893.5151/746
The Ambassador in Japan (Grew) to the Secretary of State
[Received July 2.]
Sir:…
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Under present circumstances the China dollar serves the purpose in China of both Chinese and Japanese as a medium of exchange in local and international trade, and it is therefore to the advantage of both sides in the conflict to prevent it from being completely destroyed. To the Japanese, in addition to the fapi’s usefulness as a means for acquiring foreign exchange, wherever it circulates in the occupied areas it relieves them of the necessity of creating and maintaining a new substitute currency. The Japanese show strong reluctance toward taking on the responsibilities of a new currency at the present time, having been taught a severe lesson with the Federal Reserve Bank currency in North China. Details of the negotiations now being carried on at Nanking between General Abe and Wang Ching-wei in regard to the proposed establishment of a new bank of issue have not been revealed, but everything points to an extremely cautious attitude on the part of the Japanese. What they fear, in connection with the recently exhibited weakness of the fapi, is that before they are fully prepared they may be forced to take some countermeasure which will have the effect of imposing a further burden on the already overladen yen.
The question of a new currency in central China is of direct concern to American interests because until Japan solves the problem in a manner satisfactory to herself it is highly unlikely that the promised opening of the Yangtse river will eventuate. Interpellations in the late session of the Diet showed clearly the Japanese fear that in the absence of the present rigid control now exercised by them over trade on the river that Japanese merchants trading in the fictitiously valued yen-linked military notes would find it impossible to compete with foreign traders using the China dollar. It is therefore unlikely that the present onerous conditions now imposed on American and other foreign traders in the Yangtse Valley can or will be mitigated until the currency problem is solved.
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[Page 526]During 1939 Japan’s exports to the yen bloc areas were about fifty percent of the nation’s entire foreign export trade. By value such exports were Yen 1,747,103,000, having almost trebled since 1936 when the figure was Yen 657,715,000. Were those enormous contributions of Japanese goods balanced by imports of other commodities urgently needed by Japanese industry the trade would be regarded as healthy regardless of the medium of exchange. The fact is, however, that imports from yen bloc areas during the same period were only Yen 682,973,000, having shown moderate increase over the 1936 figure of Yen 394,253,000. Japanese exports to China south of the Great Wall in 1939 were 455 million yen, or more than double the imports which were 215 million yen. In one sense it might be said that the Japanese have been making a present to the residents on the continent of goods almost three times the value of those received in return and have accepted as compensation for the difference their own depreciated paper.
Since the beginning of the present year this trend toward a one-sided export trade has shown an accelerating tendency in proportion to the rapid rate of increase in commodity prices on the continent. Thus there is in evidence a vicious circle of inflation and depreciation in China leading to increasing pressure on Japanese economy and strain on Japanese industry exerted through the medium of the yen-linked currencies. To ease this pressure the Japanese have recently adopted increasingly stringent measures such as the recent prohibition against the exchange of yen-linked notes by banks in China. Other such measures are the recently announced restrictions on travel by Japanese to the continent and the negotiations now being carried on in Tokyo regarding a plan to strengthen the control over the movement of industrial funds to the continent.
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The foregoing discussion, as the title99 would suggest, has been concerned only with Japan’s problems in connection with the yen-linked currencies on the continent. On the other hand, along with these problems Japan has undoubtedly derived much benefit from those currencies. Certainly the FRB currency has simplified the problem for Japan of ousting foreign non-Japanese interests and trade from North China. It is questionable, however, whether in the long run Japan stands to gain more than to lose through the employment of these currencies, especially in view of the increasingly uncertain outcome of the hostilities. A feeling of disillusionment over the results of the yen-linked currency experiments is unmistakably manifest among the Japanese and may account to a considerable extent for the misgivings over the wisdom of pushing forward with plans for a [Page 527] closed economy in China, which I have reported by telegram as a new and significant development in this country.
Respectfully yours,
- “Yen-Linked Currency Problems”.↩