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«7 No. Recent Articles from the Tokyo Foundation Website The Myth of China’s Leadership Financial Time Bomb Development ...»

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4.6 trillion yen, with unprotected sectors accounting for approximately 60% of total sales. This means that production in the noncompetitive sector is 40% of the 4.6 trillion yen, or 1.8 trillion yen. Even if the prices of these noncompetitive products decline by half after the TPP comes into effect, the government can still afford to make up the 0.9 trillion yen shortfall in farmers’ revenues with fresh subsidies.

Additionally, while lower prices for agricultural products represent a loss for farmers, they would be a gain for consumers, so Japan as whole would lose nothing. But some would still argue that the government has no money for additional subsidies. I believe that the government can easily squeeze 0.9 trillion yen from its 100 trillion yen annual budget, but there may be a better way to finance such subsidies.

The consumption tax is scheduled to be raised from the present 5% to 8% in April 2014 and to 10% in October 2015. It has been argued that higher taxes should be exempted for daily necessities like food, but if Japan joins the TPP and liberalizes agricultural products, food prices can be expected to decrease, and so there would be no reason to exempt the hike for foodstuffs. Some argue that the consumption tax on food should be exempted for low-income families, but these same people seem strangely unconcerned about having to pay higher food prices to protect farmers.

If an exemption is made for foodstuffs, this would mean a 19% reduction in consumption tax revenues. 11 A 1-percentage-point increase in the consumption tax has been calculated to produce revenues of 2.5% of GDP, that is, about 2.5 trillion yen. Thus, a 2-point hike generates 5 trillion yen; since 19% of 5 trillion yen is 0.95 trillion yen, the government can secure the needed revenues for Harada and the Tokyo Foundation (2013), pp. 127–30.

11

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subsidies to affected farmers with a 2% hike in the consumption tax by simply avoiding an exemption on foods.

Farm Sector Depends on Japan’s Overall Prosperity MAFF statistics show that there are 1.50 million family-operated farms, but they sell only an average of 500,000 yen’s worth of agricultural products each year, as I mentioned. Farmers in the Edo period may have led self-sufficient lifestyles, but farmers cannot live on such incomes in modern times. They need to sell their produce to purchase products for modern life. (Actually, commercial agriculture is said to have flourished even in the Edo period.) MAFF’s estimates of farmers’ incomes by size of field are summarized in Table 3. The ministry surveyed 1,603 agricultural households about their agricultural and subsidiary incomes and pension revenues. It selected relatively large farms for its sample because it wanted to know the situation of larger farms. Family-operated farms measuring more than 5 hectares account for only 5.5% of the total, 12 but they made up 44.7% of the MAFF sample; in short, the sample is not an accurate reflection of the overall situation, leading to an overestimation of agricultural income, but this is the only available survey of agricultural household incomes.

MAFF’s ”Nogyo Kozo Dotai Chosa” (Survey on the Structure and Dynamics of Agriculture), 2013. Sum of Hokkaido and other prefectures in “Keiei Kochi Menseki Kibobetsu Noka Su” (Number of Agricultural Families by Size of Cultivated Field).

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The table shows that the average agricultural income of Japanese farms is only 0.5 million yen per year. “Agricultural income” means sales minus costs.

Half a million yen is only about 5,000 dollars. Obviously, this is not enough to live on in modern-day Japan, even if it is overestimated. Then, how do they live? The table shows that the average income from side jobs is 1.9 million yen and average pension revenue is 2.1 million yen. Total income, including from agriculture, is 4.5 million yen. This is how they survive.

The average age of Japanese farmers is 65.9 years old, as I mentioned above, so they are more often than not pensioners.

For small farms, the share of pension benefits to total income is quite large.

The average pension income for households with farms measuring less than half a hectare is 2.5 million yen, and their agricultural income is minus 0.1 million yen. So, one might say that small farmers are basically pensioners who cultivate their land as a hobby.

The figures suggest that for the average farmer, the most important consideration in making a living is to secure a steady income from a side job and to receive pension benefits. Getting a stable side job will become easier if the Japanese economy is growing, and for this, Japan’s best option would be to open its doors wider to the global market and to seek further trade liberalization.

And what are the most important considerations in receiving pension benefits? Since benefits are paid from the contributions of the working-age population, then it follows that Japan needs to be prosperous with many job opportunities. For this, too, Japan should seek liberalized global trade. In short, Japan needs the TPP to ensure its own prosperity.

Large farms seeking to expand will not be hurt by the TPP, so the trade pact might be effective in rectifying just those aspects of Japan’s agricultural policy that have plagued the country to date.





Inasmuch as the lives of agricultural households also depend on a prosperous Japanese economy as a whole, it is not enough to limit imports of certain products if one is serious about protecting the country’s farmers.

Conclusion

In this paper, I have tried to show that Japanese agriculture is in a perilous state. Despite this, a small number of farms have become big producers claiming a major share of total production. If the government does not hinder their activities, agricultural productivity could rise, and Japanese agriculture can be competitive. In fact, around 60% of the farm sector is already internationally

24 ECONOMY

competitive. Misguided agricultural policies have been in place for years aimed at preventing the number of agricultural families from declining, and I have made a number of proposals that could improve the situation. Finally, I noted that the financial stability of many farming households depends on Japan’s overall prosperity. In short, Japan needs the TPP to ensure its own prosperity.

References Harada, Yutaka, and the Tokyo Foundation. 2013. TPP de sarani tsuyokunaru Nihon (Turning TPP to Japan’s Advantage). Tokyo: PHP Institute.

Yamashita, Kazuhito. 2013. Nihon nogyo o hakai shita no wa dareka (Who Destroyed Japanese Agriculture?). Tokyo: Kodansha.

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November 8, 2013 Raising the Consumption Tax Rate Shigeki Morinobu The “three arrows” in the Abenomics program of economic expansion are helping lift Japan out of decades of paralyzing deflation. In recently announcing that he would go ahead with a scheduled consumption tax hike in April 2014, Prime Minister Abe also outlined a ¥5 trillion package of measures designed to mitigate the negative impact of higher taxes. While lauding the unpopular decision to raise the consumption tax, Senior Fellow Shigeki Morinobu believes the fiscal stimulus package is a waste of fiscal resources that could jeopardize the administration’s target of “halving the annual deficit by fiscal 2015.” The following article is reprinted with permission from Chuo Online.

1. The decision to raise the consumption tax rate should be appreciated

On October 1, Prime Minister Abe officially made a cabinet decision to raise the consumption tax rate to 8% in April next year.

The Japanese economy is emerging from the prolonged deflation, partly due to the effects of the “Three Arrows” consisting of the “bold monetary policy” of the Bank of Japan, the “flexible fiscal policy” and the “growth strategy to stimulate private investment.” On the other hand, the fiscal situation remains to be the worst among the developed countries, with the primary balance in a deficit of 6.4% of GDP and an outstanding public debt of 190% of GDP in FY2012. If the confidence of the market in fiscal sustainability becomes shaken, it could have a huge impact on the economy and on people’s lives through the rise of interest rates and the like.

As for reform of the social security system, moreover, it has been pointed out that fiscal resources need to be directed toward enhancing policies in order to assist the child rearing of the working generations.

I would frankly give a high appraisal for officially deciding to raise the consumption tax rate with this timing from the viewpoint of fiscal consolidation and enhancement of social security.

Shigeki Morinobu Senior Fellow, Tokyo Foundation; Professor, Chuo University.

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2. Generous economic stimulus measures will leave problems At the same time as the decision to increase the consumption tax, economic policy measures totaling ¥5 trillion were decided—comprising tax credit for capital investment, measures for low-income earners, additional spending on public investment, and the like—in order to mitigate the negative impact on the economy due to the rise of the consumption tax rate. The increased revenue from the consumption tax will be about ¥8 trillion. Although it is only for one year, the increased expenditure of ¥5 trillion has given an impression that the Abe administration is placing low priority on fiscal consolidation. Regarding its contents as well, a lot of problems exist for the use of fiscal resources as the measures include additional public investment of about ¥2 trillion under the guise of building national resilience and the Olympic Games. We should be careful about formulating a budget with the approach of “deciding the total amount at first,” which could incur moral hazard as we have seen in diversion of the budget for reconstruction from the earthquake disaster to other uses. We should not forget its origin that discussions on the rise of the consumption tax rate started as part of the Comprehensive Reform of the Social Security and Tax Systems.

Since such waste of fiscal resources could jeopardize the attainment of the Abe Administration’s fiscal target of “halving the primary balance deficit by FY2015”—which is also an international commitment—it will be strictly watched by the market going forward.

3. Reduced tax rates should not be introduced

The biggest issue of the consumption tax after its rise is whether to introduce a reduced tax rate for food. The agreement among the ruling parties states that, “we aim to introduce it at the time of raising the consumption tax rate to 10%,” scheduled to be decided by the end of this December.

The biggest issue for introducing a reduced tax rate is how to cover the accompanying revenue loss. If a reduced tax rate of 5% is introduced for food, it will result in the revenue loss equivalent to the revenue from about 1% consumption tax rate, as food accounts for around 20% of total expenditures.

Those who advocate for introducing a reduced tax rate must show as well how they intend to secure fiscal resources of ¥2.5 trillion, equivalent to the revenue from the 1% consumption tax rate. Assertion of a reduced tax rate without alternative revenue is merely an empty, impractical theory.

27 ECONOMY

Second, a reduced tax rate will benefit high-income earners more, and therefore, it will not contribute to measures for low-income earners or resolving regressivity. As high-income earners spend more on food, a reduced tax rate will not be a measure for low-income earners, but rather a preferential treatment for the rich after all.

Last, we should bear in mind that European countries with reduced tax rates are facing serious problems due to the emergence of business models which did not exist when they introduced VAT in the 1960s. The issue is the distinction between eat-in service (for the standard tax rate) and take-out food (for reduced tax rates). They are distinguished by the temperature in the U.K., while by the number of items in Canada—we cannot say either is working. It will depend on future discussions as to how we will distinguish them in Japan, but it will certainly increase the burdens on consumers, businesses, and tax authorities in the end. Although changes in the reduced tax rates are advocated in EU, it will be politically difficult to reduce or abolish them once they are introduced.

Japan, which is witnessing such cases, should avoid introducing reduced tax rates at the 10% consumption tax rate, leaving aside cases where the tax rate exceeds 10%. Measures for low-income earners can be implemented efficiently with a simple tax refundable tax credit which has been introduced in Canada. For the Canadian type tax credit, please refer to the following essay (in Japanese): http://www.tkfd.or.jp/research/project/news.php?id=963

4. The next step is reduction of the corporate tax

The issue for the whole tax system will be the reduction of the corporate tax.

While abolishing the increased tax for reconstruction ahead of the schedule will be discussed at the same time, the special corporation tax for reconstruction is originating from the thinking that Japanese people as a whole should share the burden of necessary reconstruction from the earthquake disaster; and therefore, it is based on different logic, which will not directly lead to invigoration of the Japanese economy through reduction of corporate tax burdens. It should be fully discussed because we also have the issue of the balance with excess burdens on the income tax and the local inhabitant taxes.

Even after abolishing the special corporation tax for reconstruction ahead of schedule, the effective tax rate of the Japanese corporate tax will be several percentage points higher than it is in other countries. This is undoubtedly one of the reasons for the hollowing-out of the Japanese economy, including local

28 ECONOMY



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