Japan is at a crossroads. It ranks third in the world, behind only Norway and Switzerland, in government payouts to farmers. It's a tab that gets increasingly more difficult to justify when the agricultural sector accounts for just 1 percent of the gross domestic product.
The country underwent comprehensive land reform after World War II. At that time, land was redistributed to tenant farms. While that helped enhance productivity at the time, there is no getting around the fact that small field sizes in the island nation haven't allowed the country to keep pace with cost structures in others countries. As a result, production costs have soared over the ensuing decades.
Japan's Prime Minister Shinzo Abe made reform in agriculture a priority. Thus far, he has tackled rice. In fact, the subsidy to produce the popular Asian crop will be cut in half this year and fully erased by 2019.
Next on the docket? Dairy, along with wheat, sugar, pork and beef. It has been estimated by Bloomberg Business Week that subsidies for these commodities total $1.6 billion U.S. dollars annually. All told, those payouts account for 56 percent of total net farm income.
If the Prime Minister's plans continue to unfold, the Japanese-U.S. trade relationship could become even stronger. Japan has long been a good customer for U.S. beef. As for dairy, the nation imported $284 million in 2012 to rank sixth among all nations in dairy trade.
These subsidies and tariffs are a big deal in negotiating the Trans-Pacific Partnership. That free trade agreement would include the U.S. and Japan along with 10 other nations. If ag tariff subsidies get lowered on ag, one can bet Japan will want reductions on vehicles. Currently, the U.S. has a 2.5 percent tariff on cars and a substantial 25 percent on trucks. On the flip side, Japan has a 38.5 percent duty on beef.
