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FM AMEMBASSY TOKYO
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UNCLAS SECTION 01 OF 03 TOKYO 005052 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PLEASE PASS FAS CLAY HAMILTON 
DLP FOR WETZEL 
STATE PLS PASS TO USTR WENDY CUTLER AND MICHAEL BEEMAN 
 
E.O. 12958:  N/A 
TAGS: EAGR ECON JA
 
SUBJECT: AGRICULTURE REFORM IN JAPAN - TOO LITTLE TOO LATE FOR DOHA 
TALKS 
 
 
First of a series 
 
Summary 
------- 
 
¶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 
------------- 
 
¶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. 
 
TOKYO 00005052  002 OF 003 
 
 
 
¶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 
 
TOKYO 00005052  003 OF 003 
 
 
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.