Voluntary Report - public distribution

**Date:** 11/22/2005

**GAIN Report Number:** JA5068

JA5068

**Japan**

**Agricultural Situation**

**Japan Embarks on a Drastic Change in its Farm Subsidy Scheme**

**2005**

**Approved by:**

![](media/image1.wmf)Clay Hamilton

U.S. Embassy

**Prepared by:**

Hisao Fukuda

**Report Highlights:**

On October 27, the Ministry of Agriculture, Forestry and Fisheries
(MAFF) announced the outline of a new farm subsidy program that departs
from the current commodity-specific support given to practically all
farmers and launches direct payments targeting larger scale farmers.
Following promulgation of necessary legislation in the next Japanese
fiscal year (JFY), the new scheme is scheduled to commence in JFY 2007.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Tokyo \[JA1\]

\[JA\]

On October 27, the Ministry of Agriculture, Forestry and Fisheries
(MAFF) announced the outline of a new farm subsidy program that departs
from the current commodity-specific support given to practically all
farmers and calls for direct payments targeting larger scale farmers.
Following drafting of the necessary legislation in the next Japanese
fiscal year (JFY), the new scheme is scheduled to commence in JFY 2007.

# Background

Simply put, farm subsidies in Japan have, for decades, had two major
features: 1) Different amounts are paid based on the commodities
produced, and 2) All farmers, regardless of size qualify as eligible
recipients. In a way, the current scheme provides additional social
security to rural communities in that it aims to fill the income gap
between farming households and urban dwellers. However, now that nearly
80 percent of farmers are part-time farmers, earning approximately 2/3
of their income in non-agricultural sectors and that the average farm
household annual income is greater than the national average (8.28
million yen and 6.17 million yen respectively in 2000), the role of the
existing farm support program has ended.

From an international perspective, the movement in farm support policy
in developed nations has clearly turned toward so-called "green box"
measures as defined by the World Trade Organization (WTO), the core
feature of which is de-coupled direct payments that will help fill the
cost/price gap between specified domestic farm products and imports.
This shift away from blanket commodity-based farm subsidies to targeted
direct payments means that, in principle, the cost of farm subsidies
will be borne by taxpayers, not by consumers at large. (Currently,
consumers indirectly pay for these subsidies in the form of high prices
of farm products.)

# Major features of the new subsidy scheme

[1. Measure to rectify the difference in production conditions with
foreign countries]{.underline}

1\) Eligibility to receive payments

> Recipients must fulfill all of the following criteria:
>
> i\. Farmers who are certified by each community as "core farmers"
> (hereinafter referred to as "certified farmers") or farmer
> organizations that aim to farm over 2/3 of the farmland in the
> community in a consolidated manner ("specified farmer organizations")
> (note: The definition of a "community" is vague and may be composed of
> a small number of farms with total acreage of 20 to 40 ha).
>
> ii\. A minimum size of farmland to be cultivated:

  -------------------------------------- -------------- ------------------
  Target                                 Area           

                                         Hokkaido       Other areas

  Certified farmers                      10             4

  Specified farmer organizations         20             20

  Unit: Hectares (1 hectare = 2.47                      
  acres)                                                
  -------------------------------------- -------------- ------------------

> However, these minimum acreage requirements can be relaxed by request
> through prefectural governors under the following conditions:

a.  Can be reduced by 20% when the farmland is located in places where
    it is physically/geographically difficult to have the targeted
    acreage. (For upland farming, can be reduced by up to 50%.)

b.  For organizations that are commissioned to manage more than half of
    the community's farmland for the rice acreage adjustment/reduction
    program, depending on the rate of their success in achieving the
    acreage reduction goals, (*Note 1*), the minimum requirement of 20
    hectares can be reduced to 7 hectares. (For upland farming, it may
    be reduced to 4 hectares.) (Average farm size varies from 17.46 ha
    in Hokkaido to 1.26 ha outside of Hokkaido).

> *Note 1. For details of Japan's Rice Policy, please refer to:*
>
> *"Rice Sector Policies in Japan," Outlook Report from the Economic*
>
> *Research Service, USDA, March 2003; and "Japan's Proposed Rice*
>
> *Reforms," GAIN Report #JA3012, February 2003.*

c.  If the farmer/organization is producing targeted farm products as
    core items and generating a high level of income by such practices
    as organic farming and multiple (crop) management, individual
    considerations will be given.

2\) Targeted farm products

wheat (including barley), soybeans, sugar beets and potatoes for starch
production

3\) Details of the subsidy amount

The figures below are calculated based on the current difference between
the cost

of domestic production and sales (farm gate) price, therefore, they are
subject to change

when the new program is implemented.

  ---------------------- ------------------------------------------------
  Commodity              Amount

  Wheat                  40,200 yen/ 10 ares (or 6,400 yen/ 60 KG)

  Soybeans               30,200 yen/ 10 ares (or 8,840 yen/ 60 KG)

  Sugar beets            42,800 yen/ 10 ares (or 7,660 yen/ MT)

  Potatoes for starch    53,300 yen/ 10 ares (or 12,400 yen/ MT)

                         (10 ares = 0.247 acre)
  ---------------------- ------------------------------------------------

[2. Measure to relieve impact of income (price)
fluctuations]{.underline}

1\) Eligibility to receive payments

> Same as for above direct payments.

2\) Targeted farm products

> rice, wheat, soybeans, sugar beets, and potatoes for starch production

3)  Details of the subsidy

> For each of the above listed products, incomes of the previous five
> years are taken, the highest and the lowest dismissed, and then the
> average of the remaining three years is calculated. In case the income
> of a particular year falls below the average, 90 percent of the
> difference between the year's income and the average will be
> subsidized. In the case where a farmer receives payment under the
> disaster relief program, the subsidy will be adjusted as needed so
> that the farmer is not compensated twice for a reduced harvest.
>
> Finances for this relief fund will be borne between the national
> government and the farmers by the ratio of 3 to 1, with farmer
> contributions most often deducted from their sales receipts.

[3. Measure to maintain farmland, water and environment]{.underline}

1)  Eligibility to receive payments

In order to maintain and improve the quality of the farmland, water and
environment for the future, each community may form a group (an
organization) where farmer and/or non-farmers are united for the cause.
If the plan by the group/organization meets the national and prefectural
guidelines (to be established), it will be eligible to receive payments.

2)  Specific activities that may be eligible

The following are a few examples of collective efforts by the community
that are considered to be eligible:

-   Maintenance/cleaning of irrigation canals

-   Maintenance/inspection of agricultural infrastructure i.e.
    facilities and roads

3)  Details of the subsidy (under consideration)

  -------------------------------------------- --------------------------
  Target                                       Amount (Yen/ 10 ares)

  Rice paddy in areas other than Hokkaido      2,200

  Rice paddy in Hokkaido                       1,700

  Fields in areas other than Hokkaido          1,400

  Fields in Hokkaido                           600

  Grassland in areas other than Hokkaido       200

  Grassland in Hokkaido                        100
  -------------------------------------------- --------------------------

> Within the communities that are recognized as eligible recipients, if
> substantial reduction in environmental impact is expected, while
> achieving highly sustainable farm production methods (e.g. substantial
> reductions in pesticide use), additional payments will be made
> (referred to as advanced farm management support).

# Implications

Some press articles say that this reform will bring about the biggest
sea change in post World War II farm policy. Although direct payments to
targeted farmers will encourage consolidation and more effective
production, Post is still skeptical of the many potential loopholes. For
one, in response to powerful lobbying by the agricultural cooperatives
(JA), the eligibility to receive direct payments has been relaxed,
allowing for special cases to be made at the discretion of prefectures.
This includes allowing communities of non-farmers to receive
"environment payments" such as subsides for cleaning irrigation canals
that have little direct effect on the environment. When the authorizing
legislation is drawn up next year, it will be necessary to ensure a
strict discipline including a systematic audit system with transparency
and integrity so that misuse of taxpayer's money is not allowed.

If MAFF's fundamental goal is to rebuild Japan's agriculture and sustain
it by core farmers, targeted direct payments will be an indispensable
vehicle. However, it will be equally important to probe into the area of
"land use zoning". One of the reasons farmers do not sell their land,
making it harder to consolidate, is speculation for windfall capital
gains should the land be turned to other uses. In addition, there is
little incentive, and in some cases opposition, to private companies
leasing plots of land in order to engage in farming in a larger than
average scale.

Another, more fundamental threat to Japan's agriculture, is the lack of
successors in younger generations. In an ideal world, if farmers can
earn a comfortable living primarily from farming, that might be enough
to keep them in the rural community. However, the reality is that nearly
80 percent of farmers are part-timers. Their economic well-being depends
largely upon the overall economic health of rural communities. This is
an issue that needs to be addressed by the Japanese government as a
whole, not just by MAFF.