Chapter 4. Agricultural policy environment in Japan

Strengthening the sector’s capacity to innovate and improving environmental performance of agriculture will require the agricultural policy environment to be more conducive to innovation and entrepreneurship, as well as more coherent with sustainability policy objectives. The evolution of Japan’s agricultural structure and the global trend to more integrated value chains has diversified the types of policy support demanded by professional farms. This chapter provides an overview of developments in agricultural policies and discusses the likely impact of agricultural policy measures on structural changes, environmental performance, and innovation in this sector.

4.1. Agricultural policy objectives

The Basic Law on Food, Agriculture and Rural Areas, which replaced the 1999 Basic Law on Agriculture, lays out the current objectives of agricultural policy. This law requires the government to prepare the Basic Plan for Food, Agriculture and Rural Areas — medium-term policy directions, approaches and targets over a ten-year period, to be revised about every five years. The law establishes four basic principles: 1) securing a stable supply of food; 2) maintaining the desired multifunctional aspects of agriculture; 3) sustainably developing agriculture; and 4) promoting agricultural and rural communities.

In December 2013, Japan announced a new policy package entitled the Plan to Create Dynamism through Agriculture, Forestry, Fisheries and Local Communities. This package marked the biggest agricultural policy change since the introduction of income support payments for rice farms in 2011. The Plan set the following five policy targets: 1) doubling agricultural earnings and overall agricultural village incomes within a decade; 2) doubling agriculture, forestry and fishery exports up to JPY 1 trillion (USD 9 billion) by 2020; 3) doubling the number of new entrants to agriculture; 4) concentrating 80% of farmland among business farmers within a decade; and 5) lowering the cost of rice production of business farmers by 40% within a decade.

To achieve these goals, policies were restructured under four pillars: 1) expanding food demand through export promotion and local consumption; 2) enhancing food value chains through diversification of farm activities into areas such as processing and rural services; 3) improving farm productivity through farmland consolidation, rice production adjustment system reform, and reforms to other subsidy schemes; and 4) a new payment to improve the multi-functionality of agriculture.

The Plan was reflected in the Basic Plan for Food, Agriculture and Rural Areas, released in March 2015 (Box 4.1). In November 2016, Japan revised the Plan by adding several policy packages to improve competitiveness and to promote agro-food exports. The new Plan included a policy package to reduce input costs, an introduction of revenue insurance programmes, the reform of raw milk distribution system, measures to improve the productivity of beef and dairy sectors, reforms of agricultural supply chains, and the promotion of feed rice production. The Plan also aims to boost agro-food exports by promoting production according to international standards, protecting intellectual property rights, and promoting Japanese cuisine and food culture. The Plan was also revised in December 2017 and June 2018 to add additional reform agendas such as farmland policy reform and the promotion of ICT in agriculture.

Box 4.1. Basic Plan for Food, Agriculture and Rural Areas for 2015-2025

Japan’s food self-sufficiency ratio in 2014 was 39% on a calorie supply basis and 64% on a production value basis. Under the new Basic Plan, the government set the calorie-based food self-sufficiency target for 2025 at 45%, while the target for the production-value-based sufficiency ratio was set at 73%.

The new Basic Plan introduced a new indicator, Food Self-sufficiency Potential, to evaluate potential food production capability. The aim of this new indicator is to promote public awareness and understanding of the current state of Japan’s food security potential. It shows how much food can be produced domestically if all farmland in Japan (including abandoned farmland and farmland planted with non-food such as flowers) was cropped to maximise food production on a caloric basis under several food production and consumption scenarios.

The Basic Plan has two overriding policy principles: 1) turn agriculture and food industries into a growing industry (industrial policy); and 2) maintain and develop multi-functionality approach in agriculture and rural areas (regional policy). The following key policies stem from these basic principles.

Exports and overseas expansion of the food industry: The government promotes food exports and overseas expansion of the food industry by sharing information on trade procedures, facilitating the acquisition of certificates such as Halal, promoting the protection of intellectual property rights, and strengthening international publicity activities on Japanese cuisine and food culture.
AFFrinnovation: To bring greater income opportunities to rural society, the government encourages farmers to work on “AFFrinnovation”, or adding value to agricultural, forest and fishery products in an innovative way, to create new combinations or create a value chain.
Labour policy: To achieve a more efficient and sustainable agricultural structure, the government provides intensive support such as subsidies, loans, and financing to business farms (Ninaite) certified by local authorities. It also promotes the transfer of farmland to business farms, incorporation of farms, and recruitment of farmers.
Land policy: To reduce land fragmentation, public corporations – called Farmland Banks –rent small, scattered pieces of farmland, and consolidate and lease them to business farms. The government also works to prevent farmland abandonment.
Rice policy: Farmers are allowed to choose their production based on market demand without relying on quotas allocated by the government. The government provides detailed market information on rice, such as price, supply, demand, and stocks.
Rural area development: To maintain food supply and public goods that agriculture provide, the government promotes community network development and rural migration and settlement, as well as a multifunctional payment system and wildlife damage control.
Agricultural co-operatives and committees: The government facilitates the reform of JAs so that they can engage in more profitable activities and contribute to an increase in farm incomes.

Source: (MAFF, 2015[1]), Summary of the Basic Plan for Food, Agriculture and Rural Areas: Food, agriculture and rural areas over the next the years, http://www.maff.go.jp/e/pdf/basic_plan_2015.pdf.

4.2. Overview of agricultural policy

Japan gradually reduced its support to agricultural producers, but the change was moderate among OECD countries. The producer support estimate (PSE) was about 46% of gross farm receipts in 2015-17, down from 63% in 1986-88 but still much higher than the OECD average (Figure 4.1). Market price support (MPS) remains the main element of the PSE, mainly sustained by border measures. Prices received by producers are on average 72% above world market prices. MPS for rice, milk and pork account for a half of Japan’s MPS in 2015-17.

Figure 4.1. Evolution of Japan’s PSE, 1995 to 2017

While the most potentially distorting forms of support (MPS, support based on output and variable input use without input constraints) have declined, they still account for 85% of producer support. The share of direct payments in the PSE has increased in recent years, particularly in the form of area- and income-based payments. The total support estimate to agriculture (TSE) represented 1.0% of Japan’s GDP in 2015-2017, of which the PSE represented 82%, while the other 18% was support for general services provided to agriculture (GSSE) (Figure 4.2).

Around 84% of GSSE was directed to the development and maintenance of infrastructure, such as irrigation facilities and disaster prevention in 2015-17. Japan’s share of the expenditure for infrastructure investment and maintenance is particularly high compared to other OECD countries, reflecting the large stock of infrastructure for paddy farming (Figure 4.3). More than 40% of infrastructure expenditures in 2015-17 was directed towards the development and maintenance of hydrological infrastructure. The share of expenditure for agricultural knowledge and innovation systems, on the contrary, is one of the lowest among OECD countries. Only 12% of GSSE financed the agricultural knowledge and innovation system in 2015-17.

Figure 4.2. Composition of support to agriculture in Japan, 2015-17

Figure 4.3. Composition of General Service Support, 2015-17

Transfers to specific commodities continue to represent close to 90% of support to producers, while the European Union, the United States and Switzerland significantly reduced the share of such support overtime (Figure 4.4). The level and structure of the Single Commodity Transfers (SCT) vary greatly by commodity. SCTs above 50% of commodity gross farm receipts are maintained for barley, rice, sugar, milk, pork, cabbage, and grapes (Figure 4.5).

Figure 4.4. Share of single commodity transfer, 1995 to 2017

Figure 4.5. Transfer to specific commodities (SCT) in Japan, 2015-17

4.3. Agricultural trade policy

In general, Japan’s average tariffs of 16.3% on agricultural products (according to World Trade Organization (WTO) definitions) are higher than tariffs on non-agricultural products, which have an average of 3.6%. Furthermore, the standard deviation of 33.4 for tariffs on agricultural products indicates that tariffs vary considerably among agricultural products, with over one-quarter duty free and a maximum tariff (ad valorem equivalent) of about 390%. In addition, 17.5% of agricultural tariff lines are non-ad valorem.

Tariff-rate quota systems with high out-of-quota tariffs apply to major commodities such as rice, wheat, barley and dairy products. Following the conclusion of the Uruguay Round Agreement on Agriculture (URAA) in 1993, Japan replaced all its quantitative restrictions on imports with tariff-rate quotas, with the exception of rice which was replaced by a tariff-rate quota in 1999. Currently, the out-of-quota tariff-rate of rice is JPY 341 (USD 3.0) per kg, the tariff-quota for rice is 682 200 tonnes (milled rice), and the maximum mark-up for rice imports is set at JPY 292 (USD 2.6) per kg. Japan must import at least 7.2% of domestic consumption in the base period.1 However, due to a decline in rice consumption, the minimum access import of rice was equivalent to 8.9% of domestic rice consumption in 2017.

An ad valorem tariff of 4.3% is imposed on fresh, chilled or frozen pork, when the import price is above the gate price of JPY 393 (USD 3.5) per kg; when the import price is JPY 48.9 (USD 0.4) per kg or less, JPY 361 (USD 3.2) per kg is imposed as a specific duty. When the import price is higher than JPY 48.9 (USD 0.4) per kg but lower than the gate price, importers are required to pay the difference between the actual and standard import prices. The standard import price for pork is equal to the gate price plus the 4.3% ad valorem tariff, making the gate price effectively a floor on the price of pork imports. As a result of the URAA, the gate price and tariff rate for carcasses were reduced from JPY 447.6 (USD 4.4) per kg and 5.0% in 1994 to JPY 393 (USD 3.6) per kg and 4.3% in 2000, respectively. To compensate for applying a gate price below the bound level, Japan can, as an emergency measure, raise the gate price to a level under conditions specified in the official letter of General Agreement on Tariffs and Trade.

Special safeguard actions are taken for a number of products in accordance with the WTO Agricultural Agreement. Import spikes trigger emergency safeguard measures, which were applied on beef imports in FY2017 for the first time since FY2003.2

Promotion of bilateral and regional Economic Partnership Agreements

After 2000, Japan began to actively pursue bilateral and regional Economic Partnership Agreements (EPAs). The first agreement was signed with Singapore in 2002 and the second with Mexico in 2004; the latter was the first agreement which included agricultural products. So far, Japan has 17 EPAs in force (bilateral agreements with Singapore, Mexico, Malaysia, Chile, Thailand, Indonesia, Brunei Darussalam, ASEAN, the Philippines, Switzerland, Viet Nam, India, Peru, Australia, Mongolia, and the European Union, as well as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)). Japan is currently engaged in several other EPA negotiations such as bilateral talks with Colombia and Turkey, and multilateral negotiations including the Japan-China-Korea Free Trade Agreement, and the Regional Comprehensive Economic Partnership (RCEP).

In March 2018, Japan and ten other Pacific Rim countries signed the CPTPP, and the agreement came into force in December 2018. The CPTPP incorporates most of the provisions of the original Trans-Pacific Partnership (TPP) from which the United States withdrew in early 2017. Under the CPTPP, market access for Japanese agricultural products — including sensitive products such as rice, pork, dairy products, beef, wheat, barley, and sugar — is expected to be improved by tariff elimination and reduction, as well as by the introduction of tariff-rate quotas.

Japan and the European Union signed the EPA in July 2018, and the agreement entered into force in February 2019. The EPA is expected to improve access to the Japanese market for EU agricultural products, including dairy, pork, beef, and wheat, while rice is excluded from any market access commitment. Import tariffs on hard cheese will be gradually eliminated over a 15-year period, while a tariff rate quota for soft cheese will be created, set to be 20 000 tonnes in the first year, increased to 31 000 tonnes in the 16^th year, while the in-quota tariff should be phased out over 15 years. Tariffs on pasta, biscuits, and chocolate are set to be phased out in 5 or 10 years. Tariffs on beef and pork will be gradually reduced. In addition, the Japan-EU EPA set specific rules for protecting agricultural goods and liquor from a particular geographical origin (Geographical Indication (GI)) (Box 4.2). Specifically, 56 Japanese GIs (48 agricultural goods and 8 liquor) and 210 EU GIs (71 agricultural goods and 139 liquor) are protected.

Box 4.2. Geographical indication system for agricultural goods in Japan

There are a variety of distinctive regional agricultural products in Japan as a result of natural conditions and traditional production methods. Japan has created a system of intellectual property rights to protect the names of these products. In 2015, the Act on Protection of the Names of Specific Agricultural, Forestry and Fishery Products and Foodstuffs (GI Act) came into force. This Act protects GIs for agricultural goods from imitations.

Based on the GI Act, a producer group can apply for a registration of a GI product. The application must include specifications of the product and a quality control plan. To be registered, the agricultural good must be linked with the location where it is produced, and the quality, reputation, or other characteristic of that good must be essentially attributable to its geographical origin. Once the product is registered, MAFF monitors compliance and regulates the use of GIs. As of March 2019, 76 agricultural goods were registered as GIs in Japan.

The GI Act was amended in 2017 to enable reciprocal GI protection with foreign countries based on international agreements. Under the Japan-EU EPA, Japan and the European Union agreed to protect their respective GI products. In particular, 48 Japanese agricultural GIs (e.g. Kobe Beef) are protected in the European Union and 71 agricultural GIs from the European Union (e.g. Roquefort from France and Gorgonzola from Italy) are protected in Japan. The use of a GI is prohibited in both Japan and the European Union when the good in question does not meet the official requirements of the GI even if it indicates its true origin, uses GI in translation, or accompanies expressions such as kind, type, and style.

The government revised its comprehensive policy guidelines in 2017 to cushion the impacts from EPAs. As agriculture is one of the most affected industries, the agricultural policy programme is included as a main component of the guidelines. The comprehensive measures in agriculture include structural reforms and policy assistance for sensitive products. The structural reform programme has four pillars: 1) cultivation of human resources capable of leading future farming generations; 2) enhancement of sector competitiveness through innovations; 3) improvement of livestock and dairy profitability; and 4) promotion of agricultural exports. Japan committed an annual average of JPY 325 billion (USD 2.9 billion) to these programmes between FY2015-17.

The government offers policy assistance to sensitive products —rice, wheat, sugar crops, beef, pork and dairy— in order to protect farmers from income instability after the entry into force of the CPTTP and the Japan-EU EPA. For example, the effects caused by reducing import tariffs for beef feedlot and hog producers would be alleviated through increasing the coverage rate of the existing deficiency payment programmes from 80% to 90% of the gap between average production costs and average gross income. The hog producers’ contribution rate to the mutual fund for the deficiency payment programme was reduced from 50% to 25%.

Export promotion policy

Japan has accelerated its policy effort to promote the export of agro-food products in the last decade, mainly via marketing promotion, harmonisation of quality, and sanitary standards (Box 4.3). The government set an export target for agriculture, forestry and fishery products of JPY 1 trillion (USD 9 billion) by 2019. The value of exports of these products marked a record high of JPY 907 billion (USD 8.2 billion) in 2018, reflecting an increasing demand for Japanese products, and public and private efforts in export promotion. Exports grew for a wide range of agricultural products such as rice, beef, strawberries, green tea, alcohol drink (sake), and garden trees (bonsai).

MAFF launched the Rice Overseas Market Expansion Strategy Project in September 2017. The project seeks to raise the export volume of rice products to 100 000 tonnes by 2019, and to strengthen and expand links between rice exporters and areas with stable production of rice for export. In 2017, the Japan’s Food Export Fair was held for the first time, with more than 300 companies – including agricultural producers, food manufacturers and trading companies – exhibiting and having direct contact with buyers from all over the world. The Japan Food Products Overseas Promotion Centre was founded in 2017 to boost the export of Japanese agricultural, forestry, fishery and food products by creating a stronger platform for overseas business-to-consumer promotions and branding projects.

Box 4.3. Food safety and standardisation policy in Japan

In 2003, the emergence of bovine spongiform encephalopathy, commonly known as Mad Cow Disease, led to the reform of Japan’s food-safety-risk management. The importance of balancing both producer and consumer interests and responsibilities and cross-departmental co-operation led to the establishment of the Basic Principles of Food Safety Policy. The Food Safety Commission was also founded to perform independent risk assessment.

The Food Sanitation Act is one of the main sanitary and phyto-sanitary regulations under the SPS agreement together with the Plant and Animal Quarantine Regulation. The Food Sanitation Act and the Act on Japanese Agricultural Standards (JAS Act) provide the major regulatory framework for food labelling with an objective to ensure food safety and consumer choice. The Food Sanitation Act requires safety assessments and labelling for genetically modified foods, as well as the labelling of seven allergenic food materials (eggs, milk, wheat, buckwheat, peanuts, shrimps, and crabs). The labelling of place-of-origin to indicate the original prefecture, or country in case of imported products, became mandatory in 2000 for fresh foods. The JAS Act, the national standard to assure the quality of agricultural products, also requires the labelling of processed foods to indicate the raw materials, and processing country for imported foods, since 2001. The JAS Act introduced place-of-origin labelling for certain processed foods in 2001 to indicate raw materials that comprise more than half of the total weight, and in 2004 widened this scope to 20 categories of processed foods, which covers most lightly processed foods. The JAS standard for organic foods was established in 2000 according to the Codex Alimentarius guideline for the Production, Processing, Labelling and Marketing of Organically Produced Foods, requiring producers to be certified by a registered body in order to label their products as organic. In 2015, the Food Labelling Act, came into force, integrating food labelling provisions of the Food Sanitation Act, the JAS Act, and the Health Promotion Act. The JAS Act was revised in June 2017 to expand its scope to the manufacturing process, service, management system, and evaluation methods.

4.4. Domestic agricultural policy

Domestic price support programmes

MPS measures the value of transfers arising from any policy that affects domestic market price. In addition to border measures, such as tariffs and import quotas, domestic price support programmes also create gaps with international prices, which include production quotas, administered prices and public stockholding.

Rice

The administered price of rice was in place until 1995 when the new Staple Food Law reduced the role of the government to stockholding and deregulated the marketing of rice. Over time, rice consumption has decreased at an average rate of 80 000 tonnes annually due to falling per-capita consumption from changing dietary patterns along with reductions in dietary intake due to the ageing of the Japanese population.

For the last 40 years, the government set the rice production target based on demand projections and allocated a production quota to each prefecture. The quota was then either reallocated to individual farmers within the same prefecture or traded across prefectures in order to maintain the overall production volume at the national level. The programme controlled the supply of rice by allocating a production quota to rice farmers, which contributes to keeping the price above market equilibrium. In 2018, Japan ended the production quota system, replacing with a voluntary scheme that would enable farmers to plan their production based on market demand. The government supports this voluntary scheme by providing detailed market information on rice such as price, supply, demand, and stocks. However, subsidies that incentivise crop diversification continue to be paid to farmers who shift from table rice production to other crops (e.g. wheat and soybean).

The government stockholding programme was reformed significantly in 2011 to clarify the role of public stockholding as an emergency stock and to limit the use of stocks to influence domestic rice prices. Before the reform, rice for the public stock was bought after harvest (around December), the amount of which varied each year, and the stored rice was sold as food. Since 2011, rice for the public stock is contracted in fixed amounts (of around 200 000 tonnes per year, equivalent to 2% of total rice production) before planting so as to maintain an appropriate stock level (1 million tonnes); the rice is mainly sold as feed through auctions at prices that are close to the domestic market price.

Milk

Domestic dairy policy is focused on supporting producers of milk that is used for processing; this has a lower price than drinking milk and faces international competition. The association of JA-related co-operatives, the Japan Dairy Council, has managed a voluntary supply control system since 1979, in which almost all milk producers participate. The council announces the target supply amount of raw milk and allocates a production quota to producers through its regional associations.

Programmes to support farm income or reduce costs

The direct payment to farmers in hilly and mountainous areas was introduced in 2000 to avert the increase of land abandonment. Land abandonment in hilly and mountainous areas is mainly due to disadvantages in agricultural production. However, agricultural production in these areas serves as a means to prevent soil erosion, preserve water resources, support rural communities, and maintain the rural landscape.

The direct payment is designed to compensate 80% of the difference in production costs between hilly and mountainous areas, and flat areas. Recipients are required to continue farming for more than five years and to carry out activities that bring multifunctional benefits, such as preventing floods, soil erosion, preserving biodiversity or conserving ecosystems. In FY2017, 663 000 hectares of land received this payment, covering 84% of eligible farmland.

The Law on Farm Income Stabilization introduced three new direct payments for core farmers3 in 2007 as a main direct payment programme for the crop sector. The first payment was based on historical area planted. Wheat, barley, soybeans, sugar beet and starch potatoes are eligible for this payment. The aim was to correct disadvantages in domestic agriculture caused by geographical handicaps compared to other countries. The second payment covered the same commodities, but based on output, and sought to encourage quality improvement of domestic products by differentiating payment rates according to product quality. However, the law was modified in 2015 to convert payment eligibility from historical area to current area of production, to include rapeseed and buckwheat, and to remove the minimum farm size condition.

The third payment compensates up to 90% of lost income compared with the average income of the five previous years (excluding the highest and lowest years) in order to mitigate income instability caused by price fluctuations. This payment includes rice and five upland crops (wheat, barley, soybean, sugar beet and starch potato), and is covered by a government fund in which three-quarters of contributions come from the government and the rest from participating producers. Similar to the first two components, eligibility conditions related to minimum farm size were abolished in 2015.

In 2011, Japan introduced income support payments for rice farmers who met the production quota set by the government. The payment was made based on current area of production, with both predetermined and price-contingent components. However, in 2014 the price-contingent payment for rice was eliminated and the rate of predetermined payment was halved to JPY 7 500 (USD 71) per 0.1 hectare. The payment was provided for a limited period of four years and expired in 2018.

The government, however, maintained incentives to divert land from staple rice production, and instead produce feed rice, rice flour, wheat and soybeans. Measures include increasing the amount of diversion payments and introducing a quantity-based payment to support rice farmers who want to shift from table rice production to other crops. Although the production quota was abolished in 2018, the government still uses diversion payments to discourage production of table rice.

The payment for manufacturing milk is intended to ensure the production of milk in remote areas, particularly Hokkaido, where milk production is concentrated. This payment system was revised in 2001 to an output-based direct payment, which has a fixed rate on the basis of the production cost (JPY 10.55 (USD 0.09) per kg in 2007).

In 2018, Japan reformed production and distribution systems for raw milk. In the previous system, subsidies for manufactured milk production were only given to farmers who consigned raw milk to ten designated JA-related co-operatives that manage the voluntary supply control system of milk. In fact, 97% of farmers consigned their products to the JAs. The revised system provides access to subsidies to all farmers regardless of where they consign their products on the condition that they submit their annual sales plans to the government. This reform allows farmers to select the most suitable consignees and helps streamline the current distribution system.

Programmes to support farm risk management

Price and income stabilisation payments

In addition to measures to support income, Japan has developed a number of commodity-specific risk management programmes. Producer price stabilisation policies partially or fully compensate differences between sales and target prices or historical average prices for beef calves, fruits, vegetables and some other products. In the case of vegetables, the government, prefectures, and participating producers set up the Vegetable Production and Shipment Stabilization Fund, which compensates participating farmers in general 90% of the difference between average market price in a season and the guaranteed standard price for targeted vegetables (14 types). The level of the guaranteed standard price is set at 90% of the average wholesale price for the last six years. An additional 35 types of vegetables have similar price stabilisation schemes in place, managed at the prefectural level.

For the livestock sector, a deficiency payment scheme called the Beef Calf Production Stabilization System was implemented in 1990. This deficiency payment sets two trigger prices: the guaranteed standard price that aims to maintain the reproduction of beef calves and the rationalisation target price that is set lower than the guaranteed standard price, taking into account the international beef price and domestic production costs. Two types of funds operate within the system. One is funded by the national government and the other by producers, and the national and local governments. A payment is made when a registered calf is sold at a lower price than either of the target prices. If the average market price falls between the guaranteed price and the rationalisation target price, the deficiency payment is financed from the national government fund. If the average market price is below the rationalisation target price, a payment equivalent to 90% of the difference between the rationalisation target price and the average market price is financed from the latter fund.

The deficiency payment is also available for beef feedlot, which compensates 90% of the difference between average production cost and gross margin at the prefectural level. Producers fund 25% of the mutual fund established by the Agriculture & Livestock Industries Corporation. Similar schemes are available for hog and egg producers, in which producers finance 25% and 75% of the mutual funds, respectively.

Agricultural insurance programmes

Since 1947, the government has been supporting an agricultural insurance scheme for yield risk. As a general rule, the government contributes approximately 50% of the premiums. The current crop insurance programme mainly covers commodity-specific yield losses for rice, wheat, and barley, livestock, fruits, field crops, silkworms, and greenhouses.

In 2019, Japan introduced a revenue insurance programme. This programme insure total farm revenue, taking both market price and yield fluctuations into account. Revenue is calculated at a whole-farm level, and not at the regional level or by commodity as is the case in current risk management programmes. Under the new programme, the average revenue of the last five years for each individual farmer is generally set as the benchmark revenue, and the programme compensates up to 90% of revenue loss from 90% of the benchmark revenue if the revenue for a year falls by more than 10% of its benchmark. Farmers participating the programme select the triggering level of revenue between 50% and 80% of the benchmark revenue, and a coverage rate between 50% and 90% of lost revenue. Additionally, farmers can choose to participate in the mutual fund to increase the trigger revenue to up to 90% of the benchmark. The insurance premium is determined according to the risk grade of the farm, and tax declarations based on double bookkeeping are required to participate in the programme. The government finances 50% of the insurance premium and 75% of the mutual fund.

With the abolishment of mandatory requirement for rice, wheat and barley producers to participate in the crop insurance programme in 2019, farmers can now freely choose any risk management programme. However, the revenue insurance programme cannot be combined with other risk management programmes, such as other agricultural insurance programmes, the Farm Income Stabilization Programme or commodity-specific price stabilisation programmes. Additionally, producers of beef cattle and calves, hogs, and poultry for eggs are excluded from the revenue insurance programme as they are covered by other income loss support programmes.

Producers also benefit from disaster restoration programmes. They are available when natural disasters damage farmland and agricultural facilities. In principle, the government covers 50% of the restoration of farmland (65% in the case of agricultural facilities), but a higher support rate is applied as the costs of restoration increase. JFC provides a low interest safety net credit to business farmers affected by natural disasters and epidemics, as well as other economic and social risks.

Experience in other OECD countries shows that if the risk management instrument in place covers risks too comprehensively it increases: 1) the incentive of farmers to specialise in riskier products; and 2) the crowding-out of other risk management programmes for handling marketable risks, which may transfer to taxpayers risks that should be borne by farmers (OECD, 2011[3]). Alternatively, the government can provide voluntary risk-management programmes to help producers manage risks arising from normal variations in production, prices and weather, while providing protection from more extreme market-related shocks. One example is the voluntary savings account scheme matched with government transfer (Box 4.4).

Box 4.4. Voluntary risk-management programmes to manage normal business risk

The Farm Risk Account is a voluntary savings account, which draws on the experience of other OECD countries to manage risk, such as Canada’s AgriInvest programme, a government-matched producer savings account for moderate income declines or for making investments in farming operations to mitigate risk (OECD, 2016[4]).

A part of a farmers’ direct payments could be deposited in the special account, to be drawn on in the case of income losses from operational risks (such as market volatility or unexpected weather conditions). To provide an incentive for farmers to save, deposits of direct payments could be deducted from farmers’ taxable income, and do not have to be taxed when disbursed (in the case of losses) or at the closure of the account when used to supplement pension payments. Use of the Farm Risk Account would be mandatory in the event of a temporary shortfall in income from operational risks. Pay-out rules could limit access to the account to losses that lead to an income level below a certain percentage, for example 80%, of the reference income, with losses up to that level to be treated as a normal individual business risk.

Source: Gray et al. (2017[5]), "Evaluation of the relevance of border protection for agriculture in Switzerland", OECD Food, Agriculture and Fisheries Papers, No. 109, OECD Publishing, Paris, https://doi.org/10.1787/6e3dc493-en.

Preferential tax treatment

To mitigate the impact of natural disaster on farm income, Japan’s Income Tax Act allows farmers to defer the loss of agricultural assets to a natural disaster for a period of three years after the incidence in their income declaration. Farmers who are self-employed or have multiple sources of income are required to file a tax return. Farmers declaring income based on double book-keeping receive various tax benefits, including accelerated depreciation of capital and full deduction of compensation to farm workers. Moreover, farmers can defer the loss of farm income for three years (nine years in the case of corporate farms) irrespective of the cause of income loss.

Moreover, farmers receiving the direct payment for core farmers are allowed to accumulate their payments for future investment as expenses on the condition that they declare income based on double book-keeping. The accumulated payments can be deducted from the declared farm income on the condition that the accumulated payments will be used to acquire farmland, farm buildings, or farm machines within five years. An increased depreciation rate applies to the acquired assets using the accumulated payments in the year of asset acquisition.

Farmers benefit from fuel tax exemptions. Importers and manufacturers of heavy crude oil used for agriculture, which is mainly used for heating on horticultural farms, are eligible for an exemption from petroleum and coal taxes. Farmers are also eligible for exemption from diesel tax when this fuel is used for agricultural machinery. This tax break is currently extended to 2021.

4.5. Agri-environmental policy

Japan has a relatively brief history of agri-environmental policy. In 1999, the Basic Law on Food, Agriculture and Rural Areas first mandated the government to ensure the appropriate use of pesticides and fertilisers, and the effective use of livestock manure to promote the eco-system service of agriculture. The certification of Eco-Farmers was established in 1999. The prefectural governments set the guidelines to introduce sustainable production practice sand certify producers as Eco-Farmers. To be certified, producers must submit a five-year plan to introduce sustainable agricultural production practices, including application of composts to improve the soil quality, and reducing the amount of synthetic chemical fertilisers and synthetic chemical pesticides. The renewal of a certification requires the introduction of updated sustainable agricultural production practices. The number of certified farmers was 111 864 in 2017, which is less than 10% of commercial farmers.

Although improving the environmental performance of agriculture is a policy objective, the quantitative agri-environmental policy target has not been set at either the national or regional levels. The preparation of a quantitative policy target and action plan would require the systemic assessment of the impact of agriculture on the environment at the national and local levels (Box 4.5).

Box 4.5. Agri-environmental monitoring in Switzerland

In Switzerland, agriculture plays a key role in the national sustainable development strategy. The Federal government established a number of intermediate agri-environmental targets, including nutrient balance, pesticides, ammonia and biodiversity.

The Federal Office for Agriculture is carrying out agro-environmental monitoring (AEM) based on the Federal Act on Agriculture (Art. 185) and the Ordinance on the Evaluation of Sustainability in Agriculture. The goal of the AEM is to assess the impact of agriculture on the environment. A set of 17 agro-environmental indicators (AEI) provides the base for the AEM. The AEI are split into six areas (nitrogen, phosphorus, energy/climate, water, soil and biodiversity) and two indicators (driving forces and environmental effects). As the competence centre for AEI, the Institute for Sustainability Sciences at Agroscope is responsible for the centralised evaluation of AEI, including the development of AEI methods. Data for the calculation of the AEI have been collected since 2009, in a network of currently 300 farms, to obtain agro-environmental information at the regional level and by type of farm.

Source: OECD (2015[6]), OECD Review of Agricultural Policies: Switzerland 2015, https://dx.doi.org/10.1787/9789264168039-en.

Designing a framework for agri-environmental policies requires defining environmental targets and reference levels.4 In 2005, the Principles of Agricultural Production Practice Harmonized with the Environment laid out a list of agricultural production practices that farmers are expected to adopt for environmental preservation. In Japan, these principles define the environmental reference level beyond the mandatory regulations (Figure 4.6). However, the scope does not include a wider set of environmental practices, such as climate change mitigation, biodiversity, landscape management and animal welfare like the European Union (Box 4.6). A major direct payment programme, including the Farm Income Stabilization Programme, imposed a cross-compliance condition with these principles.

While cross-compliance conditions increase the coherence of direct payment programmes with environmental policy objectives, the experience in OECD countries shows that such conditionality would not be effective unless it was adapted to the diversity of local farming practices and conditions. Moreover, some of the literature finds that the set of production practices may not guarantee that farmers will adopt cost-effective means to improve their environmental performance as opposed to the performance-based policies in which producers can choose the most cost-effective way in their operation (OECD, 2019[7]).

Figure 4.6. Structure of agri-environmental policy in Japan

Box 4.6. Mandatory environmental requirements attached to agricultural support in the European Union

The European Union’s direct payments under the Common Agricultural Policy (CAP) are typically conditional on mandatory cross-compliance. The regulation foresees that if the conditions are not fulfilled the payment is disrupted and penalties may apply. Cross-compliance refers to environment, climate change and good agricultural condition of land as well as public, animal and plant health, and animal welfare. It applies to direct payments and environmental Rural Development Programmes payments. Cross-compliance applies to all agricultural land including land which is left fallow and no longer used for production purposes.

Cross-compliance combines so-called Statutory Management Requirements that relate to the implementation of legislative standards in the field of the environment, food safety, animal and plant health and animal welfare (18 EU Directives and Regulations) and the standards for Good Agricultural and Environmental Condition (GAEC) of land.

GAEC standards define minimum agricultural management practices addressing water quality, soil cover and erosion, biodiversity, conservation of habitats, flora and fauna and landscape features. GAEC standards establish buffer strips along water courses, minimum soil cover and land management to limit erosion, maintenance of soil organic matter level, retention of landscape features.

Source: OECD (2017[9]), Evaluation of Agricultural Policy Reforms in the European Union: The Common Agricultural Policy 2014-20, https://dx.doi.org/10.1787/9789264278783-en.

Japan’s first environmental payment scheme was introduced in 2007 as part of the Rural Development Programme. It supports environmentally-friendly farming activities that reduce the application of chemical fertilisers and pesticides by more than half compared to conventional farming practices in the region. This payment evolved in 2011 into direct payments for environmentally-friendly agriculture. In addition to the reduction of chemical fertiliser and pesticide use, farmers were required to adopt one of the environmentally-friendly production practices including organic farming, planting of cover crops, and use of manure compost. In addition, prefectures are allowed to include regionally specific environmentally-friendly production practices. In 2018, the requirement for the payments was revised so that only farmers who practice Good Agricultural Practice (GAP) are able to receive it, requiring them to participate in training and submit an activity report to assess the implementation of GAP.5

However, the environmental payment covers only about 2% of total farmland in Japan. The share of the payments with voluntary agri-environmental constraints in producer support was 0.2% in 2015-17 in Japan compared to 9% in the European Union and 13% in the United States in 2015-17 (Figure 4.7). Moreover, the share of payments with mandatory cross-compliance condition was 6% of producer support in 2015-17, where 51% of support in the European Union had such conditionality. When comparing the share in the budget expenditure, these payments conditional on adopting specific production practice account for 30% of budgetary transfer to producers in Japan, which is much lower than in the European Union and the United States.

Figure 4.7. Support conditioned on adoption of specific production practices, 2015-17

In Japan, organic farming is increasing slowly, accounting for only 0.5% of total farmland. The Law on Promotion of Organic Agriculture was established in 2006, and governments promote R&D and extension services for organic farming, increase awareness of organic farming among consumers and establish organic farming promotion plans at prefectural and town/village levels. In 2000, MAFF introduced a labelling system of organic products which requires producers to be certified by a registered organisation (Box 4.3).

Private standards for environmentally friendly products also exist. Some local governments and producer organisations have created labelling systems to certify products as respecting biodiversity in the local environment. In 2010, MAFF published a guidebook of best practices in implementing voluntary standards schemes. Currently, around 30 to 40 agricultural products are certified by the private standards for biodiversity (Shobayashi and Sasaki, 2018[10]).

The national government has been playing a predominant role in agricultural policy design and implementation in Japan. However, public goods such as water quality and bio diversity are closely to local environment (OECD, 2015[11]). Sub-national or local approaches in both decision making and financing to provision of local public goods are superior (van Tongeren, 2008[12]). Indeed, some sub-national governments in Japan design and implement the regional agri-environmental policy, including setting regional plan and locally adapted environmental targets and reference levels (Box 4.7).

Box 4.7. Regional agri-environmental policy: The case of Shiga prefecture

Some subnational governments introduced environmental payment schemes. In 2001, Shiga prefecture set an ambitious policy target to reduce the use of pesticides by 70% and introduced an environmental certification scheme for the producers who reduced the application of pesticides and inorganic fertilisers by 50% relative to the local conventional level.6 The prefecture also clarified a wider set of environmental reference levels adapted to the local condition by the prefectural ordinance such as refraining from emitting muddy water. They also introduced environmental payments in 2004 for producers who signed a five-year contract with the prefecture to reduce their chemical input by more than 50%. In 2012, the prefecture introduced another agri-environmental payment for farmers who act collectively to raise the water level so that fish can swim from the lake to paddy fields for reproduction as a regionally specific production practice under the national payment programme for environmentally-friendly agriculture.

4.6. Key points

The types of policy support demanded by professional farms has evolved overtime. Agricultural policy should provide diverse policy tools that are better targeted to producers’ management constraints and to creating business opportunities for innovation.
Japan provides one of the highest levels of support to agricultural producers among OECD countries, but its producer support is dominated by commodity-specific support, which limits the flexibility of farmers to produce based on market demand. Agricultural policy reforms in the last decade have increased non-commodity specific support, such as the Farm Income Stabilisation Programme, as the main payment programme in the crop sector. The recent introduction of a revenue insurance programme is a milestone in this direction.
Rice policy is at the core of agricultural policy issues in Japan. Government control of production and marketing has decreased over time. Termination of the rice production quota and the abolishment of rice income support payments in 2018 was an important step. Nevertheless, payments to divert production away from table rice continues to limit the supply of table rice.
The role of risk management programmes is expected to increase as professional farms are more vulnerable to market and production risks, with increasing weather related disasters due to climate change in Japan. The introduction of a revenue insurance programme in 2019 increased the choice of risk management tools for producers. However, various overlapping payment and insurance programmes make the role of each policy less clear. Moreover, many programmes tend to trigger payment or indemnity for a relatively small reductions in farm revenue, due to what would usually be considered as normal business risks.
Healthy risk-taking behaviour by producers is one driver of innovation and entrepreneurship at the farm level. Current risk management programmes leave relatively little room for producers to take the risks associated with new opportunities. Policy coverage to normal business risk could crowd out market-based solutions and own-farm risk management strategies, and incentivise farmers to take more risk through less diversification.
Although improving environmental performance of agriculture is set as an objective of agricultural policy, the quantitative policy target has not been defined both at national and regional level. Systemic assessment of environmental performance of agriculture to define policy targets, and to monitor and evaluate the policy progress is not in place at both the national and regional level.
Agri-environmental payments in Japan cover a small part of production in the sector. Environmentally-friendly farming payments cover less than 2% of cultivated area. Policy makers need to pay more attention to improving the environmental performance of a vast majority of farmers who do not participate in the agri-environmental payment programme.

References

[5] Gray, E. et al. (2017), “Evaluation of the relevance of border protection for agriculture in Switzerland”, OECD Food, Agriculture and Fisheries Papers, No. 109, OECD Publishing, Paris, https://dx.doi.org/10.1787/6e3dc493-en.

[8] MAFF (2018), Policy Measures for Promoting Environmentally Friendly Agriculture (in Japanese), http://www.maff.go.jp/j/seisan/kankyo/hozen_type/attach/pdf/index-37.pdf.

[1] MAFF (2015), Summary of the Basic Plan for Food, Agriculture and Rural Areas, http://www.maff.go.jp/e/pdf/basic_plan_2015.pdf (accessed on 22 January 2019).

[7] OECD (2019), Economic and Environmental Sustainability Performance of Environmental Policies in Agriculture: a literature review, COM/TAD/CA/ENV/EPOC(2018)3/FINAL.

[2] OECD (2018), “Agricultural support estimates (Edition 2018)”, OECD Agriculture Statistics (database), https://dx.doi.org/10.1787/a195b18a-en (accessed on 5 March 2019).

[9] OECD (2017), Evaluation of Agricultural Policy Reforms in the European Union: The Common Agricultural Policy 2014-20, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264278783-en.

[4] OECD (2016), Agricultural Policy Monitoring and Evaluation 2016, OECD Publishing, Paris, https://dx.doi.org/10.1787/agr_pol-2016-en.

[6] OECD (2015), OECD Review of Agricultural Policies: Switzerland 2015, OECD Review of Agricultural Policies, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264168039-en.

[11] OECD (2015), Public Goods and Externalities: Agri-environmental Policy Measures in Selected OECD Countries, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264239821-en.

[15] OECD (2013), “Japan case study”, in Providing Agri-environmental Public Goods through Collective Action, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264197213-14-en.

[3] OECD (2011), Managing Risk in Agriculture: Policy Assessment and Design, OECD Publishing, Paris, https://doi.org/10.1787/9789264116146-en.

[13] OECD (2009), Evaluation of Agricultural Policy Reforms in Japan, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264061545-en.

[14] OECD (2001), Improving the Environmental Performance of Agriculture: Policy options and market approaches, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264033801-en.

[10] Shobayashi, M. and H. Sasaki (2018), Agri-environmental policies in Japan : towards establishing sustainable agriculture and rural communities (in Japanese), Association of Agriculture and Forestry Statistics, Tokyo.

[12] van Tongeren, F. (2008), “Agricultural Policy Design and Implementation: A Synthesis”, OECD Food, Agriculture and Fisheries Papers, No. 7, OECD Publishing, Paris, https://dx.doi.org/10.1787/243786286663.

Notes

← 1. Japan fulfils this import requirement for rice through two different channels: the Ordinary Minimum Access (OMA) and the Simultaneous Buy and Sell (SBS) tender system. The OMA part of the quota is the main channel for rice imports, which is stored in the OMA working stocks and then sold for food processing and food aid. While rice imported though the SBS tender system is sold as table rice, an equivalent amount of government-purchased domestic rice is allocated to food aid and feed to ensure that rice imports do not affect the domestic rice price or the effective domestic self-sufficiency for table rice (OECD, 2009[13]).

← 2. The URAA permits emergency measures if the respective import volume of chilled or frozen beef from the beginning of the fiscal year up to the end of the relevant quarter exceeds more than 117% of the corresponding import volume of the preceding year. In this case, a higher tariff rate of 50% applies for the rest of the year or the first quarter of the following fiscal year.

← 3. Core farmers are defined as farm management units aiming to be or already efficient and stable business farms. Two basic criteria currently certify farms as business farms: 1) certified farmers and certified new farmers submit farm management plans approved by authorities; and 2) community-based farm co-operatives are the local unit of farm households which conduct farm management collectively.

← 4. Environmental reference levels are defined as the minimum level of environmental quality that farmers are obliged to provide at their own expense. Environmental targets are defined as the desired levels of environmental quality that go beyond the minimum requirements or minimum levels of environmental quality for the agricultural sector in a country (OECD, 2001[14]).

← 5. MAFF has strengthened the support for producers implementing GAP, which include a wider set of sustainable production practices. An integrated guidelines for GAP was published in 2010. MAFF aim to triple the number of producers acquiring GAP certification by 2020 and expand the application of GAP to almost all producing regions by 2030 through increasing support to GAP advisors and training activities. The types of agricultural policy programmes which provide preference to the producers implementing GAP have also increased recently.

← 6. This policy draws on the efforts begun in the 1970s by the prefectural government to reduce the flow of chemicals into the lake which occupies one-sixth of their territory. The initial target was to reduce emissions from point sources, such as sewage facilities and manufacturers, by a series of strict regulations. Consequently, the share of these point sources of the total emissions into the lake gradually decreased; this then required policy measures to tackle non-point sources, especially agriculture (OECD, 2013[15]).

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