Media  Global Economy  2013.10.24

The effects of Abenomics on Japanese agriculture

English translated version of "Business Prospect" on NHK Radio Channel 1 on October 1, 2013

1. What do you find is the reaction to Abenomics abroad?

Foreign investors are very interested in Abenomics. Some influential foreign investors recently visited me to ask about the impact of Abenomics on Japan's agriculture. This is a new experience for me. I have also been invited by the Center for Strategic and International Studies, a prestigious Washington think-tank, to speak about agricultural reform in Japan in a symposium later this month. This is with other prominent Japanese economists who have been invited to discuss Abenomics. I am a little puzzled over the reason why foreign investors are so interested in Japan's agriculture. Some may see agricultural reform as a touchstone of Abenomics because, despite repeated attempts in the past, agricultural reform has never produced satisfactory results. Prime Minister Shinzo Abe said, "Buy my Abenomics," in his speech at the New York Stock Exchange. However, if Mr Abe doesn't live up to foreign expectations, there may be a risk that foreign investors will "sell Japan."

2. Do you think that Abenomics will meet foreign expectations?

I have been telling foreign investors that they should not expect much of Abenomics in terms of agricultural policy. Prime Minister Abe stated that he would fight relentlessly against the existing regimes which constitute 'rocky masses' (great obstacles to reform). The largest 'rocky mass' among others in the agricultural sector is the rice paddy set-aside program. While paying the subsidy of about 500 billion yen to entice rice farmers to join the program, the government forces consumers to pay an additional amount of about 500 billion yen for the price of rice artificially inflated by limiting supply through the program. As a result, Japanese citizens pay about one trillion yen to support rice farming, total production of which amounts only to 1.8 trillion yen.

Has the agricultural industry performed better as a result of these financial supports? The answer is no. The fundamental problem lies in farm size. The cost of agricultural product per ton equals to production cost per unit area divided by tonnage of agricultural product produced in such unit area: the larger the farm size, the less the production cost per unit area. There remain many small-size rice farmers in Japan who continue to grow rice because of the high price of rice realised by the rice paddy set-aside program. They do not sell or let their farmland to full-time farmers. The agricultural policy of Abenomics intends to increase farm size by allowing full-time farmers to accumulate larger areas of land. A huge barrier to this is the fact that there is no incentive for small-size farmers to sell or lend their lands making it difficult for full-time farmers to acquire large areas of land.

Another problem lies in rice yield per unit area: the larger the unit rice yield, the smaller the production cost. The rice paddy set-aside program is a policy designed to reduce rice yield, and therefore the national and municipal agricultural research organizations are effectively prohibited from developing rice seeds that increase yield. As a result, average rice yield in Japan at the moment is about 40% smaller than that in California. A rice seed producing a higher yield than California rice was developed by a private company but virtually no farmers grow this seed.

In reality, the rice paddy set-aside program has inflated the production cost of rice. The price of rice has risen and consumption of rice has decreased. This situation is worse for rice farming. Many full-time farmers who earn a living only by farming argue that the program should be abolished. However, it is politically impossible to end the program because full-time farmers are in a minority (the majority of farmers are part-time). This situation requires a strong and determined policy from Prime Minister Abe otherwise it cannot be resolved. If the rice paddy set-aside program is abolished, the price of rice will fall; no import duties are necessary; and we do not need to claim an exemption of rice from elimination of tariffs in the TPP negotiations. Foreign investors are paying close attention to whether Abenomics will accomplish these reforms.

3. Do you expect that companies will acquire more farmlands?

The agricultural sector argues that companies do not need to own farmland as they can use rented land. Indeed, they claim that most companies do not wish to own farmland.

However, farming on leased land leads to uncertainty because of the possibility landowners may request the return of their land. Large investment in expensive machinery is necessary for farmers. Investment is also needed in farmland for things such as improvement in fertility and land readjustment in order to increase the farmland's productivity. These investments may be wasted overnight if a land owner requests the return of the land. As a result, there is a reluctance to invest in leased farmland. Ultimately, ownership of farmland is essential to provide the confidence to farm in a sustainable manner.

It is also true that there are few applications to own farmland. This is because farmland is too expensive to utilize for profitable farming. Europe maintains strict zoning - a clear and strict demarcation between urban and agricultural areas. In Europe, farmland can never be converted into land for housing. Japan does not have such a strict zoning system, and farmland can easily be converted into housing developments. As a result, the price of farmland has risen along with the inflation of land price in urban areas and the current price of farmland is overvalued against the potential earnings of farming. If you want to buy farmland, the price is the equivalent of 130 years of rent for that land. This means that renting farmland is far cheaper than buying. The price of farmland is 20 times higher in Japan than in the United States or France. The government is responsible for the negligent agricultural policy which has led to the failure to implement a clear and strict zoning and, as a result, the distortion of farmland prices.

As I mentioned earlier, the agricultural industry argues against the agricultural reforms. I think that nonetheless the deregulation in the agricultural sector will happen to some extent as the government is under heavy pressure to reform the farmland tenure system. However, I have some doubts whether such deregulation will really revitalize Japan's agriculture. I would like to go into greater detail on this later.

(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 Octpber 1, 2013.)