Japanese Agricultural Reform and the Trans-Pacific Partnership

Interview with Aurelia George Mulgan
June 21, 2012

To analyze the long-term viability of Japan’s agricultural sector and what role it may play in upcoming trade agreements, NBR asked Aurelia George Mulgan (University of New South Wales) to assess Japan’s agricultural politics and reflect on recent trends toward greater trade liberalization.

An Interview with Aurelia George Mulgan

By Laura Araki
June 21, 2012

Japan’s agricultural sector has become a major point of contention as the nation repositions its trade strategy toward greater liberalization through economic partnership agreements. While the Japanese government has attempted to instill effective agricultural reforms in order to prepare this sector for new or potential international trade agreements, policymakers have yet to create any sustainable or effective agricultural trade policies.

To analyze the future viability of Japan’s agricultural sector and what role it may play in upcoming trade agreements, NBR spoke with Aurelia George Mulgan, Professor of Politics at the University of New South Wales. This interview examines the past, present, and future of Japan’s agricultural politics as well as reflects on recent events in greater trade liberalization.

One major political reform by the Democratic Party of Japan (DPJ) has focused on decreasing the influence of powerful policy tribes within the ruling political party. How successful has the DPJ been at attaining this goal in regard to the agricultural and forestry tribe, also known as norin zoku?

The agricultural and forestry “tribe” were special-interest farm politicians (noson giin) in the Liberal Democratic Party (LDP), who were elected from rural districts with the backing of farm voters and agricultural organizations. The norin zoku exercised direct influence in agricultural policymaking (including the distribution of public works projects to their own constituencies) by holding official positions in the Diet, government executive, and party policy machinery relating to agriculture. They were primarily identified by their executive positions in the Agriculture and Forestry Division (Norin Bukai), division subcommittees, and agriculture-related special committees and investigation committees of the LDP’s Policy Affairs Research Council, or PARC (Seimu Chosakai). The most important source of their influence was the informal convention whereby PARC divisions and committees exercised their right of “prior approval” (jizen shonin) of government policies. Other important sources of influence were their close working relationships with bureaucrats in the Ministry of Agriculture, Forestry, and Fisheries (MAFF) and their expertise on agriculture-related issues accumulated over many years.

When it won the government in 2009, the DPJ under Ichiro Ozawa’s instructions abolished its Policy Research Council (Seisaku Chosakai or Seichokai), the party’s equivalent of the LDP’s PARC. However, the DPJ’s Policy Research Council (PRC) was reinstated under the Naoto Kan administration and then strengthened by the Yoshihiko Noda administration as an arena for DPJ Diet members to discuss policy and have some input into the policymaking process. The norin zoku have not been reincarnated, however. The DPJ has no equivalent of an institutionalized, semi-autonomous, agricultural policymaking group like the norin zoku—for two main reasons. First, Ozawa centralized the management of all petitions from local politicians and industry groups for government spending on particular projects, which were previously handled by tribe (zoku ) politicians and bureaucrats, through the secretary general’s office. Hence, one of the primary arenas in which the norin zoku exercised influence (and gathered votes and political funds) was closed off.

Second, structural and functional aspects of the PRC’s policy groupings are not the same as the LDP’s PARC. The PRC has divisional councils (bumon kaigi) corresponding to the Diet’s standing committees, such as an Agriculture, Forestry, and Fisheries (AFF) Divisional Council (Norinsuisan Bumon Kaigi), and these divisional councils sometimes form working teams to deal with specific policy matters, such as the AFF Divisional Council’s working team to examine the direct income compensation system for farm households. Other sub-units of the PRC are purely ad hoc in nature: investigation committees (chosakai) formed for mid- to long-term issues such as integrated social security and tax reform, and regional decentralization; and project teams set up to examine cross-sector issues, such as the Project Team on Economic Partnership that was created to consider Japan’s possible entry into negotiations on the Trans-Pacific Partnership (TPP). All PRC policy groups hold meetings for members to debate policy, with the government providing background information for discussion and representatives of special interest groups sometimes attending. Nevertheless, the transient nature of most of these groupings and their lack of hierarchies of continuing executive positions undermine them as an arena of zoku recruitment. For example, the divisional councils only have a chairman (zacho) for the purpose of presiding over council discussions. Moreover, these groups do not undertake the function of prior approval of government policies, as the PARC committees and divisions did, and thus do not act as a veto point in the policymaking process. Their role is limited to making requests or suggestions, which the PRC’s executive committee must approve.

This is not to say that the DPJ does not have its fair share of special-interest farm politicians, just as the LDP did, although they are not quite as numerous. Various DPJ Diet members could be described as agricultural policy specialists (nosei giin)—mainly ex-MAFF ministers and bureaucrats and agricultural and forestry Diet members (norin giin) who, for electoral reasons, specialize in representing the policy interests of the farm and forestry sectors, and agricultural-cooperative Diet members (nokyo giin) with close links to the agricultural cooperative organization (JA). The current MAFF minister, Akira Gunji, is a nokyo giin and norin giin who was chairman of the PRC’s AFF Divisional Council until he was appointed to his current position in Prime Minister Noda’s third cabinet in June 2012. There are even ex-LDP norin zoku in the Noda government (for example, former MAFF Minister Michihiko Kano and new Minister of State for Financial Services and Postal Reform, Tadahiro Matsushita). Hence the principle of special-interest politicians making policies for particular sectors continues under the DPJ.

Furthermore, intraparty groupings are not entirely without political influence in the agricultural policymaking process. On the TPP issue, quite a large cohort of DPJ Diet members (around 100) belong to an informal lobby group called the “association to think carefully about the TPP” (informally known as the “cautious faction,” or shinchoha), which is led by former MAFF Minister Masahiko Yamada (with MAFF Minister Gunji its former vice-chairman), and which exercises influence both inside and outside the PRC’s Project Team on Economic Partnership. The group’s vocal opposition to the TPP was able to constrain Prime Minister Noda’s eagerness to join the TPP negotiations, which he wanted to announce at the APEC meeting in Hawaii last November.

How would you describe the changes in Japan’s agricultural policies over the past few years?

Under the DPJ, agricultural reform has stalled. The major policy task has been to implement the direct income subsidy for farm households. It was first introduced for rice as a pilot project in 2010. The scheme supports all commercial rice farmers, including small-scale, part-time rice farms that account for 40% of Japan’s farmers and which continue to farm, owing to the guaranteed income that covers production costs regardless of how much the rice price falls. The scheme has now been extended to upland-field crops, such as wheat, barley, soybeans, sugar beets, and starch potatoes. Keeping small-scale farms in production blocks the scale expansion of farming by discouraging the transfer of agricultural land to full-time professional farmers. It thus traps the sector in a cycle of low productivity, low profitability, and subsidy dependence, which makes agricultural trade liberalization more, not less, difficult.

Despite the main pillar of the DPJ’s agricultural policy working at cross purposes with its trade policy—which requires the government to prepare for market opening by making the agricultural sector more productive and efficient—the Kan government established a “Headquarters to Promote the Revival of the Food, Agriculture, Forestry, and Fishery Industries” in November 2010 with a view to promoting high-level economic partnerships by undertaking appropriate domestic agricultural reforms. In short, the plan was to promote high-level economic cooperation and domestic agriculture simultaneously. In this context, the government introduced the concept of a “sixth industry” for farmers to increase their incomes from businesses related to agriculture production in addition to their agricultural income, by cooperating with commercial and industrial sector players to integrate production, processing, and marketing, and to combine agriculture with tourism and other service industries in regional areas. The notion of a “sixth industry” is reached by multiplying industrial sectors—primary x secondary x tertiary (i.e., 1 x 2 x 3 = 6). If successfully implemented, it would mean more Japanese farmers selling directly to consumers; processing farm products; undertaking the management of tourist farms, farm inns, and farm restaurants; and increasing exports to China and other Asian markets of agricultural products such as fruit, beef, Chinese yams, chicken, rice, chestnuts, peaches, grapes, pears, and mandarins. However, this policy plan has not been systematically implemented and thus remains largely a statement of good intentions.

In October 2011 the Noda government followed the Kan administration’s agricultural policy plans with a “Basic Policy and Action Plan for Revitalizing Japan’s Food, Agriculture, Forestry, and Fisheries,” which was designed to facilitate Japan’s participation in the TPP negotiations. One of its stated objectives was to bolster the farm sector’s competitiveness within five years in order to lead Japan’s agriculture to a future of low tariffs through the accumulation and scale expansion of agricultural land, the promotion of younger people’s entry into farming, and the introduction of a supply chain that efficiently connected farmers, businesses, and consumers. However, the Noda government has taken only a few tentative steps to implement the action plan. Moreover, its real intention is to direct large-scale subsidies to the farm sector to “compensate” for market opening, just as the previous LDP government did in 1994 when it signed the Uruguay Round Agreement on Agriculture. A gargantuan sum of 6.01 trillion yen ($75.5 billion) ended up being directed to rural projects, most of them in public works. The implications of the Noda plan are that the government will continue to carry an inefficient, low-productivity sector, even in an environment of incremental trade liberalization, which will require fiscal appropriations that Japan can ill afford.

Do you believe that the Japanese government has become more willing to relinquish its insistence on exemptions for agriculture? What do you see as the future of Japan’s trade agreements?

Reading Japan’s official trade policy on agriculture at the World Trade Organization (WTO) or for preferential trade agreements (economic partnership agreements, or EPAs), reveals little evidence that it has become more willing to relinquish its insistence on exemptions for agriculture. Japan’s official trade policy position on agriculture at the WTO demands “coexistence of various types of agriculture” and “balanced trade rules,” meaning balancing the interests of efficient agriculture-exporting countries like the United States and inefficient agriculture-importing countries like Japan. This amounts to a defensive, status quo, protectionist trade policy.

Equally, the government’s official stance on agriculture for EPAs is that it will “take into consideration the sensitivity of trade in products” while subjecting all goods to trade liberalization negotiations in the pursuit of high-level economic partnerships. This falls well short of a commitment to the full-scale liberalization of agriculture. In previous EPAs with other countries and regions, Japan excluded a considerable number of items from tariff abolition, mainly in the agricultural sector, which has meant that liberalization rates have been 90% or less (meaning that tariffs will be completely abolished on only 90% or less of the total range of commodities). Based on this precedent, the Japanese government will certainly want to sign EPAs that contain exemptions for sensitive agricultural products. The same will apply to the TPP if Japan ever seriously enters into these negotiations.

The Japan-Australia EPA will be a litmus test because of Australia’s demand for market opening for key agricultural products. Japanese negotiators have now told Australia that they are aiming for a high liberalization rate of over 95%. Japan’s government has also expressed its intention to improve prospects for liberalization in four key areas (beef, dairy products, wheat, and sugar) by either completely abolishing tariffs in the mid to long term or implementing a tariff-quota system in combination with domestic agricultural reform. Under this plan the government will come up with appropriate support measures (i.e., more subsidies) in a “reform” plan for domestic agriculture in order to ease the impact of market opening on those particular farm sectors.

At the same time, the Australian side has become more flexible in its demands for tariff abolition for beef, wheat, sugar, and dairy products by being prepared to allow grace periods before tariff abolition and tariff quotas for some products instead of abolition. There is a precedent for tariff-quota systems because Japan already introduced this measure for some products in its EPAs with other countries. Australia has also effectively accepted an exemption for rice by excluding rice from its trade liberalization demands. Compared with the TPP, which aims for complete tariff abolition within ten years, the Japan-Australia EPA has become more achievable. If Japan can secure certain exclusions in its EPA with Australia, it might be possible to maintain these exclusions with Australia even if that country participates in the TPP. The view that “the EPA is at least better than the TPP” is gradually gaining ground in Japanese policy circles, thus lowering the hurdle for the Japan-Australia EPA. Because the TPP is something that has been promoted strongly by two DPJ prime ministers—Kan and Noda—there is a possibility that if the DPJ regime comes to an end, TPP participation might never be realized. This possibility also enhances the prospect of achieving a positive result from Japan-Australia EPA negotiations.

Opportunities have also opened up for quicker progress on a free trade agreement (FTA) between China, Japan, and South Korea, which the Noda government seeks to expedite. In fact, the TPP is indirectly driving forward momentum on this trilateral FTA because, it is argued, China seeks to attract Japan away from the TPP, which it sees as U.S.-dominated. Moreover, China and South Korea have become more important trading partners to Japan over the last decade or so. In 2000, exports to the United States and the European Union (EU) were just under 50% of Japanese exports (47%) while those to China and South Korea were only 12%–13%. By 2010, however, the U.S.-EU share had fallen to 26.7% and the China–South Korea share had risen to 27.5%. These statistics show that China and South Korea now take more exports from Japan than the United States and the EU do. Given recent trends, including the possibility of Japan being left out of a China–South Korea FTA, there is a consensus in Japan on the importance of the trilateral FTA. Nor does the proposed agreement present such potential problems for the agricultural sector.

Do you believe that liberalization of the agricultural sector will strengthen Japan’s competitive edge in the international market system? What will this segment of the Japanese economy look like in the next decade?

Economic theory would predict that structural adjustment of the farm sector induced by trade liberalization would result in a more internationally competitive, innovative, and efficient agricultural industry. Import protection produces inefficiencies and hinders both innovation and development. While protectionists argue that cheap foreign imports will devastate the farm sector, import competition would force the farm industry to reform, with farmers adapting to the change by catering to niche agricultural markets, producing value-added products, and expanding farm exports.

Structural reform of agriculture engineered by the government in preparation for market opening would produce a similar result, but with less social dislocation and political fallout. The kind of reforms needed in preparation for liberalization would invigorate the farm sector and ensure its survival. The management scale is too small, so policy inducements are needed for scale expansion. Production costs can also be brought down (and therefore profitability increased) by producing to full capacity, which means abolishing the rice acreage-reduction scheme (gentan) and allowing farmers to generate additional income through exports. The South Korean example shows how liberalization would strengthen Japan’s competitive edge in the international market. The reform package accompanying the Korea-U.S. FTA (KORUS) facilitated drastic structural reform of the country’s farm sector—raising the competitiveness of specific products, encouraging younger people into farming, helping full-time farmers, and encouraging the departure of inefficient farmers out of the industry. These policies made domestic producers more competitive and resilient to the likely influx of imports.

What the farm segment of the Japanese economy will look like in the next decade will depend on what agricultural (and associated trade policies) the government adopts. The MAFF has made a trial calculation that if Japan were to sign on to the TPP, the value of domestic agricultural production would drop by approximately 4.1 trillion yen ($5.2 billion), almost half the total production value, and the food self-sufficiency rate (calorie-based) would fall from the current 40% to 14%. However, others argue that in the absence of market opening and structural reform of the sector, agriculture will be in an even worse state than it is now. Predictions range from “notably bad” and “seriously sick” to “completely collapsing.” The problems besetting the sector are a product of a policy once described as a “convoy system of protecting the weaker farmers,” and are largely those it faced 50 years ago: low productivity, a high-cost structure, insufficient income generated from farming, low food self-sufficiency, lack of international competitiveness, an increasing trend toward part-time farming, and fragility of the agricultural employment structure.

In the absence of an agricultural-reform orientation in government, future trends will be a continuation of current negative trends. It is inevitable that the Japanese farm sector will go into an even more pronounced decline owing to many challenges: more land under cultivation lost and more abandoned farmland leading to even less cultivated land and a lower utilization rate of cultivated area; a continuing drop in the agricultural working population and a possible demographic crisis, with the average age of that shrinking group rising above the current 66 years; fewer farm successors; a contraction in private investment in the farm industry; a decline in the value of gross agricultural output and agricultural income produced; and falling food self-sufficiency levels. The direst prediction is that if the current situation continues, there will probably be no farmers left in Japan after ten years and food production will stop.

Successive Japanese governments are threatening the future of Japanese agriculture because of their inability to take on the political challenge of radical agricultural reform to make the farm sector into a viable, efficient, internationally competitive industry, which international trade agreements and the preparation for them should be facilitating.

As you have mentioned in a previous article, in attempting to address the losses from trade liberalization, former DPJ leader Ichiro Ozawa worked to instill a program that directly compensated affected farmers. How economically and politically successful has this measure been?

Direct income compensation for farmers was a successful vote-winning measure in rural constituencies, where it helped deliver the DPJ its stunning victories in the 2007 Upper House and 2009 Lower House elections. In many cases, farmers defied the recommendations of the JA and voted for DPJ candidates. Ozawa followed his mentor Tanaka Kakuei’s kawakami (upstream) election strategy, which places first priority on securing votes in rural, agricultural districts in the initial stages of a campaign and then moves to urban areas in the final stages. In short, it requires an electoral strategy that is geared to securing votes from both rural and urban dwellers equally. Ozawa realized that in order to win general elections, the DPJ needed the votes of small-scale, part-time farmers who form the majority of farm voters. The compensation program appealed to the farming constituency because it offered direct income subsidies to all commercial farm households regardless of size, unlike the LDP-MAFF scheme that restricted eligibility to larger-scale agricultural “bearers” (although it was liberalized after the LDP’s 2007 Upper House election defeat). Ozawa’s political intention was to outbid the LDP for the farm vote. He wanted to detach the LDP from its agricultural support base and in particular to undermine the electoral connection between farmers and the JA, the LDP’s principal vote-gathering organization in the countryside. The main political consequence of this policy has been that no chink of light now separates LDP and DPJ farm policy. Both major parties compete with each other to win farmers’ votes by defending the interests of small-scale farmers.

Economically, Ozawa’s intention was to support Japan’s entry into FTAs by protecting domestic agricultural producers from price falls consequent upon the influx of cheaper farm imports. He believed that achieving free trade and higher levels of food self-sufficiency were compatible. In practice, however, the DPJ’s income compensation scheme for farm households strayed far from Ozawa’s original justification of it as a complementary policy to agricultural trade liberalization. It ended up as just a baramaki (subsidy-scattering) policy for farmers rather than a serious attempt to lay the foundations for agricultural trade liberalization. Because the policy provides incentives for small-scale farmers to remain in agriculture, it prevents full-time professional farmers from expanding their businesses by increasing farm size. It thus blocks structural reform of the sector, which is a necessary condition for agricultural trade liberalization. Hence, the policy has ceased to be an instrument of structural reform. It also entails considerable fiscal risk for the government as an accompaniment to market opening because, in the absence of structural reform, the cost of compensation to farmers will rise exponentially in the event that increased imports drive farm prices down.

Export-oriented industries have been a vocal proponent of Japan’s participation in international trade liberalization. Have these industries been sensitive to the losses incurred by the domestic agricultural sector? If so, how have they attempted to engage agriculture actors to bring about more inclusive and beneficial trade liberalization?

There has been some dialogue between the agriculture and industry lobbies (the JA and Keidanren) but they have failed to persuade each other to their respective points of view. Consequently there has been no resolution of their differences, which are diametrically opposed. In fact, Keidanren chairman Hiromasa Yonekura accused former MAFF minister Kano of being “weak-kneed” in light of his opposition to the TPP and criticized Diet members opposed to the TPP as being “mainly people who want to secure votes in the next election.”

Special interest lobbies in industry and agriculture each pursue their own interests in the political sphere. The agriculture lobby wants the government to maintain agricultural protection, while the business lobby wants the removal of impediments to Japan’s market opening and for the government to sign on to FTAs in order maintain their share of export markets against competitors already exporting under lower FTA tariff arrangements. Japan’s industrial exporters are also among some of the most vocal proponents of Japan’s joining the TPP.

The divisions between the farm and industry lobbies are replicated in the rivalry between METI (Ministry of Economy, Trade, and Industry) and MAFF, each arguing the case put forth by the industries within their administrative bailiwick. METI argues that if Japan does not participate in the TPP, the auto, electrical, electronic, and machinery industries will decline in terms of their contribution to GDP, which will push down real GDP, while MAFF argues that agricultural production value will decline by about half if Japan does participate in the TPP.

Nevertheless, portraying the TPP debate in Japan as simply “agriculture versus manufacturing industry” trivializes it. Participating in the TPP would require Japan to eliminate not only tariff barriers but also non-tariff barriers across a range of sectors with implications for a wide spectrum of vested interests. The domestic politics of the TPP are therefore far more complex than those of FTAs, which translates into better prospects for Japan’s successful negotiation of bilateral or trilateral agreements with its regional trading partners.

Laura Araki is an Intern at the National Bureau of Asian Research and a senior in the University of Washington’s Jackson School of International Studies.

This interview was produced by the Japan-U.S. Discussion Forum, NBR’s public email forum on Japanese affairs.