The contribution of land exchange institutions and markets in countering farmland abandonment in Japan

Land Use Policy 57 (2016) 582–593

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Land Use Policy journal homepage: www.elsevier.com/locate/landusepol

The contribution of land exchange institutions and markets in countering farmland abandonment in Japan Junichi Ito ∗ , Mari Nishikori, Mami Toyoshi, Hart Nadav Feuer Division of Natural Resource Economics, Graduate School of Agriculture, Kyoto University, Oiwake-cho, Kitashirakawa, Sakyo-ku, Kyoto, 606-8502, Japan

a r t i c l e

i n f o

Article history: Received 5 October 2015 Received in revised form 4 June 2016 Accepted 16 June 2016 Available online 29 June 2016 Keywords: Land rental Farmland abandonment Landholding corporations Comparative disadvantage Japan

a b s t r a c t Japanese agriculture has stagnated since the late 1980s, setting in motion a steady process of farmland readjustment. The notable consequence is an increase in the number of people who quit working on the land and a concurrent decline in cultivated farmland, a process which is often balanced by the development of land rental markets. However, since the total areas of rented land and abandoned farmland have increased in parallel, the contribution of land rental as a countervailing force may be underappreciated. And indeed, a cross-sectional observation paints quite a different picture: a negative correlation between the land rental ratio and the farmland abandonment ratio at the prefecture level. Our econometric analysis suggests that it is not so much farm households but rather non-farm household entities that are deeply involved in the appearance of this relationship over the past two decades. In particular, non-farm household producers play an important role as lessees not only by facilitating land market development but also by pre-empting farmland abandonment. Land-holding non-farm households, another relevant group of actors, are significant contributors to the supply side of farmland but their land also accounts for around half of the total abandoned area. Our analysis also offers unambiguous evidence that a former institution, namely Landholding Corporations, serve an intermediary role in facilitating the exchange of land use rights. However, although these corporations were expected to help reverse farmland abandonment, the limited resources granted by the government tend to make them averse to the kind of risky transactions that are often associated with promoting neglected or unfavorable land. © 2016 Elsevier Ltd. All rights reserved.

1. Introduction This paper sheds empirical light on the dynamics of agricultural land use for the past two decades in Japan. This is a period in which Japanese agricultural output began to stagnate, prompting realignment of land use and government intervention to diversify farm ownership and management. There is a significant body of literature that addresses similar phenomena in other countries and regions, particularly the development of agricultural land rental (e.g. Deininger and Jin, 2005; Deininger et al., 2012; Ito et al., 2016; Jin and Deininger, 2009; Jin and Jayne, 2013; Kimura et al., 2011; Vranken and Swinnen, 2006; Zhang et al., 2004) and the problem of farmland abandonment (e.g. Alix-Garcia et al., 2012; Baumann et al., 2011; Gellrich and Zimmermann, 2007; Prishchepov et al., 2013; Renwick et al., 2013; Sikor et al., 2009; Terres et al., 2015). However, little attention has been paid to the interplay between land rental and farmland abandonment. This paper aims to fill this

∗ Corresponding author. E-mail address: [email protected] (J. Ito). http://dx.doi.org/10.1016/j.landusepol.2016.06.020 0264-8377/© 2016 Elsevier Ltd. All rights reserved.

gap in the literature by exploring their simultaneous determination. Examining agricultural land use and the relevant policy issues from this viewpoint has important policy implications not only for Japan but also for other emerging Asian economies, in which agriculture is losing its comparative advantage due to economic growth under meager factor endowments for crop production (Fan and Chan-Kang, 2005; Otsuka, 2013). The difficulty faced by analysts trying to understand agricultural land use realignment in post-industrial countries lies in isolating the contribution of countervailing processes in the context of long-term structural decline. For example, a cursory observation of the increasing trend in farmland abandonment despite parallel increases in land rental might be understood as a failure of rental markets to spur productive land acquisitions. A closer look at these data at the prefecture level in Japan, however, reveals that the land rental ratio and farmland abandonment ratio are actually negatively correlated. Furthermore, our econometric analysis suggests that it is the dynamic entry of non-farm household entities that are implicated in the appearance of this relationship. A complementary role was played by the government and other facilitating organizations, such as Landholding Corporations (LHCs), which were

J. Ito et al. / Land Use Policy 57 (2016) 582–593

14

25

12 20 10 15

8 6

10

4 5 2 0

0 1960

65

70

75

80

85

90

95

2000

05

10

Output value of farming at const. prices (1,000 billion yen) Output value of crop farming at const. prices (1,000 billion yen) Ratio of land rental area (%, right axis) Ratio of farmland abandonment area (%, right axis) Land rental price at const. prices (1,000 yen/10a, right axis) Fig. 1. Shrink in Japanese agriculture. Source: Statistics for Agriculture, Food-Related Industries (MAFF), Production Costs of Rice and Wheat (MAFF). Note: The output values and land rent are moving averages over three years. They are pegged to real values at 2005 constant prices. Land rental price is nominal rental price deflated by the rice price index.

designed to lower transaction costs and information asymmetry (Deininger and Jin, 2005; Ito et al., 2016; Skoufias, 1995; Yao, 2000). This follows from the general observation that the transition from the scattered, smallholdings typical of Japanese rice farming1 to alternative models of management is unlikely to be unambiguous and linear, especially in light of the contradictory history of agricultural policy since World War II. This paper captures an important dimension of this process by illuminating the contemporary role of land markets in countering land abandonment and stimulating the entry of non-farm household into agriculture. The next section provides the context of Japanese agricultural land institutions and policy, and presents basic statistics about the work force and land use in Japanese agriculture. The third section contains an overview of the data processing undertaken and develops a model of the determinants of land rental and farmland abandonment. The fourth section presents the estimation results of our model and decomposition analysis. Finally, the fifth section concludes with a brief summary of our results and provides some policy recommendations. 2. Land policy and land use in Japan The year 1970 witnessed a turning point in Japanese agricultural policy. The amendments made to the Agricultural Land Act (ALA), which had been in place since 1952, represented a major departure from the principle of owner-cultivators toward the promotion of large-scale farming through land rental market development. At that time, there was broad consensus that countermeasures were necessary to address the persistence of small-size individual farms, which were seen as detrimental to balanced income growth between urban and rural areas. The two focal points of the amendments were a redesign of the land scheme and the establishment of facilitating organizations, measures that the government

1 The national average farm size in 2010 is 1.33 ha with the inclusion of data from Hokkaido, a prefecture with an exceptionally large average farm size of 18.52 ha. For the portion of Japan that excludes Hokkaido, known as Tofuken, the average farm size drops to 0.98 ha (data from the Census of Agriculture and Forestry, or CAF).

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hoped would encourage rural landholders who were already earning enough income from off-farm jobs to transfer their land use rights to more entrepreneurial actors. Policymakers of the day envisaged that an increase in the supply of land was absolutely vital to the development of land exchange systems. Meanwhile, there was a great demand for agricultural land because the prices of farm products, including paddy rice, were rising more rapidly than those of farm production materials. In addition, the growing demand for land in this period was spurred by a baby boomer generation that had begun to succeed farm management of their households. The situation changed after the late 1980s, when Japanese agriculture began to stagnate. This is observable in Fig. 1, which illustrates the output value of agricultural production at constant prices, the ratio of land rental area, the ratio of farmland abandonment area, and the real rental price for the past half century. Concurrent with declining output values of farming and crop farming since 1985,2 the rental price also shows a long-term downward trend. In the same period, the farmland abandonment ratio rose sharply, reaching 8.6% in 2010. Although not shown in Fig. 1, farm product prices have declined relative to factor input prices since the mid-1980s and the land use intensity rate fell below 100% for the first time in 1994. The driving force behind these phenomena has undoubtedly been the increasing comparative disadvantage of Japanese agriculture associated with the concomitant agricultural market liberalization. One of the impacts, which will be described in more details below, was that the number of people who quit working on the land increased and the cultivated farmland area decreased.3 Here, however, it is important to recognize that certain farm holding characteristics, such as ownership structure (family vs. corporate) and activity type (off-farm income and/or non-commercial farming), contribute differently to the supply and demand for farmland rental. Differentiating the relative contribution of these alternative actors is a significant contribution of this paper. Overall, the ratio of land rental area to the total arable land is on the rise (Fig. 1), with land usufruct accumulation in favor of large-scale farms. This is considered a positive sign, because land transfer from small- to large-scale farms has an efficiencyenhancing effect in the context of Japanese agriculture (Hayami and Kawagoe, 1989; Kuroda, 1989).4 2.1. Goals of land policy Land reform after the World War II and the Agricultural Land Act (ALA) enacted in 1952 laid the foundation of the Japanese agricultural land system. The ALA stipulates that agricultural land shall be predominately owned by cultivators and that legal ownership of farmland should, in principle, be confined to farm households (McDonald, 1997). At that time, it was believed that assuring land and protecting the rights of tillers and cultivators through direct state regulation were conducive not only to social justice but also to the enhancement of agricultural production.5 As a result, homo-

2 The overall value of farming includes not only crop farming, but also livestock output and agricultural service provision. 3 This paper views the widespread abandonment of farmland as an undesirable phenomenon from the perspective of farm production; from the perspective of the environment, the positive and negative effects are considered in a more multifaceted manner in the relevant literature (Gellrich and Zimmermann, 2007; Terres et al., 2015). 4 This type of land movement or “reverse tenancy” configuration became prevalent in some transition economies soon after farmland privatization. Its impact, however, has not been uniformly positive in all contexts. According to Amblard and Colin (2009) and Koester (2005), this type of structural change has a negative effect on production efficiency and social equity. 5 Whether the reform contributed to enhance agricultural production is still controversial because there are few empirical studies that support this assertion (Kawagoe, 1999).

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more prevalent than land title transfers.7 Consequently, the ALUIL is often metaphorically referred to as a “bypass” helping to circumscribe the more restrictive ALA for facilitating land rights transfers. We cannot see from this figure to what extent usufruct transfer contributed to the improvement of the production structure at the individual farm level because the data include contract renewal. However, it is estimated that the total accumulated area on which usufruct has been established by the ALUIL reached 600,000 ha in 2005, or about 70% of the total rental area (Shogenji, 2008).

10,000ha

18 16 14 12 10 8

2.2. Landholding corporations

6 4 2 0 1970

75

80

85

90

95

2000

05

Transfer of title by ALA

Transfer of title by ALUIL

Land rental by ALA

Land rental by ALUIL

10

Fig. 2. Land rights transfers. Source: Land Right Transfer and Farmland Conversion (MAFF). Note: Data for areas that are unrelated to the improvement of production structure, such as farmland transaction through inheritance, are not included in these figures.

geneous and small scale owner-operators based on family labor became established across rural Japan. However, with the rapid economic growth starting in the late 1950s, the principle of owner-cultivators was confronted with serious economic contradictions relating to the small size of individual farms created by the ALA. An income gap emerged between farmers and urban workers, which necessitated countervailing policy measures. To this end, the Basic Law of Agriculture enacted in 1961 emphasized that the income imbalance stemming from the small size of individual farms should be overcome by encouraging economically viable farms or promoting collaborative efforts among farm households. The concept of the Basic Law materialized more concretely in the Revised Agricultural Land Act in 1970, which aimed at consolidating small-scale farms into sufficiently large size farms with the help of land rental markets. Previously, under the ALA, tenant rights were highly protected, which placed landowners at high risk of being unable to regain their own land, which discouraged them from leasing out their land to others. In order to remedy this, amendments to the ALA granted landowners relatively greater rights, thereby encouraging them to part with land use rights if they were willing.6 Subsequently, various institutional reforms in line with this policy direction were implemented. The Agricultural Land Use Improvement Project started in 1975, which was formalized as the Agricultural Land Use Improvement Law (ALUIL) in 1980, allowed short-term, non-renewable leases to be approved (McDonald, 1997). The ALUIL was also established with the aim of facilitating land exchange further, and thereby improving the agricultural production structure. Fig. 2 illustrates the extent of land title and land use rights transfers by area between 1970 and 2010. Since the enactment of the ALUIL in 1980, land title and land use rights (usufruct) transfers have been pushed simultaneously under the framework of the ALA and ALUIL. However, it is evident from Fig. 2 that usufruct transfers, carried out under the ALUIL rather than the ALA, are increasingly

6 Under the original ALA, permission of the prefectural governor was necessary to dissolve a lease contract even if it was terminated by consent. From 1970, it was no longer required for lease contracts more than ten years old, or if tenant and landlord mutually agreed (McDonald, 1997). It can be said that the land system was re-designed in favor of landlords rather than tenants.

In order to support the government’s promotion of land rental development, the Farmland Exchange Promotion Project was launched in 1970, establishing public sector Landholding Corporations (LHCs) to facilitate land transactions. In 1993, the Project was legislated under the Agricultural Management Framework Reinforcement Act and subsequently changed its title to the Farmland Consolidation Promotion Project in 2009. Eventually, LHCs were replaced by Farmland Consolidation Banks in 2014. Despite their long history, it remains to be examined empirically to what extent the LHCs contributed to land rental development and deterred farmland abandonment. Although LHCs transformed their organizational structure in response to the necessities of the times, their overriding policy goal remained largely unchanged: they focused on improving farmland use efficiency by facilitating land rights transfers. More specifically, LHCs served as intermediate agents in land transactions by purchasing or renting land from farm households that had ceased farming or reduced their farm operational size, holding this land temporarily, and subsequently selling or renting it out to farm households that intended to enlarge their farm size. Since the establishment of the original Farmland Exchange Promotion Project, LHCs have played an important role in transferring land rights exclusively to farm households that have sufficient work force and farm scale.8 Their establishment was the first attempt in Japanese agricultural policy to facilitate the development of land rental markets. Besides consolidating farmland to competent farmers, other potentially positive consequences of LHC involvement in land transactions have been documented (Shimamoto, 2007). The first advantage is that LHCs helped to reduce transaction costs associated with land exchange; this includes the costs of information gathering, contract negotiation, and subsequent rental monitoring and enforcement.9 Thus, land exchanges mediated by LHCs were more likely to be facilitated. The second advantage is that LHCs pooled land for exchanges, which prevented mismatches from occurring between purchasers (lessees) and sellers (lessors). The third advantage of LHC involvement is that new entrants were better abler to initiate their farm business by borrowing funds from LHCs for purchasing or renting land.10 While the advantages have been persuasive in attracting support for LHCs across Japan, anecdotal evidence has highlighted some problems as well. One major challenge had to do with recon-

7 This is consistent with the argument that land rental markets may be more effective than sales markets in moving the distribution of operational holdings closer to the optimum (Deininger and Feder, 2001). 8 At the time when LHCs were established, they were supposed to redistribute land to farm households whose operational size after the redistribution would exceed the average size in the region. 9 The presence of transaction costs drives a wedge between participants in land exchanges through increasing the rent paid by lessees and decreasing the proportion of rent received by lessors, as explained by Deininger and Jin (2005) and Skoufias (1995). 10 Besides the intermediation of land exchange, LHCs were in charge of farmland trust enterprises, investment in agricultural production corporation, and training programs to support new entrants into the farm business.

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and the land rental ratio in 2000 and 2009. A positive correlation suggests that the higher the LHC density, the larger the land rental ratio is. Yet, this is not a natural consequence because there is much land rights exchange occurring without the involvement of city-level LHCs. According to Shimamoto (2007), LHCs mediated only 15.1% of land exchange in 2005 (on a basis of land area). This suggests that, while LHCs and other facilitators of land rights exchange12 can be significant players, the overall incentives and regulatory framework are the primary drivers.

Land rental ratio (%) 60 50 40 30

2.3. Work force and land use in agriculture 20 10 0 0

0.2

0.4 LHC density 2000

0.6

0.8

2009

Fig. 3. LHC density and the land rental ratio.

ciling their social mandate to reverse farmland abandonment with a finite budget that limits them to pursuing only the most viable investment. In practice, LHCs did not sell or rent out land that they previously bought or rented from farm households until they could find suitable long-term purchasers or lessees of the land. In cases where land prices or rental prices stagnate or decline throughout the period that LHCs were holding the land, they could suffer financial losses.11 Losses incurred by LHCs as part of their duties to counteract farmland abandonment were supposed to be compensated for by the government, but the budget constraints compelled them to avoid purchasing or renting land for which new cultivators could not easily be found. Unfortunately, this tends to exclude farmland that has, for a variety of reasons, already become abandoned. Considerable expectations were heaped on LHCs as intermediate agents given the increasing prevalence of farmland abandonment across the country but their limited budget ultimately discouraged them from being actively involved in the risky land transactions that were necessary to reverse farmland abandonment. This leads to the question of who, then, is to bear the costs of high-risk transactions, such as the conversion of abandoned farmland back to active cultivation? At any rate, this poses an important empirical question: To what extent did the presence of LHCs in the land market have a real impact on farmland abandonment? There were two types of LHCs: those established at the prefecture level (a lone LHC in the prefecture) and those at the city level. LHCs at the prefectural level mainly mediated buying and selling of farmland, while those at the city level were principally engaged in usufruct transfer. City governments, public corporations founded by city, or agricultural cooperatives were qualified to be city level LHCs. The number of such LHCs was 66 in 1990, and reached 618 in 2000 among 3229 cities nationwide. However, this number declined to 558 in 2009, when the number of cities was reduced to 1821 due to a large-scale municipal merger in Japan. We define the LHC density as the number of LHCs at the city level divided by the total number of farm households (FHs) for each prefecture. Fig. 3 illustrates the relationship between the LHC density

11 LHCs occasionally paid rent to lessors in a lump sum, which was then reimbursed by lessees to the LHCs. However, if the land rent declined, the lessees often asked the LHCs for a discount of the predetermined land rent. In this case, LHCs had to compensate for the difference.

In order to illustrate the basis upon which incentives for exchange in land use rights are formed, we underline relevant aspects of the work force and existing land use patterns. As a reference point, Table 1 presents the basic statistics about labor and land in Japanese agriculture over the period 1990–2010. One of the most demonstrative statistics here is the contrast between the sharp decline in the number of FHs (from 3.83 to 2.53 million over the past twenty years) and the increase in the percentage of non-commercial farm households (NCFHs)13 that depend largely on off-farm income for living (from 22.5 to 33.5% over the same period). And of the FHs that are still operating, rice-farming FHs which are relatively well-subsidized by the government, account for a large fraction.14 Paralleling the decline in the absolute number of FHs, the agricultural work force has decreased by more than 40% and the core work force, representing dedicated members of family farms, also decreased by close to 30%. The fact that FHs and the agricultural work force have declined so precipitously is suggestive of the well-known trend in Japanese agriculture, particular in rice production, of aging farmers and a chronic shortage of successors. Although this means that many FHs eventually cease production, most families do not part with their land ownership even after they quit working on the land, which leads to a weak land sales market.15 This, in turn, drives a further trend, in which aging FHs without successors eventually choose to stop farming, with most electing to rent out their farmland to others. Such households are referred to as land-holding non-FHs (LHNFHs),16 the number of which has increased significantly over the past two decades, reaching about half of total farm households in 2010. There are important social, economic and regulatory reasons for this trend. To begin with, farmers often regard farmland as a family asset, and therefore resist the urge to sell. This means that farmland is either not available or affordable for farmers who are willing to expand their farm size, which limits consolidation in favor of land rental. The dynamism of the land market is also limited because land title transfers for non-farm use are strictly prohibited by the ALA and its related law. The overall result is that contemporary Japanese agriculture is characterized by, on the one hand, a consistently strong majority of small individual farms and, on the other, a jumble of other land rights schemes. The former is relatively simple to character-

12 There are other organizations besides LHCs that have taken the initiative in land rights transfer, such as informal rural communities, the local Agricultural Commission, the local agricultural cooperatives, and the local Land Improvement District. 13 NCFHs are farms with cultivated land under management of less than 0.3 hectares that had an income of under 500,000 yen from selling agricultural products during the year prior to the surveyed period (data from the CAF). 14 The government has long been trying to maintain self-sufficiency of rice through market intervention, which has helped the extremely large cohort of small-scale rice producers to continue farming. In fact, rice-growing FHs represented 87% of the commercial farm households in 2010. 15 The exception here is Hokkaido, which has different land-holding patterns than the rest of Japan. 16 LHNFHs are households that possess five ares (0.05 ha) or more of cultivated and/or abandoned cultivated land (data from CAF).

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Table 1 Basic statistics of Japanese agriculture. 1990

1995

2000

2005

Households and labor Farm households, FHs (million) Ratio of non-commercial FHs, NCFHs (%) Work force in agriculture (million) Core work force in FHs (million) Land-holding non-FHs, LHNFHs (million) Ratio of FHs with less than 1 ha (%) FHs with more than 5 ha in Tofuken (1,000) Non-farm household producers, NFHPs (1,000)

2010

3.83 22.5 4.82 2.93 0.78 69.8 26.4 7.5

3.44 23.0 4.14 2.56 0.91 69.7 35.7 6.4

3.12 25.1 3.89 2.40 1.10 70.0 43.4 7.5

2.85 31.1 3.35 2.24 1.20 71.2 50.4 13.7

2.53 35.5 2.61 2.05 1.37 72.1 57.7 19.9

Land use Arable land area (million ha) Abandoned farmland area (10,000 ha) Ratio of abandoned area (%) Ratio of abandoned area owned by LHNFHs (%) Land rental area (10,000 ha) Land rental ratio (%) Ratio of rental area provided by LHNFHs (%) Ratio of rental area cultivated by NFHPs (%)

5.24 21.7 4.1 30.5 43.9 8.4 – –

5.04 24.4 4.8 33.8 54.6 10.8 – –

4.83 34.3 7.1 38.7 67.9 14.1 57.1 –

4.69 38.6 8.2 42.1 83.1 17.7 59.9 16.2

4.59 39.6 8.6 45.9 107.0 23.3 61.4 28.8

Source: Census of Agriculture and Forestry (MAFF), Crops Statistics (MAFF). Note: Arable land area includes abandoned farmland area. Land rental ratio measures land rental area divided by arable land area. Tofuken is the national total except Hokkaido prefecture.

ize: FHs with less than one hectare account for around 70% of the total. For the latter, the myriad other land use schemes include NCFHs, large FHs, non-farm household producers (NFHPs), and land abandonment. The increase in NCFHs, discussed previously, is suggestive of the strategic response to the relative increase of the non-farm wage rate: farmers decrease their participation in commercial agriculture. The number of larger FHs, or those owning or renting more than five hectares, has doubled from 26,000 in 1990 to 58,000 in 2010, which suggests that land consolidation is starting to pick up. NFHPs, which are incorporated groups producing various crops, have also increased since 2000, reaching about 20,000 in 2010. Although most NFHPs were farmer groups specializing in livestock production in 1990, the majority at present grow crops. According to Hashizume (2012), this is due to the fact that many initiatives under the framework of “group farming in rural communities” recently incorporated their businesses and started to rent farmland for rice and other crops.17 Outside of the categories just described is the growing problem of land abandonment in Japan, which requires more in-depth discussion. The arable land area decreased from 5.24 to 4.59 million hectares over the past twenty years. While this was mainly due to conversion of farmland to other uses, what deserves special mention is that the area of abandoned farmland also increased over the past two decades to 8.6% of the total arable land area.18 In particular, the ratio of abandoned farmland area owned by LHNFHs increased steadily during the period 1990–2010, reaching 45.9% in 2010. The corollary of this is that the land rental area more than doubled from 0.439 million hectares in 1990 to 1.07 million in 2010, with the rental ratio increasing from 8.4% to 23.3%. By 2010, LHNFHs were also supplying more than half of the rental area. And NFHPs have increasingly represented a large share of the renters; the ratio of rental area cultivated by NFHPs increased markedly from 16.2% in 2005 to 28.8% in 2010. Through the actions of various parties, land rental appears to be a mitigating factor in land abandonment. This is supported

17 The Farm Income Stabilization Program that started in 2007 subsidizes incorporated farms on the condition that they participate in the rice-crop diversion program. This gives voluntary group farming organizations an incentive to establish an incorporated body, through which they are qualified for renting land for dual rice-crop cultivation. 18 Abandoned land is defined as land that has not been cultivated for more than a year and there is no indication that it will be cultivated over subsequent years (data from the CAF).

Farmland abandonment ratio (%) 25

20

15

10

5

0 0

10

20 30 40 Land rental ratio (%) 2000

50

60

2010

Fig. 4. Correlation between land rental and farmland abandonment.

by the data in Fig. 4 illustrating the relationship between the land rental ratio and farmland abandonment ratio of all prefectures in 2000 and 2010. The correlation coefficients in 2000 and 2010 are −0.43 and −0.50, respectively. This is consistent with results from before and during this period as well: the comparable figures for 1990, 1995, and 2005 are −0.23, −0.29, and −0.50, respectively. Although this conclusion seems plausible, it is important to step back from these results because they are not definitely proven and the mechanisms underlying this correlation still need to be unpacked. Needless to say, and especially because land rental and abandonment are endogenous processes, correlation does not imply causation. Furthermore, the relationship between the land rental markets and farmland abandonment is not consistent across the country and between sectors. In order to shed light on the dynamic and complicated reality of Japanese agricultural land use, we explore in the following sections some of the mechanisms that generate this relationship. To begin, let us take a closer look at land exchange in the context of farm structure and size. Looking first at the characteristic

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Table 2 Dynamic aspects of lessees’ behavior by farm size in Tofuken.

Less than 1 ha 1–2 2–3 3–5 5–10 More than 10 ha

Ratio of FHs that increased rental area for five years (%)

Ratio of FHs that decreased rental area for five years (%)

1990

1995

2000

1990

1995

2000

8.1 16.7 22.2 37.7 54.7 41.2

8.8 17.7 25.8 38.5 52.9 36.8

6.7 15.7 23.7 36.0 48.6 31.4

23.9 13.4 13.6 13.3 11.1 6.1

23.2 12.3 13.1 13.5 10.8 4.6

28.5 14.2 15.4 15.6 10.1 2.9

Source: Census of Agriculture and Forestry (MAFF). Note: Data in 2005 are not available. Table 3 Dynamic aspects of lessors’ behavior in Tofuken.

Number of CFHs (10,000) Ratio of CFHs that have not leased out their farmland for five years (%) Number of NCFHs (10,000) Ratio of NCFHs that have leased out their farmland for five years (%) Number of FHs that quit working for five years (10,000) Ratio of NCFHs (%)

1990

1995

2000

264.8 79.1 59.1 86.2 42.8 55.9

237.5 76.1 54.7 91.1 42.2 55.0

204.8 72.5 54.8 91.5 44.0 50.6

Source: Census of Agriculture and Forestry (MAFF). Note: Data in 2005 are not available. Table 4 Descriptive statistics.

Ratio of RCs remotely-located Ratio of RCs located in preserved land Ratio of paddy field Ratio of improved farmland Farm product price at constant prices Ratio of FHs with more than 5 ha (%) Ratio of core work force in FHs Ratio of FHs with successors Ratio of NFHPs Ratio of FHs with small size Ratio of LHNFHs LHC density

Mean

Overall SD

Between SD

Within SD

0.068 0.766 0.636 0.451 1.164 0.995 0.315 0.640 0.361 0.446 0.260 0.166

0.066 0.148 0.223 0.212 0.130 1.240 0.113 0.107 0.355 0.124 0.085 0.172

0.060 0.142 0.225 0.209 0.000 1.089 0.096 0.061 0.186 0.123 0.050 0.130

0.028 0.045 0.011 0.047 0.130 0.610 0.059 0.089 0.303 0.023 0.068 0.115

of farm size, Table 2 shows the extent to which FHs of different scales increased or decreased their rental area during the period 1990–2000. The left-most column of the table shows that only 8.1% of FHs with an operational size less than one hectare increased the rented land area between 1990 and 1995, while, at the other extreme, 54.7% of FHs between 5–10 ha did so during the same period. A similar trend is observed for 1995 and 2000. In contrast, the right part of the table shows that the ratio of FHs that decreased the rented land area over various 5-year periods is higher for FHs with smaller landholdings. This suggests that smaller farms are less reliant on or less dynamic in regards to farmland rental. To compare on a basis of farm structure, Table 3 shows the behavior of various lessors. For instance, of the 2.648 million commercial FHs in 1990, 20.9% leased out their land to others between 1990 and 1995. In contrast, of the 0.591 million NCFHs in 1990, no less than 86.2% leased out their land to others in the same period. While this may suggest that non-commercial farm structure encourages rental, it should also be noted that, of the 42,800 farms which ceased operation between 1990 and 1995, NCFHs accounted for 55.9%. Although not shown in this table, the remainder was mostly small-scale FHs. So while both NCFHs and small FHs are roughly equal as sources of land abandonment, NCFHs are relatively more proactive in diverting land to rental area. In general, all of this suggests that FHs with a large operational size rent more land than those with small size, and NCFHs who are discontinuing farming tend to become more active lessors of

farmland. Although the problem of land abandonment by small FHs persists, the prevailing land rental configuration appears to have two advantages: (1) it has little adverse impact on equity because NCFHs who part with their land use rights have usually earned enough income from off-farm activities to afford ceasing self-production, and (2) it has an efficiency enhancing effect which allows large farms, through rental expansion, to achieve even higher economies of scale. 3. Model and data 3.1. Regression equations Let Z01 (≡ Y0 ), Z02 , Z03 , and Z04 be the national or prefectural total area of owned land, land being rented, land rented out, and land abandoned by farm households, respectively.19 Further, let Z11 and Z12 be the total area of land rented out and abandoned land for LHNFHs, respectively. It is safe to assume that NFHPs work on rented land only, the area of which is represented by Z2 . The supplydemand equilibrium of rental land is expressed as Z03 + Z11 = Z02 + Z2 (≡ Y1 ), while the total area of abandoned land is written as Z04 +

19 In some cases, owner-cultivators hire other farmers or farming organizations to do agricultural jobs on their land. This paper does not include this kind of custom work contract in the model due to the paucity of data.

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Z12 (≡ Y2 ). The total area of arable land that includes abandoned farmland, Y¯ , is equal to Y0 + Y1 + Y2 , Thus, we have y0 + y1 + y2 = 1 as an identity equation, where yi = Yi /Y¯ (i = 0, 1, 2), which means that two of three variables are independent. The land rental ratio, y1 , depends on demand for, and supply of, farmland. Demand for land arises from farm households and NFHPs (Z02 + Z2 ). It is understood that a large part of Z02 is rented by FHs with relatively large operational size, as Table 2 indicates. Apart from this, FHs with a core work force or farm successors are thought to also have a strong demand for farmland because many of them earn their livelihood with agriculture. Demand for land by NFHPs, Z2 , increased considerably over the past several years, as reported in Table 1. Some farm households and LHNFHs are major contributors to the supply side of farmland (Z03 + Z11 ). As shown in Table 3, the main source of Z03 originates from small farm households that include NCFHs. It should be noted, however, that some part of the farmland possessed by these households is a source of farmland abandonment (Z04 + Z12 ). This paper assumes a linear model containing two structural equations at time t:

where ˘ = and vt = The explanatory variables used in the parametric model are broadly classified into three categories: control factors, socioeconomic factors, and an institutional factor. The control factors include locational characteristics of rural villages, the legislative typology of farmland, distinction of rice and non-rice fields, and conditions of improved farmland. One of the socioeconomic factors that is possibly associated with y1 and y2 is agricultural output prices. A rise in prices will increase demand for land of all farmers and NFHPs, and therefore the effect on y1 is not determined theoretically. In contrast, a rise in prices, other things being equal, will forestall farmland abandonment. Other socioeconomic factors related to the demand for, and supply of, farmland depend on farmer and farm household characteristics. The institutional factor pertains to organizations that mediate land exchange. It is considered that LHCs play an important role in facilitating land rental, although their effect on farmland abandonment is not known for certain.

outlying rural communities are found in the prefecture. The variable “ratio of RCs located in preserved land” is the ratio of RCs that are located in a region that is identified by the government as an agricultural development zone. Conversion of farmland for non-farm uses in this zone is strictly prohibited by the Act on the Establishment of Agricultural Promotion Areas. The variable “ratio of paddy field” is equal to paddy field area divided by the total arable land area. The data source is the database Crops Statistics (MAFF). The variable “ratio of improved farmland” is the percentage of improved farmland that is available from the Land Use Base Investigation (MAFF). The variable “farm product price at constant prices” is computed as agricultural product price index deflated by the agricultural factor input price index. The data source is the Statistics of Agricultural Prices (MAFF). The variable “ratio of FHs with more than 5 ha” is equal to the number of FHs whose operational size is more than five hectares divided by the total number of FHs. This variable is included to capture the potentiality of large scale farms to increase demand for land. In order to avoid the endogeneity problem associated with reverse causality between the variable and the land rental ratio, this paper uses the variable with a time lag of five years.20 The variable “ratio of core work force in FHs” is equal to the number of core workers in family farms under 65 years of age divided by the total work force in family farms. Based on our inference that older farmers are more likely to reduce their management responsibility in the near future even if they are core workers, we excluded the number of core workers of age 65 and above. The variable “ratio of FHs with successors” is equal to the number of FHs that have successors in agriculture divided by the total number of FHs. The variable “ratio of NFHPs” is equal to the number of NFHPs multiplied by 100 divided by the total number of remaining farm types (FHs plus NFHPs). The variable “ratio of FHs with small size” is equal to the number of FHs whose operational size is less than 0.5 ha plus the number of NCFHs divided by the total number of FHs. This variable is included to capture the possibility that an increase in the number of small scale farms including NCFHs (which are assumed to be small) helps land rental market to develop through farmland supply. However, reverse causality is likely, as is the case with the “ratio of FHs with more than 5ha”. Thus, in this paper we use this variable with a time lag of five years. The variable “ratio of LHNFHs” is equal to the number of LHNFHs divided by the total number of FHs plus LHNFHs. The computation method of “LHC density” has already been explained in Section 2.21 The data on the number of the citylevel LHCs were collected by the authors. The Census provides data on land rental area for each prefecture only for 2005 and 2010. However, it turned out that the figure can be approximated by adding together rented land area of FHs and NFHPs that are available for the period concerned.22 The computation method for the farmland abandonment ratio has been provided previously.

3.2. Data

3.3. Endogeneity of “LHC density”

In this paper, we use prefecture-level data from 1990 to 2010 to estimate equation (2). The data source employed for the analysis is the Census of Agriculture and Forestry (CAF), unless otherwise noted. The Census is taken every five years so that data of 1990, 1995, 2000, 2005, and 2010 are available. Since Hokkaido prefecture, whose production structure is significantly different from other prefectures, is excluded from analysis, the number of observations for each year is 46. Table 4 presents descriptive statistics of data used for explanatory variables. The variable “ratio of rural communities (RC) remotely-located” is the ratio of RCs that are located in the region with a travel time of more than one hour from Densely Inhabited Districts (DIDs) by normal means; the larger the value, the more

Acknowledging that there is a possibility that the establishment of LHCs at the city level depends on existing land rental development and/or farmland abandonment in the region, we have to take

B y t +  x t = ut

(1)

where B and  each denotes a matrix of coefficients, while y t , xt and ut denote (y1t , y2t ), exogenous variables and error terms that are serially independent, respectively. The negative correlation between y1 and y2 illustrated in Fig. 4 is generated by the structural relationships described above. We generally have to choose exogenous variables carefully in order for equation (1) to be identified. However, we are able to circumvent the identification problem via the estimation of the following reduced form equation: y t + ˘ xt = vt −B−1 

(2) B−1 ut .

20 Considering the fact that land use rights duration usually lasts five to ten years, we tested the variable with a time lag of five and ten years. It was confirmed that there is no significant difference between the two estimation results. 21 In 2010, the LHCs were reorganized and changed their title to the Farmland Consolidation Promotion Organizations, with the consequence that the number of city-level LHCs becomes incomparable. Thus, we use the number of LHCs in 2009 as a substitute for that in 2010. 22 Compared to the total area of rented land, the sum of rented land area of farm households and NFHPs is overestimated by 0.8% in 2005 and 0.6% in 2010.

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Table 5 Estimation results of the first and second stages (fixed effects model). LHC density

Rental ratio (y1 )

Tobit

SUR

LHC density

0.133*** (2.60) −0.010 (−0.06) 0.173* (1.65) −0.038 (−0.57) 0.335*** (4.84) 0.130 (0.44) −0.006 (−0.58) −0.285** (−1.99) −0.009 (−0.08) −0.009 (−0.21) −0.301** (−2.09) 1.009*** (5.20) –

Predicted residuals

–

Time

−0.028 (–0.85) 230 −111.9 – – –

AC density Ratio of RCs remotely-located Ratio of RCs located in preserved land Ratio of paddy field Ratio of improved farmland Farm product price at constant prices Ratio of FHs with more than 5 ha (%) Ratio of core work force in FHs Ratio of FHs with successors Ratio of NFHPs Ratio of FHs with small size Ratio of LHNFHs

Number of observations Log-likelihood R2 Correlation of error terms Breusch-Pagan test (p-value)

Abandonment ratio (y2 )

Owned land ratio (y0 )

–

–

–

−0.020 (−0.46) −0.062*** (−2.61) 0.185** (2.46) 0.022 (0.55) −0.062** (−2.00) 0.005*** (2.90) 0.113*** (2.97) 0.005 (0.31) 0.094*** (15.24) 0.252*** (3.89) 0.326*** (4.96) 0.093** (2.14) −0.080* (–1.80) −0.004 (–1.20) 230 – 0.980 −0.326 0.000

0.076*** (2.58) −0.053*** (−3.36) 0.200*** (4.01) −0.045* (−1.71) −0.056*** (−2.70) −0.012*** (−9.43) −0.112*** (−4.45) −0.057*** (−5.71) −0.038*** (−9.37) 0.230*** (5.36) 0.304*** (6.97) −0.011 (−0.37) −0.010 (–0.34) 0.002 (1.13) 230 – 0.977

−0.055 (−1.24) 0.116*** (4.83) −0.385*** (−5.11) 0.023 (0.58) 0.119*** (3.77) 0.006*** (3.35) −0.001 (−0.01) 0.052*** (3.46) −0.056*** (−8.99) −0.482*** (−7.43) −0.630*** (−9.55) −0.082* (−1.89) 0.089** (2.02) 0.001 (0.45) 230 – – – –

Note: Numbers in parentheses denote z-values. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%, respectively.

the endogeneity of “LHC density” into consideration for the estimation of equation (2). In order to correct for a potential bias arising from the endogeneity, we employ a control function approach. In the first stage, “LHC density” is regressed on exogenous variables and an excluded instrument. In the second stage, we regress y on x, “LHC density” and the predicted values of residuals obtained from the first stage regression. A null hypothesis that the coefficient on this residual term is equal to zero is the regression-based Hausman test for the exogeneity of “LHC density” (Wooldridge, 2002). An appropriate excluded instrument here would be one that is correlated with “LHC density” and at the same time orthogonal to the error terms of the reduced form equations, but do not directly affect y1 and y2 (Cameron and Trivedi, 2005). The instrument we selected is “agricultural cooperative density (AC density)”, which is measured using the total number of branches and sub-branches of agricultural cooperatives divided by the total number of FHs for each prefecture. The number of AC branches is available in the database Statistics on Agricultural Cooperatives (MAFF). At the time when LHCs at the city level were established in the late 1980s, more than 90 percent of them belonged to agricultural cooperatives. Even in 2010, agricultural cooperative LHCs account for more than 70% of the total. Thus, it is anticipated that “AC density” is positively correlated with “LHC density”. At the same time, agricultural cooperatives are not directly involved in farm production as cultivators, although they

serve as intermediate agents for land exchanges.23 Thus, it can be said that the “AC density” does not affect y1 and y2 directly, which suggests that it is qualified to be the instrument. 4. Results and discussion 4.1. Estimation results Table 5 reports the estimation results. The first column shows the Tobit model estimators because “LHC density” is left-censored (the predicted values of residuals in the first stage are estimated by OLS). The coefficient of “AC density” is positive and significant at the 1% level, which is consistent with our original expectations. Because the error terms of equation (2) are correlated in theory, we estimated the parameters using Zellner’s seemingly unrelated regression (SUR) method (Zellner, 1962). The arable land area for each prefecture is used as the regression weight for the estimation. The second and third columns of Table 5 report the estimation results of equations y1 (rental ratio) and y2 (land abandonment ratio). For reference, the estimation result of equation y0 (owned land ratio) is also shown in the fourth column. In order to remove possible estimation bias stemming from unobserved, time-invariant covariates, we consider fixed effects of geographical difference (defined by prefectures). The Breusch–Pagan test rejects

23 In theory, agricultural cooperatives are able to start farms by renting land from farmers. However, in practice, the land area managed by cooperatives under such arrangements was an insignificant 23 ha nationwide in 2005.

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Table 6 Decomposition analysis. y and x

Rental ratio y1 (%)

Abandonment ratio y2 (%)

Whole period Rental ratio (%) Abandonment ratio (%) Farm product price at constant prices Ratio of FHs with more than 5 ha (%) Ratio of core work force in FHs Ratio of FHs with successors Ratio of NFHPs Ratio of FHs with small size Ratio of LHNFHs LHC density Others Total

15.8 5.9 −0.34 1.34 −0.14 0.04 0.57 0.06 0.18 0.20 –

– – 13.3 4.6 −10.1 0.1 34.2 9.0 38.0 11.8 −0.9 100.0

– – 31.9 −26.7 26.9 −3.6 −37.4 22.1 95.0 −3.7 −4.4 100.0

1990–2000 Rental ratio (%) Abandonment ratio (%) Farm product price at constant prices Ratio of FHs with more than 5 ha (%) Ratio of core work force in FHs Ratio of FHs with successors Ratio of NFHPs Ratio of FHs with small size Ratio of LHNFHs LHC density Others Total

5.3 3.9 −0.23 0.60 −0.15 0.15 0.05 0.01 0.09 0.18 –

– – 55.6 7.0 7.2 9.6 7.8 −0.1 −2.6 27.8 −12.3 100.0

– – 0.7 −21.6 21.7 −17.9 −3.1 6.0 130.9 −31.5 14.8 100.0

2000–2010 Rental ratio (%) Abandonment ratio (%) Farm product price at constant prices Ratio of FHs with more than 5 ha (%) Ratio of core work force in FHs Ratio of FHs with successors Ratio of NFHPs Ratio of FHs with small size Ratio of LHNFHs LHC density Others Total

10.5 2.0 −0.11 0.75 0.00 −0.11 0.53 0.05 0.09 0.02 –

– – −85.0 3.6 1.1 −13.2 41.2 19.5 22.2 6.1 104.4 100.0

– – 58.5 −30.0 −0.8 35.1 −63.4 6.2 87.4 −1.2 8.0 100.0

the null hypothesis that the error terms are independent (p-value: 0.000). The coefficient of “ratio of RCs remotely-located” for the abandonment ratio is positive and significant. The finding that the abandonment ratio is higher for prefectures with a greater incidence of outlying rural communities does not contradict our original expectations. The coefficient of “ratio of RCs located in preserved land” is negative and significant for the rental ratio and abandonment ratio. The positive coefficients of “ratio of paddy field” for the two equations suggest that both the rental ratio and abandonment ratio are higher for rice fields than non-rice fields. The negative coefficient of “ratio of improved farmland” for the abandonment ratio is consistent with our original expectations in that farmland with poor conditions is less likely to be cultivated. The estimated coefficient “farm product price at constant prices” for the rental ratio is negative and significant at the 5% level, suggesting that a rise in farm product prices deters land rental development. Although the theoretical effect of farm product prices on the rental ratio was not previously discussed, this result is consistent with the argument that price-support programs for agriculture discourage land exchange, thereby exacerbating the inefficiency associated with small farm size (Otsuka, 2013). The variable “ratio of FHs with more than 5ha” which is included in the regression to capture the potentiality of large scale farms to increase their operational size is positively and significantly associated with the rental ratio. This suggests that the greater presence of large farms in the land rental market, the more actively land is transacted. In the rental ratio equation, the coefficients of “ratio of

core work force in FHs” and “ratio of NFHPs” are positive and significant at the 1% level, while the coefficient of “ratio of FHs with successors” is positive but not significantly different from zero. The “ratio of FHs with small size” and “ratio of LHNFHs” are major factors in determining the supply of farmland. Their coefficients for the rental ratio equation are positive and significant at the 1% level, suggesting that the more of these households there are, the higher the land rental ratio. The coefficient of “LHC density” is positive and significant at the 5% level, which lends support to the assertion that Landholding Corporations at the city level play an important role in promoting land exchange. In addition, the coefficient of “predicted residuals” is significant at the 10% level, suggesting that “LHC density” should be treated as an endogenous variable. The coefficient of “farm product price at constant prices” for the abandonment ratio equation is negative and significant at the 1% level, which is consistent with our initial expectations. Prices declined over the past two decades, which had the effect of aggravating farmland abandonment. The coefficients of “ratio of FHs with more than 5ha”, “ratio of core work force in FHs”, “ratio of FHs with successors”, and “ratio of NFHPs” for the abandonment ratio equation are all negative and significant at the 1% level. To compare, the sign of the coefficients of these variables is opposite of those for the rental ratio equation; this is considered to be a cause of the negative correlation between y1 and y2 (Fig. 4). The coefficients of “ratio of FHs with small size” and “ratio of LHNFHs” in the farmland abandonment ratio equation are positive and significant, suggesting that they are associated with increased abandonment (and, as discussed

J. Ito et al. / Land Use Policy 57 (2016) 582–593

591

Table A1 Estimation results, 1990–2000 (fixed effects model). LHC density

Rental ratio (y1 )

Tobit

SUR

LHC density

0.216** (2.51) −0.264 (−1.00) 0.250* (1.78) −0.152 (−1.52) 0.453*** (4.74) 1.683*** (3.46) 0.003 (0.13) −0.329 (−1.55) −0.183 (−0.79) 0.084 (0.64) −0.287 (−1.37) 1.131*** (4.17) –

Predicted residuals

–

Time

0.225*** (3.19) 138 52.7 – – –

AC density Ratio of RCs remotely-located Ratio of RCs located in preserved land Ratio of paddy field Ratio of improved farmland Farm product price at constant prices Ratio of FHs with more than 5 ha (%) Ratio of core work force in FHs Ratio of FHs with successors Ratio of NFHPs Ratio of FHs with small size Ratio of LHNFHs

Number of observations Log-likelihood R2 Correlation of error terms Breusch-Pagan test (p-value)

Abandonment ratio (y2 )

Owned land ratio (y0 )

–

–

–

−0.072* (−1.93) 0.016 (0.38) −0.039 (−0.58) 0.008 (0.17) −0.132*** (−3.09) 0.006*** (3.09) −0.026 (−0.61) 0.034*** (3.06) 0.092*** (6.88) −0.010 (−0.14) −0.015 (−0.12) 0.081*** (2.61) −0.046 (−1.49) −0.005 (−1.02) 138 – 0.985 −0.243 0.004

0.134*** (3.05) −0.045 (−0.90) 0.332*** (4.16) −0.056 (−1.02) −0.001 (−0.02) −0.014*** (−5.86) −0.058 (−1.13) −0.046*** (−3.50) −0.027* (−1.69) 0.339*** (4.04) 0.545*** (3.84) −0.066* (−1.82) 0.042 (1.15) 0.006 (0.93) 138 – 0.978

−0.062 (−1.24) 0.028 (0.50) −0.293*** (−3.21) 0.047 (0.76) 0.133** (2.32) 0.008*** (2.83) 0.084 (1.44) 0.012 (0.79) −0.066*** (−3.64) −0.329*** (−3.42) −0.530*** (−3.27) −0.015 (−0.35) 0.004 (0.10) −0.000 (−0.06) 138 – – – –

Note: Numbers in parentheses denote z-values. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%, respectively.

above, with more active land rental, a result that is consistent with their dual contribution to these to processes). The coefficient of “LHC density” is negative but not significantly different from zero for the abandonment ratio equation. A plausible explanation for this result is that LHCs’ risk aversion to financial losses discourages them from being actively committed to the facilitation of transaction for land with less favorable conditions, a potentiality mentioned above.

4.2. Decomposition analysis By employing the estimated parameters reported in Table 5, we can compute the contribution rate of changes in explanatory variables (x) for changes in the explained variables of the rental ratio and abandonment ratio (y1 and y2 ). Table 6 displays the computation results when data from all prefecture averages are used for the explanatory and explained variables. The decomposition analysis is conducted individually for the whole period (1990–2010), the first half period (1990–2000), and the second half period (2000–2010). To do so, we re-estimated the parameters of the reduced form for the two sub-periods. Appendix A Tables A1 and A2 report the estimation results. To focus the discussion on farm size and structure, we consolidated the contributions of control factors such as “ratio of RCs remotely-located”, “ratio of RCs located in preserved land”, “ratio of paddy field” and “ratio of improved farmland” into the variable “Others” (see Table 6). Overall, the land rental ratio increased from 8.6% to 24.4% during the period 1990–2010. Among the various factors, the variable “ratio of LHNFHs” makes the largest contribution to the increase in

y1 (38.0%), which is followed closely by “ratio of NFHPs” (34.2%). These two results support the initial analysis presented earlier in this paper. Also following theory in terms of sign, if not magnitude, are the positive contributions of “LHC density” and “ratio of FHs with small size” to the rental ratio, which are 11.8% and 9.0%, respectively. The contribution rate of the farm product price index, which declined by 0.34 points during the period in question, is positive 13.3%. Somewhat less significant are the variables “ratio of FHs with more than 5ha” and “ratio of FHs with successors”, which account for only 4.6% and 0.1%, respectively. The contribution of “ratio of core work force in FHs”, which decreased by 0.14 points during the period, is negative −10.1%. Together, these results lead to the broader conclusion that the contribution of farm households to land exchange is relatively marginal; instead, non-farm household entities such as NFHPs and LHNFHs, in addition to LHCs, are the major contributors to land rental development over the past two decades. Shifting to the topic of abandonment yields results that are largely in line with expectations, while also shedding light on the relative impact of various variables. Overall, the abandonment ratio increased from 5.1% to 11.0% between 1990 and 2010. The variable “ratio of LHNFHs” makes the largest contribution to an increase in y2 (95.0%). This is followed by “farm product price at constant prices” (31.9%); food prices declined by 25% during this period, which aggravated farmland abandonment. Other factors that contributed to the increase in the abandonment ratio are a decline in the “ratio of core work force in FHs” (26.9%) and the “ratio of FHs with small size” (22.1%). Meanwhile, factors that contributed to a decrease in the abandonment ratio are “ratio of NFHPs” (-37.4%) and

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Table A2 Estimation results, 2000–2010 (fixed effects model). LHC density

Rental ratio (y1 )

Tobit

SUR

LHC density

0.121** (2.12) 0.236 (1.09) 0.131 (1.03) 0.005 (0.06) 0.293*** (3.47) −1.305 (−0.90) −0.002 (−0.18) −0.478** (−2.17) −0.139 (−0.69) −0.010 (−0.23) −0.285 (−1.63) 0.940*** (3.74) –

Predicted residuals

–

Time

−0.111 (−1.31) 138 90.9 – – –

AC density Ratio of RCs remotely-located Ratio of RCs located in preserved land Ratio of paddy field Ratio of improved farmland Farm product price at constant prices Ratio of FHs with more than 5 ha (%) Ratio of core work force in FHs Ratio of FHs with successors Ratio of NFHPs Ratio of FHs with small size Ratio of LHNFHs

Number of observations Log-likelihood R2 Correlation of error terms Breusch-Pagan test (p-value)

Abandonment ratio (y2 )

Owned land ratio (y0 )

–

–

–

−0.132** (−2.12) −0.132*** (−4.19) 0.190 (1.08) 0.056 (0.55) 0.805*** (2.64) 0.005 (1.42) 0.264** (2.53) 0.123** (2.53) 0.082*** (9.77) 0.411*** (3.58) 0.255** (2.27) 0.334*** (3.34) −0.357*** (−3.69) 0.052** (2.50) 138 – 0.984 −0.120 0.173

−0.019 (−0.70) −0.017 (−1.22) 0.213*** (2.79) −0.018 (−0.40) −0.107 (−0.81) −0.008*** (−5.37) −0.034 (−0.75) −0.063*** (−3.01) −0.024*** (−6.73) 0.025 (0.51) 0.194*** (4.00) −0.012 (−0.28) 0.007 (0.16) 0.003 (0.31) 138 – 0.993

0.151** (2.32) 0.148*** (4.52) −0.403** (−2.19) −0.038 (−0.36) −0.697** (−2.19) 0.003 (0.87) −0.230** (−2.12) −0.059 (−1.17) −0.057*** (−6.57) −0.436*** (−3.64) −0.450*** (−3.84) −0.321*** (−3.09) 0.351*** (3.47) −0.055** (−2.53) 138 – – – –

Note: Numbers in parentheses denote z-values. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%, respectively.

“ratio of FHs with more than 5ha” (-26.7%), as predicted. The contribution of “LHC density” is negative but quite minimal at −3.7% (due to the small absolute value of its coefficient, see Table 5), suggesting that LHCs do not have a strong mitigating impact against farmland abandonment. Although the results from the different periods largely fall in line with those of the whole period, there are a few important deviations. The factors that make a large contribution to an increase in y1 for the first half period are “farm product price at constant prices” (55.6%, compared to 13.3% for the whole period) and “LHC density” (27.8%, compared to 11.8% for the whole period). Conversely, the most influential factor causing an increase of y2 is a rise in “ratio of LHNFHs” (130.9%, compared to 95.0% for the whole period). Most noteworthy in the computation results of the second half period is that a rise in “ratio of NFHPs” makes some of the largest contribution to both an increase in y1 and a decrease in y2 , suggesting a major role for alternative farm structure such as incorporated farm groups.

5. Conclusion Japanese agricultural policy marked a turning point in 1970 when it began to break with the principle of owner-cultivators toward the promotion of land rental in the interest of farm size enlargement. In order for this policy goal to be realized, the government revised the Agricultural Land Act several times and introduced a series of land use programs. The focal point of the policy reform was to foster the institutional environment in which landlords who had already earned enough off-farm income were

encouraged to rent out their land use rights. At the same time, it should be noted that Japanese agriculture has been facing a totally different problem for the past twenty years, namely the increasing comparative disadvantage associated with the agricultural market liberalization. This has been accompanied by a sharp decrease in the agricultural work force, a decline in food prices, and an increase in farmland abandonment. This poses a serious challenge to the continuation of Japanese agriculture, especially in terms of efficient land use. Alternatively, however, it is possible to see this situation as one in which motivated cultivators are able to enlarge their operational farm size by taking advantage of the decline in land rental costs. Of particular interest in this context is the appearance of a negative correlation between the land rental ratio and the farmland abandonment ratio at the prefecture level. With the aim of examining the driving force behind this phenomenon, we estimated a reduced form equation with respect to the land rental ratio and the farmland abandonment ratio. Our empirical analysis reveals that non-farm household entities such as non-farm household producers (NFHPs) and land-holding non-farm households (LHNFHs) are the major contributors to the development of the land rental market over the past two decades. Although we had expected FHs with large landholdings, the presence of farm successors, and the persistence of the core work force in FHs to be relevant, NFHPs play more a significant role as lessees in facilitating land market development. Worthy of emphasis is that they also make a huge contribution

J. Ito et al. / Land Use Policy 57 (2016) 582–593

to deterring farmland abandonment.24 The existence of LHNFHs is also of great importance for the development of land rental, because they supply considerable holdings to land rental market. It should be noted, however, that farmland owned by them also accounts for around half of the total abandoned area at present, so they appear to play a dual role. Another important finding is that the density of Landholding Corporations (LHCs) is positively associated with the land rental ratio, which offers evidence that public sectors LCHs can serve as intermediate agents in facilitating exchange of land use rights. However, in contrast to the high expectations placed on LHCs to reverse farmland abandonment, they do not appear to serve an effective role. This result is unsurprising if we consider the limited budget provided by the government to invest in the riskier land transactions that are often associated with unfavorable or abandoned land. Whether LHCs are better able to check farmland abandonment boils down to the question of who is to bear the costs of transitioning the relatively more risky and expensive land. This responsibility remains unsettled even after LHCs were reorganized into Farmland Consolidation Banks in 2014. Last but not least, the analysis in this paper has very important policy implications for other countries, in particular emerging economies in Asia. It is generally believed that comparative advantage in crop farming depends on factor endowments (primarily the land-labor ratio in production) and the opportunity cost of farm labor. Thus, agriculture in land-poor but economically highperforming countries is likely to lose comparative advantage as the economy continues to grow, which naturally drains scarce resources from agriculture; the labor force declines, which is followed by a decrease in land use intensity, and potentially an increase in farmland abandonment (Lichtenberg and Ding, 2008). Nevertheless, it is worth the effort for these populous countries to maintain food production capacity at a certain level in order to help ensure food security in the world (Otsuka, 2013). At this stage, however, it is too hasty to conclude that the loss of international competitiveness in agriculture automatically erodes the power of family farms, and invariably encourages NFHPs to become significant actors in agricultural development. Nevertheless, the experiences of Japanese agriculture in this respect will continue to provide neighboring countries with unique insight into future avenues for encouraging efficient land use. Acknowledgments The authors thank the journal editor, Professor Guy M. Robinson, and anonymous referees for their insightful comments on early drafts. Thanks are also due to many participants who commented on this paper in the symposium of “Food, Environment and Life for the Next Generation” held at Kasetsart University, Bangkok, Thailand in 2015. Funding from the Japan Society for the Promotion of Science (grant number 16K14993) is gratefully acknowledged. Appendix A Tables A1 and A2.

24 NFHPs cannot enter into the farm business by purchasing farmland under the existing land system. However, they are allowed to become individual investors and shareholders in farmland-owning farm production corporations. Although not common (and also not addressed empirically in this paper), the transition of the land system over the past several years has closely paralleled the expansion in land rental (McDonald, 1997). In this relation, there has been intense debate in Japan over the pros and cons of the participation of joint-stock companies in farm production. At present, they are allowed to start into farm business under strict conditions but their effect on land use has not been investigated in this paper because the system was only recently introduced.

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