Rice farming in Japan: Political staple; The government abolishes previously sacrosanct agricultural subsidies

Rice farming in Japan: Political staple; The government abolishes previously sacrosanct agricultural subsidies

Nov 30th 2013 | TOKYO | From the print edition

NOT even the most ardent reformers around Shinzo Abe, Japan’s prime minister, believed that he would dare to scrap the policy, known as gentan, under which the government has paid farmers to reduce rice crops since 1971. But on November 26th the agriculture ministry said the system would be phased out by 2018. Rice growers, said Mr Abe, will be able to produce crops “based on their own management decisions”.Allowing a free market for rice, the country’s sacred staple food, will not by itself transform Japan’s inefficient agricultural sector, which has declined precipitously in recent years. But it is an unavoidable and welcome first step. Thegentan system was originally designed to shield the country’s cosseted farmers from short-term fluctuations in prices. By 2010 the policy kept roughly a third of Japan’s paddy fields out of rice production, costing vast sums each year in compensation to farmers for lost income.

The country’s millions of small rice-growers have thrived on the handout for decades, along with Japan Agriculture (JA), a giant network of local farm co-operatives. Many landowners pocket the government’s money while growing nothing at all. About two-fifths of the land taken out of rice production is left entirely idle. Unused land prompts regular public hand-wringing about the abandonment of the life-giving soil to weeds and rubbish.

Japanese agriculture’s biggest problem is that all but 2% of farms are smaller than five hectares and many comprise just a few fields, a fragmentation preserved by the gentan system and by other regulations. Tiny, often part-time farmers, with few economies of scale, antiquated methods and old equipment hobble the industry. The sticky rice favoured by Japanese consumers ends up costing twice or more what rice does in other countries.

To protect its wildly uncompetitive farmers, Japan has erected one of the world’s highest tariffs: the duty on imported polished rice is 777.7%. Mr Abe’s surprise decision in March to bring Japan into talks on the Trans-Pacific Partnership (TPP), a free-trade grouping, has brought these duties under pressure. Even though a final deal on TPP is far from certain, the talks are still a powerful force for change.

The phasing out of gentan should spur rice production, allowing prices to fall at last. That in turn should encourage small landowners to hand over their paddies to be farmed by larger operators, says Takeshi Niinami, the government’s chief adviser on the reform. Another of Mr Abe’s plans is to create new agencies in each prefecture to gather farmland from smallholders, consolidate it and lease it in larger chunks to companies. The combination of the two new policies could halve the cost of growing rice from an average of ¥16,000 ($16) a 60kg sack to just ¥8,000, says Mr Niinami. At those levels, Japanese rice could hold its own against imports, and even make inroads in export markets.

The scrapping of gentan comes just as Mr Abe’s commitment to structural reforms appeared to be wavering. This month another adviser, Hiroshi Mikitani, the boss of Rakuten, an internet firm, threatened to resign after the government backtracked on a promise to deregulate the sale of drugs online. Mr Abe is also being criticised for reversing what was perhaps the most lasting reform of Junichiro Koizumi, prime minister between 2001 and 2006, which was to lift restrictions on taxi fleets. A new law passed last week will force taxi firms to reduce the size of their pools in order to keep fares high and drivers well-paid—the reverse of what Mr Abe is trying to do with rice farmers.

The reforms to rice farming may have some flaws, says Robert Feldman, chief economist with Morgan Stanley in Tokyo. The old system, he points out, will continue to apply to terraced rice paddies in mountainous regions. How will mountainous be defined, he asks? Yet tackling gentan in any form had been considered far too risky politically for Mr Abe’s Liberal Democratic Party, which draws much of its support from farmers and from JA. His willingness to face down such powerful interests is stoking hopes of decisive reform in other fields too.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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