Economy, No.7  Aug. 5, 2011


In the Tohoku region, farmland has lost its levees in the aftermath of the Great East Japan Earthquake, and it will be very hard to restore its boundaries. It will also be difficult for older farmers to purchase new machinery and restart their farming operations.

However, this is also an opportunity to change currently inefficient agriculture into a new form. Redevelopment of agricultural land into large-sized farm lots will increase work efficiency, open the way for introduction of new technologies for directly sowing on paddies and help reduce costs. The transition to next-generation farmers can be attained by allocating large farming lots to young farmers. Older farmers can earn land rent revenues by leasing their own farmland.

Prior to the earthquake, the Japanese government was set to decide by June on whether to join the Trans-Pacific Partnership (TPP), also known as the Trans-Pacific Strategic Economic Partnership Agreement. Some now argue that discussing the TPP is now not a consideration, since it would wield another heavy blow on agriculture in the Tohoku region, which has already been hit by the quake. The government is in fact delaying its decision on participating. I feel, however, that participating in the TPP is actually the way to reform Japan’s agriculture.

The Ministry of Agriculture, Forestry and Fisheries (MAFF) announced the estimated impacts of lifting tariffs and import surcharges after joining the TPP. It states that agricultural production will decline by 4.1 trillion yen, including a 2 trillion yen plunge in rice production, from the current level of 8.5 trillion yen. Food self-sufficiency will slide from 40% to 14%. In addition, 3.7 trillion yen worth of multiple functions of agriculture other than crop production, such as an anti-flooding effect and retention of water resources, will vanish.

It is argued that rice production will be hardest hit by joining the TPP. A high rice price is supported by the rice acreage reduction policy aimed at suppressing rice supply. Similar to other agricultural products, rice needs tariffs in order to keep its price above the international level. In reality, however, the price retention policy in the name of protecting farmers has acted, contrary to the MAFF’s explanation, as an impediment to evolving food self-sufficiency and to the multiple functions of agriculture.

The rice acreage reduction policy has lowered rice production and contracted food self-sufficiency. The resulting high rice price has resulted in a decrease in rice consumption and distresses farmers. In the framework of the World Trade Organization (WTO), Japan argues in its negotiations seeking to maintain high tariff rates on rice, dairy products and other sensitive products that it is ready to considerably raise the low-tariff import quotaes in return for maintaining the rates. This means that Japan would accept a decline in self-sufficiency if the domestic prices can be maintained by high tariff rates. Though the multiple functions are mostly executed by the paddies, Japan has continued its policy of opting not to use paddies in this way for 40 years.

Of wheat consumed in Japan, 90% is imported. Japan has forced consumers to purchase wheat and other produce, not only domestic crops but also tariff-imposed imports, at above international prices. This is a policy that acts like regressive taxation since it places agriculture protection costs on low-income consumers as well.

Outside Japan, the United States and the European Union (EU) have switched their agriculture protection policy from price support to direct payment. Japan’s lifting tariffs and adopting direct payment to sustain agricultural production would benefit consumers and ensure food security, along with multiple functions. Direct payment will substitute for consumers’ burdens concerning imported produce. A small fiscal expenditure will ease the trouble toward consumers.

Japan’s agricultural circles say that their farm size is so small that they cannot compete with overseas counterparts. Under the same conditions, larger scale would give a greater advantage. However, there are broad differences between countries in crops, soil fertility, yield per unit area and quality. It is impossible to make comparison by scale alone. In terms of scale, Even the average farm size in U.S., the world’s largest exporter of farm products, is only 1/19th that of Australia.

graph : Toward Universally Accepted Agriculture (Part III)Capitalize on Quality Excellence to Stimulate Exports.JPG

There are considerable price gaps between different types of automobiles and, similarly, rice has price gaps that reflect gaps in quality (see Figure). Even between koshihikari rice from Uonuma in Niigata Prefecture and koshikari rice from an average place of origin in Japan, there is a 1.7-fold price difference. When Japan suffered a poor harvest in 1993, rice was imported from Thailand but a large portion of it was left unsold. It is groundless to say that Japanese rice cannot compete with poorer-quality rice because of the price gap.

Another voice heard from agricultural circles is that the disparity between foreign and domestic prices is such that the shift to direct payment will entail huge public spending. However, this argument disregards differences in quality and sounds like an acknowledgement of the enormous burden placed on consumers.

The MAFF data overestimate the foreign-domestic price gap by a factor of four, to deliberately overstate the impact by comparing the decade-ago price of non-tariffed rice imported from China and the current price of Japan-produced rice. Taking quality into consideration, the price gap is now only a factor of 1.3. If the rice acreage reduction policy is lifted, the price of domestic rice will fall below that of rice imported from China.

The tariff on rice is 341 yen per kilogram, which far exceeds the current price of rice produced in Japan, which is around 210 yen. The tariff will not be immediately removed upon joining the TPP; it will be progressively reduced over 10 years. Assuming the current price levels, it will not be until six years after the start of tariff cuts that the price of tariffed imported rice, even that of the lowest-priced Thai rice, falls below that of domestically produced rice.

Considering the high quality of Japan-grown rice, the trend of the domestic rice price that fell 30% in the past decade and a hike in the Chinese rice price following climbing rural labor costs and renminbi appreciation, there will be no impact from removing the tariff in 10 years. This will be true even more so if the policy of reducing rice acreage is abandoned.

The cost of direct payment required in a decade will total 400 billion yen. If the compensation for a rice price fall following abolition of the rice acreage reduction policy is offered solely to farms, the cost will be around 150 billion yen. Additional measures on produce other than rice will cost 250 billion yen. This total cost could be sufficiently covered by abandoning two schemes to raise a total of 600 billion yen, of which an amount of 200 billion yen will be saved by stopping subsidization for rice acreage reduction and 400 billion yen by dropping the income compensation program for rice farming households, which is blamed as wasteful.

If the cost is steadily cut during the 10-year period, the amount required will be even smaller. A century ago, landowners asserted that Japan’s agriculture, smaller in size than that of the United States, should be protected by tariffs. To counter this argument, YANAGITA Kunio, a Ministry of Agriculture and Commerce official, who later became a folklorist, advocated boosting productivity for cutting costs as a means of agricultural development.

The cost per unit produced is calculated by dividing the cost per unit area by the yield per unit area. It can be lowered by reducing the cost per area by means of upsizing or by increasing the yield per unit area. However, a rise in yield per unit area despite the unchanging consumption would mean that a smaller area of rice cultivation is required and lead to growing subsidization to farmers reducing rice acreage. For this reason, many sought to instead suppress the growth in yield per unit area. Today, the yield per unit area in Japan is 30% lower than that in California.

Discontinuation of the rice acreage reduction policy will help increase the yield per unit area and decrease the rice price. If farms at a predetermined scale or above are directly paid to boost their capacity to pay land rents, the price fall will eliminate high-cost farmers and farmland will concentrate on farms, and their scale of cultivation will grow.

Even after joining the TPP, Japan will not suffer an impact from tariff cuts in the foreseeable future. If the eligibility of household income compensation is limited to farming households at or above a fixed scale, it is possible to raise funds that will finance part of the post-quake recovery. The compensation should not be offered to part-time farming households earning high income. Narrowing of the eligibility of compensation will lead to accumulation of farmland with entrepreneurial farmers and to farm scale growth not only in disaster-related areas but also elsewhere in the country. This will increase the efficiency of Japanese agriculture as a whole.

Japan-produced rice will be unmatched if it becomes more competitive in terms of price and cost in addition to its world-leading quality. Instead of being afraid of removing tariffs, Japan will be able to further increase exports. Milk can be exported to neighboring countries, seeing that it is transported via tankers from Hokkaido to other prefectures. Against countries imposing export restrictions without scientific grounds on the pretext of radioactive contamination, Japan should allege that such restrictions violate the World Trade Organization (WTO) agreement on sanitary and phytosanitary (SPS) measures and appeal to the relevant WTO committee, or resort to dispute settlement procedures. Positive action toward trade deregulation is requisite to cultivating the export market.

Japan saw its agriculture fall despite its intent of protecting the domestic market by means of high tariffs. This domestic market is shrinking due to population aging and decrease. Japan’s agriculture will have no future without cultivating the export market. Lower tariffs in export destinations will be preferable to export expansion. The agricultural sector should act proactively on negotiations on TPP and other trade deregulation that serve to remove tariffs imposed by trade partners and to facilitate exports.

In the wake of the devastating earthquake, the issue of TPP participation is being set aside. Yet neither the countries involved in TPP talks nor the rest of the world will wait until Japan completes its recovery. If Japan delays joining the talks, deliberations will continue without reflecting Japan’s positions with respect to investment, competition, the relationship between trade and the environment, and other key issues in which rules have yet to be created in the WTO framework.

Since China’s rise, Japan’s voice has been somewhat weakened in the WTO, but in the TPP, Japan will have its say as the second biggest economic power after the United States. If the results are brought to the WTO, Japan’s stance may be incorporated into the WTO rules serving as the world order. For the country’s agriculture and for rehabilitating its economy from the aftermath of the earthquake, this opportunity should not be missed.

Translated from “sekai ni tsuyosuru nogyo e (part 3),” Nihon Keizai Shimbun, June 10 2011, p. 25. (Courtesy of Nihon Keizai Shimbunsha)