Media  Global Economy  2018.05.18

Where is Japan's agricultural policy headed?: It is time to break away from slogan politics

The article was originally published on Kaikakusya in February,2018

The Abe administration's "agricultural policy reform" represents a deceptive policy shift that has left everything to the Agricultural Village. What is touted as the "abolition of the gentan (rice acreage reduction) program" is fake news from the Prime Minister's Office. In fact, the gentan program has been strengthened. More and more farmers now cultivate rice for livestock feed. The resultant scarcity of rice for direct human consumption has led to a higher price of such rice. Export promotion with the abolition of the program in the strict sense of the term is the only avenue to reform Japanese agriculture.

The iniquity of the Abe administration and the media

Prime Minister Shinzo Abe's agricultural policy reform is deceptive: it is characterized by a huge gap between its facade and substance. This is because Prime Minister Abe has left everything about the policy to the Ministry of Agriculture, Forestry and Fisheries (MAFF) and the lawmakers of the Liberal Democratic Party (LDP) who are backed by farmers. Behind the extravagant facade, the Agricultural Village, a complex made up of these two types of entities plus agricultural cooperatives, has watered down the reform and furthered its vested interests. As for the gentan program, the media has made a major reform out of the policy that is the exact opposite of reform, contributing to the fake news by the Prime Minister's Office.

Let us take a moment here to review the agricultural policy reform under the Abe Cabinet.

In 2014, the government put the Central Union of Agricultural Co-operatives (JA-ZENCHU), which also serves as the political arm of the Japan Agricultural Cooperatives (JA), out of the scope of the Agricultural Co-operatives Act in a bid to undermine the political clout of the JA. This prohibited JA-ZENCHU from collecting contributions from the local agricultural cooperatives. However, the Prefectural Central Unions of Agricultural Cooperatives were left out of the scope of the reform. And the government stopped short of fully implementing the idea of converting the National Federation of Agricultural Cooperative Associations (ZEN-NOH) and others into joint-stock companies and subjecting them to the Antimonopoly Act to reduce the costs of procuring agricultural supplies. The decision to do so was left to them. The government also shelved the idea of regulating the arrangement for allowing associate JA members (non-farmers) to make more use of JA services.

In 2016, Yabu City in Hyogo Prefecture requested that businesses be allowed to own farmland under a special zone system. However, MAFF and LDP lawmakers backed by farmers decided that such ownership is allowed only in local governments that the central government designates as those where agricultural actors are in significantly short supply and conventional measures alone may not curb the significant increase in abandoned farmland. In effect, they limited farmland ownership by businesses only to Yabu City.

The free trade agreement that Japan and the EU practically reached in 2017 stated that they will address the issue of soft cheese only by setting the import tariff-rate quota that is more or less equivalent to the current import level without reducing the out of the quota import tariff. Given the prospect that imports will not increase under this arrangement, the Japanese government should not have had to take any measures. In December 2016, however, the Hokuren Federation of Agricultural Cooperatives, the largest milk supplier in Japan, raised the price of milk for cheese by 4 to 5 yen (about 10%) per kilogram, although it must be reduced if the prices of cheese, which have been protected so far by tariffs and other means, go down as a result of liberalization. In the supplementary budget for fiscal 2017, the government appropriated 317 billion yen for agricultural measures in relation to the Trans-Pacific Partnership (TPP), including those for cheese. In short, the Agricultural Village took advantage of the Prime Minister's leaving everything to it and increased the budget in spite of the fact that the liberalization has no impact.

The abolition of gentan is fake news

The "abolition of the gentan program" is outrageous fake news made up by the Prime Minister's Office. In 2013, just after the LDP returned to power, Prime Minister Shinzo Abe touted the revision of the gentan program (production adjustment) conducted by the LDP and MAFF as the abolition of the program. At his policy speech to the Diet as well as at the World Economic Forum in Davos, Switzerland, Mr. Abe said proudly that this was a feat that no one was able to achieve over the past 40 years.

The media reported only the Prime Minister's Office' side of the story as if it was a fact without gathering sufficient evidence to support the reporting, although senior officials of the LDP and MAFF have kept saying since the time of the reconsideration that the gentan program (production adjustment) is necessary. At a lower house budget committee meeting in February 2014, Prime Minister Abe was asked about the discrepancy between this statement and his own. Mr. Abe answered that his statement was just intended to explain things plainly, effectively retracting his earlier claim. This was a clear manipulation by the Prime Minister. But the media, which do not want to admit having reported false information, failed to report this.

Mr. Abe bragged that no one has carried out such a drastic reform for 40 years. But in his first Cabinet in 2007, Mr. Abe cancelled the allocation of production quotas as he did at this time of the reconsideration but annulled this cancellation immediately after the price of rice dropped thereafter. The media did not report this cancellation as the abolition of the gentan program. At the time, the JA made a number of demands to the government, which accepted them. They included the purchase of 340,000 tons of rice as an emergency stock, which resulted in a higher price of rice; the increase of 50 billion yen in gentan subsidies; and an additional 100,000 hectares subject to the gentan program for the following year. If he really means the abolition of the gentan program, the Prime Minister should repeal the provisions of the Act on Stabilization of Supply, Demand and Prices of Staple Food that concern production adjustment (gentan).

The abolition of production quotas was the result of the abolition of the income support direct payments system by the LDP, which returned to power at the end of 2012. Income support direct payments, which were introduced by the Democratic Party of Japan, were halved in 2014 and abolished altogether in 2018. Production quotas were also abolished because such payments were made to farmers who meet the production (acreage) quotas. The LDP took advantage of the funds freed up by the abolition of income support direct payments to significantly increase gentan subsidies for switching rice for direct human consumption to rice for feed. The acreage and production of feed rice more than quadrupled between 2013--before the revision of the gentan program--and 2016, from 22,000 hectares and 110,000 tons to 92,000 hectares and 480,000 tons, respectively. The rebound of the consistent decline of rice prices in 2014 onward bears witness to the strengthening of the gentan program. This entails a huge burden on public finances. It amounted to about 100 billion yen for 2016 alone.

What is gentan?

Gentan represents a cartel designed to keep the prices of rice higher than the market prices through the reduction of rice production by way of granting gentan (crop switch) subsidies to farmers. Because subsidies for not cultivating any crops would not win the understanding of the public, the government invented the pretext that they are designed to encourage farmers to switch rice for direct human consumption to wheat or soybean--or more recently, feed rice--to help increase Japan's food self-sufficiency.

Gentan, crop switching, and production adjustment all mean the same thing. If gentan is abolished, then crop switching will be abolished. The failure to understand this fact allows the media to write nonsensical articles and editorials that severely criticize the idea of raising the prices of rice by abolishing the gentan program and increasing subsidies for crop switching. MAFF has long argued that because the gentan program is designed to benefit rice producers, JA, not the government, should play the leading role. In line with this argument, the government decided not to allocate production quotas at the time as well, as in 2007. The basic mechanism whereby subsidies are given to encourage gentan has not been changed.

The abolishment of gentan means a lower price of rice as a result of a larger supply of the crop. This would represent a radical reform that challenges the post-war agricultural policy. In 2009, Shigeru Ishiba, the then Minister of Agriculture, Forestry and Fisheries, announced an estimate that if the gentan program were abolished, the price of rice per 60 kilograms would decrease from 15,000 yen to 7,500 yen. Lawmakers backed by farmers furiously challenged Mr. Ishiba, who maintained that the gentan program be reconsidered, thereby nipping the green shoots of reform.

The JA must be the only entity that deals in all kinds of goods and services, ranging from banking, life insurance, and non-life insurance services to agricultural products and supplies, and to everyday commodities and services. No other corporations or cooperatives in Japan are given such leeway or power. Banks, for example, are prohibited from engaging in other kinds of business than banking. What is more, this all-purpose organization is allowed to engage in political activities. No other political organizations do their own business. They only represent the interests of their members. The JA is now acting for its own benefit rather than for the benefit of farmers.

The high price of rice under the gentan program has kept many costly and inefficient farmers in the rice producing industry. These small-scale, part-time farmers and aged farmers have deposited their non-farm income, pension income, and earnings from the sale of their farmland for other purposes in the JA, which eventually has grown into the second largest mega bank in Japan with total deposits of 100 trillion yen. This is the result of the perfect combination of the high price of rice under the gentan program and the privileged JA system. The abolition of the gentan program would totally destroy the prosperity of the JA. Why, then, was there no major protection movement? The reason was that it was not really meant to put an end to the gentan program.

The Agricultural Village is laughing at the general public, who are forced to shoulder a heavy financial burden as taxpayers and to pay a high price for rice as consumers.

The Agricultural Village has instigated the downturn of Japanese rice agriculture

Between 1960 and 2015, the number of farmers significantly decreased, from 17.65 million to 3.4 million. Business farm households, whose income primarily comes from farming, total only 0.28 million, or 13% of all farming households in Japan (2.16 million). All political parties in Japan call for an increase in farmers' income. But their average income far exceeds the average income of 4 million yen in Japan. The average income is 12 million yen for dairy farmers and 15 million yen for pig farmers.

Rice farming, which must have been protected the most, declined the most. Of all commercial farm households, 79% cultivate rice for the purpose of selling the crop. But the total sales of rice account for only 17% of the total sales of agricultural produce in Japan. Japanese rice agriculture is now an inefficient industry run by many small-scale, part-time farm households or aged farmers. Business farm households whose agricultural income exceeds their non-agricultural income account for 80-90% of the production of agricultural produce other than rice but only 40% of rice production.

Japan's rice program is more problematic than any other government program. In any conventional program, the public gain affordable access to goods and services in exchange for shouldering a financial burden as taxpayers. The gentan program, however, annually imposes both a financial burden of 400 billion yen on taxpayers to finance the payment of subsidies to rice farmers that are designed to encourage a smaller production of rice--the staple food for the Japanese--and an additional burden of 600 billion yen on consumers as a result of the price of rice being higher than price which would be solely determined by the market without governmental interventions. Altogether, the Japanese people bear a total burden of one trillion yen. This means that everyone in Japan, including babies and poor people, pays 10,000 yen every year for this particular program. In short, the Japanese people have been forced to shoulder the double burden of a higher price and additional tax payment to maintain the JA. The JA opposed the TPP simply because the inflow of cheap foreign rice as a result of the abolition of tariffs will not allow it to maintain the high price of rice that has been made possible under the gentan program.

Many politicians voiced their opposition to the hike in the consumption tax on the basis that it would be regressive and make food more expensive for the poor. A lower rate of the consumption tax for foodstuffs was considered as a result. Paradoxically, maintaining the agricultural policy of pushing up food prices with high tariffs, which is nothing but the epitome of regressiveness, may seem to benefit the national interest in the eyes of many of these same politicians who cannot disregard the wishes of the Agricultural Village. The Agricultural Village has maintained gentan subsidies designed to curb the production of rice, the staple food for the Japanese.

The functions that the Agricultural Village regards as examples of the multifunctionality of agriculture, such as water resource recharging, flood control, and beautiful landscapes, are mostly the functions of rice paddies that cannot be gained without planting rice there. A huge amount of money has been granted to farmers as gentan subsidies just to prevent rice production in as much as 40% of the rice paddies in Japan. A total of one million hectares of paddy fields have disappeared since the gentan program was launched in 1970, although farmland resources are necessary for food security.

The United States and the EU have redesigned the policy of protecting their agriculture. In the past, they kept the prices of agricultural produce high. Now they make payments to farmers out of government coffers while supplying such products to consumers at low prices. The same policy would ensure the health of Japanese agriculture. Lower prices would generate greater demand, making gentan unnecessary. Part-time farmers would withdraw from the industry, enabling full-time farmers to increase the size of their land and benefit from economies of scale. Lower costs would also encourage exports, allowing the agricultural industry to grow.

If they received direct payments, farmers would not suffer from lower tariffs and prices. However, if lower prices forced high-cost, part-time farmers out of the industry, the total deposits at the JA Bank would shrink. This in turn would shake the foundations of the JA, which has developed by reducing its dependence on agriculture. This is why the gentan program could not be abolished.

What should be sought?

The net income for rice farm households with an acreage of less than one hectare, which represents the average scale for the prefectures except Hokkaido, is almost zero or below that level. Zero times 20 or 40 (households) is still zero. Imagine a community with 20 hectares of farmland. If one farmer cultivates this entire farmland, he or she will earn 14 million yen in net income. Part of this income will be paid to the land owners, ex-farmers who have leased the land as a rent. In exchange for that, land owners will maintain farmland and canals which are integral parts of agricultural infrastructure. Everybody in the farm community gains more from farmland consolidation Agricultural structure reform is needed to promote agriculture and to maintain farm community.

In fiscal 2014, the price of domestically-produced rice fell below that of Californian rice. Earlier, the import tariff-rate quota had been completely taken up or filled. In that year, however, only 12% of this quota was taken up. The abolition of the gentan program will further reduce the price. Direct payments only to full-time farmers will increase their capacity to pay the rent, resulting in more farmland being concentrated in their hands. Larger and more consolidated farmland will pave the way for more efficient agricultural production. The yield per unit of land area, which has been kept low under the gentan program, will increase. These factors will reduce the cost by 40-50%. Thus the abolition of the gentan program and direct payments will boost the productivity and price competiveness of Japanese rice, whose quality is highly evaluated in the world. In that case, Japan can cultivate overseas markets for this product.

If trading companies purchase Japanese rice at the domestic price of 7,000 yen per 60 kilograms--the level expected after the abolition of the gentan program--and export it at the export price of 12,000 yen, for example, the price will rise to as high as 12,000 yen due to smaller domestic supply. At the price of 12,000 yen, rice production in the following year will grow to around 11.3 million tons. Of them, 3.6 million tons will be exported, which will amount to 700 billion yen in export value. In addition, if high-yield rice varieties start to be grown as a result of the abolition of the gentan program, domestic rice production will surge to 15 million tons or more, of which 7.5 million tons will be exported with the export value amounting to approximately 1.5 trillion yen.

The strategy for Japan should be to export rice and import wheat and beef during peacetime. If a food crisis results in the discontinuation of imports, the Japanese people can keep hunger away with rice which would otherwise have been exported. At the same time, the farmland resources retained for exporting rice can be put to best use to cultivate potatoes and other high-calorie crops. In this way, the quantity of food necessary for the lives of Japanese citizens can be secured. Rice exports during peacetime help to secure rice stocks and agricultural resources in case of crisis. Such stocks will not entail any financial burden: no warehouse fees or interest will be incurred. The financial burden associated with domestic stocks will be dissipated. This is the normal strategy for food security practiced by almost all nations. In short, free trade during peacetime ensures food security in cases of crisis.

Two major factors hinder the scale-up of farms in Japan. First, lax regulations on land use zoning facilitates the conversion of farmland into housing lots. The leasing of farmland may entail difficulty in having the lessee return the land immediately after someone asks the landowner to sell the land. If that is the case, it will be wiser to keep the land at hand even though that means abandoning cultivation there. Second, high-cost farmers continue rice farming because the price of rice is kept high under the gentan program. For these two factors, additional farmland is not readily available to business farm households who want to rent such land. In short, the consolidation of farmland is difficult to achieve without a strategy designed to ensure strict farmland zoning and to abolish the gentan program.

Such a strategy should involve (i) repealing the Agricultural Land Act, which prohibits corporate entities from entering the industry and inhibits the emergence of successor farmers, while ensuring strict farmland zoning; and (ii) purchasing farmland owned by absentee landowners at a low price and leasing it to farmers at the responsibility of the central government. This represents a simple reform of the farmland system. JAs should be reorganized into local community cooperatives centering around the JA Bank by separating the agricultural division since financial services now constitute the primary business of the JA. If necessary, full-time farmers should organize a new agricultural cooperative on their own.

Clouds are beginning to appear on the horizon of the JA. The number of farm households is on the decline. In particular, the number of farm households whose main income comes from non-farming work dropped from 1.98 million in 1990 to 0.86 million in 2012. These Type II part-time farm households have constituted the main source of the political and economic power of the JA. Meanwhile, farmers with an acreage of 100 hectares or more are beginning to appear in large numbers. My hope is that a new administration with a firm commitment to carrying out true reform will appear after the Abe administration, which is long on slogans and short on substance. Or is it difficult to eliminate populist politics in a democracy?

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Kaikakusya" in February, 2018.)