Only Japan Left Behind by International Standards

Senior Fellow, RIETI

Six times international prices - 500% tariffs

There are two ways of raising income from farming: by either raising earnings (price x sales volume) or by lowering production costs. Yet, since the postwar economic expansion, Japan's agricultural administration has chosen to raise rice prices. However, raising rice prices without consideration for demand resulted in rice surpluses, and thus production set-aside programs have been necessary for over thirty years.

Costs can be reduced by either raising yields through selective breeding or enlarging farm scale by concentrating agricultural land in the hands of full-time farmers. However, farmers have not favored yield increases that would result in more stringent production set-aside measures. Furthermore, faced with high rice prices which are greater than the high production costs of small-scale farmers, small-scale farmers have preferred to produce rice rather than buying expensive rice in the market and have not handed their land over to full-time farmers. As a result, although the average size of French farms has increased by 150% over the past 40 years, that of Japanese farms has increased by only 36% (only 17%, excluding Hokkaido). The international competitiveness of Japanese farms has declined and Japanese rice prices, which were below world levels in the early 1950's, are now six times higher than global prices, inflated by tariffs of 500%.

Table: Comparison of Japan, EU, and U.S. Farm Policies

Among the various agricultural products of Japan rice has been the most favorably or heavily supported or protected, so agricultural resources have never ventured beyond rice. Thus, over a period of 40 years food self-sufficiency has fallen by half, from 80% to just 40%. Awareness began to grow amid rice surpluses that despite falling self-sufficiency, there was a surplus of farmland as well. So, since Japan lacks the sort of clear land use regulation system (zoning) that Europe has, 2.3 million hectares of Japan's 6 million hectares of agricultural land has either been converted to residential or other uses, or abandoned and therefore lost. This exceeds the 1.93 million hectares of farmland that was given to tenant farmers during the farmland reform just after World War II.
As a result, Japan has only enough agricultural land left to feed its population sweet potatoes, on which they could barely survive (as a calorie base). Over the past 40 years, the percentage of part-time farmers has grown from 30% to 70%, and the ratio of elderly farmers over the age of 65 has increased from 10% to 60%. In the face of agricultural decline and a lowering rate of food self-sufficiency, the issue is now one of grave concern for consumers.

The EU can rival the U.S.

The United States is able to supply food to consumers at a low price and guarantee international competitiveness while maintaining farm incomes. It does so by providing financial compensation (direct payments) to farmers to fill the gap between guaranteed prices and market prices.

The European Union (EU) maintained regional market prices higher than international levels through tariffs and other measures, and then managed surplus with export subsidies. However, following the 1992 agricultural policy reform, regional support prices have been decreased and direct payments to farmers have been introduced in order to compensate them for income loss. Grain support prices, at €101.31/ton (equivalent to U.S. $122/ton), are well below the Chicago Wheat Market price (U.S. $139/ton as of February 2004). The EU was able to compete with U.S. wheat even without tariffs and export subsidies.

Japan introduced direct financial payments to the disadvantaged hilly and mountainous regions in 2000, moving a step closer to a direct payment policy/fiscally-supported farm policy from its price policy/consumer-supported farm policy. The nature of Japanese agricultural policy, however, was still essentially a consumer-supported farm policy. Though the EU has moved closer to a U.S.-style fiscally-supported farm policy, only Japan has been left behind. The previous pattern of the U.S. vs. the EU and Japan has become a pattern of the U.S. and the EU vs. Japan.

The Producer Support Estimate (PSE), developed by the Organization for Economic Co-operation and Development (OECD) as an index for measuring farm support or protection, adds subsidies and payments to farmers that are borne by taxpayers to tariffs that are borne by consumers (difference between foreign and domestic prices x production volume). In 2002, the U.S. had a PSE of $39.6 billion, the EU $100.5 billion, and Japan $43.9 billion (approximately ¥55 trillion). Japan's figure is not excessive compared to the EU's given the difference in population scale. However, in analyzing the breakdown of that figure, we see that in 1986-1988, the portion borne by consumers was 46% in the U.S., 85% in the EU, and 90% in Japan. In 2002, the respective figures were 39%, 57%, and 90% (approximately ¥50 trillion). While EU consumer-borne farm policy, which had been at levels similar to Japan's, has undergone a drastic turnaround, in Japan the portion of farm support or protection borne by consumers remains extremely high.

Furthermore, farm subsidies concentrated on certain products gives rise to sizeable economic inefficiencies. According to OECD figures measuring this, given an OECD average index of 75, the EU scores 59, the U.S. 29, and Japan's figure stands at 118. This shows that Japan's subsidies are directed toward specific products - mainly, rice.

The day Japan exports rice

Japan must also turn its agricultural policy around. The World Trade Organization (WTO) Agreement divides policies into two groups: the green box policies, which need not be reduced, and the yellow box policies, which need to be reduced. With a consumer-borne price support policy, it is not clear who should bear the burden. In addition, while poor consumers bear the high food cost, the wealthy landowning farmers profit from high farm prices. It is unfair. A taxpayer-borne policy clarifies to the public the relationship between who bears the burden and who profits. Indeed, it raises the economic welfare level by eliminating flip-flops for the consumer while targeting farms and farmers who require policy support.

In short, Japan needs to lower the prices of its agricultural products and introduce direct payments, as was done in the EU. First, we must lower rice prices to equilibrium level by phasing out production set-aside programs for rice, step by step. Then we should bring world prices within our sight and further lower prices by providing direct payments based upon farmland only to farms of a certain size and above. As small-scale farmers are willing to lend their land to large-scale farmers due to price decreases and large-scale farmers enhance the ability to pay rent because of direct payments based upon farmland, agricultural land will concentrate in large-scale farms.

These direct payments have both direct and indirect effects. They act directly by reducing costs through easing rent, and indirectly by reducing costs and raising production efficiency by enlarging farm scale through farmland concentration. Compared to pulling down agricultural prices to the level of international prices all at once by only relying on the direct effects of direct payments, these indirect effects mitigate fiscal burdens greatly. The amount of direct payments would be the same to any product, regardless of what is produced in the paddy fields; thus we could finally rid ourselves of our fixation or obsession with rice production.

If we were to approximate necessary prices, the present agricultural budget would fall to about ¥20 trillion given an extreme case of zero tariffs. With this, we could eliminate ¥50 trillion yen, equivalent to the consumer-borne 2% of sales taxes, thus greatly reducing the burden on the public. We could lower the agricultural protection level to ¥20 trillion - half that of the United States. This would counter international criticism that, despite being the world's greatest importer of agricultural goods, we are also the most protective of our agriculture.

Japan can turn the fiscal burdens of agricultural policy to consumer benefits by lowering prices through cost-cutting measures such as the expansion of farm scale by concentrating agricultural land into farm-like farms by direct payments, as well as increasing yields by abolishing production set-aside programs. We can raise Japan's food self-sufficiency ratio - the lowest among all developed countries - by increasing production through the abolition of production set-aside programs, and the correction of relative profitability between rice and other farm products by lowering rice prices.

Contrary to popular understanding, larger-scale farms that can devote themselves to farming tend to be more environmentally friendly. Thus, pesticides and chemical fertilizer usage can be reduced. If overall price levels drop, then it is possible that rice could become an export product. Currently, high-quality Japanese rice is exported to Taiwan, which has a similar price level.

>> Original text in Japanese

* Source: Weekly Economist, Mainichi Shimbunsha, March 23, 2004.

March 23, 2004 Weekly Economist

April 16, 2004

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