Institute of Pacific Relations

Controlled Inflation in JapanAuthor(s): Edward StoneSource: Far Eastern Survey, Vol. 4, No. 4 (Feb. 27, 1935), pp. 25-30Published by: Institute of Pacific RelationsStable URL: http://www.jstor.org/stable/3022018 .

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FAR EASTERN SURVEY

Fortnightly Research Service

AMERICAN COUNCIL ? INSTITUTE OF PACIFIC RELATIONS

129 East 52nd Street ? New York City

Russbll G. Shiman, Editov Tclcphonc: PLaza 3-4700 Oblc: Inptid

Vol. IV ? 4 NEW YORK, FEBRUARY 27, 1935 S^aSff*?"? *&

Contents

CONTROLLED INFLATION IN JAPAN

China Resumes Postal Relations with Manchoukuo Japanese Export Increase Slowing Down Indo-China Shows Progress Toward Recovery Soviets Increase Trade with Outer Mongolia

New Discovery of Iron Ore Deposits in China

CONTROLLED INFLATION IN JAPAN

By Edward Stone *

Today worldwide attention is focussed on problems

of inflation, currency depreciation, and unbalanced

budgets. America's experiment of attempting to spend its way out of the depression is being carefully watched; and the efforts of this country to finance

relief and business, and to raise prices and stimulate

foreign trade, through a depreciation of its currency, have caused many thoughtful persons to wonder about

the possible results of these moves. But is this New

Deal of the United States really new ? Have not other countries since 1929 attempted through credit and

monetary manipulation to improve their internal eco? nomic situation? The present writer recently had occa- sion to describe the course of depression events about as follows:

"There was a downward trend in prices; the stock

and bond markets were badly deflated; the banks and

private investors suffered severe losses;

Depressions there was a growing number of failures and and consequent additional unemploy- New Deals ment; the debtors set up a great clam-

or for relief; a serious agricultural problem developed; the business men demanded that

prices must rise; the nation's gold reserves were show-

ing rapid diminution; and then, when it was impossible to withstand the strain any longer, the gold standard was suspended. Thereafter came the depreciation of the nation's currency in the international markets, the

development of a domestic trade boom, an upward trend in domestic prices, and a stimulating of foreign

trade. The depreciation of the currency tended to

assist the debtor, but other debt relief measures were also passed by the government and agriculture was

assisted. In entailing all of the expenses the budget be? came drastically unbalanced. The government found it

necessary to borrow heavily, primarily from the banks, which discovered that more and more of their assets were tending to consist of government obligations. Additional hand to hand currency was put into circula-

tion and, when the upward trend in business activity and prices threatened to come to a halt, further de-

mands were heard for additional credit extension and

the emission of more currency. Business men com-

plained of the difficulty of obtaining financial assist-

ance from the banks, and these institutions in turn

complained of the lack of suitable outlets for their

rapidly growing funds. The banks began to experi- ence increases in their cash deposits which were

ascribed largely to the vast increase in governmental

expenditures. All of these activities began to give rise

to the fear of inflation, and everywhere could be heard

the questions, 'Can the government continue to borrow

and spend with a lavish hand? What will happen when such expenditures cease? Is inflation on the

way?'" What country does this description fit? Many

would immediately think of the United States, which

at the moment is the cynosure of all eyes. However, at the particular time that this description was given, it happened to be in connection with the Japan of

1931-1934, which also is facing the problem of infla?

tion and the question of controlling it.

On January 11,1930, at a time when prices in terms

* Author of numerous works on monetary problems (includ- ing our Memorandum of October 26, 1934, on Silver?Conflict- ing Chinese and American Interests), and member of the faculty of Columbia University.

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of gold had already given evidences of falling through- out the world, Japan reconstituted the

Deflation gold standard. In taking this action Riskin Japan was risking the possibility of 1930 experiencing a drastic deflation. At

that time, however, the serious nature of underlying conditions was not appreciated. Mr.

J. Inouye, the Minister of Finance, justified his move on the ground that the restoration of the gold stand? ard would bring about financial improvement, and that it was a matter of absolute necessity for Japan's International credit.

After the return to the gold standard, Japan began to feel the effects of the increasing value of gold in terms of goods which was taking place in the interna? tional markets. Instead of a business revival, which had been confidently expected by many, the economic situation went from bad to worse, and the prices of commodities fell sharply owing to the steep rise in the value of the yen. The average index number of

prices prepared by the Bank of Japan, which was 160 at the time of the removal of the gold embargo, dropped by 20% to 128 at the end of 1930, while the international value of the yen, which had approached par some time prior to the actual event in anticipation of the embargo removal, remained at the parity level.

At the same time the party in power, continuing its deflationary policy, decided upon financial retrench-

ment and adopted a "no loan" policy "NoLoan" which was reflected in the 1930-1931

Policy fiscal year's budget. As a consequence of these activities, the Bank of Japan

notes in circulation dropped 12.5% between December 1929 and December 1930. All of these moves were reflected in the Business Activity Index of the Oriental

Economist, which showed a downward tendency, de-

clining 18.6% in one year, while general imports showed a reduction in value of 32.4% from the 1929

figure and general exports a decline in value of 31.6% from the 1929 figure. Agriculture was also hard hit. One authoritative source pointed out that the farm

depression affected commercial and industrial circles to such an extent that almost all leading industries had to curtail production and business concerns found it necessary to reduce their dividends. Indeed, the Mitsui Bank reported that 311 large companies had to cut their capital and 823 found it necessary to dissolve during 1930.

Nor did 1931 bring any relief. On the contrary, matters became worse. The Manchurian incident

brought on its own peculiar type of difficulties, and the suspension of the gold standard by Great Britain on September 21, 1931, aroused considerable fear in

Japanese financial circles as to the ability of Japan to maintain the gold standard, especially since the depre- ciated pound might eventually affect the trading activi-

ties of Japan in the so-called sterling countries.

By the end of November 1931 the index of whole- sale prices had dropped almost 40% from the De- cember 1929 figure and the index of employment declined 19.8%. Naturally business activity as a whole also suffered, and at the end of November 1931 the index number was 88.5, as contrasted with 106.5 at the end of 1929. The stock market was likewise ad-

versely affected, as indicated by an index number of 45 at the end of November 1931. Agriculture was

crying for relief. Exporters required assistance. Busi? ness men in general needed aid, and in addition there was a rapid efflux of gold from the nation, partly because of the apprehension in regard to the country's ability to remain on the gold standard.

The pressure from these various groups finally made

necessary the divorcement of Japanese currency from

gold, and a gold embargo was declared Gold on December 13, 1931. It has been

Embargo said that this was due to the great loss Declared of gold which the country suffered, but

while this was one of the important causes for suspension, it also seems apparent that the desire for increased trade and rising domestic prices were taken into account when this move was made.

Thus, according to reports, Mr. Takahashi, the new Finance Minister, expressed hope as soon as he as- sumed office that the re-imposition of the gold embargo would automatically improve the existing situation.

It was pointed out that this optimistic expectation was based upon three considerations: First, a lower value of the yen would stimulate exports and check

imports. Second, it would reduce wages in relation to

prices and also reduce the cost of production. Third, it would reduce debts in relation to prices. The last was most emphasized since it was obvious that the debt burden of industry, which had been weighing heavily even before the lifting of the gold embargo, had been increased by the higher value of the yen. It was

expected that the re-imposition of the gold embargo would bring about a depreciation of the yen in terms of goods and thus, through enhanced prices, lighten the debt burden of the nation.

Hence, we see that in 1931 Japan followed a policy which one year and a quarter later was followed by the United States on general grounds quite similar to those which motivated Japan's move.

Naturally it was realized that suspension of the gold standard with the consequent depreciation of the yen

in terms of gold would entail addi- Small tional expense in yen in connection

Foreign with payments abroad on foreign cur-

Obligations rency bonds issued by the Government and private obligors. The country,

however, was extremely fortunate in that the total of its outstanding foreign obligations was relatively small.

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Thus, an examination of the balance of international

payments shows that in 1931 it was estimated that but

?90,000,000 out of total receipts of ?2,047,500,000 were required to service such foreign debts. This rela-

tively insignificant sum (4.4% of receipts) would

naturally be increased as the value of the yen dropped in the world's markets, but it was anticipated that this would be more than offset by an increase in the nation's export trade.

Much has been said from time to time concerning the effects of the depreciation of the yen on the trade of other countries. Many have claimed that Japan's step gave her an unfair trade advantage. This is cer?

tainly true to some extent, although as was pointed out in our Memorandum on Japan's Trade Expansion, September 21, 1934, it was but one of the factors behind Japan's foreign trade boom. But the increase in trade was due at least partly to currency deprecia? tion, and this in turn tended to stimulate industries at home.

While the Government's actions engendered a gen? eral feeling of optimism, however, some were doubtful of the possible advantageous effects of currency depre? ciation on the nation's foreign trade. The Govern?

ment, therefore, leaving nothing to chance in its battle

against the depression, instituted simultaneously a

policy of relief expenditures and, in general, liberal

financing, in order to aid the nation's business. In

effect, the Japanese New Deal was simply a fore- runner in many respects to the American New Deal which has received such worldwide publicity.

The cumulative effect of a depreciated currency and

augmented governmental spendings was eventually re- flected in the nation's business. The

Price Level general price level increased from a

Up40.2% base of 100 in November 1931 (the month before the gold suspension) to

140.2 as of June 1934, a rise of 40.2%. At first the

major price increases were found in articles of export, primarily because of the increased demands for such

goods upon the part of foreign nations. Prices for such articles increased 81.6% between November 1931 and December 1932, bringing the index number to 181.6. Since then, however, they have softened con-

siderably due to trade restrictions and the devaluation of the dollar, so that by June 1934 half of this gain had been lost and the index number was at but 142.7. On the other hand, prices of imported articles in? creased as of June 1934 by 78.6%, whereas home mer- chandise (that is, merchandise domestically manufac? tured for home consumption) increased but 14.8%.

In other words, the inflationary program has had but small effect on the prices of commodities entering solely into domestic trade, but it has had a substan- tial effect on those goods of Japan which enter inter? national trade. At first the nation had a decided advan-

tage with its depreciated currency; but this state of affairs cannot continue indefinitely, for it means that

Japan is in terms of goods giving more than she re-

ceives. This is obvious from the rise in prices of

imported goods as contrasted with exported goods and is especially noticeable in Table 2 (see page 30), dis- cussed subsequently.

It cannot be denied, however, that the Japanese policy has tended to stimulate employment; and with

greater employment has come an increase in actual

earnings for employees, so that the internal purchasing power of the nation has been fairly well maintained.

Thus, the index of business activity has increased from 88.5 as of November 1931 to 105.3 as of Septem- ber 1934, a rise of approximately 19%. The index of

employment has also shown a rise, increasing almost

25% between November 1931 and August 1934.

The stock market has reflected the change of con? ditions. Prices of stocks have increased from an aver?

age of 58.17 as of November 1931 to 80.99 as of November 1934, while the yield on Government and

corporate bonds has declined from an average of 6.17 as of November 1931 to 4.92 as of November 1934, reflecting the cheapness of money brought about by the Government's policy.

With conditions showing signs of improvement and with the trade of Japan increasing substantially, why

then should there be any anxiety? Public Debt Has the business improvement ceased ? Increase* Not at all. The trend of business ac?

tivity is still upward, and the same can be said with respect to employment. What then is the difficulty? Are there any underlying factors pro- viding grounds for anxiety ? Unfortunately, yes; there are a number of them. The Japanese Government in its endeavor to finance business improvement has caused a rapid increase in the national public debt, which has grown from a total of ?6,163,000,000 at the end of 1931 to ?8,641,000,000 as of November 30, 1934. Despite this, however, there are complaints to the effect that the fiscal policy of the Government "has

given the business world access to augmented cash revenues?a situation which, however, has failed as an incentive to new enterprises in any appreciable num? ber. Popular consumption, on the other hand, has in

large measure held off, and the bulk of income is either

deposited with banks or being used in the repayment of debts."

Referring again to conditions in the United States, we find that the Government's easy money policy has resulted in the piling up of balances in the commercial banks of the nation. Despite these swollen balances, the nation's banks have been unable to find suitable outlets for these funds in the financing of business, and we find allusions to the huge growth of the con-

sequent excess reserves of the commercial banks, as

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well as complaints that the banks are not making funds available to business to the extent that business

might desire. On the other hand, the banks, unable to find the type of business loans which they regard as

satisfactory for the investment of their funds, have turned more and more to government bonds and are now voicing misgivings over the rapidly growing pro- portion of such bonds to their total assets.

The same picture can be painted of Japan. Most of the increased internal debt has found its way into

the portfolios of the banks, which in- Banks creased their holdings of government Increase bonds by ?2,150,000,000 between De- Bond cember 1931 and September 1934.

Holdings From November 1932, when the Gov? ernment instituted its policy of finan-

cing its deficit with bonds, through 1934, the Bank of

Japan's purchases of such securities, exclusive of

Treasury notes and rice certificates, have amounted to the huge total of ?1,725,000,000. However, the Bank of Japan's own holdings of such bonds are now in the

neighborhood of ?600,000,000, the remaining bonds

having been sold to commercial banks, insurance firms, trust companies, and others, whose security portfolios indicate that the banks have resorted chiefly to secur?

ity investments for the employment of idle funds. These idle funds have been the result of substantial

growth of national savings, which increased by ?1,851,000,000 between the end of 1931 and the end of September 1934. Such increase, however, is ascribed to the spending policy of the Government, and in the

words of one commentator, "the fact should be borne in mind that recent gains in national savings are

grounded on the unbalanced budget of the Govern? ment_" What, it might well be asked, would be the

result should governmental spending cease? The same

question is being asked very seriously in the United

States of America.

Another important point requiring consideration is whether the trade advantage which Japan has enjoyed has been eliminated. If so, the possible consequences of the disappearance of this important factor in the

improvement of Japanese economy might be far-reach-

ing. Let us now consider these two aspects of the

Japanese situation: namely, the results of Japanese efforts to spend their way out of the depression, and

the effects of these efforts on Japanese trade.

Just as in the United States, the battle cry of "infla-

tion" has been raised in Japan in criticism of the

Government's policies. Is Japan actually experiencing inflation? Inflation is often said to be manifested by an increase in the amount of money or credit in cir-

culation accompanied by a rise in the general level of

prices. It has already been noted that prices in Japan have shown some increase, for the average of all com-

modities has gone up 40.2% as compared with Novem-

ber 1931. The major portion of this increase, however, is found in foreign trade merchandise, for the so-called home trade merchandise has increased in price only 14.8%. But the average price level has increased? and by 40.2%.

Since Japan depends primarily upon hand to hand

money, however, we might well examine the Bank of

Japan's currency circulation figures for BankLoans manifestations of any undue increase Decline in the currency outstanding. Here it is

apparent that as compared with the amount of currency outstanding before gold restric- tions the increase has been only about 13%, while bank loans have actually declined. From the stand-

point of internal economy, consequently, there has as

yet been no undue inflation via the credit and cur?

rency road.

The real danger is in connection with the Govern- ment's financing of its budget deficit. This up to the

present time has been accomplished through the medi- um of bond issues, and the excess funds of the banks have been diverted to Government bonds rather than to meet the needs of the business man. The Govern? ment of Japan has thus stepped into the breach and is

doing the spending which private initiative for one reason or another is unable to do at the present time.

Once more a close similarity to conditions prevail- ing in the United States is to be observed. Again the

arguments which are voiced on every Bond side against the huge expenditures by Absorption the American Government could be

Capacity used with equal force in connection with Japan. The fear with respect to

inflation is not a fear in connection with present activi? ties but a fear of what the future holds in store. What will happen if the Government stops spending? How can the Government continue to finance its deficit? In a recent statement the Governor of the Bank of Japan made the following observation con-

cerning the continued issuance of deficit bonds: "It is difficult for me to say anything definite regarding the bond absorption capacity of Japan. I am in no posi? tion to declare that the market has or has not the

capacity to absorb bonds. Efforts must be made to

dispose of these deficit bonds. Between November

1932, when the first such bonds were issued, and October 1934, the Bank of Japan accepted about

1,675,000,000 yen of such bonds, excluding conversion

issues, rice notes, and Treasury notes. At the end of October the Bank held only about 50,000,000 yen of

bonds, all others having been sold. Judging from past conditions, there will be nothing to fear concerning the

absorption capacity of bonds totaling more than

600,000,000 yen, at least for the present. If all bonds

accepted (by the public) are added, the amount ac-

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cepted between November 1932 and November 1934 amounted to 2,019,457,000 yen."

Thus it would seem that at least at present the

Japanese Government has the situation in hand. The rise of internal prices has been controlled as much as

possible. Business activity and trade have expanded. Currency increases have been held down to a mini? mum. So far there has been control; but what the future holds in store is hard to foretell, since an un- balanced budget cannot continue indefinitely.

A substantial proportion of the improvement in

Japanese economy has been due to the improvement in

the condition of those engaged in for- Factorsin eign trade. This has been primarily Trade Gains the result of the advantageous pur-

chases which foreigners could make of

Japanese goods. If and when this advantage disap- pears, then Japan will be faced with another serious

problem. It is not meant to intimate that Japanese trade gains have been due entirely to the depreciation of the currency, for Japanese efficiency, quality, etc, also enter into the picture. It must be realized, how?

ever, that people buy goods where they can get the best prices and so far the best prices, all things con?

sidered, have been obtainable in Japan.

The following table, based on figures obtained from the Oriental Economist, permits a comparison of prices in terms of dollars.

TABLE No. 1

Comparison of Wholesale Prices of Japan and the United States

Japanese Prices prices Prices

in converted in Japan1 into dollars United States2

Nov. 1931. 116.0 114.90 83.6 Oct. 1932. 148.8 63.81 73.6 June 1933. 158.8 84.82 88.1 July " _ 159.6 88.45 95.2 Aug. " . 158.1 84.84 95.1 Sept.

" . 161.8 90.48 95.7 Oct. " . 161.2 92.17 93.5 Nov. " . 158.9 98.02 93.2 Dec. " . 155.9 95.78 93.4 Jan. 1934. 157.5 93.61 95.3 Feb. " . 159.6 95.45 97.9 Mar. " . 159.9 96.64 96.9 Apr. " . 161.9 98.25 96.8 May " . 162.6 97.45 96.6 June " . 162.7 96.70 97.6 July " . 164.1 97.53 98.6 Aug. " . 168.6 99.36 100.2 Sept. " . 173.3 100.82 100.0 Oct " . 169.8 98.58 98.1

1 Index numbers of wholesale prices in Tokyo (January 31, 1913 = 100). {Oriental Economist.) 2 Index numbers of wholesale prices in U. S. A. (Febmary 1, 1913 = 100). (Dun & Bradstreet's.) Pre-devaluation dol- lar parity used.

It will be observed that prior to the suspension of the gold standard Japanese prices were entirely too

high to permit the sale of Japanese Price goods in the international markets to

Advantage any great extent. With the inaugura- Eliminated tion of the gold embargo and the de-

preciation of the yen in terms of other

currencies, the prices of Japanese exportable goods declined, and consequently the American and other

foreign purchasers of such goods had an advantage in

price after November 1931. However, this advantage has been gradually eliminated. While, according to Table 1, prices in the United States and in Japan are now about in equilibrium, and the same could be said with respect to Japanese and sterling prices, so that the disadvantage of the Japanese exporter existing prior to gold suspension has been eliminated, it is obvious that his price advantage, also, has since sus?

pension been more or less lost.

The situation is thus boiled down to a point where the continued large sale of Japanese goods will depend upon superiority of quality at existing price levels rather than on a mere price advantage. Japan must, therefore, endeavor to sell her goods on a quality basis

or, by lowering costs of production, decrease prices of her commodities in an attempt to meet foreign com?

petition. Will she be successful in retaining the mar? kets which she has won with such great difficulties? This is obviously a point of importance.

However, this is not all. We have already mentioned the fact that currency depreciation meant that Japan was in terms of goods giving more value than she was

receiving. Table 2 below (also based upon figures of the Oriental Economist) illustrates this point very clearly.

It must be remembered that the index of Japanese prices includes the average of all prices?that is, prices

of exportable commodities, prices of

Commodity imported commodities, and purely do- Price mestic prices. Many drastic changes Varialions have occurred with respect to the con-

stituent elements of this average fig? ure, and the most outstanding of these changes have to do with the variations in prices of exported and im?

ported commodities. It will be observed that imported goods have increased drastically in price while ex?

ported goods have not kept pace. Indeed, they have tended to decline rather than to increase. We have no

space here to enter into a discussion as to the reasons for this change, but it is apparent that on the basis of goods values alone Japan is today giving more than she is receiving. It also means that those of her ex? ported commodities which contain at least some im? ported goods will eventually have to go up in price, thus further tending to offset the price advantage which Japanese goods have had in the world's markets.

Today, with every nation attempting to follow a policy of nationalism in order to prevent as much as

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TABLE No. 2 Prices of Foreign Trade Merchandise

Articles Articles of of

Average Import Export Nov. 1931. 100.0 100.0 100.0 Dec " . 114.2 110.3 115.1 Jan. 1932. 115.3 113.7 121.9 Feb. " . 121.2 120.7 122.8 Mar. " . 115.2 114.9 116.3 Apr. " . 110.6 111.6 106.6 May

" . 109.4 110.3 108.2 June " . 108.9 109.2 107.3 July " . 112.7 112.2 114.5 Aug. " . 136.7 132.0 157.0 Sept " . 142.3 139.7 153.1 Oct " . 148.9 145.7 163.1 Nov. " . 157.4 153.7 173.8 Dec " . 162.7 158.2 181.6 Jan. 1933. 159.2 158.6 161.6 Feb. " . 155.3 156.5 150.1 Mar. " . 151.1 153.3 141.1 Apr.

" . 151.1 152.2 145.9 May

" . 155.4 156.6 150.5 June " . 164.4 164.1 165.6 July " . 166.3 167.6 160.8 Aug. - . 164.8 165.4 162.0 Sept.

" . 168.9 169.6 165.6 Oct " . 166.5 168.8 156.8 Nov. " . 161.3 165.3 144.5 Dec " . 156.2 159.9 140.0 Jan. 1934. 161.3 165.8 142.3 Feb. M . 163.1 167.5 144.4 Mar. " . 164.2 169.0 143.4 Apr.

- . 166.5 172.2 142.3 May " . 167.7 173.5 143.4 June " . 171.8 178.6 142.7 Note: Figures obtained by classifying and averaging the

Oriental Economist index for which January 1913 is the basis, and the result reduced to the basis of November 1931 = 100.

possible the importation of other goods, with stabiliza- tion of currencies not yet in sight, and with govern- ments attempting to bolster the sale of domestically produced goods, it is obvious that Japanese trade ex?

pansion?and even maintenance of present trade?is

facing a serious test. Further yen depreciation would not be particularly helpful. It would give only a

momentary breathing spell. Inflation is also only a

breather, but when times get hard the inflation advo- cates gain strength, and hence it might well be asked

whether Japan will be able to continue to control infla? tion within the country.

The depreciated yen has, of course, also increased the expenses of those Japanese debtors who have fixed

obligations abroad. This includes the Dilemmaof Government and certain large corpo- Japanese rations, and has finally made necessary Debtor the marshalling of Japanese-owned

foreign funds so that they might be used to the best advantage. Previously the low prices at which various Japanese securities were selling on

foreign exchanges, due to depressed conditions in those countries in which the exchanges were located, made it

very advantageous for the Japanese debtor to buy up his obligations on such markets. Recently, however, the Government found it necessary to refuse to permit cer? tain private obligors to continue such purchases on the

ground that the exchange was needed for other more

important purposes. This demonstrates another effect of the depreciation of the Japanese currency and the difficulties which Japan is currently encountering in her attempts to balance her international balance of

payments. What will have to be done will depend primarily upon the course of events. The increase of

expenditures by the Government has naturally also increased the nation's debt burden.

With the possibility of losing some of its hard-won

foreign trade advantage, and with the increase of ex?

penses and taxes at home, Japan is in the sort of dilemma in which the inflationist gathers strength. Control of the situation, therefore, depends to a great extent upon the political moves.

PRINCIPAL SOURCES: Oriental Economist; Japan Weekly Chronicle; Trans- Pacific; Japan Year Book; Japan-Manchoukuo Year Book; Moody's Government Manual and Supplements; Monthly Bulletin of Statistics, League of Nations; Financial and Commercial Chronicle; Economist; Annalist; Foreign Fi? nancial Notes, U. S. Dept. of Commerce; World Economic Survey, League of Nations; Statistical Year Book, League of Nations; F. V. Field, Economic Handbook of the Pacific Area, New York, 1934.

SIGNIEICANT DEVELQPMENTS

CHINA RESUMES POSTAL RELATIONS WITH MANCHOUKUO

The resumption of postal relations between China and Manchoukuo is interpreted as a step in the direc? tion of rapprochement. Soon after the Japanese occu-

pation, the Chinese Post Office refused to accept mail for Manchuria, though continuing to accept it for Dairen in the Japanese leased territory. Most other countries eventually established postal communica- tions with the new state, and the Advisory Committee of the League of Nations advised League members that

they might deal with the Manchoukuoan postal au- thorities without having this imply recognition of the new regime.

China, however, held fast to its original position and as a result not only service to Manchoukuo, but also service to Europe via the Siberian route was in

abeyance, the Chinese Post Office sending mail to

Europe by the slower southern route via Suez. China also prevailed upon the International Postal Union to advise its members to use the southern route. Now, however, by the new agreement, mails to Europe via Siberia as well as those to Manchoukuo will be ac-

cepted by the Chinese Post Office. The form of the new agreement is such as carefully

to avoid any suggestion of official recognition of the

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