893.102S/1433

The Consul General at Shanghai (Gauss) to the Secretary of State

No. 507

SHANGHAI, December 3, 1936. [Received January 5, 1937.]

SIR: With reference to my despatch No. 496 of November 28, 1936,2 concerning the Japanese demand for control of the police of the northern and eastern districts of the International Settlement at Shanghai, I have the honor to report that Mr. Stirling Fessenden, the (American) Secretary General of the Shanghai Municipal Council, informed me this morning that he had been invited to attend a meeting at the British Consulate General yesterday at which were present the British Ambassador, the British Consul General, the British Consul, the Chairman of the Shanghai Municipal Council (Mr. H. E. Arnhold, a British subject) and the Commissioner of the Shanghai Municipal Police (also a British subject), who discussed the situation which has arisen in connection with these Japanese demands.

Mr. Fessenden tells me that the British Ambassador expressed himself as in agreement with the proposal that the officials of the Council should discuss this matter with the Japanese consular authorities with a view to seeking some arrangement which might meet the Japanese in a reasonable measure.

Mr. Fessenden said that he had expressed the opinion, which is in accord with my own, that an effort should be made to arrive at some compromise arrangement with the Japanese; the object of the discussions to be a reduction of the Japanese demands and an arrangement which will not disrupt the police administration of the Settlement.

He told me, however, that the British Consul General appears to be very much concerned over the Japanese demands, and seems to feel that they must be met in large measure. Sir John Brenan has also told me recently that he feels that the Japanese are determined to accomplish their ends. He seems to feel that any opposition to the Japanese demands will be charged principally to the British since the police organization of the Settlement is largely British and the municipal administration principally under officials who are British subjects.

I am of the opinion that my British colleague takes too serious a view, at present, of the Japanese demands. My impression from my discussions with the Japanese Consul General is that the Japanese will accept very much less than they have demanded; and I believe that my proposal for the appointment of "co-officers" would go a long way toward meeting the Japanese wishes. The authority of the Japanese "co-officer" should, so far as possible, be restricted, and confined to Japanese affairs.

'Not printed.

I do not believe that the anxiety of the British Consul General is fully shared by the British and American members of the Council, who are likely to seek to reduce the Japanese demand to a minimum. While it is not possible to say at this time what course will be followed in event a compromise arrangement cannot be made with the Japanese, it seems-if I interpret correctly the attitude of the officials of the Council as explained to me by the Secretary General-that the whole question of the Japanese demands and the attitude of the police administration in regard to them, will be exposed to the full membership of the Council, including the Chinese. I have emphasized with my Japanese colleague that if the Japanese demands should become known to the full Council-and they must become known if the Municipal authorities are unable to make some mutually satisfactory arrangement with the Japanese-there will likely be strong Chinese opposition to the Japanese demands, and the present difficult situation in regard to Sino-Japanese relations at Shanghai will not be improved. In his telegram to me of November 22, 12 noon, the American Ambassador, in expressing agreement with my views as set out in my telegram No. 604 of November 21, 4 P. M., to the Department and the Embassy, stated that he believed that the secrecy imposed by the Japanese should be combated. I have held that suggestion in mind, and believe that it should be followed in event that no satisfactory compromise arrangement can be reached with the Japanese to continue substantial foreign (non-Japanese) control of the police in the eastern and northern districts of the Settlement. I am not disposed, however, to urge that any publicity be given to the Japanese demands so long as there exists any possibility of a reasonable and satisfactory arrangement. I feel that if the Japanese demands were given publicity at this time, there might be serious repercussion amongst the Chinese, particularly in the northern and eastern districts, and, perhaps, a renewal of attacks on Japanese in those areas. It seems to me desirable that the matter should take its natural course between the officials of the Council and the Japanese, and then, if there is a breakdown that it should be referred formally to the full Council, with probable resulting publicity.

My British colleague has said nothing to me of the meeting held by the British Ambassador; my information comes confidentially from the (American) Secretary General of the Council who says that he was invited to attend the meeting in that capacity.

Respectfully yours,

C. E. GAUSS

JAPAN

POLITICAL DEVELOPMENTS IN JAPAN; THE ASSASSINATIONS OF FEBRUARY 261

894.00/560

The Ambassador in Japan (Grew) to the Secretary of State

No. 1630

TOKYO, January 7, 1936. [Received January 27.]

SIR: During my recent visit to Washington the Department emphasized the importance and helpfulness of including in our current despatches an "evaluation of forces". So far as such evaluation entails prophesy of future developments, it is perhaps trite to say that predictions in this part of the world are generally unwise because the unexpected can always happen-a fact often demonstrated in past and recent history. Nevertheless current trends and their contributing factors may be gauged without commitment as to the turn which these trends may take in future owing to the injection of new factors into the situation. It is on this basis that the Embassy submits the following discussion of the general situation facing Japan at the opening of the year 1936.

ECONOMIC AND FINANCIAL

The year 1935 was in general a very prosperous and successful year for Japanese commercial and financial circles. Corporation earnings for the first half of the year amounted to 14.8 per cent of the paid-in capital plus reserves and unexpended balances, showing an increase of .9 per cent over the earnings of the previous half-year. No doubt these increased earnings were in part due to the so-called "munitions boom", but they were also due in large measure to the general prosperity of the country. The average dividends against paid-in capital amounted to 7.8 per cent (per annum rate), or an increase of .5 per cent over the previous half-year. Over half of the earnings were placed to reserves, indicating not only a cautious attitude but a surplus of earnings over dividend necessities. Although the figures for the second half of 1935 are not available as yet, the available trade returns indicate that corporation earnings for the latter half will exceed those for the first half.

1

1 For previous correspondence, see Foreign Relations, 1935, vol. III, pp. 821 ff.

In foreign trade the country had the best year since the Great War. Both exports and imports registered large increases over those for 1934, and the excess of imports for the Empire dropped from Yen 123,000,000 in 1934 to about Yen 19,000,000 in 1935 (complete figures are not yet available but the above calculations are based on figures to December 25, 1935). The invisible trade balance, according to preliminary figures, was slightly unfavorable for the year, showing an excess of payments over income of Yen 44,500,000, as compared with an excess of income of Yen 8,700,000 in 1934. In 1935, however, the Japanese redeemed the outstanding South Manchuria Railway sterling bonds and made large investments in Manchuria, including the purchase of the Chinese Eastern Railway, which account for the excess of payments over income. Combining the visible and invisible balances, moreover, it will be noted that the combined adverse balance in 1935 was Yen 63,500,000, as compared with an adverse balance in 1934 of Yen 114,300,000. If, therefore, Japan is exporting its capital, as some economists claim, it is doing so at a decreasing rate.

Money remained easy in Japan throughout 1935, with steady increases in both bank deposits and in loans outstanding, indicating increasing business activity. Bank deposits increased considerably faster than loans, however, and during the year there was an increase of about Yen 700,000,000 in the spread between deposits and loans, which naturally resulted in an easy money market. On the other hand, although the Government finances appeared sound, there seemed to be some doubt among the Japanese as to Government credit toward the year-end. During the year the Government issued large quantities of so-called "red-ink" bonds, or bonds issued for the purpose of covering budgetary deficits, and in the latter part of the year the private banks and individual investors appeared somewhat reluctant to absorb more of these bonds. Although exact figures are not yet available, it is believed that the total outstanding debt of the Government passed the ten billion yen mark by the close of the year-a record debt for Japan. The Governor of the Bank of Japan, however, in his New Year message, stated that the Bank was able to take up all further Government issues until the close of the present fiscal year (March 31, 1936), and appealed to the Japanese people to uphold the credit of the Government.

Although the Japanese nation had an unusually favorable year, economically and financially, in 1935, there is little reason to believe that 1936 will be any less favorable-in fact, practically all students of Japanese economics and finance predict a steady continuance of Japan's prosperity. Their predictions are based largely on the fact that better financial conditions exist in the farming districts, due to higher prices for rice and raw silk, and that further large sums

will be spent during the year by the Army and Navy for modern military equipment, both of which factors will ensure continued and perhaps increased activity in the industries of the nation. Foreign trade will, according to the predictions, continue to flourish during 1936, and may be considerably increased by the conclusion of a trade agreement with Canada, which will restore trade with that country to normal, and by the further opening of North China through the establishment of an autonomous government there which will be favorably disposed toward Japan. Moreover, the economic recovery of the United States will undoubtedly create a larger market for Japanese goods, while the war-nervousness in Europe will cause an unusual demand for such war supplies as Japan produces.

On the other hand, there are various factors which are not so favorable and which, in the opinion of this Embassy, may cause disturbances in Japan's economic and financial circles during the year. The principal unfavorable factor consists of the uncertain position of Government credit. It is true that during the coming fiscal year (April 1, 1936 to March 31, 1937) the Government plans to issue a considerably smaller amount of "red-ink" bonds than in the present fiscal year, but even so the amount (about Yen 680,000,000) may be larger than the capacity of the market, in which case there may be serious dislocations of credit and serious financial disturbances. The Japanese, however, have proved themselves very able financiers and probably will find means to overcome the possible financial difficulties of the Government.

Another possible disadvantageous factor is the erection of further and higher trade barriers against Japanese goods. The Japanese Government is now fighting against the erection of such trade barriers by voluntarily restricting the exportation of goods to countries where it appears that opposition to the flood of Japanese goods is growing. Whether or not this means of combating the tendency throughout the world to restrict the importation of Japanese goods will be effective remains to be seen. The Japanese Government also has another weapon which was used effectively in the case of trade with Canada. This is the Trade Protection Law, which authorizes the imposition of greatly increased duties on goods imported from countries which impose discriminatory measures against Japanese goods.

Another factor which may militate against increased Japanese prosperity during 1936 is the extreme economic nationalism now apparent in Japan. This economic nationalism, principally promoted by the military for purposes of national defense, was illustrated in 1934 and 1935 by the passage and enforcement of the Petroleum Industry Law, which is designed to develop oil refining within Japan and to provide large stores of petroleum for use in time of emergency.