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Politics are Dragging Agriculture Down

Risaburo Nezu
Senior Executive Fellow, Economic Research Center

April 27, 2010 (Tuesday)

The “individual (household) income support system” for agriculture began in April 2010. This system pays individual farmers, based on farmland area, the difference between the national average of sales prices and production costs. The support will cover only rice production this year, but is expected to eventually apply to all other major crops as well. This framework is a dramatic departure from the LDP government’s policy to protect farmers’ income by cutting rice production to maintain high prices.

1. Japanese agricultural policy: falling apart since long ago

The policy of decreasing rice production started breaking down many years ago. The drop in rice production increased fallow farmland and rice prices, leading to further production cuts because of weaker demand. As a result of this downward spiral, 40% of rice paddies were either rendered idle or switched to different crop production, and the food self-sufficiency rate fell to 40%. Despite an annual budget of 3 trillion yen, agriculture is in a state of steady decline.

Japan’s agricultural sales are currently JPY 4.7 trillion (down from a peak of JPY 7.9 trillion in fiscal 1990), about the same as Fujitsu’s revenue. Yet, there are 3 million farmers, or 20 times more than Fujitsu employees; in other words, agricultural productivity is a twentieth of Fujitsu’s. Japan’s agricultural struggles are rooted in this extremely low productivity. Rice farming requires work only during specific seasons such as planting and harvesting. With no other farming work to be done, farmers earn money either by producing other crops or finding jobs in non-agricultural sectors. Non-farming income is overwhelmingly higher for most farmers, meaning Japanese agriculture is supported by such part-time workers, of which 60% are over age 65. Japan simply cannot compete under such conditions.

2. Consolidation and expansion of farmland is key to becoming competitive

In the case of agriculture, land area and productivity are nearly proportional, so that large-scale farmland expansion is certain to improve productivity. Under the post-war land reform, farmland held by landowners was divided up and handed over to tenant farmers, leaving the average area of arable land at just over one hectare, or a fiftieth and a hundredth of the averages in Europe and the US, respectively. Though Japan faces limits in its mountainous rural areas and cannot reach the levels of the US or Australia, this has been used as an excuse to avoid due efforts. For example, the French government has forcibly bought and consolidated farmland into plots of mostly over 50 hectares. Japan also allows the leasing of farmland and has changed policy to recognize business-like management by agricultural corporations. Yet, these moves have been largely ineffective. In fact, there have been many reports of land prices rising, farmland going idle or being resold as residential plots, and farming activities being hampered because of structural improvement projects such as land consolidation and farm road construction. Japan’s farming landscape is scattered and unattractive to the eye compared to Europe and the US. More than scenery, however, this problem touches on a serious problem of productivity.

What is stopping large-scale expansion of Japan’s agriculture? The answer lies in the agriculture industry becoming a political force. Improving agricultural productivity means reducing the number of farmers. For politicians whose electoral power base is agriculture, raising productivity is to jeopardize their own political foundation. On the surface of the matter, both the LDP and DPJ show they understand the need to improve efficiency and enhance the competitiveness of agriculture, and are enthusiastically securing budgets to this end. But the truth is they do not take this matter seriously. The DPJ’s manifesto states its intent to “facilitate the continuation of farm management, including small farms, to maintain the rural community environment.” In other words, the DPJ appears uninterested in farmland consolidation and large-scale expansion. Even if the individual (household) income support system is implemented, the fiscal burden would only increase and the problems would go unresolved.

3. Income support system as an opportunity for agricultural reform

Another important agricultural matter in the DPJ manifesto concerns the conclusion of free trade agreements (FTA) with the US and East Asia. Though this was reduced to a “challenge” after Japan Agriculture Cooperatives made a fuss, the concept is to promote agricultural liberalization in return for income support. In other words, the two came as a set. The reality, however, is that FTA negotiations are stalling with both the US and East Asia, and Japan is being left behind in this global trend because it cannot move forward with the liberalization of agricultural products. Opening this market would significantly improve the lifestyles of Japanese citizens. Import restrictions have forced citizens to buy rice, meat, dairy, and other products at prices several times higher than international levels, yet no one seems to question this.

Income support has been deemed to have a marginal market-distorting effect, as it has no direct impact on prices and supply and demand in the agricultural product market. This system has been adopted widely in Europe and the US, and is permitted to a certain degree by the World Trade Organization (WTO). Opening the agricultural product market would allow Japan to pursue trade negotiations aggressively with the US as well as East Asian countries. The resulting drop in domestic prices would require about JPY 2 trillion to continue income support as before, a fiscally untenable situation. Income support should be limited to farmers that can consolidate land and improve competitive strength. The remaining small farmers would pull out of the industry by either leasing or selling their land. Though this may sound harsh, a reduction of farmers is unavoidable.

4. The useful example of Europe

France’s experience offers an insightful example for Japan. France is Europe’s largest farming country, but like Japan, was based on small-scale agriculture and lacked competitive strength in the industry. France long maintained a policy of keeping prices high by limiting production. When such market-interfering policy was rejected at the Uruguay Round negotiations, however, France underwent a dramatic policy shift and, starting in 1993, adopted an income support system. France was successful in its move to more or less require the consolidation of farmland through public land corporations, and as a result, was able to reduce the ratio of farmland plots under 50 hectares from 60% to 20% and improve competitive strength. Even so, France is still unable to seriously compete with countries like the US and Australia, and provides support reaching 60% of agricultural income. That said, the burden on the government has only increased marginally because arable land area has remained the same while the number of farmers has decreased to one-third of previous levels. The greatest beneficiaries are consumers who can procure food cheaply. Neighboring Germany also implemented such farmland consolidation and has expanded the average farmland area per farmer from 2 hectares in the 1960s to 10 hectares. As a result, Germany has achieved a surplus in grain and cereals trade. There is no reason why Japan cannot follow suit.

Japan should promote farmland consolidation in tandem with the individual (household) income support system. For example, farmers with land under 1 hectare could be made ineligible to receive income support. Since fiscal 2010 is the first year of this kind of social experiment, Japan can observe the results and gradually tweak the system as it goes. In addition, Japan should return to its original mindset and open the market for agricultural products. A double protection framework of both tariffs and income support is untenable as a policy system. It is my urgent hope that the future of income support will be seriously discussed after the Upper House elections this year. This will lead to a decrease in the farming population and, by extension, fewer farm votes. It all depends on the competency of politicians and their willingness to move forward despite this.