Foreign Relations of the United States, 1951, Asia and the Pacific, Volume VI, Part 1

894.10/12–1251

Memorandum of Conversation, by the Officer in Chargé of Economic Affairs in the Office of Northeast Asian Affairs (Hemmendinger)¹

confidential

[San Francisco,] September 3, 1951.

Subject: Japanese Financial Problems

Participants:	Finance Minister Ikeda
	Mr. Watanabe
	Mr. Miyazawa2
	Mr. Joseph M. Dodge3
	Noel Hemmendinger

1. Mr. Dodge said he had read in the papers that Mr. Ikeda and Mr. Ichimada⁴ were going to Washington to confer with him and United States officials, but that was the first he had heard. He had had to deny any knowledge.

Mr. Ikeda stated that he and Mr. Ichimada had been appointed to the Japanese peace treaty delegation with the expectation that they might have occasion at the same time to discuss financial questions with Mr. Dodge and officers of the United States Government in Washington. It was not known that Mr. Dodge would be in San Francisco. Since there will be opportunity to discuss matters with Mr. Dodge at San Francisco, Mr. Ikeda was not sure that there was any occasion for him to go on to Washington, which would not be too convenient because there were important matters that would require his attention in Japan. He invited Mr. Dodge’s views.

Mr. Dodge replied, and Mr. Hemmendinger confirmed, that the period immediately following the peace conference was not opportune for serious discussions with United States financial leaders because of the pressure of other matters and because the study of the major Japanese financial questions in the United States Government was still at a working level. Mr. Ikeda stated that in the light of this comment he definitely would not go to Washington.

2. Mr. Dodge said that he would like to take this opportunity to make a general observation, which he had made also to Japanese visitors to him in Detroit, that in their enthusiasm for the treaty, the Japanese seemed to have an inadequate realization of the serious responsibilities of a financial nature which Japan would face in the post-treaty period. He referred among other things to the necessity for Japan to undertake the procurement which has been done or assisted currently by United States Government agencies.

In commenting, Mr. Ikeda referred to Japanese obligations on pre-war indebtedness, on the GARIOA indebtedness, on reparations and compensation for UN property in Japan. In addition, he mentioned to the Japanese obligations for security (including the Japanese share of mutual defense arrangements and the police reserve), compensation to Japanese nationals for loss of overseas assets and veterans’ allowances. Consideration of the latter two, Mr. Ikeda indicated, was still in a preliminary stage.

Mr. Ikeda said that it was the general conclusion of the Japanese Government that after their best efforts to meet this series of external and internal obligations, there would be a need for United States assistance on a loan basis. He realized that discussion of this problem was premature. Mr. Dodge remarked that this matter would be carefully analyzed by the United States Government and the Congress and pointed out that Congress was looking very skeptically upon requests for foreign assistance.

3. With respect to the problem of procurement mentioned by Mr. Dodge, Mr. Ikeda commented upon the difficult situation faced by Japanese importers who had over-extended themselves in purchasing imported raw materials, upon the likelihood that Japan would face a dollar shortage in the long run, and upon the shortage of electric power. Mr. Dodge agreed that these were very real problems and commented particularly upon the role of usance bills in the overextension of credit. Mr. Ikeda observed that there was no adequate credit control over the bank loans. Mr. Dodge suggested that the following controls were needed and probably no others: a. strong controls over the use of foreign exchange to purchase imported materials; b. allocations of raw materials; c. selective credit controls; and d. general budgetary controls.

4. Mr. Dodge and Mr. Hemmendinger pointed out that the main business here in San Francisco was the peace treaty and emphasized the importance of a responsive attitude by the Japanese on Article 14(a)1, which would assure the interested countries that the Japanese were prepared to negotiate soon in good faith.

Mr. Ikeda said that Mr. Dulles had told Prime Minister Yoshida, who had stated to the Diet, that there was no essential difference between the final text of the treaty and the July draft. Mr. Ikeda did not agree and thought that Article 14(a)1 as presently drafted represented a definite obligation which would have to be met. If the discharge of this obligation could be linked to the Point IV program and United States programs of assistance in Southeast Asia, it would be more palatable to the Japanese.

Mr. Hemmendinger outlined the principles which in United States thinking should apply to the negotiation under 14(a)1: that the finished goods to be supplied be imports on the part of the reparations recipient over and above normal trade with Japan, and over and above normal imports of that country from all sources; and that they represent on the Japanese side the use of productive resources that would be otherwise unutilized. These principles could be applied only imperfectly, but would be an important guide. The United States proposed to say the same, if occasion arose, to the countries interested in reparations. Mr. Ikeda expressed interest in this formula and referred specifically to the Japanese shortage of electric power. He inquired whether the text of Article 14(a)1 would limit the services to be supplied to those which would not impair Japan’s foreign exchange position. Mr. Hemmendinger replied that technically the clause referring to Japan’s foreign exchange position related only to the provision with respect to supply of raw materials, but that the more general provision that the reparations be in such form as not to cast additional liability upon other allied powers might be applicable.

Mr. Hemmendinger stated that if the Japanese desired, the United States could supply some technical information on the arrangements of the Italian-Yugoslav reparations agreement. Mr. Ikeda expressed interest and the matter was left for later discussion.

5. Mr. Dodge referred to a recent statement by Prime Minister Yoshida to General Ridgway that Japan intended to repay the GARIOA obligation in full, and asked what the Japanese had in mind. Mr. Ikeda asked first what the total obligation was considered by the United States to be. Mr. Dodge stated that the United States estimates were somewhat over $1.8 billion. This figure as an estimate of aid rendered seemed to be satisfactory. Discussion then indicated that the steps involved were, first, acknowledgement in principle by Japan of an obligation to repay GARIOA assistance, second, agreement upon the total sum to be repaid and, third, agreement upon precise terms of repayment (including the possibility of both dollar and yen payments). Mr. Ikeda referred to the arrangements for repayment of United States aid rendered in Europe under the Marshall Plan, and stated that according to his information the loan-grant ratio was 12–88%. He was not suggesting that 12% represented an acceptable settlement for Japan, but considered that the Marshall Plan arrangements afforded a possible basis for determining the amount of United States aid which should be repaid. He also pointed out that before the institution of the counterpart fund the Japanese had no information on the aid rendered and suggested that a distinction might be made between aid rendered before and after that time. According to their records, aid received after the counterpart fund was between $800–900 million.⁵

6. Mr. Dodge asked how the obligations which had been reviewed in the conversation to this point could be reconciled with proposals for tax reduction which seemed to be current in Japan. Mr. Ikeda stated that this was a matter of definition, that a surplus of about 100 billion yen was anticipated this year, of which he thought about 40 billion yen should be returned to taxpayers as representing income due to price increases. He then discussed briefly other elements of the projected supplemental budget for 1951 and the 1952 budget. He indicated that only the supplemental budget had thus far been brought to the attention of GHQ, SCAP.

1. Mr. Hemmendinger was also an Adviser to the U.S. Delegation to the Japanese Peace Conference.
2. Kiichi Miyazawa, Private Secretary to the Minister of Finance.
3. Fiscal Adviser to the Under Secretary of the Army, Financial Adviser to SCAP, and Adviser to the U.S. Delegation.
4. Hisato Ichimada, Governor of the Bank of Japan.

5. In memorandum of a conversation held in San Francisco September 7 between Mr. Ikeda, Mr. Dodge, and other officials, Mr. Hemmendinger stated in part:

   “Mr. Ikeda pointed out that under Japanese law any obligation must be approved by the Diet. Although the Japanese Government recognizes an obligation with respect to the GARIOA advance, it would have to be approved by the Diet before any action could legally be taken. Mr. Dodge and Mr. Hemmendinger indicated that the United States recognized that this was the case, and Mr. Dodge pointed out that the size of the United States security forces which would be maintained in Japan had not yet been determined and that the Japanese contribution to the support of this could be much larger than 30 billion yen. Mr. Ikeda stated that the computation was based upon the arrangements with respect to the United States air forces in the United Kingdom and represented approximately 20% of estimated total costs. He was informed that while the United States was still studying this problem, the tentative arrangement which had been discussed with Prime Minister Yoshida based upon the United Kingdom precedent was not considered applicable. While the United States recognizes the principle that arrangements with Japan should be comparable with those of other sovereign nations, other things being equal, there is in fact no comparable situation in Europe unless it be that in Germany, where United States forces are still on an occupation basis. The situation in Japan differs from any of the European situations in that Japan will be making for this period comparatively modest expenditures for her own security and will be greatly dependent for that security upon the presence of United States forces. Mr. Ikeda made no comment.” (894.10/12–1251)