AGRICULTURE REFORM IN JAPAN - TOO LITTLE TOO LATE FOR DOHA

UNCLAS SECTION 01 OF 03 TOKYO 005052

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STATE PLEASE PASS FAS CLAY HAMILTON
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STATE PLS PASS TO USTR WENDY CUTLER AND MICHAEL BEEMAN

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TAGS: EAGR ECON JA

SUBJECT: AGRICULTURE REFORM IN JAPAN - TOO LITTLE TOO LATE FOR DOHA
TALKS


First of a series

Summary
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1. (SBU) Japan is set to change its policies in farm subsidies
starting in fiscal 2007. Whether the changes will help the
government to take a more accommodating posture in trade talks over
the longer term -- both multilateral and bilateral -- remains to be
seen, but nobody is predicting any dramatic shifts in course. The
awkwardly titled "Legislation on Subsidies to Stabilize the
Operations of Selected Farmers and Farming Institutions that Would
Revitalize Japan's Farming Industry" involves more reliance on
direct supports and is supposed to be more WTO-friendly. Passed in
June, the legislation will likely prove too little too late. Japan
will not be in a position to offer up substantial tariff cuts on
agricultural commodities -- particularly on rice -- to resuscitate
the Doha talks any time soon. If combined with other reforms,
however, they could prove important in the future. End summary.

Ag Sector Now
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2. (SBU) Japan is famously one of the most inefficient agriculture
producers in the world, with an industry that remains a drag on the
overall economy and the country's willingness to play a leadership
role in the Doha talks. Some 85 percent of farmers are either
part-time or producing for their own consumption. Excluding
Hokkaido, average farm size is only 1.6 hectares. Japan's farmers
are rapidly aging -- 70 percent are over 60 years old and 40 percent
are over 70 years old. Their offspring are increasingly reluctant
to continue the business on a full time basis because revenues from
farming alone tend to be below the average income of the population.
Those men who do stay on the farm sometimes need to look abroad for
wives, as Japanese women are less and less interested in working a
family farm. Overall, in part because of Japan's coddled farm
sector, Japanese consumers are saddled with some of the highest food
prices in the world.


3. (SBU) Owing to minimal cultivable land and irrational land use
policies, the farm sector is distorted, with plots too small to make
viable commercial enterprises. Farm owners are not selling their
land in meaningful volumes; they prefer to hold properties in hope
that the land will be rezoned for non-agricultural use -- for
example, supermarkets, factories, and housing. Rezoning would boost
potential land values and provide current holders with greater
incentive to sell off. However, laws recently passed to revitalize
city centers will make such rezoning more difficult when they come
into force in 2007. In addition, current policies -- including the
recently passed agriculture reforms -- sidestep rezoning as a focus
and instead seek to encourage consolidation by targeting farm
subsidies on bigger farms.


4. (SBU) Japan's agriculture sector has been in a state of
sclerosis for decades and land use policies are only part of the
problem. Some reform-minded observers tell us that the recent
changes, involving primarily the introduction of a targeted direct
payment scheme, are inadequate. "Fake reforms" is how one
agriculture expert at Meiji University kept describing the recent
changes in a slide presentation for us in his office. The Diet
passed the legislation after several months of being worked and
reworked by the politicians and it will not go completely into
effect until April 2007 at the start of Japan's next fiscal year.
Farm sector supports will no longer be spread around to all farmers
regardless of size, but be concentrated on farms of over four
hectares -- or 10 hectares for farms in Hokkaido, Japan's relatively
lightly populated northern-most island.


5. (SBU) Most observers -- including even some in the Agriculture
Ministry (MAFF) -- agree that Japan cannot improve farm sector
efficiency until farms are consolidated and much bigger than the
targets in the current legislation. To get even the current reforms
passed in the Diet, however, loopholes were introduced. Small farms
that did not qualify for direct payments under the first draft of
the legislation will be able to receive them if they form
pseudo-cooperative arrangements with other small-scale farmers with
total farming land of over 20 hectares. These farms, usually small
in size and often with senior citizens tilling the land, will
benefit not only from government handouts but also by pooling
farming costs and encouraging more economies of scale.

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6. (SBU) In practice, observers note, the loophole could set farm
consolidation back, although there is little data to make a case
either way. Some incidents have been reported in which small farm
holders, who today are willing to lease their properties to
large-scale commercial agriculture concerns, will instead retain
them and form the pseudo-cooperative arrangements in anticipation of
government direct payments providing more income than the rents they
currently charge the large commercial concerns. Adding to the
distorting effects of the direct payments legislation, prefectures
will have some say in who gets the handouts, making them a potential
source of pork barrel largesse. According to the Meiji University
expert we met, average farm size could remain very small -- close to
the existing 1.6 hectares.

Outline of New Subsidies
--------------


7. (SBU) Putting aside what impact the new subsidies will have on
consolidation, they target large-scale farmers that produce
commodities such as rice, wheat, soybeans, sugar beets, and
potatoes. One goal is that farmers will reduce rice production --
where a domestic production glut has contributed to a decline in
prices -- in favor of other starches. Farms producing vegetables,
fruits and livestock are not covered in the legislation. Currently,
subsidies are specific to the commodity and are given to every farm
that produces them, irrespective of land size. Even with the new
loopholes in the legislation, the hope is that the new system will
spur a Darwinian shakeout in the farm sector, with bigger producers
buying out the least productive farmers. Eligible farms would also
receive preferential rates on loans for their farming activities.


8. (SBU) As explained by MAFF, the new subsidy program has two
elements, a base revenue insurance payment and a two-tiered payment
based on past acreage plus those calculated on annual yields. The
base revenue insurance payment would be funded three-fourths by the
government and one-fourth by the farm and triggered when the farm's
income for each commodity is below the average income for three out
of the past five years, with figures for the lowest and highest
years taken out. The payment would replace 90 percent of the total
loss, and is considered non-trade distorting under current WTO
rules. The second payment is designed to remedy domestic production
costs because they are higher than non-Japanese production costs.
According to MAFF, the first tier of payments is calculated by past
acreage and falls under the green box in WTO terminology. The
second tier is based on annual yields and falls under the amber
box.


9. (SBU) Defenders of the policy changes acknowledge that they are
modest, although perhaps not in fiscal terms, where the MAFF budget
for 2007 subsidies has increased slightly. Defenders argue,
however, that the reforms will begin the process of much needed
consolidation, and represent an interim step. Farmers will begin to
run their farms more like businesses -- which in turn will
underscore the need for more large-scale management. The reforms
should also encourage diversification out of rice production.
Farmers will be able to rotate their production throughout the year,
leading to more revenue per square production unit. The incentive
for this arises because rice producers will only be eligible for the
base insurance payments, while those producing wheat, soybeans,
sugar beets and potatoes will receive both elements of the subsidy
program. How big the implications are is unclear; some farmers,
especially for wheat and soybeans, will remain deterred by fierce
import competition. And although rice farmers do not qualify for
the two-tiered subsidies, an assortment of other subsidies -- such
as handouts for farmers who practice environmentally friendly
production techniques -- remains on the books.


10. (SBU) As part of the same package of reforms, MAFF is
introducing measures that would lower central government control
over production and enhance the influence of local decision makers
on their agriculture policies. Take rice for an example: in the
past, the government decided production volumes. Under the new
system, the government will only offer information on estimated
demand. Local farmers or farmers' cooperatives, with other
community input -- including local officials, distributors, consumer
interest groups, and academics -- will draft plans allocating
production to producers who are willing to cooperate in planning
output levels. The Ministry also has a set of subsidies available
to the local farming communities for them to carry out agriculture

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reform at their own discretion -- one of the purposes would be for
communities to shift production away from rice to other
commodities.

Too Little Too Late?
--------------


11. (SBU) What effect will recent agriculture reforms have on the
government's role in multilateral trade talks? There are different
interpretations, but the basic answer is probably: not much. Even
MAFF -- a bastion of conservative bureaucrats who view change with
suspicion -- recognizes that for Japan to be competitive enough to
begin to fend for itself without the prohibitive tariff walls that
domestic farmers hide behind today, farms have to be much bigger
than those called for in the new legislation. According to studies
by Yoichi Tashiro at Yokohama National University, even if farmland
were consolidated to 10 hectares, domestic rice would not be able to
compete against foreign producers -- in other words, if tariffs were
slashed to, say, 200 percent from the current 490 percent, never
mind more ambitious targets, Japanese rice farmers would be
devastated. MAFF's eventual target -- perhaps more accurately
described as vague hope -- is to expand the size of family-owned
rice paddies to between 15-25 hectares and corporate farms to 34-38
hectares.

Comment
--------------


12. (SBU) Looking at language contained in recently passed
agricultural legislation, including the emphasis on consolidation
and a move toward greater reliance on direct payments, there is room
for a small modicum of optimism. Conservatives in Japan's
agriculture lobby have at least felt the heat brought on by others
in Japan who are more determined to open the economy up. Given the
harsh demographics of Japan's rural sector, even aging farmers --
and their heirs -- may eventually prove to be a force for more
change. They want to see the reforms in rural land policy that will
eventually translate into higher property values, where the land can
be put to non-agricultural uses. They may ultimately prove unhappy
with the current muddled efforts at land consolidation and ask for
more genuine "liberalization" and not less.


13. (SBU) Only the most naive, however, should expect Japan to
become ambitious in WTO agriculture talks anytime soon. The balance
of political power today continues to rest in the hands of those
that resist market opening. The independent, non-governmental Japan
Economic Research Institute describes Japan's recent reforms as a
"stepping-stone" for expanding scale and encouraging efficient farm
management. The institute calls for additional measures to
encourage further consolidation beyond the four hectares (10
hectares for Hokkaido) target and believes that reforms should cover
vegetables, fruits and livestock, which have been excluded so far.
But no major legislation is in the pipeline. Japan's most
iconoclastic, reform-minded prime minister in the postwar period is
leaving office. Optimists continue to point to the demographics of
the agricultural sector, and to external events such as a possible
FTA with Australia, or the model that a U.S.-Korea FTA might
present, as spurs to substantial reform and market opening. The
only thing certain is that Japanese agriculture will not be ready
for the pressure of world competition anytime soon.