Can Abe’s third arrow pierce Japan’s agricultural armour?

Author: Aurelia George Mulgan, UNSW Canberra

The third arrow of Abenomics (economic growth through structural reform) is flying neither high nor fast in Japan’s agricultural sector. The Abe administration’s agricultural reform program falls far short of what is needed for structural reform of the farm industry. This has implications for agricultural trade policy and for the kind of concessions that Japan will be prepared to make in international trade negotiations, both bilateral and plurilateral, such as the Trans-Pacific Partnership (TPP).

Last May, Prime Minister Abe announced big plans for agriculture, including doubling agricultural and food exports by 2020, and doubling agricultural and farm village income over the next 10 years . However, only one proposal — the creation of farmland banks in each prefecture — has a limited potential to contribute to structural reform by increasing the size of farms on leased land. At the same time, the record of similar organisations sponsored by the Ministry of Agriculture Forestry and Fisheries (MAFF), is far from impressive. Regardless, the MAFF has allocated a budget of US$67.5 million in FY2014 to set them up.

In November the government announced a further series of agricultural policy changes. One, in particular, hit the headlines: the scheme to halve the subsidy paid to farm households participating in rice acreage reduction in 2014 and to stop the subsidy altogether in 2018. Abe claimed this reform was the biggest breakthrough in agricultural reform in years. However, an accompanying increase in the subsidy for farmers who switch to producing rice for livestock feed and other purposes will lead to a decline in the production of staple food rice and thus maintain its price — the hidden agenda of the reform. Keeping the price of staple food rice high will prevent farm consolidation by supporting small farms. When added to the range of new and existing farm subsidies on offer, the total government assistance package will continue to act as a disincentive for inefficient, small-scale part-time farmers to exit the industry.

The third tranche of agricultural reforms focuses on regulatory reforms to agricultural organisations that act as intermediary institutions in the administration of the sector. Presently, these pose serious structural barriers to reform in the industry.

The reforms target three types of institutions. First, there are the agricultural committees (nogyo iinkai), mainly consisting of farmer representatives who act as gatekeepers for farmland transactions, often keeping new entrants out while allowing farmers to make large profits from converting farmland to other uses, including real estate, amounting to around US$19 billion per year.

Second is the agricultural cooperative organisation (JA, or Nokyo), which has led the charge against the TPP because lower agricultural prices will cut business profits and undermine part-time, small-scale farmers who dominate its membership.

Third are the agricultural production corporations (nogyo hojin) that manage larger scale farms, but which, by law, are dominated by farmer management and executives who are farm workers, and which can practically only be established with the cooperation of existing farmers.

None of the regulatory reform proposals to date come to grips with the serious structural issues involving these organisations. The Agriculture Working Group of the government’s Regulatory Reform Council (RRC) compiled an interim report that proposed revisions to the duties of the nogyo iinkai and to the conditions placed on the nogyo hojin in order for them to be able to acquire farmland. It also proposed improvements in JA’s activities relating to market development and raising farmers’ production capacities.

The RRC itself took up the proposals on JA in its November report, ‘On the future direction of agricultural reform’. There were criticisms in the council that the volume of JA’s credit (banking) business was too large and that it had become a subcontractor for the bureaucratic administration of the sector — a function that it has been performing since it was first established in 1947. The RRC proposed that there should be revisions to JA’s governance, a reduction in its administrative roles and the promotion of ‘equal footing’ between JA and other organisations. This would entail abolishing the preferential conditions under which JA operates, such as its exemption from the provisions of the Anti-Monopoly Law. The Industrial Competitiveness Council will also examine JA reforms in tandem with the RRC. At its March meeting the Council discussed ‘measures to promote fair competition for agricultural production corporations and the JA’.

At the end of March, following deliberations of the Council on National Strategic Special Zones, the government decided to limit strategic zones for agriculture to just two regional sites where agricultural committees will revitalise abandoned farmland and farmers will find it easier to raise funds through credit guarantees — hardly an impressive agenda of agricultural deregulation. This is despite the zones being designated as a centrepiece of Abe’s growth strategy.

What is more, all the deregulation proposals for agricultural organisations are coming up against the ruling Liberal Democratic Party’s (LDP) own counterforce in the form of the ‘Project Team for Examining the Role of the JA in the New Agricultural Policy’. It met for the first time in March with strong objections raised to the RRC’s ‘radical views’. The chairman, Moriyama Hiroshi, is also chairman of the LDP’s 256-member group opposing Japan’s participation in the TPP talks. The Project Team justified its discussion of JA reforms on the grounds that if the RRC’s proposals were accepted they could damage JA and endanger the government’s objective of ‘doubling agricultural income’ over the next 10 years. Its political activities represent a revival of the ruling party’s veto power over prime ministerial-led reforms as well as a comeback for members of the agricultural Diet tribe (norin zoku) who blocked agricultural policy reforms for decades under the ‘old’ LDP.

Abe appears to be enthusiastic about regulatory reforms, and it seems that his style of ‘advisory council politics’ (shingikai seiji) with high-profile business and academic members is providing a forum for the voices of reform to be heard. However, this will not be sufficient if reform proposals end up being substantially watered down by the LDP’s backbench or the bureaucracy.

The question is whether Abe has the stubbornness and stamina for reform like former Prime Minister Koizumi, who took on his own party and defeated it in a showdown with the electorate in 2005.

On balance, none of the proposals for reform to date constitute serious structural reform. They offer no evidence that the Abe administration is willing to create domestic conditions conducive to agricultural trade liberalisation under the TPP — another central pillar of Abe’s growth strategy. This would require, most importantly, a shift from supporting farm prices with subsidies and import tariffs to a system of direct income support which would compensate farmers for income losses stemming from agricultural trade liberalisation.

The government also needs to increase the fixed asset tax on uncultivated farmland held by farmers for profit through conversion to other purposes, thus encouraging its sale or leasing to motivated farmers and other agricultural production entities. Finally, the government needs to permit, through an amendment to the Agricultural Land Law, joint-stock companies to own farmland. This would facilitate the entry of entrepreneurial and corporate farmers into the industry, which would enhance the sector’s efficiency, productivity and ability to compete with cheaper agricultural imports as well as deal with problems such as the shortage of farm successors.

Aurelia George Mulgan is Professor at the University of New South Wales, Canberra.