Abe Breaks Micro-Farms to End Japan Agriculture Slide: Economy

Takashi Nakajima earns $100,000 a year growing lettuces, employs Chinese laborers to harvest them, and has four months off in winter to indulge his passion for speed skating. He’s the result of a protected farming system that Japanese Prime Minister Shinzo Abe is about to dismantle.

“I don’t trust the government at all,” said Nakajima, 35, whose village of Kawakami in the picturesque valleys of Nagano prefecture boasts incomes five times the national average. “They want to streamline Japan’s farming business. Small farmers won’t be able to survive and the community will die.”

Government support, including payments to some farmers for not producing, accounted for 56 percent of the total earnings for Japanese agriculture last year, behind only Norway and Switzerland, according to the Organisation for Economic Cooperation and Development. Abe plans to cut the 161 billion yen ($1.6 billion) support for rice farmers’ incomes and reduce import barriers, forcing thousands of hand-tended smallholdings like Nakajima’s to consolidate.

“The current system is so unproductive that it’s hurting the nation as a whole,” said Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co. “The price of some agricultural goods is higher than it should be. Changing the agricultural laws is a good way to promote the conversion of land to more efficient use.”

At the heart of the battle is the Japan Agricultural Cooperatives group, or the JA, which has unique powers to finance and insure farms, supply them with equipment and fertilizers and buy their produce. With almost 10 million members, that makes the JA the country’s fourth-biggest financial services provider, its largest political lobby and the supplier of nearly half of rice distributed across the country.

Trade Talks

While past governments of the ruling Liberal Democratic Party have relied on the JA for support, rewarding the farmers with subsidies and handouts, Abe has put himself in conflict with the group over his decision to join talks for the 12-nation Trans-Pacific Partnership, a free-trade group that would jeopardize Japanese import tariffs of as much as 778 percent.

In the year since Abe’s party returned to power, the yen has weakened about 19 percent against the dollar as the government pushes policies to end two decades of deflationary malaise. The currency was 0.1 percent weaker at 103.53 per dollar at 9:39 a.m. in Tokyo, and the Topix index of stocks was down for a third day.

Shrinking Cultivation

Under the control of the JA, Japan’s area under cultivation has fallen 25 percent in the past five decades. Farm-gate prices in the country are twice the world average, the OECD estimates. Agriculture’s share of gross domestic product dropped to less than 1 percent in 2011, from 9 percent in 1960, according to the government.

“In the absence of fundamental reform, the agricultural sector will continue to wither, trapped in a cycle of low productivity, low earnings and dependence on subsidies and import protection,” OECD economists Randall Jones and Shingo Kimura wrote in a May report.

Japan’s proliferation of small farms was the result of a postwar restructuring of land ownership under General Douglas MacArthur during the U.S. occupation, which broke the power of the landlord class and allocated plots to tenant farmers that tilled about one third of the nation’s fields and rice paddies.

MacArthur Changes

As the nation’s industries boomed, rural residents moved to factories in the cities where rising incomes reduced the dependence on rice as a staple. Drained of young replacements and increasingly reliant on government support to maintain their dwindling paddies, Japan’s farmers grew old, reaching an average age of 66 by 2010.

A survey by the Ministry of Agriculture that year showed that almost nine out of ten farmers were over 50 and more than half of farming households saw it as a side business.

Abe aims to change that.

“Agriculture is the most difficult sector to reform,” Abe, 59, said in a Dec. 6 interview in Tokyo, adding that policy makers are making progress.

Parliament passed a bill this month designed to reduce the amount of idle land and consolidate farms so they can be leased to managers who will boost productivity. The law will “enable farmland to be consolidated and taken over by those who are really motivated,” Abe said.

Idle Land

A separate bill passed by parliament will introduce credit insurance, enabling farmers to borrow from banks and weakening the traditional co-operatives’ dominance in agricultural financing.

The government on Nov. 26 approved a plan to end a four-decade policy of paying rice farmers to reduce their production to support prices. The “gentan” subsidy is scheduled to be halved from April 2014 and abolished by March 31, 2019.

Wagoen, an agricultural company formed in Chiba prefecture by a group of farmers in 1991, gives a glimpse of the future for Nakajima’s industry.

Rather than the picturesque plots of land in the hills of Nagano, Wagoen grows iceberg lettuces in factories in Fukui prefecture. With 6 billion yen in sales and 1,500 employees, the company has vast greenhouses and processing plants that sell packaged meals and produce directly to retailers, bypassing the JA.

Iceberg Factories

“There is a positive effect from TPP: Farmers can’t be complacent,” said Hirokazu Kiuchi, president of Wagoen. “The time has come for farmers to become independent businessman. There are opportunities for them to become aggressive.”

Retailers are also moving in. Lawson Inc., Japan’s second-biggest convenience-store operator, set up a chain of farms in 2011 to supply its shops. The Tokyo-based company, which expects to have 30 farms within five years, holds a 15 percent stake.

“If the free-market mechanism is introduced, some of the agricultural corporations will list shares for fund raising,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management Co. in Tokyo. “The current growth rate is so low that some of those companies will grow exponentially.”

Abe’s moves show how the political clout of the JA has waned as the number of farming households declined. While the group had 9.8 million members as of March 2012, 53 percent are non-farmers who use the organization’s financial services. The Norinchukin Bank, formed by the JA with collectives representing fisheries and forestry interests, would be Japan’s fourth-biggest by risk-weighted assets if it were listed, according to data compiled by Bloomberg.

Political Clout

The JA has collected almost 12 million signatures for an anti-TPP petition and demanded that the government quit the trade talks if it can’t safeguard tariffs on rice, wheat, sugar, beef, pork and dairy products.

Abe went ahead and joined the TPP negotiations, and won July elections that gave his LDP and coalition allies control of both houses of parliament. Only seven out of 47 JA prefectural lobby groups refused to back him or endorsed rival parties’ candidates, according to Chunichi newspaper.

Joining the TPP 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, according to the government. The boost to the nation’s exports and domestic consumption and investment would mean a net 3.2 trillion yen gain in GDP, the government estimates.

Trade Winds

“Cheap products from abroad will send many farmers bankrupt,” said Nobuhiro Suzuki, a professor at the University of Tokyo’s Department of Global Agricultural Sciences. “It’s a fairytale to think Japan can compete with the U.S. or Australia for products where land area determines competitiveness. Farmers who now produce wheat or rice will be pressured to switch to vegetables, pushing those prices down also.”

Japan’s food self-sufficiency, based on calories, was less than 40 percent in fiscal 2012, according to the Agriculture Ministry. Imports of agriculture, fishery and forest products were nearly 18 times the value of exports.

Expectations that Abe’s policies will reinvigorate farms and boost food exports are “too optimistic,” said Nobuyuki Chino, president of Continental Rice Corp., a grain trading company in Tokyo.

Nakajima’s lettuce plots are typical of Japan’s farms, which are some of the developed world’s smallest. He cultivates 20 separate fields that add up to about 5 hectares in total. More than half of the country’s farms are less than 5 hectares, according to government data, an area smaller than the grounds of the White House in Washington. The cultivated area of Japan’s 1.6 million farms would all fit inside the combined size of Australia’s three biggest ranches.

Increasing Imports

For Nakajima, whose customers include McDonald’s Holdings Co. Japan., Abe’s policy is likely to mean more competition, both from importers and local rice growers who switch to higher-value crops as their subsidies dry up. Imports of lettuce already tripled to 10,545 tons in 2012 from 3,458 in 2003, according to Japan’s Agriculture & Livestock Industries Corp., the Tokyo-based organization responsible for food price stability.

“I’m worried about TPP,” Nakajima said. “Our lettuce is good and when it comes to freshness, foreign products won’t be able to match us. But I sometimes wonder whether people see the difference.”

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