Tokyo is passing its first TPP test with agricultural reform

The recent break by the ruling Liberal Democratic Party from the traditional partner, the agricultural lobby, and following announcements of a new agricultural policy heighten hope for the Trans-Pacific Partnership and for Japan.

On December 10, it was announced that an accord on creating a new free trade zone in the Asia-Pacific, the Trans-Pacific Partnership (TPP), had been postponed until 2014. This announcement came as a disappointment for Japan watchers the world over, with many Japanese policy makers and external analysts considering TPP the most consequential element of Prime Minister Shinzo Abe’s strategy to revive the Japanese economy.

While TPP is the most public signal of the Abe government’s intention to structurally reform the Japanese economy to better face global competition, the struggle to pass TPP is firmly rooted in a more domestic challenge: Japan’s long-uncompetitive agriculture. As such, the recent break by the ruling Liberal Democratic Party (LDP) from its traditional partner, the agricultural lobby, and subsequent announcements of a new agricultural policy heighten hope for TPP and for Japan.

Since 1971 Japanese agriculture has been actively maintained, yet limited in growth, by a policy known at gentan through which the government has paid farmers to reduce rice crops. While the gentan system was originally designed to protect the country’s farmers from short-term fluctuations in price, the policy today keeps roughly a third of Japan’s paddy fields out of production costing vast sums each year in compensation to farmers for lost income. Japanese agriculture is further protected through the one of the world’s highest tariffs: a 777.7% duty on imported polished rice.

Gentan has not only propped up Japanese agriculture, but is also a system of implicit political patronage between the Japan Agriculture Cooperatives (JA) group and Japan’s political parties, most traditionally the long-ruling Liberal Democratic Party. With almost 10 million members, JA is the country’s fourth-biggest financial services provider, its largest political lobby and the supplier of nearly half of all rice distributed across the country.

JA has collected almost 12 million signatures for an anti-TPP petition and demanded that the government quit the trade talks if it cannot safeguard tariffs on rice as well as wheat, sugar, beef, pork and dairy products, placing an implicit threat over the heads of politicians pressured to keep pace with the Abe government’s support of TPP.

As the LDP has traditionally drawn much of its support from farmers and from JA, tackling gentan and other agricultural programs in any form had long been considered far too politically risky. This political impasse showed signs of changing, however, with the Japanese government’s November 26 announcement that it had approved a plan to halve the gentan subsidy from April 2014 and abolish it by March 31, 2019. This move will cut 161 billion yen in support of rice farmers’ incomes while reducing import barriers.

The Diet passed a bill in December to reduce the amount of idle land and consolidate farms so that they can be leased to managers who will boost productivity. A separate bill passed by the Diet will introduce credit insurance, enabling farmers to borrow from banks and weakening JA’s dominance in agricultural financing. The government aims to focus a more efficient agriculture industry away from a declining domestic market and toward a growing foreign market by providing financial support for the production of high quality, value added products like Japanese rice, beef, and dairy, products, which already have ready and profitable markets in neighbouring countries such as China.

Ultimately, the government estimates that proceeding with further TPP-required agricultural reforms may result in an initial decline of about 3 trillion yen in production from agriculture, forestry and fisheries, with rice accounting for about one third of that. However, the boost to the nation’s exports, domestic consumption, and investment would ultimately mean a net 3.2 trillion yen gain in GDP and benefit the Japanese consumer via lower prices.

Today, Japan stands at a historical crossroads for its agriculture industry, its place in the global economy, and corresponding investor confidence. As Prime Minister Abe noted in a December 6 interview, “Agriculture is the most difficult sector to reform.” Indeed, in spite of Japan’s move toward agricultural reforms, Abe has vowed, “We are having tough talks with the United States in the areas of agriculture and automobiles…We will not make any easy concessions.”

However, in the same speech Abe reiterated his desire to end at all costs Japan’s nearly two decades of deflation and ensure sustainable growth with stronger capital spending and higher employment. Abe recognizes that TPP is necessary for these goals to come to pass, and that Japanese agriculture will have to be reformed. Tokyo’s passing of its first TPP test—agricultural reform—sends a message that the sun is rising on the Japanese economy.

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Categories: Economics, Pacific Asia

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