The Importance of Food (and money)

The Importance of Food (and money)

      Abe Touches Japan's Third Rail

 

Even modest reforms to rice subsidies are a welcome step.

 

From the Wall Street Journal

Japan's government announced last week that it will revisit a few of the rules governing the country's sclerotic agricultural market, especially rice production. While this isn't the industrial or service issue most people associate with Prime Minister Shinzo Abe's reform program, it is a sign that he is willing to touch one of the third rails of Japanese politics.

Rice farmers have long been one of the Liberal Democratic Party's core constituencies, so you know change is afoot when an LDP leader dares to discuss reducing the decades-old subsidy for farmers to not plant rice. Under the Production Adjustment Promotion Program ( PAPP ), farmers receive payments for land they leave fallow.

The purpose is to discourage farmers from increasing rice production in response to the high domestic rice prices caused by other government policies, such as import tariffs of 778%. Roughly 30% of Japan's paddy land is unused thanks to this policy.

Tokyo's rice policies are expensive for ordinary Japanese as consumers and taxpayers. Taxpayer subsidies for rice amount to 500 billion yen ($5.1 billion) per year, according to Kazuhito Yamashita of the Canon Institute for Global Studies. Consumers pay another roughly 500 billion yen more per year for rice than they would if free competition and imports were allowed to pull prices downward.

That's a 1 trillion yen subsidy for a rice industry whose total annual output is 1.8 trillion yen. The proportion is in line with the rest of Tokyo's agricultural supports. Taxpayer and consumer supports for Japanese agriculture amounted to 51% of gross farm receipts as of 2011, according to the OECD, compared to an average support ratio of 20% among OECD members.

These subsidies create major distortions. The paddy set-aside program discourages the consolidation of smaller plots into bigger farms by enabling small farmers to stay in operation when market signals otherwise would encourage them to sell. The remarkably small size of the average Japanese farm—only 8% of farms are larger than one hectare (2.5 acres)—means that Japan has exceptionally low farm productivity. Guaranteed income from PAPP and other subsidy programs also explains why farmers resist selling land for non-agricultural uses despite high land prices.

These are not subsistence farmers toiling 12 hours a day in the paddies. Rampant subsidies have transformed farming into part-time work for 72% of Japanese farming households, whose breadwinners often have other jobs. Japanese farmers on average had per capita incomes 21% higher than their non-farming countrymen as of 2010, according to the OECD. Farm subsidies are becoming a form of old-age benefit. The average age of farmers is 66 and nearly half are older than 70.

The reform Tokyo is contemplating is modest relative to the scale of Japan's agricultural problems, but it would mark an important step. Details are sparse, but the government may try to restrict eligibility for PAPP payments to farms larger than four hectares, or 10 hectares in Hokkaido, to remove a disincentive for consolidating smaller plots.

Tokyo might also move further toward direct income supports for full-time farmers. This would reduce subsidies that currently dissuade part-time farmers from giving up their plots. If coupled with freer domestic pricing and international trade, this would at least become a more honest form of socialism until Tokyo can bring itself to eliminate subsidies.

Farmers have long resisted such reforms, but their numbers are diminishing as children refuse to take over the farms. Meanwhile, Mr. Abe is keenly aware that urban voters are coming to support freer trade, including Japan's participation in the Trans-Pacific Partnership talks. TPP will require significant agricultural opening, and reform will be necessary to allow Japanese farmers to compete with imports.

This is an issue worth watching as Abenomics unfolds. TPP could be Mr. Abe's most consequential reform, but only if it triggers domestic reforms that allow greater competition.

The original link can be found at: http://online.wsj.com/news/articles/SB10001424052702304527504579168961244747846