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commenced between the German and Polish armies. Subsequently, on the 3rd September Great Britain and France, in accordance with the undertaking they had given to Poland. both declared war on Germany. The German army, with irresistible force, overwhelmed the greater part of Poland in less than ten days, and on the 17th September the Soviet Union suddenly sent troops into that country and without loss of blood occupied the eastern part, while the leaders of the Polish Government took refuge outside their country. It appears that the Soviet invasion of Poland was the result of an understanding previously reached with Germany. The German army retreated as the Soviet forces advanced, and the latter now occupy about half of the whole of Poland, including the oil-bearing districts near Lemberg. Moreover, on the 29th September an agreement with regard to a delimitation of the new frontiers between Germany and the Soviet Union was signed in Moscow. It is impossible to predict the future course of the war. which, it seems likely. will last for a long time. It differs in many respects from the last European war and appears to partake largely of the nature of a war of diplomacy, economics and ideals rather than a war of military strength.
The Imperial Government, upon being informed of the opening of hostilities by Great Britain and France against Germany, decided to pursue a policy of non-involvement in the war and to proceed to a settlement of the China incident." and on the 4th September a statement to this effect was issued. When war breaks out between third countries a non-participating country automati- cally enjoys the rights, and must accept the obligations, of neutrality under international law. and it is not necessary that a declaration of neutrality should be issued. Accordingly, the Government's statement of the 4th September may in a sense be called an expression of the attitude of the Japanese Government vis-à-vis the European war and the reason why they had adopted this method. The basis of Japan's foreign policy is to attain at all costs a settlement of the China incident." and accordingly her policy vis-à-vis third countries must be determined on that basis.
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The Government, in accordance with their settled policy of disposing of the incident." intend to take measures to deal with the present critical situation by giving effect to a multilateral and comprehensive foreign policy, after careful consideration and with due regard to the situation in Europe.
Judging from reports from various sources the difficulties of the Chungking Government are increasing, and its financial difficulties can be readily understood from the fall in value of the fapi.
The main reason why the Chiang Kai-shek régime has been able to subsist since its flight to Chungking last year is the material and moral support given to it by third Powers. Japan must assist in the task of establishing a new central Government in China and, at the same time, devise measures to bring about the elimination of the assistance from third Powers, which has been the external cause of the continued existence of the Chiang régime.
One of the chief reasons why third Powers continue directly and indirectly to put obstacles in Japan's way by helping Chiang Kai-shek is anxiety lest, with the downfall of the Chiang régime, their rights and interests in China shall be new order in East Asia." But what Japan swept away under the banner of the asks from China is close political and economic co-operation between the two countries based on the principle of friendship between neighbours, and she has no idea whatever of closing the door in China and of excluding economic activities on the part of third Powers. In the past repeated efforts have been made to dispel the anxiety of third Powers on this point; but it is necessary, by emphasising and demonstrating its truth, to induce them to abandon their support of Chiang Kai-shek.
With regard to relations with Great Britain, the so-called "Anglo-Japanese Conversations took place in Tokyo in July. As a result Great Britain agreed in principle to refrain from measures beneficial to the enemy and injurious to Japan in areas under the control of the Japanese forces in China. Negotiations were, however, broken off because Great Britain would not assent to Japan's demands in regard to the disposal of concrete questions relating to the concession at Tientsin.
Efforts to make the United States fully understand Japan's true intentions in regard to the construction of a new order in East Asia will be continued.
As regards relations with the Soviet Union, negotiations have taken place in Moscow in connexion with the so-called Nomonhan incident involving Manchukuo
and Mongolia; and as a result an agreement has been reached by Mr. Togo and M. Molotov for a truce. The Government hopes to solve one by one other questions pending between Japan and the Soviet Union.
Enclosure 3.
Extract from the Japan Advertiser of October 3, 1939.
Summary of Address by the Minister of Finance.
It may be assured that there will be increased demand for Japanese goods throughout the world as a result of the war in Europe, just as there was at the time of the Great War, when Japanese industry had a phenomenal boom, but this time there is a limit to the amount Japan can export because of the difficulty of obtaining raw materials for such exports and the shortage of labour and transportation facilities," "Domei " reports the Finance Minister, Mr. Kazuo Aoki, as telling the governors' conference yesterday.
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It is even possible that there will be a decrease in the export trade owing to
the lack of shipping and the difficulty of foreign settlements.
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In the field of imports," the Finance Minister went on, foreign raw materials will become increasingly hard to get, and some of them will be impossible to obtain during the hostilities because of export restrictions imposed by the countries of supply, rising prices and other obstacles.
"Such developments," the Finance Minister said, “ might hamper the production expansion plans of Japan in connexion with the creation of a new order in East Asia, and may force the Government to strengthen control over private demand for goods.
Japan must make further strenuous efforts to promote the export trade and obtain a liberal supply of foreign materials," Mr. Aoki declared.
The Finance Minister began his talk by stating that financial and economic measures must be formulated and carried out on the fundamental policy of building up the powers of the nation, such as national defence and along economic lines, in line with the China situation and developments in international affairs. To this end, capital, materials and man power must be co-ordinated among Japan, Manchukuo and China and the national general mobilisation system completed and strengthened.
Japan's finance has been greatly expanded by the China incident, and most prudent measures are necessary to remedy vicious influences in the national economy through the large amount of money coming from the Government. The budget must be carefully handled, with the spending programme of the Govern- ment kept in line with the programme for national economy by avoiding careless disbursement of funds which would be bad for the plans for thrift and retrenchment.
Along this principle the Government pared more than 215 million yen in the general accounts in the budget for the 1939-40 fiscal year. The Government either eliminated or deferred items which had already been decided
upon where this seemed necessary in view of the material resources mobilisation plan. Retrenchment was also adopted in connexion with many other undertakings and thrift introduced all along the line.
In the budget for next year the Government intends to concentrate on only the most important undertakings, and at the same time will endeavour to increase revenue by increased taxes as well as ever before. At the same time special attention will be paid to maintenance of harmony between the budget and various economic measures, covering goods, labour, capital and commodity prices, in order to formulate a budget in accordance with the combined economic power of the State.
General revision of the central Government and local taxation systems has long been contemplated, and it is now thought that this must be carried out as soon as possible, the Finance Minister continued. Such revision will have a far- reaching effect on various departments of the Government, so it will be carried
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