The PANAY incident was a Japanese attack on the United States Navy gunboat PANAY while she was anchored in the Yangtze River outside of Nanjing on December 12, 1937.
Japan and the United States were not at war at the time. The Japanese claimed that they did not see the United States flags painted on the deck of the gunboat, apologized and paid an indemnity. Nevertheless, the attack and the subsequent Allison incident in Nanjing caused U.S. opinion to turn sharply against the Japanese.
A flat-bottomed craft built in Shanghai specifically for river duty, PANAY served as part of the U.S. Navy's Yangtze Patrol in the Asiatic Fleet, which was responsible for patrolling the Yangtze River to protect American lives and property.
After invading China in the summer of 1937, Japanese forces moved in on the city of Nanking (now known as Nanjing) in December. PANAY evacuated the remaining Americans from the city on December 11, bringing the number of people aboard to five officers, fifty-four enlisted men, four U.S. embassy staff, and ten civilians.
The following day, while upstream from Nanking, PANAY and three Standard Oil tankers, Mei Ping, Mei An, and Mei Hsia, came under attack from Japanese naval aircraft. The PANAY was bombed and sunk; three men were killed, and forty-three sailors and five civilians were wounded. Survivors were later taken on board the American vessel Oahu and the British gunboats HMS Ladybird and HMS Bee. Earlier the same day, a Japanese shore battery had fired on HMS Ladybird.
It was a nervous time for the American ambassador to Japan, Joseph C. Grew, who feared the PANAY incident might lead to a break in diplomatic ties between Japan and the United States. Grew, whose experience in the foreign service spanned over thirty years, "remembered the Maine," the U.S. Navy ship that blew up in Havana Harbor in 1898. The sinking of the Maine had propelled the United States into the Spanish-American War. Grew hoped the sinking of the PANAY would not be a similar catalyst.
The Japanese government took full responsibility for sinking the PANAY, but continued to maintain that the attack had been unintentional. The formal apology reached Washington on Christmas Eve.
Although Japanese officials maintained that their pilots never saw any American flags on the PANAY, a U.S. Navy court of inquiry determined that several U.S. flags were clearly visible on the vessel during the attacks. Four days before the apology reached Washington, the Japanese government admitted that the Japanese army had strafed the PANAY and the survivors after the navy airplanes had bombed it. The Japanese government paid an indemnity of $2,214,007.36 to the United States on April 22, 1938, officially settling the PANAY incident.
But, Navy cryptographers had intercepted and decrypted traffic relating to the attacking planes which clearly indicated that they were under orders during the attack, and that it had not been a mistake of any kind.