Agriculture accounts for a small percentage of Japan's gross domestic product, but about 10% of the total population still lives on farms. Despite land consolidation in the past few years, more than 50% of all farms still cultivate less than 1 hectare, resulting in a highly labor- and capital-intensive agricultural sector.

Rice production comprises more than a quarter of the value of all farm products. But continued declines in rice consumption have resulted in government-mandated and voluntary diversion to other crops, and farmers have looked to more profitable operations in the livestock sector and fruit and vegetable markets.

Japan's farm lobby historically wielded great political strength, which created a highly protected, highly subsidized domestic agricultural sector. But beginning in the late 1980s, a dwindling farm base, high budget costs and pressure from international trade partners — Japan is the world's largest net agricultural product importer — began to force changes in domestic policy.

One of the first liberalizations involved permitting beef imports, and another significant change was the late 1995 opening of Japan's highly protected rice market to imports. Under terms of Japan's participation in the Uruguay Round agreement of agricultural trade reforms, the Ministry of Agriculture, Forestry and Fisheries (MAFF) agreed to allow annual "minimum access" levels of imported rice.

Since then, imports have increased each marketing year under the program. But in late 1998, Japan's government notified the World Trade Organization that it was converting its rice import quota system to a tariff-based system.

The effect in fiscal years 1999 and 2000 is reduced volume of imported rice and its share of total domestic consumption. For example, under the old quota system, Japan was expected in 2000 to import about 758,000 tonnes, or 8% of total consumption, but the tariff system will result in imports of about 682,000 tonnes, or 7.2% of domestic use.

In addition to changes in trade policy, Japan in July 1999 enacted a new "Basic Law on Food, Agriculture and Rural Areas." The legislation marked the first revision in Japan's agricultural law in 38 years. Although few detailed plans for implementation have yet been unveiled, the new law outlined key policy proposals for the next five years. These include such goals as increasing Japan's self-sufficiency ratio in certain products; establishing production targets for major commodities such as rice, wheat and soybeans; and restructuring paddy fields to increase production of wheat and soybeans. The law also includes provisions for developing price policies based on market principles, allowing non-farm corporations into agricultural production under certain conditions and adopting food labeling systems.

But even with the trade reforms and clear signs of domestic policy changes favoring greater market orientation, Japan's government to date still retains a high degree of control over the agriculture and food processing sectors.

MILLING. The Japanese Food Agency directly controls both producer and resale prices of wheat. The Agency also is the primary source of wheat for most of Japan's flour production.

The Agency imports most of Japan's wheat and sells it to millers at double the c.i.f. import price. Profits made from those mill sales help offset the costs of buying the domestic crop, for which farmers receive up to three to four times the resale price to millers.

For instance, in 1998 the Agency paid the equivalent of U.S.$1,445 per tonne to Japanese wheat producers and sold domestic wheat to mills for the equivalent of about U.S.$402. For imported wheat, the average c.i.f. price in 1998 was about U.S.$245 a tonne, and the Agency sold that wheat to millers at U.S.$486.

Flour millers are permitted to import wheat outside of Food Agency control, but only if the millers export an equivalent amount of wheat flour. Wheat imported privately for this purpose may be bought at world prices, making flour exports extremely profitable for mills.

The export trade also provides a market for lower quality flour that would have little value to domestic consumers. Japan's flour exports in calendar years1996-1998 averaged about 277,000 tonnes a year, with Hong Kong, importing an annual average of 181,000 tonnes, the primary destination.

In May 1998, the Food Agency announced a "New Wheat Policy" that it plans to implement through the 2000 to 2002 crop years. The plan calls for eventual private sector purchases of domestic wheat and a new compensation program for domestic wheat producers.

One aspect of the new policy that already has taken effect is the "Simultaneous Buy and Sell" system (S.B.S.) for imported wheat and barley for feed use. Under the plan, the Agency sells imported wheat and barley to domestic feed manufacturers at the same time that it buys the grain from overseas suppliers.

The S.B.S. system, originally put in place for rice imports, was adopted for wheat and barley feed imports following complaints from the domestic livestock industry about expensive feed. Competitive domestic feed costs is an important issue for livestock producers given the high level of relatively cheap beef imports.

The "New Wheat Policy" also eventually will allow Japanese flour mills to buy wheat directly from domestic farmers, in hopes to encourage farmers to produce the wheat types needed in the domestic market. The move corresponds with the government's intention to increase the nation's wheat self-sufficiency ratio.

In the domestic market, Japanese wheat and flour consumption had enjoyed small, if steady, growth as consumers shifted to bread and pasta from rice-based foods. That trend ended in the past couple of years, however, as the economic recession cut into consumer confidence and encouraged the population to switch back to traditional rice products.

Per capita wheat use in 1985 stood at 31.7 kg, rising to a high of 33.0 in 1996. But in 1997, use slipped to 32.4 kg and to 32.3 in 1998. Consumption was expected to stabilize near that level in 1999.

Japan's mature flour milling sector consists of about 170 flour mills and a total annual wheat grind capacity of about 10 million tonnes, a level that has been virtually unchanged for more than a decade.

According to preliminary MAFF statistics, Japan's wheat flour production in 1998 was estimated at 4.5 million tonnes. That was down from 4.638 million tonnes in 1997 and 4.657 million in 1996.

The bread and noodle sectors each account for 27% to 30% of annual flour production. In the past three years, Italian food has gained in popularity, and macaroni and spaghetti end uses have increased by nearly a full percentage point to 4% of total flour output.

OILSEEDS. Japan consistently ranks among the world's top importers of soybeans, the most consumed oilseed in the country. About 78% of total demand for soybeans is for oil use; 20% is for food use and the 2% is for feed use.

Soybeans for food are used in frozen and fried tofu (soybean curd), miso (soybean paste), natto (fermented whole beans), boiled soybeans and soy sauce. The meal from soybean crushing is used for both animal feeds and, after further processing, for soy protein and soy sauce. Consumption of food soybeans in 1999 was expected to be flat based on sagging consumer confidence.

The crush industry has been consolidating over the years. As of December 1997, a total of 95 domestic oil crushing factories operated in Japan, compared with 117 in 1990. Total crushing capacity in 1997 was 9.2 million tonnes, and oil production was 6.7 million tonnes.

Japan has been a keen follower of the development and debate over "genetically modified organisms," or GMOs, as they relate to soybeans (maize is not currently at issue because it is not a food grain in Japan). Last year, the government decided to introduce mandatory labeling for foods, including tofu, miso and natto, containing GMO ingredients beginning in April 2001.

Following that decision, demand by Japanese food manufacturers for non-GMO soybeans grew rapidly, and manufacturers of food items not subject to the mandatory labeling, such as beer makers, also began shifting to non-GMO materials. As a result, by late 1999, prices of certified non-GMO ingredients had risen by about 30% relative to conventional ingredient prices.

The disparity prompted the Tokyo and Kansai grain exchanges to announce in November a plan to introduce in April 2000 a separate listing for non-GMO soybeans to reflect the price divergence. The exchanges also requested that MAFF report non-GMO soybean imports separately, a request the ministry was expected to approve.

LIVESTOCK AND FEED. Japan's annual feed production declined markedly in the past decade, as the livestock sector consolidated amid keen competition from beef imports. Between 1991 and 1997, beef imports surged by about 67%, while the number of Japanese cattle producers declined by 36%.

Correspondingly, compound and mixed feed production also has dropped. Total feed output for all animal types in the early 1990s averaged about 26.6 million tonnes a year; in 1998, estimated production was 24.5 million tonnes, down 2.5% from the previous year alone.

Maize is the major feed ingredient, accounting for about 46% to 48% of feed formulations, with sorghum accounting for 10% to 11% and barley, about 3%. Of the total demand for maize for feed, nearly 50% comes from the poultry sector.

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