Tokyo Post files, 500 Japan
No. 775
The Ambassador in Japan (Allison) to Vice
President Nixon1
My Dear Mr. Vice President: Because you were called to the Senate floor,2 you will remember that we were unable to finish our conversation regarding Japan and its economic problems. It has occurred to me, therefore, that you might be interested in some observations which time did not permit me to make when we last met.
Japan’s economic plight is indeed most serious, owing in part to its own actions (or failure to act) and in part to forces, both domestic and international, beyond its control. In recent years the balance-of-payments position of Japan has steadily deteriorated from a surplus, adding $331 million to its foreign exchange reserves in 1951, to an estimated deficit (based on returns for 5 months) of $452 million in 1954. Obviously this situation cannot long continue. Japan is at fault because it has not adopted those measures of austerity which the United Kingdom, West Germany, and the Netherlands found necessary to rebuild and strengthen their economies. And the free world is also at fault because it has not recognized the magnitude of the problem and offered Japan admittance into the society of free nations on terms of equality.
You are fully aware, I realize, of the importance of preventing Japan from slipping behind the “bamboo curtain,” of keeping it enrolled in the cause of the free world. To assure this result, however, there must be a cooperative effort by Japan, the United States, and the other free nations. The United States cannot provide the solution alone. The deterioration in Japan’s economic position has occurred despite special dollar receipts (expenditures for goods and services) which averaged annually $750 million in 1951–53 and may equal $600 million in 1954. In fact these expenditures have been utilized to raise the level of living in Japan to a height (slightly above the prewar level) which unassisted it cannot afford to maintain.
[Page 1668]Although I strongly believe that the United States must assist Japan to develop a self-supporting economy, the primary effort must come from Japan itself. Until that country is prepared to make such an effort, assistance from the United States, in whatever amount, will fail to accomplish its objective. Instead it will merely postpone the inevitable readjustment which will gain in severity by the delay.
I am most anxious that the United States should avoid assuming the obligation of underwriting the stability of Japanese economy. Consequently, I believe that we should make it crystal clear to the Japanese, in a firm but friendly fashion, that assistance from the United States is contingent upon Japanese efforts to adopt and adhere to a program of austerity designed to maximize self help. Such a program should probably include sound fiscal and credit policies, restriction of imports, stimulation of exports, allocation of imported raw materials, land reclamation, expansion of power facilities, modernization of industrial plant, and encouragement of foreign investment.
With such a program in force, the United States could then offer assistance to expedite the necessary development, confident in the knowledge that its efforts would bear fruit which thus far has failed to materialize. If Japan is willing to help itself, the United States could offer to maximize procurement in Japan, thus providing dollars and strengthening Japan’s industrial base. It could also continue its present endeavor to secure for Japan most-favored-nation treatment and improved export opportunities through multilateral negotiations with the contracting parties in the General Agreement on Tariffs and Trade (GATT). Two other measures occur to me which would provide assistance at minimum cost to the United States. Concerning these I would appreciate your personal opinion as well as your estimate of the probable reaction of the Congress.
As you know, we have proposed that Japan liquidate its GARIOA obligation to the United States on a basis comparable to the settlement made with Germany. In the case of Japan this would amount to approximately $700 million, or 37.5 percent of its total obligation, with interest at 2.5 percent, and principal payments, after a 5year moratorium, in 60 semi-annual payments. Many Japanese labors under the false impression that postwar assistance from the United States was a gift; hence they see no necessity for repayment. This makes the assumption of the obligation a difficult political task for the Japanese Government. Moreover, with their deteriorating balance-of-payments position, they hesitate to assume this additional foreign exchange burden despite the liberal terms of the proposal. Japan today is in need of capital for urgent economic [Page 1669] projects to reclaim land, expand power facilities, and modernize industrial plant—capital in excess of that which it can provide in order that these essential tasks may be undertaken and completed within the limited time remaining.
Accordingly, I would propose that Japan be asked to pay this entire obligation ($700 million) in 7 annual installments in terms of yen. Each year this payment (equivalent to $100 million in yen) would be loaned to the Government of Japan for the purpose of developing land, power, and industrial plant. After a 7–year moratorium, principal payments in dollars would be made in 50 semiannual installments. Interest would be at 2.5 percent from the date of the funding of the obligation on the unpaid balance.
This proposal appears to have several distinct advantages. It would stimulate projects essential to strengthen Japan’s economy and thus operate to facilitate ultimate repayment of the obligation, now far from certain. Japan would more readily accept the settlement because it would be designed to provide assistance as well as repayment. Since the yen payments would be derived from budgeted tax revenues, the loans would not be inflationary because tax payments would be returned to the economy without any net addition to purchasing power. Countries claiming reparations could not charge that the United States had extracted its “pound of flesh” to their detriment, as they will otherwise be inclined to do. The United States will lose nothing by the proposal; on the contrary, it will be encouraging projects designed to make repayment possible. The terms will not be dissimilar from those granted Germany; indeed the formula utilized to obtain the total net obligation would be the same and the debt would be paid in 32 rather than 35 years. If, in any case, the United States will find it necessary to assist Japan, why not turn this GARIOA obligation into a mutual asset rather than a mutual liability?
A second proposal to which I should like to draw your attention concerns the disposal of United States stocks of surplus agricultural products. Japan, a deficit food area, is deeply interested in the prospect of acquiring such products, particularly if it is permitted to make purchases in yen and secure a substantial portion on a grant basis. If it is assumed that the United States, to assist Japan and at the same time dispose of its agricultural surpluses, is willing to offer generous terms of sale including a substantial portion of the yen proceeds as a grant-in-aid, then I suggest a stipulation that such funds be so utilized as to provide the maximum benefit to the Japanese economy. I believe that a special advantage would be obtained if the grant portion of the yen sales were utilized to facilitate regional development in Southeast Asia by assisting Japan in the settlement of the reparations problem. The absence of such a [Page 1670] settlement has prevented the restoration of normal political and trade relations between Japan and the Philippines, Indonesia, Burma, and the Associated States of Indochina. Prolongation of the dispute will intensify the antagonism of the claimant states toward Japan. Part of the difficulty has been the failure to reach agreement on the amount of reparations to be paid, and a second barrier has been the requirement in the Treaty of Peace that reparations should impose no foreign exchange burden on Japan. Hence, if claimant countries desire capital goods on reparation account, they must, under the provisions of the Treaty, provide the raw materials essential to the manufacture of such goods or the equivalent in foreign exchange. This the claimant countries have been unwilling to do. Both of these difficulties might be overcome if Japan were to utilize the grant funds, which the United States would make available in any case, to augment reparation payments and eliminate the requirement that claimant countries provide the raw materials to be utilized in the manufacture of capital goods on reparation account.
A number of considerations appear to favor this proposal. The United States would be assured that its grants of surplus products had been constructively employed; moreover, by strengthening the economies of Japan and claimant countries, it would ultimately share in the mounting volume of trade arising from increased purchasing power. Japan would find it easier to dispose of the troublesome reparations problem, both because it could afford to offer a larger settlement and because claimants would be freed from the contingent liability of providing raw materials for capital goods. The claimant countries would receive a larger total sum and could order whatever capital goods their economies might require. Both Japan and the claimant countries would find trade between them expanding because of the resumption of normal political relations and the gradual expansion of purchasing power arising from the profitable employment of reparations equipment. Finally, claimant countries would obtain a share in the disposal of surplus agricultural products by the United States, which participation might otherwise be denied them inasmuch as none is a food deficit area.
I regret having written at such length. The subject, however, is of great importance to the United States and its future position in the Pacific. I am most anxious to have your views on these proposals and shall look forward to your reply with great interest.
Please accept my warm personal regards and every good wish.
Sincerely yours,
- Enclosed with a covering note from Ambassador Allison to McClurkin, requesting that the letter be forwarded to the Vice President. The central file copy of the covering note bears several marginalia by officers of NA indicating an intention to forward the letter to Nixon, perhaps with a commentary; however, no definite record of action on the matter has been found in Department of State files. (894.00/7–854)↩
- An undated appointment record indicates that Ambassador Allison met with the Vice President on June 17. (123 Allison, John)↩