- Macroeconomics, Economic Policy
Let Corporations Play a Role in Reviving Japanese Agriculture
December 4, 2008
Japan’s farming population is declining as the current generation of farmers ages amid a dearth of potential successors. With more and more farmers abandoning production, the country is losing agricultural resources that are vital to its food security. The entry of private enterprises into the farming sector has the potential to revive Japan’s crisis-hit agricultural sector by identifying successors other than the children of farmers and creating jobs.
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Corporate involvement in agriculture is restricted by the Agricultural Land Law and related laws. Joint stock companies are permitted to participate in the farming sector in two ways. One is as “agricultural production corporations,” which can be established anywhere in the country and are allowed not only to lease farmland but also to acquire ownership rights. These corporations, though, are subject to various conditions, including that they derive over half of their sales from agriculture; that over three-quarters of the total voting rights are held by full-time farmers, farmland rights providers, agricultural cooperatives, and other parties involved in farming; and that full-time farmers account for a majority of the company’s directors. In addition, only joint stock companies that restrict stock transfers are eligible for this status. In short, this designation is for incorporated family-run farms, rather than for ordinary companies.
A System That Prioritizes Owner-Farmers
This reflects the Agricultural Land Law’s emphasis on the owner-farmer principle, or the concept that farmland should be owned by the person who cultivates it. This law was enacted in 1952 with the aim of fixing in place the results of land reforms that gave tenant farmers ownership of the land they cultivated. The owner-farmer principle is rooted in Article 1 of the law, which “recognizes that ownership of farmland by the farmer himself is the most appropriate form of ownership.” This statement was added on a whim by the then administrative vice-minister of agriculture and forestry, a strong advocate of land reform, when the official in charge of drafting the law circulated the final draft among senior officials—a last-minute change known as a hige (beard) in the parlance of Kasumigaseki, the district of Tokyo where government agencies are concentrated. Despite the origins of this statement, those involved in agriculture have taken it to be an expression of the Agricultural Land Law’s fundamental ideals.  The result was that the law placed tight restrictions on the holders, nature, and transfer of farmland rights.
At the time it was enacted, the Agricultural Land Law did not even envisage the possibility of farmland being owned or cultivated by corporate entities. The decision by some farmers to incorporate as a means of reducing their tax bills, however, caused turmoil among agricultural officials unsure whether they should permit this practice or not. The agricultural production corporation system was finally introduced to the Agricultural Land Law in 1962, but it did not permit such corporations to be joint stock companies. It was not until 2000 that joint stock companies were allowed to obtain the status of agricultural production corporations, and even then this privilege was limited to firms that restrict stock transfers so as to prevent the control of corporations by parties not involved in agriculture and the acquisition of farmland for speculative purposes.
The other form in which joint stock companies are permitted to participate in the farming sector is through the “specified corporation lease program.” This program was launched in 2003 as part of the system of special zones for structural reform created by the administration of Prime Minister Junichiro Koizumi; it was extended nationwide two years later. The aim is to have companies participate in agriculture as lessees of farmland; to qualify, a firm must conclude an agreement with a municipality to conduct appropriate farming activities in a region where there is a substantial area of abandoned farmland. The only condition is that at least one of the managing directors must be engaged full-time in farming-related work (though not necessarily farming itself), and, while the program is limited to certain regions, it opens the door to participation by a wide range of ordinary joint stock companies.
Does Corporate Status Revitalize Farms?
As of January 2008 there were 10,519 agricultural production corporations operating in Japan, of which 832 were joint stock companies; the vast majority, 6,896, were limited liability companies.
Meanwhile, 320 corporations were operating farms in 155 municipalities under the specified corporation lease program as of September 2008. Of these, 104 were in the construction industry and 65 in the food industry; 170 were joint stock companies, 85 tokurei yugen gaisha (special limited liability companies), and 65 nonprofit or similar organizations. They were leasing a combined 950 hectares of farmland, a tiny portion of the country’s total 4.67 million hectares of farmland. As for the health of these businesses, just 7% of the corporations were making a profit.
This is partly because the ulterior motives of landowners can hinder the smooth acquisition by corporations of rights to farmland, but it also illustrates that joint stock companies are not necessarily good at managing farms. Even in the United States and Europe, which lead the world in agriculture, most joint stock companies in farming consist of household farms that have acquired corporate status. In the United States, 90% of farming businesses are household farms; just 3.5% are corporate operations, and they manage only around 11.5% of the country’s total farmland. Moreover, 90% of the corporations are majority-owned by the families that operate the farms or their relatives. In a speech at the Ministry of Agriculture, Forestry, and Fisheries, Uichiro Niwa, the chairman of Itochu Corporation, who used to trade grain in the United States, said: “Joint stock companies are not suitable for agriculture. Who will protect the fields when a storm comes and all the employees have gone home for the night?” There is little evidence to back up the idea that incorporation is a way to revitalize farms. Even in the business world outside of agriculture, some corporations succeed and some fail. None, however, succeeds simply by virtue of being a corporation. Corporations succeed because they are well run. While most new corporate entrants to the agricultural sector are losing money, there are 2,000 privately run farms boasting over 100 million of annual farm produce sales.
The Merits of Corporate Involvement
This does not mean that it is meaningless for corporations to enter the agricultural sector. One of the reasons for the decline of Japanese agriculture as more and more farmers enter old age without anyone to take over their farms has been the insistence on limiting the pool of potential successors to heirs within the same family. There are now less than 3 million farms in Japan, compared with 6 million half a century ago. If the heir to a farm decides that he does not want to work in agriculture, the farm is left without a successor. There are plenty of people who are not children of farmers but are willing and able to farm. Successors should be selected not from among the offspring of 3 million farmers but from among the 130 million people that make up Japan’s population. Corporate involvement in agriculture is one means of identifying successors. If a company shows itself to have outstanding farm management ability, it should be made the successor of the farm it manages.
The Agricultural Land Law restricts not only the transfer of farmland rights but also the conversion of farmland to other purposes. Farmers’ groups oppose the entry of joint stock companies into the agricultural sector because, they argue, such companies will convert farmland to other uses. The Agricultural Land Law was so ineffective in restricting farmland conversion that it was known, together with the Food Control Law and the Public Offices Election Law, as one of Japan’s three great loophole-ridden laws. It was none other than farmers themselves, however, who exploited these loopholes to convert 2.5 million hectares of farmland to other uses—equivalent to the total area of rice paddies in Japan today, and more than the 1.94 million hectares released to tenant farmers under the postwar land reforms. More than half of this land was converted for residential or similar use. Farmers deposited the vast profits earned from these conversions with agricultural cooperatives, which invested the money and used the profits for their development. The true motivation of farmers’ groups is not opposition to the conversion of farmland but a desire to prevent farmland, the goose that lays golden eggs for them in the form of investment profits, from falling into the hands of the business community.
Europe maintains its farmland through zoning regulations alone; there are no restrictions equivalent to the Agricultural Land Law. Japan has two systems—individual conversion permits under the Agricultural Land Law and the zoning system under the Law Concerning the Establishment of Agricultural Promotion Areas (Agricultural Promotion Law)—but neither has functioned effectively. On top of its other faults, the Agricultural Land Law serves as a barrier to the acquisition of farmland by joint stock companies. I believe that the government should implement bold deregulation by abolishing the Agricultural Land Law and, at the same time, fundamentally changing and strengthening the Agricultural Promotion Law’s zoning system, which currently entrusts the job of regulation to municipal leaders who are often keen to convert farmland. Agricultural cooperatives could not possibly oppose reforms like these if they were truly against the conversion of farmland. These measures would enable corporations and individuals other than farmers’ children to participate freely in agriculture and would help Japan to retain the farmland that is essential to its food security.
Creating Jobs Through the Specified Corporation Lease Program
Opposition from the agricultural groups that, while not the force they once were, have sustained Japan’s postwar conservative politics would, of course, prevent such fundamental reforms from being achieved overnight. This being the case, I believe that one option is to attract successors for the country’s farms from among the whole, 130-million-strong population by using the specified corporation lease program, which permits the entry of ordinary joint stock companies, to encourage new people to take up farming.
The employment agency Pasona Inc. has already begun just such an initiative, which it calls Challenge Farm. In this program, first Pasona enters farming as a specified corporation. Then it casts a wide net to recruit farmers for the land and hires suitable personnel as Pasona employees on three-year contracts. After training them in farming, management, marketing, and other skills they will need to run the farm independently, Pasona makes the farm independent as an agricultural production corporation, letting the farmers take over the rights to the farmland, as well as such assets as farming machinery and sales channels. This is a revolutionary initiative that takes advantage of the specified corporation lease program to nurture the next generation of farmers and create new jobs through agriculture. What is more, even though Pasona can at first only participate by leasing farmland as a “specified corporation,” making the farm an agricultural production corporation opens up the future possibility of acquiring ownership rights to the land. In this sense, this is a way of achieving a partial, de facto relaxation of the restrictions imposed by the Agricultural Land Law.
The initiative has other advantages, too. In the past, prospective new entrants to the agricultural sector relied on loans to procure funds for purchasing farm machinery and other necessities. If their venture failed, however, the debts fell on them as individuals. They had the option of soliciting capital to establish a joint stock company, which would enable them to spread the risk and avoid personal liability for debts in the case of failure. Even an individual who attempts to enter farming by soliciting investment from family and friends to set up a joint stock company as an extension of a family-run farm would have difficulty meeting the conditions to become an agricultural production corporation. That is why Pasona, having entered farming as a specified corporation, is considering the possibility of retaining this status even after the three-year training period, during which it would establish an agricultural fund to solicit capital for acquiring farm machinery, and of leaving all of the management issues, such as how much of which crops to grow and which sales channels to use, to the new farmers taking part in the Challenge Farm program. In short, the farms would be owned by Pasona and run by the new farmers. This separation of ownership and management is a new venture in Japanese agriculture.
 Despite being a means of increasing agricultural productivity, not an end in itself, the owner-farmer principle has taken on a life of its own. An official working in the farmland system said: “I tried to tell myself on numerous occasions that the owner-farmer principle is a means, not an end, but when I was involved in administering the Agricultural Land Law I would often realize that I had become captive to this principle. . . . The very label the owner-farmer principle encourages the illusion that owning and working a farm is the ideal for farming people and that this style of agriculture is the ultimate goal of farming policies.”
The Nikkei Shimbun of November 28, 2008, revealed the general outline of the proposed policy for agricultural land reform that has been under review by the Ministry of Agriculture, Forestry and Fisheries. This calls for revision of the Agricultural Land Law to deregulate, in principle, the leasing of agricultural land; this would also allow land leasing to corporations. The proposal will shortly be presented to the Council on Economic and Fiscal Policy for deliberation, and a bill to revise the Agricultural Land Law and other related legislation will be submitted to the next regular diet session.