In-depth Japan’s Growth Strategy for a New Era
Reviving Japanese Agriculture to Cope with International Competition

Dōmoto Hiroshi [Profile]

[2012.07.03] Read in: 日本語 | 简体字 | 繁體字 | FRANÇAIS | ESPAÑOL | العربية |

Japan’s noncompetitive farming sector has been a roadblock to participation in free trade pacts with other countries. Dōmoto Hiroshi explains how Japanese agricultural policy has weakened the farming sector, particularly rice growing, and suggests steps to make the sector internationally viable.

Minuscule Exports Is the Crux of the Problem

Japanese food has won a favored place for itself in countries around the world, but the agriculture and fisheries that are the original source of this food have very little international presence. Aside from experts, hardly anyone outside of Japan is aware of these industries.

Japan’s farming and fishing sector is said to have many problems, but a look at the trade figures reveals that the real crux of the problem is that the country’s  exports of agricultural products are minuscule, both in absolute terms (at only $3 billion a year) and compared with those of other major countries (see the attached chart). 

Discussions of agriculture in Japan, however, almost always ignore exports. Instead, people focus on the import side and emphasize that Japan is the world’s biggest importer of food, noting the reliance on foreign sources for more than half of the country’s food supply. These points are used to bolster the arguments against liberalizing imports of rice and the calls for protecting the declining domestic agricultural industry.

Japan’s net imports (imports minus exports) of agricultural products may indeed be the largest in the world, but the separate figures for imports and exports reveal a different picture. In terms of net imports, Japan ranks fifth in the world. In per capita terms, Britain tops the world in imports, at the level of $880 per person annually, followed by Germany at $851, and France at $722. Japan’s per capita figure of $360 is only about half that of France and not all that much larger than the $244 figure for the United States. It is not correct, then, to say that Japan’s agricultural imports are particularly large.

The problem is that Japanese exports of agricultural products are so small, a mere $3 billion a year in total. Until the mid-1960s the picture in the advanced countries of Europe was the same as in Japan. But over the past 50 years, while Britain has increased the value of its agricultural exports by $20 billion a year and Germany by $42 billion, Japan has managed an increase of only $2.7 billion. In other words, Japanese agriculture has been depending entirely on domestic customers and has dismally failed to develop overseas markets.

A major factor behind this failure is the orientation of Japan’s agricultural policy. This policy has focused on measures to support rice growers and keep the domestic price of rice high by limiting planted acreage. And it has resulted in the enfeeblement of the farming sector. In the following section I will describe the ways in which this policy has failed.

Failings of Japan’s Farm Policy

(1) Cosseting Unproductive Part-Time Rice Farmers

The first problem with Japan’s agricultural policy has been its inability to provide adequate support for professional, full-time farmers. This is a result of the focus on support for rice growers, which has ended up cosseting unproductive part-time farmers. 

The basic data on rice growers shows that they differ from other types of farmers, such as those who grow fruit and vegetables and those who raise livestock. The differences are not unrelated to the fact that the markets for products like fruit, vegetables, and livestock are open, whereas the market for rice has remained heavily protected. Here are a few facts:

  • About 60% of farmers are rice growers.
  • Rice accounts for 22% of total farm production.
  • Rice growers’ median annual sales are only ¥1.4 million (against ¥6.7 million for vegetable growers, ¥3.0 million for fruit growers, and ¥1.5 million for livestock farmers).
  • The share of part-timers is a high 61% among rice growers (compared to 20% to 30% for other types of farmers).
  • The average age of rice growers is 66.6, the highest among all types of farmers.

Looking at these facts, people often suggest that rice growers, with their low sales, face economic hardship, and that their high average age shows the absence of young people willing to take over family farms from their aging parents. But that impression does not correspond to the actual state of affairs.

Just over 60% of rice growers are part-timers; most of them have jobs in government offices, agricultural cooperatives, factories, or elsewhere, providing them a steady source of nonfarm income. Also, whereas company and government employees are generally mandated to retire at age 60 or 65, farmers have no set retirement age. When those who have been farming part time more or less as a hobby while holding down regular office jobs reach retirement age but keep farming, they become full-time farmers for statistical purposes. This contributes to the inexorable rise of the average age of the farming population. It is said that retirees of this sort account for about 10% of all rice growers. In addition, the ranks of the full-timers include some people originally from farming families who take jobs as company or government employees and do not do any farming during the course of their careers but who head back to the family farm after they retire and start farming as a hobby. These returnees account for another 10% or so of the total, and their ranks have been growing in recent years.

Taking these shares into account, we see that just 20% of rice growers are professional full-time farmers. Most of the remaining 80% are people who are not troubled by the low level of their farm earnings and who are in no particular need of someone younger to take over their farms. 

When retirees take up farming as a hobby or when working people farm on the side, they are likely to choose rice as their crop because growing it takes only 45 hours a year on average.

Japan’s farm policy has channeled immense amounts of money into the agricultural sector, and this has had the perverse result of preserving small-scale, part-time farming, while failing to improve the competitive position of full-time, professional farmers.

(2) The Growing Problem of Abandoned Farmland  

The second failing of Japan’s farm policy is that it has caused increasing amounts of farmland to be abandoned.

As of 2010, some 390,000 hectares of Japanese farmland was lying abandoned—an area twice that of the Tokyo metropolitan area. And about 25% of this area consists of plots in flatland locations well suited to farming. The main cause is the paddy acreage reduction program, which has been the main pillar of Japan’s farm policy. 

The paddy acreage reduction program has been in effect since 1970, when it was launched with the aim of keeping the price of rice high even as consumption levels continued to decline. The program offers subsidies to farmers who cooperate by leaving rice paddies uncultivated or by using them to grow crops other than rice. The subsidies amount to around ¥200 billion a year, and over the life of the program they have totaled more than ¥7 trillion. Paddies removed from cultivation under this program eventually end up being abandoned, unless they are converted to fields for growing other crops.

That is not the only adverse effect of the program. It is also largely to blame for the fact that so many rice growers are unproductive part-timers and so few are full-time professionals, as noted already. The program has encouraged weekend farmers to hold on to their tiny plots and keep growing rice, which they can sell at a high price. This in turn has made it more difficult for professional farmers to enlarge their farms and to achieve economies of scale, even if they grow rice,  meaning that their earnings do not increase all that much.

When the program was first introduced, it met with adverse reactions in many places. Particularly famous are the opposition movements in places where rice growers had already achieved high levels of productivity, such as the village of Ōgata in Akita Prefecture and parts of Niigata Prefecture. These farmers could earn more by continuing to grow rice than by accepting the subsidies the government offered for leaving their paddies uncultivated. Their example further indicates how the acreage reduction program has interfered with efforts to enlarge the scale of farms so as to improve productivity.

The biggest losers under this program have been the general public. The acreage reduction program operates like a cartel, forcing people to pay high prices for the rice they buy, and also to foot the bill as taxpayers for the government subsidies paid out to farmers cooperating with the program. 

In response to criticism of the program, the government secured enactment of revised legislation in 2004, changing the basis for the subsidies from the area of reduced acreage to the volume of adjusted (reduced) production. But this did not change the essence of the program, which is designed to keep the price of rice high. And so the program has continued to have the same sort of ill effects as before.

The low cost of owning farmland has contributed to the increase in the area of abandoned plots. Both the inheritance tax and local property taxes provide special breaks for farmland. These breaks were originally intended to prevent cases where farm owners or heirs unable to pay their tax bills would have to sell off portions of their land, resulting in fragmented, noncontiguous plots and lower productivity. Unfortunately, though, the breaks have actually ended up providing an incentive for increasing the area of abandoned farmland. Under both the inheritance tax and the local property tax, the breaks are provided for plots that are officially registered as farmland regardless of whether they are being farmed or not. People have been taking advantage of this loophole by keeping their abandoned plots listed as farmland.

Reviving Japanese Agriculture

Given the low birthrate and graying of Japan’s population, along with the changes in people’s food preferences, domestic consumption can be expected to decline gradually over the years to come. In order to revive agriculture in this context, we need to undertake sweeping initiatives aimed at enhancing the sector’s profitability. 

First, we must stop the practice of cosseting unproductive farmers. We must in particular seriously tackle the inefficient structure of rice growing, where part-time farmers are numerous and their presence hinders the shift to larger-scale farming. In specific terms, we will need to come up with fixes for the acreage reduction policy and the low cost of farmland ownership.

Second, we need to harness the energies of corporations. For the past few years, the government has been implementing a number of measures aimed at encouraging business corporations to get involved in agriculture, but many restrictions still apply, and the conditions are not yet conducive to active participation by businesses.

Below I will discuss these agenda items.

(1) Stop Subsidizing Unproductive Farmers

The paddy acreage reduction program (now implemented as “production adjustment”) is a type of cartel; it should be abolished, and transactions should be conducted at market prices. In the face of this change, part-time farmers, many of whom operate at a low level productivity, will have four options: (1) continue growing rice, ignoring considerations of profitability, (2) switch to a crop other than rice, (3) abandon farming because it is unprofitable, or (4) lease their plots to more efficient professional farmers.

In the case of Option 1, the market price of rice will naturally decline, so the general public will enjoy the benefit of being able to eat rice for less money. Meanwhile, inefficient part-time farmers choosing this option will find it difficult to keep operating, and so they will probably select another option at some point. And Option 2 is problematic in that other crops require greater inputs of labor than rice. So the part-timers will have an incentive to pick one of the remaining two options. Option 3 will mean the ongoing existence of uncultivated plots, assuming the present system of tax breaks remains in place. To keep this from happening, it will be essential to tighten up the system and strengthen tax-collection operations so as to tax land held by those who have abandoned farming at the same rate as regular residential land. 

After the Democratic Party of Japan took power in 2009, the government introduced a program of direct payments to farming households. This sort of system, which aims to improve market competitiveness, has been widely adopted in other countries. But as implemented in Japan, the program makes the payments conditional on cooperation with the production adjustment program. The payments to farming households were originally intended to allow the lowering of the price of rice while continuing to protect Japanese agriculture. The idea was that farmers would effectively enjoy the same benefits they received from high rice prices even if the actual price of rice declined. This would improve their competitive position, enabling high-quality Japanese rice to come out ahead in international competition even if Japan were to participate in the Trans-Pacific Partnership and open up its domestic market to imported rice. 

As it is currently being implemented, the program of payments to farming households provides (1) subsidies based on their rice-growing area (after cooperating with the production adjustment program) and (2) subsidies (starting in 2012) based on the area of rice paddies converted to other farming uses.

Given the severe strains on the Japanese government’s finances, instead of this sort of program offering indiscriminate, uniform subsidies to farmers, it would be better to limit payments to those farmers operating at or above a certain scale and offer subsidies for moves that facilitate productivity by enlarging the size of farms.

(2) Tapping into Corporate Energy

In 2009 the government secured revision of the Agricultural Land Act and implemented a program for rationalization of farmland ownership. 

Under the revised law, conditions for corporations from other industries to enter the field of agriculture were relaxed. Following the revision, ordinary corporations became able to acquire stakes of up to 25% in agricultural production corporations, and the restrictions on their leasing of farmland for agricultural purposes were also lifted. But the barriers to business corporations’ involvement in agriculture remain high. Many firms that have taken stakes in agricultural production corporations complain that, with ownership shares limited to 25%, they cannot take control of management, making it hard to participate wholeheartedly in the agricultural sector. As for the option of leasing farmland, businesses note the risk that leases might not be able to be smoothly renewed and point out that it is hard to secure leases on good plots. 

Since involvement in agriculture by businesses is seen as contributing to the fostering of young people who will become the farmers of tomorrow, it is essential to encourage this involvement through such measures as lifting the limit on investment in agricultural production corporations.

Another change implemented by the government in 2009 was a program to address the problem of abandoned farm plots by rationalizing the ownership of farmland. The bodies actually undertaking the rationalization were limited to local governments and agricultural cooperatives; the program was entrusted to 47 prefectural agricultural public corporations, 160 “facilitating organizations” (former municipal agricultural public corporations), and 380 agricultural cooperatives. 

Partly because it was limited to a single year, the initiative did not produce major results. Many organizations were established, but private-sector corporations were excluded, and some complained that the exercise was nothing more than a grab for authority and budget funding. So dealing with abandoned farmland continues to be a major issue. The field should be opened up to the private sector so as to tap business know-how on property sales and management.

(3) TPP Participation: The Last Chance for Japanese Agriculture?

In November 2011 Japan indicated its intention of participating in the Trans-Pacific Partnership talks aimed at creating a huge free-trade area around the Pacific Rim. Participation in the TPP has been the subject of widespread debate in Japan, and the agricultural sector is seen as being the most affected. This trade agreement is certainly bound to have an impact on Japanese farming, but participation is essential for the sake of making this sector more competitive.

Since the TPP negotiations will take time, and grace periods will be provided for the elimination of tariffs, we will have at least another 10 years until the effects are fully felt. The question is what we can do in the interim; simply preserving the status quo is not an option even worth considering.

In this article I have touched on the need to move away from the acreage-reduction and production-adjustment approach and to revise the special measures provided for farming households, while also emphasizing the importance of eliminating barriers to participation in agriculture by business corporations. If we move to implement such steps, 10 years should be enough time—not ample, perhaps, but sufficient—to prepare Japanese farming for full implementation of the TPP. And if we do not take such initiatives, the alarmist talk of the “death of Japanese agriculture” is liable to come true even without our country’s incorporation into the TPP framework.

(Originally written in Japanese.)

  • [2012.07.03]

Joined Sanwa Bank (now Bank of Tokyo-Mitsubishi UFJ) after receiving a master’s degree in science from Tokyo Institute of Technology. Following stints at the Kansai Institute for Social and Economic Research and the Mitsubishi UFJ Financial Group, is now a senior fellow at the Center for International Public Policy Studies, where he specializes in macro-economic analysis.

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