Media  Global Economy  2020.02.27

Japan's farm protection policy untouchable even for PM Abe's office Shinzo Abe cannot afford to disregard the wishes of farm-interest lawmakers as he faces an election of some kind almost every year, including the one for choosing his own party's presiden

The article was originally posted on RONZA on January 19, 2020

The burgeoning livestock sector and struggling irregular employees

The administration of Prime Minister Shinzo Abe plans to implement additional measures primarily for the livestock sector on top of the existing measures designed to cope with the TPP. He cites negative implications of the latest trade agreement between Japan and the US. Safeguards in the absence of actual negative effects mark the recurrence of a package of domestic measures designed to mitigate such effects of the GATT Uruguay Round. Japan poured a total of 6,010 billion yen (55 billion dollars) into these measures.

Japanese farmers will not be affected even if tariffs are reduced somewhat under the Japan-US trade deal or the TPP-11.

Since the TPP-11 entered into force more than one year ago, tariffs on beef imported from Australia and Canada have been reduced from 38.5% to 25.8%, a decrease of more than 10%. Yet the impact of the tariff reduction is rarely felt in Japan, where the prices of domestic beef and calves are at an all-time high. This is because there is a certain level of segregation between domestically-produced beef--most of which is wagyu--and imported beef due to differences in quality.

On top of that, the livestock sector is now thriving to such an extent as to be called a bubble. The average annual income of large diary and pig farm households is more than 40 million yen (364 thousand dollars) .

By contrast, half a million people in the "employment ice age generation" are estimated to remain irregularly employed.

When the Ministry of Health, Labour and Welfare recently invited applications for ten openings for regular employees, some 1,900 people applied. Many irregular employees are struggling to make ends meet with low wages. Is it really appropriate to grant subsidies borne by taxpayers to farmers, who on average earn several times as much the national average annual income of employees?

Something may be wrong with the current politics that is eager to further increase the income of people who might own a Porsche and eat foie gras or caviar while others are so poor that they live in a small apartment and satisfy their hunger with cup noodles.

MAFF concocted the reason to protect the livestock sector

Japan's livestock sector mainly uses imported grains for feed as I explained in my previous three articles: " Unknown aspects of Japan's farming communities (I): the average annual income for pig farmers is 20 million yen!," " Unknown aspects of Japan's farming communities (II): is dairy farming excessively hard work?" and "Farm households no longer vulnerable." Dairy farms in Hokkaido, which traditionally use pasture for feed, are also increasingly dependent on imported grains. (The cost of commercial feeds, which are largely purchased grains, accounts for more than 70% of the total feed cost.)

It is safe to say that there is no reason to protect the livestock sector from the perspective of food security, environmental conservation or the maintenance of the health and lives of the public. From the perspective of the national economy, the livestock sector should be taxed and reduced rather than being protected or promoted, as it entails negative economic externalities.

I have found the only reason why Japan's Ministry of Agriculture, Forestry and Fisheries (MAFF) considers it necessary to protect the livestock sector on its website. It states: "Amid the soaring global demand for beef, stakeholders voice concern that Japan will not be able to continue importing beef at will forever and that it may even lose to other beef importers on the international market. This points to the importance of steadily promoting the domestic production of beef." (The original statement is in Japanese; see page 18 of the MAFF document , which contains a parallel statement for pork on page 29 of the same document.)

This statement makes light of the public.

How could the Japanese lose on the international market as they are forced to buy beef and pork for prices much higher than the international prices due to tariffs? MAFF's argument would stand if it could ensure that these products would be provided at costs and prices lower than international standards. If that was the case, there would be no need for tariffs.

Moreover, Japanese livestock products are so dependent on grains imported from the US and other countries that it could be described as being processed from such grains. If Japan loses on the international grain market as an importer, Japan's livestock sector will be unable to survive.

MAFF argues that someday, international grain prices will become so high that a food crisis will result. But what happened when the grain prices increased by three or four times in 2008?

A food scarcity crisis did happen in low-income countries such as the Philippines. The situation was quite different in Japan, a high-income country that depends substantially on imports for grain supplies. There were no queues for rice or bread in this country. The one thing that happened then was an increase of 2.6% in the consumer price index for food.

An agricultural policy that increases public burden

There are other problems with Japan's agricultural policy. MAFF's very policy for promoting the livestock sector works against benefiting the public.

The public should have more affordable access to goods and services if they shoulder a fair share of the tax burden as in the case of health care policy. In the case of livestock farming, however, the prices of livestock products that the public buy are paradoxically increasing despite a huge amount of public funds invested in the sector.

Beef, whose price is at an all-time high, is not the only product whose price is rising. The price of raw milk sold by dairy farms (in terms of the overall milk price) has been largely on the rise since fiscal 2007, when it was 79.2 yen per kilogram. It reached 103.4 yen in fiscal 2018. These price rises are a world apart from deflation--the Bank of Japan would commend them.

A higher price of raw milk will push up the prices of milk and other dairy products, which need to be lower to increase their international competitiveness amid the declining tariffs. In this way, the upward trend in the prices of livestock products is the exact opposite of what it should be. No politicians make an issue of this trend of increasing the consumer burden despite the recent uproar over the regressive nature of the consumption tax.

While the prices are rising, the cost per farm household is declining. This is pushing up the income of the average farm household as the amount of income is calculated by subtracting the cost from the product of the unit price and the quantity sold. (For this relationship, see page 9 of the MAFF document mentioned earlier.)

According to a government document, the total agricultural output, which corresponds to total sales, rose from 8.4 trillion yen to 9.3 trillion yen from 2014 to 2017, an increase of 900 billion yen. During the same period, agricultural production income increased by 900 billion yen as well, from 2.8 trillion yen to 3.8 trillion yen. This document seems to stress that the government's agricultural policy has contributed to a higher agricultural income.

The increase in agricultural income does not mean, however, that it is the result of lower costs made possible by the government's agricultural policy and efforts by the agricultural sector. Rather, the fact that agricultural sales and income increased by the same margin shows that agricultural income increased at the expense of consumers, as income is calculated by subtracting costs from sales.

It was consumers that pushed up the income of farm households. The government policy did not contribute at all. Note that low agricultural income in 2014 is attributed to a drop in the price of rice in the same year.

2018 data released on January 15 shows that both the total agricultural output and agricultural production income fell, by 218.4 billion yen or 2.4% and 274.3 billion yen or 7.3%, respectively. The ostensible impact of the government policy seems to have dissipated.

Elected lawmakers and national public officials should be "servants of the public as a whole." However, lawmakers representing agricultural interests (farm-interest lawmakers) and MAFF now think only about their interests.

This was not the case before. In the past, farm-interest lawmakers and MAFF had a firm sense of purpose or mission that they supported Japan's agriculture, including the livestock sector, in order to lower costs and prices for better international competitiveness as well as for a stable supply of affordable food to Japanese consumers. Their policy was not parochial: their idea was far from the notion that as long as farmers' incomes increase, the other members of the public are irrelevant.

The livestock policy has only one aim: to raise the income of livestock farmers. Their income is now much higher than the national average. The livestock policy has already achieved the goal. It may as well be terminated. But it cannot be stopped because it is deemed necessary to win elections.

Such a costly election strategy seems ironic, however. Unlike rice farmers, most of whom are part-time farmers, livestock farmers, most of whom are full-time farmers, are small in number and declining by 3-6% every year.

Preferential treatment for them is an inefficient election strategy.

3 trillion yen (27 billion dollars) wasted in measures for coping with beef trade liberalization

Tariffs may protect domestic industries but result in higher prices for consumers.

The government has poured a whopping nearly 3 trillion yen (27 billion dollars) into a package of measures to cope with beef trade liberalization, including those for beef calf producers. This package, financed specifically by revenues from beef tariffs, is designed ostensibly to improve the productivity of the beef and other meat sectors.

Under this policy package, the government has kept the price of beef high with tariffs and used the revenues from these tariffs to subsidize livestock farmers. This means that livestock farmers receive duel protection of high prices and subsidies.

The original purpose of this package was to streamline the livestock sector at the expense of consumers and eventually benefit consumers through resultant lower prices. Despite the infusion of these considerable funds, the livestock sector has not been streamlined at all.

The typical culprit is the program of subsidizing beef calf producers, a mainstay of this package. Under this program, two types of price are established: (1) the guaranteed standard price, aimed at guaranteeing reproduction by calf farmers; and (2) the rationalization target price, aimed at encouraging such farmers to streamline their operations.

The idea is to improve productivity so that the guaranteed standard price will eventually match the rationalization target price. Since the program was implemented, however, the guaranteed standard price has moved away from--rather than closer to--the rationalization target price.

As of the second quarter of fiscal 2019, the price of wagyu calf was 770,000 yen. It was more than twice the guaranteed standard price, which had been 332,000 yen (3,000 dollars)until 2018, let alone the rationalization target price, which had been 277,000 yen (2,500 dollars) until then. There is no chance that the actual price, which is well above the guaranteed standard price, will move closer to the rationalization target price. In short, there has been no production streamlining.

The degeneration of the policy package for the livestock sector

Under the program of subsidizing beef calf producers, when the market price of calves is lower than the guaranteed standard price, the government is supposed to compensate for the gap. Except when BSE cases were reported, because the market price has always been higher than the guaranteed standard price, no compensation money has been paid to livestock farmers.

On top of that, the ruling Liberal Democratic Party (LDP), under its initiative of a "new agricultural policy age," raised the guaranteed standard price to 541,000 yen (5,000 dollars) and the rationalization target price to 429,000 yen(3,900 dollars), both for 2019. The LDP cited the need to adjust the guaranteed standard price in order to better reflect the realities of current livestock farm management. The purpose of raising the guaranteed standard price was to make it easier for the government to pay compensation money to farmers by lowering the standard for doing so.

In its latest move, the LDP legislated compensation money for price guarantee for beef fattening farmers as a measure in response to the TPP and then raised its level. (The LDP also legislated similar measures for pork farmers after reducing the burden on them and increasing budget allocations for them). Safeguards of this kind have traditionally been introduced as a budgetary measure. If such measures are enshrined into law, they are institutionalized, meaning that the government has to finance them almost indefinitely.

This is something the government should not have done. The purported idea behind the program of subsidizing beef calf producers was this: If the price of carcasses falls, beef fattening farmers will try to decrease the price of calves. They might as well reduce it substantially. This in turn will hurt calf farmers financially. So why not pay compensation money to calf farmers to fill the gap between the guaranteed standard price and the market price?

Yet compensation money is paid to beef fattening farmers even when the price of calves--the key cost for them--increases. A lower price of carcasses should result in a lower price of calves, but this does not happen. Calf farmers are thus benefited. When such a higher calf price pushes up the cost for fattening farmers, the gap between the calf price and the carcass price is filled with compensation money to support stable management by fattening farmers.

However, such a financial measure serves to sustain an unjustly high profit resulting from a price higher than the guaranteed standard price, which allows for reproduction by calf farmers. In more precise economic terms, the very existence of the policy of compensating beef fattening farmers allows the calf price to stay high even when the carcass price falls.

If the package of measures to mitigate the effects of the GATT Uruguay Round is pork-barreling through public works projects, the package under the LDP's initiative of a "new agricultural policy age" is a new type of pork-barreling for livestock farmers. There are many other subsidizing measures.

On top of that, the government reportedly plans to set up a special fund for this purpose, citing an expected long period in which tariffs are reduced in stages.

To date, however, many funds for the livestock sector have been created by the Agriculture & Livestock Industries Corporation. Wasteful spending by many of these funds was noted by the Board of Audit (BOA) twice, in fiscal 2010 and 2012. BOA surveys revealed that ten of these 60 funds had no operations to perform but incurred administration expenses to cover the salaries of their employees among other purposes.

The hidden agenda of these funds may be to employ ex-MAFF officials in a practice known as amakudari, in which retiring bureaucrats land cushy and high-paying jobs at private companies and special public corporations.

Dairy policy that has jumped on the TPP bandwagon

In Japan, the price of raw milk is set differently depending on the type of raw milk defined by its usage: drinking milk, manufacturing milk for specific milk products including butter and skimmed milk powder, that for raw cream and the like, that for cheese, and the like. These different types of raw milk are the same in quality but different in price. The weighted average of these different prices in terms of the net revenue for farmers is referred to as the overall milk price.

At the center of the government's dairy policy is the Act on Temporary Measures concerning Compensation Price for Producers of Milk for Manufacturing Use of 1965. Popularly known as the Deficiency Payment Act, this act allows for, among other things, subsidies for manufacturing milk. These subsidies were supposed to be a temporary measure until Hokkaido transforms from a supplier of manufacturing milk for butter and skimmed milk powder into a supplier of drinking milk.

The price of manufacturing milk that dairy manufacturers can afford to pay to producers is lower than the price of drinking milk; it is too low to guarantee reproduction by even large-scale producers in Hokkaido. The government thus decided to add deficiency payments (subsidies) to the price that dairy makers can afford to pay in order to guarantee a certain level of price for producers, thereby allowing dairy farms in Hokkaido to stay in business.

Originally, MAFF expected the temporary measures to continue for five years or so. Nevertheless, they have been in place for over half a century.

The shortage of butter around 2014 suggested that Hokkaido was becoming a supplier of drinking milk rather than that of manufacturing milk. In fact, the production of manufacturing milk for butter and skimmed milk powder declined by 40% between fiscal 1995 and fiscal 2019, from 2,370,000 tons to 1,480,000 tons.

The production of raw milk for raw cream and the like (including adjusted milk that is almost equal to drinking milk) stands at 1,270,000 tons, nearing the production of manufacturing milk for butter and skimmed milk powder. The region where manufacturing milk for butter and skimmed milk powder accounts for more than half of raw milk production has been subject to protection under the Deficiency Payment Act as a supplier of manufacturing milk. Given the growing production of manufacturing milk for raw cream and the like, Hokkaido can no longer be described as a supplier of manufacturing milk for butter and skimmed milk powder. In short, the Deficiency Payment Act has already served its purpose as a temporary law.

Large quantities of raw milk are transported every day from Hokkaido to the Kanto and Chukyo regions in two large high-speed ships that link the port of Kushiro in the northernmost prefecture and the port of Hitachi in Ibaraki Prefecture in 20 hours. In 2003, 530,000 tons of raw milk, a record high, was shipped in this way.

Apart from this, drinking milk packed in Hokkaido is carried to the other prefectures. The amount of this milk peaked at 330,000 tons in 2013. More than 20% of raw milk produced in Hokkaido is shipped to the rest of Japan for drinking milk, increasingly making the prefecture the key supplier of drinking milk for all the other prefectures.

The scarcity of butter is not necessarily a bad thing; it suggests that the goal of the Deficiency Payment Act is being achieved. A smaller production of manufacturing milk in Hokkaido reduces not only the amount of deficiency payments but also the need for high tariffs on butter and other dairy products.

The reverse has happened, however. The deficiency payment program was not abolished; it was strengthened as a domestic measure in response to the TPP. The scope of the program was expanded to include raw cream and the like in the types of manufacturing milk eligible for deficiency payments. This will reverse the trend, making Hokkaido the key supplier of manufacturing milk again. Yet raw cream and the like are not subject to the latest liberalization agreement. It is like "prospering after a fire."

The reversed trend provides a basis not for abolishing the Deficiency Payment Act, which is a law for "temporary measures," but for maintaining it into the future. This has not only served to protect the interests of the ruling party's farm-interest lawmakers and dairy farmers' organizations, but also allowed MAFF to maintain and even strengthen its authority over dairy policy.

Nevertheless, there is a better way to lessen the burden on the pubic: export.

If raw milk and the like can be transported from Hokkaido to the Kanto region, it may well be possible to ship them from Kyushu to Shanghai. If Japan can export raw milk and drinking milk to China, it need not produce butter and skimmed milk powder--which can fetch only low prices--in Japan. Japan might as well transport raw milk and the like from Hokkaido to the rest of Japan--including those that are traditionally used as manufacturing milk for butter and skimmed milk powder--and export any surplus generated as drinking milk there to China from Kyushu. (This means exporting raw milk and the like from Hokkaido to China indirectly.)

Thus Hokkaido will become the key supplier of drinking milk. This in turn will allow Japan to abolish the deficiency payment program and remove the related burden on taxpayers. Japan might as well abolish tariffs on butter and skimmed milk powder and import them from Australia, New Zealand, and France instead.

Additional measures on the pretext of offsetting the impact of the Japan-US trade deal

When I recently searched on MAFF's website for domestic measures taken for the livestock sector in response to the recent trade agreements, a plethora of measures turned up. They ranged from subsidies for machines and facilities for production and animal waste management to grassland development, the breeding of wagyu beef embryos, and support for indebted farmers. It seems as if subsidiary programs of some kind are always available for any project livestock farms want to implement.

Moreover, soft (effectively interest-free) loans are available for the portion of the project cost not covered by subsidies.

Furthermore, as a domestic measure in response to the latest trade agreement between Japan and the US, dairy farmers and beef farmers who increase the number of their cattle are qualified for a subsidy of 275,000 yen per dairy cow and 246,000 yen for wagyu beef cattle. When it comes to such domestic measures, anything goes.

Compliant fiscal authorities and the Abe administration

In the past, the Ministry of Finance (MOF) exerted tremendous power over the allocation of the national budget. No matter what agricultural groups demanded and no matter how farm-interest lawmakers supported them, such demands were turned down when the deputy director of the competent section at MOF said no.

The power relationship changed substantially over the course of formulating a package of measures to offset the effects of the GATT Uruguay Round.

It was the non-LDP cabinet of Morihiro Hosokawa that struck an agreement under the GATT Uruguay Round negotiations. The agreement included the partial liberalization of Japan's rice market amounting to 800,000 tons of rice. In these negotiations, "no single grain of foreign rice allowed" was Japan's political slogan. Four resolutions to that effect were adopted in plenary sessions of the Diet.

Shinzo Abe himself participated in a sit-in in the Diet to protest against the idea of partially liberalizing Japan's rice market.

After returning to power, the LDP was well aware of the importance of farmers' votes. It wanted to stress how it differed from the Hosokawa administration, which agreed to the partial liberalization of the rice market. The LDP thus made MOF cough up 6,010 billion yen for a package of domestic measures in response to the GATT Uruguay Round.

Junior LDP lawmakers whose constituency was tenuous shared a sense of crisis that they would lose the next election unless they secured farmers' votes. Back then, no LDP lawmakers had the power to prevent junior farm-interest lawmakers from running wild. When the LDP was an opposition party earlier, the intra-party order and power structure that had developed during its long tenure in power disintegrated.

MOF could not resist the pressure from the LDP, which had just returned to power. I and my colleagues at MAFF saw the accumulation of unreasonable appropriations for measures ostensibly designed to offset the effects of the GATT Uruguay Round. Since then, the power of the Ministry of Finance has noticeably waned.

Under the Abe administration, the Prime Minister's Office (Kantei) seems to be taking leadership. And yet, the agricultural policy is implemented as farm-interest lawmakers wish. Mr. Abe himself cannot afford to disregard their wishes as he faces an election of some kind almost every year, including the one for choosing his own party's president. As I argued in my article "The House of Councillors Election Determined by Single-seat Constituencies, Farmers' Votes Hold the Key " (the Japanese original posted on July 8, 2019), farmers hold a casting vote in single-seat constituencies in both houses of the Diet.

Prime Minister Shinzo Abe released a fake news story that the government had abolished the gentan (rice acreage reduction) program. At the World Economic Forum (WEF) in Davos, he grandly boasted of having achieved what none of his predecessors could do in the last four decades. However, the gentan program was revamped (not abolished as Mr. Abe claims) primarily by three parties: farm-interest lawmakers, MAFF, and the Japan Agricultural Cooperatives (JA). Mr. Abe was rarely involved in this process.

Judging from his grandiose statements, many people believe that Abe is the type of politician who exercises leadership and braves a storm. In reality, however, he is the type of politician who tries to coordinate different interests and delegate power to others, unlike former Prime Minister Junichiro Koizumi.

Abe's only agricultural initiative, a stab at reforming JA, made only a tiny dent

The reform of JA seems to be the only achievement made by the Abe administration that took over the vested interests in the agricultural sector.

However, this achievement should be attributed to Chief Cabinet Secretary Yoshihide Suga, whose farming father was given a hard time by JA. He asked the director-general of a bureau at MAFF, who is antagonistic toward JA, to reform the most powerful agricultural organization in Japan. This reform was also formulated in consultation among the three parties: farm-interest lawmakers, MAFF, and JA. The reform made only a tiny dent in JA; it failed to divest JA of its political clout as well as its monopolistic economic power in the agricultural sector. In fact, JA's behavior has rarely changed.

Drastic changes to the associate membership system, which is permitted in no other types of cooperatives but JA, would have dealt a major blow to JA. These changes have been shelved. They have little chance of being implemented as LDP Secretary-General Toshihiro Nikai and other LDP lawmakers have made it clear that they respect the wishes of JA. It seems that Prime Minister Abe is not going to raise an objection to this.

Even the traditionally powerful Ministry of Finance (MOE) cannot disobey Kantei, which now has overwhelming authority over the personnel affairs of bureaucrats. In fact, ministry officials seem to be pandering to the wishes of Kantei as seen in the Moritomo cronyism scandal.

Kantei uncritically accepts the wishes of farm-interest lawmakers. The result is the implementation of measures that lack fiscal discipline. The only thing MOF did to save its face was the appropriation of funds to implement measures for offsetting the impact of the TPP and other trade agreements not in the general budget but in the supplementary budget, which implies or sounds not permanent but temporary spending.

Despite farm-interest lawmakers' clamor for better farm household income, the target of closing the income gap between agriculture and industry as called for by the Agricultural Basic Act of 1961, has been overshot. But this was made possible by a shift toward part-time farming in rice production and increasing dependence on imported grains in livestock farming. The drafter of the Agricultural Basic Act expressed regret that the abolition of tariffs on corn had deformed the livestock sector.

Is it too late to turn the tide?

Tadaatsu Ishiguro was a leading figure responsible for agricultural policy in pre-war Japan. Ishiguro, who worked hard to redistribute farmland among tenant farmers, was regarded as an advocate of nohon-shugi, or the belief that agriculture should constitute the basis of the state. Ishiguro's nohon-shugi was best expressed when he called for boosting food production in 1940 as Minister of Agriculture and Forestry in a dialogue meeting with some 15,000 farmers. He said:

The belief that agriculture is the basis of the state does not mean that only benefits for agriculture should be sought. Our ideals, which are regarded by the public as being of what is called nohon-shugi, are far from such a self-serving idea. We value agriculture simply because it is the basis of the state. Agriculture that does not constitute the basis of the state is unworthy of a thought. Because the public think of me as an advocate of nohon-shugi, I'm taking this opportunity to call on you to become farmers who genuinely constitute the basis of the state. That is what I'm asking you.

Agriculture as the basis of the state as advocated by Ishiguro is agriculture that executes the mandate to provide a stable supply of affordable food for the public. Back then, farmers were poor, and so were workers. The Ministry of Agriculture and Forestry (MAF) as represented by Tadaatsu Ishiguro and Kunio Yanagida, was consistently opposed to the landlord class that tried to gain profit by raising the price of rice, and for the benefit of consumers and the public at large.

Unfortunately, MAFF, the MAF's descendant, has lost the lofty ideals it inherited from MAF. I suspect that Japan's agriculture today is far from constituting the basis of the state. Aren't the agricultural interests in this country seeking to gain a huge profit by converting farmland--which is essential for food supply--to other purposes? Aren't they intent on increasing their income only by making the public pay high prices for food? Isn't Japan's agriculture today unworthy of a thought?

Japan's agricultural policy has abandoned logic and ideals. Is there no other option but to let it run its course? If things go on like this, I feel that Japan's agricultural policy makers and implementers will remain unconcerned about consumers and the public at large.