See also: Hayami, Y. Japanese Agriculture under Siege: The Political Economy of Agricultural Policies, Macmillan, 1988.
Introduction: Japanese agricultural policy worthy of study because of a) GATT agreement and Japan's importance as a major importer with a highly protected domestic agricultural sector; b) the development of Japan's agricultural sector and associated policies in conjunction with rapid growth of rest of the economy, exhibiting a trend apparent in the development of newly industrialising countries (NICs) such as Korea and Tiawan, namely the increase in domestic protection as real incomes grow.
The most extensive plains are in Hokaido (characterised by short summers and severe winters - ave temp 41ûC with 1015mm. (40in.) of rain), which also has the largest farms (though still tiny by western standards). There are also larger plains round Osaka - Kyoto - Kobe, Tokyo (plain of Kanto) and Nagoya (plain of Nobi). Kyushu is almost sub-tropical (warmed by the sourthern Japan current in contrast to the northern Okhotsk cold current in the Sea of Japan). Rainfall in Honshu mountains is 3810 mm (150 ins).
Japanese Agricultural Policy History:
Basic Factors:
1. Limited arable land, high population (124 m.) and rapid growth, coupled with benign climate and abundant rainfall make JapanÕs agricultural land extremely valuable and highly productive. More than 40% of cultivated land is in rice - 10m. tonnes, 1/3 of crop income. Potatoes, vegetables and fruit (mandarin oranges) are also major crops. Livestock is mostly pigs and poultry, though there are some 5 m. cattle.
2. Wars and island isolation -> self sufficiency goal (but Japan is largest food importer and has increased imports of food in the post WWII era, imports 5% of total world wheat imports, 20% of soy and feed grains, and domestic self-sufficiency has mostly declined, 1960:1885: Grains 83% to 34%; Rice 102% - 107%; wheat 39% - 14%; coarse grains 66% - 2%; Dairy, eggs and meat about constant at 81 - 103% Total final food consumption 91% -78%)
3. Post WWII reconstruction -> land reform, 1950, 6m. farmers on 5 - 6 m. ha. (a change in ownership, not occupation) farm sizes in Japan constant at around 1ha. since 1900.) Japan peace treaty didnÕt become effective till April 1952, post allied occupation.
4. Democracy -> 1/2 population in farm households (now down to 15%), predominant agricultural representation + emphasis on cooperatives as political as well as production/marketing movements
5. Rapid economic growth -> a) high and growing demand for food; b) pressures on agricultural incomes and wages. leading to dramatic shift on internal comparative advantage away from agriculture - Manufacturing productivity outstripping agricultural productivity growth by 1.4% (1960 - 1980) in Japan, whereas the comparison in most other countries has been the other way round. 2.9% in UK advantage to ag.; 3.1% in US; 3.6% in FRG. -> shift of comparative advantage away from agriculture in Japan.
6. historical shift from the "food problem" of low income, high food drain economies to the "farm problem" of high income low food drain economies occurred very rapidly in Japan, mirrored in development of NICs (eg.Korea).
7. Government is through a national legislature (ÔdietÕ - two elected houses - lower- Representatives and upper - Councillors), with executive power in a Cabinet headed by the Premier. Representatives are elected for a four year term, Councillors for six (with one half subject to re-election ever third year - 100 of the total of 252 Councillors are elected Ôat-largeÕ, the remainder from 47 prefectural districts). As in the UK, the lower house has control over legislation and veto rights over the upper house. Traditionally (i.e. since WWII) the Liberal-Democrats held power, but the 1993 election saw the LDP loose its majority, while the opposition socialists were heavily defeated.
Table 1. Japan's economic and agri-food history.
Income per head: 1880 - 1920 Japan a developing country; a Newly Industrialising Country (NIC) by 1935 - 1960; a developed/industrialised country from 1970 onwards. Income growth reflected in contraction of the agricultural sector, measured in either labour or GDP shares of total economic activity (cols. 2 and 3), and also in the declining importance of food consumption in the total (col.4) also reflected in increasing share of food consumption devoted to marketing and processing leading to decreased importance of farm gate prices in determination of food costs at consumer end. (See Hayami, p 26 -42 for description/ analysis of Japanese agricultural policy to WWII)
Productivity Growth (Col. 5) while agricultural output and productivity in Japan has grown at rates comparable to elsewhere in the world, the very rapid growth in non-agricultural labour productivity rates has resulted in agriculture falling behind the rest of the economy in Japan, to a greater extent than elsewhere elsewhere. Pre WWII, this led to a declining ratio of farm to non farm incomes (col.6) but since then farm incomes have improved a) because of an improvement in the relative prices of farm to non farm outputs (agriculture's terms of trade) resulting from protectionist policies and b) because of the influence of off-farm sources of income for farm households, which has been a major factor.
Between the wars, in spite of falling relative incomes in agriculture, protection was kept at a minimum because of the reliance of the economy on manufacturing growth premised on low labour (and hence food) costs. Since WWII, however, the decline in the proportion of food in total consumption and the increase in incomes reduces this problem and allows protection to grow.
However, in 1930s industrial depression compounded an agricultural depression of the 1920s and saw the introduction and development of rice policy to maintain domestic rice prices through government marketing and control of imports (Hayami, p37 - 38) and also led to the coalition of landlord and industrial interests for the support of farmers incomes - the potential cost of increased food prices being offset by the maintenance of a 'reserve' labour pool for industrialists to weaken the potential power of labour organisations and unions, though only to limit rural poverty, not to reduce the gap between agricultural and non farm incomes.
Post WWII Policy Development:
Objectives:
Instruments
Nominal rates of protection measures the difference between domestic producer prices and world prices as a proportion of world prices:
Commodity by commodity, Japan protects rice, dairy, beef, poultry and eggs more heavily than feed grains. Principle is the same as for industrial goods - protect secondary processing and manufacturing but not primary commodities (for which Japan has no comparative advantage). Rice might seem an exception, but rice is extremely important in domestic Japanese agriculture (60% of farm households get more than 60% of farm cash receipts from rice)
Import Restrictions: apply either through explicit quotas or through state trading. Rice Imports controlled through state trading - Food Agency - (which also controls wheat and barley; while another state trading organisation - Livestock Industry Promotion Corporation - controls beef, butter and powdered milk) Note: while Import Quotas do contravene GATT provisions and regulations, state trading does not. However, IQs do generate considerable economic rents for those who own the licences to import and also to those responsible for their allocation - which creates vested interests in maintaining them in the domestic political process.
Price Support Policy: Price Stabilisation programmes - (Meat, Dairy products) buffer stock operations supporting domestic prices between ceiling and floor prices, where the stabilised price zone is higher than the equilibrium price so that the buffer stock makes a loss financed by the government, partly through import levies (beef). Deficiency Payments also used - soybeans, rapeseed and milk products. Milk products DP is partly financed from state trading profits in the marketing of milk.
Capital Subsidies: by 1984 some 40% of total agricultural investment was funded from government subsidies, while 80% of land infrastructure (farm ditches, irrigation improvement, farmland consolidation, farm rent subsidies, as well as major drainage schemes) was so funded. These percentages increased more or less in line with the rate of nominal protection on output. Hayami cites estimates that net subsidies (net of farmers tax payments, which are minimised through various unspecified means) amount to 35% of total agricultural GDP.
Rice is under direct government control: Food Control Law, 1942 which controlled most food items when introduced, but now only rice remains under government control including distribution to the wholesale level (control was exercised up to the retail level until 1972). Initially, the policy was directed to controlling food prices in the interests of the consumer, but shifted in the 1960s to favouring the producer. Imports are controlled through the state trading practice of the Food Agency, and in practice imports are virtually nil.
1960: Production Cost and Income Compensation Formula: cost of production ascertained for yields per hectare one SD lower than average, where yields are typically inversely related to costs of production, and labour costs set equal to non farm wages. Hence the CoP formula led to massive increases in rice prices (and production) which eventually (1968) forced a halt to price increases.
Gap between producer and import prices increased from 50 to >120%.
Producer price frozen 1969 - 71 (although the formula was not abandoned! - budget rules, OK).
1988 - 91 has shown some reduction in the gap between domestic producer and import prices. As domestic production exceeded consumption at these prices, surpluses built up in storage. Old rice sells at a severe discount to fresh rice - so average salvage value of rice declines sharply with increasing surplus. Stocks sold for industrial (limited); feed use or export (also limited because of international objections) selling price one half to one seventh of domestic market selling price.
Hence introduction of acreage control programme (1969) which subsidises set-aside (either withdrawal from production or diversion to other crops). Nearly 1/4 of total paddy area is now set-aside. By 1973, the market seemed to be under control - supplies (controlled through set-aside) in line with demand, which has been steadily falling. Then world food crisis fears (and increasing costs due to oil crisis) coupled with domestic complacency about the force of supply response to rising prices led to a new round of rapid producer price increases and relaxation of acreage control. The ensuing price freeze and reimposition of acreage control in late 1970s and throughout the 80s was inevitable (see Hayami, 67 - 71 for summary).
Marketing policy: In addition to the above, the Food Control Agency also controls the marketing of rice:
in '000 yen per ton brown rice, 1986 - Hayami - the situation was as ilustrated below:
Consumer prices tend to be increased as producer prices are increased, but with a delay - hence avoiding some of the problems of rapid increases in consumer prices during 60s, though with consequent increase in government costs. By 1990, this picture had been revised by reducing the purchase price and the selling price, and reducing the net tax cost:
Policy leads to reduction in consumer surplus (further encouraging switch away from rice to other foods in consumption) and also slowing the production adjustment from rice to other commodities, while depressing outmigration of labour from agriculture. Rice consumption declined (in expenditure terms) from 10% in 1960 to 4% in 1970 to 2% in 1980, to 1% in 1990.
Hayami sees rice policy as a key to policy reform in Japan - Rice is key product of many (often part-time) farms and high prices reduce incentives for these farms to release land to neighbours for other uses (or even more efficient rice production in larger scale units). Reducing rice prices (now begun to some extent) may trigger some additional structural change and start a process of agricultural and associated policy reform in Japan.
Japanese Farm Policy Developments: (1980s)
1. Slower economic growth -> Pressure on budgetary support; slower increase in food demand; less opportunity to absorb released labour; switching from export-led to domestic-led growth in the macro-economy leads to pressure to increase domestic demand (from where? - answer?? reduce government spending on agriculture and reduce proportion of consumer spending on food (20% in Japan versus 10% in the US) by reducing protection.
2. High Levels of Support had become unsustainable -> high land prices; growth in output; surpluses in rice and dairy products - something had to be done.
3. Achievement of Farm Income Parity? Ambition had led to high support costs (budget problems + high food prices), while off-farm incomes for many part time farms has meant that farm families are actually already better off than non-farm families.
4. Change in the political balance of power away from the traditional LDP (with majority of farmer and NOKYO support) to a more free-market political party, coupled with pressure from GATT negotiations, led to policy change:
Policy changes:
Major resistance to policy change comes from the historical establishment of vested interests in control and protection of the agricultural system - the "Iron Triangle" between Bureaucrats, Cooperatives and ruling LDP which relies on agriculturally related votes to sustain it in office, coupled with the rigidity of agricultural structure.
Failures to reform the basic structures and reasons for the dominance of part time farming are explored by Hayami (Chapter 4) Though it is possible that some reform may now bein progress (see Hayami, Chapter 5 for beginnings of this). Although restrictive land laws have been responsible in the past for slow structural change, these have now been considerably relaxed. The principle reason for slow adjustment appears to be that the relative rates of return between small farms and their larger counterparts has not been great enough to persuade the small farmers to release land to larger farmers. The rates of technological change and associated economies of size now show sign of moving sufficiently in favour of larger farms to encourage amalgamation of operation if not ownership. In addition, the lack of enthusiasm of younger generations for farm work is also expected to accelerate structural reform (Tachi, University of Tokyo).
Japan and the UR Ag. Agreement (source: IATRC URAA evaluation, 1994): Rice is the key domestic problem - no (or limited?) internal political impetus to liberalise rice markets, in spite of external pressure through GATT and bilateral trade disputes/talks.
Rice is exempted from the tariffication procedure for 6 years (to 2000), in return for which Japan has agreed to a minimum import (access) formula of 4% of domestic consumption (86/88) in 1995 rising to 8% by 2000. This will be implimented through the Food Agency, who will import the rice, and have agreed a maximum mark up on imports at an equivalent of a 731% tariff equivalent (basis Thai rice price) - hence, Japan has bought special exemption for rice through accepting greater import access than otherwise (3 - 5%). The consequences of this agreement seems likely to be a substantial increase in the excess supply of rice in Japan, which either means a depression of domestic market prices (of probably more than tarrification plus 15% reduction would have cost in terms of price reductions) or a build up of stocks/increase in set-aside.
On other commodities, Japan has agreed to tariffication of previous import restrictions, but has managed to convert to tariffs at high levels so that for most products the actual decline in import protection over the period of the URAA will be slight. The only exceptions are Beef, Oranges and juice, cheese, ice cream, soy and rapeseed (canola) oil, which had been ÔliberlaisedÕ prior to the URAA, and are due for tariff cuts of between 25 and 45%.
However, arguments above would suggest that there is already a momentum building up in Japan for greater reforms than the IATRC seem willing to admit.