The Agricultural Cooperatives and Farming Reform in Japan (2)
February 27, 2009
The collusive triangle of Japan’s agricultural cooperatives, Diet members defending agricultural interests, and MAFF continues to grow tighter, as shown by strengthened moves to reduce rice-growing acreage and faltering structural reform efforts. Agricultural administration is increasingly distancing itself from the goals of developing the industry and maintaining a stable supply of food for the nation’s tables.
The cooperatives are now the linchpin of this triangle; if they change, the politicians—their eyes firmly on their electability in the next contest—will also shift their stances, bringing agricultural reform within reach. What are the prospects for change in the cooperatives?
The agricultural cooperatives belonging to the nationwide organization called JA could not exist without MAFF, the Ministry of Agriculture, Forestry, and Fisheries, which wields its influence via the “agriculture tribe” members of Japan’s National Diet who promote industry interests in the policy arena. A bank, being a company established under the auspices of the Commercial Code, operates under the regulation of the Bank Law; if that law were to vanish from the books, however, the bank itself would continue to exist (and indeed, would be able to act more freely than before). The JA cooperatives, however, were incorporated by the Agricultural Cooperative Association Law, whose regulatory effects are controlled by MAFF. Striking this law from the books would do away with their very basis for existence, causing them to vanish. The JA carries out a range of political activities aimed at resisting lower tariffs on imported agricultural products, maintaining rice prices at high levels, and securing funding from public budgets. All these activities are possible only thanks to the presence of MAFF. If this ministry were dismantled and its functions brought under the umbrella of the Ministry of Economy, Trade, and Industry, for example, it would signal an end to the political influence of JA.
In short, preservation of JA is entirely dependent on preservation of MAFF, and organizational threats to the ministry—as seen during the furor over bovine spongiform encephalopathy, or “mad cow disease,” and more recently after the discovery of contaminated rice in marketed food—represent threats to JA as well. In this sense the cooperatives face a very different situation to that of banks. Their pursuit of their own interests could result in undermining public support for MAFF, thereby placing them in danger—something to avoid at all costs. They cannot allow themselves to kill the goose that lays the golden eggs, so to speak, and their actions are somewhat circumscribed as a result.
A prime example of this took place while Japan’s trade officials were involved in the Uruguay round of World Trade Organization negotiations. At this time JA took a hard-line stance, opposing the introduction of a comprehensive tariff system for agricultural products with the slogan that not a single grain of foreign rice could be allowed to enter Japan. This approach succeeded in postponing the start of rice imports under the tariff system, but at a cost: JA was forced to agree to a partial opening of Japan’s rice market amounting to 8% of consumption, or some 800,000 tons per year.
The Burden of Spiraling Deficits
Over the years the JA cooperatives have seen their power grow thanks to the increasing number of part-time farmers and the overall movement away from farming. But in the long run, this movement can lead only to a decline of farm families and of the cooperatives themselves.
Let us first look at farming households. More than 60% of all farmers are classified as “type-2 part-time,” meaning they earn the majority of their income from non-farming activities. Looking at the absolute numbers shows a serious drop in the population in this category in recent decades, from 1.98 million households in 1990 to just 1.21 million in 2005. This figure plunged by a sharp 22% in just the years 2000–2005. The demographic shifts are especially stark among rice farmers, long at the center of the political activities carried out by JA. In particular the aging of this population is extreme: among farmers who grow rice for all or most of their income, fully 71% are aged 65 or older. There is one segment of the farming population that is seeing steady growth, though—large-scale farmers, whose interests have been relatively neglected by JA. While the overall number of farming households selling rice fell by 16% over the five years from 2000, those households with under 3 hectares of farmland fell across the board, while those with 3 hectares and up actually grew in number. The growth was strongest in the number of the largest farms, with 10 hectares or more under cultivation, which saw a 3.4% increase over this period. All these figures point to a situation in which small-scale and part-time farmers are dwindling in number and large-scale operations run by full-time farmers, or farmers who obtain the majority of their income from farming, are on the rise. The foundation of JA’s very existence is growing less stable each year.
Next let us turn to the cooperatives themselves. JA cooperatives consist of a lot of very small farms and part-time farmers. The principle of the equality of all cooperative members requires that the group deliver even small amounts of fertilizer to any of them, no matter how distant they may be, when it is ordered. A JA cooperative whose existence depends on these tiny farms will invariably incur considerable deficits in supplying them with the agricultural materials they require.
There are many inefficient cooperatives dealing mainly with tiny farms where this is the case. These organizations have traditionally run up deficits through their produce-selling and material-purchasing businesses and covered the shortfalls through their functions as credit unions and mutual aid associations. In 2002, the average JA cooperative was some ¥285 million in the red on its economic activities (including a ¥122 million shortfall for material purchasing and ¥44 million for produce sales). This was more than counterbalanced by the ¥125 million positive balance in its credit union business and the ¥281 million in black ink for its mutual-aid operations, though. As a result the average JA cooperative was profitable to the tune of ¥121 million annually in 2002.
More recent years, however, have brought signs of trouble to the credit union operations that have helped to keep these associations afloat. From the 1970s up through the first half of the 1990s total deposits at JA banks climbed by more than ¥2 trillion each year. This ¥2 trillion mark has not been cleared from 1995 onward, though, and what is more these institutions are seeing anywhere from ¥500 billion to ¥1 trillion leave saving accounts each year due to account holders leaving their assets to their descendants, among other reasons. Residents in farming communities tend to deposit significant income from non-farming activities or the sale of land removed from cultivation in their JA accounts, but once they leave this money to their children living in urban districts, those funds are generally withdrawn and deposited in city banks instead.
JA banks have always been well below the national average for financial institutions when it comes to putting their deposit assets to work. While city banks have loan-deposit ratios (outstanding loans as a percentage of the total deposits they hold) of around 100% and major regional banks of around 80%, the JA banks’ loan-deposit ratios are only in the 30% range. While the deposits on their books have ballooned thanks to the non-farming income and land-sale proceeds mentioned above, their lending has been constrained by the overall decline in agriculture, despite a few bright spots like loans to fund new housing construction. This still leaves some 70% of the funds on deposit at JA banks that needs to be put to productive use elsewhere.
It is this money that has flowed into housing loan companies in recent years. The Norinchukin Bank, the national organization of all JA financial operations, made heavy use of this pool of funds in its overseas investments, achieving returns that were for a time deemed “miraculous.” This miracle would not go on for good, though. The ongoing global financial crisis, with its roots in the American subprime mortgage market meltdown, has dealt a heavy blow to Norinchukin, one of Japan’s major institutional investors. In November 2008, amid turmoil in the financial markets, the bank wrote down losses of ¥100 billion and lowered its projected profits for the year through March 2009 by 71%, from ¥350 billion to ¥100 billion. The bulk of the bank’s assets are in the form of securities and similar instruments whose market value is below their book values to the tune of ¥1.6 trillion in unrealized losses. For Norinchukin, remaining tied in to the JA system offers the benefit of obtaining funds from the JA banks’ deposits, but this must be far outweighed by the burden of having to help cover the red ink stemming from the agricultural-related activities carried out under the Zen-Noh (National Federation of Agricultural Cooperative Associations) umbrella. It is moreover likely that as income from the financial side continues to shrink it will prove insufficient to make up for the losses on the agricultural side, forcing JA to get out of the farming business altogether. This would spell the demise of Zen-Noh. It must also be noted that the Norinchukin Bank is now asking JA group entities for a capital infusion amounting to ¥1 trillion to prevent the erosion of its capital ratio as it seeks to clear away its losses from the current financial storm. While it has been successful in the past, the JA cooperative system today is seeing its very existence undermined from the financial business side.
A Lack of Political Neutrality
JA cooperatives are also experiencing increasing uncertainty in the political sphere. A number of “agricultural tribe” members of the Liberal Democratic Party lost their seats in the House of Councillors election held in July 2007. The Democratic Party of Japan rode to victory on its promise of income guarantees for commercial farming households, and just 23 out of 45 LDP candidates endorsed by the National Council of Farm Policy Organizations, JA’s political arm, were victorious. One bright spot in this election for the JA—which had seen its preferred candidate for a proportional representation seat, a former MAFF bureaucrat, defeated in the previous upper house contest in 2004—was the election of Toshio Yamada, a former high-ranking official in Zenchu, the Central Union of Agricultural Cooperatives. He received 449,000 votes, the second-highest total for an LDP candidate.
The nation’s JA cooperatives employ some 300,000 people, and if we include their families, we can count some 600,000 voters with direct ties to the associations. Japan is home to around 3 million farming families, however, and there are a total of 5 million people with JA membership. Election analysts believe it was people in the former, smaller group, sensing a threat to the cooperative organizations, who voted for Yamada, while the larger group of farmers cast their ballots for the DPJ with its promises of income guarantees.
In 1844 the Rochdale Society of Equitable Pioneers, an early cooperative organization that came to form the model for most similar organizations that followed, produced the Rochdale Principles, a set of ideals governing the operations of cooperative societies. Among these ideals was the maintenance of political and religious neutrality. Nobody, however, would argue that JA has maintained such neutrality in the nation’s political affairs. It is openly acknowledged as one of the Liberal Democrats’ main sources of support. The JA cooperatives themselves have traditionally endeavored not to take direct part in electioneering, instead allowing the National Council of Farm Policy Organizations—ostensibly a group independent from JA—to support candidates from the LDP. In fielding Yamada from Zenchu as the LDP candidate, however, JA openly threw its weight behind the party. With this move to place one of its own in the national policymaking arena, the organization abandoned all pretense of neutrality and bared its true desires.
In late 2008 the Diet passed a revised Act on Special Measures for Strengthening Financial Functions, enabling the injection of further public funds into troubled financial institutions. The DPJ opposed the eligibility of the Norinchukin Bank for capital infusions at this time, a response probably connected to JA’s increasingly open involvement in the political process. In late November 2008 the Democrats also introduced a bill that would amend the Agricultural Cooperative Association Law to enforce the political neutrality of the cooperatives. In this way the DPJ is delivering a jolt to the ruling LDP through the agricultural associations.
Japan may be approaching the day when the “JA empire,” which has controlled the nation’s agricultural policy on both the political and economic fronts ever since World War II, crumbles at last.