Foreign Relations of the United States, 1952–1954, China and Japan, Volume XIV, Part 2

894.10/4–2853

No. 647
Memorandum by the Director of the Office of Northeast Asian Affairs (Young)to the Assistant Secretary of State for Far Eastern Affairs (Robertson)

confidential

[Washington,] April 28, 1953.

Subject:

• Policy on Loans to Japan

Two questions on loan policy toward Japan require decision in the near future:

(1) Shall the applications for $39 million of loans for General Electric and Westinghouse high pressure thermal power equipment now before the Eximbank be approved?

(2) What answer should be given to questions posed to the Department of State by the International Bank?

(1) The applications to the Eximbank are ready for action by the Board and the National Advisory Council, but are held up by one consideration, possible conflict with the International Bank’s sphere of activity. The loans are to finance sales of high pressure thermal equipment by Westinghouse and General Electric. Westinghouse took the matter up with Mr. Linder at an early phase, and he obtained an expression from the International Bank that there would be no objection to such financing by Eximbank. Since then, however, three things have happened. The amounts are larger than was originally understood, the term of the loans is to be 15 years rather than a shorter period, and the credits are to be extended to a Japanese Government institution rather than to private companies. If the applications were to be presented now, they would be considered more appropriate for the IBRD than the Eximbank. Mr. Linder took the position at the meeting of the Eximbank April 24 that the applications should be transferred to the IBRD if the IBRD desires and is prepared to proceed promptly, i.e., in three or four weeks not three or four months. General Edgerton, new Chairman of the Eximbank,¹ said he proposed to ask Mr. Black or Mr. Garner what the IBRD thought. Any protracted delay would be a serious disappointment to the Japanese. The Japanese Embassy has asked the good offices of the Department of State to avoid such a situation. It does not appear possible for the applications to be transferred to the IBRD and for quick action to be taken.

This is of course a part of the larger problem of Eximbank–IBRD relations which has been a sore point for some years. It has been United States policy to regard the IBRD as the bank of first recourse for development loans, but there has been little attempt to reach a general understanding between the two institutions. The Secretary of the Treasury is opposed to Eximbank loans where other sources of financing are available because Eximbank loans affect the public debt.

(2) An IBRD mission went to Japan in the fall of 1952 and was joined in December by Vice President Garner. After considerable discussion with the Bank mission the Japanese submitted an informal application for loans in the amount of $320 million, mostly for power development. Mr. Garner’s public expressions were discouraging, but he has indicated to the Department of State that the Bank would be disposed to make loans to Japan in some magnitude if the United States Government can give satisfactory answers to a number of questions, which boil down to an expression of the longterm support by the United States for the Japanese economy and of a United States foreign policy interest in the making of such loans on the part of the Bank. Mr. Garner’s questions (attached) were submitted to Mr. Linder and Mr. Allison in February and March of this year but have not been answered. Recently the Japanese Government submitted a revised informal application in the amount of $120 million, still for power development.

It does not appear feasible to give Mr. Garner an authoritative written reply to his questions because security considerations are involved and because such an answer would imply commitments which the United States Government is not in position to make. If a formal position were to be taken it would be appropriate to submit it to the National Advisory Council, but it is believed that any such attempt would result in such a whittling down of the position as to make it meaningless. The Bank’s staff has already had access to all the relevant information in the possession of the United States agencies.

We have discussed these problems extensively with the Office of Financial and Development Policy in the Department of State and with staff officers in Treasury, and the following recommendations take views expressed by them into account. It does not appear profitable, however, to pursue the matter further at staff levels. The normal relationship of the Department to the Eximbank is through the Assistant Secretary for Economic Affairs who represents the Secretary at meetings of the Eximbank Board. The normal contacts with the International Bank are through the Assistant Secretary for Economic Affairs, the Treasury Department and the United States Executive Director of the Bank.

Recommendations

It is recommended

(1) that you discuss the action to be taken by the Eximbank on the Westinghouse and General Electric applications with one or more of the following—Mr. Linder, Mr. Overby² and General Edgerton—with a view to assuring action in the near future by the Eximbank, without prejudicing future lending by the IBRD;

(2) that you seek an understanding with Mr. Linder and Mr. Overby with respect to the United States position on loans to Japan by the IBRD, pursuant to such understanding meet with Mr. Garner, and reply orally to his questions along the lines of the attachment to this memorandum for the confidential information of himself and other high officers of the Bank of United States nationality.

The attachment is being reviewed by OFD, who are in general accord but may have some minor amendments. Amended version will be submitted shortly.³ In the meantime, believe desirable you speak to Linder before the Eximbank meeting on Wednesday April 29.

[Attachment]

(1) Question: What are the prospects of United States continuing special flow of dollars sufficient to cover service on loans in addition to current Japanese requirements even as and when Japan takes over her own defense and the present dollar income from the presence of United States troops in Japan gradually disappears?

Answer: It is recognized at high levels of the United States Government that the United States will have to continue economic assistance to Japan in some form at least as long as security considerations prevent any high volume of trade with the mainland of Asia. As long as the United States maintains large forces in the area, Japan’s earnings from this source will probably enable it to meet its foreign exchange needs and commitments. It is impossible now to determine the precise arrangements which will obtain when these special dollar earnings diminish to a point endangering Japan’s dollar position. That is probably four to five years away. Present thinking in the United States Government is that necessary assistance will continue to be rendered to the extent that the military requirements permit though (through) offshore procurement of military end-items. A beginning of such offshore procurement has already been made, more is contemplated under the United States Fiscal Year 1954 aid programs, and it is United States policy to try to program such procurement for several years ahead.

(2) Question: What burdens are the GARIOA debt settlement and possible reparation settlement likely to impose on the Japanese balance of payments?

Answer: The United States will probably ask Japan to repay the GARIOA claim at the rate of about $32 million a year for 35 years. A decision by the National Advisory Council is anticipated soon. Mr. Dulles is firmly opposed to seeking repayment in larger amounts.

It is not anticipated that reparations settlements will impose any significant burden on the Japanese balance of payments.

(3) Question: Does United States consider it desirable for the Bank to lend to Japan? If so, what are the reasons in favor of such lending and what amount would be necessary to have a significant effect on the Japanese economic situation, including Japanese financial and economic policies?

Answer: The United States Government would like to see loans to Japan by the International Bank. It recognizes that Japan’s investment requirements must be met for the most part from internal sources, and that at present Japan does not lack dollars with which to finance imports which are economically justified. The Japanese are understandably hesitant about committing their foreign currency reserves for long-range development purposes, however. Japan’s history indicates that it would make every effort to meet its obligations, and the servicing of even as much as $500 million of loans would not be a crucial factor in its international payments. Japan’s total investment requirements (yen and foreign currency) over the next five years are estimated to be of the order of $20 billion. Loans could be linked to the import requirements (direct and indirect) of power development and other necessary investment projects.

The reasons for loans are primarily, however, of a psychological and political nature. Both the Japanese economy and political atmosphere are highly sensitive, and IBRD loans would have implications in Japan with respect to the friendship and cooperation of its former enemies out of all proportion to the economic importance. Conversely, refusal to loan would be taken as a rejection of Japan and an indication of lack of confidence in Japan’s future. It would strengthen those elements in Japan which believe that Japan must seek a middle course or even cooperation with the Soviet bloc.

From the standpoint just discussed, loans of modest amounts would help, particularly if no ceiling was announced. IBRD loans could also be helpful in influencing internal Japanese financial policies, in particular the directing of Japanese resources into the most essential investment. From this standpoint, the larger the loans the better. To have maximum effect, there should be an initial statement of willingness, on proper terms, to lend up to $300 million. If such a statement is unreasonable, and we are inclined to think it may be, it is believed that loans of the order of the current Japanese request—i.e., $120 million—would be useful. Either a large general commitment or a series of project loans over a period would provide a basis for a voice in Japanese policies. They would not furnish leverage to insist upon policies opposed by the Japanese Government or important elements in the community, but they could help the Government to put across measures which it desired. It is believed that specific conditions, as opposed to advice, should relate directly to the development and execution of an investment program. Advice and conditions would be received with better grace from the Bank than from the United States Government. The very preparation of loanable projects, together with Bank advice, could stimulate necessary planning on the part of the Japanese Government.

(4) Question: Is there sufficient agreement between Bank and United States on the financial and economic policies and measures essential for Japan’s progress to provide for consistent advice, inducements and conditions in relation to financial assistance from both parties?

Answer: The United States Government is in complete agreement with the views expressed by Mr. Garner on a number of occasions with respect to the economic policies and measures which are necessary on Japan’s part, anticipates no conflict in the future, and is prepared to consult frequently with the Bank, if it should determine to proceed with major loans, on the advice and conditions which may be given by the United States and the Bank respectively.

(5) Question: If Bank is to do lending, will United States consider it appropriate that any funds supplied by it would be on a non-loan basis?

Answer: The United States regards the International Bank as the bank of first recourse for long-term development loans. It believes it would be desirable for the Export Import Bank to proceed with the thermal power plant loans presently under consideration, but would consider that in the future the International Bank would be the logical lender for loans of comparable amounts and terms. The United States would not expect to use loans to effect balance of payments assistance which may become necessary, but would prefer to rely on offshore procurement or even direct grant aid. This would depend, however, on circumstances and Congressional policies not now clearly foreseeable.

(6) Question: How can the Bank and the United States most effectively assist (a) in promoting trade between Japan and other countries, particularly in the Pacific area, and (b) in exploring the possibilities of financing from various sources the development of supplies of foodstuffs and raw materials so as to free Japan from excessive dependence on the dollar area?

Answer: Japan’s progress toward self support depends in large measure on the economic development of other countries, particularly in South and Southeast Asia. The Department of State believes that the International Bank can play an important role in such development, through both its funds and its advice, and that there should be close cooperation to this end between the Bank and United States agencies. The Administration has as yet had little opportunity to examine the possibilities, but Mr. Stassen is expected to attack the problem aggressively in relation to United States aid programs, and the Department of State will give high priority to the integration of United States and United Nations policies and programs furthering the development of the Pacific area.

1. Maj. Gen. Glen E. Edgerton (ret.).
2. Andrew N. Overby, Assistant Secretary of the Treasury.
3. Amended version not found in Department of State files.