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)

Source: Ministry of Agriculture, Forestry, and Fisheries, Food Balance Sheet, 1983 and 1986.

¹Data relate to fiscal years.

Table 1.

Japan: Self-Sufficiency Rates of Major Agricultural Products, 1960–86¹

(In percent)

		1960	1970	1980	1986
Rice		102	106	87	108
Wheat		39	9	10	14
Barley		107	34	15	15
Pulses		44	13	7	8
	Soybeans	28	4	4	5
Vegetables		100	99	97	95
Fruits		100	84	81	73
Eggs		101	97	98	97
Milk and
	milk products	89	89	86	86
Meats		91	89	81	78
Beef		96	90	72	69
Pork		96	98	87	82
Poultry		100	98	94	89
Sugar		18	23	29	33
Fats and oils		42	22	29	32
Food total		90	78	72	70
Grains total		82	45	33	31

Source: Ministry of Agriculture, Forestry, and Fisheries, Food Balance Sheet, 1983 and 1986.

¹Data relate to fiscal years.

View Table

Table 1.

Japan: Self-Sufficiency Rates of Major Agricultural Products, 1960–86¹

(In percent)

		1960	1970	1980	1986
Rice		102	106	87	108
Wheat		39	9	10	14
Barley		107	34	15	15
Pulses		44	13	7	8
	Soybeans	28	4	4	5
Vegetables		100	99	97	95
Fruits		100	84	81	73
Eggs		101	97	98	97
Milk and
	milk products	89	89	86	86
Meats		91	89	81	78
Beef		96	90	72	69
Pork		96	98	87	82
Poultry		100	98	94	89
Sugar		18	23	29	33
Fats and oils		42	22	29	32
Food total		90	78	72	70
Grains total		82	45	33	31

Source: Ministry of Agriculture, Forestry, and Fisheries, Food Balance Sheet, 1983 and 1986.

¹Data relate to fiscal years.

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.

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)

Source: Ministry of Agriculture, Forestry, and Fisheries.

¹Yen per metric ton; years refer to beginning of crop year running October to September; from 1975, includes production subsidy.

Table 2.

Japan: Administrative Prices of Major Agricultural Products, 1970–89

(In yen per kilogram, unless otherwise noted)

		1970	1980	1985	1987	1988	1989
Rice (husked)
	Government purchase price	138	295	311	293	279	279
Wheat
	Government purchase price	57	178	185	174	166	160
Sugar beet
	Minimum producer price1	7,760	20,480	21,020	19,660	18,720	18,450
Soybeans
	Standard price	84	280	287	266	251	251
Manufacturing milk
	Guarantee price	44	89	90	83	80	80
Butter
	Stabilization indicative price	647	1,253	1,276	1,100	1,080	1,092
Skimmed milk
	Stabilization indicative price	388	501	541	527	521	527
Steer beef
	Standard stabilization price	…	1,105	1,120	1,020	995	995
Pork
	Standard stabilization price	345	588	600	455	410	400

Source: Ministry of Agriculture, Forestry, and Fisheries.

¹Yen per metric ton; years refer to beginning of crop year running October to September; from 1975, includes production subsidy.

View Table

Table 2.

Japan: Administrative Prices of Major Agricultural Products, 1970–89

(In yen per kilogram, unless otherwise noted)

		1970	1980	1985	1987	1988	1989
Rice (husked)
	Government purchase price	138	295	311	293	279	279
Wheat
	Government purchase price	57	178	185	174	166	160
Sugar beet
	Minimum producer price1	7,760	20,480	21,020	19,660	18,720	18,450
Soybeans
	Standard price	84	280	287	266	251	251
Manufacturing milk
	Guarantee price	44	89	90	83	80	80
Butter
	Stabilization indicative price	647	1,253	1,276	1,100	1,080	1,092
Skimmed milk
	Stabilization indicative price	388	501	541	527	521	527
Steer beef
	Standard stabilization price	…	1,105	1,120	1,020	995	995
Pork
	Standard stabilization price	345	588	600	455	410	400

Source: Ministry of Agriculture, Forestry, and Fisheries.

¹Yen per metric ton; years refer to beginning of crop year running October to September; from 1975, includes production subsidy.

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.

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

Source: Ministry of Agriculture, Forestry, and Fisheries.

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)
1960	69	73	7	15
1965	109	102	10	–67
1970	138	124	23	–196
1975	260	203	40	–388
1980	295	265	69	–96
1981	296	273	61	–66
1982	299	284	57	–82
1983	304	284	48	–100
1984	311	295	52	–105
1985	311	305	57	–70
1986	311	310	55	–78
1987	293	310	52	–85
1988	279	302	45	–7
1989	279	307	…	…

Source: Ministry of Agriculture, Forestry, and Fisheries.

View Table

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)
1960	69	73	7	15
1965	109	102	10	–67
1970	138	124	23	–196
1975	260	203	40	–388
1980	295	265	69	–96
1981	296	273	61	–66
1982	299	284	57	–82
1983	304	284	48	–100
1984	311	295	52	–105
1985	311	305	57	–70
1986	311	310	55	–78
1987	293	310	52	–85
1988	279	302	45	–7
1989	279	307	…	…

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

Source: Hayami (1988).

¹Defined as the percentage by which the producer price exceeds the border price. Weighted averages for 12 commodities (rice, wheat, barley, corn. oats, rye, beef, pork, chicken, eggs, milk, and sugar).

Table 4.

Average Nominal Rates of Protection in Industrial Countries, 1955–84¹

			1955	1960	1965	1970	1975	1980	1984
Japan			18	41	69	74	76	85	102
European Community			35	37	45	52	29	38	22
	France		33	26	30	47	29	30	25
	Germany, Fed.
		Rep. of	35	48	55	50	39	44	49
	Italy		47	50	66	69	38	57	20
	United Kingdom		40	37	20	27	6	35	15
Australia			5	7	5	7	-5	-2	…
Canada			—	4	2	5	7	-3	-3
United States			2	1	9	11	4	—	6

Source: Hayami (1988).

¹Defined as the percentage by which the producer price exceeds the border price. Weighted averages for 12 commodities (rice, wheat, barley, corn. oats, rye, beef, pork, chicken, eggs, milk, and sugar).

View Table

Table 4.

Average Nominal Rates of Protection in Industrial Countries, 1955–84¹

			1955	1960	1965	1970	1975	1980	1984
Japan			18	41	69	74	76	85	102
European Community			35	37	45	52	29	38	22
	France		33	26	30	47	29	30	25
	Germany, Fed.
		Rep. of	35	48	55	50	39	44	49
	Italy		47	50	66	69	38	57	20
	United Kingdom		40	37	20	27	6	35	15
Australia			5	7	5	7	-5	-2	…
Canada			—	4	2	5	7	-3	-3
United States			2	1	9	11	4	—	6

Source: Hayami (1988).

¹Defined as the percentage by which the producer price exceeds the border price. Weighted averages for 12 commodities (rice, wheat, barley, corn. oats, rye, beef, pork, chicken, eggs, milk, and sugar).

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)

Source: OECD (1990).

¹EC-10 for 1979–85; EC-12 for 1986–89.

Table 5.

Net Percentage Producer Subsidy Equivalents, 1979–89

(In percent)

	1979–85	1986	1987	Est. 1988	Prov. 1989
Japan	64	75	76	75	72
Australia	11	16	11	10	10
Austria	29	49	51	49	44
Canada	30	49	48	43	35
European Community1	35	50	48	43	38
New Zealand	23	33	14	7	5
United States	26	42	40	35	27
Average, all OECD countries	35	51	49	45	39

Source: OECD (1990).

¹EC-10 for 1979–85; EC-12 for 1986–89.

View Table

Table 5.

Net Percentage Producer Subsidy Equivalents, 1979–89

(In percent)

	1979–85	1986	1987	Est. 1988	Prov. 1989
Japan	64	75	76	75	72
Australia	11	16	11	10	10
Austria	29	49	51	49	44
Canada	30	49	48	43	35
European Community1	35	50	48	43	38
New Zealand	23	33	14	7	5
United States	26	42	40	35	27
Average, all OECD countries	35	51	49	45	39

Source: OECD (1990).

¹EC-10 for 1979–85; EC-12 for 1986–89.

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)

Source: Tyers and Anderson (1986).

Table 6.

Tyers and Anderson Model: Simulated Effects of Unilateral Liberalization of Japanese Support Policies

(Percentage changes)

			Wheat	Grain	Rice	Ruminant 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	–30	20	128	–13	128	4
	Self-sufficiency rate		–1	—	–49	–79	3	–61	–13
	Net imports
		(thousands of metric tons)	–960	–6,090	6,280	2,960	–120	14,300	470
Global effects
	World trade volume		—	3	30	57	–8	28	1
	International prices		0.4	—	4.1	4.2	0.6	3.3	0.5

Source: Tyers and Anderson (1986).

View Table

Table 6.

Tyers and Anderson Model: Simulated Effects of Unilateral Liberalization of Japanese Support Policies

(Percentage changes)

			Wheat	Grain	Rice	Ruminant 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	–30	20	128	–13	128	4
	Self-sufficiency rate		–1	—	–49	–79	3	–61	–13
	Net imports
		(thousands of metric tons)	–960	–6,090	6,280	2,960	–120	14,300	470
Global effects
	World trade volume		—	3	30	57	–8	28	1
	International prices		0.4	—	4.1	4.2	0.6	3.3	0.5

Source: Tyers and Anderson (1986).

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)

Source: Vincent (1988).

¹Constant nominal wages and aggregate real domestic expenditure.

²Constant aggregate employment and trade balance.

³In foreign currency.

⁴In percent of baseline GDP.

⁵CPI deflated.

Table 7.

Vincent Model: Projected Short-to-Medium-Term Impact of Unilateral Agricultural Liberalization in Japan

(Percentage deviations from baseline)

	Scenario A1	Scenario B2
Real GDP	-0.31	0.12
Real domestic expenditure	—	0.02
Total exports3	3.16	6.09
Total imports3	5.44	5.59
Trade balance4	-0.38	—
Consumer price index	-2.89	-3.52
GDP deflator	-2.10	-2.73
Nominal wages	—	-1.06
Real wages5	2.89	2.47
Labor share of national income	2.48	2.35

Source: Vincent (1988).

¹Constant nominal wages and aggregate real domestic expenditure.

²Constant aggregate employment and trade balance.

³In foreign currency.

⁴In percent of baseline GDP.

⁵CPI deflated.

View Table

Table 7.

Vincent Model: Projected Short-to-Medium-Term Impact of Unilateral Agricultural Liberalization in Japan

(Percentage deviations from baseline)

	Scenario A1	Scenario B2
Real GDP	-0.31	0.12
Real domestic expenditure	—	0.02
Total exports3	3.16	6.09
Total imports3	5.44	5.59
Trade balance4	-0.38	—
Consumer price index	-2.89	-3.52
GDP deflator	-2.10	-2.73
Nominal wages	—	-1.06
Real wages5	2.89	2.47
Labor share of national income	2.48	2.35

Source: Vincent (1988).

¹Constant nominal wages and aggregate real domestic expenditure.

²Constant aggregate employment and trade balance.

³In foreign currency.

⁴In percent of baseline GDP.

⁵CPI deflated.

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.