Rethinking the rice paddy set-aside program

1. How did the meeting you attended in Washington go?

The conference I joined on October 24th was organized by the Center for Strategic and International Studies (CSIS), a prestigious Washington think-tank. As indicated by the title of the conference "Abenomics: Still on Target?" we discussed the Abe administration's economic policy. After the keynote speech given by Professor Jun Saito, a special advisor of the Cabinet Office of Japan, we had two sessions of discussion. There were three discussants from Japan and seven from the US. The three Japanese participants were Mr Akinari Horii, the former Assistant Governor of the Bank of Japan and currently a special advisor of the Canon Institute for Global Studies to which I also belong; Mr Kanji Yamanouchi, Minister for Economic Affairs of the Embassy of Japan in Washington, and myself. The first session covered issues concerning the so-called first and second arrows of Abenomics (finance and fiscal policy). In the second session we discussed the third arrow which concerns the strategy for economic growth. I joined the second session and spoke about the agricultural reform of Abenomics, a part of the Abe administration's economic growth strategy. An American expert on the Japanese economy and a US business executive working in Japan also joined the discussion. They talked about the labour market, corporate activities, the investment environment and other issues in Japan.

My general impression of the conference was that Abenomics was highly appreciated in terms of its finance and fiscal policy while the growth strategy was not so well received. One of the attendees pointed out that Abenomics failed to effectively address the existing policy measures which hinder the fluidity of labour or discourage enterprises from entering into, or exiting from markets.

2. What points did you raise during the conference?

At first, I stated that I could appreciate Abenomics' growth strategy in general because it focuses on an improvement of the general economy and targets economic growth. This is a clear contrast to the economic policy of the previous administrations of the Democratic Party of Japan which placed more emphasis on income redistribution.

I then summarized the details of Abenomics' agricultural reform. Specifically I mentioned how it aims to double farmers' income over the next ten years by way of price increases, sales expansion and cost reduction. The price increase is to be achieved by an increase in added value, for which processing and distribution of agricultural products by farmers themselves as well as agritourism are promoted. Sales volume is to be increased by doubling exports and cost reduction is to be realized by accumulating farmland under agricultural entities through the promotion of the leasing of farmland thus increasing farm size. I added that in my opinion these policy measures were unlikely to prove effective as they merely rehash or revive measures that have already been implemented without effect.

Amidst a shrinking domestic market due to a falling and aging population, exploiting overseas markets and expanding exports are crucial to maintain and develop agricultural production in Japan. Expansion of exports requires price competitiveness. In the case of Japanese rice, the price must be decreased in order to increase exports. Japanese rice is highly valued around the world for its taste, and some farmers have started selling it outside Japan. However, the rice paddy set-aside program has been in place for more than forty years, which aims to maintain a high price of rice by restricting production. One side effect of the program is the failure to increase farm size because small-scale farmers have continued to produce rice due to its high price and have resisted leasing their farmland to full-time farmers.

I elaborated on this theme by pointing out that the rice paddy set-aside program is a doubly wasteful policy which places a heavy burden on the national economy due to consumers being forced to pay about 500 billion yen for the price of rice artificially inflated by limiting supply through the program in addition to the 500 billion yen of taxpayers money spent to entice rice farmers to join the program. It would be interesting to invite the members of the Tea Party in the US to the National Diet of Japan to see them raise as severe criticism against the rice paddy set-aside program as they do against the Federal government's perceived extravagance. The rice paddy set-aside program has been at the heart of Japanese agricultural policy since the end of World War II and constitutes the largest 'rocky mass' among other 'rocks' that have hindered agricultural reform. The future of the Japanese agriculture hinges on whether this program can be abolished or not.

3. What was the reaction of the audience to these views?

In relation to the TPP negotiations, the chairman and some of the attendees asked some questions including one about whether Japan can really abolish import duties on five items of agricultural products - rice, wheat, sugar, meat (beef and pork) and dairy products - despite strong political pressure to exclude these five items from tariff elimination. Some expressed doubts about Prime Minister Abe's ability to implement drastic reform. On the other hand, some pointed out that the Abe administration will be able to carry out dramatic policy measures as there will be no general election for three years.

One optimistic view advanced was that currently coordination is being made to increase the percentage of tariff elimination (to increase the number of narrowly-defined products (tariff lines) on which import duties are abolished by excluding processed products made from the aforementioned five items of agricultural products) and that this increase may be successfully completed under the Abe administration's leadership. Other one stated that in any event the reform in agricultural sector is inevitable because of an increased aging population of farmers in Japan.

I replied to these views by saying that the percentage of tariff elimination is not crucial to tariff negotiations: the Japanese government is aiming for elimination of more than 95% of tariffs. However, even if Japan offered to eliminate 98% of tariffs, New Zealand would still not be satisfied unless the tariff on dairy products was abolished. On the contrary, even if the percentage of tariff elimination was as low as 80%, New Zealand would not object as long as the tariff on dairy products was eliminated. The same applies to other exporting countries, such as the US, Australia and Canada, which want to increase exports of agricultural products of rice, wheat, sugar, beef and pork, but not processed products made from them, so they would claim elimination of tariffs only on these raw agricultural products. As for the politics in Japan, I stated that although we will not have a general election for three years, politicians are concerned about whether they can continue to hold political office after their current term. Many recently elected diet members of the ruling Liberal Democratic Party cannot disregard promises they made to agricultural groups in their election campaigns to oppose the TPP agreement or to withdraw from the TPP negotiations if the import duties on the five items could not be maintained. In addition, I said that the import duties on rice can be abolished if the rice paddy set-aside program is terminated but that this requires rock-solid determination from Prime Minister Abe similar to that shown by former Prime Minster Junichiro Koizumi in the postal service privatization.

The day after the conference, I read in a newspaper at the airport that the rice paddy set-aside program might be reviewed. It may not be abolished, but only be rethought. However, there is a slight hope that the largest "rocky mass" could finally be breaking down. We need to keep our eyes on how this issue develops.

(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 October 29, 2013.)