Japan Agriculture Policy Review
One in a series of policy notes on countries of interest to Canada. This note draws on analysis from several institutions, listed on page 5.
Japan, with a population of about 125 million, is a major importer of agricultural products. Japan's mountainous topography limits the area available for farming, with a total cultivated land area of around 4.8 million hectares. Farm holdings are small, averaging just over 1.5 hectares.
Japan has producer support levels among the highest in OECD (Figure 1), driven in part by food security concerns and memories of food shortages during World War II and its aftermath. The Ministry of Agriculture, Forestry, and Fisheries (MAFF) has used a combination of border measures, domestic policies including direct budgetary payments, regulation and mandated administrative processes to support domestic production.
This policy note first provides an overview of the policies that Japan has traditionally used to support its agricultural sector. Following this, new policy developments that seem to signal a shift towards a more decoupled framework are described. Finally, some possible changes in the structure of Japanese agriculture resulting from demographic drivers are outlined
Domestic Agri-Food Policies
Japan's commodity policies fall into several categories: producer quotas; income stabilization policies; deficiency payments; the rice diversion program; hazard insurance subsidies; and stock holding policies. Brief descriptions of these policies follow below.
Producer quotas exist for fluid and manufacturing milk. The Japan Dairy Council administers the fluid milk quota. The quota's purpose is to control milk production to stabilize market prices. The Agriculture and Livestock Industries Corporation (ALIC), a state trading enterprise, administers the manufacturing milk quota for milk destined to be made into butter and milk powder. Participating farmers are paid a direct payment per litre for milk within their quota. Separate quotas are maintained for milk used in cheese and cream production.
Japan introduced commodity-based stabilization policies in the late 1990s based on pre-existing programs for vegetables and fruits. These policies compensate farmers for part of the losses they incur if current year market prices are lower than a moving average of historical prices. Stabilization policies are in place for fruits, vegetables rice, soybeans, milk, and other products. As agricultural prices have been falling for some time, the moving averages of historical prices also trend downward.
Deficiency payments pay all, or part of, the difference between a target price and the actual market price in the current year. Such programs exist for beef calves, soybeans, and pork.
Static rice demand and high, policy supported, returns to rice farming have meant that production threatens to exceed consumption in most years. To counteract this and to avoid problems with surplus rice disposal, Japan's rice diversion program pays farmers to use rice fields for purposes other than growing rice for food. Diversion payments vary according to the crop or land use that the farmer chooses. The payments can be substantial, with a $6,933-per hectare maximum payment for farms above a minimum size. These annual payments are in addition to other subsidies received for crops other than rice. Many paddies are planted to rice but get diversion payments because farmers do not harvest rice grains for the food market, but instead harvest the fields for green manure or feed, grow special rice for industrial use, or other special purposes.
Many crop and livestock activities benefit from government-subsidized insurance programs, which pay an indemnity when crops fail or livestock are hit by disease. The programs are voluntary, and details of coverage vary by crop/livestock activity. The government typically pays part of the premium and also provides reinsurance in case indemnity requests overwhelm local insurance funds.
Most government-set prices have been eliminated, except for sugarcane, sugar beets, potatoes and sweet potatoes for starch manufacture still exist. A production quota remains in place for sweeteners made from corn and potato starch.
State trading enterprises maintain stocks of certain foods and feeds, notably rice. Other stocks include butter, skim milk powder, wheat, soybeans, and corn for feeding. The stocks are supposed to be sold and replenished in an orderly way for food security purposes. In addition, interventions in dairy markets are sometimes made to bolster prices.
Trade and Border Measures
Japan is the world's largest net importer of agri-food products with Canada accounting for 5.6% of the $68 billion in Japanese Agrifood imports in 2005 (Figure 2).
Japan uses tariff-rate quotas (TRQs) to protect its most sensitive commodities, such as rice and rice flour, wheat and wheat flour, butter and milk powder, and sugar. The quota is a fixed volume of product. Imports brought in within the quota pay a lower tariff, while imports in excess of the TRQ face much higher tariffs, almost all so high that they prohibit trade. The government gains even more control by allocating a number of important quotas to one of two state trading enterprises.
The Food Department within Japan's MAFF has the exclusive right to import rice, wheat, and barley within those TRQs and the Agriculture and Livestock Industry Corporation (ALIC) has exclusive importing rights to two of the biggest dairy TRQs. The government, through the state trading enterprises, decides how much to import, when to import, and at what price to resell the imports into Japan's market. Within some of the quotas, government owned corporations have the sole right to import, and the imported commodities are resold domestically with sizable markups.
In recent years, Japan has converted part of its TRQs to operate under Simultaneous-Buy-Sell (SBS) programs. Under SBS rules, companies interested in selling to Japan and companies interested in importing can jointly make a bid to import a specified amount. The joint bid proposes a purchase price (from the exporter) and a sales price (to internal markets). The state trading enterprise (STE) chooses the bids that have the biggest difference between the purchase and sales price and awards them the requested import volume, provided other criteria are met. The STE then retains the difference between the prices as a mark-up. While SBS systems do not avoid mark-ups, they do allow more direct contact between sellers and buyers. SBS systems are in place for rice, feed wheat, and feed barley.
Japan's border policies also protect certain processing industries. Strict government control over wheat, rice, dairy, and sugar products encourages processing of foods made from those commodities. Tariffs on vegetable oils make crushing margins high enough to sustain Japan's soybean and canola crushing industry. Despite border measures which protect flour milling, sugar refining, and butter and powder production, Japan's imports of processed foods and beverages have grown.
New Policy Developments
In the post-war era, farm subsidies in Japan have had two defining features: 1) different amounts are paid based on the commodities produced; and 2) all farmers, regardless of size, qualify as eligible recipients. Previous policy programs provided a degree of social security to rural communities in that they aimed to fill the income gap between farming households and urban dwellers.
This approach to policy is now being challenged. The historical rationale behind such transfers has been eroded: the average annual farm household income is now somewhat greater than the national average (by 25-30 percent); almost 80 percent of farmers are part-time, with about two-thirds of their income earned off the farm. As this information has become more widely understood by the electorate, they have pressured for changes to policies which use their tax dollars to make transfers to relatively affluent farming households.
In March 2005, a new Basic Plan for Food, Agriculture and Rural Areas was announced. One of its most important elements is a transition towards a flexible commodity policy. The government is reducing its involvement in price formation of agricultural products. The administered price for rice was abolished in 2004 and administered prices for wheat and barley in 2007. However, there are still several commodities for which administered prices are set. The Agriculture and Livestock Industries Corporation continues to operate price stabilization systems for beef and pork.
A new Farm Management Stabilization Programme came into effect on April 1, 2007 that provides new direct payments. In part, these payments are intended to compensate for part of the loss of income compared with the average income of the preceding years and to mitigate income instabilities caused by price fluctuations. The gradual shift from government involvement in price formation to more decoupled direct payments might in time result in Japan following policies similar to those of the EU.
Regardless of recent policy announcements, Japan's domestic policy and border measures still provide its farmers with considerable assistance. The figure above shows relative support to selected commodities in Japan. The producer nominal assistance coefficient for rice was almost six in 2004; this means that Japan's producers received prices equivalent to six times world prices, after considering all means of support and protection.
Demographics Will Drive Change
In 2005, Japan counted roughly 2.2 million commercial farms. Over 8 Simultaneous-Buy-Sell million people live on these farms. Despite having some of the highest levels of agricultural support in the world, 5.6 million farmers rely more on non farm economic activities than farming. Only about 30% of Japanese farmers are full-time farmers.
The main threat to Japan's traditional agricultural sector now is a shortage of successors in younger generations. About 2.0 million of the 8 million farmers are considered
"core farmers" because they are actively involved in the management of the farm. Almost 1.4 million core farmers are over the age of 65 and almost 300,000 are between 60 and 64. Within the next 10 to 15 years, most of these individuals will leave farming due to their age or health reasons. There are roughly 700,000
"core" farmers under the age of 60, with around 400,000 that derive the majority of their income from farming activities.
Given the age distribution, it is likely that major adjustments are imminent that will involve rationalization and consolidation into larger farm sizes. The average farm size is likely to gradually grow from 1.5 hectares currently to as much as 8 or 13 Simultaneous-Buy-Sell hectares as this process of inter generational transfer takes place. The speed of adjustment will depend on the decisions of elderly, part-time farmers and hobby farmers to exit the industry.
While historical policies assisted one generation of farmers (those of the 1960s and 1970s), they may have impeded adjustment and been a factor in the age distribution of farmers in Japan today.
Japan's key agri-food sectors have high tariffs, which have contributed to higher food prices. The most heavily protected products are rice, wheat and milk, with Japanese producer prices being roughly six times world prices for wheat and rice. Despite high levels of protection and support, Japan's rate of self- sufficiency has been declining and now sits at under 40% on a caloric basis; agri-food imports were CAD $68 billion in 2005.
Recent policy discussions have touched on some of the challenges currently facing Japan's agri-food sector. Most land holdings are quite small and many farmers supplement their incomes with off-farm income. Measures put in place to assist one generation of farmers have slowed adjustment and unintentionally discriminated against subsequent generations of would-be farmers.
The government is gradually reducing its involvement in the price formation of agricultural products. Although there are still high levels of border protection for many commodities, administered prices were abolished for rice in 2004 and for wheat and barley in 2007. New direct payments were introduced in 2007 to compensate for a more flexible commodity policy and to concentrate support on more efficient and stable farmers.
Asian Productivity Organization (1998) Agricultural Price Policy in Asia and the Pacific, APO, Tokyo.
Ministry of Agriculture, Forestry and Fisheries (MAFF). 2005. Key Points in the Basic Plan for Food, Agriculture and Rural Areas, Tokyo, Japan
OECD, Agricultural Policies 2006: At a Glance, Paris.
PECC (2003) Where demographics will take the food system, Pacific Food System Outlook,Singapore.
Roberts, I, Warr, S., and G Rodriguez 2006. Japanese agriculture forces driving change. ABARE research report 06.24. Canberra, Australia.
World Trade Atlas, 2006.
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