Sticky situation for Japan’s rice policy

Asia Times, Jul 28, 2005

Sticky situation for Japan’s rice policy

By Bennett Richardson

TOKYO - The roots of Japan’s association with rice run deep. The Japanese emperor still performs a number of traditional Shinto ceremonies to bless and protect the rice crop each year, and guarding rice has been a key political function of governments from the feudal times into the present. But Japan’s rice policy is likely to come under increasing international criticism over the next few months, as the country is a major symbolic bastion of overt protectionism which is thwarting the ambitions of World Trade Organization (WTO) nations negotiating for greater market access for their agricultural products.

WTO members are holding meetings this week in Geneva that aim to reach a preliminary accord by July 31 on reducing trade barriers that protect sensitive agricultural products. Any failure to reach consensus would dash hopes of inking a final accord at Doha development agenda negotiations in Hong Kong in December. While some progress toward agreement was seen at meetings in Dalian, China in mid-July, the sticking point that nobody wanted to mention was Japan’s rice policy.

Rice has long been one of Japan’s most protected domestic markets. A combination of restricted market access, high tariffs, and farming support via subsidies and production controls contributes to a situation in which the Japanese consumer pays around 12 times more per kilogram of rice than US consumers. While often criticized as an unfair burden on the Japanese consumer, more people in government are now beginning to realize that Tokyo has gone out on a limb with its rice policy and that the nation’s notoriously inefficient rice farmers can’t continue to be supported forever.

In 2004 alone, the Japanese government is said to have spent some Y5.283 trillion (US$47 billion) on support for the farming sector, at a time when Tokyo is striving to reduce public expenditure in other areas and hiking taxes. A recent OECD (Organization for Economic Cooperation and Development) report recently showed that around 1.4% of gross domestic product (GDP) goes toward agriculture support in Japan, and that a massive 80% of rice farming receipts are derived from government payments.

Increasingly isolated

Japan accepted the introduction of minimum market access for foreign rice in 1995 under the GATT Agriculture Agreement; this was supposed to bring imports to 8% of domestic consumption by 2000. But in April 1999 the government adopted a tariff rate quota (TRQ) system whereby minimum access is kept just below 8%, and imports beyond the quota are subject to such prohibitively high tariffs that more foreign rice is effectively stopped from entering the market.

This system, sometimes called "dirty tariffication", currently allows an annual import quota of 682,000 tons of rice and rice products, which corresponds to 7.2% of average consumption in the 1986-88 base period. Imports of rice beyond the quota are unrestricted in legal terms but subject to a Y341 per kilogram tariff. This tariff is now estimated at 490%, but the rate will soar to massive 778% under new calculation rules to be introduced as part of the Doha Round.

"Japan is perhaps the only major OECD country to have pursued extremely high tariffs as a means of supporting its farmers," says Hidehiro Konno, a former vice minister for international affairs at Japan’s Ministry of Economy, Trade and Industry. Europe and the US have both opted for more orthodox subsidy payments to farmers and are in the process of gradually reducing them, leaving Japan increasingly isolated on the issue of maintaining super-high barriers at the border as a method of protecting its agriculture sector from foreign competition. Perhaps the only country that Japan could expect sympathy from is South Korea, which similarly coddles its rice farmers, forcing Koreans to pay three times more per kilogram of rice than Americans.

The Doha Round

With the July 31 deadline looming, WTO nations met in Dalian, China on July 12-13 in the hopes of hammering out some kind of compromise on agriculture. The "July Package" Doha Agenda work program, agreed to on August 1 last year, serves as the framework for the current negotiations and sets out various measures on agriculture that may affect Japan’s rice trade. In line with the Doha Ministerial Declaration calling for substantial reductions in trade-distorting domestic support, the July Package states there will be a strong element of harmonization in reductions of domestic support by developed countries; in particular, higher levels of support will be subject to deeper cuts.

The OECD finding that domestic support to Japanese producers of rice is close to 80% of gross farm receipts will provide additional ammunition in the negotiations leading up to Hong Kong to pressure Japan to do more to bring its rice policy into line with WTO objectives. Japan’s high tariffs on rice imports outside of the TRQ are sure to draw the most fire. The Doha Ministerial Declaration calls for substantial improvements in market access to be achieved through tariff reductions according to a tiered formula. A G20 proposal made at Dalian to divide nations into five groups for tariff cuts, with Japan possibly in the middle band, seems the most likely basis for any agreement in Hong Kong. This would supposedly involve uniform cuts in a similar approach to that used in the Uruguay Round; a method that is seen as the least drastic of remedies available, even among food importing nations such as Japan.

But Tokyo is almost certain to oppose other parts of the G20 proposal, such as capping tariffs at 100%. It is possible a special exception will be made for rice due to its sensitive status in order to prevent any derailment of negotiations in Hong Kong, but the July Package states that even for sensitive products the principle of substantial improvement through TRQ commitments and tariff cuts applies. As such, Japan may have to lift its minimum market access to more than 682,000 tons of rice and rice products. It may also have little option but to substantially cut the beyond-quota tariff on rice to allow more foreign rice to enter the domestic market, or risk throwing the negotiations into chaos.

Farming reforms: One step forward, two steps back

To be sure, Japan has made some effort to deregulate its domestic rice industry but progress has been slow and only partly successful. Japan lifted a ban on nationwide wholesaling operations in 1996 and ended domestic market price support for rice in 1998. The gradual introduction of market mechanisms has resulted in a steady drop in the price of local rice from Y23,000 per 60 kilograms in 1993 to Y16,000 per 60 kilograms today. Some see such moves as an attempt by the government to force the most inefficient rice farmers out of business. Many small-enterprise farmers would leave rice farming if the price dropped to Y11,000-12,000 per 60 kilograms, according to the Research Institute of Economy, Trade & Industry, a Japanese government-affiliated think tank.

Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) has actively regulated the rice auction system to prevent abuse and artificial price inflation. For example, MAFF plans to introduce limits on bidding prices and allow unsold rice to be re-auctioned. Such moves are in response to the manipulation of auctions in 2003 by the National Federation of Agricultural Cooperative Associations (Zennoh), and after rice producers set artificially high minimum bidding prices last year to prevent prices from dropping.

In line with the introduction of more orthodox market principles, an enterprise mentality has grown in the rice-trading sector. A number of rice dealers and producers are planning to list on stock exchanges as they seek to expand operations that were once strictly regulated. At least two Japanese rice wholesalers, one rice marketer and one group of rice farmers have said they intend to go public within several years - a move that would have been unthinkable in the 1990s.

Japan also plans to abolish the 30-year old government control of rice output by fiscal 2007, but reforming subsidies for rice farmers remains behind schedule. In 2004, discussion on the new Basic Plan for Food, Agriculture and Rural Areas seemed at first to indicate a revolution was in store for Japan’s highly cosseted agriculture sector, but many of the original plans on establishing stricter criteria for granting subsidies have been watered down as the farming lobby pressured the ruling Liberal Democratic Party to protect their interests. Recommendations that survived and were presented in March to Agricultural Minister Yoshinobu Shimamura allow for shareholder companies to enter the agricultural business for the first time, and set out a commitment to concentrate state support on large-scale principal farmers in a bid to improve overall efficiency.

Japan’s agricultural lobby still maintains a powerful hold on policymaking due to the disproportionate strength of the rural vote in Japan. Votes in some country areas were worth five votes in Tokyo in terms of national representation in elections last year, a situation that has prompted citizens’ advocacy groups to sue the government on constitutional grounds. Reform remains bogged down despite efforts by free traders in Ministry of Economy, Trade and Industry (METI) and the more progressive stance of Agricultural Minister Shimamura compared to his predecessors.

Part of the problem lies in the fact that the average farm size in Japan is a very small 1.6 hectares and many rice farmers are part-time. Around 64% of rice farmers engage in farming only as a sideline to their main source of income and so have little incentive to improve profitability. The Basic Plan includes a policy to promote collective farming and the consolidation of farm use so that small-scale farmers can join principal regional farm managements.

Another possibility is allowing small-scale farmers to lease their farms to large agricultural producers, says Yasuo Endo, director of the Japan Office of the UN Food and Agriculture Organization. One example of this in practice is the company Watami Farm, a subsidiary of izakaya-style restaurant operator Watami Co that operates farms in government-designated special deregulation zones comprised of leased fields from local farmers.

Government running out of options

Tokyo has cut spending in areas such as public works for several years now, and agriculture is slowly coming into the line of fire as the government searches for ways to reduce public debt and put off a much-feared consumption tax increase. Agriculture is increasingly seen as a major area in which budget savings can be made. While farmers would lose subsidies, studies show that consumers would gain Y316 billion a year. A recent UN Food & Agriculture Organization study shows that the welfare of Japanese rice importers would also improve by over Y55 billion annually if the world rice trade were liberalized. The same study shows that liberalization of the global rice trade would lead to an expansion of the global market for rice of 15% within one year.

Japan is aware that its rice crop is a potential export product due to its high quality, and the Basic Plan includes recommendations to promote the export of agricultural goods. In fiscal 2003, most of Japan’s 391 tons of rice exports went to Southeast Asia, and the government hopes to begin exporting to China in the future. Tokyo and Beijing are currently negotiating to end the Chinese ban on rice imports. As Japan moves to sign more bilateral Free Trade Agreements, agriculture remains a sticking point with other rice producing nations such as Australia, India and China. In order to create incentives for other countries in Asia to open their markets to Japanese electronic goods, Tokyo may have to push farm reform faster in order to provide attractive incentives to such nations in the FTA negotiation process.

Although rice is still a staple food in Japan and retains much of its cultural significance in Japanese society, its per capita consumption has declined rapidly in the post-war years, which may help prompt policymakers to ease protection of the market over the long-term. In 1965, the average yearly intake of rice was 114.9 kilograms, but this had fallen to 62.7 kilograms by 2002 as people switched to more Western sources of food starch such as pasta and noodles in recent years. Other factors that may spur lawmakers to speed reforms include the fact that most Japanese prefer local rice to imported rice and are willing to pay a small premium, and the possibility of electoral reform to reduce the power of the rural vote.

Farm lobby not down and out

But farmers and Zennoh retain strong political sway over rice policy and the ruling Liberal Democratic Party (LDP). The position of rice as Japan’s traditional staple food and strong community traditions associated with rice farming make resistance to change in the sector particularly stubborn among conservative elements. The ability of Prime Minister Junichiro Koizumi to push through reforms may weaken in the face of such opposition from the Old Guard in the lead up to the end of his term in September 2006. Conservative elements in the LDP will be able to slow farming reforms if Koizumi’s control over the LDP is seen to falter as it has to some degree with his plans to push through privatization of Japan’s postal system.

Food security is also a major issue in Japan, which the farming lobby has exploited to its advantage. The Basic Plan sets out a target of lifting the nation’s food self-sufficiency ratio to 45% from the current 40% by 2015. Included in this plan is maintaining the self-sufficiency ratio for rice at 100%. But economic research suggests that agricultural trade intervention is an inappropriate way to ensure food security. Rather, access to credit and foreign exchange to buy food during times of scarcity is more important. Japan has had the largest foreign exchange reserves in the world since 2000, but many Japanese still feel swallowing an economically unsound rice policy is a small price to pay to avoid any further reliance on food imports.

Bennett Richardson is a Tokyo-based freelance journalist.

source : Asia Times

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