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Japan farming reforms a stiff test of Abe's resolve

01/31/2015 | 08:06pm US/Eastern

After December's landslide re-election, Japanese Prime Minister Shinzo Abe's programme to revive the nation's economy is set to meet perhaps its stiffest challenge, the nation's sclerotic farming industry.

He will soon submit legislation to reform agriculture, a sector where a dwindling band of aging farmers works tiny plots, while conducting gruelling negotiations to sign up for the Trans-Pacific Partnership (TPP), which would cut towering import tariffs that shield domestic farmers.

Standing in his way is Japan Agriculture (JA), a lobby group that controls most aspects of pricing and distribution through its network of about 700 farming cooperatives, and also supplies feed and machinery.

It doesn't like Abe's plans to clip its wings, nor the TPP.

And the JA, which has long had close ties to his Liberal Democratic Party (LDP), has financial clout - its banking business had nearly 91.5 trillion yen (517 billion pounds) in deposits in March 2014 - and a large membership, which give it influence over lawmakers in rural constituencies.

In January its members campaigned against and helped defeat the LDP's candidate for governor of Saga, a prefecture in farm-heavy southwestern Japan.

Though agriculture is only about 1 percent of Japan's economy, that defeat worries those who fear the government could temper what Koichi Kurose, chief economist at Resona Bank, calls "a symbolic part of Abe's structural reforms" ahead of nationwide local elections in April.

"If they pull back from that to win elections, they can pull back from the whole Abenomics reforms," he said.

"Foreign investors are also watching closely whether or not Abe can carry out agricultural reforms, which will affect their evaluations of Abenomics," said Chizu Hori, senior research officer at Mizuho Research Institute Ltd.

At home, farmers hurt by another plank of Abenomics - loose money and a weaker yen - are also watching closely.

Hiroyasu Sugiura, 67, whose dairy lies in the shadow of Toyota Motor factories in central Japan, says he is desperate.

The tumbling yen helps exporters like Toyota but has led to a sharp rise in feed costs, which now swallow nearly 80 percent of Sugiura's dairy revenue.

"The weaker yen ... may have given Toyota Motor trillions of yen in profit, but we are getting squeezed by the same national policy," said Sugiura, who is also the head of the Aichi Dairy Cooperative. "We want the government to protect us."

PITFALLS

For the consumer, however, high prices and a recent butter shortage are the pitfalls of a closed market for milk and dairy products, where output volume and sales prices are set by the state and a few designated groups under the JA, while imports are under effective state control.

Raw milk production was 7.45 million tonnes in the year through March 2014, down from 8.66 million in 1997, while the number of dairy farmers has fallen to 18,600 in 2014 from 160,100 in 1975. Cow numbers have fallen by a third from their peak.

Meanwhile, Japan imposes a 360 percent tariff on butter imports to protect domestic farmers while maintaining an import quota as a condition for such high tariffs under international rules of trade.

Abe wants to break that system to give local farmers or cooperatives autonomy so they become more productive and profitable.

Other reforms include a scheme to encourage land transactions so farms can expand.

The average Japanese farm is only two hectares (five acres), or 1 percent of the size of the average U.S. farm and 0.07 percent of Australian farms.

"One of the most important elements Abe needs to tackle is to make farms grow bigger to be more productive," said Mizuho Research's Hori.

Structural reform is critical ahead of the TPP, which would link 12 countries covering nearly 40 percent of the world economy.

Disagreement between the United States and Japan, the two biggest, over how widely Japan will open up has delayed progress, though more talks are scheduled this week to try to get agreement this year.

Japan imposes high tariffs on dairy produce, rice, wheat, beef, pork and sugar to protect local farmers, but under the TPP it would have to cut or remove some, and allow higher imports, putting more pressure on its beleaguered farmers.

Some, however, are already removing themselves from the suffocating umbrella of JA.

One cooperative in Hamanaka, a small town on the northern island of Hokkaido, now buys cheaper feed from trading houses, instead of JA, while recruiting young couples by offering a paid training programme and financial and technological help so they can take over land from retiring farmers.

"We have no idle farm lands in Hamanaka. Five couples are on our waiting list," said Shigenori Ishibashi, the co-op head, adding milk output in the town had risen 25 percent since 1983.

"We're not afraid of TPP or the weak yen," Ishibashi said.

(Additional reporting by Aaron Sheldrick and Daiki Iga; Editing by Will Waterman)

By Yuka Obayashi

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