get beyond the category of strategic goods or goods which are listed under the Battle Act as of such a character that trade in them with Communist areas might lead to a cutting off of economic and military support. Actually today the Japanese have voluntarily adopted far more drastic restrictions on trade with Communist China than any other country except, I believe, the United States and Canada. Other countries are doing business with Communist China in terms of non-strategic goods which Japan, as a matter of its self-denying ordinance, is not doing. It is quite possible that the Japanese might want to put their relationship on a basis more nearly that of the other countries such as Britain, France and so forth. That would be understandable and I don’t think we could seriously object to it because it would not involve a violation of the spirit or letter of the Battle Act.” (Department of State, News Division, “News Conferences of the Secretary”, vol. XXIV, 1953–1955, under date)