Media  Global Economy  2013.02.01

LDP back in power and its prospective agricultural policy

English translated version of "Business Prospect" on NHK Radio Channel 1 on December 25, 2012

1. The Liberal Democratic Party (LDP) ousted the Democratic Party of Japan (DPJ) in the recent Lower House election. Before we discuss the new government's prospective agricultural policy, let's take a brief look back at the development of agricultural policy over the past decade.

One of the major characteristics - as well as problems - of the Japanese agriculture industry is the fact that farms are too small. Costs are higher for small businesses, which bring in a lower income because income consists of sales minus costs. This fundamental structure of the agriculture industry has long been in need of improvement ever since the prewar period. Kunio Yanagida, one of the leading Japanese folklorists, stated upon joining the then Ministry of Agriculture and Commerce in 1900 that the average farm size at the time - 0.3 to 0.4 hectare - had to be increased to about two hectares in order to improve productivity and compete with farmers overseas.

However, his idealistic policy was hampered by high political barriers. The national average farm size at the moment is about 1.8 hectares, which includes Hokkaido where farm size is relatively larger. With respect to rice farming, most farmers except those in Hokkaido are cultivating less than one hectare of land. Given this, the LDP, before transferring power back to the DPJ-led government, announced its policy that agricultural income support program would cover only farmers with more than four hectares of land. This was the LDP's policy for structural reform in agriculture, as opposed to the individual household income support system proposed by the DPJ in its campaign manifestos, under which the DPJ proposed to provide all farmers with government income support without any restriction. The LDP criticized the DPJ's policy proposal as pork-barreling.

However, the LDP's proposed policy encountered severe criticism from the agriculture industry as being discriminatory, and the LDP was badly defeated in the Upper House election in 2007. Therefore, the LDP retreated from its original policy of subsidizing only larger farmers, and made a compromise to leave municipal governors to decide for themselves whether smallholders would be eligible for a subsidy.

2. What was the agricultural policy of the DPJ-led government?

It was on the back of the individual household income support system that the DPJ gained support from constituencies in farming regions to defeat the LDP, so its proposed system contributed to establishing the DPJ-led government in 2009. The DPJ's original plan in 2003 was similar to the LDP's in that it aimed at structural reform, in which the price of rice would be reduced by abolishing the rice paddy reduction program, while government financial support would be given directly and only to full-time farmers. Reducing the price of rice would drive part-timers out of farming due to the high cost of operations, at which point they would lease their farmland to full-time farmers. Giving direct financial support only to full-time farmers would increase their capacity to pay rent on land. As a result, full-time farmers could accumulate farmland, which could increase farm size and reduce operational costs. This cost reduction could improve profitability, in turn improving their ability to pay lenders of farmland.

However, in order to win election in 2004 the DPJ abandoned its original plan that requiring a certain farming size for financial support, which further required eligible farmers to participate in the rice paddy reduction program in 2008 rather than abolishing the program. The DPJ's individual household income support system would compensate farmers for the difference between the market price and the price guaranteed to farmers. Therefore, abolishing the rice paddy reduction program could put a heavier financial burden on the government to provide income support because it could lead to a decline in the market price. This led the DPJ to provide income support only to farmers who participated in the rice paddy reduction program. Consequently, the DPJ enforced the rice paddy reduction program by distributing an additional 400 billion yen of income support to farmers who already enjoyed 200 billion yen in subsidies for participating in the rice paddy reduction program.

One way in which the DPJ deviated from the previous LDP government's policy was that the DPJ was against maintaining prices for rice farmers by buying rice from the market when the price went down. This was because rice farmers could be subsidized by the individual income support system to cover the difference between the market price and the guaranteed price, and therefore did not mind how low the market price was.

3. What do you think the new LDP government's agricultural policy will be?

The LDP has stated the following in its policy pledge:
"Farmers do not want 'individual household income support' as one-off pork-barreling, but rather 'proper pricing to sustain production' and 'a stable income.' The LDP will review the entire system of individual household income support and change its name and uniformity across the country. The system will be changed to support the voluntary efforts of local farmers and their general management, which include not only rice farmers but also farmers producing multiple products such as wheat, soybeans, livestock, vegetables and fruit, as well as various other actors such as corporations and community-farming entities in accordance with actual local conditions."

The policy pledge does not state that it will abolish the individual household income support system but simply says that it will "review" the entire system.

Farmer's income increased in 2010 for the first time in seven years due to the individual household income support system introduced by the DPJ-led government. "Excessive rice-paddy acreage" generated from non-compliance with the rice paddy reduction program was cut in half compared to before the system was introduced. So the income support system effectively enforced the rice paddy reduction program and maintained the price of rice. Since the LDP emphasizes maintaining the price of rice, I would expect that new LDP government will retain the fundamental framework of the individual household income support system.

I suspect that the phrase "change its ... uniformity across the country" means to increase the unit value of income support for regions where production costs are higher, which could protect farmers with high-cost operations. The phrase "various other actors ... in accordance with actual local conditions" suggests that they may distribute income support without requiring any qualifications on the part of farmers.

The LDP has also stated that paying due attention to the "multiple functions" of agriculture not only in producing agricultural products but also in creating water resources and preventing floods will legislate the Japanese-style direct payment system to subsidized entities preserving farmland. The current individual household income support system is essentially the one paying subsidies based on the size of farmland. Therefore, the LDP's policy pledge indicates that, although it will change the name, it will maintain the basic framework of the individual household income support system.

Another thing that the LDP's policy pledge strongly indicates is its intent to maintain the price of rice. I suspect that it will restore the traditional policy to buy up rice on the market if the price of rice drops. Supporting a higher price of rice would entail maintaining higher customs duties. This will make it difficult for Japan to participate in negotiations for the Trans-Pacific Partnership Agreement or the Free Trade Agreement with Australia, according to which Japan would be required to reduce or abolish tariffs. Thus, the agricultural policy of the new LDP government will affect trade policy. We will need to keep an eye on further LDP policy developments.

(This article was translated from the Japanese transcript of Mr. Yamashita's speech in the "Business Prospect" session of the radio program "First in the Morning News" broadcast by NHK Radio Channel1 on December 25, 2012.)