Abe’s Third Arrow Finds Its Mark

This article originally was published in the Wall Street Journal on February 11, 2015. View it here.

At the start of the year, Japan’s Prime Minister Shinzo Abe declared the spring session of the Diet to be the “Diet to carry out reforms.” On Monday he cleared the way for the first and perhaps most significant of the session’s structural reforms when the Central Union of Agricultural Cooperatives (commonly known as JA-Zenchu) agreed to reduce the organization’s role in overseeing local cooperatives and representing the agricultural sector in its deliberations with Tokyo.

While the legislation still needs to be finalized, passed and implemented—which could take as long as five years—this appears to be a major victory for Mr. Abe’s structural-reform program, the so-called third arrow of Abenomics.

The government’s plan will transform JA-Zenchu from a “special private corporation” that enjoys extraordinary, semipublic powers protected by law into a “general incorporated association” without regulatory functions and subject to ordinary taxation. The group will lose its power to audit and guide local cooperatives, as its auditing arm will be spun off and forced to compete with other auditors. Its profitable wholesale division will be similarly converted into a publicly held company. With its legal status changed, JA-Zenchu will face restrictions on its political activities and lose privileged access to Ministry of Agriculture, Forestry, and Fisheries officials

To be sure, reform will not completely marginalize the group. The plan would allow it to wield influence over farmers through its powerful financial-services arm. With its long history as Japan’s leading agricultural group, JA-Zenchu likely will continue to play a role articulating agricultural interests and organizing farmers.

Even with JA-Zenchu’s agreement, passing the legislation could still be difficult, particularly in the Diet’s upper house where agricultural interests are disproportionately represented. The lobby may exploit any loopholes in the legislation to protect its status or run interference during the implementation phase. Even if the reforms are implemented, both the national and prefectural governments will need to follow up with other reforms to bolster the agricultural sector.

Yet by convincing JA-Zenchu to accept a more limited role in the agricultural sector the Abe government may create more space for national and local policy makers to promote more efficient production and for producers and local cooperatives to experiment with new production models. JA-Zenchu’s willingness to tolerate reforms—not without some opposition—also suggests the organization recognizes that, while it once played an important role ensuring that farmers shared in the benefits of Japan’s economic miracle, it has more recently perpetuated a production model that cannot compete in global markets.

The same holds true for Mr. Abe’s Liberal Democratic Party, whose members successfully forced the prime minister to postpone agricultural reforms when they were first proposed last year. LDP politicians in rural Japan have long depended on JA-Zenchu’s electoral machine for votes and money. Last month’s victory of a JA-Zenchu-backed independent candidate for governor suggested that the farm lobby could still wield power over the conservative party.

But even senior members of the LDP’s “farm tribe,” JA-Zenchu’s best friends in the party, seem to recognize that it is time to try something different, if only to ensure the long-term survival of Japanese agriculture. The LDP is far from united in favor of the new plan, but for the moment pragmatism has prevailed.

It may be that the LDP’s about-face has something to do with the Trans-Pacific Partnership. Negotiators—and the U.S. Congress—have signaled that it may be possible this year to conclude the TPP, the proposed regional economic partnership between the U.S., Japan and 10 other countries from Asia and the Americas.

Japan’s farmers and their representatives now face two unpleasant choices. They could oppose ratification and say that Mr. Abe failed to protect their interests adequately. However, they would then risk losing all of their influence in a showdown with the prime minister. Even if they succeeded, it would then result in Japan being left out of the region’s premier trade bloc.

Or they could accept the TPP but block reform. Yet that would guarantee significant losses for the agricultural sector once the TPP is implemented.

Removing the obstacle posed by JA-Zenchu is the least-bad option. And by caving to the government’s demands, the farm lobby and its LDP allies may have made the TPP more likely by demonstrating Mr. Abe’s commitment to agricultural reform and the TPP.

Still, in terms of structural reform the plan is more symbolic than a dramatic boost to Japan’s economy. For several years agriculture has contributed only 1% to Japan’s gross domestic product. Farmers make up only 3.22% of the workforce (down from nearly 5% at the start of the century), and as of 2013 the average age of a Japanese farmer was 66.2. Production of virtually every crop is well below historical peaks, including the acreage under cultivation. While in 2014 Japan’s agricultural exports reportedly topped ¥600 billion ($5 billion), a record high for the second consecutive year, Japan’s agriculture imports are more than ten times larger. So it is unlikely that limiting the influence of JA-Zenchu alone will reverse the decades-long decline of Japanese agriculture. The very weakness of the sector—and its vulnerability should TPP be concluded—may well have strengthened Mr. Abe’s leverage in negotiations. Other reforms, most notably labor-market reform, will be harder.