Introduction
The World Trade Organization ministerial conference held in Cancun, Mexico, in September 2003, broke down due to conflicting opinions on such issues as agriculture. Japan could not accept the agreement reached between the United States and the European Union that banned tariffs on agricultural products over a certain level (for example, 100%). When it comes to free trade agreements (FTAs) that require the abolition of substantially all trade tariffs, Japan was able to sign an agreement with Singapore, which has no agricultural industry, but negotiations with Mexico are said to not be going smoothly because of strong opposition from the domestic farming sector. Japan's agricultural sector has come under fire from those who say that Tokyo is unable to play a leadership role in WTO negotiations or conclude FTAs because of farm issues. In view of this, the government has launched a review of the nation's agricultural policy under the Council on Food, Agriculture and Rural Area Policies.
"I am filled with deep anxiety regarding the current state of Japan, which has gained a bad international reputation, paid the price of becoming isolated within the global free trade system and still remains frightened over the possibility of the destruction of domestic rice farmers, should rice be imported, and fears that supply of its staple food will fall into the hands of foreign countries. 'Food security' has become one of the grounds for arguing for opposition to the opening of the rice market, but how can we talk about security when we are producing rice that is seven to eight times more expensive than that in other countries?" Such were the words of Takekazu Ogura - the division chief in charge of postwar agrarian reforms and the man behind the drafting of the former Agricultural Basic Law, as well as the chairman of the government's Tax Commission at the time the consumption tax was introduced - during negotiations of the Uruguay Round of trade liberalization talks under the auspices of the General Agreement on Tariffs and Trade.
The Staple Food Control Law enacted in 1942 was essentially a consumer protection law aimed at securing equal distribution of limited food supply among the population, and rice prices in Japan were lower than international prices up until 1953.
Why did international competitiveness decline?
The former Agricultural Basic Law, enacted in 1961, was based on the belief that the structural problem of subsistence farming brought about by postwar agrarian reforms could be resolved if farming scale was increased through the outflow of labor from the farming sector to other industries, and that farms would start growing other produce as consumer demand for agricultural products shifted to such items as livestock and fruit, following a rise in income. Because of this, the Agricultural Basic Law aimed to reform the nation's agricultural structure, increase profit for farmers and correct the income gap between the agricultural and industrial sectors by reducing production costs through expanding the scale of farms, and boosting productivity and the selective expansion of agricultural production by shifting to agricultural products for which demand could be expected to rise. Income increases if either sales value increases or production costs are slashed. Agricultural income could have been sufficiently secured by cutting costs, even for crops whose demand could not be expected to rise such as rice, if productivity was boosted by expanding the scale of farms. However, policymakers adopted a different policy to correct the income gap between the agricultural and industrial sectors.
"One way to correct that income gap is to revamp the agricultural structure. [However,] authorities instead decided to support prices. They raised rice prices substantially. Rice pricing policies in the postwar period had existed to suppress prices. But authorities moved to use them as a means to raise rice prices. Without thinking of balancing supply and demand, the argument that rice prices should rise in line with inflation and increasing production costs was presented at the Rice Price Council, the Diet, and in petitions from agricultural organizations. That is one reason for the failure [of the structural reforms]" (quoted from Ogura). There was a rice glut, and while production adjustment continued for over 30 years, the nation's agricultural resources did not shift from rice, which was profitable, to other produce, and Japan's food self-sufficiency fell to 40% from 79% in 1960. It was the agricultural imports, rather than domestic producers, that moved to incorporate the idea of selective expansion. During the past 40 years, some 2.3 million hectares of farmland has disappeared. This figure is greater than the total amount of land liberated under the postwar agrarian reforms. The perception that farmland was in excess, when in fact it was only rice that was in surplus, came to be firmly established, and so even while Japanese negotiators at the WTO explained the need for food security, no one at home had a sense of the crisis being faced over the decline in farm land resources indispensable for food security. At present, Japan only has enough farmland for its people to survive if they all ate potatoes.
Cost per unit of a crop is calculated by dividing cost per unit of farmland by yield, so a rise in yield per unit through such technological advances as improving varieties reduces cost. However, amid the rice surplus, there was little increase in yield per unit, which would have lead to more stringent production adjustment. The expansion of farming scale through the accumulation of farmland is also a factor that displays economy of scale and lowers costs. However, because high rice prices even also effectively encouraged farms with high production costs to continue to grow rice rather than buy it, the number of small-holding farms did not decrease and farmland did not accumulate. In this way, structural reforms did not move forward and Japan's international competitiveness in agriculture declined. Even after the abolition of the Staple Food Control Law, production adjustment - the cartel that maintains rice prices - continued. Although the size of an average farm in France has grown by some 150% over the past 40 years, the comparable figure for Japan is a scant 36% (17% if Hokkaido is excluded).
The peculiarities of Japan's agricultural policy and the policy reforms of the EU
The PSE (Producer Support Estimate) developed by the Organization for Economic Cooperation and Development (OECD) as an index to measure agricultural protection combines consumer burden in the form of price support brought about by tariffs (the gap between domestic and international prices multiplied by production volume) and taxpayer burden in the form of subsidies and payments made to farmers. In contrast to the U.S. and the EU, which saw the proportion of their consumer burden in PSE fall from 47% to 39% and 85% to 57% respectively, the figure for Japan remains at 90%. In Japan, which relies on tariffs, agricultural policy has become extremely dependent on consumer burden. On the other hand, the EU has implemented agricultural policy reforms and greatly reduced its dependency on tariffs so that now it can compete with U.S. wheat, even on a zero-tariff basis.
The EU reforms comprised a reduction in price support and the introduction of direct payments to farmers. Under WTO rules, agricultural subsidies such as direct payments are classified into three "boxes": "amber" subsidies which should be reduced and can be retaliated against; blue, subsidies which do not require reduction but may face retaliation; and "green" subsidies which do not need to be reduced and will not be targeted for retaliation. In 1996, the U.S. began introducing Green Box direct payments to farmers that were not linked to production or prices. The EU, for its part, reduced price support and introduced Blue Box direct payments linked to farmland area and livestock numbers in 1992, after introducing Green Box direct payments to disadvantaged areas to correct disadvantages in production conditions in 1975 and Green Box direct payments to promote environmentally friendly farming methods in 1985.
Agricultural reforms that can weather the WTO and FTA age
In order to boost international competitiveness, Japan should correct its past agricultural policies, lower prices and introduce direct payments like the EU. Firstly, prices for rice should be lowered to the level where supply and demand are in balance through the gradual reduction and abolition of production controls. If direct payments to farmers affected by the price cut are made based on farm area, the money will not adequately compensate them, as part of that money will be used in expenditures such as rent to landlords. Because of this, in order to ensure that both production and prices are not affected, the government should make U.S.-style Green Box direct payments that can sufficiently compensate farmers for lost income to farms larger than a certain size (initially, 10 hectares in Hokkaido and three hectares in all other prefectures). Unlike price support, which affects all farmers, focusing assistance on certain farms is indeed the essence of direct payments, and it is inappropriate to subsidize farms that are not adversely affected by lower prices (part-time rice farmers only get ¥100,000 in income from farming). The ¥8.22 million and ¥8.01 million in income made by farmers who plant rice as a secondary crop and as part-time rice farmers respectively, exceeds the ¥6.62 million in income of an average salaried worker's household.
The graph in diagram 1 compares the reasons why farmers found it difficult to expand their farms in 1994 and 2001. During this seven-year period, the price of rice fell 24%, from ¥21,367 per 60 kg to ¥16,274 per 60 kg. Unlike the days when rice was expensive, there are much fewer farmers who do not want to let go of their land as a result of lower prices. On the other hand, from the point of view of borrowers, the number of those who cite low rice prices has increased sharply. When prices fall, farmers with small holdings become willing to relinquish their land, but because the ability of tenants to pay rent also declines, farmland is often abandoned. If the government were to provide EU-style direct payments to farms larger than a certain size in proportion to farmland acreage, so as to supplement their ability to pay rent, farmland would become concentrated at these farms. These direct payments would serve not only to cut costs directly through reduction of the rent burden itself, but also to cut costs indirectly by increasing farming scale and improving productivity through the concentration of farmland. If the government relied on these indirect effects, the fiscal burden would be much less than if it attempted to slash rice prices to international levels in one stroke.
There is no reason for agricultural groups to oppose this idea of selective targeting of farms by the government, because small-holdings farmers would also receive a part of the direct payments as income from rent. For areas where farming conditions are so poor that production costs will not fall despite efforts, the government should refer to the direct payments the EU provides for areas with disadvantageous conditions and expand the scope and amount of its direct payment program for mountainous areas that was introduced in fiscal 2000. It is essential for these payments to be focused on certain farms, and it would be pointless if this could not be done. Although there was political opposition, the government limited the areas and farmland eligible for the mountainous area direct payments when the scheme was introduced. Any new direct payments should also be limited to those farms that will assume responsibility for future food production, or else such structural reforms would prove ineffective. Judging from Japan's PSE, the burden shouldered by the public to protect domestic agriculture comes to ¥5 trillion (or 2% of the consumption tax) for price support through tariffs, and ¥500 billion in taxpayer burden. According to the OECD, while farms receive 100% of the direct payments, they get no more than 25% of the price support as income after purchasing items that include agrochemicals and fertilizer. The WTO negotiations do not call for the total abolition of tariffs on farm products and there are virtually no FTAs that do not have exceptions for agricultural products. But even if domestic prices of farm products were reduced to those of international levels, my calculations show that farmers' incomes can be maintained through direct payments of ¥1.25 trillion, or 25% of the aforementioned ¥5 trillion, and the existing taxpayer burden of ¥500 billion. This figure is well within the current state agriculture budget of ¥2.4 trillion.
We need to shift from a consumer-burden based agricultural policy. The basic conditions for Green Box policies accepted by the WTO are that prices are not supported and that policies are based on taxpayer burden. Although consumer burden-based policies do not clarify who is actually footing the bill, those based on taxpayer burden make the relationship between burden and benefit clear to the public. Price support is unfair in that poor consumers also shoulder the burden while wealthy landowning farmers who only farm part time also receive benefits. Direct payments through taxpayer burden, which are also recommended by the OECD, will not only do away with the distortions on consumption and raise economic and welfare levels, but can also limit beneficiaries to those farms and farmers that really need public assistance.
If Japan can do away with the so-called convoy style of agricultural policy and farmland can be concentrated through direct payments for specific targets, costs will decrease as a result of an increase in farming scale, prices will fall and the fiscal burden of agricultural policy can be transformed into consumer benefit. Is this not indeed a consumer-oriented agricultural policy? This new policy could lead to a rise in food self-sufficiency (through the rise in production in wheat and other crops with the abolition of the production controls for rice and the correcting of the relative profitability of rice vis-a-vis products such as wheat), a stable supply of inexpensive food for consumers, a reduction in the overall burden on the general public, development of the food industry (as a result of supplies of low-cost raw food materials), stable income for farms responsible for producing the nation's food and the promotion of agriculture that is environmentally friendly (as farms that are larger in size are more apt to adopt farming methods that protect the environment). During WTO negotiations, Japan and the EU agreed that the multifunctionality of agriculture - its important role in areas other than agricultural production, such as the cultivation of water resources - should not be overlooked. However, co-operation between the two sides fell through because the policies they had hoped to secure were different - tariffs for Japan and direct payments for the EU. If Japan wishes to join hands with the EU, should it not adopt the same policy stance? As PSEs show, the agricultural policies of the EU are closer to those of the U.S. than Japan. It is not without reason that the U.S. and the EU reached a farm accord right before the WTO Cancun meeting to reject high tariffs such as the one Japan slaps on rice. I believe the time has come for Japan to release tariffs, which have long shouldered much of the weight of domestic agriculture protection, from this heavy burden.
A strong agricultural sector that can triumph over international competition
The farm policies envisioned by Ogura were not realized while he was alive. However, the following words he uttered a decade ago have not lost their luster, but in fact shine brighter than ever.
"Since prewar times, Japan's agriculture and its agricultural policy have been plagued either by the poverty of farming villages or food shortages. The most radical effort to break this deadlock was the postwar agrarian reform. Looking at the present as one who was involved in this reform, I am struck by how times have changed in terms of the improvements made to the quality of life in farming villages and Japan's dietary habits. However, I feel that there is a weakness in this economic prosperity. Japan's farms have lost 'strength of farming' in return for gaining wealth. We can no longer depend on the warmth of protection and subsidies. It is time for us to not only repeatedly chant that we oppose imports, but also strive to create 'strong farms' that can withstand liberalization and seriously think of a way in which they can be revived and get by on their own."
How would those who have followed Ogura's footsteps feel upon hearing these words? It would not be an exaggeration to say that the future of Japan's agriculture hinges on how many can sympathize with these remarks.
