JAPAN'S PROBLEMS AND PROSPECTS

Created: 10/9/1963

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Problems and Prospects

' l

DIRECTOR OF CENTRAL INTELLIGENCE

UNITED STATES INTELLIGENCE BOARD

SECRET CONWOLIED DISSEM

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The Cenlrol Intelligence Agency ond ihe intell;gericevorganizationi'oi lhe Depart-'

Assiflflnt Chief of Staff foi Intelligence. Department of lhe

Awitfant Chief of Naval Operation*epartment"of the Navy

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" Director of thoAtomic Energy

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The Auiitant Director, Federal Surccu_thc'wbject^beinBhb lurlkdktlon / .C .,

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NATIONAL INTELLIGENCE ESTIMATE

Japan's Problems and Prospects

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TABLE OF CONTENTS

CONCLUSIONS

I. INTRODUCTION

II. POLITICAL PROSPECTS

ECONOMIC.

INTERNATIONAL RELATIONS V. MILITARY PROSPECTS

Table I

Table H

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JAPAN'S PROBLEMS AND PROSPECTS

CONCLUSIONS

postwar political institutions, although notto the test of adversity, seem to be taking root, and thefor continued political stability appears favorable.leftist political vote has been increasing, to theof the Japanese Socialist Party, the conservativeParty will probably retain power over the next (Paras.)

economy continues to grow vigorously. It is,heavily dependent on foreign trade and isto threats to Its exportubstantialof foreign trade will be necessary if it is to meet itsgoals.orldwide depression, Japan'soutlook is favorable. The economy will almostto expand, but probably not at the remarkable rateyears. )

C Japan can be expected to movereaterin world affairsore self-confident and independent posture during the next few years. Relations with the US will be marked by greater insistence on Japan's being consultedull partner on matters of concern to it and by great sensitivity to discrirnination against it in US markets. In the absenceaterial change in circumstances, there is little prospectajor alteration in Japan's economic or political relations with Communist countries during the next few years.

D. The US-Japan Security Treaty will almost certainly remain the keystone of Japan's defense and military planning underrule. US bases in Japan willensitive subject and the Japanese would be particularly edgy about their use in con-

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with hostilities which Japan did not see as an immediate threat to itself. As economic prosperity increases and national self-esteem reasserts itself, Japan mayreater interest in such issues as national defenseore impressive military establishment. Strong antimilitary sentiment will, however,to prevail among the Japanese for some time to come, and it appears unlikely that professional military opinions willignificant influence on governmental policies for many years.

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I. INTRODUCTION

The postwar period has seen profound changes in Japan's politicalumber of elements in the prewarmilitary, the aristocracy, and the special bureaucracy surrounding thehave been all but eliminated as political forces. The entire legal and institutional framework of government has been fundamentallyand liberalized; the role of political parties has been expanded, and the position of the opposition protected and strengthened; new elements have access to power; labor unions have emergedajor force; civil rights have been extended; and the size of the electorate has quadrupled.

Economic and social transformation have also brought about basic changes in political life. Traditionally, such divisions between left and right as existed in Japanese politics have been rooted firmly in class and functional distinctions; Japan now appears to betage in which such distinctions are becoming much less meaningful. There hasapid movement of the conservative rural population to urban areas. Industrialization continues to spread Into rural areas, breaking down former social, economic, and political identifications. In both city and countryside, there haseplacement of older,voters by an anti-traditional postwar generation as it came of age. Moreover, in the postwar period, not only the youth, but all elements of Japanese society have been exposed to the teachings and writingsredominantly leftist intellectual community which was released from past suppressionolerant Occupation.

These changes have been conducive to the development of leftist political forces. Nevertheless, the left has found it difficult to exploit its opportunities. Prosperity under capitalism, highetter distribution of income, and the growth of confidence in the future have lessened the appeal of the leftist shibboleths of "exploitation" and "oppression" and have, to some extent, satisfied rising expectations. Japan Is also currentlyradual recoveryense of national self-esteem which renders it increasingly advantageous for all elements to think in terms of national rather than class goals.

In recent years, some reaction to postwar political reforms has occured: political figures purged during the Occupation are reappearing; the police system is being recentralized on the prewar pattern; there isrend toward the national control of education,teady diminution of local autonomy. Such revisionist trends as exist,seem limited in scope and do not appear to pose any Immediate threat to basic advances made toajor control over the tempo

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and nature of such trends will be the growing dependence of the political leadership on the mass support of an electorate which is slowly but steadily becoming more willing and able to use its ballots andin support of other than traditional candidates and programs.

the prospects for continued moderation in Japan'sand policies seem reasonably good. There appears tochance that basic postwar reforms will be abrogated. Itnoted, however, that these institutions have developederiodJapan has not had to face political or economic crises ofas to put them to the test. While we believe thatinstitutions are taking root, lt does not necessarily followevolution will insure continued compatibility betweenJapanese Interests, or that other factors, primarily economic,at some time bringadical change in Japan's currentorientation.

II. POLITICAL PROSPECTS*

Liberal-Democratic Party. The ruling Liberal-Democratic Party (LDP) carries with it the prestige of success and the advantages of money and power. The LDP, however, Is increasingly aware that lt cannot rest on its oars. Many of its leaders realize that it must strive to replace the widely held view that the LDParty of "old-guard" politicians, steeped in corruption, enervated by factionalism, andto the wishes of big business. These leaders recognize that the LDP must make the transitionarty based primarily on class to one based on broad popular appeal and gain the support of thebody of independent voters who support whatever party offers the most attractive programs and candidates.

The LDP has proven adept at exploiting favorable economic and social conditions in postwar Japan and will probably continue to do so for some time. The party appears to understand what steps lt must take to improve its political prospects and, despite continued factionalism, is making some modest progress. The international status of Japan has improved to the pointudicious amount ofsm can be made to work for the conservatives, as Prime Minister Ikeda is seeking to do with his theme of Japan as the "thirdalong with the DS and Westthe Free World. On balance, we believe the LDP will probably be able to maintain Itself in power for the rest of this decade.

Japanese Socialist Party. The Japanese Socialist Party (JSP) will almost certainly continue to be the only major opposition party during this decade. It is supported by Sohyo, Uie principal trade union federa-

* Seeor relative electoral strengths of Japanese political parties.

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tion,embership ofillion. There hasong-term increase in the leftwing vote in Japan, with the JSP as the principal beneficiary. If this trend continues at the present rate, the JSP willerious challenge to conservative rule by the end of the decade. However, the JSP may find it difficult to continue to advance at recent rates unless it overcomes certain obstacles toroad appeal to the whole nation. Many Japanese fear that the JSP would follow radical economic policies which might Jeopardize continued economic growth and prosperity. The party will have to attune its presently neutralist foreign policy to the main trends of Japanese nationalism and political life; its am (colon la list theme Irritates more than it inspires the Japanese, since it equates Japan with the backward nations of Asia and Africa; and lis "American imperialism" theme no longer servesonvincing explanation for all the world's Ills.

has been within the JSP in recentnovement away from rigidon class warfare, and there has been some movementlines. The degree to which the Socialists will havethe end of the decade cannot be estimated precisely.undoubtedly favor moderation, and some perceptibleJSP orientation are likely to occur over the next severalthe Socialistsartyapacity to clinganachronistic doctrines, and temporary returns to more radicalcannot be ruled out. Thus far, there is little sign the JSP isthe same process of moderation which has characterizedsocialist parties.

Democratic Socialist Party. The Democratic Socialist Party (DSP) was formed by moderate elements of the JSP which splintered offt has the support of the relatively small labor federation Dome! Kalgi withillion members. The DSP hasteady decline In popular support and parliamentary influence. Many supporters are returning to the JSP with its superior organization and resources. The DSP may at bestoleartner ln some coalition.

Japanese Communist Party. Over the next few years, the Japanese Communist Party (JCP) will probably continue to attract attention disproportionate to its size. When it seems politicallyIt will act with other leftist groupings in demonstrations, directed primarily against US bases and the introduction of nuclear weapons in Japan and for closer relations with the Communist states. Its proven ability to get out the crowds for demonstrations will encourage the other leftist parties, particularly the JSP, to seek its support and to act in concert with it where popular protest soems advantageous.ontinuation of the present economic prosperity and moderate political

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atmosphere, lt seems unlikely that there will be any significant Increase In popular support for the JCP or Ln Its parliamentary strength. Its increasing association with Peiplng's militant line In the Slno-Soviet split will probably further aggravate Internal party dissension and could lead to another defection of party members similar to that Inhen an Important JCP official. Kasuga Shojlro.ew followers broke away from the JCP and formed the "revisionist" Socialist Reform Movement. Open espousal of the Communist Chinese side would further Isolate the JCP from the other leftist forces which, in the main, arc unsympathetic to Chinese attitudes on such issues as nuclear testing and coexistence.

Soka Oakkal Efforts of both the JCP and the socialist parties to increase their shares of the popular vote will probably be undercut by the Soka Oakkal (Value Creation Society) which ls drawing members from the same low-income milieu from which the extreme leftists have traditionally drawn their strength. This partly religious, partly political movement hasonsiderable measure of influencend now has probably several million followers. Its avowed objective is the elimination of corruption through the establishment of ils militant Buddhist creed as the state religion, and it pursues this goal by aggressive proselytizing at home and abroad and. to an increasing degree, by political activity. Dissatisfaction with present conditions, personal frustrations, and poverty havearge part in its growth, but many have Joined because they see in the propagation of Its creed the salvation of the nationime when they believe Japan to be riddled with political corruption and engulfed by alien Influences. In spite of Its predominantly lower class following, the organization's nationalism and traditionalism leads to some affinity with the LDP.

The Soka Oakkal may eventually decline to the status of relative unimportance that has been the fate of numerous postwar quaal-religious movements ln Japan. However, its strong and efficient organization, militant recruitment tactics, continued exploitation of antiwaropposition to political corruption, and the championing of popular causes pointrobable increase In Its growth and politicalover the next few years. Its leaders are young and dynamic, but do not as yet appear to be power-hungry or self-seeking. For the short run, the Soka Oakkal does not appear to pose any major political problem for conservative rule. As yet. Its elected representatives have demonstrated neither great political responsibility nor Initiative. Greater legislative strength, however, could lead them toore comprehensive political action program If this should occur, the Soka Gakkai'smethods and organization, and its nationalistic doctrines, would probably cause It to move to the right; its political philosophy could evolveniquely Japanese form of totalitarianism, which

eventually pose serious problems for moderate conservative forces in Japan.

ight Extremists. The number of right extremists is small and they are divided into several hundred groups. There Is widespreadto the tactics of assassination and terror which some pursue and they are viewed with distrust by the government. They willtoisruptive element on the political scene. However, barring an unlikely coalescence of their lorces, they will almost certainly notignificant influence in government, military, or business circles over the next few years.

CONOMIC PROSPECTS

Since the end of World War II, Japan hasigher rate of economic growth than any country of the industrial West;8t exceeded that of any other country in theumber of factors have contributed to these successes. Postwarhave followed policies which have favored economic development and stability and have taken prompt remedial action to offset periodic downturns in the economy. There hasigh rate of domestic savings and investment. The Japanese still work hard and adapt quickly to scientific and technological advances. US aid and offshore procurement were important boosts to the economy, particularly ins. Many of these factors will continue to operate and will assist In maintaining the current prosperity.

Japan is, however, deficient in nearly all the basic natural resources needed to keep the economy running. Thus, the critical clement ln Japan's economic viability will continue to be its ability toolume of export trade adequate to pay for vital and increasing imports of sources of energy, raw materials, and food.

Japan's consumption of energy will probably nearly double ln the nextears. Most of the useable hydroelectric power sources have been developed; Japanese coal, though plentiful, is generally not of high grade and production costs are high. OU deposits are small, scattered, and difficult to exploit, and Japan will have to continue to import well overercent of Its crude oil. The development of the Japanese oU concessions In the Persian Gulf will eventually reduce the foreigncosts of oil. The cost of developing these concessions androyalty payments are now, however, resultinget drain on Japanese foreign exchange resources. Japan is pushing ahead in the development of nuclear power as an energy source, but the effort has been hampered to some extentack of funds for both basic and applied scientific research.apan plans to have five nuclear

Sec Tabicor statistics on Japan's economic growth

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stations in operation. Nuclear power, however, will probablyfor less than two percent of Japan's primary energy output

Japan will also remain short of many important Industrial raw materials. It imports the bulk of its requirements of iron ore and coking coal. Deposits of nonferrous minerals, with the possibleof zinc, are insufficient to meet needs. All aluminum ore isand minerals to support the chemical industry are generally inadequate. Japan must turn to outside sources for all Its cotton and most of Its wool, and faces critical shortages in timber for construction and industrial purposes.

ighly successful program of intensive cultivation, multiple cropping, and extensive use of chemical fertilizers, Japan has made impressive gains in agricultural output, but it still must import about one-fifth of its requirements ofniquely effective birth control program has reduced the annual rate of population growth to about one percent, but the slowly expanding population and higher consumption standard will keepajor food importer.

Labor problems will add to Japan's difficulties as the economy continues to expand. The ratio of qualified job-seekers to available jobs has been declining in recent years, and the chief labor difficulty in the near future will be to train enough workers in the proper skills to meet rapidly changing needs. At the same time, rapid modernization and rationalization in industry will create troublesome pockets ofespecially in the coal mining and other older industries.

Shortage of skilled workers and pressure from trade unions for parity with West European wage levels will probably continue to force wages up, as has been the case since the end of World War n. Thus far, however, rising labor costs have not impaired Japan's competitive position in world markets, since industries producing for export have generally been able to keep increases ln productivity ahead of increases ln costs. Consumer prices are also on the rise, in part because ofsupport prices for rice and In part because productivity in some industries producing consumer goods primarily for domesticand in the distribution system has not kept pace with rising wage costs. The government has not as yet acted to check these Inflationary trends and may be forced to unpopular measures In order to do so.

Facts no longer support the popular view of Japanow-wage country whose exports have an unfair advantage in other markets. There hasefinite shift in Japan's exports away from labor-intensive towards capital-intensive goods, and Japan's current export industries consist mostly of large firms whose average wage levels are relatively high, The role of traditional Japanese export industries such as textiles, toys, and ceramics in Japan's overall foreign trade isand low-wage areas such as Communist China, India, Hong Kong,

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Taiwan, and South Korea are now competing with and, in many cases, underselling these traditional Japanese products in the Far East and in other world markets.

Trade uirfc the US. Japan is acutely aware of its economic and political interdependence with the US and the Free World, and concern for Its Western markets will remain the paramount factor ln itspolicy for at least this decade. In recent years, the US hasfor nearly one-third of Japan's foreign trade, with only Canada having greater imports from and exports to the US. Trade between Japan and the US2ew higho the US4 billion and imports8 billion. Further removal by Japan of restrictions on Imports should increase US sales to Japan and Japan will probably continue to be the leading purchaser of US farm products and an important customer for coking coal. Iron ore, and capital goods, particularly heavy equipment.

A number of crucial problems will plague Japan-US tradeand may create sensitive political Issues as well. Over the past few years, Japan has had serious balance of payments problems,an important imbalance ln Its trade with the US. So long as the US faces similar problems of its own, it will be difficult for Japan to Increase its exports to the US (visible and invisible) so as to reduce the Japanese import surplus. The suspension of US offshore procurement, theof US defense expenditures overseas, and the implementation of the Buy-American Act nave adversely affected Japan's balance of payments, as well as certain Japanese Industries. Also, under the Ship-American policy, the US Government has encouraged preferentialfor US flag vessels, to the detriment of Japanese shippingFor the short term, Japan's balance of payments willajor restraining factor in its economic expansion; as long as this situation obtains, the US will be the chief target of Japanese criticism and Japan will seek means of redressing the balance.

rade with Communist China. Trade with mainland Chinato have considerable appeal to the Japanese, who recall the large trade with this area up to World War II. Although developments over the past years on the mainland have weakened the lure of the China market, certain business and government circles In Japan and much of the public look forward to China's eventual economic recovery and the expansion of Peiping's trade with non-Communist countries. The Sino-Japanese trade agreement of2 marked the renewal of quasi-official economic relations between the two countries, broken off by Pelping8 for essentially political reasons.

he current pact provides for trade of0 mUllon annually for five years. Actual trade, however, will almost certainly exceed this level, since it la likelyizeable volume of business will be con-

ducted for cash or short-term credit at trade fairs or through "friendlysmall, leftist-oriented companies and some dummies of large trade concerns. Nevertheless, mainland China's share oftrade will probably not exceed one to two percent of Japan's overall foreign trade for severalumber of factors will limit the growth of this trade: Japan will continue generally wary of dependency on Communist Chinese sources of supply and will be unwilling to jeopardize its US and non-Communist Asian markets. Any largeof trade with mainland China during the next few years would require the granting by Japan of extensive medium- and long-term credits which the government would probably be reluctant to do. Japan Is also well aware of the political pitfalls in dealing with Peiping and the propensity of the Communist Chinese to inject politics into commercial relations. The present limited arrangement appears useful to theGovernment: it serves to offset leftist political pressures fortrade with Communist China; it offers protection against the political liabilities the government would Incur li it failed to meet West European competition for the China trade; and it meets minimum demands among the conservative business community for entry Into the China market.

In the long run, it is possible that Japan's trade with mainland China will grow to an extent not nowdue toin the Chineseersuasive softening In Peiplng'secision by Communist China to look to the Free World for large-scale support for Its industrial program, or other factors. Until the end of this decade, however, it seems likely that Japan will move only gradually toward improving its position in the mainland China market, exercising caution and avoiding unacceptable economic orrisks in iU relations with the US.

Trade with the USSR. Barring dramatic changes in Japan'srelations with the USSR, the prospects over the next few years for Japan-Soviet trade appear to be only slightly better than In the case of Communist China. Over the next three years, Japan-Soviet trade will take place under an agreement signed ineplacing one which expired inowever, since the establishment of normal trade relations with the Sovietsapan has builtarge import surplus, which has resultedonsiderable drain on Japan's foreign exchange reserves. Even if this imbalance wereJapan would face difficulties in absorbing greater quantities of Soriet materials such as coal, iron ore, timber, and oil, because Japan already has stable and advantageous trading relationships in such goods with non-Communist countries. In all these circumstances, it appears unlikely that SovietJapanese trade will increase greatly over the present three percent of Japan's total trade.

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is possible that Soviel plans for the development of Siberia could, over time,ignificant boost to Japan-Soviet trade. The Soviets have dangled such perspectives before the Japaneseut so far have imposed conditions unacceptable to tbe Japanese. There is still talk of the Japanese participating ln the constructioniberian oil pipeline, between Irkutsk and Nakhodka on the Pacific coast.prospects for this project are stalled over Soviet Insistence on favorable credit terms, Japanese unwillingness to accept Increasedof Soviet crude oil in repayment, and Japan's reluctance to breach Western restrictions on selling large-diameter pipe. Theive-year credit to Peipinginylon fiber plant, however, mayoosening of Japanese credit to Communist countries for certain kinds of industrial development.

Trade with the EEC. Japan's trade relations with West Europe have improved markedlyesult of Prime Minister Ikcda's talks with various countriesreat Britain, France, and thepowers have agreed to discontinue discriminatory trade measures against Japanese products. Periodic cabinet-level meetings and Japan's entry into the OECD should stimulate closer economic relations.Japanese exports stilligh Common Market tariff wall and Increased trade within the market will be at least partly at the expense of trade with other countries including Japan. For the next few years there will probably not be any great increase In Japan's trade with West Europe beyond the presentercent of Its total trade (six percent with the EEC countries and seven percent with other West European nations).

Trade with Latinavorable climate exists for anin Japan's political and economic relations with South andAmerica. These relations have not been hampered by such special factors as the wartime bitterness that affects relations with many Asian states, or the fear of Japanese competition that influences manycountries. Trade with Latin America has Increased In the post few years and was six percent of Japan's total tradeespite Latin American inflation and shaky economic and political structures, over half of Japan's official loans and guaranteed export credits in recent years have been to Latin America. Japan ls also Involved In annumber of Joint ventures in the region. Part of JapaneseIn Latin America is attributable to successful Japanese emigrant colonies there, especially in Brazil. Japan is making greater publicity efforts and Latin American leaders are visiting Japan with greater frequency, and it appears likely that these and other factors should open the wayteady if not spectacular increase ln trade.

with Non-Communist Asia. Japan's trade withAsian nations is as large as its trade with the US (abouttotal trade). It has, however, shown little recent growth and. with

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exceptionew countries, will probably not rise appreciably during the next few years. Inhibiting factors, particularly in southeast Asia, are unsettled political conditions, low purchasing power, and,arge trade surplus In Japan's favor.umber of Asia's non-Communist nations are developing home industries which are protected and in competition with Japanese products. In its search for markets and raw materials, Japan will continue to interest itself Ln south and southeast Asia. Its reparations program to various southeast Asian countries is improving Japan's image in the area and facilitating trade. Trade with Australia mayubstantial Increase over the next few years. Australia is already an Important Japanese wurce for wool, grains, and coking coal, and may also become one of Japan's chief sources of Iron ore. Otherwise, however, prospectsignificant Increase in this area's share of Japan's trade do not appear promising.

he Economic Outlook. Japan's phenomenal recovery and growth and Its success Ln dealing with the business cycle have been basedore or less steadily expanding market for its exports In the non-Communist world. Foreign trade is the critical element in the Japanese economy. Theyearallsirtual doubling of Gross National Product (GNP) overyear period, an annual increase of over seven percent. This will require moreoubling of foreign trade. In the first three years of the plan, Japan surpassed the planned goals, averagingperccnt growth of GNP per annum. As has been pointed out above there are difficulties in the path of continued growth at the planned rate, particularly in the cases of the two most important markets for Japanese exports, the US and non-Communist Asia. If Japan's exports fail to Increase at something like the planned rate, the economy will suffer. While the government will probably retain the power to oflset periodic economic downturn by monetary and other measures. It could not prevent the difficulties which would resulterious deterioration In foreign trade. We cannot estimate with any high degree of assurance the course of Japanese trade during the remainder of the plan period. However, we believe that,orldwide depression Involving the US, the chances are good that Japan's economic growth will continueealthy rate.

IV. INTERNATIONAL RELATIONS

n the next few years, Japan will probably move gradually away from its postwar Insularity andreater involvement in world affairs. This development will almost certainly take place within the frameworkairly firm commitment to association with the Free World, particularly the US. At the same time, there willrend towards greater Independence of posture and less inclination to follow the US lead on outstanding international questions.

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with the US. Japan's dealings with the US In the next several years will be marked by greater Insistence on Its acceptanceull and equal partner, and by heightened concern over continued access to the US markets. To Japan, partnership will principally mean prior consultation on contemplated CS actions afTectlng Japan's political and economic interests

Continued major economic problems in Japan-US relations can be expected, springing from Japanese export Initiatives and efforts of US producers to protect themselves against Japanese competition. The recent agreement on the allowable levels of Japanese textile exports to the US was reached only with difficulty. Further difficulties are Ukely to arise over Japanese exports of woolens, metals, and machinery. Any settlement Involving real or imagined discrimination againstgoods can be expected to produce adverse public reaction In Japan and increase pressures on the Japanese Government and ln business circles for countermeosures.

Japanese attitudes towards military relations with the US are ambivalent. On the one hand, there is general public acceptance of the need for US military protection to insure Japan's security. Thus, the Japanese can be expected to be sensitive to US moves they might Interpret as lessening the US commitment or ability to defend Japan from Communist attack. Steps toward further withdrawals of US forces from Japanrastic reduction of US military expenditures ln Japan would almost certainly create considerable uneasiness and mistrust in Japan, particularly among government leaders.

On the other hand, US bases in Japan and related problems of weapons and forces will continue to involve Issues of great sensitivity in Japan-US relations. The government Is bound to be responsive to the popular pressures which the left can whip up on these Issues. Wc do not believe that this situation will lead to demands by any conservative government for evacuation of the bases. However, the government will be particularly edgy whenever US bases in Japan are used in connection with combat operations which the Japanese do not see asirect threat to Japan itself. The government will probably not feel able to consent to the storage of US nuclear weapons In Japan, but it may finally take the risk of agreeing to allow US nuclear-powered submarines to make resupply visits to Japan.

Continued US administration of Okinawa will probably not become an active political issue ln Japan during the next few years. The present government and sophisticated opinion recognize the Importance of Okinawa to the defense ol Japan and non-Communist Asia. If the Japanese should come to believe that the rights or welfare of the Okinawans were being prejudiced or that the US Intended to make the present administrative arrangements permanent, the leftists could

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whip up popular resentment, and the question of the return of the Islands to Japan couldajor Issue.

Relations with Communist China. The present LDP leadership feels that recognition of Peiping and advocacy of its admission to the UN can be avoided for some time since the minimum demands of both the LDP leftwing and the Socialist opposition have been met by the restoration of limited ecomonic relations with the mainland. Moreover, many conservative leaders see real disadvantages in changing Japan's China policy at this time. In the first place, it would offend the US. Also, Japan would lose the considerable commercial benefits it derives from trade with Taiwan, which might not be easily offset bybenefits in trade with the mainland. On the other hand, popular attitudes will probably continue toreference for recognition of Communisteneral feeling that Peiping's exclusion from the UN is unnatural,idespread desire to expand trade as much as possible. The government is not now under strong pressure to adopt this view as Its own.

Relations with the USSR. Whereas the Japanese recognizeand historical affinities with China and believe they can somehow handle the Communist Chinese, the attitude of Japanese toward the USSR has traditionally been marked by distrust, dislike, and fear. Over the past year or so, the USSR has been seeking in various ways to change its unflattering Image and to improve relations with Japan. Although surveys reveal the USSR still to be the country most disliked by the Japanese, these Soviet efforts may not be in vain: there will probablyreater inclination on the part of the Japanese to favor superficial manifestations of friendshipreater response to Soviet culture and trade initiatives than in the past. This will be particularly the case if Soviet policy persists In its current effort toeneral relaxation of Bast-West tensions.

The Japan Foreign Office asserts that the only obstacleeace treaty with the USSR is the issue of territories seized by the USSR after World War II. Japan might settle for the return of Shikotan and the Habomai islands but would probably not renounce Its claims to the two southernmost Kurilcs (Elorofu and Kunashiri) except in return for other concessions. In the present phase of Soviet policy, the USSR mayove to settle its differences with Japan andeace treaty.

Relations with Other Countries, Prime Minister Ikeda hascommitted himself toettlement of differences between Japan and the Republic of Korean past years, domesticdifficulties and deep-rooted prejudices and animosities on both sides have made the solution of outstanding Issues very difficult. More recently, some progress toward ameliorating relations has been made,

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and this movement will probably continue. Japan Is informallyto extend grants and loans to the ROK of0 million as part of an overall settlement. Even if there is no early settlement, Japanese commercial and financial relations with the ROK willgrow. Japan will probably continue to view good relations with the Republic of China (ORC) to be in its strategic and economic interest.ubstantial Increase in Japanese trade with Communist China would cause severe strains with the GRC and might even face Japan with the alternatives of either reducing such trade or having the ORG break off economic and diplomatic relations with Japan.

Japanese will be concerned to preserve and build uppotential markets In underdeveloped areas, especially InAsia. To this end, Japan will probably take some limitedinitiatives other than those associated with directSuch Japanese moves are likely ln the health, publiceducation fields, and the development and gradual expansionJapanese technical "Peace Corps" will probably be undertakengovernment. Nevertheless, In these and other projects,contribution will almost certainly be small when comparedprograms of other industrial countries. The Japanese havetimes floated rather vague proposals tor regionalmotivation has apparently been to better trade prospects, toeconomic groupings in Europe, and to enhance Japan's world Similar initiatives may be expected in the future.

V. MILITARY PROSPECTS

Barring hostilities directly threatening Japan's security, the next few years will almost certainly see no major changes in Japan's defense policies, military establishment, or assessments of the Soviet and Chinese Communist threats. The US-Japan Security Treaty will almostremain the keystone of Japanese defense and military planning for the rest of this decade. As economic prosperity increases andself-esteem reasserts itself, it Is likely that Japanese concern over such issues as national defense and the desireore Impressive military establishment will slowly grow. Nevertheless, strong antlmill-tary sentiment will continue to prevail amtmg the Japanese populace.

Japan's current defense outlay is proportionally one of the lowest ln the world, and in past years has not kept pace with the growth of either the budget or GNP. There is little prospect for drastic change. Expenditures under the Second Defenseill probably continue to run slightly ahead of scheduled annual Increases, but these increases will be partially offset by likely decreases In US military aid before the plan endshe annual defense outlay under the draft Third Defenseould come to lessercent of the estimated GNP during that period. (European NATO

countries currently devote about Ave percent of GNP to defense; the US, aboutercent; Japan's defense outlay3 wasercent Of ONP.)

Within these severe restrictions, public acceptance of growing defense expenditures and the need lor Improved defense capabilities will probably continue to grow slowly. Leftist forces will not cease their clamor against US bases, but some moderation of opposition to the Self Defense Forces (SDF) seems possible.ontinuing accretion of the good will already gained by the SDF through disaster relief and other clvtc projects, Its public Image will probably Improve. Within the next tew years, for example, the public will probably be receptive to tlie elevation of the present Defense Agencyull ministry.

Japan's military can also be expected to make steady, if slow, progress in various aspects of advanced weaponry. The Defense Agency will push developmentariety of Japanese missiles. Japan'ssnd development on sounding rockets has produced excellent results. While no work to adapt these rocketsilitary role has spparently been done lo date, Japanese efforts to develop an independent missile system in the future are probable. Nuclear weapons sndsystems are within Japanese industrial and scientific capabilities, though widespread antipathy within the scientific community as well as among the general public will continue to limit research and development Ui this field. This situation might change after the Communist Chinese acquire nuclear weapons- Japan might then opt for developing Itsprogram to the thresholdeaponsoint which it would take several years to reach, but it would be much more reluctant to cross that threshold than most other countries. The Japanese military will continue to prepare for the possibilityhange in Japan's antl-nuclear policy by continuing to Include tactics for an atomic battlefield in SDF training, and by continuing Interest ln dual-capable weaponsNevertheless, lt seems likely that Japan will continue to rely on the US nuclear deterrent and not try to develop its own nuclear weapons at least during this decade.

Pressure from military circles for greater independence from civilian control In military planning and policy will probably grow in the future, and leading military officers may become dissatisfied with the scope and tempo of the Japanese military effort. Nevertheless, It appears virtually certain that professional military opinions are not likely toignificant influence on defense policy decisions for many years. Through this decade at least, it is almost certain lhat Japan's military policies will continue to be determined by the civilian government leadership, responsive primarily to what lt believes the political traffic will bear.

TABLE I

RESULTS OP LATEST JAPANESE GENERAL ELECTION House of Representatives.0

popduuivotb

Democratic

Communist

Minor and Independent

TABLE II

SELECTED STATISTICS ON JAPAN'S ECONOMIC GROWTH

COALS

National Product (BlUion US

1 prices Industrial Production Index

Exports FOB. (Million UScav. (Million US dollars)

J

AID Data Book,3 Japanese Economic Planning Agency

.CENTRAL INTELLIGENCE AGENCY

DISSEMINATION NOTICE.

= ; Vwa* disiermnored by tho Control Intelligence Agency- Thii '

Additional essential dowrriinoliori mnvhv "th*

WSTMUTIONi

"White House

National SecurityDepartment of Slateepartment of Defense'*tomic EnergyFederal Bureau of Investigation

Original document.

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