Rural Industries Research Development Corporation
Rural Industries Research 
& Development Corporation

Australia-Japan
Research Foundation
The
 Report

Has Japanese agricultural protection had its day?  Policies for the new millennium

The full report

This short report is based on work done in the RIRDC research project Issues, options and strategies for improving Japanese agricultural trade policies (No. ANU-36A) due to be completed later this year.

This short report is a html version of a pamphlet prepared by Dr Ray Trewin and Malcolm Bosworth of the Australia-Japan Research Centre, Asia Pacific School of Economics and Management at the Australian National University, under the direction of Professor Peter Drysdale for the World Trade Organisation meeting in Seattle last year. The research was assisted by Marpudin Azis, Sarah Leeming and the staff of the Australia-Japan Research Centre. The authors are extremely grateful for the cooperation of the the National Farmers Federation, and Professor Masayoshi Honma.

Author contact details are: telephone: +61 2 6249 3780 facsimile: +61 2 6249 0767 
Web site: http://ajrcnet.anu.edu.au  EMAIL: ajrc@anu.edu.au

A PDF version of the original pamphlet is abvailable for download (6 megs in size, needs Adobe Acrobat).

It is no secret that Japanese agriculture is highly protected. Agricultural protection has persisted despite repeated criticism from Japan's trading partners and clear evidence that the price paid by consumers and other sectors in the Japanese economy is very high.

The political influence of farmers and associated groups such as cooperatives has been very strong in Japan and they have been able to achieve some of the highest protection levels in the industrialised world. While Japan's major trading partners have pushed hard for agricultural reform, domestic support for change has been much weaker. Japanese policymakers have been able to embark on economically costly policies to promote food security and redistribute income to farmers because consumers and efficient exporting industries have not complained too hard about high prices, at least while the economy has prospered over the past three decades.

But times have changed in Japan. The agricultural sector has continued to shrink as farmers age and farming increasingly becomes a part-time job. The economy is in a severe recession, which has induced a large structural adjustment, high unemployment and lower real incomes in Japan. Food prices are now an issue for Japanese consumers and they are questioning the wisdom of having to pay over six times the world price for rice and over four times the world price for milk. When recent import liberalisation brought lower prices for beef and some other products, consumers embraced this by increasing consumption.

Past policies clearly have not worked, and Japan has partially accepted this fact. A new Basic Law on Food, Agriculture and Rural Areas was passed in 1999 promising agricultural reform (AJRC 2000). How far does this reform go and does this law signal that Japan is at last serious about making real changes to its agricultural policies?

High prices for Japanese Consumers

 

Great lengths to protect a declining sector

Japan's justification for its protectionist policies has been that farming in Japan is different from farming in other countries. The differences are hard to find. Japan's agricultural sector looks much like many others in countries where farming has lost its comparative advantage: with a falling number of small and mainly part-time farmers, heavily reliant on imported inputs to supplement high-cost domestic inputs, and contribut- ing a declining proportion to the economy (EAAU 1997). Sectoral decline, be it in agriculture or manufacturing, is an important way of releasing resources for expanding sectors, such as services. Japanese agriculture now makes up less than 2% of GDP. Why has the Japanese government been so intent on protecting such a small sector of the economy, and why has reform been so slow?

The difficulty in reforming agriculture in Japan can be explained by the dominance of agricultural cooperatives and the nature of Japanese politics which gives greater weight to the lobbying power of the countryside. The problem with trying to please lobby groups is that policies can be put in place that are unrealistic, inefficient, and conflicting.

Food security is the number one goal. Self-sufficiency in food has been encouraged through import restrictions which create high prices and encourage domestic production. The state is heavily involved in controlling the supply and prices of some commodities on the domestic market, with profits going to government revenue. Farmers have been offered subsidised interest rates to purchase machinery and construct production facilities, and the government has spent heavily on infrastructure in rural areas.

Goal of food security an illusionary one

Japan has placed great importance on the need to achieve food self-suffi- ciency, but the policy may be hurting those it professes to protect. Food may be plentiful in Japan, but it has not been sold at the "reasonable prices" that the Japanese new Basic Law desires. Food is costly, especially for those on low pay, and this has reduced the ability consumers have to buy other goods and services, thereby hurting other suppliers. High prices affect the community's capacity to consume food and may act to reduce food security for vulnerable groups.

Self-sufficiency in food is at odds with other objectives of stability and sup- port of farm incomes. By supporting farm incomes through maintaining high prices, the sector's long term competitiveness and its ability to provide food security are reduced. The goal of protecting the environment sits uncomfortably with Japan's heavy reliance on intensive agriculture to fulfil self-sufficiency goals. It can be argued that Japanese agriculture is not truly self-sufficient as it is heavily dependent on imported inputs such as fertiliser and oil.

Japan is finding food self-sufficiency to be an elusive and unrealistic goal. Japan resorted to imports after self-sufficiency in rice, the staple food, failed during recent droughts. The programs in place to limit rice produc- tion and prevent surpluses were partly to blame. These programs are estimated to have reduced rice production by 25 per cent at the time. Consumer demand has weakened for traditional products and driven down self-sufficiency ratios. The change in demand has partly been a response to high prices.

New justifications for protecting the rural sector

Policymakers have been stating that Japanese agriculture is multifunction- al. The view that agriculture provides net positive benefits to the environ- ment and culture is a questionable one. Japanese farming needs large doses of fertiliser and other inputs, and it is unlikely that the net impact on the environment has been positive: in a number of countries a correla- tion has shown up between agricultural protection and environmental damage. Japanese consumers are asking how environmentally sound agri- culture really is following a number of health scares associated with home- grown food. The hope that agriculture would help with flood control has not been fulfilled. Multifunctionality is discussed in detail in ABARE (1999) and AJRC (2000).
 

Japanese agriculture is relatively highly dependent on imported inputs

 
 
 
Japan's Policy Menu
  • food security
  • stability
  • income support
  • environmental protection

 
Policy Tools
  • price support
  • trade restraints
  • state trading
  • input subsidies
  • infrastructure investment

Few benefit from Japan's agricultural policies

The benefits of Japan's agricultural policies are far outweighed by the costs to consumers, other producers and the economy generally. While Japanese policymakers like price stability - for both producers and consumers - and stable farm incomes, this may not be in anyone's best interests.

Consumers clearly lose - stable prices are far less important to them than lower prices. Manufacturers and service industries, particularly exporting industries and processing industries, also lose through higher factor input prices. A number of these manufacturers have moved offshore, and are exporting back to Japan or to the world, taking Japanese jobs and capital with them (Honma 2000).

Farmers are gaining less from the policies designed to protect them. Incomes of full-time farmers are above the national average but declining in relative terms. Stable prices do not guarantee stable farm incomes because production quantities often fluctuate, and stable prices reduce the incentives to adopt efficient and commercial farming practices.

Some part-time farmers may benefit from lower land taxes and higher pensions, but full-time farmers appear to have gained little. Higher farm incomes feed through to higher land prices, raising production costs and reducing farm rates of return. High land prices favour incumbent farmers, and deter new farmers and those expanding their business, as they face large capital costs. Many full-time farmers would accept more competition so long as this provided them with the ability to innovate and expand production.

Finally, there are negative impacts on other countries, including developing countries. Japan's policies have the effect of lessening production abroad, as well as transferring any domestic instability through to the world market. Japan often states it is the world's leading food importer, but this is merely because of the size of its economy and its poor resource endowments. Foreign exporters want to be allowed to compete equally with domestic food producers. In terms of purely economic benefits, this is what is best for Japan as well: the Japanese economy has paid the price of domestic political goals in supporting a small sector.

Japan and the Uruguay Round

Japan pledged in the Uruguary Round to convert some agricultural nontariff measures, such as quantitative restrictions, to tariffs. Tariff quotas were applied to guarantee a certain minimum access for imports. Most of these remain unfilled. Rice was exempted from tariffication as long as Japan increased minimum market access to 4% of the base domestic market and then increased access to 8%. This proved too hard for Japan and tariffication was introduced in 1999 at prohibitively high levels, which actually lowered market access. This and other developments suggest that Japan's Uruguay Round commitments are likely to lead to little liberalisation, although tariffication at least makes the high levels of protection more transparent, and provides a base for future multilateral reductions, as also required under the APEC (Asia Pacific Economic Cooperation) Bogor Declaration.

Pressure for change

Japan's trading partners have repeatedly complained in both bilateral and multilateral forums about Japan's resistance to agricultural liberal- isation (see ABARE 1988). If current exports are lost through a rise in protectionism, Japan may have little power to protest in multilateral forums, such as the World Trade Organisation (WTO), without further action on agricultural reform.

What future does Japanese agriculture have without a change in policies? The decline in the number of farmers is likely to continue. Self-sufficiency ratios will continue to fall. The recession has shocked many Japanese into realising that prosperity is not guaranteed and that a more competitive economy is necessary. It is increasingly obvious that protectionist approaches have not been effective: the economy faces low growth in the long term and needs to reform lagging sectors. This difficult domestic environment has coincided with changing trends internationally. Production is becoming more innovative and greater importance is being given to sustainability of production, and to meeting consumer demands, including for safe food.

The main beneficiary from the reform of Japanese agricultural policies would be Japan. Although domestic considerations alone have not been sufficient in the past to generate reform, this may be changing a little. In a recession, the public is finding it less palatable that farmers are allowed to gain from high prices, while other sectors suffer. Growing demands for agricultural reform will eventually encourage political changes. Now is the best time to push for agricultural reform.

A new law for the new millennium

Changes to Japan's agricultural sector were included in the 1999 Basic Law on Food, Agriculture and Rural Areas, following a report by a special Advisory Committee to the Prime Minister in September 1998. The changes resulted from pressures from its trading partners and from Japanese business interest groups and consumers. Many of the changes were contained in earlier guidelines agreed to between the government and agricultural groups in the Fundamental Principles of Agricultural Policy Reform adopted in December 1998.

These changes provide a degree of optimism that the tide may be finally changing in Japan against the continued provision of agricultur- al protection "at any cost." But do they go far enough, quickly enough? The new Basic Law aims to make Japanese agriculture more market ori- ented and WTO-consistent by restoring the price mechanism and giving farmers payments that are decoupled from production, rather than using import controls. The law represents a significant change in policy, and has had broad acceptance, including from the Japanese Ministry of Agriculture, Forestry, and Fisheries (MAFF) and the agricultural cooperatives. Price support policies for a number of major commodities are now under review with the aim of increasing market functions.

Changes to land use have given farmers in joint-stock corporations the opportunity to purchase land for agricultural production. The greater use of market tenders and lowered guaranteed prices will improve state trading enterprises. Greater market orientation is evident in the dairying industry.

The new law still contains provisions that promote self-sufficiency and agriculture's multifunctional role, and emphases the need to encourage sustainable agricultural development including in new regional areas. These are still major policy goals in Japan. In April 1999 MAFF, in outlining Japan's Fundamental Position on the upcoming WTO Negotiation on Agriculture, Forestry and Fisheries, said that food security was one of the issues of most concern to Japan.

There have been some recent glimpses of changes in policy, for instance Japan's move toward providing farmers with income support, along the lines applied in Europe, rather than price support. With this approach the expense is very visible and may be very unpopular during times of stringent budgets. Moreover, although the new law did include a food self-sufficiency ratio as a policy target, it is generally acknowledged by policymakers that this is more a guideline than a target. Raising the ratio above its present level of 41% on a calorie basis cannot be achieved by policy alone.

Self-sufficiency ratios are determined not only by supply but also by demand. High prices of traditional staples, such as rice, have pushed consumers toward imported food. Japan has embarked on a campaign to shift consumer demand back to traditional products that the Japanese agricultural sector provides, albeit at a high price.

Beef industry liberalises...and farmers survive

Full-time Japanese farmers should be assured that liberalisation will not bring their demise. Quotas on beef were replaced in 1991 with tariffs of 70%, which were gradually reduced to the current level of 50%. The Japanese beef market has grown in response to lower prices, yet the domestic industry still exists and produces much of what it did previously, but in a more competitive form (AJRC 2000). This is an example of how consumers, efficient agricultural producers, and the economy can benefit from the policy of replacing import restrictions with tariffs. If tariffs, such as on rice, were reduced further to ensure that Japan met its minimum market access commitments, this would bring further benefits.

Beef liberalisation increases consumption and farmers survive

 

Better ways to help the farming sector

The reforms introduced following the Uruguay Round fall well short of what is needed to allay external pressure on Japan or to ease the burden on the economy. Japan's objectives for the rural sector can be achieved in more efficient ways.

Food security

The most efficient policy instrument for achieving food security beyond that provided by open and well-functioning markets is to provide subsidies for stockpiling staple foods (Anderson 1998). Stockpiling, while representing a substantial and direct cost to the government, would be far more effective than trade restrictions, which have no budgetary impact but cost consumers and the Japanese economy far more and contribute less to food security. If Japan continues to admit imports only to "top up" domestic production, it is unlikely that diversified food sources and well-functioning import and distribution networks will be developed. Import liberalisation helps achieve food security, as it aids the development of smooth and effective supply systems, and stabilises trade and domestic production (Ohga 1998). Food security requires an agricultural sector that can adjust to constantly changing international and domestic environments. This requires realistic prices for land, and low exit costs. Farmers need to be motivated by commercial factors if the agricultural sector is to become competitive. Those who argue that the problem will disappear as Japanese farmers grow older and the sector shrinks are advocating the death of the sector, not adjustment to be able to survive efficiently. The longer adjustment is delayed, the more difficult it will become. Declines in agriculture will diminish the power of interest groups such as the MAFF, the cooperatives and rural-based politicians, even if these groups take on broader interests. To all parties, adjustment to a more efficient and dynamic sector is preferable to the continued decline of the sector.

Other important ways to achieve food security have been discussed in APEC and are set out in PECC (1999). A balanced and integrated package includes measures aimed at improving agricultural production, such as developing rural infrastructure. The package includes ways to achieve technology transfer and food safety. There are also measures aimed at improving the trading system, such as addressing food security through the reform of export taxes, embargoes and subsidies (that discourage production and raise world prices), and achieving further trade and investment liberalisation. Japan's main interest in food security would appear best served by achiev- ing an efficient farming sector complemented by more reliable trade with a wider range of sources - the concept of "food reliance". Trade has provided food security to many APEC economies during economic crises and natural disasters. An exception could be made to the general elimination of export controls provided in Article XI of the GATT to allow countries suffering crit- ical food shortages to temporarily apply export prohibitions or restrictions. Exporters should be required to apply such measures nondiscriminately.

The environment

Environmental concerns are not able to be addressed by agricultural protection, and the value of agriculture to the environment and culture is better preserved through paying farmers directly rather than providing agricultural protection through import barriers (see ABARE 1999 and AJRC 2000 for more details on this argument).

The biggest contribution that can be made to farming in OECD countries is the replacement of price supports with direct payments that can be targeted to achieve environmental or other spillover benefits (Anderson 1998). Unfortunately, governments find direct payments less palatable because they appear in the budget and funds are often hard to find for this type of protection. This may be a desirable discipline. Agricultural protection, whether provided as income support or in some other form, needs to be curbed if farming is to be internationally competitive and capable of surviving without government support.

A trading agenda for the future

Trade liberalisation in manufacturing and services under the Uruguay Round significantly benefited Japan, and future WTO negotiations are bound to place considerable external pressure on Japan to liberalise agriculture. While the structure of the 2000 WTO trade negotiations is yet to be decided, it will cover not only agriculture and services, but will involve further industrial tariff reform. The comprehensiveness of the round, which is likely to have to be completed within a set period, perhaps three years, will provide potential for sectoral trade-offs. Many of Japan's major trading partners may see agriculture liberalisation as the price Japan must pay for other market-opening measures. Japan's exporters will be keen to trade out of the recession, and are likely to join the call for agriculture reform to secure increased market access abroad.

In terms of negotiations, from an economic perspective the most protected sectors such as rice should be reformed first. The out-of-quota tariff rates on rice and many other products are substantially above the levels necessary to support existing production. If not politically feasible, it may be useful to address other sectors first in order demonstrate the benefits of reform. This is happening in Japan with beef.

Under arrangements set out in the new Basic Law, sectors such livestock are beginning to be reformed with greater use of market operations to deliver lower guaranteed prices. Taking the easy road involves the risk that the economic benefits of the reforms will be lost if highly assisted sectors, such as rice, are left alone.
 
 

Key Issues for Negotiation at Seattle 
  • reduction of high tariff levels and relaxation of tariff quotas;
  • change in state trading activities affecting imports to allow genuine commercial access;
  • trade and investment liberalisation in conjunction with liberalisation of export subsidies;
  • the introduction of multilateral disciplines over the use of export taxes, embargoes and quotas;
  • multifunctionality addressed through direct payments rather than producer subsidies and trade impediments; and
  • development of a well-functioning import and distribution network, including holdings of commodity stocks.
Japan will be involved in a list of agricultural reform items
 
 

The challenge for the new millennium

Australia's interest in Japanese agricultural reform stems not only from it being major agricultural exporter, but from the benefits it gains from a healthy Japanese economy. Reforming economies benefit most from trade reform and a stronger Japan helps Australia's prosperity, as the economic relationship between the two countries covers more than just agricultural trade.

Japan"s economy will require continued restructuring as it adjusts to changing domestic and international environments, and agriculture must play its part. Domestic interests behind agricultural reform, such as consumer and business interests, have essential roles in supporting change. Academic research is also important as it can show the costs of protectionist policies and the benefits of reform. Research can feed into Japanese policy processes, for example through the Council for Food, Agriculture and Rural Area Policies, which includes inde- pendent academic researchers.

The recent APEC meeting in Auckland strongly endorsed a new comprehen- sive WTO round, and support for the round is gaining momentum. A balanced and comprehensive package of measures was approved, covering rural infrastructure development, technology transfer and food safety. Food security was seen as best achieved through the removal of export taxes, and through trade and investment liberalisation. The meeting recognised the benefits of multifunctionality, but stated that this issue is better addressed directly rather than through production subsidies and trade restrictions. Japan is now starting to realise that past policies to protect farming have not worked and that it can no longer avoid agricultural reform. The challenge for the new millennium is to find more sustainable ways to secure the future of the farming sector. The new Basic Law provides a foundation for change and it is one that Japan's trading partners and domestic pressure groups can build on to achieve a better future for Japanese agriculture.
 

References

AJRC (2000), "Improving Japanese agricultural trade policies: issues, options and strategies", Pacific Economic Papers 300 (forthcoming), Canberra: Australia-Japan Research Centre.

ABARE (1988), "Japanese agricultural policies: a time of change", Policy Monograph No. 3, Canberra: AGPS.

ABARE (1999), "Multifunctionality: a pretext for protection?", ABARE Current Issues 99.3, August, Canberra: ABARE.

Anderson K (1998), Domestic Agricultural Policy Objectives and Trade Liberalisation: Synergies and Trade-Offs, paper presented at OECD Workshop on Emerging Trade Issues in Agriculture, Paris, Paris: OECD.

EAAU (1997), "A new Japan? Change in Asia"s Megamarket", Canberra: Department of Foreign Affairs and Trade.

Honma M (2000), The New Basic Agricultural Law and Trade Policy Reform in Japan in "Improving Japanese agricultural trade policies: issues, options and strategies", Pacific Economic Papers 300, Canberra: Australia-Japan Research Centre.

Ohga K (1998), World Food Security and Agricultural Trade, paper presented at OECD Workshop on Emerging Trade Issues in Agriculture, Paris: OECD.

PECC (1999), "A 'win-win' outcome in APEC food policy", PECC Issues 4/1999, September, Singapore: Pacific Economic Cooperation Council.

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