Chapter

IV Agricultural Policies in Japan and Their Economic Consequences

Author(s):
International Monetary Fund
Published Date:
January 1990
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The Japanese economy’s impressive postwar performance has been led by rapid growth in manufacturing productivity and accompanied by a substantial loss in comparative advantage in agriculture. However, government policies—prompted by concerns about farm income as well as food security—have acted to inhibit the reallocation of resources corresponding to this shift in comparative advantage. Thus, although Japanese imports of agricultural products during the postwar era have increased in relation to domestic production, almost three fourths of food consumption is still produced domestically at prices substantially higher than those on the international market.

In recent years, pressure for agricultural policy reform has increased. Much of the pressure has been associated with Japan’s substantial trade surplus, as well as with the large imbalances in world agricultural markets that have made agricultural reform and trade liberalization a major priority in the Uruguay Round of multilateral trade negotiations. Within Japan, public awareness of the costs of agricultural policies seems to be increasing, and the need for reform has been recognized in the Mayekawa reports and the latest Five-Year Plan.2 Thus, certain steps have been taken, such as the liberalization of beef and citrus imports and small reductions in administrative prices for a number of commodities. However, full-fledged reform remains a major unresolved issue.

This paper reviews the main policies that have been used to support Japanese agriculture and provides an indication of the costs of these policies and of the benefits that would accrue from their elimination. It presents a brief background on developments in the agricultural sector in Japan and discusses policies that have affected agriculture: given the importance of rice in Japan, it also outlines separately policies related to that commodity. The paper then examines the effects of government intervention and the impact of policy reform and provides concluding comments.

Postwar Developments in Japanese Agriculture

The importance of agriculture to the Japanese economy has declined markedly since the mid-1950s. Over 1955–88, real GDP in agriculture rose at an average annual rate of only ½ of 1 percent, and its share in total GDP shrank from about 20 percent in 1955 to 2½ percent in 1988. Employment in agriculture, which accounted for almost 40 percent of total employment at the beginning of the period, fell by over two thirds and now amounts to less than 7 percent of the total.

At the same time, Japan’s agricultural imports have risen rapidly, both in relation to world trade in agriculture and to domestic production. Accordingly. Japan’s self-sufficiency in food has declined (see Table 1). Nevertheless, 70 percent of food consumption continued to be produced domestically in 1986, with self-sufficiency rates particularly high for rice and certain other highly protected commodities. The growth in imports has largely reflected the expansion of domestic livestock industries, which are heavily dependent on freely imported feedgrains.3

Table 1.Japan: Self-Sufficiency Rates of Major Agricultural Products, 1960–861(In percent)
1960197019801986
Rice10210687108
Wheat3991014
Barley107341515
Pulses441378
Soybeans28445
Vegetables100999795
Fruits100848173
Eggs101979897
Milk and
milk products89898686
Meats91898178
Beef96907269
Pork96988782
Poultry100989489
Sugar18232933
Fats and oils42222932
Food total90787270
Grains total82453331
Source: Ministry of Agriculture, Forestry, and Fisheries, Food Balance Sheet, 1983 and 1986.

In the postwar period, Japan’s comparative advantage in agriculture has declined sharply. From I960 to 1980, the annual growth of labor productivity in agriculture fell short of that in manufacturing by about 1½ percentage points: for the United States, the United Kingdom. France, and the Federal Republic of Germany, annual productivity growth in agriculture exceeded that in manufacturing by an average of 3 percentage points over the same period.4 The loss in comparative advantage in large part reflects the rapid growth of productivity in Japanese manufacturing. In addition, however, agricultural productivity has been adversely affected by the small scale of farming operations in Japan, which has limited the scope for substituting capital for labor and the realization of scale Economics, particularly for land-extensive industries. In the ease of rice, for example, the average cost of production on large farms (i.e., larger than 3 hectares) was 50 percent less than on small farms (i.e., smaller than 0.3 hectare) in 1985: moreover, this discrepancy was only about 10 percent in the period 1955–65. In 1985, average farm size amounted to 1.2 hectares, with only 4 percent of all farms operating on land of more than 3 hectares: this scale of holdings has been broadly unchanged over the last 30 years and compares extremely unfavorably with other industrial countries.5

During the 1950s, the relative decline in agricultural productivity growth and broadly constant domestic terms of trade in agriculture led to a widening disparity between rural and urban family incomes, which, in turn, became a major consideration in the development of agricultural policies over the subsequent two decades. The objective of rural-urban income parity certainly has been achieved—in the mid-1980s, the average per capita income of farm households was about 10 percent higher than that of wage-earning households in other sectors. Government policies have contributed to growth in farm incomes through the provision of subsidies as well as by causing a sharp rise in the agricultural terms of trade.6 However, off-farm earnings appear to have been the main factor in the increase in farm household incomes. Part-time farming increasingly has become the norm, and by the mid-1980s, off-farm earnings accounted for 85 percent of farm household income, up from 50 percent in 1960. It may be noted further that the proportion of off-farm earnings in total farm household income is higher the smaller the scale of operation. Thus, the Japanese farm sector is dominated by a large number of small-scale, part-time, and high-cost producers for whom agricultural income is relatively unimportant. This suggests substantial scope for greater efficiency through structural reforms and a lowering of trade barriers.

Policies Affecting Japanese Agriculture

The key objectives of Japanese agricultural policy from the early 1960s to the mid-1980s were (i) the equalization of incomes and living standards of farm and nonfarm workers and (ii) the achievement of food security. The Agricultural Basic Law of 1961 specified that the income parity objective should be achieved by raising productivity through increases in operational farm size and improvements in land infrastructure and agricultural technology, as well as by shifting production toward products whose demand was expected to increase. Food security became a prime concern following the world grain crisis and the soybean export embargo imposed by the United States in 1973, and later the establishment of the 200 nautical mile exclusive economic zones in view of the Japanese fishing industry’s heavy dependence on coastal waters.

In pursuit of these objectives, the Government has intervened heavily in the agricultural sector. Measures that have attempted to encourage structural adjustment include supply management and deregulation of controls on land use. Progress in achieving structural adjustment, however, has been limited. Although certain subsectors (such as poultry and pigs) have expanded and have done so with relatively little protection, the policies have failed to transform Japan’s farm sector into one dominated by “viable farm units.”7 As noted earlier, there has been little change in the operational scale of farms, and rural-urban income parity has been achieved mainly through the increased importance of off-farm earnings.

Analysts8 cite a number of factors that have contributed to the prevalence of small-scale, part-time farming: the rapid growth in nonfarm employment opportunities and in their accessibility; the diffusion of small-scale machinery; regulations governing land use; and expectations of land price increases combined with the widespread fear that land, once leased, is lost forever. This agricultural structure, however, has been heavily supported by policies that directly affect agriculture: border measures, direct price and income support to producers, input subsidies, and tax preferences. The discussion that follows briefly describes the main features of such policies.

Border Measures

The border measures that have perhaps generated the most attention recently among Japan’s major trading partners have been the quantitative restrictions on agricultural imports. The number of agricultural and marine product groups considered under GATT rules to be subject to import quota restrictions was reduced from 102 in 1962 to 22 by 1974. Subsequently, there was no change in the number of agricultural product groups covered by quotas until 1988, although quotas were removed on some minor individual items within the groups and loosened on certain other commodities. In addition to these quotas, state trading by governmental monopolies controls the imports of four other agricultural product groups. The most important of these is rice, which has not been imported since 1970 except for small quantities intended for particular forms of processing. All in all. the commodity groups subject to quantitative restrictions have been estimated to have accounted for almost half of gross agricultural output in the mid-1980s.9

Japan took several steps to liberalize quotas during 1988–90. In response to a GATT panel ruling on a complaint lodged by the United States that restrictions on 10 of 12 agricultural products (which account for a relatively small share of trade) were inconsistent with the GATT, the Government undertook to phase out quotas on eight of the product groups by April 1990 and agreed to improve market access for all the other four groups.10 More important, following negotiations with the United States and Australia, it was announced that quota protection for beef and fresh oranges would be eliminated in April 1991. and for orange juice by April 1992. For beef, new tariffs would replace the quotas, while citrus imports would continue to face existing tariffs.11

A number of other nontariff barriers also have served to protect Japanese agriculture, including health and quality standards and the limited capacity of quarantine facilities (e.g., for live cattle imports). As part of the 1988 citrus agreement, however, one notable nontariff barrier, a regulation requiring imported orange juice to be blended with domestic citrus juice, is being phased out.

While quantitative restrictions have been important, tariff protection has been relatively modest. Substantial tariff cuts were made under the Kennedy and Tokyo rounds of multilateral trade negotiations. The average post-Tokyo Round tariff rate on agricultural commodities was 8.6 percent for Japan, substantially higher than the 2.9 percent for the United States but lower than the 12.3 percent for the European Community (Yoshioka, 1988).12 In addition, certain agricultural commodities are protected by tariff quotas,13 whereby primary tariff rates (sometimes zero) are applied up to a certain quantity of imports and higher rates levied thereafter.

Price and Income Support

Direct support through price and incomes policies has come to play a key role in Japanese agricultural policy. Prior to the enactment of the Agricultural Basic Law in 1961. pricing policies were limited to rice, wheat, raw silk, feed, and potatoes for industrial use. Subsequently, pricing policies also have been applied to livestock and dairy products, soybeans, rapeseed. sugar beet, sugar cane, vegetables, and fruit. It has been estimated that in 1982 as much as 80 percent of agricultural output was covered by price policies.14

A noteworthy feature of agricultural price policy in Japan is its product specific nature, with no general system covering the agricultural sector as a whole. The extent of government control also varies widely. Government regulation has been most pervasive for rice, wheat, barley, beef, dairy products, and sugar, with state trading organizations administering price support schemes. The largest and most expensive price support program is that for rice (see below).

Producer prices for most commodities are set on the basis of estimated production costs and, in pursuit of the Government’s policy, to ensure income parity between farm and nonfarm employment. However, for a number of commodities, in particular rice, the annual price-setting process has been heavily influenced by political considerations. Since 1960, domestic sales prices generally have been lower than the guaranteed purchase prices for producers, resulting in large government expenditures, either directly or through statutory agencies.

Price stabilization schemes have been developed for a number of products, including beef, pork, dairy products, and cane and beet sugar. These programs involve buffer stock operations to maintain domestic wholesale prices within certain price bands. Deficits, generated by consumer prices normally being lower than prices within the band, are financed by import levies and budgetary transfers. In the case of beef, for example, the Livestock Industry Promotion Council (LIPC). which administers the price control and import quota system, intervenes in order to stabilize prices by adjusting domestic stocks as well as the How of imports into the Japanese market. The price stabilization arrangements for beef are likely to change as the role of the LIPC is reduced markedly with the liberalization of beef imports.15

Deficiency payments are used to support incomes of producers for a limited number of products, including soybeans, rapeseed, and milk for processing. In these cases, the Government makes payments to producers for the difference between target prices and market prices. For calves, vegetables, and fruit for processing, similar support is provided under “price stabilization” funds, which make deficiency payments when market prices fall below certain target levels. Payments by these funds are financed jointly by contributions from the Government and producer associations.

As the price support mechanisms were instituted from 1960 onward, administrative prices of agricultural products in Japan rose (Table 2). The government purchase price of rice, for example, increased fourfold from 1960 to 1977, more than twice the rate of increase in world market prices. The rise in administrative prices came to a halt in the 1980s. Indeed, during 1986–88, support prices of major agricultural products were reduced across the board, reflecting the lower cost of imported inputs as well as the recognition of the need to raise efficiency and reduce discrepancies relative to world market prices. Accordingly, the government purchase price of rice was lowered by 6 percent in 1987 and by a further 4½ percent in 1988, the first such reductions since 1956. In addition, it was announced in mid-1988 that effective 1989. the calculation of the purchase price for rice would be on the basis of production costs of farms with a minimum of 1.5 hectares, rather than the average for all farms as in the past. Calculating producer prices on the basis of costs on more efficient farms was introduced for several other products in 1987–88 as well.

Table 2.Japan: Administrative Prices of Major Agricultural Products, 1970–89(In yen per kilogram, unless otherwise noted)
197019801985198719881989
Rice (husked)
Government purchase price138295311293279279
Wheat
Government purchase price57178185174166160
Sugar beet
Minimum producer price17,76020,48021,02019,66018,72018,450
Soybeans
Standard price84280287266251251
Manufacturing milk
Guarantee price448990838080
Butter
Stabilization indicative price6471,2531,2761,1001,0801,092
Skimmed milk
Stabilization indicative price388501541527521527
Steer beef
Standard stabilization price1,1051,1201,020995995
Pork
Standard stabilization price345588600455410400
Source: Ministry of Agriculture, Forestry, and Fisheries.

Progress in increasing the market orientation of administered prices was much more limited in 1989. The purchase price of rice was not reduced, and implementation of the new method for calculating production costs was delayed. In addition, support prices for manufacturing milk and beef also remained at their 1988 levels. In 1990. however, some renewed progress has been evident: in July the purchase price for rice was lowered by 1¼ percent and the revised cost-calculation scheme was instituted.

Other Policies

Japanese agricultural policy relies on a number of other subsidy programs in addition to direct price and income support. These include subsidized production diversification programs (most notably in the rice sector), the financing of buffer stock operations, the financing of marketing activities for products subject to state trading, the subsidizing of several land and other infrastructure improvement programs, the subsidizing of loans at preferential rates of interest, and the public funding of research and development activities.16

Given the large number of such programs and the various institutional channels through which the assistance is provided, quantifying the extent of such support is difficult. With regard to budgetary expenditure of the central government, however, program payments excluding those related to price policies amounted to an estimated ¥ 1.8 billion or 15 percent of gross agricultural output in 1985. up from only 4 percent of gross agricultural output in 1960.17 Furthermore, the farm sector came to depend heavily on such assistance to finance investment—government subsidies funded 60 percent of capital formation in agriculture in 1984, up from 26percent in 1960.18

Certain features of Japan’s tax system also have served to discriminate in favor of agriculture, Hayami (1988) cites studies that suggest that first, the effective tax rate on agricultural income is markedly lower than that on other income, reflecting a lower ratio of reported to actual taxable income on self-assessed agricultural income. Second, property taxes on farmland in urban areas are negligible compared lo other uses, reflecting land price assessments that are only a fraction of market value. In 1982, an attempt was made to raise property taxes on agricultural land in urban areas to a level equal to those on residential land, but loopholes were introduced that have exempted 85 percent of the targeted farmland. And third, the inheritance tax includes an exemption for agricultural land with respect to the difference between the market value of the land and the present value of the agricultural income from the land, provided the heir declares the intention to continue farming the land for 20 years. With a widening margin between the present value calculation and market value, this exemption increasingly acts to discourage the liquidation of inherited farmland. These problems have attracted increasing attention, and the Government is now in the process of conducting a comprehensive review of the land tax system to address them as well as other issues. Legislation regarding a comprehensive land tax reform is scheduled to be presented to the Diet by the end of FY 1990.

Finally, Japanese agricultural policies are intimately linked with the activities of agricultural cooperatives (Nokyo). Organized at the village, prefectural. and national levels, the cooperatives have links to all agricultural sectors with almost all farm households as members.19 The cooperatives provide farmers with a comprehensive range of services, including marketing, finance, insurance, management guidance, and provision of fertilizer and other inputs. The increase in part-time farming has led to a greater dependence of farmers on these services. Furthermore, they perform important roles in the implementation of government policies, particularly in the marketing and distribution of rice, for which they receive commissions and budgetary subsidies. The cooperatives have also been accorded a quasi-official role in various aspects of the policy formulation process, and are generally consulted on all major legislative changes that may affect them.

Policies for the Rice Sector

Rice has traditionally been the most important agricultural product in Japan, and government intervention in the rice industry has been long-standing. At present, rice continues to account for one third of total agricultural output and is subject to the highest protection among agricultural products.

Since the passage of the Food Control Law in 1942, the rice industry has been under the direct control of the Government.20 The Food Agency of the Ministry of Agriculture, Forestry, and Fisheries initially regulated the distribution of rice from the producer to the consumer, and set prices from the farm gate to the retail level. In 1972, controls over rice distribution beyond the wholesale level were removed, and retail prices were freed.

At present, most of the rice crop is marketed through either the government rice (seifu mai) channel or the voluntary rice (jishu ryutsu mai) channel. Under the former, the Food Agency purchases rice from producers through agricultural cooperatives and sells it to wholesalers,21 whereas under the latter cooperatives sell directly to wholesalers. Under supply management programs introduced since 1971. the total quantity of rice a producer can sell through these two channels has been subject to regional quotas.

A substantial portion of the rice crop—estimated from 15–25 percent—is said to be marketed through illegal private channels rather than through cither of the two official channels. The Government has made strong efforts to contain such private marketing, as these practices serve to undermine other policies, such as the production quotas.

In 1988, a number of measures were taken to liberalize trade between wholesalers and retailers. Scale requirements for obtaining licenses to trade were relaxed;22 wholesalers were allowed to sell in neighboring rather than only in one prefecture; retailers were permitted to sell prefecture-wide rather than only in one locality; and it was decided that new entrants would gradually be permitted into the wholesale network.

With regard to the mechanism of price support, purchase prices of government rice are set annually by the Food Agency. Since 1960, the government purchase price has been based, in principle, on a formula that takes account of both production costs and the objective of income parity with urban workers.23 To take account of the latter, nonfarm wage rates have been used to impute the value of family farm labor in the calculation of production costs. Furthermore, average production costs have been calculated to ensure that costs of marginal producers are covered,24 although as noted earlier, beginning in 1990. average production costs are to be based on those prevailing on larger and more efficient farms.

In practice, the government purchase price has not been set purely on the basis of strict adherence to this formula. After increasing rapidly during 1960–68 with the introduction of the formula and the rise in industrial wages, the purchase price was frozen during 1968–70 to counter a situation of excess supply that had developed (Table 3). In the mid-1970s, the price was pushed up again in response to food security concerns; most recently, lower production costs associated with the appreciation of the yen have not been fully passed through to prices.

Table 3.Japan: Purchase and Selling Prices of Government Marketed Rice. 1960–89
Government

purchase

price

(Yen per

kilogram)
Government

wholesale

price

(Yen per

kilogram)
Government

administrative

cost

(Yen per

kilogram)
Government

profit on

trading

(In billions

of Yen)
19606973715
196510910210–67
197013812423–196
197526020340–388
198029526569–96
198129627361–66
198229928457–82
198330428448–100
198431129552–105
198531130557–70
198631131055–78
198729331052–85
198827930245–7
1989279307
Source: Ministry of Agriculture, Forestry, and Fisheries.

With regard to the government selling price to wholesalers a fixed formula has not been used as a basis for its determination. Rather, it has been set according to a variety of considerations such as changes in the cost of living, general economic conditions, and the fiscal situation. As may be seen in Table 3, the selling price was kept below the purchase price from 1961 until 1987; this, combined with administrative costs, has resulted in considerable losses for the Government. During the 1980s, increases in the selling price relative to the purchase price have substantially reduced budgetary expenditures and transferred to consumers a substantial portion of the cost of support.

The voluntary rice marketing channel was initiated in 1969 mainly in an attempt to lower the fiscal cost of the price support mechanism, but also as a means to better reflect consumer preferences. Prices of voluntary rice are free from government intervention, and determined through negotiations between agricultural cooperatives and rice wholesalers. Most of this rice has been of higher quality, and prices have been roughly 25 percent higher at the wholesale level and roughly 35 percent higher at the retail level.25 To encourage this marketing channel, the Government provides various subsidies including those related to marketing and storage costs. Since its introduction, the share of voluntary rice has risen to about one half of the total rice sold through the two legal channels.

During the 1960s, the Government accumulated a large stock of surplus rice, as consumption moderated and production increased in response to the sharp rise in the purchase price. As one way to address oversupply. a number of supply management programs have been introduced since 1971,26 While the emphasis of the programs has shifted over time, all of the programs have involved subsidies designed to reduce rice output and increase that of other priority crops such as wheat, barley, and soybeans. During the 1980s, the focus increasingly has been on encouraging productivity improvements such as the use of bonus payments when the rice land diversion also involves the consolidation of land holdings. Reflecting budgetary concerns, however, subsidy levels have been cut back sharply in recent years.

Effects of Government Policies

With the increased attention that has been paid worldwide to agricultural support policies, various approaches have been applied in attempting to quantify their effects. One transparent measure is the nominal rate of protection (NRF)—defined as the percentage difference between the domestic price and the international price. The calculation of NRPs is subject to a number of problems, such as quality differences, the unavailability of price data at equivalent points in the distribution process, and the exclusion of nonprice agricultural support, that may bias the results in either direction. Nevertheless, NRPs calculated by Hayami (1988) clearly suggest that the level of agricultural protection in Japan has risen from 18 percent in 1955, a level that was below that of most other major industrial countries, to 102 percent in 1984, substantially higher than any other (Table 4). According to these data, the level of protection in Japan is particularly high for feedgrains.

Table 4.Average Nominal Rates of Protection in Industrial Countries, 1955–841
1955196019651970197519801984
Japan184169747685102
European Community35374552293822
France33263047293025
Germany, Fed.
Rep. of35485550394449
Italy47506669385720
United Kingdom4037202763515
Australia5757-5-2
Canada4257-3-3
United States2191146
Source: Hayami (1988).

Moreover, the substantial appreciation of the yen since early 1985. accompanied by only modest cuts in support prices, appears to have resulted in a further large increase in the level of protection. While comprehensive data for the most recent period are not available, the NRP for rice, for example, rose from 420 percent in 1984 to 622 percent in 1988, and the NRP for wheat rose from 412 percent in 1984 to 791 percent in 1988.27

As noted above, the NRP does not take account of nonprice income support. One measure that does is the producer subsidy equivalent (PSE), defined as the subsidy that would be necessary to compensate producers for removing government support under existing programs and expressed in percentage terms as a ratio of transfers to producers to total producer income.

Table 5.Net Percentage Producer Subsidy Equivalents, 1979–89(In percent)
1979–8519861987Est.

1988
Prov.

1989
Japan6475767572
Australia1116111010
Austria2949514944
Canada3049484335
European Community13550484338
New Zealand23331475
United States2642403527
Average, all OECD countries3551494539
Source: OECD (1990).

In the context of providing a quantitative measure of support policies for the Uruguay Round, the OECD has calculated PSEs for a range of commodities and countries for the period 1979–89. The results indicate that, according to this measure, the Japanese agricultural sector has received the highest level of government support among major industrial countries (Table 5). Furthermore, the PSE for Japan tended to rise over the course of the 1980s. largely reflecting the rise in the value of the yen. As in the case of the NRPs. the PSEs indicate that the grain products receive the heaviest protection. Indeed, in 1989 the transfer to producers is estimated to have been the equivalent of over 92 percent of producer income for wheat, and 86 percent for rice.

The OECD has also estimated that the direct cost for consumers and taxpayers of Japan’s agricultural support policies averaged $62 billion a year in the period 1987–89, up from $32 billion in 1979–81.28 Moreover, with the decline in budgetary expenditures on agriculture over this decade, as well as the rise in the value of the yen, an increasing proportion of the total cost—over 90 percent in 1987–89—has been borne by consumers in terms of high domestic relative to foreign prices. Finally, it may be noted that the average annual transfer to producers, as measured by the nominal PSE. amounted to $35 billion in 1987–89. or about 60 percent of the average cost. The remainder represents a deadweight welfare loss of 1 percent of GNP. and suggests substantial welfare gains from liberalization.

Measures such as the NRP and the PSE are indicators of the direct effects of agricultural policies. Various studies also have analyzed the impact of Japan’s agricultural policies on domestic and international economic variables by performing counterfactual simulations of a liberalization of these policies. One major study (Tyers and Anderson, 1986) simulated various trade liberalization scenarios using a world food model that covered 7 commodity groups involving grains, livestock products, and sugar, and 30 countries or country groups. According to these simulations, the unilateral liberalization by Japan of its support policies in the grains, livestock, and sugar markets would result in a welfare gain to Japan equivalent to 2 ¼ percent of GNP. This gain reflects the estimated favorable impact of lower prices on consumer welfare being substantially greater than the estimated loss to producers. There would be a large increase in imports for rice, ruminant meat (beef and mutton), and dairy products, resulting in large reductions in self-sufficiency in these products (see Table 6). For the latter two groups, consumption more than doubles, while in the case of rice (for which demand is price inelastic) the increase in consumption is modest, despite a sharp fall in prices. There is a notable decline in imports of coarse grains, owing to the impact of the cut in ruminant meat production on feedgrain imports.

Table 6.Tyers and Anderson Model: Simulated Effects of Unilateral Liberalization of Japanese Support Policies(Percentage changes)
WheatGrainRiceRuminant

Meat
Non-

ruminant

Meat
Dairy

Products
Sugar
Domestic effects
Producer prices–74–77–68–74–33–64–67
Consumer prices–20–23–64–74–33–61–64
Production–30–29–44–60–10–41–42
Consumption–18–3020128–131284
Self-sufficiency rate–1–49–793–61–13
Net imports
(thousands of metric tons)–960–6,0906,2802,960–12014,300470
Global effects
World trade volume33057–8281
International prices0.44.14.20.63.30.5

The results suggest that the boost in imports of rice, ruminant meat, and dairy products would imply a sharp rise in world trade and lead to higher world prices. While net exporters of these commodities thus would benefit on both counts, net importers could suffer losses associated with a fall in their terms of trade.

The Tyers and Anderson model, while rich in detail with respect to world food markets, is a partial equilibrium framework that does not capture the response of various aspects of the overall macroeconomic environment, other sectors of the economy, and factor markets, to agricultural policy changes. A number of recent studies have assessed the economy-wide consequences of agricultural support policies in Japan, as well as in other countries, by building applied general equilibrium models that incorporate the spillover effects of agricultural policies on the rest of the economy.

The results of one such study are reported in a paper by Vincent (1988). Two main alternative scenarios are presented that examine the implications of a unilateral liberalization of agricultural support policies in Japan.29 The scenarios differ in their treatment of how equilibrium is established (i) in the labor market, and (ii) between aggregate expenditure and supply. One scenario assumes constant nominal wages and changes in employment to clear the labor market, as well as constant real domestic-spending so that any changes in national income are reflected in the external balance. In a second scenario, these assumptions are reversed, namely, wages are assumed to adjust to keep employment constant and domestic spending to adjust to keep the external balance unchanged. Both scenarios assume that capital is fixed in each industry,30 and thus the simulation results apply to a short- to medium-term adjustment period.

The two scenarios are summarized in Table 7, While the differences in assumptions do lead to certain differences in the simulation results, several broad conclusions emerge. First, the results suggest that support for agriculture has served to reduce significantly the real incomes of Japanese wage earners, by raising prices of agricultural imports and import-competing products and the overall level of consumer prices. Agricultural liberalization is estimated to result in a 2½ to 3 percent rise in real wages, and a 2½ percent rise in labor’s share of national income.

Table 7.Vincent Model: Projected Short-to-Medium-Term Impact of Unilateral Agricultural Liberalization in Japan(Percentage deviations from baseline)
Scenario A1Scenario B2
Real GDP-0.310.12
Real domestic expenditure0.02
Total exports33.166.09
Total imports35.445.59
Trade balance4-0.38
Consumer price index-2.89-3.52
GDP deflator-2.10-2.73
Nominal wages-1.06
Real wages52.892.47
Labor share of national income2.482.35

Second, support for agriculture has acted as a tax on other tradable sectors in the economy, in particular export-oriented manufacturing. The elimination of border protection to agriculture, by lowering consumer prices, also would lead to a reduction in the overall domestic cost structure. This would lead to an improvement in the competitiveness of nonagricultural sectors of the economy. Thus, while agricultural liberalization would result in a surge in food imports and a large drop in agricultural output, it would be accompanied by an expansion of exports and output in manufacturing. In Scenario A, the estimated increases in exports in four key export-oriented industries—machinery, transport equipment, other industrial equipment, and transport and communications—range from 2 to 8 percent: in Scenario B they range from 5 to over 18 percent. Indeed, as is suggested by the results of a third simulation that assumes constant real (rather than constant nominal) wages, if nominal wages were to fall in line with consumer prices, the increase in Japan’s exports would exceed the increase in agricultural imports.

Vincent also presents a simulation of the longer term effects of agricultural protection in Japan, by allowing, under the assumptions of Scenario B, capital to be mobile between sectors. While he notes that the results obtained are similar to those in Scenario B, because capital in addition to labor moves from the agricultural to nonagri-cultural sector, the efficiency and welfare gains are larger. Correspondingly, the increases in both exports and imports are larger, as are the gains in output and real labor income.

The OECD Economics and Statistics Department also has been conducting a major project called the World Agricultural Liberalization Study (WALRAS). with the objective of quantifying the economy-wide effects of agricultural policies in OECD countries.31 The WALRAS model links six separate general equilibrium models for Australia. Canada, the European Community, Japan, New Zealand, and the United States, and a residual rest-of-the-world block. The production side of each sub-model specifies 13 industries, with the agricultural sector disaggregated into livestock and other agriculture, and the food-processing sector disaggregated into the meat, dairy, and other food products industries. Both labor and capital are assumed to be mobile between sectors, The model also specifies in detail the structure of consumption, government spending and revenues, foreign trade flows, and saving and investment.32

Martin and others (1990) present simulation results that gauge the effects of a full multilateral removal of the average 1986–88 levels of agricultural assistance in the six countries/regions. As the simulation is intended to measure the long-run impact of agricultural liberalization, both the government balance and the current account are assumed to remain unchanged.33 The results suggest that multilateral liberalization would improve welfare—as measured by household real income—by almost 1 percent on average in the OECD countries. In Japan, the welfare gain is 1.1 percent. This gain is smaller than that estimated in the Vincent study, mainly reflecting a large terms-of-trade loss of 3½ percent that is estimated to result from multilateral liberalization. The removal of agricultural support leads to a rise in world market prices and world trade volumes of agricultural products, and Japan’s import prices increase by 4½ percent, whereas in the Vincent study import prices are assumed not to respond to changes in Japan’s agricultural policies.

Notwithstanding the rise in import prices, consumer prices in Japan would fall by 2 percent, owing to substantial declines in domestic producer prices in the agricultural and food-processing sectors. As in the Vincent study, the removal of agricultural support policies results in a rise in output in nonfood manufacturing and service industries that offsets large output declines in agriculture and food processing.

Martin and others also present the results of the economic effects of unilateral liberalization of agricultural policies by the various countries/regions. While the welfare gains are comparable for most countries, in Japan’s case, unilateral liberalization results in a rather larger gain of 1.6 percent. This is mainly attributable to a substantially smaller terms-of-trade loss of only 1 percent under unilateral liberalization. At the same time, however, because world agricultural prices rise less, the decline in output in Japanese agriculture is higher in this case. Thus, as the study emphasizes with respect to all OECD countries, liberalization may be most achievable tin a multilateral rather than unilateral basis, since it would impose a smaller adjustment burden on the agricultural sector.

Concluding Comments

Japan’s farm sector has continued to supply most of domestic consumption in spite of a sharp decline in comparative advantage. As outlined above, a wide range of supportive measures were put in place that have preserved an increasingly inefficient productive structure and have pushed up domestic prices to several times those on the world market. While the key objectives of rural-urban income parity and food security have been achieved, this has not come without considerable cost to consumers and taxpayers.

As suggested by several studies, support for agriculture also has resulted in a welfare loss for the Japanese economy as a whole, with the cost to the general public being greater than the benefit received by producers. Thus, while certain steps to reduce support for agriculture have been taken, a full-fledged reform would be highly desirable. Moreover, the net benefits that would accrue would provide room for adequate adjustment assistance—as deemed necessary—in order to ease adjustment costs associated with the reallocation of resources.

Finally, agricultural trade liberalization may not lead to any substantial changes in Japan’s aggregate current account balance. By increasing the overall cost of wage goods and diverting resources into less efficient productive endeavors, agricultural support policies also work to depress the performance of other sectors of the economy. Hence, agricultural liberalization would make these sectors more competitive internationally, and the net effect on the external balance is ambiguous. This conclusion supports the view that agricultural reform in Japan should be pursued primarily with the objective of improving resource allocation and consumer welfare. While agricultural liberalization measures are likely to help relieve trade tensions, they should not be counted on to result in a measurable change in Japan’s aggregate current account balance.

References

    Australian Bureau of Agricultural and Resource Economics, Japanese Agricultural Policies, Policy Monograph No. 3 (Canberra: ABARE, 1988).

    Burniaux, Jean-Marc, and others,“WALRAS—A Multi-Sector, Multi-Country Applied General Equilibrium Model for Quantifying the Economy-Wide Effects of Agricultural Policies,” OECD Economic Studies, No. 13 (Winter 1989–90), pp. 69102.

    Fitchett, Delbert A., Agricultural Trade Protectionism in Japan: A Survey, World Bank Discussion Paper 28 (Washington: World Bank, 1988).

    Hayami, Yujiro, A Century of Agricultural Growth in Japan (Tokyo: University of Tokyo, 1975).

    Hayami, Yujiro, Japanese Agriculture Under Siege (New York: St. Martin’s, 1988).

    Ito, Takatoshi, “Japan’s Structural Adjustment: The Land/Housing Problem and External Balances” (unpublished; Washington: International Monetary Fund, 1989).

    Kelly, Margaret, and others,Issues and Developments in International Trade Policy, IMF Occasional Paper 63 (Washington: International Monetary Fund, 1988).

    Martin, John P., and others,“Economy-Wide Effects of Agricultural Policies in OECD Countries: Simulation Results with WALRAS,” OECD Economic Studies, No. 13 (Winter 1989–90), pp. 13172.

    Organization for Economic Cooperation and Development, National Policies and Agricultural Trade: Country Study, Japan (Paris: OECD, 1987).

    Organization for Economic Cooperation and Development, Report on Monitoring and Outlook of Agricultural Policies, Markets, and Trade (Paris: OECD, 1988).

    Organization for Economic Cooperation and Development, Agricultural Policies, Markets, and Trade, Monitoring and Outlook (Paris: OECD, 1990).

    Tyers, R, and K.Anderson, “Distortions in World Food Markets: Quantitative Assessment” (unpublished; Washington: World Bank, 1986).

    Vincent, David, “Effects of Agricultural Protection in Japan: An Economy-Wide Analysis,”paper presented at a conference organized by the American Enterprise Institute, Washington, and the Center for International Economics, Canberra, May 26–27, 1988 (Washington, D.C.).

    Yoshioka, Yutaka, Food and Agriculture in Japan, About Japan Series, No. 18 (Japan: Foreign Press Center, 1988).

The author is a senior economist in the IMF’s Asian Department. He gratefully acknowledges helpful comments and assistance from colleagues throughout the IMF. particularly Owen Evans, Jorge Mar-quez-Ruarte, and Peter Winglee.

For the details of the Five-Year Plan, see Economic Planning Agency. Economic Management Within a Global Context. May 1988.

These industrial countries gained comparative advantage in agriculture vis-à-vis a number of developing countries as well see Hayami (1988).

During 1960–80. the price of agricultural products relative to manufactures doubled in Japan, despite a 10 percent decline on world markets.

Viable farm units were defined in the Agricultural Basic Law as “farms sufficiently large in operational scale so that family members engaged in farming are able to work in their full capacity and earn high enough income to enjoy the level of living equivalent to that of nonfarm workers.” (Hayami, 1988.)

Including Hayami, a leading expert on Japanese agriculture. See Hayami (1988).

By April 1990, quotas were being removed for processed cheese, prepared and preserved beef, other sugars and syrups, fruit puree and paste, fruit otherwise prepared and preserved, fruit juices (noncitrus), tomato juice, ketchup, and paste, and other food preparations, mainly of sugar. GATT-inconsistent quotas were liberalized for certain dairy products (including condensed and evaporated milk), and starch and inulin; and GATT-consistent quotas for dried leguminous vegetables and groundnuts.

The tariff rate on beef is to be set at 70 percent for 1991/92, 60 percent for 1992/93. and 50 percent for 1993/94.

The variable import levy, a form of tariff, however, is a principal means of agricultural protection in the EC.

These commodities include natural cheese, oats, maize for corn starch and industrial uses, feeder cattle, and leather.

The Government has announced that once the beet quotas are eliminated, the LIPC will not be involved in the pricing, purchase, or sale of imported beef.

For a detailed discussion of these programs, see OECD (1987) and ABARE (1988).

Estimated from Ministry of Agriculture, Forestry, and Fisheries sources.

The Nokyo have a membership of about 8 million individuals, including other local residents in addition to fanners who utilize their services.

In the face of severe shortages and high prices during the Second World War. this law was passed to ration all staple foods. Since 1952, rice has been the only commodity whose distribution is under the Government’s direct control.

The actual purchasing and selling of government rice is done by designated collection agencies; about three fourths of these are cooperatives, with the rest made up of registered dealers.

Both wholesalers and retailers need to be licensed to trade by their respective prefectural governments.

Prior to the adoption of this “Production Cost and Income Compensation” formula, purchase prices had been based on maintaining the purchasing power of farm income from year to year.

The average cost has been based on the average for farms where the yield per hectare is lower than the national average by one standard deviation. See Hayami (1975).

There have been four rice land diversion programs since 1971: The Rice Production Control and Diversion Program (1971–75), The Comprehensive Paddy Field Utilization Program (1976–78), The Paddy Field Utilization Program (1978–86), and The Paddy Field Farming Establishment Program (1987–92).

Staff calculations on the basis of Japanese government purchase prices; that milled rice, 5 percent broken. f.o.b. Bangkok; U.S. No. 1 hard red winter wheat, f.o.b, Gulf ports.

The cost to consumers is defined as the cost of higher domestic prices owing to border measures less consumer subsidies, and the cost to taxpayers is defined as public expenditures on support policies less tariff receipts (OECD, 1988).

The liberalization assumes (i) the elimination of domestic subsidies on current agricultural inputs estimated to have amounted to about 9 percent of agricultural> GDP in the early 1980s, and (ii) the removal of tariffs and other border measures so as to eliminate differentials between domestic and international prices, as given by estimates of average nominal rates of protection of 420 percent for agricultural crops and 116 percent for livestock products in 1986.

The supply side of the model is disaggregated into 19 different industries in the agricultural, primary, food-processing, other manufacturing, and service sectors.

A detailed description of the WALRAS model is provided in Burniaux, and others (1990), and the simulation results may be found in Martin, and others (1990).

It should be noted that the foreign trade sub-model treats imports originating in different countries/regions as imperfect substitutes, which implies that reductions in the level of agricultural protection can result in terms-of-trade losses. It is also assumed, however, that the price elasticity of consumer demand for food products is relatively low, so that welfare gains from the efficient reallocation of resources outweigh any terms-of-trade losses.

Tax rates on consumer incomes are varied to maintain the government balances, and real exchange rates adjust to keep current accounts unchanged.

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