Foreign Relations of the United States, 1947, The Far East, Volume VI

894.60/9–2947

The Acting Political Adviser in Japan (Sebald) to the Secretary of State

No. 1307

Tokyo, September 29, 1947.

Sir: I have the honor to forward as an enclosure copy of a statement to be made by myself as Chairman and Member for the United States at the Forty-Second Meeting of the Allied Council for Japan to be held on October 1, 1947. This statement, which has the approval of General MacArthur, is to be made pursuant to the Agenda item under Official Matters, “Report by the Chairman on Japanese Industrial Production”, and was proposed for discussion by the Supreme Commander for the Allied Powers.⁷¹

Respectfully yours,

W. J. Sebald

Counselor of Mission

[Enclosure]

Proposed Statement for Meeting of Allied Council for Japan

One of SCAP’s major objectives in Japan has been the realization of a sound and self-supporting economy in a reformed and democratized institutional framework. Of the infinitely varied and enormously complicated problems confronting the Occupation, the task of securing the rehabilitation of the Japanese industrial machine along peaceable lines has clearly been among those most difficult of attainment.

In appraising Japan’s present position, it is of interest to recall that the remarkable expansion and alteration of the character of the Japanese industrial machine was the outcome of plans formulated and executed beginning in the early 1930’s. With the invasion of Manchuria, Japan shifted her emphasis from the production of textiles and other light manufactures for export to the development of heavy machinery industries, including machine tools and the creation of a complete chemicals industry. The program was continued throughout the ‘30s and for Japan’s purposes, was successful. The machine tool industry, capable of turning out more than 60,000 units a year, and the heavy machinery industry, which produced the largest industrial units needed in her Empire, plus a chemicals industry, which in some phases included production of synthetic nitrates, were all developed during that period and were exceeded only by the industries of the United States and Germany. While Japan’s peak industrial production level was achieved in 1941, her war production capacity reached a plateau probably in 1943, after which all efforts were turned to the fabrication of end items. In 1944, her production reached such impressive totals as more than 1,500,000 gross tons of shipping and 25,000 aircraft.

Initially, the Occupation was confronted with an industrial establishment virtually at a standstill. The effect of the Allied blockade of Japan by sea and by air had throttled all supply lines from Asia and the island portions of her former Empire, while bombing raids had destroyed perhaps 30% of her overall plant capacity and had greatly disorganized all industrial effort through the burning of cities and disruption to essential services. With surrender and entrance of the occupying armies, industrial chaos became even more pronounced. The Munitions Ministry, somewhat comparable to the American War Production Board, has been dissolved with no governmental organization of adequate scope to replace it in directing industrial production. At the time of surrender, most war industries were shut down and workers discharged and paid off with large yen allowances. Much of the industrial labor force had already fled the urban areas, while shipping and other services had come almost to a complete stop. The textile and chemical industries were found almost at a standstill. Less than 30% of the machinery and metal-working plants were in operation. Steel production fell likewise, and reached an all-time low of less than 5,000 tons of rolled products in October 1945.

Attendant upon the release of several hundred thousand Korean and Chinese impressed mineworkers, who rioted throughout mining communities while awaiting repatriation, the coal mining industry had degenerated into chaos. SCAP, in this situation, in September 1945, issued Directive No. 3, calling upon the Japanese to maximize production of consumers’ goods and other essentials, and specified a list of some ten war industries in which production was prohibited. This was followed later by the designation of a large number of industrial plants for eventual reparations removals.

Since that time, the inability to import even the greatly reduced peacetime material requirements of such commodities as high-grade iron ore, high-grade coking coal, wood pulp, wool, soy beans, industrial salt, minerals, hides and skins, and tanning materials has obliged Japan to subsist on meager stockpiles and her own inadequate resources. Failure of the resumption of a flow of raw materials sufficient at least to meet Japan’s minimum requirements has imposed an insuperable obstacle in the way of an emergence of a self-supporting economy and, further, has deprived Japan’s neighbors of urgently required manufactured products—for Japan still represents the chief prospective source of fabricated products for the Asiatic area. Further factors complicating Japan’s industrial recovery have been the critical shortages of food and consumers’ goods and the inflationary price spiral.

Very substantial recovery has taken place since then. The index of industrial production has risen from a low point in the fall of 1945 to present levels of approximately 45 calculated upon a base period of the average for the years 1930–34. This base period is used since it represents the Far Eastern Commission’s appraisal as to what constitutes normal peacetime requirements. This five-year average in every case understimates current peacetime requirements because of the 20% population increase. The wartime peak production index was approximately twice the 1930–1934 average.

The major production handicap throughout the Occupation has been the coal shortage. By the war’s end, Japanese mines were in an extremely debilitated condition requiring extensive repairs and replacements as a result of destructive wartime stripping and grossly inadequate maintenance for many years. Machinery and tool shortages were, and are, a serious obstacle to recovery. Replacement of the large numbers of repatriated Korean and Chinese laborers who had been impressed into service in pits constituted a major initial problem. Although 130,000 Japanese were recruited as replacements by spring of 1946, through intensive SCAP and Japanese Government efforts, labor turnover has been high and miners relatively unskilled. The decrease in working hours from ten- and twelve-hour shifts to eight hours resulted in a much greater loss in working time at the coal face. Output per worker has fallen from 17 tons per month for the period 1935–1938 to a present level of about 5.5 tons. Working conditions are the most hazardous of any major coal-producing country in the world, creating serious difficulties in maintaining a stable labor force.

Coal output in November 1945 was only 500,000 tons, only one-tenth of peak wartime production, or less than the requirements merely to run the railways for one month. In March 1947, SCAP embarked on a program of restoring the mines mechanically by greatly increasing deliveries of machinery and equipment. Output has now risen to the point where it has been averaging 2,200,000 tons in recent months. Minimum requirements for a balanced peacetime economy are well over 3,000,000 tons monthly. Present production is largely consumed by transportation, thermal electric power, gas and coke requirements and at the mines; industrial users have been obliged to sustain the bulk of the disparity from normal requirements. In part, the inadequate deliveries to industrial consumers results from the necessary use of domestic coal to replace unobtainable imports of high-grade coal normally consumed by the iron and steel and chemical industries. Under these conditions, it has been impossible to stockpile adequate reserves for the critical winter months. It is also obvious that any appreciable rise in coal available for industrial consumption would have immediate salutary effects.

Recovery in iron and steel production has been critically handicapped by the coal shortage. Steel production has recovered from practically zero at the outset of the Occupation to a level of some 90,000 tons of ingot per month, or approximately one-third of minimum requirements. Steel output per unit of coal used is substantially below normal because of the low quality of iron ore and coal; this has been further aggravated by the low level of operation and consequent inefficient use of fuel.

Production of chemicals has been confronted with the same short supplies as other basic industry, principally the lack of coal, salt, iron pyrites and, seasonally, electric power. Production of soda ash and caustic soda, basic to rayon and many other industries, remains so low as to constitute a major handicap to recovery. Fertilizer production has been maximized by SCAP action through concentration of production in and channeling of available materials to a small number of designated efficient plants. As a result, synthetic nitrogen fertilizer production has been quadrupled since early 1946. It is now running at more than 80% of former peak production but, due to the loss of imports from Korea, present output meets only some 50% of Japan’s calculated requirements.

Shortage of fats and oils is particularly acute in Japan in view of her dependence on soy beans as a source and in view of the fact that soy bean imports have been abysmally low, averaging less than 200 tons a month in 1946 compared to more than 75,000 tons a month in the pre-war period. As a result, the soap, paint, fatty acid, and similar industries are seriously prejudiced.

The textile industry is the very heart of the Japanese economy. Japan in pre-war years led the world in volume of raw silk production, and manufactured cotton and rayon exports. Failure of these industries thus far to make a more substantial recovery has depressed the entire Japanese economy. Raw silk output, while more than doubling since early 1946, is currently operating at only one-sixth of the 1930 level. The silk industry virtually disappeared during the war by reason of the inaccessibility of Japan’s markets, and reeling establishments came to a virtual standstill. Most important, however, this industry, which during its peak was able to sell annually over $300 million worth of raw silk to the United States, is in effect a casualty to technological change, namely, the development and widespread use of synthetics.

Shortages of raw wool have frustrated recovery in the woolen industry. Production in 1946 and 1947 has been undertaken on the basis of inventory stocks. However, substantial capacity is available and resumption of raw wool imports will permit a quick rise in productive activity.

Rayon, yarn and fabric output, one of Japan’s best pre-war sources of foreign exchange, has been seriously handicapped because of deficiencies of caustic soda, rayon pulp, and coal.

The recovery in cotton textiles has been impressive even though levels are still depressed. Imports of cotton from the United States began in June 1946 and the industry now has some 2.2 million spindles in operation of almost 3 million on hand. This latter figure compares with a pre-war high of 13 million spindles available. Further anticipated cotton imports resulting from the removal of various financing obstacles should accelerate activity, although the large number of spindles scrapped during the war will impose a very low production ceiling. In order to alleviate Japan’s need for dollar markets in a dollar-short world, substantial imports of non-American cotton have been arranged by recent agreements.

The production of machinery and mechanical equipment has been limited by scarce supply of fuel, power, and minerals. While Japan needs machinery and mechanical items of every type, production has been concentrated in accordance with priority programs for the rehabilitation of coal mines and fertilizer production. Generally, the machinery production index is about the same as that for industry as a whole. However, since machinery constitutes one of Japan’s main hopes for replacement of probably reduced exports in textiles and raw silk, the production of machinery will necessarily have to be increased relatively more than most other categories.

Generation of electric energy by public utilities since the Occupation has been above the 1930–34 annual average. Since the cessation of hostilities, however, there has been an enormous increase in residential consumption, in part a consequence of the shortage of charcoal. During the first five months of 1947, thermal power plants produced an average of 107 million KWH per month to supplement the monthly average of 2,428 million KWH generated by hydro plants. Thermalgenerated energy was only 4 per cent of total electric energy. Coal deliveries to the thermal power plants in the same period are reported to have been 720,000 tons (by contrast, coal deliveries to the iron and steel industry, the largest industrial consumer of coal, in this period were 790,000 tons). Consumption of electric energy by the primary metals, metals, machinery and tools, and chemical industries has been disproportionate to the output of products.

The Chairman, in the last session of the Allied Council, reported on the reopening of private foreign trade in Japan. Details were submitted at that time concerning the efforts by the Supreme Commander to rejuvenate foreign trade as the indispensable prerequisite to the creation of a stable and self-supporting economy. It is anticipated that considerable progress towards securing a more adequate flow of essential industrial raw materials will be achieved in the coming year. However, continuing world shortages of those raw materials and the political and economic disruption prevailing in Asiatic sources of supply to Japan will not, for some time, permit the volume of imports required to meet minimum essential needs.

In conclusion, while it is obvious that industrial recovery in Japan, in the face of desperate shortages of materials, has been truly impressive, the desired recovery can be brought to fruition only with the reemergence of normal foreign trade conditions as a result of the treaty of peace opening the broad avenues of peaceful trade with all countries.

71. In despatch 1321, October 8, from Tokyo, Mr. Sebald reported comment by other members of the Allied Council. The Chinese member expressed interest in a regulated economic recovery for Japan and stated that the supply of raw materials from China could be increased by Japanese assistance in rehabilitating China’s damaged industries. The British member implied that successful conclusion of negotiations concerning payment for Japanese trade with sterling-bloc countries would make possible an increased supply of raw materials for Japan. (740.00119 Control (Japan)/10–847)