Japan's Agricultural Policy Stagnates amid Surging Food Prices: Eliminate acreage reduction programs, boost production, and promote export

Senior Fellow, RIETI

Surging grain prices have recently been making headlines. As price levels will likely remain high, I would like to examine what agricultural policy should be put in place in Japan.

We can begin by examining the unique characteristics of the international agricultural market. Due to national trade policies, this market is isolated from each country's domestic market. When international prices are sluggish, countries raise tariffs to prevent inflows of cheap agricultural products. When international prices go up, countries impose export taxes and/or quantitative export restrictions as a means to safeguard domestic supply.

In addition, unlike industrial products, grain traded in the international market accounts for only about 15% of total production, therefore even marginal changes in supply and demand can significantly impact trade volume and international prices. Back in 1973, international grain prices jumped to three to four times their previous levels, prompting a host of warnings of an impending food crisis. Ultimately, the decrease in world grain production was only 3%.

For years, Japan has protected rice and some other specific farm produce, artificially maintaining high prices by means of high tariffs on imports. At the same time, however, Japan has imported wheat, corn, and many other food products in enormous volumes, becoming the world's largest importer of agricultural products. From the viewpoint of food security - ensuring sufficient food supply in times of emergency - is it possible and advisable for Japan to maintain such a policy stance?

*            *            *

In the Uruguay Round negotiations, Japan proposed that the use of export bans and other quantitative restrictive measures be restricted with respect to agricultural trade. The proposal, however, was rejected due to strong opposition from India which countered that it is natural for a country to safeguard its domestic food supply first and foremost in the event of crop failure.

Indeed, when international grain prices rose in 1995-1997, the European Union suspended export subsidies and instead imposed export taxes, prioritizing internal food security over food supply to developing countries. India and Vietnam currently ban food exports while Russia and China impose export taxes.

Japan, which had earlier called for replacing quantitative export restrictions with export taxes followed by gradual tax rate reductions, recently toned down its proposal. Shifting its stance to tolerate the use of export quantitative restrictions, Japan now proposes that an importing country be able to ask a committee of experts to arbitrate the restrictions in cases where bilateral consultation with the exporting country fails. Yet even this softened proposal draws harsh criticism from other countries which see it as too selfish of Japan, a country that has tried to block agricultural imports with high tariffs in order to protect domestic farmers, to try to secure the steady flow of agricultural imports in times of difficulty.

*            *            *

As India noted, it is unrealistic to ask other countries to export agricultural products at a time when their own people are facing hunger. We must recognize that a country ultimately relies most on its domestic agriculture. Japan's agriculture, however, is in a dire situation, with its food self-sufficiency ratio fallen from 79% in 1960 to the current 39%.

The westernization of the Japanese diet has been cited as a major reason behind this. But even if this were the case, the food self-sufficiency ratio would not have fallen to such a critically low level had the government adopted policy to lower rice prices and raise wheat prices. In reality, however, the government did the opposite. In the 1960s, while substantially raising rice prices, the government did increase the producers' wheat price but only in line general price increases, while the consumers' wheat price was somewhat lowered.

The high retail price of rice accelerated the decline in rice consumption; Japan's average per capita consumption of rice has halved over the past 40 years. Despite declining demand, the high purchase price the government promised farmers encouraged them to grow more rice, resulting in surplus rice production. Thus, for nearly 40 years since the 1970s the government has implemented production adjustment measures such as acreage reductions and conversion of rice farmland to other crops. On the other hand, the production volume of wheat remains slightly above 1 million tons, equaling one-quarter of the volume in 1960, in spite of production promotion measures undertaken since the mid-70s. Today, Japan is cutting back on domestic rice production by 5 million tons, while importing more than 7 million tons of wheat.

Even since the food control system was abolished in 1995, the government has adhered to its production adjustment policy with an aim to maintaining the domestic rice price at a certain level. Yet this is merely a supply control cartel, which normally forces consumers to bear the resulting costs in the form of high prices.

In reality, however, the downward trend of domestic rice prices shows no sign of ending, in spite of the fact that 1.1 million hectares - more than 40% - of Japan's rice paddies are being subjected to production adjustment. As part of the production adjustment policy, the government provides subsidies for conversion to other crops such as wheat and soybeans to improve the nation's food self-sufficiency ratio. But only 430,000 hectares have yet been converted. In order to prevent further falls in domestic rice prices, more rice paddies must be subjected to this adjustment. But the idea is not finding favor among farmers, many of whom feel they cannot afford to take any more production adjustment.

Without sufficient farmland, food security would not be ensured. Nevertheless, despite the declining self-sufficiency ratio, the continuing adjustment of rice production sends the wrong message, spreading and reinforcing the idea that "surplus farmland" exists in Japan. This misperception resulted in the elimination of 2.6 million hectares of farmland through conversion to housing land or abandonment of farming despite development of 1.1 million hectares of farmland through public works projects. Today, Japan is left with only 4.6 million hectares of farmland which, if used for planting only potatoes and rice to maximize the possible number of calories, would barely be enough to keep the Japanese population alive. If the government further pushes production adjustment in the form of acreage reductions, farmland will be further reduced and Japan's food security threatened.

It is now evident that Japan's conventional rice policy, centered on production adjustment and price maintenance, has been a failure. Given the international circumstances surrounding agricultural products, the government cannot afford to waste time making a fundamental shift in its policy.

Agriculture is said to be multi-functional, with such side-benefits as recharging water resources and preventing floods. However, it should be recognized that rice paddies, a tool for producing rice, can deliver such multiple functions only when they are used as paddies.

Amid ongoing demographic aging, Japan's total amount of domestic rice consumption in the coming years is expected to decrease not only due to the decline of per capita consumption but also due to population decline. If the government maintains its current price support policy and if, as a result of such policy, per capita consumption of rice is again halved over the next 40 years total rice consumption will fall from the current 8.5 million tons to 3.5 million tons by around 2050. The portion of rice farmland subjected to production adjustments will expand to 2.1 million hectares whereas that actually used for growing rice will be reduced to 500,000 hectares. This means a significant contraction of Japanese agriculture as both farmland resources and their multiple functions decrease.

*            *            *

Comparison of the trend in the domestic rice price and the import price of rice from China (see Figure) shows that while the price of Chinese rice has been rising in line with the international trend, the price of Japanese rice has been falling due to dwindling domestic rice demand. This is evidence that the Japanese rice market is segregated from the international market, firmly protected by tariff barriers. More important, however, is that the gap between these two prices is narrowing. My estimates indicate that if the government abandoned the production adjustment policy, the domestic rice price would fall to ¥9,500 per 60 kg, a level below the current import price of rice from China, and domestic demand for rice would expand to 10 million tons.

Japanese and Chinese rice prices

Since the era of the Staple Food Control Law, agricultural organizations have opposed any move that would lower rice prices, saying that this would endanger fulltime farmers who rely heavily on agricultural income. But, the government would be wise to compensate some 80% of the decrease in price from the current ¥14,000 in the form of direct payments to these farmers. Fulltime farmers account for 40% of the total volume, 7 million tons, of rice distributed in Japan. Thus, the total amount of direct payments would be some ¥160 billion, equal to the amount of subsidies currently paid to farmers as incentive to participate in the production adjustment cartel.

Part-time farmers whose principal source of income is not from farming would also be able to lease their farmland to fulltime farmers and earn an annual rent income of about ¥100,000, more than what they currently earn from farming. When the scale of farming by fulltime farmers expands and the cost of farming decreases, rent income to part-time farmer-cum-landowners will increase.

Shifting to a direct payment scheme would benefit consumers in the form of lower rice prices, while the amount of fiscal burden would not change. It should be also noted that the world population is continuing to increase even Japan's population is on decline. Until now, we have focused only on domestic demand and this has resulted in the gradual decline of agriculture in Japan. But Japanese agriculture should traverse national boundaries and expand into overseas markets. Japan should designate 4 million tons of rice, for which the price has been substantially lowered, for export to China, and this would only account for 1% of the total grain demand in China. And in the event of a food crisis, rice for export could be redirected to the domestic market to tide the country over during difficult times.

Consumers started the Taisho rice riot in 1918. And it was consumers who had to stave off hunger during the postwar period by gradually and painfully selling off their belongings for food. Thus, food security, by its nature, is a demand that should come from consumers. The current policy, under which the government restricts food supply, keeps high prices, and shifts the burden onto consumers, is contradictory to the true idea of food security.

The fact that Japan's food self-sufficiency ratio stands at 39% means that 61% of the food consumed in Japan is procured from the international market, thus aggravating food shortages in net food-importing developing countries. The EU is now moving to abolish its production adjustment policy. For many years now, I have been calling for an end to the rice production adjustment policy, but the agricultural administration has backpedalled on any drastic reform. However, a top government leader is finally beginning to warm to the idea of reviewing the production adjustment policy. Now is the golden opportunity to break away from the postwar agricultural regime that has been preserved at the consumers' expense and to expand Japan's shrinking agriculture industry by promoting export. Japan is capable of this form of international contribution at a time when the international community is faced with a serious food shortage and it represents the very policy that would lead to the country's own food security.

>> Original text in Japanese

* Translated by RIETI.

June 10, 2008 Nihon Keizai Shimbun

June 23, 2008

Article(s) by this author