Abe's Anti-TPP Cabinet

By RICHARD KATZ, APP Member and editor of The Oriental Economist Alert, a newsletter on Japan.

See End of essay for additional information on the anti-TPP members of the Abe Cabinet

The U.S.-Japan cabinet-level talks on the Trans-Pacific Partnership trade pact broke down on Wednesday largely because of Tokyo's refusal to sufficiently lower farm tariffs and other associated import barriers. The irony is that Japan, not America, has the most to gain from liberalizing food trade, as Japan's own reformers recognize.

Consider the costs of protecting farmers, most of whom are part-timers over the age of 60. Japanese consumers spend 13.7% of their total household budget on food, far more than the 6.3% spent by Americans, or even the 9.3% spent by Britons. If this share were reduced even to 11% by opening the food market to more competition, Japanese households would save 7.5 trillion yen ($72 billion) per year.

To put that in perspective, the output of Japan's entire farm sector is only worth 5.4 trillion yen. The five "sacred" farm sectors that Prime Minister Shinzo Abe resists liberalizing?rice, beef and pork, dairy, wheat and sugar?produce just 3.6 trillion yen, or 0.8% of Japan's gross domestic product.

Then there is the hidden cost to taxpayers, who provide almost half of farmers' income through subsidies. This compares to 23% in the European Union, 10% in the U.S. and 2.7% in Australia. In 2009, these subsidies amounted to 4.3 trillion yen.

Tax breaks for farmland have to be taken into account too. No one knows exactly how much revenue is lost because the land assessments are not transparent. However, Nikkei reports that farmland is typically taxed at a rate of one yen per square meter?a negligible $20 per year for the average-sized farm. By contrast, residential land is commonly taxed at 180 yen per square meter.

This tax break is most harmful in the three big metropolitan areas surrounding Tokyo, Osaka and Nagoya. In these areas, which comprise 17% of Japan's territory, almost one-third of the entire nonforest area is farmland. Much of that is only under cultivation because the laws make it difficult for the aging owners to sell the land for other uses. If the land tax were increased to just half the residential level for all farmland throughout Japan, the revenue gain could be 4.2 trillion yen per year.

The combination of ending subsidies and equalizing land taxes could reduce Japan's budget deficit by perhaps as much as 8.5 trillion yen per year. That's more than the 7.5 trillion yen gain projected from this year's hike in the consumption tax.

Land-use laws were originally aimed at keeping farmland in the hands of the farmers who till the soil that they own. But this has resulted in small, inefficient farms. It creates an artificial scarcity that raises the price of land throughout the nation, thereby suppressing new development and lowering GDP growth.

And this policy doesn't even help farmers, since it deprives them of potential capital gains. According to research by Yoshihisa Godo of Meiji Gakuin University, the tiny amount of farmland that is allowed to be converted to nonfarm purposes often appreciates in value several times over.

Instead, 8% of all Japanese farmland lies fallow. Even more remarkable, 13% of Japan's houses are abandoned and now sit on unused land, much of which is farmland. If they were torn down, the taxes on the land would quadruple because they would no longer be eligible for tax breaks on land with a residence.

Adding to Japan's fiscal crisis are political distortions created through the Local Allocation Grants that Tokyo gives to prefectural and local governments, amounting to about 3.5% of GDP and one-quarter of the national budget. In theory, the grants are supposed to redistribute money from richer prefectures to poorer ones. But in reality the money goes disproportionately to rural areas, regardless of per capita income. The biggest gainers are prefectures whose Diet members have held the balance of power in the last three Upper House elections. The national government pays out more in these Local Allocation Grants than it takes in via the consumption tax.

Why are all these self-destructive practices retained? Because as far as the ruling Liberal Democratic Party is concerned, the purpose of small farms is not to grow food but to cultivate voters. Despite Supreme Court decisions calling for more equality in voting power, the most rural half of Japan's population chooses more than 60% of the Diet members elected to district seats.

That helps explain why the new head of the LDP's Task Force on the TPP is Hiroshi Moriyama. In 2010, Mr. Moriyama founded an anti-TPP caucus whose membership now includes 63% of the 408 LDP members in both houses.

Still, the conditions are ripe for a determined prime minister to override the powerful farm lobby. The LDP's opposition is weak, as are Mr. Abe's leadership challengers within his own party. He could even pick up votes from opposition representatives who support the TPP.

Import liberalization and reform of land taxes and land-use laws would raise government revenues immediately and stimulate GDP, boosting the goals of Abenomics. If Mr. Abe will not act on structural reform when he has all these advantages, one has to question if he will ever act at all.

ADDITIONAL INFORMATION

Can Abe?s third arrow pierce Japan?s agricultural armour? by Aurelia George Mulgan, UNSW Canberra, East Asia Forum, 6 April 2014