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 strafed the Panay and its 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.      

     Immediately after the Panay bombing, a lesser known aspect of the story started to unfold. In the days following the Panay incident, Japanese citizens began sending letters, cards, and money to the American embassy in Japan; a few were sent to the Navy Department in Washington, D.C. One noteworthy group of letters received by the navy was from thirty-seven Japanese girls attending St. Margaret's School in Tokyo. The letters, each written in English and dated December 24, 1937, extended their apologies for the sinking of the Panay. By coincidence, the girls' letters are dated the same day the Japanese government's formal apology reached Washington. The letters are very similar in content. The typical letter reads, "Dear Friend! This is a short letter, but we want to tell you how sorry we are for the mistake our airplane[s] made. We want you to forgive us I am little and do not understand very well, but I know they did not mean it. I feel so sorry for those who were hurt and killed. I am studying here at St. Margarets school which was built by many American friends. I am studying English. But I am only thirteen and cannot write very well. All my school-mates are sorry like myself and wish you to forgive our country. To-morrow is X-Mas, May it be merry, I hope the time will come when everybody can be friends. I wish you a Happy New Year. Good-bye."

<Here are two more letters from Japanese citizens.>

"We are really sorry to think that our absolutely trusted military should have made the blunder. We only pray that this sort of thing will never again be caused by the Japanese, who fight only for the sake of peace." The donor expressed sympathy for the Panay incident, adding, "When we think of the victims of the incident, words fail to express our deep regret."

 

Beguiled by the rough mischievous waves
     And Amid the din and turmoil of the battle,
The heroes of the air, eager to chase the fleeing foe.
     Bombed, alas! By mistake, a ship not of the enemy,
But of the friendly neighbor country, which sank
     with a few sailors aboard.
The source of nation-wide grief, which knows no bounds,
     That fatal missile was.