Free Trade is the Way to Achieve Japan's National Food Security

Senior Fellow, RIETI

Agriculture always seems to be a sticking point whenever Japan attempts to forge ahead with trade liberalization, be it through multilateral trade talks at the World Trade Organization (WTO) or the Asia-Pacific Economic Cooperation (APEC) forum, or in the course of bilateral negotiations toward concluding economic partnership agreements (EPAs).

In the past, the Japanese government led by the Liberal Democratic Party (LDP) strongly resisted calls for the liberalization of agricultural trade, as evidenced by the bilateral beef and orange talks with the United States and the Uruguay Round negotiations under the General Agreement on Tariffs and Trade (GATT), because it wanted to protect the interests of its highly valued farming industry. In this regard, the government stance remains unchanged under the rule of the Democratic Party of Japan (DPJ).

The DPJ had pledged to promote the "conclusion" of a Japan-U.S. EPA in its draft manifesto. This, however, provoked strong protests from agricultural cooperatives, which said that such a move would be destructive to the nation's agriculture. Thus, in its manifesto for the general election in 2009, the DPJ rephrased its campaign pledges by stating that it would "promote negotiations" toward concluding a Japan-U.S. EPA but in such a way that would "not include any measure detrimental to the development of Japan's agricultural industry and its farming villages." None of Japan's agricultural industry leaders would welcome the conclusion of the WTO Doha Round and EPAs with the U.S. and Australia. Despite being a trade-oriented country, Japan has been unable to play a constructive role in negotiations at the WTO or for EPAs because of this problem of agriculture.

Decline of Japan's agriculture

Unfortunately there seems to be no stopping the decline of Japan's agriculture.

During the period between 1960 and 2005, Japan's agricultural production decreased from 9% to 1% as a percentage of the gross domestic product (GDP) and the food self-sufficiency ratio from 79% to 40%. In the meantime, type II farm households - i.e. part-time farmers with non-farm income exceeding 50% of total income - increased from 32.1% to 61.7% as a ratio to total farming households and those aged 65 and above from 10% to 60% as a ratio to total farm population.

Securing farmland is a precondition to national food security. In the period immediately following World War II, Japan had more than 5 million hectares of farming land for its total population of only 70 million and yet people suffered starvation. For the purpose of ensuring a stable food supply to its people, the government has since consistently provided generous protection to agriculture. But for all these efforts, farmland, a resource critical to national food security, has continued to decrease through development and conversion to non-farm uses.

Today, Japan is left with only 4.61 million hectares of farmland, far below the level at the end of the war. Although 1.05 million hectares of new farmland has been developed through public projects, 2.5 million hectares of farmland has disappeared either through abandonment or conversion for other purposes such as housing. This loss accounts for more than 40% of the 6.09 million hectares of total farmland in 1961. Incidentally, the amount of farmland lost over those years is equal to the amount of paddy fields designated for rice production today, i.e. the total area of paddy fields across Japan from Hokkaido to Okinawa, (although only 1.5 million hectares of these paddy fields are actually planted with rice, with the remaining 1 million hectares set aside under the rice acreage reduction program).

Japan's farm produce market is protected from foreign competition by means of imposing extremely high tariff rates exemplified by a 778% tariff levied on rice imports. The erosion of Japan's agriculture, which has occurred even with such extensive protection extended by the government, indicates that this is a phenomenon caused by domestic factors, rather than external factors.

Two factors defining the future course of Japan's agriculture

If left unattended, Japan's agriculture will further decline, driven by globalization and a decrease in population.

In the ongoing negotiations at the WTO, Japan has been calling for expanding the scope of "sensitive products" or items subject to smaller tariff cuts than required under the general rule. However, should it be allowed to do so, Japan would have to raise the low-tariff quota ("minimum access" opportunities) in exchange. At present, Japan produces 8.5 million tons of rice a year while importing 770,000 tons under its minimum access commitment. The volume of minimum access rice imports would have to be increased to 1.2 million tons or about 13% of total rice consumption in Japan, which, if achieved, would lead to an additional drop in the nation's food self-sufficiency ratio and a further decrease in farmland. Strategies and tactics employed by the Japanese government and agricultural industry leaders are contradictory to the goal of increasing the nation's food self-sufficiency ratio set forth under the Food, Agriculture and Rural Areas Basic Act. High agricultural tariffs, symbolized by a 778% tariff on rice imports, and the high domestic prices of tariff-protected farm products are what the government has been desperately trying to protect. The protection of domestic agriculture by means of artificially high prices thus kept for farm products is the true intent of the agricultural industry and its insistence on the need to raise Japan's food self-sufficiency ratio is nothing but an expedient means to achieve that end.

Over the past 40 years, Japan witnessed a 50% fall in rice consumption per person. But up until recent years, its impact on the total rice consumption has been somewhat offset because the country's population had been on the rise. Such, however, is no longer the case and Japan's total rice consumption will be subjected to dual downward pressure, namely, a decrease in per-person rice consumption resulting from population aging and a decrease in population. If Japan's total rice consumption is to decrease to 3.5 million tons by around 2050, the area of paddy fields set aside under the acreage reduction program would increase to 2 million hectares, leaving only 500,000 hectares for actual rice production. Furthermore, with the aforementioned increase in minimum-access rice imports taken into consideration, 300,000 hectares of active paddy fields would be enough to cover the entire rice consumption. The prospect of decreasing domestic demand looms as an imminent threat not only for rice growers but also the growers of other farm products as food. The ensuing results will be a further shrinkage of Japan's agriculture and farmland.

Characteristics of Japan's agricultural policy

Farm income is the difference between the total sales of farm products, calculated by multiplying the unit price by the quantity, and the cost of those products sold. One peculiar characteristic of Japan's agricultural policy is that the government raised domestic prices as a quick way to increase farm income instead of encouraging farmers to reduce costs by expanding the scale of farming operations and increasing production volume.

Provided that the total area of farmland is kept constant, an increase in the size of farming operations per farm household translates into a decrease in the number of farm households. With the overwhelming majority of their members being rice growers, agricultural cooperatives have been consistently opposed to the structural reform of agriculture, primarily driven by the desire to maintain the size of membership. Agricultural cooperatives see greater advantage in having a large number of part-time farm households as their members, rather than having a small number of "shugyo noka" or farm households deriving more than 50% of their income from farming (hereinafter referred to as "fulltime farmers" for convenience). This is because the presence of many part-time farmers, who typically keep their non-farm income in their cooperative bank accounts, enables agricultural cooperatives to strengthen their financial stability and maintain their influence over politicians. During the regime of the food control system, under which the price and supply of staple food were subject to government control, agricultural cooperatives aggressively lobbied politicians for raising the producer price of rice.

Things turned out just as they had hoped. That is, from the 1960s onward, the government steadily raised the producer price of rice, whereby even high-cost small part-time farmers continued to grow rice as they thought they would be better off doing so rather than becoming consumers and purchasing rice at an artificially high price. Because small part-time farmers did not let go of their farmland, the consolidation of farmland ownership and/or usership by large-scale fulltime farmers or those trying to earn their living solely from farming did not occur, eliminating the chance for structural reform of Japan's rice agriculture through economies of scale. Unable to increase their production volume or reduce costs, fulltime farmers' profits failed to increase.

Even today, years after the abolition of the food control system, domestic rice prices are kept artificially high by means of a supply-restricting cartel called the acreage reduction program. In order to make farmers participate in the program, the government has been providing about 200 billion yen in yearly subsidies, amounting to a cumulative total of 7 trillion yen to date. At present, 1 million hectares or more than 40% of paddy fields are set aside under the program. The government has been persistently pursuing policies contradictory to its goal of improving national food self-sufficiency, holding down the volume of domestic rice production by 5 million tons on one hand while importing 7 million tons of wheat on the other. When Norin-sho (literally translated as the Ministry of Agriculture and Forestry) proposed an acreage reduction policy in prewar Japan, it was Rikugun-sho (the Ministry of the Army), the chief advocate of food self-sufficiency, that opposed the proposal. Indeed, the true idea of food self-sufficiency just does not go together with the idea of acreage reduction.

The producer support estimates (PSEs), developed by the Organization for Economic Cooperation and Development (OECD) as a measure of protection extended to domestic agriculture, have two components, namely, a "taxpayer portion" which represents income support subsidies financed by the government and a "consumer portion" of an amount determined by multiplying the difference between domestic and foreign prices by domestic production volume (i.e. income support to farmers in the form of higher domestic market prices, instead of lower international market prices, paid by consumers).

The consumer portion for the U.S., the European Union, and Japan respectively accounted for 17%, 45%, and 88% (approximately 4 trillion yen) of their total support to farmers in 2006, compared to 37%, 86%, and 90% in the 1986-88 base period for domestic support commitments set in the Uruguay Round negotiations. While the U.S. and the EU have shifted weight from "price support" to the government's "direct payments" in their support to farmers over the years, Japan continues to protect famers by means of price support (see table). Because extreme high tariffs need to be imposed on farm imports to fill the huge gaps between domestic and international prices, Japan has been unable to undertake meaningful commitments in trade liberalization negotiations, whether at the WTO or for bilateral free trade agreements (FTAs).

Table: Comparison of Agricultural Policies in Japan, the U.S., and the EUTable: Comparison of Agricultural Policies in Japan, the U.S., and the EU

Direct income payments to farmers, proposed by the DPJ, are meant to be a program under which the government would pay farm households for the artificial or imaginary cost of rice production calculated by the Ministry of Agriculture, Forestry and Fisheries in excess of the market prices of rice subject to their participation in the acreage reduction program. (It should be noted, however, that DPJ Secretary General Ichiro Ozawa had in the past called for achieving a self-sufficiency ratio of 100% even under the zero-tariff regime - a proposal predicated on the abolition of the acreage reduction program.)

The greatest problem with the DPJ-proposed program is that the provision of such subsidies would virtually increase farmers' selling prices of rice and thus enable and/or encourage small part-time famers to continue growing rice. This would prevent the realization of consolidated ownership and/or usership by fulltime farmers, whereby any hope for structural reform would be eliminated. In fact, some small part-time farmers appear to have begun requesting the return of their farmland that has been leased out to fulltime farmers so that they can cultivate on their own. This is nothing but a repetition of the now defunct (as of 1995) agricultural policy under the regime of the food control system that overly protected small farmers. After all, the LDP and the DPJ are no different in that they need the votes of part-time farmers.

As to farm products other than rice, the DPJ intends to promote the expansion of domestic production. However, in tandem with a decline in their supply capacity, the Japanese farmers have lost much of the domestic market to their foreign competitors having superior performance both in quality and quantity. Japan's self-sufficiency ratios for wheat and soybeans stand at 13% and 6% respectively at present. Because of its qualities, domestically grown wheat is good as a raw material for almost nothing else but udon noodle. Indeed, it is not suitable for making bread or pasta. Increasing production volume for wheat and other non-rice crops would only result in the accumulation of stock for the lack of buyers. Exporting the particular type of wheat that is good only for udon noodle would be next to impossible. An excess stock of agricultural products would have to be disposed of at the cost of taxpayers.

In contrast, Japanese rice enjoys a high reputation in overseas markets. It is rice - a crop with a good chance for success in export markets - that Japanese farmers should be producing as much as they want.

Desirable policy mix

Abolishing the acreage reduction program to allow domestic rice prices to fall and making direct payments to fulltime farmers are the right mix of policies that should be pursued by Japan. If the government ends the acreage reduction program thereby letting the benchmark rice price fall to the equilibrium price of around 9,500 yen per 60kg, small part-time farmers or those that are typically producing rice at high costs would lease out their farmland to fulltime farmers. In parallel with this, the government should provide subsidies to fulltime farmers in the form of direct payments so as to increase their rent-paying capacity. By doing so, the government can facilitate the consolidated usership of farmland by fulltime farmers, thereby helping them to expand the scale of farming operations and reduce costs.

Due to a decrease in domestic demand, the benchmark price of Japanese rice has fallen from about 20,000 yen per 60kg in 1998 to a level between 14,000 yen and slightly above 15,000 yen in the past few years, but the import price of Chinese rice has increased from about 3,000 yen to above 10,000 yen over the years (see figure). This means that even today the tariff rate does not have to be as high as 50%. The ending of the acreage reduction program would bring down the benchmark price of Japanese rice to around 9,500 yen, a level below the price of Chinese rice imported into Japan. Should this happen, a substantial portion of the current 770,000 tons of rice imported under the minimum access commitment would not be imported. Meanwhile, lower costs of production, which can be achieved by expanding the scale of farming operations with the help of direct payments from the government, would enable fulltime farmers in Japan to export their products, which in turn would lead to a further increase in production volume.

Figure: Rice Price Trends: Narrowing Price Gap between Japanese and Chinese RiceFigure: Rice Price Trends: Narrowing Price Gap between Japanese and Chinese Rice

By implementing policies that drove down domestic feed grain prices, the EU has successfully replaced feed grains imported from the U.S. with those produced within the region. Lowering domestic prices for farm products enables a country to capture new demand for domestic farm products. In the case of Japan, the export of rice is the driver of such a positive spiral. Japan's narrow-sightedness to focus solely on domestic demand for farm products as food has been the cause of the decline of domestic agricultural production. The Japanese population will surely continue to age and decrease but the global population is rising and will continue to do so. And just outside Japan's national boundaries is a growing market in Asia, which is underpinned by a steady rise in income levels.

Japan's leading industries, whether automakers or electronics and electric appliance manufacturers, have successfully expanded their business by looking to markets outside Japan. Japanese farmers and agricultural policy makers should follow suit, shifting from the current defense-only policy to one that promotes expansion into overseas markets.

Given the costs of transportation to China and quality disparities between Japanese and Chinese rice, Japanese farmers will be able to export rice to China and other overseas markets if domestic prices are brought down to a level below 9,500 yen. The equilibrium price in the domestic market may temporarily fall below the international market price. But such price disparities between domestic and international markets will be eliminated in due time through arbitrage, that is, buying rice in Japan at a lower price and export for sale in foreign markets at a higher price. If Japanese agriculture becomes more cost efficient through the expansion of farming operations, Japan's export and production of rice will increase further.

The greatest domestic issue facing China today is the so-called "sannong wenti" or the "three rural problems" causing the growing urban-rural disparities with the per capita income for urban population more than 3.5 times that for rural population. This means that China's coastal areas, which are geographically close to Japan, have a large number of wealthy high income earners. This is good news for Japan in terms of rice export opportunities.

Furthermore, as China seeks to address the three rural problems, the cost of labor in the rural areas will increase, resulting in higher prices of farm products grown in China. California produces rice that is comparable to Japanese rice in quality but the production of such high-quality rice is limited in volume. This is one reason why the U.S. has lost its share to China in Japan's minimum access imports. Meanwhile, global demand is growing for short-grain rice such as Japanese rice, in contrast to somewhat weak demand for long-grain rice such as Thai rice. Last year, U.S. export prices for long-grain rice dropped in tandem with overall grain prices but those for short-grain rice moved upward, making short-grain rice twice as expensive as long-grain rice. When international prices (export prices) for short-grain rice rise due to such factors as those just discussed, Japanese domestic prices will rise as well, which will in turn lead to an increase in domestic production.

This is how Japan can and should safeguard its food security in the era of population decline. In normal times, it can export rice and import wheat and beef from countries such as the U.S., and Australia. And, in an event where a food crisis hits and it becomes difficult to import food, all domestically grown rice - including what would have been exported in normal times - can be used for domestic consumption to stave off starvation. This way, Japan can achieve two critical goals, namely, free trade in normal times and food security in times of crisis. Or, it would be more accurate to say, exporting farm products by adhering to the free trade regime is about the only way for Japan to ensure national food security, that is, if Japanese farmers are to keep production in step with demand in normal times and Japan is to preserve farmland resources that are essential to food security at a time when domestic food demand is in decline due to its shrinking population.

Facilitating the expansion of farming operations by fulltime farmers also contributes to the realization of environmentally friendly agriculture. Small part-time farmers are mostly weekend farmers who work as salaried employees on week days. Those farmers inevitably operate with limited labor input (including innovative efforts) and thus tend to substitute labor too easily with pesticides and chemical fertilizers. That is, they are inclined to minimize the use of labor, an expensive production factor, and increase the use of relatively cheap production factors such as pesticides. When more farmland is cultivated by fulltime farmers, who have less constrains in the use of labor, less pesticides and chemical fertilizers will be used, for instance, because they would work themselves to prevent and eradicate weeds whereas small part-time farmers would spray pesticides.

This is not a question of whether domestic agriculture should be protected or not. What is being asked is which policy is best-price support through the imposition of high tariffs or direct payments to farmers. Taking a lead in implementing drastic agricultural reform, the EU has been engaging proactively in WTO negotiations. Allowing falls in domestic farm prices will not only strengthen Japan's bargaining power in negotiations at the WTO and for EPAs but also contribute to the promotion of agriculture, national food security, and environmental improvements. Instead of adhering to the conventional agricultural administration and watching helplessly as domestic agriculture declines, Japan should be betting on structural reform through direct payments.

>> Original text in Japanese

* Translated by RIETI from the original Japanese article in the June 2010 issue of Shoko Journal published from the Shoko Chukin Bank Institute of Commerce, Industry & Economics, Ltd.

June 2010 Shoko Journal

August 17, 2010

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