NATIONAL INTELLIGENCE ESTIMATE, NUMBER 41-60, PROBABLE DEVELOPMENTS IN JAPAN

Created: 2/9/1960

OCR scan of the original document, errors are possible

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NATIONAL INTELLIGENCE ESTIMATESupersedes)

r-onse Ao

PROBABLE DEVELOPMENTS IN JAPAN

Submitted by the DIRECTOR Or CENTRAL INTELLIGENCE

The following Intelligence organizations participated tn the preparation ol this estimate: The Central Intelligence Agency and the intelligence organizations ol the Departments of State, the Army, the Navy, the Atr Force, and The Joint Staff.

Concurred tn by the CNTTED STATES INTELLIGENCE BOARD

0 Concurring acre The Director of IntelU-genee and Research. Department of State; tkehief of Staff [or Intelligence. Department of the Army; theChief of Naval Operations lor intelligence. Department of the Navy; the Assistant Chief of Staff, intelligence. USAF; and the Director lor Intelligence. The Joint Staff, and the Director of the National Security Agency. T'mi atomic Energy Commission Representative to the VSIB. the Assistant to the Secretary of Defense. Special Operations, and the Assistant Director. Federal Bureau of Investigation, abstained, thebeing out tide of their farisdlctlon.

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0OX O

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TABLE OF CONTENTS

Page

L

II. THE

Foreign

Political

Economic

Military and

US-Japan Security

ANNEX: PRESENT SITUATION AND TRENDS

nd tne Liberal-Democratic

The Japan Socialist

The Japan Communist

CHARTS:

Selected Index of Japan's Economic Growth (Current Prices)

Balance of Payments.

Japan's Trade with the Sino-Soviet

Foreign Trade by Geographic

Current Strengths of Japanese Self-Defense

B El EASE DATE

s EGaVGT

PROBABLE DEVELOPMENTS IN JAPAN

THE PROBLEM

To analyze recent trends and to estimate probable developments in Japan over the next five years, with particular emphasis on Japan's international orientation.

CONCLUSIONS

critical dependence upon the US for defense and on theworld for trade will continue toowerful deterrent to any significant shift in Japanese foreign policy.ratification of the US-Japan Treaty of Mutual Cooperation andwhich we believe to beno major economic reverses, Japan's foreign policy will probably remain essentially unchanged over the next two or three years.

Under the revised security treaty, the US will probably be able toubstantial military position in Japan. Despite continued left-wing opposition to US forces and bases in Japan, and the dependence of these bases upon Japanese labor for effective operations, we believe that the US will be able to use them for logistical support of security actions in the Far East. The Japanese Government probably would not agree to theof combat operations from the bases unless it were convinced thatritical threat to Japan's security. )

It is highly unlikely that Japan will consent to the introduction of nuclear weapons into Japan during the period of this estimate. Except in an extreme emergency suchirect threat ofon Japan itself or, possibly,ast resort to keep South Korea from fallingommunist invasion, it iscertain that Japan would not agree to permit the launching of nuclear strikes from bases in Japan.

A key factor in Japan's international orientation is the state of the economy The economic outlook for Japan is good, assuming continued high levels of foreign trade, particularly with the US. Aeconomic recession wouldcreate strong pressures within Japan for expanded relations with thearas.

PTE

Under any government an important Japanese foreign policy objective will be the improvement and, eventually, the normalization of relations withChina. Japan will probably make no significant overtures in that direction so long as Communist China continues its hostility toward the Kishi government or insists upon the loosening of US-Japanese ties and the acceptance of Peiping's claim to Taiwan as the price for improvedHowever, if Peiping were to reduce its demands andonciliatory approach, Japan would probably agree to Chinese Communist offers to expand trade and other relations. If Communist

China were admitted to the UN, or if other major nations were to recognize Peiping, Japan would probablytrong compulsion to recognize Peiping, although it would probably seek US acquiescence. (Para. IS)

here is widespread, but at present quiescent, neutralist sentiment in Japan. This sentiment could increase rapidly if the Japanese came to believe that US deterrent power could not preventaggression. Soviet rocket and space achievements have already raised some doubts on this score where none existed two years ago.

DISCUSSION

INTRODUCTION

Japan is the must dynamic of Die non-Com-munist stales of Asia. Its economyapid pace; its social structure is undergoing significant change; and its foreign policy is developing along lines of greaterand self-reliance. Because Japan is slill dependent upon the US for defense and on the non-Communist world for economicits foreign policy is based upon the maintenance of close ties with the US and the West. Moreover. Japan has achievedresults in almost every field ofduring the pastears and, although the nation is not committed by tradiLion to any fixed orientation in world affairs or wedded to Western patterns of politicalin broad outline the present form of parliamentary democracy and Japan'swith the West are supported by the majority of the Japanese people.

Many of Japan's historic national values and traditions were destroyed or weakened by military defeat, occupation, and foreignreforms. The process of integrating old and new values is not yet complete and many uncertainties remain In the highly complex Japanese society.

iseriod oftranscends anything It hasIts economy has provedimpressive rates of expansion.basic facts rrmain: Japan is poorresources; It stilleriousproblem, and Its economy isto international economicover which the Japanese have no control.

the political structure isstabilized. Most of the population,the peasants and businessmen,in outlook. It is upon thisthat the governing(LDP) bases Its strength. There isrestless, radical element, comprising

lbout Mie-th:rd ol anized labor, intellectuals, and students from which the large Japan Socialist Party (JSP) and the smaller Japan Communist Party

(JCP) draw their followers

jQ^nservativcs, ic" various factions

mostbetween theamong the leaders

W-*

ol the conservatives, many of whom have shown political irresponsibility ln their lntra-party struggles for power. In seeking totheir political careers, few are restrained by party discipline or by the broader consider' ations of Japan's Internal stability orposition. Although the leaders of all factions of the Liberal-Democratic Partyto recognize the necessity of close ties with the West, they do not hesitate to exploit foreign policy issues for persona) advantage. The Prime Minister Is subject to continualfrom Socialists and Communists on the one hand and. on the other, is constantlyby the aspirants for his Job among the faction leaders of his own party. The press keepsapid drumbeat of bitter and sweeping criticism of successive JapaneseConsequently, the positionrime Minister such as Kishi, who Is seeking specific changes In important internal matters andynamic foreign policy, isprecarious.

During the nextonths. Kishi and his government will face some very difficult tasks. The most important will be the ratification of the revised US-Japan security treaty andagreements which ts now scheduled for Diet debate In the springhe issues involved bear directly upon many of the most sensitive aspects of Japanese politics andsusceptibilities. The outcome of thewill not only affect the political future ofajor proponent of close ties with the US. but will also hare an importanton the entire range of US-Japan relations

There arc several factors which willaffect Japan's internationalPrimary among these is the stale of the economy. Japan is completely dependent upon foreign trade and international market conditions for its economic well-being.any Japanese government must place first emphasis upon maintaining the best possible trading position. Anyeconomic reverse, especiallyenial of economic opportunities or discrimination against Japan by the West, would lend to strengthen the hand of the

nonconservative political groups and topressures on the government to cut its defense expenditures and seek commercial and political rapprochement with the Bloc, especially Communist China.

There is alsoroximity to anpowerful Communist China. The Japanese people in generalonsiderable sense of rapport with the Chinese, based upon historic, cultural and commercial ties.all Japanese leaders believe thatJapan must normalize relations with Communist China. Another consideration is the widespread neutralist sentiment in Japan. Among the nonleftist elements of thethis is based upon an extreme sensitivity to nuclearense of militaryin the East-West conflict,esire to concentrate upon economic improvement.

Working contrary to these considerations are the factors that favor Japan's continued alignment with thebased almost entirely on trade with the non-Communist world; the need to continue to rely on the US for defense; Communist China's intransigent attitude towardeep suspicion of the USSR,eviving national pride

ii. the outiook

Foreign Pofiey

apan's critical dependence upon the US for defense and trade will continue toowerful deterrent to any significant shift in Japanese foreign policy. Assumingof the US-Japan security treaty and no major economic reverses, the broad outlines of Japan's foreign policy will probably remain essentially unchanged over the next two or three years. However, the nature and strength of the US-Japan relationship willin large measure upon the US response to Japan's urge for recognition as amature power in world affairs and upon Japan's success in expanding its trade with the nor.-Communist world.

vpiovio roireuase

See AnnexiBaTr'liWJW* Present Sit-aa-Uon and Trendi

s

pattern of US-Japanese relations will also be affected by domestic politicalin Japan. The current high degree of cooperation with Ihe US reflects theof Prime Minister Klshi. who appears to be the most aggressive advocate of close US-Japanese ties among the leading Japanesefigures. Even under Klshi. however. Japan will not be guided wholly by US wishes if its own domestic and international interests appear toifferent course. If Klshi should be replaced, working relationshipsthe US and Japan might become more difficult, especially If the transfer of power were accompanied by acute dissension among the conservatives. However, we do not believe that any other likely conservative Primewould alter drastically the broad outlines of Japanese foreign policy

Under any government an importantof Japanese foreign policy will be the improvement and. eventually, theof relations with Communist China. We do not believe that Japan will make anyovertures to gain this objective so long as Communist China continues itshostility toward the Kishi government, or so long as it insists on the loosening of US-Japanese ties and the acceptance of Pclping's claim to Taiwan as the price for friendship. If Communist China were to reduce ItsandunclhaWrv approach, domestic pressures would probably force Japan to move rapidly to expand trade and other relations which, in turn, would increase pressures for recognition. If Communist China were admitted to the UN. or If other major nations, such as Canada or France,Peiping. Japan would probablytrong compulsion to recognize Peiping.it would probably seek USAlthough increas'ngly aware of the difficulties involved, Japan will probablyto hope that some kind of "two Chinas" solution will be found which would keepnon-Communist.

Although Japan's trade and culturalwith the USSR will probably expand gradually, the relationship between the two countries is unlikely to advance beyond that of correct formality. If the USSR revertsenacing and tough approach toward Japan, Japan's attitude will almost certainly harden Theretrong current of hostility toward Russia in Japan, and the issues ofoccupation of the South KurUes andon Japanese fishing are formidable, although not insurmountable, obstaclesapprochement.

Beneath the surface in Japan theretrong strain of neutralist sentiment which is shared to some degree by all elements of the population. Most Japanese support the Ki3hi government's forthright rejectionafe or realistic course for Japan to follow under present world conditions.neutralist sentiment could be increased to the point of threatening Japan's closewith the Westhe Japanese come to believe that US deterrent power could notaggression. Soviet rocket and space achievements have already raised some doubts on this score where none existed two years ago. Neutralist sentiment in Japan would also be stimulated by the appearanceetentethe West and the Soviet Union

No significant or lasting improvement in the bitter relations between Japan and South Korea Is likely so long as Rhee Is In control in South Korea. The Japanese have probably come to the view that negotiations with South Korea under Rhee serve little or no purpose, but they will probably continue to seek through diplomatic channels some basis for future agreement

In Its relations with the Afro-Asian area. Latin America and the Middle East. Japan will continue to place primary emphasis upondiplomacy, seeking to expand itsand sources of raw materials. In dealing with these areas, and in the UN. Japan will continue to characterize itself as primarily an Asian country and to stress its freedom from US and western influence. At the same time, however. Japan to an increasing extent will regard Itselforld.industrial powera basicWith the major industrial sta

Political Prospects. During the next five years, the Japanese Government will almost certainly remain in the hands of moderate conservatives who will probably seek no drastic change in Japan's domestic orrolonged economic recession, successive conservative Japanese governments will probably continue to have the supportarge majority of the Japanese people. Within this broad trend, however, considerable political changes are possible.

Prime Minister Klshi's political future Is uncertain. He need not call general elections2 and his prestige has risenhis recent visit to Washington to sign the security treaty. He has announced histo run for another two year term asof the LDP {an office which carries with It the prime ministership) In the partyscheduled forhepower and leverage which accrue to the Prime Minister, giveonsiderableover his rivals. His opponents are competing among themselves and have shown no signs of developing the issue, the unity, or the support necessary to bring him down. His rivals, however, are restless and impatient and Kishi himself isarticularlyfigure within the LDP or with the public at large. If he desires to remain in power, he will have to call upon all of his political skill to avoid the pitfalls that lie ahead in the Diet struggle over ratification of the newtreaty, the probable subsequentof the cabinet and partyand the party election. Should Kishi leave office, voluntarily or otherwise, theof powerew regime would probablyitter struggle for power amongaspirants, including Foreign MinisterFinance Minister Sato (KLshi'sinister of International Trade and Industry Ikeda, and Takeo Mild and Ichiro Kono, both former cabinet ministers.

The two party system as it has developed5 (when the left and right wingformed the Japan Socialist Party and the Liberal and Democratic Parlies merged) was disrupted when right wingiet members, defected from the

JSP in9 and0 to form the new Democratic Socialist Partyhe ultimate fortunes of the new party will depend on its ability to attract additional defectors from the JSP, enlist the support of small businessmen and farmers who now back the LDP, and weaken the hold of the JSP and Sohyo on organized labor. Conservative unity is still not firmly establishedplit tn the LDP is possible, although we do not believe it likely.

Despite recent defections and electionthe Japan Socialist Party, with Itslabor support and Its ability topublic opinion, will continue toajor force on the Japanese political scene, capable of severely harassing the conservative government and restricting Its freedom ofThe DSP and the JSP will probablyon many major Issues, and the policies of the Socialists will reflect the attitudes and receive the support of large segments of the Japanese people. However, so long as the Socialists remain spilt, with the JSPa class party largely dominated bylabor, the Socialists will probably not be able to attract much more lhan the one-third of the electorate which has hitherto supported them. The Socialists could attain power in the next five years only if the conservative alignment were to disintegrate, or If there were torolonged economic recession which the conservatives proved unable Lo cope with. Neither of these developments appears likely.

The Communists, through their "united front" activities and their penetration of labor unions, mass media, teacher and student groups, will continue toubstantial influence on Japanese opinion, and willtheir capabilities for violence andIf they soft-pedal their revolutionary goals and act in concert with the Socialists and other "peace-loving" organizations, themay regain gradually some of the respectability which they lost In the past with their violent tactics. However, except In the event of an economic disaster or near-break-down of theigrceHn their own right.

s

Prospects. Japan's economic prospects are dependent upon international economic and commercial developments, and particularly upon continued access to the US market. Japan's efforts to attain the level of exports necessary to sustainising standard of living, and adequate foreign exchange reserves will be centered on the US. In response to US pressure, Japan has agreed to liberalize to some extent its present restrictions against the Importation of selected manufactured goods and industrial materials, and it willits attempts, by voluntary exportto forestall the erection of US tradeagainst Japanese imports. It will also seek to persuade the CS to maintain itsICA and other offshore purchase programs because special dollar earnings from this source and from outlays by and for US troops in Japan still mean the difference between profit and loss in Japan's external accounts.

Assuming the current level of worldand continued accessfair share" of the US market, the Japanese economy will continue to grow.9 the economyrapidly from the recessionnd it is likely that GNP0ercent. Japan's high rate of investment will probably continue and be concentrated in the basic industries, steel, electric power, transportation, chemicals, and machinery. The government will probably not hesitate to apply iLscredits. Investments andthe rate ofagain threatens to result inpeculative increase in imports.

The issue of trade with Communist China will probably not become an acute political problem as long as the Japanese economyto prosper, and Peiping continues its antagonistic policies toward the Japanese Government. Japan will seek actively toIts trade in all promising markets,the USSR, but for Ihe period of this estimate, at least, trade with the US willto be the key to Japan's economic well-being and the point of primary emphasis In its tradeajor economic reverse would create strong pressures within Japan for expanded relations with the Bloc,Communist China.

Military and Security. Japan willto depend primarily on US deterrent strength for its defense. At the same time, the trend toward acquiring and developing technically advanced conventional weapons will continue and probably accelerate,there is no significant economicandonsiderable amount of popular opposition. Although at the end of the period of this estimate Japanell-trained and efficient defense force, it will still have only limited ability to defend Japan against major attacks.

Japan will probably make substantial progress in research and development ofenergy for peaceful uses within theof this estimate Japan may eventually develop its own nuclear weapons, although not within the period of this estimate.

The US-Japan Security Relationship. The revised US-Japan security treaty and related agreements were presented to the Japanese Diet. It is likely that the ensuing Diet debate over raliflcalion will be one of the most bitter and protracted inJapanese history. The Japan Socialist Party and its well-organized supporters, faced with the certainty that the treaty will beu* the Diet vote follows party lines, will probably use demonstrations, strikes,obstructionism, andiet boycott to prevent or delay ratification.their extremism will be tempered by the moderate attitude ol Ihe Democratic Socialist Party. The Japan Communist Party will use Its influence over segments of organized labor, students and front groups to attempt to rally public opposition to ratification. The brittle unity of the Liberal-Democratic Party will be under severe strain and Klshi will probablyery difficult time maintaining party discipline. Although we believe that he is likely to achieve Dieteneral election on the issue is possible.

The major targets Im. will probably be the

he limitation of the treaty area to

se

SEPTET

proper, the rights of the US to use its military bases ln Japanonflict In which Japan is not directly involved, and theof introduction of nuclear weapons lnlo Japan by the US.

The US has met Klshi's most urgentby agreeing that the US willwith the Japanese Government before making major deployments of forces Into Japan, including major changes in equipment (specifically the introduction of nuclear, or before using military bases in Japan to conduct combat operations directly from Japan. The language of the presentAgreement governing the status of US forces in Japan will be modified somewhat to remove Its occupation flavor and to bring it more closely into line with the NATO Status of Forces Agreements, and the requirement that Japan make an annual contribution in yen lo the support of the US forces In Japan has been eliminated.

The terms of the revised security treaty do not affect the status of US bases onHowever, Japan will continue to seek an Increasing degree of participation inaffairs, and the presently quiescent Issue of US administration of the islands may againource of friction In US-Japan relations should major issues arise in USwith the Islanders.

With the ratification of the security treaty, the US will probably be able toubstantial military position In Japan.the provisions of the treaty, however, the unimpaired use of Japanese bases for logistical purposes in support of security actionsin the Far East Is not certain: forthe operation of US bases being highly dependent upon Japanese labor, strikes and sabotage could greatly reduce theirfor logistical support. The presence of US forces and bases in Japan will continue to meet with strong opposition, particularly from the Socialists, Communists, and the largeof organized labor which are under left-wing domination. Moreover,ime of crisis In which Japan itself were notthreatened, it is possible that another Japanese Government might interpret the treaty narrowly or press for Its revision,if it encountered strong internalto the US use of the bases. However, on balance, we believe that the US would be able to use Japanese bases for logisticalin support of security actions elsewhere in the Far East during this period, although the Japanese Government would expect to be Informed In advance of our Intentions.

The Japanese regard the consultationprovided In the new treaty asprimarily to prevent Japan fromInvolved in hostilities against Its will. The Japanese Government probably would not agree to the use of US bases In Japan to launch combat operations Involving conventional weapons against targets elsewhere ln the Far East unless it were convinced that theInvolvedritical threat to Japan's immediate or future security. Approval for such combat operations would be almostin the eventommunist attack on the Republic of Koreu. and probable in the case of Taiwan itself However, the Japanese would base their decision on their own analysis of the situation, carefully balancing theof the threatened area to Japan's own security against the likelihood ofagainst Japan.

It Is highly unlikely that the Japanese Government will consent to the introduction of nuclear weapons Into Japan during theof this estimate Except in an extreme emergency suchirect threat of attack on Japan Itself or. possibly,ast resort to keep South Korea from fallingommunist invasion, it is virtually certain that Japan would not agree to permit the launching of nuclear strikes from bases in Japan.

If Prime Minister Kishi should fall toapproval of the new security treaty, the US military position in Japan would bethreatened. If, as is probable, agovernment remains in power, US bases could probably be maintainedIn their present formear or two, becausepulcl be willing tother benefits Japan derives from Its

atlon with tbe US byithdrawal of US forces. However, failure to secureof the treaty would impair all aspects of the US-Japan relationship, andradual deterioration of our base position. The speed of this deterioration would depend upon the reaction of the US to the defeat of the treaty, the circumstances under which It was brought about, and Ihe willingness of those who succeeded Klshi toew basis for continuing theWhatever the circumstances, however, defeat of the new security treaty would lead the public to expect the present militaryto be altered, and the use of US bases to be circumscribed by additional

n announcement by Communist China that nuclear weapons were stationed onsoil wouldrofound effect in Japan. We believe It likely that such anwould greatly increase neutralist tendencies among the Japanese people and public pressures upon the government to seek an understanding with Communist China. However, if Kishl or some other Primeof similar convictions and courage were at the head of the Japanese Government, themight agree to the stationing of US nuclear weapons in Japan, but not without some form of Japanese participation inof their use. Even so the Japanesewould probably have to move against strong public opposition.

s

ANNEX

SITUATION AND TRENDS A. Political

Kishi and the Liberal-Democratic Party. Prime Minister Kishi recovered from theBiU defeat which nearly led to his political eclipse innd his position has been strengthened by the results of the municipal and Upper House elections Ln the spring1 The elections, in which Kishi's foreign policyajor campaign issue, marked the first time since the end of the occupation that the upward trend in the Socialist'svote was reversed. Although the Liberal-Democratic Party did little more than hold its own; the election was considered toajor victory for the conservativesote offor Kishi. This has enabled Kishi lo hold to his policy of no official contacts with Communist China and to move forward with the revision of the US-Japan security treaty.

Nevertheless factional rivalries within the LDP stillhreat to Kishi'sInew cabinet following the elections Kishi was rebuffed in his efforts to engage the responsibilities of all the major factional leaders and was forced toew factional grouping led by his brother, Finance Minister Eisaku Sato, and Minister of International Trade andHayato Ikeda. This arrangement left

1 Ofower House seats, the LDP. thend the Communists one; there are two Independents andeats are vacant. The LDPfpper House seats and is supported by almost all ofhe Socialists havepper Househe Communists three, and two are vacant. The Socialist totals Include theiethe Lower andn the Upper House) who seceded from the JSP in9 and0 to form the Democratic Socialist Party.

important segments of the party (including that led by Ichiroitter rival of Ikeda andtrong Kishi supporter)the cabinet and the party hierarchy, Although temporarily quiescent in recent months, these rivalries will almost certainly come to the surface again as the variousleaders seek opportunities to upset Kishi's leadership. Thus far, Kishi, firmly supported by the business community and with substantial financial resources at hishas been able to beat down challenges to his authority and toeasonably firm degree of party discipline. His task has been made easier by the fact that his rivals are also competing sharply among themselves, and have been unable to form an anti-Kishi "unitedfter the security treaty is ratified. It is likely that Kishi will attempt to reshuffle his cabinet and the hierarchy or the Liberal Democratic Party Lo furtherhis position.

he Japan Socialist Party. The position of the opposition Japan Socialistnocialistto Peiping designed to play on popular enthusiasm for normalization of relations with Communist China, boomeranged. The mission joinedoint communique with Chou En-lai condemning US Imperialism. This cost the Socialist Party considerablesupport. The poor showing in the Upper House elections, even in the Socialist's urban strongholds, aggravated the long-standing Intraparty conflict between the dominant left-wing, which Is tied to theGeneral Council of Labor Unionsnd the minority right wing whichesspro-gran: which iv.ishiJfi:i'smasses

In October,itter debate in the party convention, this conflict led to theofight wing Socialist Diet members under the leadership of Suehiro Nishio.defections followed, and when the new Democratic Socialist Party was formed in late January, under Nlshio's chairmanship, it Includediet members and had the full support of Zenro, Japan's second largest trade union confederation. The Socialist Partyreflected not only right wingwith the extremist policies of the JSP but also what appears torowing demandarty that lies somewhere between the present conservative and JSP camps. Whether or not the DSP in timeirm footholdajor political force, the new party may well tend to restrain JSP extremism and also to actoderating force on theMeanwhile JSP leaders and their Sohyo colleagues, unfazed by the election results continue on their extreme leftward course. Their foreign policy objectives, includingof the US-Japan security treaty and the eventual neutralization of Japan, continue to be virtually undistinguishable from those of the Communists. The participation of the JSP and Sohyoemonstration at the Dietovember in the course of whichforced their way past police into the Diet grounds, earned them extensive public criticism and probably helped to enhance the public standing of the new party movement.

The Japan Communist Party. The Japan Communist Party has an estimatedof0 and it has attracted about one million votesotalillionercent) in national elections.ontrols only one seat inwer House and three in the Upper House of the Diet. The party has heavily infiltrated intellectual circles, student groups, and leftist teachers, government employees, and railway workers unions.onsequence, it exertsinfluence. However, the party is plagued by factional cleavages based largely ondifferences. The party hascapabilities for mass violence andAn estimatedohousand of its members are hardcore Communists who would probably remain loyal to the party underand hazardous circumstances. Probably half of this number would engage in illegal and covert activities if ordered to do so.

B. Economic

Japan recovered quickly fromconomic recession once the upward trend in international trade was resumed1 Byapan's industrial production was more thanercent above theperiodoreign exchangewhich slipped to0 million inlimbedostwar high of3 billion by' High levels of activity now characterize almost all areas of the manufacturing sector of the economy. Japan's rapid transition fromto expansion during the pastonths demonstrates the dynamic aspect of the economy. However, Japan's recession and recovery also demonstrate the precariousof its economy, ita heavy dependence upon favorable foreign trade conditions, and its sensitivity to external developments over which the Japanese have no control.

Although Japan is at presentigh rate of industrial expansion andItumber or long-range and permanent economic problems. Japan'sof paymcnLs position, althoughimproved, will probably always bebecause of the need lo import virtually all the raw materials to keep its industry going and slightly less thanercent of its foodn three periods of mild recession the government has demonstrated its ability to cushion the effects of aneconomic downturn by controlling the domestic money supply, restrictingand regulating credit. However, it probably could not maintain anong period of time withouteconomic and political consequences. The recent improvement in Japan's economic position has led Its trading partners to press

'See Tableelected Indexes of Japan'sGrowth.

'See Tablealance of.

hard for an end to Japanese Import andrestrictions.

In addition. Japan has suable foreignIt is expected to payotal of nearlyillion In grants and loans over the nextears under its reparationsAlso It must service and repay0 million inoans to the L'S and0 million on IBRD loans granted for steel, transportation and electric powerIt must provide its share of funds for the IDA and the expanded requirements of the IMF and IBRD. It must finance itsexports on terms which are as attractive as its International competition. In addition, the US is seeking to reopen negotiations to settle Japan's Government and Relief InAreas (GARIOA) debt, forQ million.

Another long-term economic problem is how to provide employmentabor force that will increase at the rate of more than one million annually for the next decade.the decline In the birth rate, whichin thes. will reduce thisin the future. Japan has always been plagued by widespread underemployment, even In times ofquallythe Japanese Government will be under heavy pressure to Increase living standards. Although the Japanese people are livingthan at any time in their modern history' and have the highest living standard in Asia, theyteady improvementwith Japan's status as one of the world's leading Industrialhissentiment has compelled Japaneseto ease taxes on Individual incomes, to invest heavily in economic development and social welfare programs, and to limit military expenditures.

n addition Japan is facing Increasingly stiff competition in international markets from other exporting nations. Japan hasconsiderable effort to expanding trade with underdeveloped areas, particularly South and Southeast Asia. Although this effort has brought some limited success, the Japanese arc well aware that the trade potential of these areas is limited by their lack ofresources and by their Inability, at their present stage of economic development, toarge volume of imports. For several years. Japan hasointregional economic development scheme for Southeast Asia, with the expectation that, in time, the purchasing power of the urea would be increased, making possible expanded Japanese exports. However, the Japanese clearly regard the underdeveloped areas as secondary to the USotentiallymarket. In the4on-Communist Asia's share of total Japanesedeclined fromoercent, while the US share increased fromoercent.

apan's search ior raw materials andaccounts in large part for the attraction of "rwnnalizing" relations with Communist China apparent among practically allof the Japanese population. To date, Japan's trade with the Communist Bloc has been of marginal economicercent of Japan's trade. This trade has declined even below these levels since8 when Communist China, which accounted forf Japan's trade with the Bloc suspended trade with Japan, largely for political reasons. The current economic prosperity In Japan has reduced the domestic pressure for trade with Communist China. However, trade with the USSR has increased rapidly, although It Is still only about one percent of Japan's total lna*MMOVID FOR MILUI

iSlno-Sovlet

Sec Tableapan'.

BlOC.

he US is Japan's most important trading aartner, accounting forercent ol Japan's ixports andercent ol its Imports*or the first time in the postwar :ra, Japanurplus in itstrade with the US. Apart from its fear of in international business recession. Japan's jreatest economic concern Is that the upward 2end in its exports to the US may beaffected by US restrictions on Imports resulting from the recent appearanceeflcit in the US balance of payments position, jr from pressures exerted by many US pro-luce rs whose products compete with Japanese mports. The Japanese leaders, fearful of the jossible economic and political consequences, ire very sensitive to any Indications that their iccess to the US market may be curtailed. Moreover, the Japanese are concerned by the lownward trend In special dollar earnings ihich has resulted from the reduction In US loops stationed in Japanffshore procurementince fforld War II Japan has not achieved ain its world trade accounts, and special loUar earnings have made the difference be-ween profit and loss in Japan's International iccounts.

ilitary "

n the face of public suspicion and dis-ipproval, the Japanese Oovernment hasgradually but steadily, to build up its [elf-Defense Forces. Despite considerable tublic reluctance and the opposition of theand Communist Parties, the Japanese Jovemment is accepting the Idea that Japan hould carry an increasing share of the cost if Its own defense3pan more than doubled Its defense budget.

fromillion8 million. This still represents only aboutercent of the national budget and less than two percent of GNP. Japan's Self-Defense Forcesnd the National Police Agency. The government is now considering its military program foreriod. Under this program the defense budget would be doubled again in the next five years. Most of this increase would go to Improvements in the quaUty of arms and equipment. First priority is theof Japan's air defense capabilities byImproved radar equipment,the Air Self-Defense Force to century-series fighters, andefensive ground-to-air and air-to-air missile capability. Second priority Is to strengthenand mine warfare capabilities of theSelf-Defense Force, and third priority is to Improve the mobility of the Ground Self-Defense Force.

During the past year the training and capabilities ofan Ground Self-Defense Force have shown markedHowever, the ground forces are presently capable of conducting only limited defensive operations within Japan. TbeAir Self-Defense Force has madestrides towards becoming an effective, modern air force. Itersonnel strength ofnd its aircraft strength is.ets. The air force nowimited capability to perform Its missions of air defense and tactical support. The Japanese Maritime Self-Defense Force is stillormative stage of development.this force is well-trained, the fleet Is small.

The public revulsion against nuclear weapons continues unabated. However, the highly sensitive issue of nuclear weapons has been relatively quiescent during the past year, possibly because there have been no recent nuclear weapons tests in the Pacific. The Japanese public has accepted with equanimitygovernment'stoa defensiveround-to-air and air-to-airtep which would have been vigorously denounced two or three

SEPTET

agoove toward introducing nu-:lear weapons into Japan.

oreign Policy

apan's international position and the pattern of Its foreign policy have continued assentially unchanged during the past year. Japan remains closely aligned with the US and the West; in Southeast Asia, lingeringtoward Japan arc disappearing and no gangerajor obstacle to Japan's expanding economic and diplomatic activities In that area, Japan has played an active and instructive role in the UN, thereby increasing its prestige and international stature; and Japan's relations with the Government of the Republic of China remain friendly. Theproblem areas in Japan's foreign policy ire its relations with the Communist Bloc and the serious state of Japanese-South Korean

oth Communist China and the USSR ire conducting vigorous campaigns to lead lapan toward neutralism. Particularlythe first part9 the USSRa steady flow of diplomatic notes,broadcasts, and public speechesKlshl's foreign policy of closewith the US and the negotiationsevised US-Japan security treaty. Moscow tamed that these policies were "pregnant th grave consequences" and urged neutral-for Japan. The USSR's cultural offensive winning in high gear with top flight Soviet performing throughout Japan beforeciative audiences. The USSR's scientific (enlevements have greatly enhanced Soviet Srestlge with the scientific and technically-mlnded Japanese. Moreover,o the US, which was exhaustively cov-by Japanese press and TV, appears to lavetrong and favorableapan. Nevertheless, Japanese leaders con-fnue to fear and distrust the Soviet Union, hich they regard as the major threat to apan's security. Sensitive outstanding ls-pes between the two are the Soviet Union's continued occu]>atlon of the Southern Kuriles, Shikotan, and Habomai. and the increasingly stringent restrictions which the USSRon Japan's northern fishing operation. Thus far the Japanese have declined toa peace treaty with the USSR until Japanese territorial claims are recognized.

Communist China's intransigent behavior on the international scene during the past year and Its crude efforts to upset the Klshi government by trade restrictions, propaganda, manipulation of the Japan Socialist andParties, and by bald threats, havemany Japanese and, in fact,public support for Klshi. Dueto Japan's current prosperity and the way in which Peiping overplayed its hand,pressures on the Japanese Government to seek accommodation with Communist China have declined As yet, however, the Japanese public does not appear to bear the same suspicion of the Chinese as they do of the Russians. Most Japanese, probablyKishi and other key conservativebelieve that Japan must eventually arrive at some kind of modus vivendl with theregime In China. With the conclusion of the revised US-Japan security treaty, many Japanese believe the next goal should berelations with Communist China.

Japanese-ROK relations are complicatedesidue of historical and culturalwhich do not yield easily lo the normal approaches of western-style diplomacy.in no other area are specific issues so intertwined with questions of "face."and "responsibility."

There is no prospect for any realin ROK-Japanese relations as long as Rhee is alive Even after his death, theof distrust and animus will persist. It is likely, however, that after Rhee's death Korea's leaders will view their relations with Japanore prttMfW WLIlUfttfc that mutually beneficial euWMfff'flM will beto develop.

Tablr X

& EXACTED INDEX OF JAPAN'S ECONOMIC GROWTH (Current prices)

plan jfy

(calendar hears)

'

roduct. ..

national product per

est

production

increase over

year of:

GNP

production

production

...

consumption as a

of GNP

private investment

a percent or GNP

International Financial Statistics. International Monetary Fund

(Reparationsshort-termetc.)

Balance 20

ET TOTAL ALL

-5

23

-31

5

265

-5

Mainly special dollar receipts.

Source: International Financial Statistics. International Monetary Fund.

FOR RF1FASE DATE;0

SE

Table 1

JAPAN'S TRADE WITHO VIET BLOC CALENDARND9

(In million* ol US dollars)

1

1

19S9

communist China

USSR

OUiers

Total

Percent ol Japan's World

7

(eJ-fJ

Communist China

4

USSR

Other.

Total

3

1.6

Percent o[ Japan's World Total

Table 4

EOREJtiN TRADE BY GEOGRAPHIC AREAS CALENDAR YEARS ISM.ND1

sports(total in billions of US dollars)total in billions of US dollars) xports lln percent of total)

North and Central America

(United States! South America Africa

Australia and Oceania nports (in percent of total! Asia

North and Central America

(United States) South America ATrtta

and Oceania

may not add to totals because of

UTt1

Tabic 5

CURRENT STRENGTHS OF JAPANESE SELF-DEFENSE FORCES

Sell-Defense Force

Personnel Strength: Principal components;

armynlantry divisions

combined brigades

Self-Detente Force

Personnel strength:

General service

MSDF air arm

Ship strength:

Destroyer (DDI

)

Escort Vessel (DBl Patrol Eacort (PFi Submarine Chaser (PC) Support a riding Ship (Large)

(LML)

Amphibious Vessels

Motor Torpedo Boat

Under Construction: ir arm strength: lrcralt 'notr Selt-Defonie Force

Peraonnal strength: 0rained pilots Aircraft strength:ircraft

ets ofircraft are in storage Tactical units:

4 Fighter squadronsll-weather fighter squadronransport squadrons)

2

lr.

AFPROVEQ FOR RF1FASE0

Original document.

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