This Selected Issues paper for Japan illustrates the impact of fiscal and structural reforms on the Japanese and world economies. Japan faces a sizable fiscal deficit, against a backdrop of weak trend growth and growing imbalances in the world economy. Moreover, upward pressure on health care and social security spending owing to an aging population will add significantly to strains on public resources in the near future. The Japanese government is taking a range of measures aimed at raising productivity growth and stabilizing the public debt in relation to GDP over the medium term.

Abstract

This Selected Issues paper for Japan illustrates the impact of fiscal and structural reforms on the Japanese and world economies. Japan faces a sizable fiscal deficit, against a backdrop of weak trend growth and growing imbalances in the world economy. Moreover, upward pressure on health care and social security spending owing to an aging population will add significantly to strains on public resources in the near future. The Japanese government is taking a range of measures aimed at raising productivity growth and stabilizing the public debt in relation to GDP over the medium term.

III. Agricultural Policies in Japan: Domestic and Spillover Effects1

1. Government support of agriculture remains among Japan’s main structural issues. Present policies slow the reallocation of resources out of agriculture into sectors where they could be used more productively. Reducing support levels and better targeting support toward clear policy objectives would help to improve productivity and generate economic welfare benefits. In this context, agricultural policy reform can contribute to revitalizing Japan’s economic growth.

2. Other countries also have an interest in Japanese agricultural policy reform, because Japan’s present policies have spillover effects on its trading partners. Trade restrictions discourage imports, distort world prices for many farm products, and, by insulating the domestic market, exacerbate world price fluctuations. The impact on developing country food exporters is especially important, particularly in the context of the Doha Development Agenda for the ongoing multilateral trade negotiations under the WTO.

3. This paper surveys present Japanese agricultural policies and highlights both its domestic effects and those on other countries. It begins in Section A with a brief review of the agriculture sector, the sector’s role in the Japanese economy, and the government’s sectoral policy objectives, contrasting this with Japan’s relatively open trade regime outside agriculture. Section B sketches the main policy mechanisms and describes the broad levels of support provided to the sector, drawing on calculations by the OECD and others to place this in the context of the support provided by other industrialized countries. The domestic and international effects of current policies are described in Section C, summarizing various modeling exercises and other analysis. Section D examines the current policy debate and provides concluding comments.

A. Recent Developments in Japanese Agriculture

4. The agricultural sector now accounts for about 1 percent of Japan’s GDP, about half its share in 1990, reflecting a continuation of the sector’s marked post-war decline described by Citrin (1990). Unlike much of the post-war period, when real GDP growth in agriculture was positive (albeit modestly so), since 1990 the sector has contracted by some 2 percent a year. As elsewhere, the low income-elasticity of food demand has translated over time to a decline in agriculture’s share of economic activity; in Japan, however, this decline has been exacerbated by the sector’s low productivity growth. Agriculture now accounts for 4 percent of employment, compared to 6½ percent in 1990. Reflecting the aging of the rural and farm population, less than 2 percent of total employment among those aged 25–54 is in agriculture; moreover, among “core agricultural producers” two-thirds are aged 60 or more, compared to one-third in 1985 and to one-fourth of the total 2003 population (Cabinet Office, 2004). From 1990–2003, cultivated land area fell 10 percent and is now 12½ percent of total area,2 while the agricultural population fell 44 percent. FAO data indicate that despite other, higher, measures of agricultural employment, only some 380,000 men under age 60 engage mainly in farming.

Summary of Agriculture Sector

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Source: Ministry of Agriculture, Forestry, and Fisheries.

5. Farm sizes remain small, despite the decline in labor use in the sector and some movement toward farm consolidation (including, recently, by leasing). Farm size reflects various barriers to farmland conversion (in zoning, tax law, and property law) and is facilitated by farm support policies (Godo, 2000).3 Along with the aging of the population and other factors, small farm size contributes to low productivity and stagnant growth (Cabinet Office, 2004).

6. Despite heavy import protection and other farm support, Japan is among the world’s largest net agricultural importers. It accounts for about 10 percent of global imports of cereals, oilseeds, and meats, and about 5 percent of global imports of bananas, dairy products, fibers, sugar, and tropical beverages. These figures suggest the potential importance of Japan’s policies for other countries.

7. Complex and overlapping policy objectives have contributed to stagnant productivity in the sector and to unambitious reform implementation. The main policy objectives through most of the past several decades were food security and self-sufficiency, and the equalization of living standards across farm and nonfarm workers. The 1961 Agricultural Basic Law, which provided broad guidance for agricultural and rural policy, foresaw reaching these objectives by strengthening rural infrastructure and increasing farm efficiency, notably through larger farms. Over the years, Japanese policy makers have also stressed an environmental role for agriculture and have often cited the flood control benefits of well-maintained paddy fields. Directing policy toward maintaining self-sufficiency has not proven effective nor, as explored later in the paper, been without cost.

Self-Sufficiency Rates of Selected Food Products, 1960-2003

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Source: Statistical Yearbook, Ministry of Agriculture, Forestry, and Fisheries.

Self-sufficiency on a value basis is presently estimated to be 70 percent.

8. A new Basic Law was adopted in July 1999 and is based on the 1998 results from an advisory committee to the Prime Minister and agreement on the “Fundamental Principles of Agricultural Policy Reform” by the Liberal Democratic Party, the Ministry of Agriculture, Forestry, and Fisheries (MAFF), and the agricultural cooperatives (Honma, 2000). The advisory committee’s report recognized that protectionism had made farmers inefficient and had slowed the sector’s structural adjustment, contributing to higher food imports and the relocation of food processing industries overseas. The agreement that followed stressed an increased role of prices and the market system. The main objectives under the new Basic Law are: i) securing a stable food supply; ii) developing rural areas; iii) sustainable agricultural development; and iv) fulfilling agriculture’s multifunctional roles—a reference to environmental effects and the benefits attached to an open and attractive country side. The new Basic Law explicitly recognizes a role for farm support decoupled from production (Honma, 2000; Trewin, 2000) and thus provides something of a way forward. The Agricultural Basic Plan adopted by Cabinet in March 2005 provides a framework that could support ambitious reform in this direction, but whether this will be pursued will depend in part on the outcome of the WTO Doha Round agricultural negotiations.

B. Agricultural Policies in the Context of the Overall Trade Regime

Nonagricultural policies

9. Outside of agriculture, Japan maintains a broadly open trade regime. Nonagricultural most favored nation (MFN)4 tariffs average 3.7 percent, and 99 percent of all tariff lines are bound in the WTO (WTO, 2004). Comparable tariff averages for the European Union (EU) and the United States are 4 percent. Outside of agriculture and processed foods, high tariffs are largely limited to footwear. Although imports in some areas remain affected by regulatory and administrative procedures, the share of Japan Industrial Standards aligned with or equivalent to international standards rose from 21 percent in 1999 to 91 percent in 2003.5 The coverage of nontariff barriers is now similar to that in the EU and the United States (OECD, 2005).

Nonagricultural Trade Policy Measures

The Market Access Map (MAcMap) database (Bouët and others, 2004) measures applied tariff rates, taking into consideration tariff rates under regional trade agreements and unilateral trade preferences for developing countries, and also utilizing equivalent measures of non ad valorem tariffs. For Japan, these estimates indicate very low tariff protection—less than 1 percent—for manufactures other than textiles, clothing, and footwear (TCF), compared to 1 to 2 percent for the EU and the United States. Reflecting high tariffs on footwear, Japan’s tariff protection of TCF is much higher than that for its other manufactures.

The Overall Trade Restrictiveness Index (OTRI) (Kee and others (2005)) is the equivalent uniform import tariff that, if substituted for present trade policies, would maintain imports at the observed level. The tariff component of the OTRI estimates utilize information on preferential tariffs as well as MFN tariff rates. Estimates for nontariff barriers are subject to wider measurement error than those for tariffs. For Japan, the uniform import tariff for nonagriculture that would leave total imports unchanged if substituted for present tariffs is 1.6 percent (see table). A uniform tariff of 7 percent would substitute for present tariff and nontariff barriers. These results are broadly similar to those for the EU and the United States.

MacMaps and OTRI Estimates for Nonagriculture

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Sources: Bouet and others (2004); Kee and others (2005).

Aggregate measures of agricultural policy distortions

10. Protection and support for agriculture contrasts sharply with the generally liberal trade policies throughout most other areas of the economy. Overall measures of agricultural policies show that producer prices in Japan are more than double world market prices, and that government policies account for well over half the receipts of Japanese farmers—the highest among the large industrial economies. Japanese consumers pay a little over two times prevailing world market prices for their farm products. In most OECD countries, agricultural support has begun to decrease and support mechanisms have become more targeted and less distortionary. In Japan, such reforms are at an early stage.

11. A review of the OECD’s calculations of producer support estimates6 (PSEs) and other measures helps to put Japan’s policies in context. Japan’s overall PSE has fluctuated between 50 and 70 percent of farm receipts over the period covered by estimates (since 1979) (Bull and Roberts, 2001), but without a clear downward trend. PSE calculations clearly show continued very high agricultural support among most industrial countries, although Japanese support, at 58 percent during 2001–03, is the highest among the large OECD countries and significantly exceeds that of the EU (35 percent) and the United States (20 percent). Several OECD countries have undertaken moderate (if uneven) reductions over the past 15 years, although support rates of 60 to 75 percent continue in countries such as Iceland, Korea, Norway, and Switzerland. PSEs for Australia and New Zealand, on the other hand, are just 2 to 4 percent.

Japan and OECD: Aggregate Agricultural Policy Indicators

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Source: OECD.

12. In addition to overall high support levels, there are two other important broad characteristics of Japan’s policies. First, support varies greatly across products. Other industrial countries typically support a broad range of products relatively evenly. However, reflecting the dominance of rice in Japanese agriculture and as the main supported commodity, variability in commodity support in Japan is nearly double that of any other OECD country (OECD, 2004). This suggests that not only are there large distortions between agriculture and other sectors of the economy, but within agriculture as well.

PSEs for Selected Commodities

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Source: OECD.

13. A second important characteristic is the unusually high and persistent share of Japan’s farm support accorded through “market price support,” which has consistently accounted for 90 percent of Japan’s overall producer support.7 Traditionally, Japan’s market price support has been accomplished through a combination of import barriers and administrative prices, although in the past few years administrative prices have applied to fewer products and remaining administered prices have been frozen or reduced. Import barriers nevertheless remain high. According to the OTRI estimates of Kee and others, Japanese agricultural import barriers are equivalent (on a trade volume basis) to a 58 percent uniform tariff on agricultural products—compared to a 7 percent uniform tariff-equivalent outside agriculture.

OTRI Estimates for Agriculture

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Source: Kee and others (2005).Note: The OTRI is the uniform tariff that if substituted for current policy would leave import volume unchanged.

14. The heavy reliance on market price support distorts internal market prices and thus both production and consumption. It has important implications for the costs of agricultural support in Japan and for spillover effects on other countries. Since the mid-1980s, several OECD countries have reduced the role of such support while cutting back on overall farm support rates. Among other OECD countries, the percentage PSE fell from 34 to 28 percent, and the share of that support provided through market price support was reduced from 74 to 56 percent. Others, such as Switzerland, have retained overall high support levels but reduced their reliance on market price support in favor of less-distortionary approaches.

uA03fig01

Selected Countries: Overall Farm Support and Trade-Distorting Support, 1986-88 to 2001-03

Citation: IMF Staff Country Reports 2005, 272; 10.5089/9781451820645.002.A003

Source: OECD.1/ Share of PSE due to trade or market price support measures or to payments based on output and input use (percent).

15. Public works expenditures in rural areas are not considered in aggregate measures of agricultural policy, but have been a large share of the MAFF budget. The public works share of the MAFF budget rose from 30 percent in the 1970s to 54 percent by 1995. Although the increase—particularly during the post-bubble downturn—probably reflected in part the use of counter-cyclical fiscal stimulus packages, George Mulgan (2001) argues that the shift occurred to compensate farmers for reduced support prices and for steps toward market liberalization. Budget pressures and other factors reversed this trend in more recent years, and MAFF data indicate that the share fell to 44 percent by 2005. Within the MAFF budget, the public work shares of agriculture spending declined from 46 to 36 percent from 1995 to 2005.

16. Like other developed countries and many middle-income countries, Japan unilaterally grants trade preferences to developing countries under the Generalized System of Preferences (GSP). Japan’s GSP scheme grants developing countries partial or full tariff preferences on about 20 percent of dutiable agricultural tariff lines. For the least-developed countries, the scheme provides full tariff preferences (duty-free access) for close to 40 percent of dutiable agricultural tariff lines.8 Of least-developed countries’ 2002 agricultural exports to Japan, 34 percent were products not subject to duty and 17 percent were eligible for preferences; the remainder were subject to full tariffs (Brenton and Ikezuki, 2005). However, as of 2002 only six least-developed countries received Japanese agricultural GSP benefits of 1 percent or more of their exports to Japan. The 2003 GSP changes are likely to have moderately increased the utilization of GSP preferences.

C. Economic Impacts of Japanese Agricultural Policies

17. It is often suggested that the high levels of agricultural support and the ways in which Japan implements this support significantly distort international trade as well as production and consumption within Japan. Portions of the land, labor, and capital that are retained in agriculture could probably be used more productively in other activities. The high variability of support for different commodities suggests resource misallocation within agriculture as well. Present agricultural policies thus may detract from other efforts to improve economywide productivity and rejuvenate growth. High producer prices help sustain inefficient farm practices (as reflected in the small farm size) and encourage high input use.

18. Standard analysis also suggests that high market prices (typically more than double world market prices) distort consumers’ choices. In a high-income country such as Japan, inelastic food demand suggests that high food prices would reduce overall food consumption modestly. However, differences across food groups (see the box) distort consumers’ choices of different foods, and the burden of high food prices falls disproportionately on lower-income consumers, for whom food makes up a larger share of their budget.

19. Overall, it could be argued that import barriers and other policies that promote production and tax consumption significantly distort trade. Lower agricultural imports is the most direct effect, but high food prices also effectively tax other tradable sectors of the economy. Policy distortions thus spill over on other countries in various ways. Along with farm policies in other OECD countries and elsewhere, policies adversely impact many developing countries.

Summary of Policies for Key Commodities

The Uruguay Round Agreement on Agriculture (URAA) and concerns about low self-sufficiency and stagnating productivity growth have begun to generate changes in farm support policies. The 1999 Basic Law encourages more use of market mechanisms. Administered prices or fully guaranteed producer prices have been replaced with income stabilization schemes, introducing elements of market price signals. While not reducing overall agricultural support or protection, which remain high, these changes help set the stage for more fundamental policy reforms.

Rice policies included an import ban, administrative prices, and marketing restrictions. Japan agreed, under the URAA, to minimum amounts of rice imports beginning in 1995 (increasing thereafter); in 1999 it effectively converted the special treatment of rice to an import tariff (at a rate equivalent to several hundred percent), avoiding further increases in minimum access amounts. In line with the move toward market price mechanisms, administrative prices were replaced by the voluntary Rice Farming Income Stabilization Program, which partially compensates producers when market prices fall below their three-year average; participants must set aside land and pay part of the program costs. Still, rice producer prices are estimated to be ten times higher than in other japonica rice producing countries, while consumer prices are two to three times higher (Fukuda, Dyck, and Stout, 2003).

Income stabilization programs (sometimes without set asides) also exist for wheat, barley, beef, pork, dairy, and sugar (in conjunction with restrictive tariffs or other import barriers) and oilseeds. Public investment projects and certain other policy changes have consolidated rice paddies, encouraged leasing and contract farming, and diverted some 40 percent of paddy area from rice (in chronic oversupply) to other uses.

20. Despite their substantial costs, Japan’s agricultural policies do not seem to have been effective in meeting stated policy objectives. Self-sufficiency rates have dropped steadily and now stand at about 40 percent on a calorie basis (and about 70 percent on a value basis), despite the unusually heavy policy focus on food security. Rural-urban income parity has partly reflected the large role of off-farm income for rural households.9 The farm work force has aged very rapidly, with very few younger workers participating. Agriculture sector productivity has stagnated, contributing to low economic growth economywide. The inefficacy of past policies need not imply that agricultural support must always be ineffective or inefficient, but suggests that heavy reliance on import restrictions and other forms of market price support as the means for attaining these objectives is costly and ineffective. The OECD estimates that only a fourth of the costs of market price support accrues to farm household income (Ash, 2004)—much of the rest is used up in higher input costs or in sustaining high land prices.

21. Several studies have sought to illustrate the possible magnitude of the economic effects of agricultural policies in high-income countries.10 Bull and Roberts (2001) used a 17-region, 24-sector Asia- and agriculture-focused aggregation of the Global Trade Analysis Project (GTAP) database now common in empirical general equilibrium (GE) trade studies.11 The authors study a multilateral partial agricultural liberalization scenario under which agricultural import barriers and other support measures are halved. They estimate that under such a scenario, economic welfare in Japan would increase by the equivalent of 0.15 percent of GDP. However, their estimates suggest that in isolation from other countries’ policies, Japanese farm policies on their own reduce Japanese economic welfare by the equivalent of some ½ percent of GDP. Bull and Roberts’ estimates also suggest that current policies greatly dampen imports of some product groups. Although their illustrative partial liberalization scenario would still leave high barriers to rice imports, for example, Japan’s rice imports could nevertheless increase to a fourth of domestic consumption, from their baseline 2004 projection of 9 percent. The table above summarizes the price effects in Japan under this scenario.

Bull and Roberts Model: Simulated Effects on Japan of Partial Multilateral Agricultural Reform Scenario

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Source: Bull and Roberts (2001).

22. Other authors examining the effects of trade reforms include:

  • Tokarick (2005) estimates the welfare impact on Japan of a full multilateral agricultural policy reform at ½ percent of GDP. Reflecting the negative terms of trade impact of higher world food prices (due mainly to policy changes in the EU and the United States), the estimated cost to Japan of its own farm policies would exceed ½ percent of GDP.

  • Van der Mensbrugghe and Beghin (2004) simulate full, global agricultural reforms over the period 2005–15. They find value added in agriculture in Japan could be 25 to 30 percent lower than under present policies as productive factors move toward more efficient uses in other sectors.

  • Anderson, Martin, and van der Mensbrugghe (2005) examine a global computable general equilibrium model version of the GTAP database. In their simulation, eliminating over ten years present global restrictions on merchandise trade (including agriculture) and agricultural support policies increases global welfare by nearly $300 billion in 2015, or 0.7 percent of global GDP. Globally, food and agricultural policies account for about three-fifths of the costs of present policies. For Japan, the full liberalization of global merchandise trade could raise welfare by 1.1 percent of GDP.

  • Francois and others (2004) use a 17-sector, 16-region CGE model to explore a number of issues surrounding the Doha Round trade negotiations, aggregating Japan together with Korea and other high-income Asian countries.12 They suggest that, at least for the high-income Asia group that includes Japan, agricultural policy reform that results in a flow of the factors of production out of (constant returns to scale) agriculture and into (monopolistically competitive) sectors such as manufacturing could more than double the estimated welfare benefits of agricultural reforms.

23. Industrial countries’ trade distortions have taken on additional prominence in the context of the ongoing WTO Doha Round negotiations. Many observers suggest that dismantling industrial countries’ trade restrictions and agricultural subsidies would considerably aid developing countries’ attainment of the Millennium Development Goals (MDGs). Modeling exercises tend to find that industrial countries’ trade and agricultural liberalization would benefit developing countries in general, and many have emphasized the role of agricultural reforms.13 Importantly, modeling exercises and other economic analyses consistently conclude that a country’s own policies have a greater impact on its economic performance than do those of other countries (even collectively). Nevertheless, increased access to the markets of industrial and middle-income countries would provide substantial benefits for, and encouragement for further reform by, many developing countries. According to research by Anderson, Martin, and van der Mensbrugghe (2005), which figures prominently in World Bank and International Monetary Fund (2005), under a hypothetical (and “ambitious”) Doha Round outcome agricultural reform could account for two-thirds of the benefits resulting from all reforms in merchandise trade. Conventional estimates of welfare gains for developing countries as a group as a result of an ambitious Doha Round range around 1 percent of GDP; this could go higher if effects not captured in conventional assessments were to be included, such as if reforms were to help generate higher sustained growth.

D. What Lies Ahead?

24. As much as in other industrial economies, Japan’s agricultural policies reflect the calculus of political economy. Protection rose as the relative size of the agricultural economy shrank and as the importance of food costs in consumer budgets declined. Consumers could more easily tolerate the costs of agricultural protection as their incomes rose, while farmers—a smaller but better organized group—formed effective lobbies (Honma, 2000).

25. With rural incomes on par with urban incomes, using sectoral policies to raise prices to all producers—the way in which 90 percent of present agricultural support is provided—is particularly costly and ineffective. It also burdens other countries and risks contributing to a vicious circle in which protectionism is mimicked by others. Support for farm income can be accomplished more efficiently and cheaply by moving away from market price support and toward direct payments to farmers (Yamashita, 2004). Such steps would follow the trend in other OECD countries away from market price support. Other countries have developed significant experience “decoupling” farm support from production (Baffes and de Gorter, 2005), and useful lessons from this experience (admittedly not all successful) can be brought to bear in Japan.

26. While even direct income payments are likely to distort output, the benefits will be better targeted toward farm incomes and with little leakage into input costs. Reduced incentives for intensive use of inputs, such as pesticides and fertilizers, would carry environmental benefits. Other environmental objectives, such as the flood control benefits of rice paddies, could be better met through policies focused on the areas at risk. Alternative policies could also include targeting skills and technology for on-farm performance, targeting systemic low incomes through social safety nets and adjustment assistance, and diversifying income sources through rural development.

27. There are signs of progress toward a gradual opening in agriculture. According to Fujisue and Koike (2005), the decline in rural political power and disappointment with the self-sufficiency rate resulting from present policies have contributed to MAFF’s willingness to examine in 2004 a role of imports in keeping a stable food supply. The Basic Plan adopted by Cabinet earlier this year posits the further reduction of import barriers and other market price supports in favor of less-distorting direct compensation to farmers—perhaps through tax incentives.

28. By pressing ahead now with reforms, Japan can show leadership in bringing about an ambitious Doha Round outcome. This leadership could leverage ambitious commitments in agriculture to be a positive force in other areas, such as reducing non-agricultural tariffs and strengthening WTO rules in anti-dumping and other disciplines. By opening its own markets in areas of interest to developing countries, and by helping forge a Doha outcome that leads other countries to do the same, Japan can help raise the development prospects of low-income countries.

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1

Prepared by Brad McDonald (ext. 36641).

2

Farmland area has declined by about 1 percent a year over the past two decades, largely due to urbanization.

3

The Council of Regulatory Reform’s 2002 report highlighted the regulations on farmland utilization and their impact on farm size and efficiency.

4

MFN tariffs are those applied on imports from WTO members (and sometimes extended to nonmembers). Lower rates may apply to imports under regional trade agreements or under unilateral tariff preferences granted to developing countries.

5

See also WTO (2004), Section III(2)(v).

6

The PSE is the gross transfers from consumers and taxpayers to agricultural producers, measured at the farm-gate level, arising from policy measures that support agriculture. The PSE is often expressed as a share of gross farm receipts.

7

The figures provided here reflect both market price support (the wedge between internal Japanese market prices and world market prices) as well as direct subsidies on farm output and inputs.

8

These figures reflect the April 2003 changes to the GSP that broadened coverage and deepened preferences for least-developed countries.

9

In 2003, for example, income from agricultural activities accounted for only about one-sixth of farming households’ income (other income includes pension benefits) (MAFF, “Annual Report on Food, Agriculture and Rural Areas in Japan, FY2004,” p. 111).

10

The studies reviewed in this section are conventional static analyses. They do not consider transitional effects, nor do they account for possible positive externalities (what some may refer to as the “multifunctionality” of agriculture) or negative externalities (such as the environmental effects of the additional input use associated with subsidized production).

11

See the GTAP website at www.gtap.agecon.purdue.edu.

13

Models suggest positive but very uneven benefits for developing countries from industrial country agricultural reforms. Developing countries “would gain more if the developing and the developed nations simultaneously liberalized their agricultural sectors” (Francois and others, 2004). Charlton and Stiglitz (2005) stress that a “development-friendly” Doha Round would include not only industrial countries’ agricultural reforms, but also tariff cuts on laborintensive goods and reforms in services trade.

Japan: Selected Issues
Author: International Monetary Fund