Media Global Economy 2020.04.16
The next five-year Basic Plan for Food, Agriculture and Rural Areas is now being drafted, although it is barely reported by the media under the shadow of the extensive coverage of the coronavirus outbreak and the cherry blossom scandal. It is the fifth Basic Plan after the first was implemented in fiscal 2000 under the Food, Agriculture and Rural Areas Basic Act.
The Basic Plan is supposed to ensure stable food supply to the public. Yet it has failed to attract the public attention it deserves.
It has been the custom that the Basic Plan is formulated virtually within Japan's agricultural circles. Under this customary practice, the Ministry of Agriculture, Forestry and Fisheries (MAFF) prepares a draft plan that is almost identical to the final plan in prior consultation with the Japan Agricultural Cooperatives (JA) and norinzoku or lawmakers who represent agricultural interests. The draft plan is referred to an advisory council made up of stakeholders in the JA and other agricultural groups, as well as academics and journalists who have opinions favorable to the government, for approval. It is then endorsed by the Cabinet.
This is a typical Japanese decision-making process; the JA, norinzoku and MAFF spend much time laying the groundwork for consensus building. Nevertheless, the three parties have had similar opinions as far as basic directions and components of the plan are concerned, aside from minute details. In the four previous plans, they were unanimous on the need to increase food self-sufficiency-the top priority for the Basic Plan.
This does not seem to be the case for the fifth plan.
The formation of the agricultural policy triangle and the framework of the post-war agricultural policy
Japan's agricultural policy has been implemented by the tripartite coalition of the JA, norinzoku, and MAFF.
The JA organizes the farm vote to elect norinzoku, who exercise their political power so that MAFF will be able to keep high rice prices and farm tariffs in place and secure adequate budget allocations for agriculture. Farmers, including inefficient small-scale farmers-who are kept by artificial high rice prices-, deposit their income including the non-farm income, in the banking arm of the JA, the second largest megabank in Japan.
I first named this tripartite coalition the "agricultural policy triangle" in my book Nokyo no Taizai [The JA's grave sins]. The triangle is an extremely powerful community of interest.
How was the agricultural policy triangle formed? What did it achieve as its policy?
The postwar agricultural land reform expropriated farmland from landlords and sold it to tenant farmers for low prices. Tenant farmers thus became land-owning farmers. As the agricultural land reform progressed, tenant-turned-landlord farmers became conservative. This prompted socialists and communists who had made inroads into farming communities to liberate tenant farmers immediately after the end of World War II to pull out.
This development convinced General Douglas MacArthur and then Financial Minister Hayato Ikeda of the need to make land-owning farmers-the key product of the agricultural land reform-serve as a buffer that protected not only farming communities but the entire Japanese society from communism. To this end, the two leaders ordered the Ministry of Agriculture and Forestry (MAF), the MAFF's predecessor, to draft the Agricultural Land Act.
The Act prohibits, for example, a young person not from a farming family from engaging in farming by setting up a venture business, soliciting capital, and acquiring farmland. Such a stock company would go against the owner-cultivator principle, as its employees would cultivate the land owned by its stockholders.
Immediately after the end of World War II, a bad rice harvest resulted in a severe food shortage in Japan. Farmers preferred selling their rice to black markets rather than to the government as it fetched higher prices. This made it difficult for the government to collect rice in its effort to distribute food evenly among the public as rations. To secure rice shipments from farmers, the government reorganized the compulsory agricultural organization under the wartime command economy into what is now known as the JA.
While dairy farmers and fruit growers have their own specialized agricultural cooperatives apart from the JA, rice farmers have no such co-ops other than the JA. This is because the JA was organized to collect rice in the first place. Herein lies the reason why the JA shows an extraordinary obsession with rice.
The agricultural land reform gave rise to farming communities made up of farm households that were no different from one another. This was convenient for the JA group, which builds on a one vote per member principle (meaning that every member, be it a large or small farmer, has an equal say). In short, farming communities in Japan were organized under the JA group.
As MacArthur and Ikeda envisioned, farming communities constituted a strong constituency for the Conservatives. It is no exaggeration to say that the Agricultural Land Act and the JA paved the way for the postwar long-lasting conservative regime in Japan. In a sense, these two actors constitute the strongest anti-communist policy.
The government maintained the number of farm households to retain its political power
Japan-US trade friction between the 1980s and the 1990s coincided with the Cold War between the US and the Soviet Union. Japan's MAFF rebuffed US calls for farm trade liberalization by questioning, "is it all right to see a socialist regime in Japan?"
As the Japanese economy rose from the ashes of WWII, the income gap between agriculture and industry widened. To rectify the widening gap, the Agricultural Basic Act of 1961 called for reducing the cost of rice production by increasing the farm size. It also encouraged farmers opting to give up rice production to convert to the production of fruits and livestock, the demand for which was expected to grow in a strategy called "selective expansion."
This strategy paid off. Livestock farms have steadily increased in scale, now earning an income several times higher than that of the average income earner (see " Unknown aspects of Japan's farming communities (I): the average annual income for pig farmers is 20 million yen ($182 thousand)!" and " Unknown aspects of Japan's farming communities (II): is dairy farming excessively hard work? ").
As far as rice--on which the JA depends--is concerned, however, the government did not take the agricultural policy as called for by the Agricultural Basic Act. It instead raised the price for which it bought rice from farmers (known then as "producer's rice price") in the 1960s. In other words, the government took an expedient approach to pander to farm voters, instead of trying to increase farm household income through agricultural structural reform as called for by the Agricultural Basic Act.
Nevertheless, a higher rice price meant lower demand and higher supply, resulting in the government accumulating a large surplus of rice. Under pressure to shoulder a large financial burden to dispose of the surplus, the government decided to encourage farmers to reduce rice production with incentive subsidies. This was how the gentan (acreage reduction) program (formally known as the "production adjustment" program) started.
In short, the gentan program was introduced for fiscal reasons. Back then, Japan's fiscal authorities had an unimaginably great power.
The abolition of the food control system in 1995 has put an end to the government purchase of rice. The gentan program is now the only means to support the rice price. The JA group, which opposed rice acreage reduction and called on the government to buy out all the rice farmers produced under the food control system, is now eagerly promoting the gentan program. Unlike other sectors of agriculture, small-scale farm households remained in the rice sector due to the high rice price policy.
The income of these rice farm households largely comes from non-farming work and annuities. A look at the average income of all farm households shows that the non-farm income and their pension income are now four times and twice larger than the farm income, respectively, as of 2003. Such income is deposited into their accounts at the JA group, thus helping the JA Bank develop into Japan's second largest megabank, with total deposits of more than 100 trillion yen.
In the dairy sector, numerous farmers left their farms, many of which were taken over by the remaining dairy farmers. As a result, the scale of the dairy farms increased steadily. The number of dairy farm households has fallen to less than 4% of the level some 50 years ago. Yet the JA did not take an interest in this reduction.
The scale expansion of rice farms as described by the Agricultural Basic Act assumed that the number of rice farm households would decrease on condition that total farmland would not increase in Japan. This was something the JA could not tolerate or accept. The high rice price policy as advocated by JA resulted in many small-scale farmers remaining in rice agriculture. This state of affairs provided a favorable environment for norinzoku to win elections.
While some 80% of farm households in Japan grow rice, their production accounts for less than 20% of total agricultural production in Japan. This clearly shows the extent to which inefficient farmers remain in the rice production sector.
Nowadays, officials at MAFF are not what they used to be. For some time following the end of the war, the mainstream argument at the then Ministry of Agriculture and Forestry (MAF) was that the next step to be taken after liberating tenant farmers was to address the agricultural structure in which small farmers dominated. This was because these were the two big challenges for Japan's prewar agriculture. The slogan within the MAF was "from farmland reform to agricultural reform." This was when MAF had high ideals and convictions, which culminated in the enactment of the Agricultural Basic Act.
Nevertheless, the structural reform of the rice sector as dictated by the Agricultural Basic Act-which is tantamount to increasing the scale of farms-would mean fewer farm households. In that case, MAF would see the dwindling of its political power to secure enough budget allocations from the Ministry of Finance. MAF would also have difficulty securing plum jobs for its retiring officials.
These points constituted the logic of the MAF officials who gave up their ideals. This was how the agricultural policy triangle of the JA, norinzoku, and MAFF－who shared common interests－was formed.
The gentan program is rational for the farm economy
The demand for farm products has the major characteristic that a drop in prices does not mean a corresponding rise in demand, unlike other commodities. If the price of a TV set drops by half, some consumers may want to buy two sets instead of one. By contrast, even if the price of rice halved, no one would consume rice twice as much since the consumer's stomach remains the same. The demand does not increase that much.
A bumper harvest of a vegetable may send its price plummeting, attracting media attention. This is because if the market wants to absorb a slight increase in supply, it needs to reduce the price substantially. Since an increase in production entails a disproportionately lower price, sales-the amount calculated by multiplying production by price-fall. This is what the phenomenon of "impoverishment of farmers because of a bumper harvest" is all about.
The gentan program leverages this characteristic of farm products demand in reverse. A slight reduction in supply will result in a disproportionate higher price, the corollary of which is increased sales. A rise in the price of rice will make it possible for farmers to buy expensive farm machines. The JA will benefit from high sales commissions associated with higher prices of rice as well as agricultural machines and materials. In fact, that is what actually happened.
Japan's agricultural policy is characterized by the fact that it has protected the country's agriculture with raised prices (consumers' burden) rather than fiscal spending (taxpayers' burden). The US shifted the focus of its agricultural policy from price support to fiscal spending 60 years ago. The EU did the same 30 years ago. Keeping domestic prices higher than international prices requires imposing tariffs. This is the reason why agriculture always stands in the way of trade liberalization talks.
What puzzles me is that while the regressive nature of the consumption tax was at issue when the tax was introduced, the policy of keeping the prices of farm products high and imposing high tariffs is considered to benefit national interests, despite it being regressive in every aspect.
Other government policies financed by taxpayers' burden, most notably the health care policy, provide the public with affordable access to goods and services if they shoulder a fair share of the cost. Japan's rice policy, however, encourages farmers to reduce production in exchange for subsidies worth 400 billion yen in order to raise the price of rice substantially.
Japan's rice farming imposes a disproportionate burden on the public both as taxpayers and as consumers. This is an impossible policy for the national economy but a crucial and rational policy for the agricultural policy triangle, not least the JA.
Internal discord over food self-sufficiency
Most of the public is aware of Japan's low food self-sufficiency and believe that it should be raised.
First of all, it should be noted that food self-sufficiency is of little policy relevance. The rate of food self-sufficiency is domestic food production divided by food consumption including the consumption of imported food. It is thus unsurprising that the rate is apparently low if the current "satiated" level of Japan's food consumption is taken as a given.
The self-sufficiency rate will be higher, however, if it is calculated based on Japan's frugal diet in the past. Japan's self-sufficiency right after the end of WWII, when hunger was rampant, was 100% because domestic food production was equal to food consumption in the absence of imports. No one would argue that the food situation then was better than the present, when self-sufficiency is 37%.
Some critics maintain that the self-sufficiency rate should be expressed in terms of monetary value, saying that the calorie-based rate is inappropriate. Yet my argument above is still relevant. There is not much meaning in the food self-sufficiency rate that fluctuates as consumption changes.
Nevertheless, the Basic Plan for Food, Agriculture and Rural Areas that was endorsed by the Cabinet in 2000 set out the target of raising the self-sufficiency rate from 40% to 45% in terms of calories. Since then, the government has maintained this goal for 20 years. (The target was 50% when the Democratic Party was in power.) Yet the actual rate is now 37%, farther away from the target.
MAFF officials should be held accountable for this drop in the self-sufficiency rate, regardless of whether the target is appropriate. However, they seem to have no compunction about a lower sufficiency rate.
Japan's agricultural policy from 1960 onward has been to reduce the demand for domestic rice by substantially raising the price of rice and increase the demand for wheat--for which Japan is largely dependent on imports--by keeping its price unchanged. This policy of preferring foreign products has resulted in a lower self-sufficiency rate. Japan has reduced rice production by 5 million tons. It now imports 8 million tons of wheat and barley.
The target of food self-sufficiency has not been met for such a long time. If a government target endorsed by the Cabinet is not met for so long, the competent ministry should be held accountable. MAFF, however, does not seem to be repentant. In the face of a fall in the food self-sufficiency rate, no official at MAFF has dropped his eyes. No high-ranking official has resigned to take responsibility. MAFF officials know that there is no point in raising the rate.
Conversely, if food self-sufficiency goes up, the Ministry of Finance may conclude that MAFF is no longer in need of associated budget allocations. A lower sufficiency rate is more convenient to solicit public support for the protection of Japan's agriculture.
In all likelihood, MAFF planned to set out a token sufficiency target in the next Basic Plan for Food, Agriculture and Rural Areas. However, some norinzoku members argued against the setting of the target sufficiency rate. This is because they are under fire from their electorates, who are discontent with the failure to meet the target after all these years.
These politicians are in direct contact with the public, unlike MAFF officials who dare not take any responsibility for the failure to meet the target. norinzoku members must have felt that they did not want to receive such criticism any more.
Unsurprisingly, both the JA and MAFF do not want to abandon the sufficiency target because they want to secure public support for the protection of Japan's farming sector. MAFF thus devised a trick to make the food self-sufficiency rate look higher than it actually is. The ministry put forward a new definition of the sufficiency rate for livestock products that ignores the fact that Japan depends on imports for most of its feed supply (Japan's feed self-sufficiency is 25%).
The conventional self-sufficiency rate does not regard livestock products produced with imported feed as domestic products. This is because livestock production is virtually impossible if the import of feed stops. This is an appropriate way of thinking. As I noted in " Unknown aspects of Japan's farming communities (I): the average annual income for pig farmers is 20 million yen ($182 thousand)!," Japan's livestock sector, which is more like an industry of processing imported feed, is of no relevance to the country's food security.
And yet, the self-sufficiency will remain low.
So, MAFF came up with a food self-sufficiency rate that does not consider the self-sufficiency of feed. The newly-defined rate regards livestock products dependent on imported feed as being domestically-produced. For example, self-sufficiency of beef is 11% in terms of the conventional rate but a whopping 43% in terms of the redefined rate. Using the new rate, total food self-sufficiency will increase from37% to 46%. Thus the 45% target seems to have been achieved in appearance. This is pure deception but MAFF used this trick to shirk its responsibility for the self-sufficiency rate that has remained low.
MAFF's stratagem is met with opposition from the JA group.
The JA group is making a sound case that the redefined sufficiency rate makes it difficult for Japan to achieve self-sufficiency in feed. The redefined rate is convenient, however, for dispelling livestock farmers' discontent that their products are not regarded as being domestically-produced. For them, livestock products are livestock products regardless of whether the feed is domestically produced or imported.
It should be recalled again that the JA group is built on the rice sector rather than the livestock sector. What it wants to protect is the high price of rice made possible by the gentan program. The program is chiefly aimed at reducing the production of rice for direct human consumption by granting subsidies to rice farmers who stop the cultivation of such rice and grow other crops. Rice for animal feed is important among such substitute crops.
In other words, the JA group is afraid of the prospect that the government will give up the policy objective of improving Japan's feed sufficiency. It fears that the resultant reduction in subsidies for the production of rice for animal feed rice would make it difficult to reduce the production of rice for direct human consumption under the gentan program.
JA's objection over the export target
The current agricultural policy is aimed at increasing farmers' income. The government went as far as to endorse the target of doubling agricultural and rural income at a Cabinet meeting. This came after the ruling Liberal Democratic Party (LDP) released its 10-year strategy to double agricultural and rural income in 2013. This strategy called for, among other things, aiming to see the income of farmers and other rural community members double. In short, increasing farmers' income has become a policy objective of not only MAFF, but the government as a whole.
As a means to achieve this objective, the government calls for expanding the export of farm products. The aim is to increase farm household income through export.
The specific target is to increase the exports of agricultural, forestry, and fishery products and food to 1 trillion yen. Exports in 2019 stand at 912.1 billion yen, up 0.6% from a year earlier. Of them, farm products, including processed goods, account for 587.7 billion yen.
The JA group made the criticism that the export target will not lead to an increase in farm household income. This is because farm products for export are in fact largely "processed goods" made from imported goods such as wheat and sugar; domestic farm products account for an extremely small proportion.
This is a fact I have long pointed out. For example, I once noted that domestic farm produce and products made from it amounted to 89 billion yen at the most out of the total farm product exports of 357 billion yen in 2014 (see Nihon Nogyo wa Sekai ni Kateru [Japan's agriculture can beat the world]. Nikkei Publishing, 2015, pp. 104-106).
Figures for 2018 shows that the exports of major items that can clearly described as domestic farm products were small; beef amounted to 24.7 billion yen, green tea to 15.3 billion yen, apples to 14 billion yen, and rice to 3.8 billion yen. The shares of these four items in total exports of agricultural, forestry, and fishery products and food stand at 2.7%, 1.7%, 1.5%, and 0.4%, respectively.
The criticism by the JA reflects its discontent with the fact that the Abe administration implemented the JA reform.
Additionally, many LDP norinzoku feel that farmers are dissatisfied with or critical of the fact that they have to reduce the production of rice by 100,000 tons in total every year to support its price. The JA's simple fear is what might happen to rice production if it continues its disparate effort to persuade farmers to reduce their rice production (see " Japanese agricultural policies destroying the world's most sustainable paddy field farming").
Some norinzoku make a sound case that the export of rice should be promoted. This calls for reducing the price of rice, however. I do not know to what extent they are aware of the implications of their argument, but its logical consequence should be the abolition of the gentan (rice acreage reduction) program.
Let me quote some passages from my earlier article " The true reason for sluggish exports of farm produce lies in the vested interests of Japan's agricultural circles, which hinder export competitiveness."
Given that California rice was 11,464 yen (Japan's import price) in 2018, Japan's rice could be exported at a price of about 13,000 yen because of its higher quality. If production adjustment (gentan program) is discontinued, the price of rice will fall to about 7,000 yen. If a trading company purchases it at 7,000 yen and sells it at 13,000 yen, it will make a profit without fail. As a result, the supply of rice will decline in the domestic market and the domestic rice price will soon rise to 13,000 yen. Economists refer to this as price arbitrage.
In short, exports serve to prop up the domestic rice price, which seems to fall significantly only if the domestic market is considered. In fact, the domestic rice price did not fall below the international price in the early part of the Meiji Era [1868-1912], when rice was a major export item for Japan.
Since the price of rice will rise just after the abolition of the gentan program, rice production will increase significantly the following year. Moreover, if the abolition results in the planting of rice varieties with higher yields per area, which has been restrained so far, rice production will be more than 15 million tons and 7.5 million tons of rice will be exported. Because the total value of exported rice amounts to 1.5 trillion yen, only the export of rice will suffice for achievement of the central government's export target, 1 trillion yen, for all of farm and fishery products and food inclusive.
If, as in the U.S. and EU, full-time farmers who will be affected by price decline receive compensation for the gap between the existing price of 14,000 yen and the declined price of 13,000 yen (the covered quantity is 3 million tons, 40% of the current production), this will require 50 billion yen, which is far less than the 400 billion yen paid by taxpayers for the acreage reduction program. Moreover, if small-scale farmers withdraw from the rice industry due to rice price decline, the farm size of full-time farmers will expand, resulting in lower costs and increasing profits. Therefore, the compensation will be only temporary and could be abolished someday.
In prewar Japan, MAF already had gentan plans, which were crushed by the Ministry of the Army. This was because gentan would go against Japan's food security.
If Japan rescinds the gentan program, produces rice in excess of domestic consumption, and exports the surplus, its food self-sufficiency will rise since the numerator in the equation increases. If the government really intends to promote the export of Japan's farm products, the only approach available is to focus on rice, whose potential production is the highest. This approach, however, will pit the government against the JA, which is based on the policy of supporting the price of rice under the gentan program.
A big bang in Japan's agricultural policy?
The income from growing rice is virtually zero for the average farm household in all prefectures except Hokkaido, whose average farm is about one hectare in area but 15 million yen for farm households whose total farmland amounts to 20 hectares or more. A group of 20 farm households with one hectare of land each would generate virtually no income from growing rice in total. The consolidation of all their farmland into one farm household would generate 15 million yen in income.
Farm households who lease out their land in this way would be given a rent out of this income. This would constitute the remuneration for these small landlords in exchange for their work to maintain farmland, farm roads, canals, and other related infrastructure. At any rate, we may need to envision a new rural community where farmers coexist with their landlords who engage in the maintenance of related infrastructure.
More specifically, if the abolition of the gentan program reduces the price of rice, high-cost, small-scale farmers will be tempted to lease out their land. If the recipients of direct subsidies are limited to full-time farmers, they will be better able to pay their land rent. As a result, farmland will be concentrated in their hands. The increased area of their farmland will result in cost reduction and more revenue, which in turn will increase rents to the landlords. All farming community members will benefit in this way.
There are political organizations that represent the interests of farmers in the US and the EU as well. What clearly separates them from the JA group is that the JA group itself is engaged in economic activity. For this reason, the interests represented by the JA group are more likely their own interests rather than those of farmers.
Direct subsidies in the face of a lower price of rice will protect the affected farmers but not benefit the JA. Structural reforms will save farming communities but undermine the JA because farm households, its support base, will dwindle. A crack in the agricultural policy triangle may suggest a widening gap between the interests of farmers and those of the JA.
Just like the farmland reform resulted in the collapse of the land-owning class in the past, a big bang may occur in Japan's agricultural policy when norinzoku lawmakers who make regular contact with farmers clearly realize that they in fact do not share common interests with the JA or MAFF.